Egypt telecoms try to payoff competition

Bribery? No, perhaps the word's too strong. But how else can one characterize the attempt by a pair of telecom operators in Egypt to pay the government hundreds of millions of dollars to crush the threat of a new competitor?

Even if the proposed payoff was public information, it still smelled rotten: it might have added some easy money to the state coffers, but would have sent a terrible message to foreign investors and ordinary Egyptians. Fortunately, for once, President Hosni Mubarak and his government did the right thing. Mubarak's message was clear: at least when it comes to telecommunications, Egypt's marketplace is not for sale.

Together, the Egyptian Company for Mobile Services (MobiNil) and Vodafone Egypt offered to pay Telecom Egypt (the state-owned fixed-line monopoly) 2 billion Egyptian pounds ($340 million), the exact amount Egypt Telecom paid the government in license fees in 2001 to establish a third mobile phone network.

With the multimillion-dollar payoff, Orascom-owned MobiNil and London-based Vodafone sought to eliminate a third competitor for the next five years, fortify their market dominance and avert a potential price war that would erode their profitability and market share. In short, the two powerful companies tried to spend their way out of potential trouble: they tried, and they failed.

Weeks of speculation and behind-the-scenes maneuvering ended on May 8th when, after being briefed on the matter during a cabinet meeting, Mubarak issued clear and final instructions for the immediate start of a third mobile operator set up as an Egyptian shareholding company. MobiNil and Vodafone's offer had set off heated debate in the People's Assembly, with parliamentarians charging that a deal would not benefit consumers and violate the Communications Law, which prohibits monopolies and promotes new investment in the communications sector.

On April 22nd, a day after the Egyptian business daily Alam Al Youm broke the news, MobiNil's president and chief executive officer, Osman Sultan, issued a statement saying only that "the Egyptian Company for Mobile Services can confirm that there are discussions underway between the parties on this matter. However, we cannot comment on any specifics or on the outcome of such discussions at this time." Vodafone also refused comment.

Telecom Egypt chairman Akil Beshir did not deny that postponing the launch of its mobile operations was one of the options on the table. The exclusivity period for MobiNil and Vodafone ended in November 2002, but Telecom Egypt's search for an international partner coupled with a sluggish economy have contributed to delays in the commercial launch of their mobile network. Telecom Egypt has not disclosed the names of potential partners, whether it will seek an equity partner, or contract an international telecom provider to set up and manage the network.

"Vodafone and MobiNil proposed to pay us the money we spent for licensing a network, which is 2 billion pounds, in exchange for Telecom Egypt not starting operations of a third network for four years," acknowledged Ahmed Fahmy, PR officer for Telecom Egypt, adding that the two operators made the offer in mid-April.

"We are still trying to run the network, but there were some difficulties with the partner we were negotiating with because of the regional and economic circumstances," Fahmy said before a presidential decision that sealed the fate of a third operator. "If we do not find a third partner, we may accept MobiNil and Vodafone's offer."

No capital expenditure had yet been made in setting up the network, but another mobile network can be operational in roughly six months, he said. Rolling out a third network would require investments in excess of $300 million for Egypt's state-owned landline monopoly, and financing is expected to be difficult in less than optimal economic conditions.

Prior to Mubarak's decision, Telecom Egypt apparently seemed on the brink of accepting a deal, or so analysts thought. "I think they will opt to get back the license fees they paid to the government instead of entering a market that has witnessed slow growth rates, especially after the
devaluation of the Egyptian pound, which would make capital expenditures more expensive," said Amr Abol-Enein, vice president and head of research at HC Securities and Investment.

A telecom analyst at a regional investment bank based in Egypt agreed that entering the market at this time is not a feasible decision for Telecom Egypt. "They can easily be sustaining losses for the upcoming two, three years before they start to break even. Plus, you have to factor in some
political issues, like the signal they would be sending by having a government-run operator launch a price war against two huge, well-known investors."

Vodafone owns 67 percent of Vodafone Egypt, while MobiNil's principal shareholders are France Telecom/Orange and regional telecom operator Orascom Telecom, who own 36 and 31 percent of the company's shares respectively.

It will take a third operator about six months to set up a network covering Cairo and Alexandria, and more than a year to achieve close to the same level of coverage as the existing mobile operators. Bare spots in coverage would not lure a rush of customers unless prices are significantly lower.

