Investment in Egypt's telecoms network infrastructure boosts revenue

As of the end of 2016, Egypt’s telecommunications sector was strongly positioned for future growth. With more than 95m mobile subscribers, many of whom are young, the nation’s three mobile telecoms providers – namely Vodafone Egypt, Etisalat Misr and Orange Egypt – are investing heavily in network expansion, quality of service improvements and new technologies. This has accelerated in recent months, following the National Telecom Regulatory Authority (NTRA) issuance of four 4G long-term evolution (LTE) licences in mid-2016, one each to the three major mobile operators and one to the state-owned fixed-line operator Telecom Egypt (TE). This development, which has been underway since 2014, indicates a potentially transformative period ahead, as the new licence holders work to install infrastructure and, subsequently, begin to launch 4G subscriptions in the coming years (see analysis).

Planning Ahead

The sector will undergo significant changes over the course of 2017-18. “The main issues we have been focusing on in recent years are service quality, cost of service and ensuring fair competition among the major operators,” Noha Gaafar, senior manager of regional cooperation and international relations at the NTRA, told OBG early in 2016. “We foresee an enormous amount of potential in Egypt when it comes to the future of the telecoms industry.” A planned move – approved by regulators – for TE to expand into the mobile segment will increase competition and, given the firm’s 45% ownership stake in Vodafone Egypt, potentially result in ownership shake-ups.

More broadly, as in many other countries with high mobile penetration rates – as of end-September 2016 this figure was at 108% in Egypt – generating additional growth in the future will rely in large part on expanding service offerings and improving service quality. However, as of end-September 2016, only 27% of total mobile subscribers in the country also subscribed to mobile internet, a baseline for added-value services – indicating the need for operators to roll out new products to expand that market to attract new customers.

To facilitate this, the Ministry of Communications and Information Technology (MCIT) is targeting a number of supporting objectives under its ICT 2030 Strategy, which was launched in mid-2016. The initiative – the details of which have yet to be finalised – forms a key component of the government’s overarching Vision 2030, a broad-based economic development programme aimed at shoring up Egypt’s economic development over the next decade and a half. “Key to our plans moving forward is a drive to expand and improve upon Egypt’s telecoms infrastructure,” Ahmed Said, economic affairs director at the NTRA, told OBG in early 2016. “Additionally, we have worked to streamline the regulatory apparatus and the kinds of initiatives we pursue. We expect to see many improvements in the coming years.”

History

The sector is generally considered to be a bright spot in an otherwise challenging environment, but it has a deep history.

Egypt’s telecoms sector dates back more than a century and a half. In 1854 the UK-based Eastern Telegraph Company strung the country’s first telegraph line between Cairo and Alexandria. The line was part of a larger network linking Britain to India. In 1881 meanwhile a copper fixed-line was added to the Cairo-Alexandria route. Two years later, in 1883, this line was extended to Port Said, Suez, Ismailia, Zagazig, Tanta and Mansoura. In 1918, in the run-up to Egyptian independence a few years later, the newly formed Egyptian government bought a controlling share in the Eastern Telegraph Company for LE755,000 (equivalent to $40,000 as of December 2016), effectively assuming control of the nation’s telecoms network. The firm’s holdings were subsequently transferred to the Egyptian State Railway, Telegraph and Telephone Authority. Eventually the country’s telecoms infrastructure was handed over to the state-run Arab Republic of Egypt National Telecommunications Organisation (ARENTO), which oversaw the country’s telecoms sector for the next 75 years.

During this period the system was upgraded and added to regularly, in line with international telecoms trends. By 1952, for instance, Egypt was home to more than 60,000 fixed-line subscribers. In 1972 a cable linking Egypt to Italy was completed. This was followed in 1986 by the completion of Simoy 1, a submarine cable linking Egypt to countries in Asia, Africa and Europe. The internet, via Simoy 1, arrived in Egypt in 1992. The nation’s first mobile telecoms services, meanwhile, were launched by ARENTO in 1996. In the late 1990s the state set out to reform and revitalise the telecoms sector, in an effort to place it at the centre of the country’s future development. In 1998 ARENTO was divided into a regulatory arm and an operations arm, namely the NTRA and TE, the latter of which was a 100% state-owned joint-stock company. A year later, in 1999, the government established the MCIT, which was charged with turning Egypt into a country with advanced technology capabilities.

