Big trouble for Batelco

This is the end. For Batelco, Bahrain's state-owned telecommunications monopoly, the old era is nearly over and a new, more challenging one is
about to begin.

On April 22nd, Kuwait's fast-moving Mobile Telecommunications Company (MTC), in partnership with British giant Vodafone, bagged the license to become the second mobile telecom operator in Bahrain. Just a few hours before the announcement was made, Batelco announced its own aggressive program - the Get Ready project - to meet the challenge from MTC head on.

But it's not clear that the sluggish monopoly is up to the challenge. For starters, Batelco is highly overstaffed. The company's ratio of staff cost to revenues is 21.3 percent, which is the highest in the region, says Sayed Zahiruddin, a telecom analyst with Bahrain's TAIB Bank. He insists that Batelco urgently needs to trim its staff in order to improve its operating performance.

Tony Hart, Batelco's CEO, admits there is a serious problem of overstaffing. "Our workforce continues to be our most valuable asset. But in our review, we found we had too few skilled personnel in some areas and too many in others," Hart admits. "This has been about 'rightsizing' -
getting our many sets of skills, talents and expertise exactly where we need them in order to get ready for the competition."

Easier said than done. Batelco recently announced severance packages as part of its Voluntary Retirement Scheme (VRS), hoping that a large number of its employees would sign up. But employees, most of them Bahraini nationals, are up in arms. The employee union has taken management to the local courts, which ordered Batelco to put its VRS program on hold until it obtains the necessary clearances from the labor ministry.

Batelco says it will challenge the court order, but there are signs that the company could get entangled in lengthy courtroom battles just as the competition arrives. Instead of being able to focus on the threat from the competition, management will be spending its time fighting its own employees.

The combined effect of competition and overstaffing will have serious implications for Batelco, which has so far been a steady performer with an average revenue growth of 12 percent over the last five years. The company's profits have grown at an average eight percent
annually.

Zahiruddin says that as Batelco will be forced to continue its price reductions, it will limit the revenue growth potential for the company: "I
expect the topline growth during 2003 to be around four or five percent.

However, full-fledged competition will have an impact on the mobile revenues, which presently account for over 40 percent of Batelco's total
revenue. I expect a negative growth of around five to seven percent in Batelco's top line for 2004. And the profit level is expected to remain
flat or have single-digit growth over the next two years largely due to the costs of restructuring."

Batelco's management, for its part, complains that the government has bent over backwards to attract overseas companies. They say that while the newcomer has been given all the facilities needed for a successful business, Batelco has been left in a straitjacket, with little freedom to deal with its own problems, especially reducing its workforce.

Batelco management has a point. For MTC-Vodafone the entry into Bahrain has been extraordinarily smooth. The company had to pay a mere $265,000 as an upfront license fee. Moreover, during the 15-year period of the license, it will have to part with only one percent of its gross revenues as an annual fee, which compares extremely favorably to the nearly 10 percent revenue sharing that is imposed on companies in most other Arab countries.

The good news does not stop there. Included in the license is an option for MTC to roll out 3G services when it wants. To further sweeten the
deal, the government has promised to unbundle Batelco's infrastructure, ensuring that MTC will have almost immediate access. The new company will also be able to offer national roaming facilities by using Batelco's existing network for a year. These terms are by far the most attractive that any newcomer in any telecom market has had for a long time.

Little wonder, then, that despite the global telecom slump over a dozen companies were keen to bag the license. "The emphasis in this beauty contest tender was not on maximizing immediate governmental financial gains, but making the new network viable right from the start," says Jawad Abbassi of Arab Advisors, an Amman-based consultancy.

Armed with these incentives, MTC will launch its services by the end of the year and will surely try to capture as much of the market as possible.
Sayed Zahiruddin says that 79 percent of the mobile subscribers in Bahrain today are pre-paid, generally low usage customers. So the new player is expected to concentrate on winning high-value accounts.

"MTC is known for such strategy," Zahiruddin says. "In Kuwait, it accounts for 50 percent of the market share in terms of the number of subscribers and over 70 percent in terms of mobile revenues. It is expected to have the same strategy in Bahrain."

MTC is expected to adopt a two-fold strategy: to take the market away from Batelco and to increase the overall market for mobile phones. In order to do so, the company will be forced to compete, at least initially, on price. But that may not be tough on the newcomer, since it has a huge advantage over the existing monopoly - MTC is a far leaner operation than rival Batelco.

But the Bahraini monopoly is fighting back. The company's customer care centers - and its sales and marketing divisions - will be reinforced to
ensure that unhappy customers don't switch to the competition. Central to Batelco's strategy, however, is price. With the end of its monopoly in mind, the company has been cutting prices over the last few years.

"The customers wanted greater price value and more attractive tariffs. Batelco has developed four new mobile phone packages, tailor-made for
specific groups of customers," says CEO Hart. The packages comprise a discount of nearly 30 percent. By dropping prices so low, Batelco is
clearly hoping to preempt the competition.

Batelco will clearly try to retain its corporate clientele. It has designed several packages offering highly attractive services to its bigger customers and has also set up special customer care centers to cater to privileged clients. While Batelco's corporate clients may account for bulk of its fixed-line revenues, that is not where the company makes most of its money.

The real money lies in the mobile business. While analysts expect Bahrain's fixed-line phone density to remain stable at about 25 percent,
the country's mobile density has already jumped over the 50 percent mark and some expect it to reach 75 percent in the next three years.

Revenue from the mobile business has been growing at 30 percent a year and, as mobile operators get ready to offer more value-added services to
subscribers, the average revenue per user is expected to jump significantly. Hala Baqain of Arab Advisors says that Batelco's mobile revenues could be as much as $247 million by 2006, against $144 million from the fixed-line business.

However, analysts point out that Batelco has focused on growing the mobile market to the exclusion of other, more urgent priorities. Whatever the outcome of this summer's battle between the two telecom giants, the average Bahraini certainly won't be complaining. Rarely do consumers find themselves in a market where prices keep falling and customer service keeps getting better and better.