Should you sell or buy Etisalat, ex-UAE telecoms monopolist?

It should be an easy answer. Take away a monopoly and profits are bound to fall. Monopolists make excess profits thanks to their monopoly.

At first glance the loss of its monopoly is thus a blow to Etisalat, one of the largest companies in the Middle East and now former holder of a monopoly on telecommunication services in the UAE. But life if never quite that simple!

For a start Etisalat has been paying a high price for its monopoly status with 50% of profits going straight to the UAE Federal Government to pay for this privilege. The monopoly gone, presumably so are these huge payments. The money saved can surely go to fund investment in new services and to fight imminent competition.

Moreover, Etisalat has an enormous advantage as the incumbent telecoms provider. Who will be able to compete with its land-line telephones with zero tariffs? Will its customer base rush off to new and unproven suppliers unless the financial incentive is enormous?

How long will it take alternative telecom providers to set up and get licensed? Will they have the cash to buy market share?

Thus while the panic reaction by shareholders has been to sell, there is another view that this might be a good buying opportunity. It has always been hard to get shareholders to sell Etisalat shares and now they are doing so.

In the longer term, there might be some cause for concern. Mobile phone services are very profitable for Etisalat at present, and there is room for rivals to undercut the partly state-owned giant. Satellite and television services have less scope for competition, but it could be significant in the longer run.

Likewise the emergence of alternative Internet Service Providers could be a nuisance. But the best response Etisalat could offer would be to ramp up its roll-out of broadband Internet services, and to bring down broadband access charges to under Dhs150 per month; these subscribers are not likely to want to migrate to anything less than broadband.

However, given that the UAE is the Arab world's most wired society, and that the market is growing very rapidly, perhaps the whole telecommunication's cake is going to be much bigger in the near future. In that case Etisalat could have a smaller market share but still be bigger and more profitable than today.

Further-out competition may become a problem for Etisalat, but in the short to medium term the UAE telecoms market is strong enough for Etisalat to maintain its growth momentum and even to increase it in the face of competition. So on that argument the shares are a buy and not a sell!