While most telecom operators around the region are under pressure with profit margins and ARPU declining, few CEOs can comprehend the challenges faced by Palestine’s two telecom operators, Paltel and Wataniya Palestine.
Yet despite facing restrictions on the import of equipment, a complete lack of 3G spectrum and illegal competition from Israeli operators, Paltel, Palestine’s incumbent telco, managed to increase its pre-tax profits by a healthy 14.6% in 2011.
Certainly, Paltel’s full year results for 2011 were impressive. Despite facing increased competition from second operator Wataniya Palestine, which entered the market in 2009, and numerous obstacles owing to restrictions imposed by Israel, Paltel managed to increase its revenues by 9.4% to reach $522 million at the end of 2011 compared with $477 million at the end of year 2010.
Its operating revenues for mobile, fixed-line and data revenues grew by 9.7%, 4.6%, and 81.4% respectively, while net profit increased by 5.1% to stand at $128 million at the end of 2011 compared with $122 million the previous year.
“They [results] were above expectations in the budget guidelines and in some items we exceeded the business plan," says Ammar Aker, Paltel's CEO. "We are very happy about the performance of 2011 and we are looking forward to an even better performance in 2012."
Paltel said that the results, which were above expectations, were achieved through a new operating strategy that focused on core telecom functions while it outsourced various support functions.
The growth in customer base was achieved across mobile, fixed-line and data services and can be partly attributed to Palestine’s relatively low mobile and fixed-line penetration rates.
Running a telco amid internal and external political strife has also done little to dent Aker's optimism, which stems partly from the growth opportunity that remains in Palestine. Indeed, while most countries in the region are approaching or have already surpassed 100% mobile penetration, Palestine has a mobile penetration rate of about 80%, and an internet penetration rate of just 58.9% as of Q4 2011, according to data from the ITU.
Paltel has some 2.5 million mobile subscribers, out of a total Palestinian population of 4 million. Wataniya has about 300,000 subscribers and the Israeli companies have about 300,000, according to Aker.
But laying out firm plans for the year ahead is not always a simple matter for Paltel, which runs mobile and fixed-line services in the West Bank and Gaza. Indeed, the company faces numerous challenges including price pressure from Palestinian customers, a complete lack of 3G spectrum, and the presence of Israeli operators in the market.
Despite this, Paltel is planning to invest $70-$80 million in its fixed and mobile networks across the West Bank and Gaza in 2012. The telco will invest the funds in its mobile network and fibre, mainly to increase the capacity of its internet backbone. However, the mobile component of this investment will only be for 2G equipment. The telco, along with its competitor Wataniya, has still not been able to obtain the required spectrum from Israeli authorities.
“We have the [3G] licence from the Palestinian Authority, we paid for it - the same way our competitor also has a licence for 3G - but neither of us has been able to start 3G services and launch different products because we don’t have the frequency and spectrum assigned to us by the Israeli authorities…Israel is the one that will have the final say on the spectrum issues in the West Bank and Gaza," he says. Aker adds that he thinks it us unlikely that the spectrum will be released this year.
The problem is exacerbated by the fact that Israeli operators continue to provide 3G services to Palestinian areas including cities by positioning 3G base stations on borders and in settlements in the West Bank.
“Israeli operators still dominate 10% market share in the Palestinian market because they cover certain areas and sometimes we cannot cover those areas because they are very close to settlements," Aker says.
Aker adds that most estimates indicate that Israeli operators have about a 10% share of Palestine's mobile market. However, he adds that their prices for 3G “are not that competitive" for the level of income of an average Palestinian citizen.
“Some people are using these 3G services because they don’t have a Palestinian alternative from us or our competitor," he says. "I believe once we have 3G service from Palestinian operators the 3G will have much more penetration and it will be widespread everywhere."
In terms of mobile growth, Aker says that Paltel is experiencing growth of about 5-10% a year. This is mainly because mobile penetration rate has still not yet reached 100%.
Moreover, there remains some pent-up demand in Gaza, where the mobile sector’s growth has been limited by Israeli restrictions on the import of telecoms equipment, including base stations, into the territory.
“The only obstacle is that we did not have growth in Gaza from 2007 to 2010. In 2011 we had some growth because we were able to expand our network in Gaza. There is still some room to grow in mobile voice in Gaza because it did not have enough growth in the past three years, so there will be growth in mobile voice and growth in fixed data,” he says.
Paltel has about 160,000 ADSL subscribers and hopes to see that figure reach 200,000 this year. It is also an area where Paltel has a clear advantage over Wataniya, which currently only has a mobile network. Furthermore, fixed-line data is also an area with significant growth potential.
"Fixed-line internet penetration is reasonable and is increasing every year which shows there is a demand for fixed internet and mobile internet in Palestine," he says.
