OBG talks to Jean-François Thomas, CEO, Orange; Ihab Hinnawi, CEO, Umniah; and Ahmad Hanandeh, CEO, Zain

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Interview: Jean-François Thomas, Ihab Hinnawi, Ahmad Hanandeh

What kind of impact would a fourth mobile operator have on the telecommunications sector?

JEAN-FRANCOIS THOMAS: I believe those already operating within the sector are right to question the need for a fourth operator. Telecommunications is a capital-intensive sector in which large investments are needed to establish and expand coverage in both mobile and fixed networks. With technology changing rapidly, operators must continuously invest to keep pace. Therefore, there needs to be a certain level of return on investment. A fourth operator would reduce the sector’s value and would only offer a short-term gain for the government from selling the licence.

The reasons for adding a fourth operator do not fit the criteria for Jordan’s telecommunications sector. First, Jordan already has an extremely competitive market with its three current operators, which compete fiercely for customers, distributors and innovation in services. Second, the end price for consumers is already one of the lowest in the region, and a fourth operator would push prices to unhealthy levels. Finally, Jordan’s operators all have very extensive networks in terms of coverage, and given that we are all international companies, we have access to the latest technology. This allows Jordan to be one of the most mature telecommunications markets in the region. A fourth operator would add no real value to the sector in these regards.

IHAB HINNAWI: This is currently the most pressing issue facing the Jordanian telecommunications sector. I believe that Jordan does not need a fourth operator. If you look at the penetration rate, the level of competition and the price rates in Jordan, any expert will tell you that there is no room for a fourth operator. Adding a fourth operator will negatively affect total revenues in the sector, which in turn will significantly hurt the government’s revenue intake.

This is the second-most competitive market in the region, with a penetration rate around 140%, and it is a very price-sensitive market because of its low purchasing power. Even the most miniscule drop in prices would have an impact on the entire sector.

With these factors in mind, a fourth operator would only serve to devalue the market. Any government profits garnered from the selling of the fourth licence will be a fraction of the losses the sector will incur.

AHMAD HANANDEH: There are a number of criteria for a government to bring in a fourth competitor to its telecommunications sector: to increase competitiveness, improve the quality of services, raise income for the country or reduce prices. However, when these criteria are applied to the Jordanian telecommunications market, they fail to establish any logical reason for a fourth entrant.

Jordan is the second-most competitive market in the Middle East, and has the second-lowest prices.

The ICT sector, mainly driven by telecommunications, contributes over 14% of the country’s GDP, and when it comes to quality of services, Jordan has the highest quality in the region and is in the upper tier globally. There is no reason to bring in a fourth operator in what is already a highly saturated market that has not been able to grow in revenues in the last two to three years. Moreover, 40% of the existing customer base already has two mobile lines.

A fourth operator would only drive down prices in a market where they are already low, and this would result in a retraction of both quality and revenue for the entire sector. The government would lose money, the profits for the operators would shrink and investment in infrastructure would dwindle.

What kind of services do you expect to drive the sector’s competitiveness moving forward?

HANANDEH: At the moment the competition on voice services has reached a negative point, as revenues in this area are declining. The next era of telecommunications is in data, and competition will now be based on gaining subscribers for data connectivity services both at home and in the mobile segment. There will be a great deal of competition for value-added services for data connectivity. Here, operators need to be careful, because competition should not be on the price of data but in the quality of these services. For this to be achieved, an ecosystem for e-services such as mobile banking or mobile health services needs to be created. These ecosystems are not ready yet and will present interesting investment opportunities within the sector. Maximising value through content, applications and strategic alliances with other sectors will be a key component of competition moving forward.

HINNAWI: The telecommunications sector has always seen waves of different revenue types that reverberate through the sector. Now we are looking at a competition based on data distribution; 3G data bundles, wireless and fixed data bundles. While voice and SMS services have reached the saturation point, data revenues are now going up and penetration in this area is around 60%. In the next one to three years, the competition will be in mobile and fixed network data bundles, mainly. We will see the creation of much more personalised consumption packages that target specific sub-segments of the market, as opposed to a more holistic and standardised consumption package aimed at a generalised market. Finally, there will be competition in terms of vertical integration. More collaboration is already taking place between the telecommunications sector and other growing industries such as tourism, health and education, as well as banking and insurance. The value-added services these partnerships create will be monetised by both the telecoms providers and the other sectors we work with, and will be an important driver of the economy moving forward.

How would you characterise the tax regime within the telecommunications sector?

