Signing up: The sector has seen dramatic growth in recent years

Fast-growing, intensely competitive, open to international investment and dominated by the private sector, Egypt’s telecoms industry is one of the country’s great success stories. While mobile penetration is high, a growing population and a larger range of devices and pricing plans mean that subscriptions continue to rise. Competition is driving operators to expand value-added services, and incumbents in both the mobile and fixed-line segments are getting a new lease of life. The Egyptian Ministry of Planning expects that the industry would attract LE11.3bn ($1.9bn) in investment during the 2011/12 fiscal year.

REVOLUTIONARY RESET: The revolution had a significant, albeit temporary, effect on the sector. Shops were closed, making it difficult for customers to buy credit, and then the brief blackout imposed by the government had an even greater impact on the mobile sector. According to Vodafone Egypt’s CEO, Hatem Dowidar, the drop in tourist numbers also resulted in lower roaming revenues, a small but not unimportant part of operators’ income. The transition of the government also presented challenges. “The year 2011 was a tough year for many companies that partner with the government, as spending was down in all sectors, but for ICT especially,” said Khalid Hammouda, the managing director of Teradata, a data solutions provider.

The use of mobile services recovered rapidly, and the revolution arguably helped stimulate the growth of mobile internet use, particularly for social networking. However, this created a number of supply-side challenges for operators – higher borrowing costs and tighter lending conditions among them.

According to Robinson Cao (Jibin), the subregion CEO for the Chinese communications company Huawei, “Increasing smartphone usage and raising the number of post-paid customers are key challenges. In Egypt, about 88.76m customers are prepaid with a low average revenue per user (ARPU).”

However, the market has great demographic potential. “Egypt represents a golden opportunity with its large consumer market of 85m people,” Duke Park, Samsung’s managing director in Egypt, told OBG.

OPERATORS: Egypt has three mobile operators: Vodafone Egypt; the Egyptian Company for Mobile Services (known popularly as Mobinil); and Etisalat Misr. As of early 2012, Vodafone had a market share of around 38%, followed by Mobinil with 34% and Etisalat with 28%, according to Karim Khadr, the head of research and senior analyst for telecoms at HC Securities and Investment in Cairo. Vodafone, Etisalat and Mobinil’s owners – France Telecom-Orange and Orascom Telecom, which has a 5% stake in Mobinil – are listed internationally.

EXPLOSIVE GROWTH: According to a December 2011 report by the US-based research and consultancy firm Frost & Sullivan, Egypt has seen “explosive growth in its subscriber base in recent years due to increased affordability, innovative and price-competitive services offered by the mobile operators, and enhanced features like 3G support”. There were 92.44m mobile subscribers in Egypt at the end of June 2012, up from 83.43m the previous year, according to the Ministry of Communications and Information Technology (MCIT). However, some of this rise can be attributed to changes in the definition of a subscriber by the UN’s International Telecommunications Union (ITU), which was used to calculate the MCIT figure. According to the UN ITU, a subscriber is a SIM that has been used at least once for receiving or making a call or any data communication, including SMS text messaging.

Mobile penetration was 112.75% in June 2012. This was up from 102.76% at end-2011, when the ITU used a narrower definition of subscriber. However, penetration statistics do not reflect the exact number of people with mobile phones. Many people have two or more SIM cards, and often more than one telephone, whether for business and personal use, or so they can switch networks depending on whom they are calling.

There is also a degree of “churn”, that is, subscribers changing networks regularly to benefit from better offers. USB mobile internet devices (“dongles”) are also counted as SIM cards. Finally, in some cases, one mobile phone may be used by several people. The number of subscriptions, however, does give a good idea of the number of active devices in the country, and there is no doubt that this is high relative to the market. “The market is becoming increasingly saturated,” Khadr told OBG. Most people who could be expected to have a mobile device already own one.

Deduct the elderly, the very young and the poor from Egypt’s population, and there are around 55m customers – approximately two-thirds of the population – among whom Khadr estimated that penetration was around 100%. However, the number of mobile connections is likely to grow further, as hundreds of thousands of young people buy their first SIMs each year and many buy their second communications device, particularly for data use (see analysis).

NEW DYNAMISM: The latest entry, of Etisalat in 2007, increased competition in the telecoms market, the effects of which are still being felt. The company’s pricing and promotion saw it rapidly gain subscribers, and the incumbents had to cut fees and sharpen marketing in response. Both incumbents at first pursued a value strategy – aiming to offer better services than the newcomer, at a slightly higher price – rather than competing on cost. However, in the price-sensitive and voice-dominated Egyptian market, low cost won. By April 2012, calls costs were as low as LE0.14 ($0.023) per minute, down 5 piastres from LE0.19 ($0.032) in 2011.

