Elusive Access

Recent amendments to legislation could affect not only Turkcell's long-awaited entrance into Iran but also the overall development of the country's under-served and potentially-lucrative mobile sector. CommsMEA analyses the likely impact on a market constrained by insufficient capacity and coverage but offering huge potential for new entrants that are able to manage its political risks.

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By  Richard Agnew Published  October 31, 2004

|~|iran1.gif|~||~|Perhaps it was too good to be true. Having seen off a range of contestants for Iran’s second mobile licence with a huge bid of US$3 billion earlier this year, Turkcell now finds its entrance into one of the region’s most potentially lucrative markets hangs in the balance. Iran’s parliament provisionally approved legislation last month obliging the government to get its approval for local investments with more than 49% foreign ownership. This was also backdated to include Turkcell’s agreement, which was finally confirmed only a few days before. The bill has left the operator, which has a 70% stake in the Irancell venture, in the position of having to seek approval for its deal with the Iranian Ministry of Telecoms as it stands. A parliamentary ruling on the project is expected to be announced shortly. But analysts say that the bill will apparently render Turkcell’s deal void. Against the backdrop of renewed interest from its rivals and the legislation’s specific focus on the telecoms and transportation sectors, the signs also don’t look totally promising. “The new bill, once finalised and ratified by the conservative Council of Guardians, directly affects and seemingly nullifies the agreement,” wrote the World Markets Research Centre in a recent circular. Beyond Turkcell’s own interests, the move also throws the government’s ambitions to grow Iran’s telecoms sector and reduce unemployment into doubt. Coupled with trade embargoes and the lack of an independent regulator to ensure that new entrants have a smooth working relationship with the incumbent operator, Telecoms Company of Iran (TCI), the bill accentuates risks facing potential investors. The second mobile licence was also a cornerstone of the third phase of the government’s plan to develop the mobile market and meet its ambitious target of 35 million wireless subscribers by 2009. Although TCI has various plans to improve its own network and shift penetration upwards of its current mark of 4%, outside help from the new entrant would also have contributed significantly to the expansion in terms of funding and expertise. At the least, this push will now be delayed, and severely if the scenario arises where the original licence tender must be redrafted. Research group, IDC CEMA, had predicted that the country’s mobile user base would reach twelve million by 2008, based in part on the assumption that a second operator would launch by the first quarter of next year. But now this looks unlikely — even if Turkcell achieves its aim or MTN, the second placed bidder in February, steps into the fray. “In the short term [the bill] means that a second mobile operator will not be entering the market until much later in 2005, completely derailing plans to substantially increase mobile penetration rates,” says Lucy Norton, senior telecoms analyst for the Middle East at the World Markets Research Centre. “It was hoped that services would start in February 2005, but this is a pipe-dream now,” she adds. On a practical level, another consequence of the delay will be to hold up geographical expansion of Iran’s mobile network coverage, which is restricted on highways and in areas outside the main cities. “Currently, coverage is limited to the major cities such as Tehran, Qom, Esfahan, Mashad and Shiraz, and the tourist locations along the Caspian Sea coast. But even in these major centres the coverage can be patchy,” explains Martin Dirnberger, Middle East director with Radio Frequency Systems, an RF technology provider which has worked with TCI on the expansion of its microwave links. “We’ve seen similar situations in Syria to what we’re seeing in Iran. These are large countries with often sparse population distributions outside the major centres. From an RF perspective, these demand unique solutions to ensure coverage, and to minimise the total number of cells,” he adds. Perhaps the most pressing problem facing the mobile sector in Iran, however, is limited network capacity; an issue which TCI has not been able to resolve through investment in its own network. Figures for the Iranian year 2002/03 indicate that fewer than 50% of calls were successfully routed through TCI’s switches, and it took users an average of two to three efforts for their calls to get through. Also, while nearly half of TCI’s subscribers are situated in Tehran province, the capital only houses between a quarter and a third of the incumbent’s base stations. “TCI hasn’t increased capacity significantly so the situation should still be more or less the same,” adds Mohsen Malaki, programme and consulting manager, communications, IDC CEMA. The capacity shortage has also been heightened by TCI’s recent sale of around 5.6 million post-paid SIM cards — for around US$600 each — before it had installed additional capacity to accommodate the new users. Further, a separate network is being installed for the operator under a build-operate-transfer (BOT) contract with local and international partners. It will provide at least two million new lines but is yet to go live — despite originally being scheduled for launch in March of this year. “The key impact the BOT project will have will be to introduce pre-paid services for the first time,” says Norton. “However, two million lines won’t make a massive difference to the supply crisis in the market, given that there’s only around three million operational GSM lines in Iran at the moment and effective demand for mobile services is estimated to be around 24 million subscribers,” she adds. Pent-up demand is also expected to increase as incomes improve, prompting increases in one-off fees for connections. “In the absence of extra capacity, and with no second operator, the cost of a SIM card [could] rise above US$1000, from US$500 at the moment, and perhaps double that on the black-market,” Norton adds. On the plus side, TCI has set out several initiatives to improve its own network, although it is yet to become clear when they will materialise. The operator is believed to still be in talks with equipment vendors over a four-fold increase in capacity, to accommodate the 5.6 million users provided with SIM cards earlier this year. Part of its investment plans include growth in PSTN access through BOT contracts with private players, but its major area of focus is expected to fall on its mobile services. The coming twelve months will apparently also see TCI embark on a fast-track wireless sector ‘catch up’ programme, with a nationwide network upgrade designed to support an additional ten million subscribers. Another under-resourced area the incumbent is likely to concentrate on is value-added services, which currently extend mostly to SMS and caller identity (ID) — a paid-for service in Iran which is believed to be generating significant uptake because of a relatively high incidence of harassment calls. Also on the timetable for next year is a national trial of GPRS. “The 2005 initiative will expand the network countrywide, and improve coverage and capacity in the major centres. We understand that some 1000 new base station sites are to be rolled out,” says Dirnberger. As for Turkcell, it remains to be seen how much of a chance its venture has of progressing. The new bill has yet to receive final approval, but if it is passed then the operator will reportedly have three months to obtain a parliamentary permit, possibly by revising Irancell’s share structure. A statement released recently by the operator says that it will pursue approval for the venture, and indicated that it has yet to hand over the US$369 million upfront fee it owes for the licence. A further possible scenario, says Norton, is that Turkcell’s bid is merely disqualified, offering MTN a chance to take the operator’s place by proposing a venture which complies with the ownership limit set by the new bill. The South Africa-based operator has already indicated its interest in doing so. “We have been under the impression that if the deal with Turkcell does not get through, MTN would have a strong chance,” Chris Kilowan, MTN’s local representative, told South Africa’s Business Day. “If the rest of the conditions make sense, we are ready to work under the new regulation,” he added. Analysts also echo the attractiveness of the market to a new entrant, if it can live with the risks. “If the new entrant, whether it’s Irancell or a third operator, could maneouvre and find its way around the policy and regulatory issues, then there’s significant growth potential — not just because the market is under-penetrated but because the incumbent is weak,” says Malaki. “Any experienced investor with operations in other countries which have similar demographics would definitely be successful, if it could manage the politics,” he adds.||**||

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