Orascom's About-Face

While many of its deep-pocketed peers are gearing up for growth, the days of regional expansion for Egypt-based Orascom are over. The operator has been forced to shift from an aggressive policy to one of consolidation in its core markets. CommsMEA looks at the progress Orascom has made, and the challenges it faces in protecting its new territories.

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By  Richard Agnew Published  June 3, 2003

Introduction|~||~||~|Orascom, the once-huge pan-regional mobile operator, has scaled back its ambitions somewhat.

The company, which became laden with debt after blazing a trail of expansion into 21 countries across the Middle East, Africa and the Indian sub-continent, has now narrowed its focus to four. This year has also seen it restructuring its senior management team and implementing a new operations control unit, as well as beating an exit from many of its former markets.

Moreover, following the divestment of half of its GSM division in Tunisia, and the US$424million sale of its stake in Jordan-based operator Fastlink in January, Orascom has been able to repay large chunks of its debt.

Last month also saw further progress being made, as the operator pressed on with its financial clear-out and answered pressure from investors with the sale of several assets owned by its troubled sub-Saharan subsidiary Telecel.

The deal, which will see Telecel’s ventures jettisoned in Gabon, Benin, Niger, Togo, Burkina Faso, Zambia, Uganda, Burundi, Central African Republic and South Africa, furthered the company’s overall policy of shedding less lucrative ventures and shifting to a focus on robust growth.

But the new, risk-averse strategy will not be without its own challenges. While the divisions sold off reflect Orascom’s past bid for glory, the company must now rely on its remaining operations in North Africa and Pakistan to generate stability and profitability.
MobiNil, Orascom’s Egyptian subsidiary, is a major part of that plan, representing over half of the group’s subscriber base at the end of last year. However, Egypt also forms one of the most competitive mobile markets in the region, with two operators currently present and a third entrant planned.

MobiNil has also failed to escape the global and industry-wide constraints that have forced its parent to shift down a few gears. Uncertainty among consumers and businesses, along with the devaluation of the Egyptian pound — in which the operator collects the majority of its earnings — have made it necessary for the business to adopt a more cautious approach.

“The tough economic environment is challenging on two fronts,” admits Osman Sultan, chief executive officer and president of MobiNil. “One is that the economic slowdown has had an impact on the ability of people to spend more money on wireless services or applications. Amplifying the slowdown is the currency [situation], which is eating part of our gains in operational efficiency,” he adds.

Despite MobiNil’s evasion of the direct effects of Orascom’s restructuring, its parent’s risk-conscious approach has also increased the need to reign in its own expansion plans, according to Sultan. “We didn’t really make changes to the financial structure, we just adopted a more prudent strategy [with a view] to the economic environment and the global uncertainties we were witnessing in the industry. Because of the uncertainties we felt it was more wise to make [our] growth in step with the value created,” Sultan contends.

As part of that policy, the operator has altered its focus from purely expanding its subscriber base, to building loyalty among its existing users and nudging them towards higher value services, thus protecting its revenues. “[We’re] making sure that the growth we have is not only subscriber growth, but [also] value growth. In figures, this means that we had [slightly] slower subscriber growth than the year before, but we had better revenues because we focused on protecting the value that is generated from that growth,” Sultan claims.

With that aim in mind, MobiNil has also invested in call centre technology and loyalty programmes to increase the ‘stickiness’ of its own users and reduce the expense of subscriber growth.

“Customer service is a concept we have been really focusing on since the beginning. We have created and set up the largest customer contact centre in the region, in terms of workstations and number of people. We have [also] increased the points of contact [between us and] our customers through the rollout of our own shops [and] we have increased the number of transactions that can be done in [them],” Sultan says.

While Egypt represents Orascom’s toughest market in terms of competition, the other countries the group intends to focus on in the future — Tunisia, Algeria and Pakistan — represent “major subscriber growth areas” and opportunities for long-term profits, according to Joseph Braude, Pyramid Research senior analyst.

