Mobile profits fall as Egyptian customers increase

23 November 2007
The introduction of a third operator into the Egyptian mobile phone market is hitting profits despite the rapid rise in user numbers.

On 17 October, Alex Shalaby, chief executive officer of Mobinil, Egypt’s largest mobile phone operator, met Minister of Communications & IT Tarek Kamel in the Smart Village technology campus on the outskirts of Cairo to sign a licence for a technology that many of his customers may never use.

Egypt’s third third-generation (3G) mobile phone licence was not purchased for £E3.34bn ($607.7m) because the new licence holder wanted to offer 3G services, such as picture messaging and video calling. Shalaby and his opposite numbers at rival companies Vodafone Egypt and Etisalat Misr need 3G licences because their existing second-generation networks are overloaded by a surge in the number of people making mobile phone calls.

Mobinil does not reveal how many minutes of voice traffic are carried over its network, but Vodafone Egypt, the second largest operator in the country, does. It carried 5,591 million minutes of calls on its network in the three months to the end of September 2007. In the same period in 2006, the number of minutes was just 3,462 million. Etisalat Misr, the Egyptian subsidiary of UAE operator Etisalat, only launched in Egypt in May 2007. So far, the Emirati management team has refused to provide separate figures for the new business.

Additional capacity

Mobinil’s reason for acquiring the 3G licence, which it hopes to launch in the second quarter of 2008, is to give the company more capacity for its growing voice business. Protecting its core voice business, rather than selling data services to better-off customers, is Mobinil’s strategy.

The decision to buy the 3G licence was made at a board meeting in July. However, Shalaby had been pushing the Mobinil board to acquire the licence for some time, only to be rejected on the grounds of cost. Eventually, the board agreed to the purchase. Extra bandwidth was urgently required as Mobinil forecast it would run out some time in late 2008 or early 2009. “Our projections for when we will run out of frequency spectrum have come closer than we previously expected,” Shalaby told MEED in the summer. “The day is not far off when we will not be able to take on new customers.”

The number of Egyptians buying mobile phones has surpassed all expectations since May 2006, when the market began to take off. The number of active mobile phone subscribers almost doubled over the following year, from 14 million in the second quarter of 2006 to nearly 27 million in the third quarter of 2007 (see chart, page 38).

Mobinil beat rival Vodafone Egypt in attracting the most new users. It had 13.7 million customers at the end of September 2007, compared with Vodafone Egypt’s 12.2 million. Two years ago, the operators had 5.9 million customers each. Etisalat has not announced the number of customers on Etisalat Misr’s books, but analysts at Wireless Intelligence, the data-collection arm of the GSM Association, estimate the subsidiary has more than 1 million customers already.

Marketing incentives

Mobinil has been the most aggressive of the three operators in its search for new customers. In September, it cut the price of the scratch cards used by its prepaid customers to buy credit by 15 per cent. Effectively, Mobinil started paying the sales tax on its customers’ voice calls. Other marketing incentives have included cutting the minimum monthly spend to just £E0.10.

With the introduction of the new operator, Etisalat Misr, into the market this year, the two incumbent operators have had to improve their services and drop their prices. The success of their tactics, however, has taken all three operators by surprise.

“How did we increase this penetration?” says Guillaume van Gaver, a vice-president at Mobinil. “There were external factors. Egypt has a booming economy with a very young population. There is strong demand for communications services, which has been helped by the low cost of handsets.”

Egypt’s rapid growth over the past 12 months has been stunning, but the country still lags behind most of its neighbours in terms of penetration. The GCC countries and Jordan were both faster to adopt mobile phones because their populations have much more money. Most countries in North Africa, however, also adopted mobile phones faster than Egypt. Wireless Intelligence estimates Algeria to have a mobile penetration rate of 72.3 per cent, for example. Egypt’s is just 36 per cent, although it has grown rapidly from a mere 22.9 per cent a year ago.

Part of Egypt’s problem has been its economic weakness. The Egyptian economy grew by 6.8 per cent in 2006, compared with 4.8 per cent growth in Algeria and 6.6 per cent in Jordan. But Egypt is starting from a poor position. Its gross domestic product (GDP) per head was just $1,430 in 2006, compared with Algeria’s $3,009 and Jordan’s $2,400. Egypt’s 77-million-strong population has been underserved by its telecoms sector for years because telecoms companies viewed the massive but poor population as too difficult to serve.

Revenue increases

The two incumbent operators have both greatly increased their revenues recently. Mobinil and Vodafone Egypt have had licences to operate in Egypt since 1997, but their revenues have really taken off over the past two years. Mobinil’s revenue for the six months to the end of September was $781.9m, 92.6 per cent more than the $406m it generated in the same period in 2006.

Vodafone Egypt, which has always attracted more high-spending customers than Mobinil, generated revenues of $918m in the six months to the end of September, 24.8 per cent more than it recorded in the same period in 2006. Both companies are exceeding the forecasts by Analysys, a UK-based consultant, that mobile phone revenues in Egypt will grow by 20 per cent a year until 2011 - the fastest rate in the Middle East and North Africa.

The good news for the mobile operators is that there is no end to this growth in sight. They are signing up customers more quickly than they did at the beginning of the year. In the second quarter of 2006, they signed up 738,243 customers. In every three-month period since then, the number of new customers has increased on the previous quarter. The operators added a total of 3.3 million customers between July and September 2007.

“Our strategy director is changing his penetration projections every two months,” says Van Gaver. “The price drops we introduced were more than compensated for by the users being eager to use their mobiles more.”
He says claims that revenues have withstood pressure from steep price cuts are correct, but the operators’ net profits have been less resilient.

Net profits

Mobinil’s net profits in the third quarter of 2007 were $86m, 8.6 per cent less than the $94m the company generated in the three months to the end of June. Third-quarter net profits in 2007 were also down on the same period in 2006, when they were, coincidentally, also $94m. The drop in Vodafone Egypt’s net profits has been faster: between September 2006 and March 2007, when the operator announced its final set of results as a public company, net profits fell by 26.7 per cent from $139.1m to $102m.

Only the company’s management and its two investors, Vodafone and Telecom Egypt, know whether the slide in profitability is set to continue. Vodafone Egypt has reported its operating profits - always a larger figure than net profits - since it went private.

Operating profits climbed just 2.2 per cent, from $321m to $328m, in the six months to the end of September 2007. As its revenues rose by 25 per cent in the same period, the cost of acquiring the additional sales has increased substantially.

Etisalat has so far kept Etisalat Misr’s profits hidden. Possibly it has done so because the Egyptian operation is making large losses as it enters the market and tries to break up the duopoly. The Egyptian subsidiary paid $2.9bn for its licence in 2006, a sum it has yet to pay off. The parent group’s profit margin fell to 33.8 per cent in the three months to the end of September, down from 38.6 per cent in the same period in 2006.

“It is mostly because of the Egyptian operation,” says Wael Ziada, telecoms analyst at Egyptian investment bank EFG-Hermes. “The cost of the licence and the amount of debt will result in Etisalat not making any profits in Egypt for three, four, five, or even more years.”

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