Egypt is moving towards the biggest shakeup in its telecoms market since the entry of the cellular operators in the late 1990s. On a three-year view, Egypt is expected to have a telecoms market in which all existing players will have the opportunity to become fully integrated players, in other words to offer both fixed and mobile phone services. This does not necessarily mean that all operators will choose to become fully integrated. Whether the players take up the licences will depend on the economics of the proposition, including the cost of the licences, access charges and pricing, and expected market share penetration. According to the government's plan, the liberalisation of the telecoms market is expected to occur in two phases under the unified licences umbrella. First, Telecom Egypt (TE), the sole fixed-line operator that is 80 per cent owned by the government, will be granted access to the mobile market through other mobile operators' networks, and the three existing mobile operators will be granted the right to offer domestic fixed-line services to end-customers through TE's existing network. Second, all operators will get upgraded to full-scope licences, including 4G mobile services and fixed-line services (giving operators the right to install their own fibre infrastructure). Given the present severe competition among the mobile operators and the continuous cellular emigration, resulting in lower fixed-line usage, TE's management has adopted an “if you can't beat ‘em, join ‘em” kind of thinking on mobile services and revealed its ambitions to upgrade to an integrated operator and introduce its own mobile services apart from its stake in Vodafone Egypt (VFE). But there are concerns regarding the “price” TE and/or the government will need to pay for TE's direct access to the mobile market, as the government may feel obliged, or even pressured, to provide a quid pro quo to the mobile operators. Initially, this might be the right of the mobile operators to resell domestic fixed-line services using TE's network. While the mobile operators may be interested in offering domestic fixed-line services to customers, history shows that in other markets switching to alternative service providers is a slow process, and the incumbent usually continues to retain dominant market share. Furthermore, to the extent that cellular operators do sell this service, TE will still get paid for transmitting and terminating calls. However, the price might be raised to the ability to build its own fibre rings to handle its traffic (cellular and domestic fixed-line) as well as backhaul links to international gateway licences (IGWs) and a re-pricing of IGW licence fees to make them economically viable for Mobinil and VFE, which is understood to be the case now. Only TE and Etisalat Misr have IGWs, and as a result Mobinil and VFE use TE's IGW for their international calls. New IGWs would be very damaging to TE's wholesale segment, as revenue from the expected nascent mobile business would be insufficient to offset the impact. At least 20 per cent of TE's revenue would be at risk. In such a scenario, the government may have to compensate Etisalat Misr for changing the goal posts after it paid for its IGW in 2007. Thankfully for TE, there is some protection in the near term, as it has a three-year wholesale (I&I) agreement with Mobinil and VFE. Even if the unified licences are offered immediately, wholesale revenues should be protected for at least that period (it will also take mobile players at least 18 months to install their infrastructure). Furthermore, the pricing of the licences and the termination rates operators can negotiate will still have to be assessed in a build-or-buy analysis. However, the three operators might be very keen to install fibre rings in Egypt's main cities in the medium term. It is legitimate and reasonable that the NTRA, the national telecoms regulator, is not forcing TE to build a 3G technology network as 4G will be offered in the near term. Hence, TE will be granted direct access to the mobile market, avoiding any immediate capital investment in the network and enjoying a grace period to gain critical mass before embarking on a capital-intensive green-field infrastructure license. However, by the time TE is able to build and launch its own network in 2015 or 2016, mobile penetration could be in excess of 140 per cent. Furthermore, recent history shows that the mobile market is already highly competitive, making it very difficult for a new entrant to build market share with decent profitability margins. However, TE's ability to offer its customers triple-play (fixed voice, ADSL broadband and mobile) bundles, assuming regulatory approval comes through, could be the “game-changer” which is still subject to the company's strategy, i.e. targeting the enterprise segment (especially government entities and state-owned banks) and broadband (data is becoming key while voice is increasingly being commoditised), or focusing on the lower end of the pre-paid market. There would be serious concerns if the government tried to overpass the current disputes between TE and the mobile operators and approve the mobile licence for TE without reaching an amicable settlement. Two weeks ago, the first stern official statement came from Vodafone Group, one of the three global telecoms players parenting the three Egyptian mobile operators, on TE's proposed mobile licence in which it declared its intentions to defend its Egyptian mobile operator. Similar statements or reactions might follow from France Telecom and Etisalat, which are the parent companies of Mobinil and Etisalat Misr. As a result, the new cabinet (remaining an interim one) has suggested that the approval of the licences might be postponed and that the government will carefully consider the global operators' reactions, especially given its aim to facilitate and improve the investment climate in Egypt. Finally, there has been much speculation and unclear official statements over whether TE would be required to sell its stake in VFE. TE has said that if it obtains the full-spectrum 4G licence, which is expected to be issued within two years, it will consider the best options for its shareholders regarding its stake in VFE either by completely acquiring VFE or by exiting it according to the price and will of all the concerned parties. The company added that currently there is no immediate need to exit VFE and that it has not received any official notification to do so. Therefore, the authorities aren't expected to force TE to sell its stake while it operates without spectrum. However, as we move into later stages, under which TE could upgrade to an infrastructure-based operator with its own spectrum, it may then be forced to divest. However, ETEL may not wait, preferring to find a buyer sooner rather than facing a forced sale at a later stage. The sale would hit TE, as it would lose income from investments from VFE (representing more than 30 per cent of its net earnings), and revenue from the nascent mobile business would be insufficient to offset the impact in the short term. The writer is a senior analyst at a leading local investment bank
