What will Etisalat's lost monopoly mean?

UAE investors did not like the news that Etisalat was losing its monopoly status and voted with their feet, bringing the share price of the partly privately-owned state company crashing down to earth.

But the UAE government is not going to award one or two more telecom licenses in an open competition including the big foreign operators. Rather it has decided to protect Etisalat from the full force of market liberalization by a duopoly structure, and by creating a corporate clone.

For the $1.1 billion rival to Etisalat will be 40% owned by state pension and other interests, and the remaining shares are earmarked for private sector shareholders including an initial public offering, which may or may not be open to foreigners. The company is likely to officially get its license this June or July and become operational early next year.

The model that policymakers appear to be following is similar to the Dubai real estate market. Here the authorities have set up rival government promoted or owned developers, and created a competitive market without losing overall control.

The UAE like Qatar and other small Gulf states is acutely sensitive to the fact that some 80% of its population are residents and not citizens. It thus tends to favor company structures that preserve the rights and privileges of its nationals, both in terms of ownership and employment.

Etisalat has become a major employer of UAE nationals, and clearly the government will want to ensure that its new rival can not operate with lower cost staff. Similarly the ownership of this key national asset stays in the hands of UAE nationals and for the benefit of their descendants.

Competitive pricing

However, policy makers do not just want a duopoly fixing prices. They recognize that in a modern economy telecoms are a vital part of national infrastructure. It is likely, therefore, that the new competitive structure will address such thorny issues as the pricing of Broadband Internet costs.

Some services in the UAE cost 10 times what they do in European countries. And the argument about economies of scale is mistaken as smaller countries like Denmark have the lowest costs, not the highest.
Similarly a solution to Voice-Over-Internet-Protocol telephony will also have to be found. The UAE is too important a member of the global business community to simply ban these services, a way has to be found to work with them.

In summary, the arrival of a competitor to Etisalat may not be welcome to shareholders as the days of monopoly profits are numbered, but this is not quite the open door to global competition that some in the industry were hoping for in the UAE.

Even Saudi Arabia has opened its telecoms to foreign competition, and ironically Etisalat is now able to operate in the Kingdom while the UAE will not be allowing Saudi telecom firms into the UAE.