Having long been one of the most dynamic sectors of the economy, continuing to grow even during periods of turbulence, the Egyptian telecoms industry experienced a landmark year in 2017. September saw the launch not only of long-awaited 4G services, but the entrance of a new mobile operator. The advent of 4G has led to substantial new investments by local and international players, and paves the way for Egypt’s telecoms business to move to the next level in terms of service provision, innovation and diversification.
The sector is overseen at the central government level by the Ministry of Communications and Information Technology, which was established in 1999. The ministry has the responsibility for formulating policy for the industries, which are regarded as among the most important for Egypt’s economic and social development.
The sector is separately regulated by the National Telecommunications Regulatory Authority (NTRA), which was established in 2003 following a split in 1999 between the government’s telecoms operations and regulatory functions. The NTRA’s responsibilities include creating an enabling environment for competition, while also working to improve the quality and availability of telecommunications services. The authority aims to make ample services available throughout the country, support the creation of a healthy investment environment – including through incentives for investors – and craft policies to support infrastructure development and ICT utilisation. NTRA also has responsibility for protecting national security in the telecoms field, testing and crafting telecoms and broadcasting equipment, and allocating spectrum to operators.
For decades the sector was dominated by Telecom Egypt (TE), a fixed-line, state-owned enterprise that traces its roots back to a telegraph connection established between Cairo and Alexandria in 1854. All telecoms companies were nationalised in 1957 and TE emerged as a joint-stock company in 1998 from ARENTO, a state-owned but nominally independent telecoms utility. When the government launched an initial public offering of 20% of TE in 2005, it opened the legacy operator to private investment for the first time, enhancing the firm’s transparency and governance.
Gradual liberalisation in the 1990s and 2000s opened the market to more competition, bringing major international telecoms companies into the mobile segment in particular. Before TE entered the arena in September 2017, Egypt had three mobile operators. All majority foreign owned, Vodafone Egypt, Orange Egypt and Etisalat Misr are under the umbrella of mother companies based in the UK, France and the UAE, respectively. Etisalat Misr is 66% owned by Etisalat, with the remaining 34% largely in the hands of Egyptian state-owned enterprises, including the Egyptian National Post Authority (20%) and the National Bank of Egypt (10%). Orange owns close to 99% of its Egyptian subsidiary, with the remaining stake held by minority shareholders via a free float on the Egyptian Exchange. Vodafone Group owns 54.93% of Vodafone Egypt and TE holds 44.94% , which gave it a strategic foothold in the mobile segment in the years before it launched its own provider, WE, in late 2017. The remaining 0.13% freely floats on the Egyptian Exchange.
Although sector reforms have allowed other companies to bid for fixed-line licences, TE has an effective monopoly on that part of the industry. However, in 2016 Orange acquired a fixed-line licence for $11m and expects to launch services in the first half of 2018. Discussions with TE about using its infrastructure were ongoing as of December 2017.
Currently, Egypt’s telecoms segment is the highest growing sector in terms of year-on-year (y-o-y) growth, having increased by 12.5%. Currently its contribution to GDP is 3.5% with a forecast of 14.5% yo-y growth for 2019-20. Egypt’s mobile telecoms segment has been characterised by steady subscriber growth in recent years, following a period of very rapid rises in the years to 2012, and a period of consolidation driven both by the market nearing saturation and tighter regulation. Between 2009 and 2012 alone, the number of mobile subscriptions nearly doubled, from 55.4m to 96.8m. This translated into the penetration rate increasing from 72.1% of the country’s population to 116.9%, with penetration topping 100% in 2011, according to figures compiled by Beltone Financial, an Egyptian investment bank. However, true penetration – the proportion of Egyptians with mobile telephones that are used regularly – is estimated to be considerably lower, perhaps around 70%. Multiple SIM card ownership is common in Egypt, with customers switching between providers to take advantage of on-network tariffs and special offers. Subscriber numbers dropped in 2014 and again in 2015 to 94m – a penetration rate of 107.4% – as the market matured and price competition, which had been driving subscriber growth, eased.
