Taking the Initiative

In May, the Egyptian government unveiled a broadband initiative as part of its 'E-readiness' programme. The target is to have 100,000 ADSL subscribers by the end of 2007. However, in development terms, it also envisages a shift in the way Egyptians view broadband access — from merely a means of accessing the web to an essential tool for their civil and cultural life, writes Lucy Norton

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By  Richard Agnew Published  August 28, 2004

|~|e1.gif|~||~|Egypt’s broadband initiative — announced at ITU Telecom Africa in May — is the first of its kind in the Middle East region. While subscriber targets have been issued by various countries, and e-government projects and regulatory strategies are getting off the ground — Egypt is the first government to bring all these aspects together into one programme. Indeed, Egypt is following the example of more developed and liberalised economies, such as South Korea, Canada and the UK, in its concerted effort to build a 'broadband society'. And just like these governments, Egypt is hoping that its focus on broadband will result in improved economic competitiveness and administrative efficiency. Four months after the initiative was announced, it is evident that the role the Egyptian government will take in the development of the market will consist of more than just target-setting. Rather, the government is directly intervening to speed the rate of service uptake (the market currently numbers around 14,000 DSL subscribers). There is a solid rationale for such an intervention, given that the government can help to reduce the investment risk for broadband ISPs in the early stages of market evolution — particularly in the face of uncertain demand. Uncertainty of demand has had a major stalling effect on broadband investment worldwide. ISPs in the most developed economies have demonstrated caution in rolling out infrastructure beyond the most urbanised areas for fear that demand is too weak. Therefore, those governments with their hearts set on a certain penetration rate for broadband have acknowledged and responded to the market need for tangible financial, regulatory and public relations support to mitigate risk for service providers. Consider South Korea — the most penetrated broadband market in the world. To foster market growth, the government has offered tax breaks to ISPs, while mandating the installation of DSL equipment in new residential complexes. It has also pumped millions of dollars into subsidies for the roll-out of fibre-optic networks. Egypt's approach, it will be seen, is somewhat less interventionist than this. But that said, the approach still seeks to encourage the three key drivers of market growth — increased supply, increased demand and effective competition. Increasing Supply: International Bandwidth, Rural Connectivity and Wireless Egypt’s approach to increasing the supply of broadband services has focused on two areas — the amount and affordability of international bandwidth and also the level of rural connectivity. Even before the broadband 'road map' was introduced in May 2004, Telecom Egypt (TE) and the MCIT have been investing to increase the country's international capacity. The country's international bandwidth has increased ten fold over the past three years and at the end of 2003, Egypt had over 1,000M/bits of international bandwidth. This capacity investment has been essential to support the government's free internet access model, introduced in January 2002, which saw internet users increase from 600,000 in December 2001 to 2.5m at the end of 2003. The government has also allowed for an increase in the amount of national bandwidth available in the market, through licensing private ISPs (under class A licences) to roll out their own backbones and resell connectivity to class C ISPs. With healthy levels of capacity now available to the country's nascent broadband service providers — of which there are eight facilities-based operators — cutting bandwidth prices has become the government's new concern. Government support of cost reduction is what ISPs have been looking for since the initiative was announced and cuts in retail ADSL tariffs were mandated. Paying for bandwidth accounts for 70% of an ISP’s cost base. Furthermore, TE still monopolises the international gateway market and competition is unlikely to enter this part of the 'bandwidth chain' until 2007. The government has therefore been taking measures to cut the cost of international links in order to improve the business case of service providers. The MCIT is currently negotiating with FLAG Telecom, as well as other international carriers, to lease STM-1s on a 15-year basis under rights of use (RoU) agreements. The long-term leasing model will mean that the provision of internet links will become substantially cheaper, with the cost saving passed on to ISPs. The bulk of capacity provided to the market under this new pricing model will be via FLAG Telecom’s FALCON projects — a submarine cable that will link Egypt to Hong Kong and be lit in early 2005. Rural connectivity is the other key area where the government is taking a direct role in increasing supply — in cooperation with TE. With teledensity standing at just 13.3% at the end of 2003 (or 8.9m lines) Egypt remains a low tele-density market, with the most underserved areas lying outside the Nile Delta region. This lack of existing copper infrastructure clearly restricts