Is Egypt's telecommunications sector headed towards a showdown?
Egypt’s telecommunications sector might be heading for an international showdown, as the government presses ahead with plans to issue a controversial fourth virtual mobile licence to fixed-line operator Telecom Egypt (TE).
After over a year of negotiations and delays, Egypt’s Ministry of Communications and Information Technology has announced that it will issue a universal licence in the second half of September.
However, unresolved financial disputes between TE and mobile companies will most likely delay the issuing of the licence, say analysts.
Minister of Communications and Information Technology, Atef Helmy, told Al-Borsa newspaper earlier this month that the disputes would be resolved “within weeks,” ahead of the issuing of the licence.
Yet, as the government’s latest deadline for issue approaches, there have been no reports of such settlements.
The licence would allow TE, the country’s only fixed-line operator, which is 80 percent government-owned, to make use of the infrastructure of one of the mobile operators to provide its own mobile services, repackaged under the TE brand, in exchange for wholesale prices paid to the mobile operator.
In return, the universal licence will allow Egypt’s three privately-owned mobile operators, the Egyptian Company for Mobile Services (Mobinil), Vodafone Egypt, and Etisalat Misr, to build a virtual network to provide landline services, using TE’s existing fixed network.
The proposed licence will not, however, allow mobile operators to acquire their own international gateway or to build their own fibre network, similar to TE’s. Therein lays the rub.
A poorly disguised fourth mobile licence
Analysts and industry insiders have described the virtual licence as a thinly-veiled attempt by the government to essentially grant the state-owned fixed-line operator a fourth mobile licence, without holding an international auction, in which it might be outbid.
An official source at Mobinil told Ahram Online that “a real universal licence” would give mobile operators access to international gateways and the right to build a fibre infrastructure of their own.
“The universal licences should be granted at the same time with the same rights, in order to have equitable competition in Egypt’s telecom sector," the source said.
"This means that the international gateway and the rights of mobile operators to build their own fibre infrastructure are part of the universal licence.”
Currently, TE has a monopoly over the fibre backbone required for all kinds of telecommunications, from fixed line to mobile and Internet services, explains Omar Maher, Telecommunications Analyst at Cairo-based investment bank EFG Hermes.
“The mobile operators are not interested in having a fixed-line licence; it’s not lucrative enough for them," Maher told Ahram Online.
TE’s revenue from voice services fell by 15 percent from the previous year, in the second quarter of 2013, as landline subscribers declined to 7 million from 7.6 million.
In addition, Mobinil and Vodafone rely on TE for their international traffic. Etisalat acquired its own international gateway licence in 2007, agreeing to pay 100 EGP per existing subscriber and 20 EGP for every new subscriber thereafter.
This was a good bargain for Etisalat, which had only just entered the market. However, Mobinil and Vodafone, who at the time had much larger customer bases, decided not to seek the licence, explains an industry insider.
Today, Vodafone boasts just over 40 million subscribers, and Mobinil 33 million, while Etisalat has acquired around 23 million customers.
Since late 2012, TE has been offering wholesale discount prices to Mobinil and Vodafone to use its international gateway, to the extent that it has pressured its own profitability margins, says Maher.
“Economically, at this point it makes more sense for Mobinil and Vodafone to continue relying on TE for international services, rather than paying the price of an international gateway licence, not to mention the ensuing operating costs,” deems Maher.
An industry insider disagrees, pointing to the low quality of the transmission and the relatively high prices imposed by TE.
“Even with the discounts, mobile operators have to charge much higher fees than in other countries for international calls, and they get the shorter end of the stick when it comes to quality,” says the source; hence the call for a more holistic unified licence.
All mobile companies indirectly rely on TE infrastructure to provide data services to their customers.
For the past few years TE has been suffering from a lack of growth at the revenue level, as declining voice revenues have countered growing revenues from its Internet Service Provider, TE Data, according to Maher.
“This lack of growth is particularly problematic for TE because parts of their costs are growing irrespective of the muted revenue growth.”
Being largely state-owned makes it very difficult for TE to downsize its employee base of 46,000 employees, to which it is obliged to provide an annual salary increase (around 8 percent), like the rest of the public sector, explains Maher.
“With the mobile penetration rate standing at 116 percent, analysts do not see much growth potential for TE once it enters the market” says Maria Samir, Telecommunications analyst at Beltone Financial.
“TE is not looking to attract more of the voice market (calling minutes) which is almost saturated,” says Maher.
Instead they are after the right to sell data lines, he adds, which in layman’s terms means Internet access through SIM cards used in dongles, electronic tablets and smart phones, like mobile operators.
In selling broadband ADSL services, TE data is currently limited to its fixed-line subscribers, a pool of currently 7 million, of which 1.5 million have already installed broadband.
“The licence will allow it to target the rest of the market, including higher-ARPU (Average Revenue Per User) customers, such as post-paid subscribers and Smartphone users,” explains Maher.
Moreover, TE will be able to offer “total telecommunications solution” packages to corporate clients, with discounts, and the convenience of a unified bill, say the analysts.
Egypt’s National Telecommunications Regulatory Authority (NTRA) does not require TE to give up its 45 percent stake in Vodafone Egypt, which contributes a third of its net profit, according to analysts.
“There is nothing which legally obliges TE to sell its stake in Vodafone in order to acquire the universal licence,” TE said in a note sent to the Egyptian Stock Exchange last month, in response to media reports that had suggested otherwise.
“TE might only have to give up its share in Vodafone Egypt once it has launched its virtual mobile operations, if the Egyptian Competition Authority deems that TE is abusing its pricing power, or if TE decides to acquire a 4G (fourth generation) mobile network operator licence that may be auctioned by the government as early as 2014,” says Maher.
However, the foreign shareholders of mobile operators might not be so patient, and the companies are prepared to resort to international arbitration if the licence is issued under the current terms and conditions, analysts and industry insiders told Ahram Online.
Mobinil is majority-owned by France’s Orange S.A., which owns 93.92% of the shares; the British multinational Vodafone Group owns 55 percent of its Egypt subsidiary; and Etisalat Misr is 66%-dominated by the United Arab Emirates-based Etisalat Group.