Whereas in some markets, operators can succeed in targeting specific demographic groups, for example expatriates in the Gulf, in Egypt low- or low-middle-income Egyptians make up the largest percentage of the population, so firms tend to compete over this mass market. The price-cutting that has been triggered by intense competition has driven down ARPU to levels that are low by regional standards. All operators have found it necessary to cut prices in order to gain or defend market share and revenue growth has slowed.

ARPU: Mobinil’s ARPU was LE23.5 ($3.93) in the first quarter of 2012, according to the firm’s data. Khadr estimates that Vodafone was operating at around $4.11 and Etisalat LE23-25 ($3.84-4.18). At the end of 2010, ARPU ranged from LE30 to LE40 ($5-6.70). For comparison, Morocco’s Maroc Telecom reported ARPU of just over $9 in the first quarter of 2012, while overall ARPU in Jordan’s mobile sector is forecast to be more than $12 in 2012. Both countries are more affluent than Egypt on a per capita basis, but not by a high margin.

Falling ARPU has compressed margins; according to Khadr, Vodafone was delivering 45% in the first quarter of 2012, with Etisalat at 39% and Mobinil at 32%. Mobinil has been affected in particular by the market dynamics, with its margins dropping from the mid-40s over the past two years. Etisalat’s margin, meanwhile, was supported by its international gateway licence, which enabled the firm to set prices for international connections. Khadr anticipates margins to erode at least 10% further; however, ARPU is expected to level off in the medium term, as the scope for price cuts is considerably more limited and the use of higher-value services is now increasingly widespread (see analysis).

MOBINIL: In May 2012, the Egyptian Financial Supervisory Authority gave its approval to a tender offer by France Telecom-Orange to take almost full control of Mobinil, which continues to face tough competition from the other two operators. Net subscription additions have slowed, without being offset by higher revenues.

France Telecom-Orange purchased a 95% stake in the firm in May 2012, increasing its share from an effective 33.34% by buying out Egypt’s Orascom Telecom Media and Technology Holding (OTMT) and the 29% of the shares listed on the London and Egyptian exchanges. OTMT, which is part of the Orascom group that is owned by Egyptian billionaire Naguib Sawiris, will retain a 5% stake and 28.75% of the voting rights in Mobinil. It will also continue to be France Telecom-Orange’s strategic partner in the country. The deal reportedly cost France Telecom-Orange around €1.5bn, and priced OTMT’s shares at LE202.5 ($33.9).

BUY-OUT: The France Telecom-Orange buy-out of the company’s minority shareholders will amount to a delisting; a decision thought to have been made partly because of the disadvantage at which Mobinil faced as the only GSM operator on the Egyptian Exchange, which required it to disclose performance figures while its rivals did not. Mobinil made a loss of LE74m ($12.4m) during the first quarter of 2012, largely due to its partial switch to a 3G network, which in turn led to higher depreciation and amortisation.

However, after a difficult 2011, there were clear signs of recovery – revenue increased 3.9% year-on-year ( yo-y) during the first quarter of 2012, to LE2.5bn ($418m), driven by data and broadband services; a sign that the firm is successfully tapping into the growth area of the telecoms sector. The firm’s subscriber numbers also rose 7.5% y-o-y to 32.6m.

ETISALAT: Etisalat, a UAE-based telcoms company majority-owned by the Emirati government, has a 66% stake in Etisalat Egypt, one of its many international subsidiaries, with the remaining 34% taken by a number of Egyptian institutional investors. In October 2011, the press reported that Etisalat Misr was delaying a planned stock market listing until conditions improved. The firm had been lining up a sale of between 15% and 25%, and was reported to be in talks with investment banks regarding securing financial and legal advisory services for the stock market listing.

But in light of the turmoil of early 2011, Etisalat decided that the time is not right for a listing. The firm is said to be planning an offering at a later date. While a listing would improve access to capital, Etisalat’s shareholders may be cautious about becoming the only publically listed GSM operator, for the same reasons that Mobinil delisted.

VODAFONE: Vodafone Egypt is majority-owned by the UK’s Vodafone Group, with a 54.93% stake. Telecom Egypt (TE) owns 44.95%, and the remaining 0.13% is in minority free float. TE has a monopoly over fixed-line business and interests in other segments of the ICT industry, including its stake in Vodafone Egypt, and TE Data, an internet subsidiary. The state holds an 80% stake in TE, while the remaining 20% is traded on the London Stock Exchange (LSE) and the Egyptian Exchange.

