The opportunity of taking 50 per cent of the profits from a new business after contributing just 20 per cent of the costs would interest any company. When the new venture guarantees a strong cash flow and is receiving support from the head of state’s wife, a business would think it is a dream come true.
This must be how senior managers at Vodafone, the giant UK telecoms operator, are feeling following the success of its consortium in winning Qatar’s second mobile phone licence. Vodafone formed an alliance with the Qatar Foundation, a charitable body made wealthy by a share of the state’s gas revenues, in the run-up to the auction in December last year.
The consortium successfully bid $2.1bn for the licence. Vodafone is contributing $400m and the Qatar Foundation $1.7bn, yet the two are to share the profits from the venture equally between them.
Qatar is the Gulf’s last uncompetitive telecoms market. Its incumbent operator, Qtel, has had the market to itself since its creation as a joint-stock company by emiri decree in 1998.
Presented with a choice of mobile providers for the first time, Qataris are expected to switch to Vodafone in their droves.
Despite a penetration rate of about 120 per cent, the Qatari market can still accommodate further growth. Every Middle Eastern market that has licensed a new operator in the past few years has experienced a surge in customer numbers both before and after the new operator launched its mobile phone services.
In Egypt, mobile phone penetration surged to 42 per cent from 27 per cent over the course of 2007. The growth came after Etisalat Misr launched the third mobile service and existing operators cut their prices to compete.
The Qatar Foundation is saying little about its support for Vodafone except that it wants the UK company’s technology for the benefit of Qatar. The organisation declines to be specific about the technology it wants, but the statement is puzzling considering the widespread availability of most mobile technologies.
Vodafone can provide mobile email and mobile broadband running on third generation (3G) and 3.5G high-speed networks – but so can all its rivals. The Vodafone-Qatar Foundation consortium beat bids from the US operators AT&T and Verizon and regional heavyweights Zain from Kuwait and Etisalat from the UAE.
The tie-up with Vodafone is the Qatar Foundation’s first investment in telecoms, but the charity has other commercial ventures. It funds Al-Jazeera Children’s Channel, a commercial broadcaster with a public service remit, and no relation to the news channel of the same name. It also made a $7.9bn endowment for the Al-Sidra Medical & Research Centre in Qatar’s Education City.
If Qatar Foundation had bid the same amount as Vodafone, the consortium would have lost. AT&T, Verizon and Zain have yet to declare how much they bid for the licence, but Mohammad Hassan Omran, chairman of Etisalat, said in May that the consortium, led by his company, bid more than $1bn.
William Fagan, the executive director of the Qatari telecoms regulator, ictQatar, which ran the auction, also declines to say how much the losing companies bid.
What is clear is that Qatar Foundation’s decision to carry80 per cent of the cost of the licence in return for a 50 per cent share of the profits was a key factor in preventing Etisalat from winning the licence.
Vodafone will have management control of the new company, which will probably launch mobile phone services shortly before the end of the year. It will be called Vodafone Qatar. The management team, which has yet to be appointed, will float 40 per cent of the company on the Doha Securities Market in the autumn. The initial public offering (IPO) is a condition of the licence.
Vodafone will have to give away another 15 per cent stake in the company to several yet unnamed government-backed investment organisations at the time of the IPO. When it finally launches, Vodafone will have 23 per cent of Qatar’s second operator and Qatar Foundation will have 22 per cent.
Qtel is not being idle while Vodafone prepares itself for launch. It is cutting popular mobile phone tariffs and increasing customer numbers. The number of mobile phone customers grew by 37 per cent over the year to the end of March, up from 30 per cent in the year to September 2007.
The incumbent is using its fixed-line business to offer landline telephony and internet connections to existing mobile phone users. It hopes that this triple-play offering will prevent customers from switching their mobile tariffs to Vodafone.
However, the tactic has its limitations. There are many more mobile phones than there are households in Qatar. One member of a household will need a Qtel mobile phone to receive discounted fixed-line services, but everyone else will be free to move to Vodafone if they want to.
Fagan insists that ictQatar has already put dispute resolution procedures in place so that any disagreements between Vodafone and Qtel can be resolved quickly. If these procedures prove to be effective, Qtel will be unable to prevent its customers transferring their numbers to Vodafone.
A strong regulator can prevent an incumbent from delaying people’s applications to transfer, but even if Qtel only allows a small proportion of its highest-paying customers to transfer, Vodafone is guaranteed a successful business.