With 3rd service provider set to come online, growth expected in lower income brackets
CAIRO: There is plenty of room for growth in the Egyptian mobile market, but turning that growth into profit will be a challenge for telecom operators in the country.
Even with a third mobile network coming online, mobile providers have a large and growing market to share. Only about 7 million of 77.5 million Egyptians currently use mobile phones. Certainly that number is concentrated amongst the wealthiest segment of the population, but mobile use is trickling down fast. The mobile market is expected to grow to 23 per cent of the population by the end of 2007, according to data from the Wireless World Forum.
“The cost of a call, even from a pre-paid phone, is exceptionally low in Egypt, and we expect more and more of the country’s poorer population to start using them, comments Shrouk Diab, a telecommunications analyst with the Beltone Financial Group in Cairo.
Hence, it is not surprising that three operators were willing to pay the exceptionally high price of LE 16.7 billion ($2.9 billion) for the third mobile license awarded last July. The network will begin operation in the second quarter of 2007, and offers mixed 2G and 3G services. The price is so high that Cairo has been rife with rumors since the sale that at least one of the three winners was planning to dilute their stake.
But all of the consortium members, which comprises Etisalat (66 per cent), the Egyptian Post Office (20 per cent), the National Bank of Egypt (10 per cent) and the Commercial International Bank (4 per cent), have confirmed their intention to settle their share in cash before the deadline. They have stated that they would not need to resort to loans in order to pay for their piece of the pie.
So promising are the prospects for market growth, that Telecom Egypt is considering a bid on another 3G license as well, as Chairman Akil Beshir stated at a recent analyst conference. Its main homegrown competitor, MobiNil, says that it will defer such a decision, but it clearly isn’t giving up yet. The fact that the license is expected to cost LE 3.34 billion ($580 million) does not seem to deter any of the players.
Telecom Egypt, the national telecom provider, will still profit from the third mobile network, even though it lost out in the bidding for it. Telecom Egypt will reap benefits from interconnect fees and the use of its infrastructure by Etisalat.
But all of the players in Egypt’s mobile market will have to raise margins if profits from the growing market are to be sustained. Average revenue per user (ARPU), the telecom measure of profitability on sales, is low in Egypt and is not on the rise.
According to Beltone analyst Diab, Vodafone appears to enjoy an edge here. Calculating both prepaid and postpaid clients, MobiNil declined at a rate of 34.3 per cent last year, while Vodafone dropped by 16.7 per cent or less than half as quickly.
“This means that Vodafone is retaining the higher-end, value-added customers, which at the end of the day is how you realize your revenue. MobiNil is not growing its net adds that much faster than Vodafone, not enough to really justify the rate their ARPU is declining at.
Nor the price war for prepaid customers, which started between the two companies in 2005 and has been forcing them to cut margins to the bone, explain the drop.
Why is ARPU so low? Egyptian mobile users are eager to obtain phones, but are very careful about how they use them.
“Egypt is not a country of conspicuous consumption, of big spenders and show-off luxury, says Ann Bengtsson, a consultant specializing in the effect of culture on business based in Brussels. “The Egyptian middle class saves its money and is likely to use telephones sparingly.
In fact, Egypt boasts a savings rate of 23 per cent on gross income according to the National Bank of Egypt, a very high level for a developing nation.
All of this makes the retention of higher-value customers especially important for profits, and both Vodafone and MobiNil say that they are focusing their strategy on this area. Both companies are also investing heavily in infrastructure to reach the largest possible number of consumers in the country.
To retain high-value clients and to boost ARPU, Egypt’s mobile phone providers will have to offer them more value-added services. This means still more investment, and it may prove difficult for these companies to maintain the pace while ARPU grows at a slow rate.
Etisalat is expected to pursue a slightly different strategy. Making use of the extensive distribution system made available to it by its partnership with the Egyptian Post, it is planning to reach the largest possible number of less affluent consumers to make up for low margins with high volume, and to minimize the payback period. This move may generate even further competition on price, at least on the lower end of the market, and could push ARPU down even further.
But, as several analysts have pointed out, the market is at its outset in development in every respect. With less than five years of experience, it is difficult to predict how mobile users will behave as the network becomes more reliable and as more services are introduced. One recalls the early experience of mobiles in Central and Eastern Europe and the plethora of predictions that East European consumers, also relatively conservative spenders on average, would be slow to adopt them. In fact, penetration rates are up to 80 per cent across the region today. Who can say that Egyptian consumers will not follow the same pattern? NOOZZ