FIXED LINE SEGMENT: TE traces its history back to the first telegraph line laid in Egypt, in 1854. It is 80% owned by the Egyptian government, with the remaining 20% listed on the LSE. By law, the government can sell up to 49% of TE. A secondary offering is possible in the future, particularly if the company needs additional capital for investment, but it is unlikely in the near future, as TE is relatively cash-rich, market conditions are not ideal for a further floatation and because privatisation remains politically sensitive.

TE has a monopoly over fixed-line business and interests in other segments of the ICT industry, including its stake in Vodafone Egypt, and TE Data, an internet subsidiary. TE had a total of 8.65m fixed-line subscribers at the end of 2011, down from around 9.62m in 2010. TE weathered the revolution better than the GSM operators, in part since it could provide call services during the mobile blackout.

Net profit for 2011 fell 6.8% y-o-y to LE2.93bn ($49m) from LE3.14bn ($525m) in 2010, as revenues declined some 3.2% to LE9.9bn ($1.65bn) and earnings before interest, taxes, depreciation and amortisation (EBITDA) dropped 2.4% to LE4.55bn ($761m). Some LE900m ($150.6m) of TE’s profits came from its stake in Vodafone Egypt. Higher corporate taxes led to net profit margins falling from 30.8% to 29.6%. Earnings per share came in at LE1.49 ($0.25). According to Khadr, ARPU for fixed lines is around LE30 ($5), above that for mobiles.

Like fixed-line incumbents across the world, TE has been affected by the rapid rise of mobile telephony, which has eaten into its core business as users have switched to GSM. As with many of its counterparts, the firm now aims to slow erosion of its fixed-line subscriber base and optimise profitability from it; TE is in a fortunate position given that Egypt has the largest fixed-line market in the Arab world. More importantly, TE is leveraging its experience, brand and infrastructure to grow in new areas, particularly mobile and data.

STRATEGIC DIRECTION: In August 2012, TE’s CEO, Tarek Aboualam, stepped down and his replacement, Mohamed El Nawawy, was announced shortly thereafter. Despite the change in leadership, the firm’s strategy is not expected to change. TE has been developing internet services for years and has the remit to tackle the internal issues it faces: slimming its workforce of more than 50,000 and reforming the firm’s hierarchy. In 2012 the company aims to restore revenue growth, while improving service and call quality.

The strategy follows the announcement that the firm would focus on profitable, higher-spending subscribers to boost revenue, rather than “keeping customers with low ARPUs without any real impact on our revenues” – a shift that positions TE as a value player in the sector.

INFRASTRUCTURE: With subscriber numbers continuing to grow and data volumes rising, maintaining and enhancing network infrastructure and technology is a priority for Egypt’s telcos. “Mobile operators have to invest in new technology like 4G to compete,” Khadr told OBG. “The need for capital expenditure in an environment in which there is still price pressure is what the Egyptian market has to face.” Vodafone, for example, invested LE2.8bn ($468.6m) in 2011, half of which was allocated to 3G and the data network; the firm is reported to be allocating similar sums in 2012.

As noted, Mobinil has also been investing in its 3G capacity, and having staked a considerable sum on taking full control of the company, France Telecom-Orange is likely to want to ensure that it keeps pace with its rivals on the technological front.

In February 2012 the international press reported that Etisalat Egypt had chosen China’s ZTE Corporation to expand its network to meet rising capacity requirements. The contract will cover the second phase of Etisalat’s wireless expansion plan, as well as the supply, installation and implementation of software designed radio universal mobile telecommunications system – a 3G operating system – and business support systems. The agreement is also expected to include further infrastructure development.

GSM operators tend to operate their own infrastructure, while also using some of TE’s operating systems. Vodafone’s Dowidar told OBG that he expected competition on data and services to encourage greater cooperation between operators on sharing network infrastructure, particularly transmission towers.

With thinner margins but an increasing need to enhance network capacity and connection quality, pooling resources on capital-intensive equipment makes commercial sense. There has as yet been little concrete progress in this direction, partly due to the rivalry that exists between the operators.

However, all firms are keen to balance investment and profitability, and the rationale for infrastructure sharing is only growing stronger.

OUTLOOK: Telecoms is seen as one of the more “recession-proof” sectors worldwide. In Egypt it has also proven remarkably resilient to political unrest, despite being one of the worst-affected sectors at the height of the revolution. In 2012, the industry is operating at full throttle, despite dampened economic growth. On the supply side, operators are cautious about stock markets, but investments by all players make it clear that cash is available when it is needed. Competition between players – backed by international telecoms firms and the government – is unlikely to abate, but ARPU cannot fall much further. Subscriber growth, albeit at a lower rate, is all but guaranteed by demographics. Operators are skilled at developing value-added services, which bolster margins and open new lines of competition. With changes in firms’ ownership and strategies, the sector will likely remain fast paced.