the development of the DSL market. To address this infrastructure shortage, TE is investing in CDMA 2000 1X WLL networks to cover both Upper and Lower Egypt. The technology will provide 'always on' connectivity with a theoretical maximum download speed of 153k/bits (though in practice it will likely deliver slower rates). The networks will therefore give subscribers in the rural areas an internet connection similar to an 'always on' ISDN connection. Finally, wireless standards are also set to provide a complimentary system of networks for high-speed access. The public wireless LAN standard Wi-Fi has been licensed for indoor access in the ranges of 2400-2483.5 MHz and 5725-5825 MHz. Short-range wireless internet access networks, or 'hotspots', will therefore soon become available in hotels and airports across Egypt. Fostering Competition: LLU and DSL Resale The government has given its backing to both regulatory and licensing initiatives to increase facilities-based competition in the nascent broadband market. As far as regulation is concerned, the emphasis is on DSL competition. There are currently eight operators licensed to provide ADSL over their own equipment. Competition between these players will form the kernel for development throughout the market, given that no cable operators are present to offer customers a choice of provider in the early stages — in contrast to markets like the UK. The government is therefore focusing its attention on fostering a fair local loop unbundling regime, which will stimulate the roll-out of ADSL networks. With the announcement of the broadband initiative in May 2004, the government mandated a cut in tariffs for unbundling — first introduced in April 2002 — by 50% to LE20. It is unclear whether the cuts have been calculated relative to the cost of offering the service or rather to allow service providers a certain operating margin, in light of the mandated cut in retail tariffs that was also introduced in May. Regardless of how the reduction has been arrived at, however, the result will still be improved profitability for DSL infrastructure providers. Consumer choice and value is also being increased in the market through Egypt's growing reseller industry. Wholesale DSL services are available from class A ISPs, who are free to resell access and equipment to class C ISPs. As a result, the virtual ISP model is growing in popularity. However, these resellers are restricted in their ability to vary the technical characteristics of the access services. Stimulating Demand: Assessment, Pricing and E-government Encouraging demand is arguably the most important area for a government to focus on in its bid to develop a 'broadband society'. Uncertain demand is the major stumbling block for the rate of investment in a broadband market, (along with incumbent operator's objections to unbundling). Furthermore, an investment-focus on encouraging it, as opposed to subsidies for service providers, is arguably the most efficient and effective form of government intervention as it promises to underpin a more sustainable and self-sufficient market in the long term. The Egyptian government's approach to this issue has been three-fold — retail price cuts, demand-assessment and online government services. In May 2004, the government took the bold market-shaking step of mandating a cut in retail tariffs for a 256Kbits/s connection from LE400 a month to LE150. While, the move could have created havoc in the market — threatening the very existence of smaller ISPs - the impact of the cut was cushioned by three factors. Firstly, as class A ISPs have recognised, the retail tariff controls were introduced at a still early stage in market development (at the time there were only around 4,000 ADSL subscribers). Therefore, ISPs were well-positioned to review their forecasts and integrate the new charges into their business model. Secondly, the retail cuts were accompanied with cuts in unbundling charges. Finally, the government was also able to demonstrate to the market that the tariff cuts would quickly result in increased subscriber uptake — giving the ISPs the economies of scale they need. Thanks to the free internet initiative — introduced in January 2002 — the government was able to ascertain ahead of its tariff cuts what the growth implications would be. An analysis of monthly internet usage levels under the free initiative (where subscribers pay only the call charges for accessing the internet) revealed that around 40,000 internet users spend over LE100 a month. On top of this, there are estimated to be a further 100,000-plus 'substantial users' of the internet spending significant time and money on access. Knowing then that, for these customers, an ADSL connection does not mean a quantum leap in spending on the internet, ISPs can be more confident that the 'always-on' and 'free phone line' benefits of ADSL access will be enough to compel these users to upgrade. And it is this confidence that oils the wheels of investment. While also bringing the benefits of broadband ('always on' connectivity that does not tie up the phone line) more within the financial reach of Egyptians, the government is also looking to help add more weight to the broadband proposition with its e-government initiative. Through a new government portal, Egyptians can now apply for university, renew driver's licences and request births certificates and ID cards. More services are to be added to the portal over time. The government is hoping