Monopoly constrains telecoms liberalisation in Egypt

14 September 2010

Egypt has taken great strides to open up its telecoms sector. Competition among the various operators is increasing, but the dominance of the state-owned provider is hindering progress

Telecoms in numbers

17.5 million: Estimated number of web users in Egypt

40 per cent: Percentage rise in broadband subscriptions since 2009

$2.1bn: Estimated figure Egyptians spent on e-commerce transactions in 2009

Source: MEED

The Egyptian telecoms sector is one of the most progressive in the Middle East, standing out in terms of penetration rates, connectivity and services available. The progress made over the past 10 years reflects the increasing liberalisation of the country’s economy, but the dominance by state-owned operator, Telecom Egypt (TE), still hinders competition.

Subscribers are demanding more advanced telephony services. They want speed and capacity now

Carlo Alloni, Ericsson

The Ministry of Communication and Information Technology (MCIT) and industry regulator National Telecommunication Regulatory Authority (NTRA) have for the past decade focused on promoting Egypt as an information and communication technology (ICT) hub for the Middle East and Africa. Egypt prime minister, Ahmed Nazif, created the IT Industry Development Agency (Itida) in 2005 to attract foreign investment and increase competition in the sector. 

Egypt’s liberalised telecoms market

With investment in infrastructure and a series of ICT initiatives to increase computer and internet penetration rates, Egypt is now well connected. There are currently an estimated 17.5 million internet users in the country.

Through a national backbone infrastructure and connections to several international submarine fibre-optic cables, Egypt has cultivated one of the most competitive internet markets in Africa. The country’s first fibre-to-the-home was launched in Cairo and the latest submarine cable network connects Egypt to France from Sidi Kerir to Marseille. The contract signed between TE and Alcatel-Lucent was worth $125m. Named TE North, the cable expands Egypt’s international connectivity enabling it to serve as a communication hub between Europe and Africa.

There were plans to auction a second fixed-line licence in 2008, but this did not happen

With more than 200 internet and data service providers, Egypt’s internet market has been greatly liberalised over recent years, allowing for lower prices and high-speed bandwidth connectivity. Its international internet bandwidth capacity has more than doubled over the past year, from 48Mbps to just under 100Mbps, to meet growing demand for data and content. Investment is being made to develop the market further. In December 2009, the MCIT announced plans to invest $1bn in broadband internet infrastructure with the aim of boosting subscribers by 4 million by 2014. Broadband subscriptions have risen 40 per cent since 2009 to 1.5 million subscribers.

Mobile connections in Egypt 
Source: MEED 

“Subscribers are demanding more advanced telephony services,” says Carlo Alloni, president of northeast Africa for Sweden’s Ericsson. “They want speed and capacity and they want it now.”

According to Amman-based Arab Advisors Group, Egyptians spent an estimated $2.1bn in e-commerce transactions in 2009. Egypt was the first country in the world to register a domain name (.misr) in Arabic, following the Internet Corporation for Assigned Names and Numbers’ decision to issue domain names in non-Latin scripts. This was a significant step in Egypt’s telecommunication’s strategy to make the internet more accessible. But with 10 million subscribers, mobile internet is a more dynamic growth area for operators.

Telecom Egypt sales 
Egyptian pounds billions
*=First half of 2010. Source: Telecom Egypt

Egypt launched third-generation (3G) mobile services in 2007, making it one of the first adopters in Africa. The licences were also some of the most expensive in the region, demonstrating the potential size of the market. The oldest operator, Mobinil, paid $138.3m, Vodafone Egypt paid $586m and most recently, Etisalat Egypt paid $3.1bn for a 3.5G licence.

The number of mobile subscribers has increased rapidly in recent years. At the end of April 2010, there were 58.7 million subscribers in Egypt. The penetration rate, currently at 80 per cent, is relatively modest in comparison with other countries. Libya’s penetration rate is 135 per cent and Algeria’s is 90 per cent.

Telecoms operator competition in Egypt

There are currently three mobile operators in Egypt. The largest in terms of connections is Mobinil, a joint venture between France Telecom and local outfit Orascom set up 12 years ago. The two companies ended a two-year legal dispute over the ownership of Mobinil in May this year. The ownership structure remained unchanged with France Telecom owning 71 per cent and Orascom with 34.6 per cent. Earlier this month, Mobinil chief executive officer, Hassan Kabbani, announced plans to sell bonds valued at $175m to fund a network expansion.

Vodafone Egypt is the most profitable mobile operator. The company was recently in talks with TE to sell its 55 percent stake for a reported $4.3bn. The move was believed by many in the industry to have been an attempt by Vodafone Group to streamline its business.

