Bonaparte's battalions

Internet access is now free, but someone still has to make money. Jasper Thornton talks to the Network Providers about their new business challenges
had his armies, Dante his Beatrice, Pele his Brazilians. Behind every success story lies an unsung supporting act; and so it is with the Internet. When your fingers blast over the Qwerty, and your computer squirts data, voice and video down a phone line, a few companies are working furiously backstage to make sure everything connects. And those fabulously free dial-up numbers (the first in the Middle East) are the fruits of their hard work, ideas, and wildcat competition -- which is exactly how markets are supposed to operate. These free- market foot-soldiers of the IT world are the Network Providers.
As every user knows, you dial-up and connect to the Internet via an Internet Service Provider (ISP) -- but the Network Providers do the heavy lifting. They haul the traffic, marry your connection to the phone lines -- and suffer your rage when things go wrong. For them, however, life is rarely simple. Letting you log on free is only one of a host of issues they face as they challenge for Egypt's IT future.
It is, however, the biggest. Back in 1999, Noor, one of the country's big seven network providers, announced at a press conference that they would provide free Internet. Since then, the Network Providers, and the Ministry of Communication and Information Technology (MCIT), have been scrambling to make that vast vision real. When Al-Ahram Weekly visited MCIT to meet Mustafa Abdel- Wahid, the ministry architect behind free Internet, his mien was ultra-droll. "Yup, that was some project!" he deadpanned.
The market may be free, but it is not equal. To make free internet work, Abdel-Wahid and his team divided Network Providers into three tiers (imaginatively named A, B and C).
Class A providers are licensed to build and run data networks around the country, which they can also rent out to ISPs (other people's, or their own). They also have monopoly access to the international pipe (the tube that links Egypt to the outside world). This is a five-year deal: during that time, no additional class A licences will be issued, Abdel-Wahid told the Weekly. That happy élite is composed of Nile On-Line, TE Data (formerly Geganet), Egynet and Link.
Standing a little behind class A is class B. These providers are also allowed to build a data network (which they are, furiously). They must, though, rent time on the international pipe from class A. They are MenaNet, Raya and Noor, who are active, and a dormant pair, Tricom and Online!
The poor cousins are class C. They can only offer users bandwidth by renting it from class A; in effect they are "virtual" network providers. They have no licence to build their own. They are the dozens of Internet service providers around the country whose operations range from the substantial to the guy with a computer in his garage.
All this makes for some interesting business questions.
Con O'Donnell, an IT consultant with Egypt's National Systems Research, explained to the Weekly that the free Internet model has been designed with the end- user in mind, not for the profit of the Network providers. Previously, their income came from subscriptions paid by users dialing up; that particular rug has now been dramatically whipped from beneath their feet.
Abdel-Wahid outlined the new business model that replaces the subscription one. Now, when a user dials in, the Network Provider they choose to use gets 70 per cent of the cost of the call from Telecom Egypt. "The battle, then, is to get customers," Abdel-Wahid says.
Good news for the Network Providers, bad for the nation's phone company? Maybe not. Basel Dalloul, high-octane CEO of Network Provider Noor, explained to the Weekly: "The 70/30 split is a bit of a myth," he argues. "Two-thirds goes straight back to Telecom Egypt, who also get bigger capacity, free." He explains: "To qualify for revenue sharing (70/30), the provider must 'co- locate' their equipment in the same phone exchanges that handle the Internet user's call." The Network Provider must also be able to handle the full call, from dialler to receiver. "If I get a call from Giza, but my equipment is in Ramses, even if it is routed partly through Ramses, I get no revenue. I have to have equipment in Giza, too," Dalloul says.
There's the rub. The only place Network Providers can situate their equipment is in Telecom Egypt's phone exchanges (co-locating), so that the technology can all be wired up. "I have to pay rent to Telecom Egypt to co-locate. I also pay for power, pay lease-line charges between exchanges, pay the license fees, hell I even pay rent on the lines that connect my server to the phone company's switches!" Dalloul remarks. And, every time a Network Provider's switches are used, Telecom Egypt's switches are freed to take other calls. So the phone company loses nothing; and they get their capacity increase paid for. Network Providers say the cost of fully co-locating is huge: Cairo has 90 telephone exchanges, while Egypt as a whole has 4,000.
Abdel-Wahid thinks little of such complaints. He pointed out that the ministry has bargained to bring rental costs down. "Previously, a square metre in the phone exchange cost $5,000 a year to rent; now it is a mere LE1,000 a year," he said. "The cost of transmitting between exchanges is also 50 per cent less, the overheads smaller." He also commented that the new model gave Network Providers a 20 per cent greater revenue each hour, if the user logged on for an hour, than the old one (based on subscription cost of a pound a day).
So who's right? One network provider told the Weekly they served 5.5 million minutes of user time last month. At current rates, the network providers get 1.162 piastres a minute. So one network provider should have earnt about LE64,000 last month, assuming they had already footed the bill of co- locating equipment in all the relevant exchanges, which almost certainly they had not. That's not great, when the cost of building capacity plus other overheads is factored in.
So what do the experts think? O'Donnell guesses that in a year, only two to three providers will be left standing: "Egypt just doesn't have enough users to support them all," he says. The providers agree: "There will be consolidation and mergers," says Dalloul. "At the moment there are four or five providers too many for the market." And even the winners, he thinks, will not start earning for two to three years. Internet use has increased by 30 per cent since the free Internet arrived, says Abdel- Wahid, (he guessed there were now a million users) but gains will soon stall; Egypt simply doesn't have enough families that can afford PCs. The ministry did tell the Weekly that it was working on a stripped-down LE1,500 computer built by a military contractor. But such initiatives won't kick in for a while.
So who will be left standing on the podium? In the end, the biggest: those who can win enough users -- with cunning inducements, smart ads and good branding. The Class A team are well placed to compete for home-users: their international pipe and ready bandwidth see to that; moreover, only they can rent bandwidth to the class C "virtual network providers," pretty much guaranteeing them income. For the class B providers, pulses will be palpitating: "They have six months to co-locate, after which the revenue share deal expires," says Abdel-Wahid. Class B are particularly well suited to connecting businesses in Egypt, as they then do not need then to pay rent on the international pipe. Both class A and B will try and persuade users that their service is quicker, or less glitchy, than rivals'. Egynet, for example, trumpets its high speed DSL lines, while Noor, Egynet and Nile On-line provide only their own ISPs, running on their own networks so, as they put it, "if it goes wrong, it's our fault. We can't pass the buck!"
For class C providers, who must hand over most of their income to the class A giants, the question, as Abdel-Wahid puts it, is cutting costs (they only really need a technical support and advertising team), and working out ways to offer premium services. "They can still charge users through the phone company; the charged lines still work," says Abdel-Wahid. That will require dreaming up ways to persuade users to pay for what they can otherwise get nothing. And so the free Internet model may come full circle: to survive, you friendly neighbourhood provider may just start charging you again.
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