Egypt: Telecoms competition

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Discussions are continuing over the long-awaited potential introduction of a new mobile operator in Egypt, which has the potential to dramatically tighten margins in what is already a very competitive sector. If the agreement is concluded, incumbent operators may find themselves looking to further expand value-added services (VAS) to maintain revenue streams and margins.

In mid-November, the international press reported that state-owned Telecom Egypt (TE) was in “advanced talks” with the government over launching its own mobile operator. The potential deal would see TE become a “universal operator”, diversifying from its core fixed-line business, which is seeing subscriptions fall as competition from mobile and internet call services increases.

Should TE be granted a licence to offer mobile services, as is expected, Egypt’s three existing GSM operators, Mobinil, Vodafone Egypt and Etisalat Egypt, would probably also be allowed to become universal, allowing them to move into the fixed-line business, currently a TE monopoly, the firm’s CEO, Mohamed El Nawawy, told Reuters. Whether the GSM firms would wish to do so is open to question – in the 12 months leading to the end of August, fixed-line subscriptions fell 5.93% to 8.41m, or 10.41% penetration.

TE has been diversifying its revenue streams through its successful TE Data subsidiary. This helped the firm post a third-quarter net profit of LE633m ($103.44m), somewhat above the LE625m ($102.13m) forecast by a Reuters poll, and 2.9% up from the same period in 2011.

TE is also already involved in the mobile sector through its 45% stake in Vodafone Egypt. The future of this share could be under question should the firm obtain a universal licence. At the moment, the most likely option is for TE to launch a mobile virtual network operator (MVNO). An MVNO service uses other networks’ infrastructure, requiring significantly lower capital expenditure and risk, and usually lower licence costs as well.

Under this model, TE’s MVNO would become a fourth mobile player, according to Mohamed El Nawawy, the CEO of TE. “We are interested in moving forward as soon as possible, as soon as we get a licence, offering a virtual service,” he told the international press in November. TE’s share in Vodafone would make the latter’s network the natural one to choose.

International press reports suggest that TE could either bid for a majority share in Vodafone, from its UK-based owner, giving it a substantial existing market share, or sell its holding in the Egyptian subsidiary and go it alone with its new operator, aiming for organic growth.

Either way, should TE be awarded a universal licence, competition in the mobile sector, which is already tough, would be likely to increase. The average price per minute is already the lowest in the Middle East, pushing average revenue per user (ARPU) below LE30 ($4.9); Vodafone, which has had the highest ARPU of the three players lately, reported LE26.1 ($4.26) in the third quarter.

There were 92.64m mobile subscriptions in Egypt at the end of August, meaning that penetration reached 112.81%, according to the Ministry of Communications and Information Technology (MCIT)’s monthly “ICT Indicators in Brief”. The figures disguise the fact that there are almost certainly many Egyptians without mobile devices, as the number of subscriptions is inflated by those who have two or more SIM cards. The number of active subscriptions is further increased by the proliferation of USB modems, which count as mobile subscriptions and are commonly used by Egyptians to go online.

Nonetheless, the consensus in the industry is that the mobile voice market is nearing saturation and that amongst the 85m-person population, those demographic groups without mobiles – the very young, old and poor – are unlikely to provide much penetration growth.

For some time, the mobile operators have largely been focusing on winning market share from one another, and increasing volumes, rather than seeking out new subscriptions. This has intensified price competition. The three operators are thus targeting greater take-up of value-added services, particularly use of mobile internet, to boost revenues and margins. Egypt had 10.97m mobile internet users at the end of August, meaning that 11.73% of mobile subscriptions were internet-enabled, and that 35.02% of all internet users were going online through mobile devices.

The cost of internet handsets is still high for many Egyptians, and low levels of post-paid penetration make increasing take-up through contract deals with free or cheaper mobiles difficult. However, these challenges are not insurmountable, as operators in other emerging markets such as Morocco have used pre-paid internet add-ons and packages with a certain amount of free data to build up VAS usage.

Whether the fourth player materialises or not, the broad direction of Egypt’s mobile sector seems clear enough: encouraging more data use, and building value, while remaining price-competitive.

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