HINNAWI: Jordan is one of the highest-taxed countries for telecommunications in the world. As an investor, we understood the tax model when we initially invested and adjusted our business plan accordingly. At times, however, we are subject to irrational changes in the tax regime. The revenue sharing tax, income tax and sales tax models have all been changed multiple times. This goes against our original investment business model.

I do not believe it is a good strategy to penalise or tax high-revenue sectors heavily for the mere fact that they are successful. The government should offer a greater level of transparency for the investors.

In short, it is safe to say that the telecommunications sector is over-taxed and that there needs to be more dialogue in regards to proposed tax changes.

THOMAS: When a company does business in a country as an international investor, it should contribute to that country and its success. In Jordan, however, the question is one of balance within the tax regime.

The burden on successful companies, particularly in the telecommunications sector, is too high.

Orange’s revenue is approximately JD400m ($562.6m) and the amount of money that we are giving to the government is around JD125m ($175.8m), a regime that almost makes us a tax collector for the government. We pay a large array of taxes to the state, and this is on top of the high costs that we must pay for electricity, which has risen 150% in recent times.

We are happy to contribute to the public purse, but at these levels the tax regime can be a discouragement to potential investors.

How does Jordan rate for operating environment, high-speed infrastructure and technology-readiness in terms of mobile services?

THOMAS: The telecommunications infrastructure is clearly a very strong asset for the country. We have good fixed-line and mobile networks as well as strong international connectivity. Given the rest of the macroeconomic parameters at play in Jordan, we have a very advanced telecommunications system on offer in the kingdom. We also know that each point of broadband penetration in a given country adds tremendously to the potential for economic growth. Now our focus should be not on infrastructure but in the service layer. There should be an integrated effort in building an e-economy, in which the connectivity that the telecommunications sector creates can be used to grow and sustain other industries HANANDEH: Jordan is an excellent operating environment despite the challenges that the country faces. We operate in a safe environment that secures investment. With regard to infrastructure, Jordan has been one of the most successful countries in the region when it comes to establishing high-quality telecoms infrastructure for both mobile and data connectivity. We are competing at an international level at the present moment, but there are some concerns as we look to the future. The sector still needs large amounts of investment and we need to work closely with the government to draw out a detailed plan for the future of the industry.

How have over-the-top (OTT) applications, such as WhatsApp, affected your revenue from legacy services, and how can their impact be mitigated?

HINNAWI: This has been a growing issue for telecommunications companies, as OTT technologies have grown so rapidly and have really started to have a severe impact on the sector. They are eating up our voice and SMS revenues; many text messages are being sent via OTT applications and the sector is missing out on millions of dollars in revenues. Worldwide, the sector will lose over $250bn in SMS revenues by 2020. With at least half of the consumer data usage going to OTT applications, the incremental revenue from data is dropping rapidly.

As the sector looks for solutions, the choices are either to fight the OTT applications or partner with them. Unfortunately, neither of these options is ideal. But this growth in OTT cannot be stopped, so we will need to look at other revenue schemes and cost-cutting procedures to compensate for the losses derived from OTT applications.

THOMAS: It is clear that these types of applications are having an impact on telecommunications companies all over the world. It is a complicated issue because we are fighting with somebody who is selling something that you used to sell, except they are offering it at no cost. Telecommunications companies may see these OTT operators as destroying the value on services they once sold, but consumers will not see it this way. We have built the networks and the OTT operators utilise our infrastructure without paying the operators or the state via taxes. In the long term I do not believe this system will be sustainable without finding some sort of balance.

There are different approaches to take. Orange is trying to promote our own similar OTT service with a combined Skype and WhatsApp-type service.

Another way could be to have our customers pay us to use these OTT services; this would be against net neutrality so it would have to be a collective decision. This is really a global issue to tackle, as opposed to a uniquely Jordanian issue.

With a penetration of 140%, is there still room to grow in the GSM market? What sorts of services will be necessary to support future growth?

HANANDEH: The factors for increasing penetration are not primarily going to come from the voice side of the service anymore. Efforts to raise penetration will be focused on activating services that need SIM cards to operate. This includes products such as vehicle tracking systems, surveillance cameras, “smart” TVs and other smart electronics.

These will be areas where we think there is still a lot of growth in mobile penetration to come. It is these complementary services – ones that depend on the mobile telecommunications network – that will help to increase the penetration rate going forward.

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The Report: Jordan 2013

Telecoms & IT chapter from The Report: Jordan 2013

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