Untapped potential

Iraq offers the last major telecoms growth opportunity in the Middle East
Iraq holds huge telecoms potential, but will operators be able to tap it.
Iraq holds huge telecoms potential, but will operators be able to tap it.

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Iraq’s telecoms sector has come a long way in the decade since the fall of former dictator Saddam Hussein back in 2003, when the country lacked even a single mobile operator and relied on a single state-run fixed-line provider.

But while Iraq is now home to three GSM operators, a number of fixed-mobile players, and a growing fibre-to-the-home network, the country’s telecoms sector has yet to realise its full potential, and is mainly being held back by regulatory problems and ongoing security issues.

Indeed, Iraq is widely viewed by analysts, operators and vendors as the Middle East country with the greatest growth potential, while simultaneously being seen as one of the most frustrating markets for operators to expand in.

In terms of subscriber and revenue growth on the mobile side, 2012 was fairly impressive. Farid Lekhal, principal at Delta Partners, points out that the number of mobile subscribers grew by 12% in 2012, reaching 28 million subscribers, giving a penetration rate of 80%.

However, fixed growth was low in comparison, with 100,000 new lines, bringing fixed penetration to 23%. Fixed broadband did however grow by 90% reaching a total of 120,000 lines, but penetration remained extremely low at 1.5%, Lekhal says. From a revenue perspective, the total market is now worth $5 billion, growing year-on-year at 11%, and with 85% of this revenue coming from mobile, he adds.

On the mobile side, operators continued to benefit from a mild competition with market ARPU remaining stable at around $15 and each operator gaining its fair share of gross adds, and market share remaining on par with the previous year: 51% for Zain, 38% for Asiacell and 12% for Korek, according to Lekhal. Mobitel continues to remain a niche player with a network covering only some parts of the Kurdish zone, though it is the only operator with 3G at this stage.

The factors holding back Iraq’s mobile operators appear to stem mainly from regulation that has so far failed to promote growth of the sector. This is most apparent in the failure of the Ministry of Communications (MoC) or regulator, the Communications and Media Commission (CMC), to award spectrum for 3G services to the three mobile operators. This is despite the fact that the operators claim to be ready – from an infrastructure standpoint – to launch 3G services.

As Lekhal explains, “While the licences acquired or renewed in 2007 by the three mobile operators – for $1.3 billion each – were technology neutral and hence were supposed to also cover 3G and 4G services, mobile operators need additional spectrum capacity to be able to launch these services."

He adds that to release this spectrum, the government put a $3 billion price tag on 3G licences in the fourth quarter of 2012, a decision challenged by the three mobile operators. “Growth will be severely hindered until 3G services are launched and the Iraq market can experience a mobile data explosion similar to what happened in other markets in the region,” Lekhal says. “While there is no clear timeline to solve the spectrum issue, such a launch could still happen in 2013.”

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Bahjat El-Darwiche, partner, Booze & Co, says that all players in the Iraqi market also need greater clarity on the issue of a whether or not a fourth mobile operator will enter the market. “The fourth operator has been in discussions since 2007 but there is still no clarity yet on how they will go about it. There are still a lot of investment requirements in infrastructure, whether in 3G or 4G, but still you don’t have all the regulatory clarity that the operators need to make these investments,” he adds.

It is a situation that continues to frustrate the operators. Dr Diar Ahmed, CEO, Asiacell, said: “There is still some uncertainty regarding the process by which the Iraqi authorities will permit the offering of 3G services. In the meantime, Asiacell has taken steps to prepare for the issuance of a 3G spectrum by upgrading its network.”

Unfortunately, the effects of this lack of regulatory direction are felt beyond the telecom sector, according to El-Darwiche. “This is a sector that is fundamental for society and the economy, so telecom today is really a foundational sector for the rest of the economy,” he says. “Unfortunately we are not seeing things moving as fast as they should in this sector and this is affecting sector performance investments as well as the benefits that the rest of the economy and society could get out of the sector.

“A country like Iraq would definitely benefit from a much clearer policy in terms of sector development objectives, including how to rebuild the fixed side of the industry which is important also for mobile operators,” he says.

The three GSM operators also face other regulatory pressures, not least the requirement to list a percentage of their value on Iraq's stock market. The timetable for these IPOs caused considerable problems for the operators. The original deadline was 2011, and their failure to meet this deadline led the regulator to impose hefty fines on the telcos. Indeed, in mid-2012, the CMC said it would fine Asiacell $8,500 a day since September 1, 2011 for failing to list on the local stock exchange, while Korek would be fined $2,500 per day. The following month, the CMC handed Zain Iraq a fine of $12,864 a day from September 2011 for failing to stage its IPO.

