Reconnecting Egypt

With the political situation in Egypt improving, the telecom sector much potential
ARPU, Operators

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Egypt’s telecom operators have faced more than their share of challenges in the past year, with revenues sliding as a result of the political unrest that persisted long after the downfall of former president Hosni Mubarak.

But the level of the declining revenues faced by the operators looks set to be a temporary phenomenon. The situation also belies the true state of Egypt’s telecoms sector, and its potential.

Indeed, Egypt is home to one of the most developed telecom sectors in Africa, with national and international fibre infrastructure, some of the lowest pricing for services in the region and a competitive mobile sector. The country is also home to more than 150 internet and data service providers.

“There were more than 80 million mobile subscribers in Egypt by the end of Q3 2011, following a year-on-year growth of 26%,” says Farid Lekhal, a principal at Delta Partners. “This implies a penetration above 93%. As the market reaches saturation levels, mobile operators are moving from the intense competition, which pushed voice prices down by more than 50% over the last two years, to customer value management.”

Osman Abu Al-Nasr, country director in Egypt for Nokia Siemens Networks, thinks that demand for communication is at an all time high, with figures past market saturation. He says: “In spite of this turbulence and the relative instability associated with revolution – or perhaps as a result of this – the demand has increased for continuous communications through mobile phones. The end result was an increase in the mobile penetration rate and subscriber numbers, especially with the fierce competition between mobile operators and their aggressive promotional offerings. Specifically, the mobile penetration rate of 79.57% in August 2010 increased significantly to 97.93% in August 2011, and by now should have crossed the 100% threshold.”

Al-Nasr also believes that there is still more growth on the horizon and that initiatives such as LTE, fixed and mobile broadband, mobile payment solutions and the issuance of a fourth mobile provider licence “can all regain momentum”.

The highest growth is mainly seen to be in mobile broadband services which gives network operators like Mobinil, Etisalat Misr and Vodafone Egypt newer streams of revenue to tap into. The average revenue per user (ARPU) is steadily declining and this is where telcos can differentiate themselves and gain customers.

After studying the market carefully, Carlo Alloni, president and head of Ericsson North East Africa, says that while the operators continue to seek growth and create shareholder value, they are faced with declining ARPUs. “The need for new services that can introduce an additional source of revenue, reduce churn and attract new subscribers from competitors is more important than ever,” he says. “I also see customer experience and mobile broadband offerings to be a significant differentiator in the market place.”

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With the Arab Spring, tourism hit an all time low, seriously hampering roaming revenues for the telcos. This was also coupled with censorship and restrictions on internet usage during the crisis driving revenues further down. However, due to this, mobile broadband became a steadfast alternative and the gains are only just starting to trickle in.

Alloni thinks that broadband services are definitely garnering interest and could very well be the next cash cow for operators. He says: “We see a growing market in broadband services, for both mobile and fixed networks. Consequently, there are some applications which have started to gain popularity, and lately for example we noticed a renewed attraction to all smartphone applications, with Facebook and Twitter being the dominant applications. Fields that I personally think can be further explored are related to traffic, health and security, where I believe there is still repressed demand.”

Lekhal agrees. He says that mobile operators are “betting on mobile broadband” to mitigate the voice revenue declines. “The potential is substantial as data currently accounts for approximately 10% of total revenue, compared to around 25% in comparable markets such as Turkey or South Africa. This is all the more relevant given the very low fixed broadband penetration – 1.4m lines at the end of 2010 – and the Egyptian population’s appetite for internet services, as so clearly proven during the Arab Spring.”

Lekhal also points to fierce competition between the mobile operators in the mobile broadband space. He says that Mobinil’s new strategy is to become ‘Egypt’s main broadband operator’. Vodafone too has announced plans to invest $500 million for its infrastructure in 2012 to support its broadband rollout.

