OBG talks to Hatem Dowidar, CEO, Vodafone-Egypt, and Yves Gauthier, CEO, Mobinil

Interview: Hatem Dowidar,Yves Gauthier

What was the impact of the revolution on the telecoms sector’s performance in 2011?

HATEM DOWIDAR: It was a very different year for the telecoms sector in 2011 given major damage to some of the infrastructure, especially on the mobile towers. It was a big challenge at the beginning of 2011 to restore the network fully to its normal operating condition. At some point, almost 10% of the network was out, which took about a month to restore. This resulted in a fairly slow first quarter that year, and then the market started to recover. But if we look at the total revenues of all the operators in 2011, we can see that the numbers remained the same on the previous year.

The telecoms sector was more resilient than other industries, but we saw a significant drop in profitability in 2011, as revenues stayed stable while many costs increased. Security, human resources, transport and many other expenses combined to make 2011 a challenging year in terms of profits.

Some of the positive trends of the year included a large increase in the number of internet users as the revolution made people more curious about social media. For example, the number of people on Facebook doubled in 2011 and many of them are accessing their Facebook accounts using their mobile phones. However, on the negative side, we have seen continued strong price competition that has consequently eroded voice revenues even further.

YVES GAUTHIER: It was a difficult year in 2011 for the telecoms industry in Egypt. After the revolution, there was a broader economic crisis that affected all sectors, including telecoms. Mobinil suffered from a boycott campaign, for example, which affected our profits and the sector slowed as a whole after the revolution. However, the biggest challenge has come from the more widespread slowdown in the general economy, which has hampered spending. If tourism can rebound even slightly, it will create jobs that will enable people to earn more discretionary income. First, however, we must do our best to jumpstart the overall economy.

How can revenue from data plans be increased and what challenges do you face in doing so?

GAUTHIER: We believe that future growth will revolve around data, like in Europe or other more developed regions, based on the spread of broadband. At present, we are preparing the network for that sort of expansion and investing in infrastructure to remain competitive and stay relevant in the future.

Voice services remain more or less steady, and growth will come from new services centred on mobile devices. In developing countries in Asia, for instance, the trend is that non-voice services represent more than 40% of telecoms’ revenue. In Europe that number is around 30-35%, so we can assume the trend will make its way to Egypt – maybe not with the same acceleration rate, however. Still, seeing that non-voice revenue presently accounts for less than 10% of revenue in Egypt, there is plenty of room for growth in non-voice services. This can be data or other services such as mobile banking and social networking. This is why we have to be prepared for a future spike in data demand.

The growth of data very much depends on the price of smart phones, which continues to drop. Today a person can purchase a smartphone for as little as $70 or $80. We are trying to push our suppliers to reduce the price even more, making smart phones more affordable to customers and data-plan penetration will slowly increase. Today in Europe, I believe smart phones make up some 80% of phone sales.

In Egypt, however, smart phones account for perhaps 20% or less of mobile phone sales, so the possibilities are tremendous in terms of the progress that we can make. If smartphone prices can reach $40 or $50 – a goal that I do not think is too far off – we can expect a surge in market penetration.

DOWIDAR: At the moment almost 10% of our revenues are coming from internet and data plans, which is not as high as Europe’s. But the number of subscribers is becoming significant, and the growth we have seen in that is continuing with strong momentum. In the past couple of years, data revenue has been making up for the decline in voice revenue and we expect that this will continue over the coming years.

However, one challenge in expanding the data segment is having enough affordable infrastructure to connect the network. Currently, operators are depending on Telecom Egypt’s infrastructure and in some areas it is not fast enough to support heavy data traffic. As we work to develop the wireless network, it is also very important that Telecom Egypt and the government continue to make investments in the fixed network. For example, there are now discussions regarding the possibility of a 4G wireless licence in 2013 that would require additional investment.

Another major challenge is getting more smart phones into the hands of the people so that they can use the data services that we are making available. We saw a large increase in smartphone usage in 2011 and these devices have been on the rise ever since. The number of smart phones has been growing in the market by 50-100% each year. That means that in two or three years, Egypt could catch up with parts of Europe in terms of market penetration.

What are the greatest hurdles to increasing coverage in rural areas and how can they be overcome?

DOWIDAR: Actually, rural areas are much easier to cover thanks to wireless technology, and we are currently building internet infrastructure in many of those regions. But the challenge in some of these rural areas goes back to the basics, such as literacy rates. It is not useful to have internet if a person cannot read and write. People, once they are literate, can then use technology and the internet to improve their lives, but these fundamental issues must be resolved first.

GAUTHIER: A major difficulty in this country is building a site and creating the transmission backbone, because both are costly and time-consuming to develop. In some regions, network infrastructure can be difficult to put in place. Nevertheless, more operators are sharing infrastructure with each other, which in turn makes it easier to extend coverage to rural areas.

What sort of impact have you seen on roaming revenues following the drop in visitors and tourists?

GAUTHIER: Roaming revenues dropped by half after the revolution, having a significant impact. We are hoping that the new government will create a stable political and economic environment, which will improve investment inflows and bring tourism back to Egypt. The near future, of course, is not expected to be without its own challenges, but we are confident about the country’s long-term prospects.

DOWIDAR: Roaming revenue has been almost directly proportional to the number of tourists. The current level of tourism is about two-thirds of what Egypt regularly receives. Roaming revenues are about two-thirds of what they used to be, which is a substantial loss and will only return once the tourists are back.

What sort of difficulties do operators face in shifting customers into the post-paid segment?

DOWIDAR: Actually it is a very different market here. The post-paid market in Egypt is a one-month rolling contract. Since we do not have subsidies in Egypt, the customer can start a post-paid plan and then switch to another operator, so we do not have the same drive to have people on post-paid plans like they do in Europe.

In fact, some customers are happy using pre-paid plans and prefer to keep it that way since direct debit is nearly non-existent in Egypt and many of the postpaid subscribers still pay their bill either in cash or they pay directly in-store, compared to other countries where 100% of the post-paid is done by direct debit. For these reasons, post-paid plans are not one of the major issues that the sector is facing at the moment.

GAUTHIER: Operators are not trying to shift customers into the post-paid segment. The real challenge we have is keeping customers loyal. Egypt possesses a pre-paid market and pre-paid customers can be among the best.