Genuine Competition

It has been a three-year wait, but Egypt is at last on the verge of having a third player enter its mobile market. And instead of Telecom Egypt, Vodafone and MobiNil are facing more international competition.

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By  Tawanda Chihota Published  April 19, 2006

|~||~||~|Despite being one of the first Arab markets to welcome in foreign players, Egypt's mobile performance has been somewhat lacklustre. By the end of 2005, seven years after Vodafone began competing with Orascom-owned MobiNil, mobile penetration had reached 18.5%. For a population of close to 75 million and GDP per head levels low at US$1,200 this is a respectable level. However, if one considers that 45% of Egypt's current 14 million subscribers were added in 2005, then the sector's performance up until last year seems less impressive. And with countries like Iraq achieving close to 15% penetration in just two years, it is clear that Egypt has not been the region's best performing market. There are a number of reasons for Egypt's muted progress compared to its Arab counterparts. A relatively high teledensity level in Egypt has had something of a 'drag' effect on mobile growth, compared with markets like Morocco or Iraq. In addition, a currency readjustment at the beginning of 2003 did apply some downward pressure on demand. However, more than anything else, it has been an absence of aggressive competition that has kept the market from expanding more quickly. MobiNil and Vodafone Egypt have been operating in a duopoly for a number of years. As a result, charges have remained relatively high for the market while both companies have shied from introducing better value offerings for prepaid customers. However, under the looming threat of a third player, both MobiNil and Vodafone Egypt introduced more attractive price plans in 2005. Offers have included lower per minute charges and longer validity periods for prepaid cards. Their intention was to target specifically the lower income segments of the market. And the results have been explosive. Together, the companies acquired 6.5 million subscribers in 2005, compared to just 1.8 million net additions in 2004. The market therefore expanded by a massive 84% in 2005, its fastest rate for years. Extra competition is clearly the tonic that Egypt needs to unlock its mobile market potential. So why has it had to wait so long? In fact, the delay in introducing a third player to the market was not the government's first intention. Under liberalisation plans drawn up in 2001, Telecom Egypt was expected to launch its own mobile network in 2003, after the exclusivity period granted to Vodafone Egypt and MobiNil expired. However, in the face of a worsening economic environment and generally dampened demand for telecoms financing and investment, Telecom Egypt faltered at the last moment. The incumbent instead chose to forfeit its frequency, allowing Vodafone and MobiNil access to the extra bandwidth. The mobile operators each agreed to pay US$201 million over four years to the telecoms regulatory authority for the extra spectrum. This arrangement paved the way for the incumbent's purchase of a 25% stake in Vodafone Egypt at the end of 2003. But now, three years on from the expiry of their exclusivity rights, Vodafone Egypt and MobiNil are facing the fresh threat of international competition. Third Licence Runners and Riders So who are the would-be contenders in Egypt's forthcoming auction? Some of the competitors have already made themselves known, among the 19 requesting tender documents at the beginning of March. And like all recent mobile market opportunities in the Middle East and Africa region, the battle looks set to be staged between European and Gulf market players. Kuwaiti operators MTC and Wataniya have both confirmed their intention to bid, while Saudi Telecom, Etisalat, Batelco and Qatar Telecom have also publicised their interest. European players, meanwhile, have been less talkative. Norway's Telenor has made its interest in the opportunity public. It is currently considering whether to take a local partner for a possible bid. Meanwhile, companies conspicuous by their silence are Telecom Italia, Telefonica and Turkcell. Telecom Italia has maintained close relations with the Egyptian telecoms market for some time. Its IP networking affiliate Sparkle is currently partnering with Telecom Egypt to provide international enterprise networking services. Meanwhile, Telefonica has been in expansive mode across emerging Europe in 2005 and already boasts a North African mobile asset in the form of Meditel in Morocco. Finally, Turkish mobile operator Turkcell is a company eager to expand globally. The company has tried to enter the North African mobile sector before, unsuccessfully bidding for a licence in Algeria in 2003. Among the European and Gulf companies, South Africa's MTN has also declared its intention to bid. The company, which comes fresh from its acquisition of a 49% stake in Iran's second mobile network, has announced that it will partner with local telecoms firm Raya Holdings. Indeed, the operator has been exploring opportunities all over the Arab Middle East and is no doubt eager to place a serious bid in Egypt. However, it remains to be seen whether it will stand the financial pace set by the likes of MTC and Etisalat. There are also relative newcomers to the Arab region who have either declared or at least hinted at their interest. Russia's Sistema has confirmed that it will place a bid. Meanwhile, there is a likelihood that Chinese-backed companies make up some of the interested 19. Both Russian and Chinese players emerged onto the international telecoms asset market in 2005, looking at regional markets like Yemen and Turkey. Again, it is unclear how much of a challenge they will pose to more established, arguably more committed Gulf and European players. Market Outlook Under the timeframe and framework set out, interested bidders must submit an initial formal offer by April 17, 2006. The final running order will therefore soon be known. It is still unclear whether the list will include Telecom Egypt. As for how high bids will go, Egypt's National Telecommunication Regulatory Authority has stated that it expects to raise US$2.5 billion from the entire licensing process, which no doubt includes bid bonds and fees paid by Vodafone and MobiNil for 3G spectrum. However, it is likely that the government will be expecting auction bids exceeding US$1 billion. With the financial stakes high, Kuwait's MTC must be the front-runner. The Egyptian market had been publicly in the company's sights for over a year. Furthermore, with its acquisition last year of sub-Saharan operator Celtel - which already has operations in neighbouring Sudan - the strategic fit of Egypt within its portfolio is even more compelling. However, its Kuwaiti counterpart Wataniya, which has shown less eagerness to acquire abroad, may choose Egypt as the market to bet big on, thereby adding to its African assets in Algeria and Tunisia. As for Etisalat, perhaps MTC's most serious competitor as far as cash bids are concerned, the company has committed substantially to Pakistan and is also actively looking at India. It may therefore be too distracted elsewhere to take this opportunity from MTC's grasp. Indeed, the Egyptian market could not look more attractive to foreign players than it does at the moment. Improving economic indicators, rapid market expansion in 2005 and huge EBITDA margins at both MobiNil and Vodafone Egypt (over 50% at the end of 2005) are all powerful advertisements for the huge potential still residing in the Arab region's largest market. Of course, the key question for the new entrant is what share of this expanding market it can secure. The ministry has forecast a 20% share within the first four-five years of operations. This assessment, which implies a subscriber base of around 4-5 million subscribers for the new entrant, may well be optimistic, given the current aggressive stance of duopoly players Vodafone and MobiNil. Much will also depend on the strength of the regulator the NTRA to establish an even playing field for the new entrant in areas such as interconnection and roaming. What is certain however is that the Egyptian market is now poised on the verge of receiving the investment and competition it needs to really start showing its potential. What remains to be seen is just how far the new wave of investment in the Egyptian mobile communications sector will raise overall penetration. Lucy Norton is a Middle East Business Intelligence consultant with risk management company The Risk Advisory Group in London. ||**||

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