The firm’s external affairs director Khaled Hegazy dismisses this suggestion. “There were never plans to sell Vodafone’s stake to Telecom Egypt. This is a partnership and talks like these between members happen, but it was decided to keep the stakes as they are,” he says.

Etisalat Egypt, a subsidiary of the UAE telecoms giant, joined the market about two years ago and has the smallest market share with 14 million connections. It is the only operator with its own infrastructure and international gateways, offering 3.75G connectivity for High Speed Uplink Packet Access. Etisalat will invest $1.4bn in Egypt over the next three years, the company said in June.

Customer mobile upgrades in Egypt

Yet despite the rapid growth and potential of Egypt’s mobile sector, Average Revenue Per User (ARPU) is decreasing year on year.

Most of Egypt’s mobile subscribers are pre-paid and rely on the 2G network. There is enormous potential to shift users towards post-paid accounts and 3G or 3G+ networks, but customers will need to be convinced to do so.

The low ARPUs are cutting into operators’ profits, caused by increased competition in a maturing market based on voice services and the adoption lifecycle, where late adopters of the service tend to spend less. The declining ARPUs have motivated the three mobile operators to invest in the wireline data market.

“There’s an opportunity in the fixed-line business, particularly in broadband, for improving their overall margins,” says Said Irfan, research manager at US-based International Data Corporation.

In the past few years, Mobinil has purchased Linkdotnet, Vodafone has bought Raya Telecom and Etisalat has acquired Nile Online and Egynet to offer customers a wide range of services including mobile broadband.

In September 2009, the NTRA invited bids for two triple-play licences to provide cable, internet and telephone services. Linkdotnet won one of the licences and a consortium headed by Vodafone won the other. The move was an attempt to loosen TE’s monopoly over fixed-line services, but since the licences are limited to Cairo’s residential areas, TE’s dominance is unlikely to be challenged.

Despite the NTRA’s attempts at liberalisation and increasing competition, certain aspects of the industry are still limited. The structure of the sector is complex. TE, the most dominant figure in Egyptian telecoms is 80 per cent state-owned. It is the only fixed-line voice operator in the country. It also controls the infrastructure and international gateways and dominates the internet market through its fixed data service, TE Data. While it does not have its own mobile licence, TE owns a 45 per cent stake in Vodafone Egypt.

The company’s retail voice revenues have decreased due to competition from the mobile market. That said, TE posted a 23 per cent rise in profits in the second quarter of this year, driven mainly by TE Data and Vodafone Egypt revenues. Although it is in direct competition with the mobile operators, TE also benefits greatly from the mobile market due to its stake in Vodafone Egypt. Chief executive officer, Tarek Tantawey, has expressed an interest in applying for a fourth mobile licence, should the NTRA issue one, to create the synergy of mobile, fixed and data services. This would, however, increase its dominance.

The process of acquiring a licence is prohibitively expensive in Egypt. Etisalat was the only operator granted permission to establish its own international gateway for its own use, so the other two operators have to rely on TE links. Greater gateway liberalisation would help open up connectivity for telecoms operators.

The easiest way to increase competition would be to allow Etisalat to wholesale its gateway access or allow the other operators to establish their own, albeit at great expense.

TE’s dominance is unlikely to wane in the foreseeable future. There were plans to auction a second fixed-line licence in 2008, but this did not happen and it remains uncertain whether another licence will be issued any time soon. Similarly, although there have been talks of a fourth mobile licence, these talks are unlikely to surface before 2011.

State protection

The Telecommunications Act, ratified in 2003, also helps protect the state operator. In March this year, the NTRA banned all Voice over Internet Protocol calls on mobiles since the law states that all international calls must pass through TE’s gateways. The ban did not extend to international calls made via fixed-line data services.

The protection is not surprising, however. TE employs about 20,000 people and is a national symbol of Egypt. If the market were to be opened up too quickly TE’s revenues would suffer drastically. So the MCIT and NTRA have chosen to manage competition over the past few years rather than let it flourish.

Communications minister Tarek Kamel has hinted at plans to offer up more shares in TE. The initial public offering (IPO), which took place in 2005, raised $820m. Depending on the number of additional shares floated, this move could help liberalise the fixed-line market.

The affordability and level of service in the mobile sector indicate that the NTRA is doing a good job. Over the past decade, it has introduced more competition, particularly within data services and the contents market, both of which are very open.

But there is still huge potential for further growth, with the best opportunities in broadband services and mobile internet.

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