Recent Performance

Since then Egypt’s telecoms sector has expanded rapidly, driven by a series of initiatives led by MCIT, TE and NTRA and increasingly, private sector projects. By the end of October 1999, the country hosted around 654,000 mobile subscribers, some 300,000 internet users and 266 private ICT companies, according to data from the MCIT. The mid-2000s represented a turning point for Egypt’s telecoms sector. As in most other markets around the world during this period, as mobile technology took centre stage, fixed-line telephony services decreased. By 2009 TE’s waiting list for a new fixed-line connection dropped from 22,733 to 4542. Meanwhile, mobile subscriptions nearly doubled over the same period, to reach 51.5m by August 2009. Over the past five years this high rate of growth has largely continued apace. From 2010 through 2014, for instance, the number of mobile subscriptions in the country increased at an average annual rate of 15.7%. Estimates put the annual growth of internet users at nearly 18% over the same period. As of the end of October 2015, Egypt was home to 90.13m mobile subscribers – up more than 209% from the end of 2007 – and an internet penetration rate of 37.8%. Similarly, the number of internet users sharply increased to reach an estimated 30.8m at the end of July 2016. The country’s internet capacity, meanwhile, reached 1032 Gbps by end-September 2016, up approximately 59% from the same period in 2015, according to MCIT figures. Behind this rapid growth has been a steady stream of investment on the part of the three mobile service providers and government funded provider, TE.

Telecoms – and, more generally, ICT – is understood to be a steadily growing contributor to Egypt’s GDP and government revenues. As of the end of 2014 – the most recent period for which data was available at time of publication – the ICT sector’s contribution to the government was at LE12.77bn ($676.8m). This figure indicates a growth rate of 14.63% from the end of 2007, when the total sector Treasury contribution was LE11.14bn ($590.4m). ICT exports, meanwhile, have dropped off considerably in recent years, in line with rising levels of competition from other countries in the area of business process outsourcing. As of the end of 2014, MCIT data showed total ICT exports of $1.64m, down from around $450m in 2007.

Fixed-Line Services

State-owned incumbent operator TE controls all fixed-line infrastructure in Egypt. In line with markets around the region, traditional fixed-line subscriptions have been declining, but the operator has been adapting, reducing its fixed subscription footprint, focusing on wholesale activities and preparing for the roll-out of a wholly owned subsidiary mobile operator (see section below). TE is the single largest telecommunications company in Egypt. In 2015 its total profits topped LE4bn ($212m), according to local estimates, whereas Vodafone, Orange and Etisalat together brought in around LE4bn ($212m) in the same period. Currently, the bulk of TE’s profits come from its infrastructure leasing activities. The state-owned company rents out spectrum and minutes to all three mobile operators, and provides an international gateway for Vodafone and Orange. Etisalat operates its own international gateway. Furthermore, TE already owns some 45% of Vodafone, the largest mobile operator. Given this structure, it remains unclear to what extent the entrance of TE into the mobile segment will have on the market and the other three players.

As of the end of September 2016 Egypt was home to 5.9m fixed-line telephone subscriptions, down 5.13% from 6.22m a year earlier, according to numbers from MCIT. Subscriptions have fallen off considerably from just a few years ago. In 2010, for instance, Egypt was home to some 9.6m fixed-line subscriptions. This figure fell to 8.71m in 2011, 8.56m in 2012, 6.82m in 2013 and 6.32m in 2014. The 2016 figure represents an overall penetration rate of 7.16%, down from 12.2% in 2010.

TE’s installed fixed-line exchange capacity, meanwhile, was at 14.82m lines as of end-September 2016. As demand for fixed-line calling services has significantly declined over the past decade, the company has strategically disinvested in fixed-line telephony infrastructure. Indeed, over the course of the year running up to end-September 2016, the number of installed lines in the country declined by more than 16%, according to data from MCIT.

Rural areas, many of which are out of range of the mobile networks, have historically been fixed-line strongholds in Egypt. However, expanded network coverage by the mobile operators has begun to push down fixed-line calling subscriptions in those areas as well in recent years. As of end-September there were 1088 telephone exchanges in rural areas, down from 1093 a year earlier. Residential subscribers accounted for 87% of all fixed-line subscribers in Egypt by end-September 2016. Commercial subscriptions made up an additional 12%, while subscriptions by government agencies and other state entities accounted for around 1%, according indicators published by MCIT.

The fixed-line calling segment, though not expected to grow dramatically in the coming years, may soon benefit from increased competition. Indeed, in late 2016 the NTRA issued new fixed-line calling licences to all three mobile operators, effectively liberalising the segment. The change in strategy is part of the regulator’s overarching push to facilitate the development of 4G LTE mobile services and relatedly ramp up telecoms infrastructure investment and service provision. The new fixed-line licenses do not include access to fixed ADSL and other data services, which are expected to remain under the control of TE in the coming years (see analysis). While there are more than 200 internet service providers (ISPs) in Egypt, TE is the sole wholesaler, leasing capacity to retail-facing service providers and the three mobile operators alike. More than half of TE’s total annual revenues come from data wholesaling.