"The scenarios of the price war are evident. The profitability of the two operators would be endangered in the presence of an operator basically run by the government, which can easily create a very uneven playing field," noted the analyst.

But if Telecom Egypt waited five years to set up a cellular network, MobiNil and Vodafone would have ensured their market dominance, leaving a third operator in the dust. Still, any deal between MobiNil, Vodafone and Telecom Egypt would have required the approval of the Telecommunications Regulatory Authority.

Until 1998, the Arab Republic of Egypt National Telecommunications Organization was exclusively responsible for providing all telecommunications services in Egypt and also served the function of regulator. Now, Egypt's Ministry of Communications and Information Technology is the policymaker, Telecom Egypt is the service provider and the Telecommunications Regulatory Authority is the telecom sector's regulator.

For years there has been talk of privatizing a slice of Telecom Egypt, the country's largest public sector company, but those plans have been put on the back burner after the telecom bubble burst and in the wake of lackluster economic conditions. Egypt's monopoly landline provider is
cash-rich and can easily await better timing to launch an IPO or sell an equity stake to a strategic investor.

The Middle East's largest wireless service provider, MobiNil, was born in May 1998, a reincarnation of the privatized, formally state-owned wireless service, which was in existence since November 1996 but was soon going to face competition from a private, market-driven
competitor.

Vodafone Egypt, then called Click GSM, launched its service in November 1998. While MobiNil had the advantage of a headstart and an existing
client base of 80,000 subscribers, Vodafone's strategy was to capitalize on the woes of an oversubscribed competitor in a cellular duopoly
guaranteed until late 2002. But nearly six years later, MobiNil still maintains an edge, with a larger subscriber base (4.4 million to Vodafone's 4.1 million) and a greater number of post-paid users.

MobiNil has enlisted George Kordahi, host of MBC's Who Wants to be a Millionaire, and Egyptian pop singer Hakim to appear in television commercials promoting its service. "Let's withdraw two answers," says Kordahi aboard a Nile yacht. He dials a friend on his mobile, then asks the advice of the audience. The crowd shouts, "MobiNil" in unison. Kordahi turns to the female contestant who replies, "MobiNil, final answer." In another spot, Hakim bellows his song "Alo," the name of MobiNil's prepaid service, over his mobile to the love of his life.

MobiNil's financials indicate solid profit margins. "MobiNil's profits and margins are the highest in the region and one of the highest worldwide," said Abol-Enein. The company posted a higher than expected 84 percent jump in first-quarter net profit to 153.5 million pounds ($26 million) on April 23rd. "They are adopting an active hedging strategy."

MobiNil has substantially reduced its foreign debt exposure from $250 million to about $40 million and is retaining its hard currency revenues from roaming fees to pay off dollar-denominated loans. (Vodafone Egypt is not a publicly traded company, and its financials are not publicly available.)

More than 80 percent of mobile subscribers in Egypt are in the less lucrative prepaid segment, Abol-Enein points out. MobiNil's average post-paid subscriber tallies 400-plus minutes a month in outgoing calls, while prepaid subscribers average merely seven minutes per month in outgoing calls. To maximize revenue per user, the mobile tariff structure has been adjusted, slightly lowering the price per minute for prepaid subscribers, and increasing the price per minute for post-paid subscribers while lowering post-paid monthly connection fees.

With a market penetration at six percent, Egypt has not reached saturation levels, say analysts. MobiNil forecasts penetration rates to reach 14 percent in 2008. But for now both MobiNil and Vodafone are focusing on value growth in favor of subscriber growth - by promoting post-paid subscriber usage and catering to corporate clients, in addition to offering an array of value-added services.

"Value-added services will definitely provide room for growth in coming years," says Abol-Enein. "In three, four, five years, the contribution will be more tangible. However, at the current stage, I don't see services, excluding SMS, representing a major contribution to revenues."

In the long term, then, the two players appear to be in a strong position. In the short term, though, after their failed, embarrassing bid to crush the coming competition, Vodafone and MobiNil must admit the error of their ways and ask for the public's forgiveness. Saddled with a $340 million image problem, these mighty companies have hopefully learned their lesson, after having been humbled by their own hubris.