Opportunity Knocks

Syria remains one of the region's least liberalised mobile markets, with two relatively young operators — Syriatel and Areeba Syria — closely controlled by the state regulator, the Syrian Telecommunications Establishment (STE). Penetration is just under 20% in a population of around 20 million. A third GSM licence is under consideration and Alex Ritman examines the implications of such an award.

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By  Alex Ritman Published  September 5, 2006

|~|Areeba-Syria-200.jpg|~|Areeba Syria's managing director Ismail Jaroudi says that, were a third operator to be launched next year as some suggest, it would go against a contract signed with the regulator.|~|UAE operator Etisalat, currently surfing a tidal wave of acquisitions, publicly stated earlier this year that it is interested in acquiring Syria's third GSM licence. Speaking in June, chairman Mohamed Omran expressed confidence in his company's plans to enter the country. “Etisalat will also soon announce the details of negotiations to acquire the third mobile licence in Syria. Our meeting with the Syrian officials proved positive,” he said. Nothing has yet been announced from the Syrian Telecommunications Establishment (STE), so it is unclear whether the statement was a bold remark in a game of brinkmanship, or whether the UAE operator is indeed close to securing a position in the country. The timing of the award of this third licence remains a source of some doubt. The timing of the tender — should the award process actually go to this way — is likely to be influenced heavily by the Syrian government. Given the current political climate in the country, it is unlikely that the liberalisation of the mobile market is necessarily high on the ministerial to-do list. Areeba Syria — 75% owned by Investcom — changed its name from Spacetel Syria in line with its owner's international badge in February, and its managing director Ismail Jaroudi says he has heard of the regulator's interest in introducing a third player. “However, there is an issue over the timing,” he warns. According to Jaroudi, both Areeba and Syriatel signed contracts with the STE giving them seven years of exclusive presence in the country's mobile market. “When they came in, both operators had some obligations and some benefits, and one of these benefits was to have seven years of exclusivity,” Jaroudi explains. He says that only after the seventh year does the regulator have the right to bring in a third operator. “From our calculations the seventh year will end on June 29, 2009. So basically, the third operator, as far as the contracts that we have are concerned, cannot commercially launch before this date.” John Everington, senior research analyst for UK-based Informa Telecoms & Media, believes the tender is likely to take place sometime in 2007. “I think the third licence will be offered next year. I think it'll be a 15-year BOT licence, like Syriatel and Areeba.” However, should the regulator respect the dates put forward by Jaroudi, it could be unsettling news for the operators, such as Etisalat, that have expressed an immediate interest in participating in the Syrian mobile industry. Market conditions are unlikely to remain the same in three years' time as they are at the present time. Everington believes another potential interested party is Qatar incumbent Qtel. “Qtel is certainly trying to position itself as an international player in the footsteps of MTC and Etisalat at the moment. I think it would definitely be interested and MTC is likely to bid as well.” Syria could well be a perfect landing station for Qtel, which has publicly announced its intentions to ramp-up its overseas investment policy. The valuation of the third licence could be relatively high, given the growth potential that remains in the market and the scarcity premium currently being paid for greenfield opportunities in the region. “According to our data, the mobile penetration rate was just 19.3% at the end of June 2006,” says Everington. “This is well below the regional average, so there's opportunity for growth.” A reserve price of several hundred million dollars for the licence would not be unexpected. However, Everington warns that the Syrian mobile market is quite a complex one from an investor standpoint. “It is fraught with difficulties. There are plenty of obstacles facing future entrants.” He says that the two current operators face tight regulation, limiting their scope for competition. “It will be interesting to see, between now and when the licence is offered, whether the government eases the regulation of the sector to allow freer competition. There is definitely room for a third entrant, it could come in with a new brand and could gain market share. Unless there is substantial liberalisation of this sector, though, the market's growth is going to be curtailed.”||**|||~||~||~|The current BOT agreements between the operators and the regulator also put in place a sizeable revenue share agreement. “According to the BOT contract agreement with the STE, the revenue sharing began at 30% and moves to 50% (during the life of the licence),” explains Jaroudi, adding that the current position sees the operators paying over 40% of their revenues over to the government. With the government taking a significant chunk of turnovers, it would appear against the national interest to see a price war between the two operators. As such, neither is allowed to compete on price, and must submit joint applications to the regulator to introduce new tariffs and services. “They cannot, for example, allow a price reduction on one side and not on the other side, otherwise they would be hurting the market's interests,” says Jaroudi. “We compete on the range of services, the quality of the services, on providing added-value to the subscriber. Our main focus is the quality of the network.” Another cause for concern is the previous troublesome history between foreign investors and local partners. “Investors have had their fingers burned in the past,” says Everington. Egypt's Orascom Telecom used to own a 25% stake in Syriatel, but relinquished its shareholding in July 2003 following a bitter legal dispute with its partner Drex Technologies, owned by Rami Makhlouf, cousin of the country's president. “He was making moves on Syriatel. He wanted it all, with management control, for himself. This set up quite an ugly tiff between the two companies.” Out of its entire portfolio of assets, Areeba Syria is Investcom's second largest mobile subsidiary behind Ghana. In 2005, it brought in almost US$400 million in revenue — over 40% of the group's total — from a subscriber base that hit 1.46 million at the end of the year, representing a 45% market share. Six months later, at the end of June 2006, Areeba had 1.75 million customers. Syriatel, the elder operator by three months and market leader, had just fewer than 1.9 million users at the end of June 2006 according to Informa Telecoms & Media. The operator's turnover grew 31.5% during 2005 to reach US$510 million, with profits of US$98 million. Unsurprisingly, Jaroudi believes the two incumbent operators are doing enough in the market without any need for a third licence. “From what I see I believe that we have been aggressive and are supplying the demand. We are taking on board the possible and potential subscribers in the right time.” He predicts penetration rates by the end of 2006 will be in the region of 23-24%. “And in the coming couple of years I expect this will be 35-40%.” With Investcom's acquisition by MTN earlier this year, Areeba Syria now finds itself part of the South African mobile juggernaut, a position that Jaroudi considers positively. “In the interest of our customers, it will bring best practices, and a portfolio of products that can be shared across the markets. We will be able to capitalise on MTN's know-how. Definitely it will be a value to all.” Despite the relatively early stage of Syria's mobile market when considering factors such as penetration, both operators have made assertive plans to move to 3G services. Such a development has raised some concerns from market commentators. “In terms of countries wanting to roll out 3G in the Middle East, Syria is very much the exception,” claims Everington, who looks to the region's other 3G countries — Bahrain and the UAE, Kuwait, Saudi Arabia and Qatar — all fairly well developed markets with high incomes, high ARPU, and high mobile replacement cycles. “I think 3G is going to have a tough time in Syria,” says Everington, who suggests that while the country has a small middle class that can afford things such as 3G services, whether they actually demand and pay for them will depend on how the services are positioned and the price. Jaroudi is also weary of the potential investment black hole of launching 3G in a market that does not want it. Despite already having installed a trial 3G network and made its first 3G call in June this year, he says it may be next year or even 2008 before it will be commercially launched, with the operator still deciding on the most suitable applications. “We do not want to provide a solution that is not financially feasible. The importance for 3G is the application, and the application requires content.” Jaroudi says that there needs to be a focus on computer literacy to help develop local content. “Give the market a couple of years, when internet penetration is higher, when content can be produced and handset prices are more realistic. Then we can witness an interest in 3G.” By that time, a third operator may well have landed.||**||

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