Mobile

As fixed-line calling subscriptions have dropped off, mobile subscriptions have grown considerably. From 2010 through end-September 2016 the number of mobile subscribers in Egypt rose by more than 36% from 70.66m to 96.26m, according to MCIT data, driven by the standard practice of subscribers holding multiple SIM cards. Since 2013, when the number of mobile subscriptions in the country peaked at 99.7m in total, this figure saw a temporary dip, due primarily to a cracking down on inactive subscriptions by the NTRA in recent years, dropping to 93.26m in September 2015 before rebounding over the following year. With mobile penetration of 108.5% at the end of September 2016, by most accounts Egypt’s mobile market is relatively saturated. Due to the market plateauing somewhat in 2011-12, the country’s three mobile operators have competed aggressively on prices, services and advertising spend.

Data as to the market share of each operator varies, but the market is a competitive one. Based on 2015 statistics published by Orange, Vodafone controlled around 36% of the market, while around 33% of the subscribers had contracts with Orange itself, and the remaining 31% were with Etisalat. According to local press reports, 2015 data showed Vodafone with a 44% share of mobile sector revenues, while Orange had 33% and Etisalat had 23%. The market split between the three operators has gone largely unchanged since 2011. “When it comes to mobile, we haven’t seen growth since 2011,” Sarah Shabayek, a telecoms analyst at Cairo-based investment bank CI Capital, told local media in mid-2016. “In all markets globally, after penetration maturity comes data revenue that would lead to another round of growth – but that hasn’t happened.”

Indeed, as of the end of September 2016, just 27.2% of total mobile subscribers were mobile internet users, up less than 0.5% from around 26.85% a year earlier – nowhere near the rapid growth rates seen in the mobile segment in the first decade of the 2000s. Nonetheless, mobile internet subscriptions are on the rise, albeit at a somewhat slower rate than expected by analysts. From 2010 through end-September 2016 the number of mobile internet subscribers in the country jumped from 7.85m to 26.18 in total, which represents a compound annual growth rate of around 38%.

Vodafone

While estimates as to the exact size of its market share vary, Vodafone, which was established under the brand Click GSM in 1998, is the largest mobile operator – and one of the most prominent players in any industry – in Egypt by subscribers and revenues. During the firm’s most recent fiscal year, which ended on 31 March 2016, the company reported revenue growth of 8.9%, which made it the second largest market behind Turkey in the Middle East, Africa and Asia for the UK-based Vodafone Group.

According to Vodafone Egypt, revenue growth in the country was attributed primarily to strong expansion in data transfer services. This is in line with the Vodafone Group’s overarching revenues, some 74% of which come from mobile telephony services, while another 21% came from ADSL internet services. Since a restructuring in 2007, just under 55% of Vodafone Egypt’s shares have been held by the Vodafone Group, while just under 45% are held by TE, and a remaining 0.13% are held publicly on the Egyptian Exchange (see Capital Markets chapter).

Pushing Ahead

Vodafone Egypt has focused on ramping up its data service offerings in recent years. Currently the company operates under a 15-year 3G mobile services license, which it acquired from the NTRA in 2007, and the more recently awarded 4G LTE license. Rolling out 4G subscriptions will require a significant amount of work on Vodafone’s part in the coming years. In late 2015 Vodafone Egypt’s CEO, Essam Ahmed, told local media that the company planned to invest almost LE9bn ($477m) through 2017. A significant percentage of this financing will likely go towards the installation and development of 4G LTE infrastructure and services. This figure represents a considerable increase on Vodafone’s part in terms of investment in Egyptian telecoms.

Indeed, from its founding in 1998 through to 2015, the company spent an estimated LE30bn ($1.59m) in Egypt in total, according to Ahmed. “[Our] strategy in the upcoming period is based on paying attention to the development of the network and expanding coverage to provide the best service to our customers in various parts of the country, especially with regards to online services and data transmission,” he told local media in late 2015.

Orange

Established in May 1998 as Mobinil, Orange Egypt is the oldest and the second-largest mobile operator in the country, with some 33.4m subscribers at the end of 2015, according to company statements. Orange Group, the French multinational, holds 99% of the company, with the Egyptian subsidiary accounting for Orange Group’s largest operation in the world in terms of subscriber numbers, as well as more than 27% of total Orange Group revenues in the MENA region in 2016. This figure was equal to around 3% of total Orange Group revenues. According to company data, Orange Egypt serves around 33.2% of total mobile subscribers in Egypt.

In March 2016 the firm underwent a rebranding – changing its name from Mobinil to Orange – and announced a number of development plans and expansion efforts. “Today, Orange is a mobile operator in Egypt, but we want to be much more than that in the future,” Stéphane Richard, the firm’s CEO and chairman, told local media in mid-2016. “We want to be a true digital player and help the economy of Egypt and help its people to gain from the benefits of the digital age.”

