Egypt's third mobile licence will soon be available for the best bidder. Niveen Wahish tries to find out if it is a worthwhile investment After years of indecision, the National Telecommunications Regulatory Authority (NTRA) has finally made up its mind, deciding to open up the mobile telecommunications market to a third operator. During the coming three to four months they will be seeking international bids for the establishment and operation of a third mobile phone network to offer second generation and third generation (3G) mobile telephony. The operator is free to choose between the CDMA 2000 and UMTS/GSM, both 3G mobile systems. According to an NTRA statement, a bidder will be chosen by early next year. The new company, they expect, could start operations by mid-2007. Two years ago, NTRA had deemed the establishment of a third operator unfeasible, but earlier this year said that it may be reconsidering that statement. NTRA attributed the reversal of its decision to changes in the telecommunications market. Among those changes the NTRA cited the improved investment climate which has attracted investors interest in a potential third operator, the drop in the cost of the CDMA technology, the entry of new operators in markets similar to Egypt and the fact that Egypt's penetration rate is less than 13 per cent, but is expected to grow to 20 per cent in four years. The appreciation of the Egyptian pound is another factor in favour of the third operator because it would mean a lower investment cost. The decline in the value of the pound following its 2003 flotation and the need to ease demand on hard currency was one of the reasons NTRA had turned down a third operator back in 2003. At the time, worries about the potentially destabilising effect in the region of the war on Iraq also figured into NTRA's calculations, together with a global drop in telecommunications sector investments. With this decision, NTRA hopes to gain no less than LE2.5 billion of licence fees, provide third generation services in Egypt, and attract foreign investments. According to Amr Madani, adviser to the minister of communications and information technology for telecom development, "the telecom infrastructure is an important factor in the investment decision. Investors who are coming from abroad want a telecom network that is compatible with the one they have back home." Inviting a third operator is also important, continued Madani, to regulate competition and avoid a market duopoly between the two companies. However, despite the gains that the government may see in a third operator, the question remains whether there is enough room in the market. Experts say that compared to other countries in the region, Egypt's penetration rate is relatively low. Not only that, but other Arab countries, with smaller populations, such as Jordan, Tunisia and Morocco, have larger penetration rates and more than two operators. Jordan has three operators and a fourth is on the way. In Egypt the true size of the potential mobile market is not clear, but it has been growing steadily. "If the two companies feel that a third operator is inevitably coming, then they will expand their market more aggressively," argued Wael Ziada, senior telecoms analyst at EFG-Hermes. This has in fact already begun to happen, with the end of 2004 and the beginning of 2005 seeing unprecedented growth. Madani of MCIT pointed out that since December, when the two companies (Vodafone and MobiNil) began to sense that NTRA was serious about giving out a third licence, subscriber numbers have seen a 30 per cent growth. Vodafone and MobiNil between them had some 8.5 million subscribers at the end of last March. A report by Prime Securities projects that total new subscribers in 2005 will reach 3.43 million, closing the year with a penetration of 15.2 per cent, up from 10.7 per cent at the end of 2004. That potential growth is one of the factors that NTRA sees as justification for a third operator. Still, the third operator will not have its work cut out for it. "The third operator will be competing with two companies who have established experience and a brand name," pointed out Mohamed Fahmi, sector manager in the research department of Prime Securities. "It took the existing two companies three years to roll out their network and to improve their service. If the third operator takes that long, then it will not be competitive before 2009." Moreover, "it would have to offer prices that are lower than what the two companies are already offering," he added. A statement by Vodafone Egypt summarises the situation. "In this market, post pay customers are paying 30 piastres per minute, one of the lowest rates in the world. And prepay lines are available with monthly commitments as low as LE10, again among the world's lowest. Whoever is successful in winning the third licence will not find us an easy competitor." As Ziada, of EFG-Hermes put it, "how the third operator will play it in the market in term of the fares it offers is important in determining the subscribers it can attract." He explained that studies have shown that the single most important barrier in emerging markets to consumer entry into mobile market is the cost of handsets and connection fees. That explains why the two companies have been slashing connection fee to rapidly expand. According to the Prime Securities report, during the first quarter of 2005, connection fees have dropped from around LE300 late last year to less than LE100. Connection fees have come a long way. Back in 1996, when mobile telephones first hit the Egyptian market, connection fees reached LE3,000. Ziada pointed out that back in 1998-99, the connection fee represented 40 per cent of the revenues of mobile operators. Currently, connection fees are around four to five per cent of revenues. With such aggressive marketing, Ziada believes that there will be some growth in the market by mid-2007 just when the third operator would be rolling out its services. "Most of the value would have gone to existing companies. This makes it less feasible for a third operator," he said. Nonetheless, he said there will still be a market for them, depending on how aggressive they are and on the horizon over which they plan to recover their investment. Another leg that a third operator could stand on the market, besides cheaper fares, is the technology they offer. However, Fahmi believes that 3G technology will not be affordable for many customers, and not have enough customers to sustain itself. Ziada reiterated a similar view, stating "3G may not, in the short term, be relevant for the mass market." Nonetheless, MCIT officials are optimistic. Madani believes that in the end it is the investor who will decide if they stand to benefit or not. Some Gulf operators have already expressed interest in acquiring the third licence, according to Madani. He explained that there is increased liquidity in the Gulf due to the hike in oil prices as well as the withdrawal of many Arab investments from the US market. Fahmi adds that to some investors, the Egyptian market, however small their market share, may be their best feasible choice seeing that their own markets are already saturated. Although news of the third operator shook the share price of telecoms in the market, both Vodafone and MobiNil shares depreciated by 7.7 and nine per cent respectively, Ziada does not expect the third operator to impact their fundamentals. Madani of MCIT agreed, saying that he does not expect the third company to corner more than 20 per cent of the market share in four to five years, mostly from market growth resulting in new subscribers.
