Egypt: Telecoms competition intensifies


Economic News

3 Jul 2013
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The proposal by Egyptian regulators to allow all four main telecoms companies to provide universal services looks set to shake up the industry, encouraging growth in data service amid a tight competitive environment.

On May 12, Telecom Egypt (TE), the monopoly fixed-line operator, announced it would be ready to launch its new mobile network by July once it is awarded a universal telecoms licence by the National Telecommunication Regulatory Authority (NTRA).

In 2012, the NTRA revealed its plans to issue universal licences in 2013 to TE, plus mobile operators Vodafone Egypt (in which TE has a 45% stake), Mobinil and Etisalat Egypt. This will allow the mobile companies to enter the fixed-line market to compete with TE, using the incumbent’s infrastructure, while also allowing TE to operate its own standalone mobile operator, which according to local press reports will take the form of a virtual network operator (MVNO). An MVNO does not own its own radio spectrum or network infrastructure, instead leasing capacity from another mobile company. This model is less capital-intensive than traditional network development, without the need to build base stations, for example. However, it also tends to yield lower margins.

TE is 80% owned by the government, with the remainder listed on the Egyptian Stock Exchange and London Stock Exchange. The company has seen its profits slow in recent years as fixed-line activity gives way to increasing mobile usage, but TE’s shift into the mobile market is partly intended to offset the decline of its core business.

The company has already had some success in diversification. For example, subsidiary internet business TE Data has played an important role in bolstering the parent company’s earnings. TE Data’s revenues rose 28.9% in the first quarter of this year on the same period of 2012, Mohamed Elnawawy, TE’s CEO, told the international press in May.

Elnawawy said that he expected 3-4% revenue growth for Telecom Egypt overall in 2013, double the rate seen in the first quarter of this year, when net profit came in at LE858m ($122.57m), down 6% on 2012 but still above analyst expectations. Earnings before interest, taxes, depreciation and amortisation (EBITDA) fell 32% to LE947m ($135.29m), but the EBITDA margin stood at 34.8%, a healthy level that the company expects to maintain for the full year.

TE is aiming for capital investment of LE1bn-1.2bn ($142.86m-171.43m) this year. Elnawawy did not say how much the company plans to invest in its new mobile network, if indeed it launches one this year, or its revenue expectations for the venture.

TE’s impending emergence as a mobile operator in its own right will certainly have an impact on the broader mobile segment. Price competition among the three existing players has driven down call costs to LE0.11 ($0.02) per minute, Mohamed Zein, senior analyst at HC Securities, a Cairo-based investment bank, told OBG. But lower prices have not necessarily led to greater usage, and with revenues from value-added services (VAS, mostly mobile-internet-based) taking up only some of the slack from declining voice earnings, average revenue per user (ARPU) has fallen to some of the lowest levels in the world.

Zein estimates that ARPU is now LE22-26 ($3.14-3.71) per month, below the regional average, though the EBITDA margins for operators remain relatively healthy, at between 33% and 44%.

This has prompted a push by existing operators into VAS, bolstered by lower costs for smart phones and cheaper data packages. With voice penetration at over 100%, “data is the future”, Zein says simply.

Because of opportunities in data – as well as in developing niche services, there is space for a fourth operator, Khaled Rabie, vice president for public and economic affairs in north-east Africa at Ericsson, told OBG.

“Many believe the market is too saturated for this but I disagree,” Rabie said. “The population isn’t stable in Egypt; it’s growing, and therefore there is room for more players. Secondly, new marketing could help tap new segments. Thirdly, there are further opportunities for different technology using mobile networks, such as machine-to-machine communication. A fourth licence still has a place on the market.”

Zein, like most analysts, expects TE’s mobile operator to bid for an LTE (long-term evolution, similar to 4G) licence when they are offered in the next few years. While there is some scope for developing 3G usage before taking the next step, LTE is already in the pipeline.

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