that the project will encourage a crucial shift in the way that Egyptians assess the value of an internet connection; not just as a means surfing the 'world wide web', but as an essential time-saving tool for everyday life. Current Progress Four months into the initiative, the government's broadband 'road map' is already starting to bear fruit. Thanks to the unbundling tariff cuts, as well as an accurate sense of demand available to the ISP community, collocation is gathering pace. By July 2004, there were an estimated 200 exchanges opened to facilities-based ISPs and around 14,000-15,000 lines were estimated to be unbundled. This is an increase of around 10,000 users since May 2004. Narrowband market leader, LinkdotNet, is likely to control the largest share of the ADSL market. Meanwhile, the commercially-driven resale segment is creating further value for consumers and also driving revenues for the people who need it most — the infrastructure investors. Indeed, as ADSL growth rates and internet usage levels currently stand (around 3,000 ADSL users are being added a month), the government's target of 100,000 subscribers by 2007 should be exceeded. As regards the uptake of the government's new online services, exact usage levels are not available. However, the government is providing serious support for the programme by manning post offices throughout the country with customer service personnel to educate people on the value and relevance of online government services. Similarly, in the related and growing areas of e-banking and e-commerce, the government is also offering support through marketing campaigns emphasising the security safeguards in place. However, a still limiting factor in the growth of the residential internet users — and by implication the growth of broadband access market — is the low level of PC ownership in Egypt. There were around 1.5m PCs in the Egyptian market at the end of 2003. And while a vast proportion of these will be in the business sector, residential PC penetration remains extremely low. The government has been addressing this issue as part of the free internet model. A public-private partnership programme has been set up between TE and 17 private PC vendors. Under the agreement, TE subscribers can pay for a PC through affordable monthly installments, with the TE phone line acting as the guarantee for the agreement. At the end of 2003, 48,000 PCs had been sold under the initiative. However, the target is to sell 100,000 PCs every year to households. More marketing as well as moves by the government to increase private and foreign participation in the scheme can therefore be expected. As for what tax breaks, if any, will be introduced into the broadband market, the issue awaits discussion by Egypt's new cabinet, which is led by the outgoing Communications and IT Minister Ahmed Nazif. South Korea embraced this approach while other markets have been more reluctant to do so. While the government is unlikely to ratify tax breaks for service providers, import duties on broadband equipment — which currently stand at between 5% and 10% with sales tax standing at around 10% — could well be cut. Towards Market Maturity Looking ahead towards the 2007 deadline and beyond, DSL competition will become the key driver of market value, as the sector matures and government support becomes less central to market growth — although the government is also looking into issuing licences for cable modem services. It remains to be seen whether the regulator the NTRA will introduce bit-stream unbundling to stimulate competition further. The wholesale service allows ISPs to vary the technical characteristics of their services without collocating DSLAM equipment in TE exchanges. Instead, TE provides 'backhaul' services to a broadband provider, carrying the broadband traffic to an ISP's point of presence. As competition levels intensify, value-added services will become the key strategic focus for private ISPs. Bandwidth-intensive content and 'triple play' services will therefore become central to revenue growth, along with appropriate pricing. The development of compelling, real-time streaming services promises higher levels of internet usage and greater demand for higher data rates — up towards the 1M/bit-mark and beyond. Meanwhile, 'triple play' — which includes voice services in the broadband package, along with TV and internet access — promises providers better levels of customer retention as well as a new revenue stream in the form of cheap voice calls. A regulatory ruling on the VoIP issue is expected at the end of this year. In rural areas, however, where broadband demand will remain less tangible, the government will still be required to play a major role, far beyond the 2007 date. TE may roll-out further CDMA 2000 WLL networks under its universal service obligations, with private players contributing to the cost. However, the government will also be in a position — via its e-learning and e-health initiatives — to act as an anchor for demand in remote areas, guaranteeing private players a certain degree of usage. Once infrastructure has been rolled out to schools and hospitals in remote areas, the business case for marketing and providing broadband services to near-by communities is immediately improved. Lucy Norton is a senior telecoms analyst for the Middle East at the World Markets Research Centre, a leading provider of country intelligence||**||

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