Subscriptions were also affected by NTRA moves to deregister unused mobile lines and subscriptions with incomplete user details for security reasons, with 13m deregistered in 2015-16, according to local press reports. In 2015 the NTRA also imposed temporary restrictions on the sale of SIM cards. The regulator limited sales to the three mobile operators’ official outlets, thus cutting out a substantial part of the market, although sales from unofficial outlets were not entirely eliminated. The move was again intended to tighten registration of SIM cards for security and antifraud purposes.
MOBILE CITIZENS: Subscriber growth has returned since 2015, with more than 6m new subscriptions between the end of that year and November 2017, when the total reached 100.7m, up from 97.8m at end-2016, according to Beltone. Penetration reached 109.9% as a result, up slightly from 109.7% in 2016. However, maintaining multiple SIM cards is still common, suggesting that true penetration remains some way below 100%.
Ample scope for growth remains thanks to a population rising by about 1m people per year. The increasingly tech-savvy populace is very young, with one-third of the population under 15 years of age, according to the World Bank. As smartphone devices become more affordable, apps and online content grow more appealing to the local market, and incomes rise, it is likely that penetration will continue to increase. However, operators have started to concentrate less on ever-increasing subscriptions in recent years and more on bolstering revenues from their existing subscriber bases, particularly through data utilisation and value-added services.
Although mobile internet use has been growing rapidly over the past decade, as more and more Egyptians have acquired smartphones and tap into online applications, services and content, penetration remains low with considerable room for growth. As of September 2017, the latest period for which figures were available at the time of press, Egypt had 32.76m mobile internet subscribers, equalling a penetration rate of 35.8%. Growth is high, with more than 4m data subscriptions added since the end of 2016 alone, when there were 28.65m users – a penetration rate of 32.1%. In 2009 penetration stood at just 6.2%, with 4.77m subscribers. However, even the most modest true penetration estimates probably overstate the proportion of the population using mobile data. Some data subscriptions – like many voice subscriptions – are duplicate, while some are inactive or barely used for data services. Although data revenue contributes less than half of operator income at the moment, the popularity of data is expected to grow, particularly as the new 4G services are rolled out. The NTRA began issuing 4G licences in 2016, with TE being the first player to acquire one. The three incumbent mobile operators held off for a period due to concerns over pricing and spectrum allocation, but by October of that year all had acquired licences following negotiations with the regulator. All four mobile providers launched 4G services in September 2017 and are marketing their offerings heavily. The technology requires providers to upgrade their networks to carry increasing amounts of data traffic and to further improve service quality – an increasingly intense area of competition. “One of the main issues in Egypt is that customer experience is not part of any curricula, thus private companies have to organise their own in-house training courses,” Giorgio Modesti, CEO of Teleperformance Egypt, a provider of outsourced customer management services, told OBG. The launch has also provided the firms an opportunity to refresh and strengthen their brands (see analysis).
As of November 2017 and excluding recently launched WE, Vodafone Egypt led the mobile segment with 44m subscribers and a market share of 43.7%, according to Beltone Financial. It was followed by Orange Egypt with 33.5m subscribers and a 33.3% market share, and Etislalat Misr with 23.2m subscribers and a 23% share.
Vodafone has been in the leading position since 2010 when it overtook Orange. In 2009 Orange Egypt – then under the brand Mobinil – had topped the market with a 45.8% share and Vodafone was close behind at 42.1%. Etisalat Misr, launched in May 2007, had already captured a 12.1% share by the end of its second full year of operation. Etisalat brought an aggressive pricing policy to the market, catalysing a surge in competition among the operators. In a relatively low-income, price-sensitive industry with high levels of subscriber turnover, average revenue per user (ARPU) began to decline; however, operators were able to offset this to an extent with rapid subscriber growth.
Market share has not changed radically since 2012, with each operator maintaining similar levels of growth. Over the past six years, Vodafone’s market share has varied from 41.1% to 43%, Orange’s from 33% to 35.4% and Etisalat’s from 23.1% to 24%. Operators are increasingly looking to protect market share and bolster revenues through segmentation – that is, focusing on specific areas of the market – and service quality. Vodafone, for example, has had success in building its postpaid subscriber base, which tends to be more affluent and higher spending, as well as business customers, a relatively lucrative niche.
Orange’s previous brand, Mobinil, was launched in 1998 by Egyptian businessman Naguib Sawiris through his firm Orascom Telecom Media and Technology, in partnership with international counterparts such as France Télécom. Mobinil later adopted the name of one of France Télécom’s purchased companies, Orange. Orange Group is now a multinational telecoms firm listed on global bourses such as the New York Stock Exchange and the pan-European exchange Euronext.