Bhanu Chaddha, senior research analyst, telecommunications, Middle East, Africa & Turkey, says that an important consideration for 2013 will be a decision from the CMC regarding the “rollback of fines imposed” on all three operators for failing to list 25% of their equity on the local stock exchange. “IDC believes that at a time when quality of service (QoS) and network coverage remains a major concern, while operators are also gearing up to launch 3G services, taking cash out of operations could negatively impact overall development of the sector,” he says.

Either way, it does appear that the IPOs will take place this year. Asiacell will be the first to list shares. It said in December that it aimed to raise about $1.3 billion from an initial public offering during January. The mobile operator, which has 9.9 million subscribers, said its IPO would "be the first of its kind in Iraq and one of the biggest share offers in the Middle East region in the past year" consist ing of 67.503 billion shares and representing 25% of the company’s share capital.

Room for optimism

But despite the challenges, Iraq’s mobile operators appear to remain upbeat about growth opportunities in the country. Asiacell’s Dr Diar Ahmed points out that despite the rapid increase in Iraq’s mobile subscriber base, its penetration rate is still considerably below that of other Arab countries.

“Due to low broadband penetration as well as limited broadband penetration in Iraq, this presents a significant opportunity for growth in data services such as 3G. Accordingly, Asiacell has taken steps to prepare for the issuance of a 3G spectrum by upgrading its network. Growth of revenue from data is expected to accelerate when 3G is launched,” he says.

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Analysts also agree that, despite the regulatory challenges, Iraq represents a major opportunity for its mobile operators. Delta Partners’ Lekhal says: “Mobile will however remain the main growth engine, with penetration and mobile data likely to be the two key drivers of market development.”

Delta Partners reinforces this view with some hard figures: Mobile penetration is currently at 80% and is expected to reach 100% by 2015. Adjusting for regional peers, mobile penetration could reach 120% over the next five years, meaning that the mobile market is still expected to grow by 50% over the next five years, the firm states. “Once 3G licencing and spectrum issues are addressed, the boom in data revenue will also more than compensate for the competitive pressure on voice pricing,” Lekhal adds.

“In addition, the predominantly young population of Iraq also provides an opportunity to grow. Additionally, due to the growth in Iraq’s urban population it is expected that this will lead to an increase in mobile subscribers as well.”

Fixed-focus

IDC’s Chaddha adds that the fixed-line infrastructure and the broadband market are still underdeveloped in Iraq, partly owing to delays in allocating the 3G spectrum. “These three factors put together present both opportunities as well as key challenges for the development of telecoms landscape in 2013 and beyond,” he says. “Opportunity remains in development of broadband services and monetisation of the content over 3G, while issues related to policy and regulatory decisions with regards to spectrum allocation will need to be addressed, before the socio-economic benefits of broadband availability can be realised.”

El-Darwiche adds that regulatory issues are also slowing development of the fixed-line sector. “As far as I know the government is the only entity licenced to offer fixed networks,” he says. “Also the backbone infrastructure remains a monopoly of the government. The international gateway also remains a monopoly of the ministry. This will be another factor to clarify in the new policy and regulatory environment.”

However, El-Darwiche also adds that the overall telecoms industry is moving to a stage where the separation between fixed and mobile networks is no longer justified. He says that this is something Iraq’s Ministry of Communications should consider. “Today mobile operators rely heavily on fixed infrastructure to carry their data traffic. More and more mobile networks are just mobile extensions of a fixed network.”

Delta Partners’ Lekhal adds that on the fixed side, market growth remains hindered by limited infrastructure, especially for broadband. Out of the seven relevant fixed players, only two have a nationwide coverage – state-owned ITPC and Dijlanet – while the remaining players offer regional coverage only such as the Kurdish zone, Baghdad and Basrah. Most operators use WiLL (wireless in the local loop) to address the last mile challenge; only ITPC – via its subsidiary Uruklink – offers DSL services in some urban areas, and some operators also use VSAT broadband connectivity in remote areas to ensure nationwide coverage, according to Lekhal. “This reliance on WiLL impacts achievable throughput, with average speed around 1-2Mbps, and pricing,” he says.

However, this limited growth does also present some opportunities for growth. Delta Partners reckons that the number of fixed broadband lines is expected to grow at a 50% CAGR over the next three years, reaching a penetration of 5%. “This will leverage major plans to improve the fibre infrastructure in the country,” Lekhal says.

“The government has approved a $2 billion budget to upgrade the country's fibre infrastructure, with the Minister of Communications stating the ambition to lay 20,000 kilometres of fibre and connect 8 million households with FTTx in the next five years,” he adds.

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