In practice, this means investing heavily across a range of existing and new areas. In 2016 alone the firm reportedly planned to spend some LE2.5bn ($132.5m) to upgrade and expand upon its existing 2G and 3G networks. With the awarding of a 4G licence in late 2016, Orange has hinted that it plans to invest heavily in 4G-related infrastructure in the coming years. Indeed, early in 2016, prior to the awarding of the 4G licence, Richard told local media, “We hope that the financial and technical conditions of the licence and the spectrum will take into account the economic reality of the industry and the big investment that is needed after the spectrum.” In order to fund this expansion, the firm plans to carry out a sale of 20% of Orange’s shares on the market in the near future.

Etisalat

The third-largest mobile operator in Egypt as of 2016 is Etisalat, which was established in 2007 when the NTRA tendered a third mobile license as part of a market-wide liberalisation effort. The company is controlled by the UAE-based provider Etisalat, which manages 15 telecoms firms throughout the Middle East, Asia and Africa.

According to Etisalat’s own data, the firm had around 23m mobile subscribers in Egypt as of the end of the second quarter of 2016, accounting or some 24% of the total local mobile market. The Egyptian subsidiary is the second-most profitable for the company outside of the UAE, behind only Morocco. Some 66% of the Egyptian unit is owned by Etisalat in the UAE, while Egypt Post owns another 20%. The remaining 14% is held privately, mostly by Emirati and Saudi Arabian investors.

The primary driver of the company’s profit growth in recent quarters – it rose from LE180m ($9.5m) to LE540m ($28.6m) between the first and second quarters of 2016 – has been data transfer services and corporate services, both of which are rapidly growing areas of focus for Etisalat for the period moving forward. The company also plans to invest heavily in infrastructure in the coming years, in part to handle 4G LTE requirements. “An infrastructure upgrade is one of the most important challenges that must be dealt with and which will eventually reflect on the Egyptian market and the economy as a whole,” Hazem Metwally, the firm’s CEO, told local media in November 2016. “One must add to that the rising operation costs and equipment prices that are paid in foreign currency.”

In order to address these issues, Etisalat has invested around LE1.7bn ($90.1m) in Egypt in 2016, according to Metwally. This figure is in line with the company’s recent investment in the company, which has averaged LE1.5bn-2.5bn ($79.5m-132.5m) on an annual basis in recent years.

Te Impact

As evidenced by the planned capital expenditure programmes for the country’s three mobile operators, the issuance of four 4G LTE licences by the NTRA in the latter half of 2016 was predicted to majorly impact on the mobile market in the coming years. Perhaps the biggest news with regard to the new licences is the entrance of TE into the mobile segment. When the NTRA initially announced that it planned to issue 4G LTE licences in 2014, it included a proviso that would require TE to sell its stake in Vodafone if it wanted to hold one of the new licences. Subsequently, however, this provision was dropped. TE became the first 4G licence-holder in mid-2016, while Vodafone, Orange and Etisalat chose not to bid on the NTRA’s initial offer due to a lack of sufficient spectrum. Over the course of subsequent discussions, all three mobile operators agreed to acquire a licence based on additional incentives offered by the regulator, including additional spectrum (see analysis).

Tower Sharing

Siting and building a new base station is a relatively complex and difficult process in Egypt, requiring the permission and approval of various state agencies. Consequently, in the coming years the national mobile operators could move away from ownership and are looking towards an infrastructure leasing model. In April 2016, for instance, Mobinil (now Orange) sold its tower management operations to Eaton Towers, a UK-based shared telecoms infrastructure management firm, for around LE1bn ($53m).

Outlook

While the licensing of 4G LTE service providers in Egypt bodes well for consumers, the operators face a tightening competitive environment. Vodafone, for instance, was issued 5 MHz of LTE-appropriate frequencies as part of its deal with the NTRA, as compared to 10 MHz each for Orange and Etisalat. While Vodafone is already the largest owner of radio spectrum in Egypt, this difference could put pressure on the market leader’s operations moving forward. Furthermore, all three mobile operators report relatively narrow margins and various infrastructure-related challenges, while mobile data – and smartphone usage – is still seeing slow uptake. This is largely due to price, which remains a major consideration for many Egyptians when it comes to subscribing to telecoms services.

The introduction of 4G LTE services has the capability to jumpstart subscriptions in these areas, as faster data transfer speeds translate into better user experiences on smartphones.

Similarly, the entrance of TE into the mobile market will not only increase competition, but also has the potential to lead to more streamlined performance across the sector, which bodes well not only for consumers, but for the operators as well. “We expect to see considerable improvements in terms of quality of service, affordability and network reach in the coming years,” the NTRA’s Said told OBG.