Initial signs are encouraging. Last year, although MobiNil saw its subscriber growth slow, the division reported net profits of US$77million, and Orascom’s operations in Pakistan saw substantial user base expansion. Its Algerian division is also believed to have overtaken the incumbent, Algerie Telecom, and gained 70% of the market, despite only having launched in February last year.

Meanwhile, the operator’s Tunisian division, Tunisiana, is also believed to be well ahead of schedule in its goal of signing up 500,000 subscribers by the end of this year, and rumours also link Orascom to a move into under-penetrated Libya, where its sister company, Orascom Construction, is present.

But even these markets will not be without their pitfalls. Pakistan, for instance, is thought by some to represent something of a wild card for Orascom, a situation epitomised by an assassination attempt on the Egyptian-born American president of the subsidiary, Mobilink.

The company has touted the market as a long-term investment, and recently spent US$39million on a project to double the capacity of Mobilink’s network. However, fears pervade over the group’s ability to reign back the division. “[Orascom] will do well to follow the course of maintaining control over the local company’s management and competitive strategy... and not cede effective control to the local minority shareholder’s management, as some investors have suggested,” says Braude.

On a regional basis, the company also faces wider strategic concerns. With many new opportunities for investment springing up across the Middle East and North Africa, what Braude calls a range of “mini-Orascoms” have made their own bids for growth outside their own borders.

The trend poses the risk of market overcrowding developing in the future, and will see a “bifurcation of roles” emerging between those of Orascom and its regional peers, according to Braude.
While Orascom has set a conservative course, focusing on markets providing it with revenues via long-term subscriber growth, operators such as Kuwait’s Wataniya and MTC — which bought Fastlink from Orascom in January —- are gravitating towards countries with greater mobile penetration.

The trend is evident in MTC’s recent successful bid for the second mobile licence in Bahrain, and the two Kuwaiti companies interest in the licences to be offered in Lebanon later this year.
Other opportunities are also expected to come up in Saudi Arabia, Iran and other Gulf countries. These markets are likely to provide greater opportunities for the development and rollout of new technologies, services and marketing strategies geared towards increasing spending by customers already signed up.

“I think [MTC and Wataniya] have learnt from the experiences of Orascom — both its successes and shortcomings. I don’t think they’ll aspire to the ‘hyper-growth’ that Orascom went through in its early years. They’re looking for certain opportunities such as the Gulf markets... with higher income per capita. Their growth rate will be slower but their opportunities to capitalise on value added services and higher-end services will be greater,” adds Braude. Orascom, however, will be unable to participate in that process, he adds. “In a nutshell, the company’s days of regional expansion are effectively over,” he says.

Yet he believes that Orascom will not be immune from the effects of liberalisation, nor be able to separate itself from it. For example, Wataniya is already working jointly with Orascom on the management of Tunisiana.

Another potential challenge to Orascom’s position is the expected entry of Egypt Telecom as a third mobile operator in Egypt. Although the on-off move has been hit by delays and concerns over its economic viability, the Egyptian government is still expected to take place, perhaps through a roaming agreement with one of the existing operators.

However, the increased competition could end up auguring price reductions and working in Orascom’s favour, argues Braude. “Although the Egyptian market is, in some ways, more mature than Algeria and Tunisia, there is growth potential there that hasn’t been explored by the operators. [We] haven’t really seen the robust competition that would yield even greater growth. [As a result], there is potential [for] Orascom to get those new adopters,” he says.

Sultan, however, claims to be unfazed by the prospect. “Since we started, all our business plans have taken into account the possibility of a third entrant when the duopoly period ended,” he says.

Nor will the third player’s entry force the operator to change its core strategy. “Ultimately, there is a very simple recipe. If you make [customers] happy, there is no reason that they will seek another operator for mobile services,” explains Sultan.
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