Following a series of share acquisitions, Orange Group now owns 98.92% of the Egyptian branch. The group has seen Etisalat in particular eat into its market share as price competition intensified after 2007. The company has also been affected by its relatively high leverage, which, with high interest rates – the central bank’s overnight lending rate stood at 19.75% in December 2017 – has increased its cost burden. A traditional focus on lower-value, pre-pay subscribers has also made Orange vulnerable to price competition. However, an increased emphasis on younger consumers means that it benefits from the growing ranks of young Egyptians acquiring mobile phones. This demographic is also increasingly using the devices to go online to an extent that older generations are not.
The decline in Orange’s market share slowed from 2012, and the operator has recently found new life. In March 2016 the company was formally renamed Orange Egypt, bringing a globally recognised brand to the market. The company announced that it aimed to diversify beyond mobile services to become a “true digital player”, and that the move would allow it to better benefit from company-wide synergies and knowledge transfer, including bringing global products and services to the Egyptian market. These include Orange’s secure authentication system, Mobile Connect and Orange-branded devices tailored to the Middle East market.
AVERAGE REVENUE PER USER: After Etisalat’s entry raised competition, ARPU across the mobile industry declined considerably to some of the lowest levels in the world – close to LE20 ($1.32) in some cases. While voice pricing reached a natural floor, revenues have been buoyed by growing data usage.
Precise ARPU figures are difficult to obtain due to limited corporate disclosures, however, in the October-December period of 2017 Vodafone Egypt recorded a blended ARPU of LE35.10 ($2.31). Meanwhile, pre-paid ARPU was LE30.30 ($2) and post-paid was LE96.70 ($6.37), which is indicative of how much more revenue contracted users generate per month. According to Ahmed Adel, head of telecoms research at Beltone Financial, this represents a significant rise on 2013, when blended ARPU was LE22.20 ($1.46). The pre-paid average then was just LE17.60 ($1.16) and post-paid averaged LE71.80 ($4.73). Revenues have been bolstered over the years by rising usage and well-targeted offers. Adel estimates that the market as a whole has a blended ARPU of 90-95% of Vodafone’s rates.
However, the sharp decline in the Egyptian pound following the central bank’s move to float the currency in November 2016 means that dollar ARPU – a significant measure for the international owners of the three operators – has continued to decline. The industry expects a slight contraction in current ARPU during 2018 and 2019, due to increased competition from WE, TE’s new mobile arm. Still, revenues have been supported by the NTRA’s move in September 2017 to slash the value of pre-paid recharge cards by 36% while maintaining their price – effectively increasing the cost of credit so consumers receive less credit per pound than before. The regulator said the move was intended partly to shift the tax burden onto the user rather than the operator, giving the latter more resources to invest in networks. While investors objected, it may help operators at a time of rising competition, having been introduced around the same time as WE’s launch.
Overall, revenues are not expected to drop drastically, as mobile voice services are now seen as an essential product. Voice revenues are supported not only by population growth, but also by barriers to over-the-top (OTT) services that have eaten into voice usage in other countries. There is also the growing appetite for mobile data to account for, which will boost that particular revenue stream. “With current penetration rates well over 100%, it is all about increasing ARPU,” Yasser Aboulmagd, CEO of Mobiserve, a provider of services and know-how to the telecoms sector, told OBG. “This includes delivering content and data upgrades.”
The launch of WE in September 2017 brought a fourth operator to an already competitive arena. TE had been laying plans to become a universal telecoms player for some years, with regulatory reforms and the industry’s broader evolution making the move possible. In August 2016 TE was granted a licence to enter the mobile market by the NTRA, becoming the country’s first integrated telecoms operator offering fixed-line, mobile and internet services. It also became the first operator to acquire a 4G licence in August.