Al-Nasr thinks the immediate need is one of basic communication as “people want to know what is happening and need to remain connected”. “There has been a higher usage of voice, data and SMS services in mobile communications. Lately, there have also been some innovative uses of mobile communications in the country, for example embedding mobile SIM cards in vehicles for remote tracking as an anti-theft measure,” he says.

Operator challenges

It is no secret that operating costs for telcos are high, and that reducing tariffs due to competition has left operators with substantially less revenue. In order to emerge successfully, operators will need to find a way to differentiate themselves, according to Alloni.

“The challenges nowadays are not only the classic challenges such as low ARPU and a challenging trend of revenues. Nowadays, telcos must find a way to differentiate themselves through network quality and customer experience whilst finding innovative ways to tackle the costs,” Alloni says.

This is an accurate analysis from a user-centric focus. However Al-Nasr also assesses the challenge from a macroeconomic perspective. “The current events have led to an economic slowdown, which we have seen in the drop in tourism revenue. This has reduced the availability of foreign currency in the country, which could have an impact on telco infrastructure imports with their massive investment requirements. Legislation is being reviewed to ensure that no entity is authorised to cut communications in any form and under any circumstances, in a bid to regain the confidence of investors.”

Lekhal believes that both subscribers and investors have a role to play, and all telcos are facing challenges, yet adapting their strategies to meet these changes. “Vodafone has been outperforming the market over the last few years and is now positioning to ride the mobile data wave,” he says.

“Mobinil’s difficulties forced the operator to review its strategy and focus on high value customers and mobile data. Etisalat is now a sizable player and caught up in terms of customer base (approximately 25m) with the two historical operators, while maintaining an ARPU in line with the other two. Key challenges will relate to properly making the transition from an acquisition-focused strategy to a customer value driven one. Network investments in the next few years will be substantial to support the uptake in mobile data,” he adds.

Al-Nasr says that Egypt’s relatively strong telecoms infrastructure could, like in more developed markets, deter investment in the latest technologies such as LTE. The logic behind this argument is that if an operator has already invested in 3G or HSPA+, there is less requirement for LTE. In comparison, operators in a country such as Libya, which lacks decent telecoms infrastructure, could be more tempted to leapfrog HSPA and move straight to LTE. “For instance, while rebuilding the infrastructure in Libya it might be more feasible to install LTE directly for mobile communications, whereas in Egypt it is the other way around and LTE might be delayed due to the existing infrastructure.”

Lekhal says: “The instability first impacted the operators’ bottom line as both Vodafone and Mobinil are expected to report 2011 results lower or stable compared to 2010. This is due to the network shutdown that took place during the uprising. In addition, some of the decisions expected to be made by the government are still pending, such as the granting of a fourth mobile licence or an MVNO license for Telecom Egypt. Depending on the outcome, the overall competitive landscape could be significantly impacted.”

Alloni on the other hand speaks positively about his outlook on the situation and says the situation is sensitive, however “we must not forget that the current circumstances are normal consequences, following major political changes, and the situation, therefore, tends to rise to a positive trend with each progressive stage towards political stability, and this is what we definitely hope for in Egypt and the region.”

Lekhal agrees. He says that mobile operators are “betting on mobile broadband” to mitigate the voice revenue declines. “The potential is substantial as data currently accounts for approximately 10% of total revenue, compared to around 25% in comparable markets such as Turkey or South Africa. This is all the more relevant given the very low fixed broadband penetration – 1.4m lines at the end of 2010 – and the Egyptian population’s appetite for internet services, as so clearly proven during the Arab Spring.”

Lekhal also points to fierce competition between the mobile operators in the mobile broadband space. He says that Mobinil’s new strategy is to become ‘Egypt’s main broadband operator’. Vodafone too has announced plans to invest $500 million for its infrastructure in 2012 to support its broadband rollout.

Al-Nasr thinks the immediate need is one of basic communication as “people want to know what is happening and need to remain connected”. “There has been a higher usage of voice, data and SMS services in mobile communications. Lately, there have also been some innovative uses of mobile communications in the country, for example embedding mobile SIM cards in vehicles for remote tracking as an anti-theft measure,” he says.