The Palestinian telecoms market is also hampered by the lack of an independent regulator. While Palestine’s Ministry of Telecoms and IT (MTIT) has made some big efforts to drive competition in the country’s fixed-line and wholesale sector, Aker says that the ministry lacks a genuine strategy and that some of its policies could hinder investment.
“We have our issues with the regulator [MTIT] but we have managed to resolve most of them. The regulator always thinks that reducing the prices is the best thing they can do for the subscriber while we think it has to be done through a mix of suitable prices,” he says. “You also have to consider feasibility of the investment because once you reduce the prices to a certain level then the investment will not be feasible and at the end of the day we have to make some profit for our shareholders.”
Aker insists that the current prices for telecom services are “suitable to the customers” and affordable. At current levels, they also allow a fair return for Paltel. “We are making good margins as any other telecom company, and that will always motivate us to invest in our network,” Aker says.
However, while Palestine now has two mobile operators, Paltel remains the only fixed-line operator in the country. While Paltel lost its official status as the exclusive fixed-line operator five or six years ago, no other companies came forward to take a second licence. Consequently, the MTIT has adopted other measures to try to drive competition. Apart from regulating Paltel’s fixed-line prices, it also granted a licence to the Jerusalem District Electricity Company (JDECO) allowing it to use its fibre network for broadband back in March 2011.
The licence allows JDECO to offer capacity on its dark fibre network, which connects Jerusalem, Ramallah, Bethlehem and Jericho, to ISPs operating in the West Bank.
MTIT is also encouraging Palestine’s Electricity North and Electricity South companies to use their dark fibre networks for broadband backhaul, in a bid to reduce the cost of backhaul services for ISPs.
Aker says that while Paltel is “not against” these initiatives, it would prefer to see a more clear, comprehensive strategy from the MTIT. For example, he questions whether the utility companies that offer broadband will also have to cover remote areas. If they can simply cover the areas they want to, they will have an unfair advantage over Paltel, which has to cater to more expensive-to-reach remote areas.
“They will maybe provide some services in the business area of Ramalla, but the regulator is forcing me to provide this service in a remote area in Southern or Northern West Bank where there are not enough customers and there is no business case.
“We ask them [MTIT] to bring in another operator and give them a full licence with the same rights and obligations as we have. But you can’t have a small company come in and mess around with the market here and there, because a small ISP right now can provide the same service as Paltel. But we have to invest millions and they only have to invest half a million,” he says. “We have to look at the experience of other markets and learn from them. It is in the interests of everyone to develop the telecoms market of Palestine.
“They have to have a clearer strategy for liberating the market because we believe there is no monopoly for Paltel,” Aker says.
To illustrate his point, he says that in the internet market, Palestinian ISPs are permitted to bypass Paltel and buy capacity from Israeli operators. Aker insists that the Israeli operators have a wholesale price advantage over Paltel because they have greater economies of scale.
“Any Israeli company can get a link next to the hill outside my office and offer internet services to the West Bank,” he says. “They can use a microwave, point-to-point connection and offer the service throughout the city.
“Many Palestinian ISPs buy the internet direct from Israel and distribute it to the Palestinian people and the Palestinian customer does not know that they get their ISP from Israel, because the ISP is licenced by the regulator and they can operate.
“We are not against having a liberalised market. We are for cleaning up the market from the Israeli operators and having competition between the Palestinian players.”
Barriers to expansion
Late last year it emerged that Israel was thwarting attempts by Palestine’s telecoms regulator, the Ministry of Telecommunications and Information Technology (MTIT), to extend telecoms services to remote villages.
The Israeli army prevented Paltel, Palestine’s incumbent telecom operator, from laying fibre optic cable to numerous villages that fall in so called “Area C” parts of the West Bank, according to Dr. Mashhour Abudaka, head of Palestine’s (MTIT).
“Already the army has interfered in places south of Bethlehem. When Paltel was digging fibre to one of the villages, the army intervened and stopped them,” Abudaka said.
He added that Paltel complained to the MTIT that Israel was preventing it from laying fibre to about 10 villages, including Jurat ash Sham'a, Wadi Al-Nees, Umm Salamuna, Al-Ma'sarah, Marah Moa'la and Khirbet Alhaddadah, which are close to Israeli settlements in the West Bank.
Under its licencing agreement, Paltel was expected to provide 99% of all Palestinian areas with high speed internet access by the end of 2011.
“Israel is not allowing Paltel to dig and provide [internet] access. The telephone lines are very old, and some households don’t have telephones at all,” Abudaka added. “Many students live in these villages and they rely on broadband.”
“They [Israel] are not doing anything about it or allowing Paltel to do anything about it.”
Abudaka added that efforts from the regulator to discuss the issue with the Israeli civil administration had failed.
“We met them and have discussed with them before, but they never came up with a reply,” he said.