The licence includes authorisation to sign national roaming agreements – that is, for WE to use other operators’ physical network, not unlike a mobile virtual network operator. The company signed such an agreement with Etisalat Misr in May 2017, allowing WE to use Etisalat’s voice and data services where TE has not already rolled out its own network. This came a month after a memorandum of understanding was signed with Orange regarding national roaming, which was in the negotiation process at the time of publication. TE is, however, rolling out its own radio network to decrease its dependence on national roaming pacts. Initially WE offered only pre-paid consumer packages, but post-paid and corporate products are expected in 2018. The operator is already preparing for the rollout of LTE services by integrating its business support systems, such as customer relationship management, billing and point of sales. According to media in late 2017, TE has invested LE6.5bn ($428.2m) in WE on top of the cost of its universal licence.
WE’s first months were successful in terms of subscription numbers, well outstripping TE’s somewhat conservative targets. By the end of the third quarter of 2017 – just 12 days after the operator launched – it had already acquired 350,000 customers, and by early December had 1.7m, according to a company statement. By end-2017 the figure had climbed to around 2m. This put WE a full two years ahead of its initial business plan. The downside has been that WE’s national roaming costs are exceeding initial estimates, as call and data volumes have been considerably higher than expected. Thus, TE is developing its own network to accommodate the traffic. “TE initially offered mobile services – 2G, 3G and 4G – via Etisalat,” Adel told OBG. “Being a virtual player brings very limited margins, but WE should have its own network operational by 2019. This will give it a better opportunity to gain market share and set prices for mobile data services.”
Although TE is rapidly growing WE and its associated infrastructure, the firm remains committed to its core fixed-line business. It is also looking to build on its position in the submarine cable market, in which the company is an important regional player. TE further aims to expand its enterprise segment, which the firm sees as having particular potential, given the increasing participation of telecoms companies in the ICT sector. In December 2017 the TE board of directors approved the company’s budget for 2018, forecasting a revenue growth percentage in the high-single to low-double digits, an EBITDA margin in the mid-to-high twenties and capital expenditure of around 30% of revenues. This builds on a successful 2017 – in the first three quarters of the year, consolidated firm revenues grew 34% year-on-year to LE4.43bn ($291.8m), while normalised revenue increased by 9%, partly on the back of continued growth in data services.
As TE’s plans to launch a mobile arm have taken shape, there has been some speculation over the future of the company’s 45% stake in Vodafone Egypt. An argument exists for the legacy operator to sell its shares to prevent issues of market competition, but the company has not yet been obligated to do so. According to Reuters in June 2016, the terms of the acquisition of TE’s 4G mobile license did not require the company to divest its stake in Vodafone, and representatives of TE told OBG that the company has no intention of releasing its holding for the time being. However, employees of TE will be withdrawn from Vodafone Egypt’s board of directors to prevent a conflict of interest.
Adel told OBG that one option TE has is to divest its Vodafone Egypt stake in the medium term to help finance the expansion of WE. This is likely to be a capital-intensive process as the operator rolls out its own network and pays licence fee instalments.
The fixed-line segment was widely seen to be declining a decade ago, as Egyptians signed up for mobile services in the tens of millions. This has been a global trend: the migration from fixed to mobile by existing customers, while new subscribers often choose mobile over fixed-line connections. Consequently, TE’s fixed-line subscribers decreased from 8m in 2011 to 6.5m in 2016, according to company statistics, and expanding the fixed network seemed to make little economic sense for the firm, long the monopoly operator.
However, recent periods have seen something of a revival in the fixed-line segment thanks in part to rising demand for ADSL services, as well as the growth of small businesses and larger corporations that often prefer fixed voice services for internal and external communication. The decline in the number of fixed-line subscriptions began to slow in 2014 and 2015, with 2017 seeing the first growth in years. According to Beltone Financial, which had slightly different figures than TE, the number of subscribers rose from 6.1m at the end of 2016 to 6.7m in November 2017 – an increase of nearly 10% in just 11 months. TE expects the materialisation of fully-integrated telecoms operators to raise competition in both the fixed-line and mobile business.
The landmark developments of 2017 will continue to play out in 2018, with all four mobile operators pursuing investment in infrastructure and marketing of 4G. Following its remarkable early growth, WE will look to establish its position in the industry, with TE aiming to claim its stake as the main data player and capitalise on existing business relationships to corner a higher-value segment of the market.
Steady subscription growth and increasing demand for data should continue to bolster the position of all operators, with 4G services providing a new field of competition in what is incrementally becoming a less voice-dominated, price-sensitive growth industry.
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