Operator challenges

It is no secret that operating costs for telcos are high, and that reducing tariffs due to competition has left operators with substantially less revenue. In order to emerge successfully, operators will need to find a way to differentiate themselves, according to Alloni.

“The challenges nowadays are not only the classic challenges such as low ARPU and a challenging trend of revenues. Nowadays, telcos must find a way to differentiate themselves through network quality and customer experience whilst finding innovative ways to tackle the costs,” Alloni says.

This is an accurate analysis from a user-centric focus. However Al-Nasr also assesses the challenge from a macroeconomic perspective. “The current events have led to an economic slowdown, which we have seen in the drop in tourism revenue. This has reduced the availability of foreign currency in the country, which could have an impact on telco infrastructure imports with their massive investment requirements. Legislation is being reviewed to ensure that no entity is authorised to cut communications in any form and under any circumstances, in a bid to regain the confidence of investors.”

Lekhal believes that both subscribers and investors have a role to play, and all telcos are facing challenges, yet adapting their strategies to meet these changes. “Vodafone has been outperforming the market over the last few years and is now positioning to ride the mobile data wave,” he says.

“Mobinil’s difficulties forced the operator to review its strategy and focus on high value customers and mobile data. Etisalat is now a sizable player and caught up in terms of customer base (approximately 25m) with the two historical operators, while maintaining an ARPU in line with the other two. Key challenges will relate to properly making the transition from an acquisition-focused strategy to a customer value driven one. Network investments in the next few years will be substantial to support the uptake in mobile data,” he adds.

Al-Nasr says that Egypt’s relatively strong telecoms infrastructure could, like in more developed markets, deter investment in the latest technologies such as LTE. The logic behind this argument is that if an operator has already invested in 3G or HSPA+, there is less requirement for LTE. In comparison, operators in a country such as Libya, which lacks decent telecoms infrastructure, could be more tempted to leapfrog HSPA and move straight to LTE. “For instance, while rebuilding the infrastructure in Libya it might be more feasible to install LTE directly for mobile communications, whereas in Egypt it is the other way around and LTE might be delayed due to the existing infrastructure.”

Lekhal says: “The instability first impacted the operators’ bottom line as both Vodafone and Mobinil are expected to report 2011 results lower or stable compared to 2010. This is due to the network shutdown that took place during the uprising. In addition, some of the decisions expected to be made by the government are still pending, such as the granting of a fourth mobile licence or an MVNO license for Telecom Egypt. Depending on the outcome, the overall competitive landscape could be significantly impacted.”

Alloni on the other hand speaks positively about his outlook on the situation and says the situation is sensitive, however “we must not forget that the current circumstances are normal consequences, following major political changes, and the situation, therefore, tends to rise to a positive trend with each progressive stage towards political stability, and this is what we definitely hope for in Egypt and the region.”

Inside information

As CEO of Mobiserve, a Cairo-based telecom vendor and systems integrator, Sameh Atalla (pictured) has a particularly clear view of the country’s telecoms sector.

Atalla sees significant growth potential, not least because the operators must now make up for lost time following the political unrest.

“New projects that were supposed to be introduced last year were either cancelled or delayed. These projects were planned to expand the sector and to grow the subscriber base and reflect growth for the entire industry,” he says. “There’s market potential for growth in order to compensate for all delayed projects from last year’s political unrest. Nevertheless, the cost trends are still going up due to all extras that need to be spent to cover for lack of security during the acquisition and construction phases,” he says.

Atalla views restrictions on investment as one of the key challenges faced by telcos. “I believe the main challenges come in the area of investment restrictions due to the political instability,” he says. “Investment will be enhanced considerably once security and political stability are recovered.”

In 2012, Atalla sees potential for projects in switching and electromechanical services, which he says will be “the main drivers for potential growth” this year. “This is in addition to other projects introducing new technologies, pending better political conditions of course,” he says.

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