The growing market is on the cusp of new developments

Fast-changing, competitive and an important magnet for foreign and private-sector investment, the Egyptian telecoms sector is one of the most dynamic parts of the country’s economy, having weathered the economic slowdown over the past few years.

Following the approval of a new universal licence in September 2014, the sector is set to see significant changes: a new mobile operator will be launched by legacy telco Telecom Egypt (TE), the fixed-line market will be opened to mobile companies and, within a few years, fourth-generation (4G) networks will be rolled out and new international gateway licences offered.

Regulator

The industry is regulated by the National Telecommunication Regulatory Authority (NTRA), which is responsible for overseeing all aspects of the sector. Its remit includes competition; tariffs and termination rates (the fee charged for switching from one network to another); the allocation and management of spectrum; service standards; the legal structure; and consumer protection. The authority also oversees the importation of telecoms-related goods, ensuring that they meet standards. The NTRA’s board is headed by the minister of communications and information technology, and while it is charged with regulating – among others – the government-owned TE, a fixed-line and mobile operator, it is theoretically independent.

Legacy Operator

The market legacy operator is TE, which is 80% state-owned, with the remainder floating on the London Stock Exchange as well as on the Egyptian Exchange (EGX), making this one of Egypt’s most prominent equities. TE has a monopoly on the fixed-line business, as well as an ADSL subsidiary, TE Data, which has a majority market share. Following reforms approved in 2014, TE, and the sector as a whole, will undergo extensive changes. New measures have opened the fixed-line market to other companies, and within three years will loosen TE’s hold on international telecommunications gateways (IGWs) and telecoms infrastructure. The changes will also see Egypt issue 4G licences, probably in 2016. The auction of 4G licences is a move that is intended to both expand capacity for greater data volumes in the medium to long term and provide a welcome boost to government revenues.

Just as significantly, TE has now been allowed to launch its own mobile operator, a long-awaited opportunity that the company will take advantage of swiftly, adding a fourth player to what is already an exceptionally competitive GSM market (see analysis). In 2013, TE posted consolidated revenues of LE11.135bn ($1.6bn), up 11% on 2012, while earnings before interest, taxes, depreciation and amortisation (EBITDA) fell 1.4% to LE3.684bn ($523.1m), pushing the EBITDA margin down to 33.1% from 37.2%. Net profit after tax reached LE2.959bn ($420.2m), up 12.9% from LE2.62bn ($372m) in 2012, and leading to a net profit margin of 27%.

Mobile Operators

There are three existing mobile operators. According to HC Securities, an Egypt-based financial institution, in terms of market share, the largest operator is Vodafone Egypt (sometimes known as VFE), in which TE has a 45% stake, with the remainder held by UK-based Vodafone. As part of the package of reforms that will see TE launch its own GSM company and usher in 4G, the state telco must either sell its stake in Vodafone Egypt or take full control of it – the first option being seen as the most likely.

Mobinil, which was originally launched as a subsidiary of domestic conglomerate Orascom, is the second largest operator by market share and until 2009, had the largest number of subscribers. The firm is now nearly completely owned by France Telecom, which took a 94% stake in May 2012. Former owner Orascom Telecom Media and Technology Holding retains a 5% stake, with the remainder floating on the EGX.

In third place is Etisalat Egypt, which launched in 2007 and helped shake up the market when it introduced aggressive pricing and leveraged its IGW. The multinational UAE-based telecoms services provider Etisalat has a 66% stake in the Egyptian operator and Egypt’s state postal company holds 20%, with the remaining shares held by private institutional investors.

Market Breakdown

As is common in many emerging markets, people typically own multiple SIM cards, resulting in a mobile penetration rate in excess of 100%. There were 97.66m mobile subscribers in Egypt at the end of July 2014, according to the Ministry of Communications and Information Technology (MCIT). The market leader was Vodafone Egypt, with 41.11m subscribers or a 42.1% market share, followed by Mobinil with 33.38m (34.2%) and Etisalat with 23.17m (23.7%).

By end-2014, HC Securities expects the total number of subscribers to have risen to 103.69m. HC estimates Vodafone will have 42.51m subscribers, Mobinil 35.88m and Etisalat 25.30m, giving the players market shares of 41%, 31.6% and 24.4%, respectively. HC predicts the new entrant will lead to a moderate increase in market growth, with most of the new TE mobile customers likely to be multiple SIM owners who are already subscribers on other networks. The launch of TE’s mobile operator will have an impact on market share, but nonetheless HC expects that incumbent operators will continue to see subscriber growth through to the end of the decade at least. By end-2015, HC estimates that TE will have gained its first 1.5m subscribers, with Vodafone’s subscriptions rising to 44.02m, Mobinil’s to 37.12m and Etisalat’s to 26.18m. This would give the new mobile operator a market share of 1.4%, to Vodafone’s 40.4%, Mobinil’s 34.1% and Etisalat’s 24.1%.

By the end of the decade, HC forecasts that there will be 132.74m mobile subscribers in Egypt. It estimates that TE’s mobile company will have 12.5m subscribers, more than eight times the number just five years before, indicating significant growth potential for the new operator in an already packed market. This would give TE a projected market share of 9.4% – still modest compared to the incumbent operators, which will maintain the same market positions since Etisalat overtook Mobinil in 2009. HC forecasts a total of 49.42m subscribers for Vodafone, with a market share of 37.2%; 41.26m for Mobinil and 31.1% market share; and 29.56m subscribers for Etisalat, with a 22.3% market share.

Penetration

By the straightforward measure of SIM card ownership per head of population, Egypt’s mobile penetration was above 118% at the end of 2013, according to government figures. This is a respectable level for an emerging market – Morocco, for example, has a rate of around 130%. However, when penetration is adjusted for age – including only the “addressable” population, stripping out the under-10s and over-70s, who are much less likely to own a mobile phone themselves – the rate was much higher, at 150.2%.

HC estimates that “real” penetration, that is the proportion of the addressable population who owns an active SIM card, stripping out multiple SIM ownership, is around 90%. Egypt’s mobile telephony penetration is thus fairly high; most adult Egyptians who want a mobile telephone already have one. In a sense, then, the market is nearing saturation.

However, subscriptions are expected to continue to grow steadily for three main reasons: population growth, existing subscribers buying multiple SIMs and the increase of “real” penetration as mobile telephony eventually reaches even those demographic segments that currently do not have SIM cards. The first factor is one reason that Egypt’s telecoms market remains appealing, despite low average revenue per user (ARPU). The population is growing by 2.5% a year, and around a third of Egyptians are under the age of 15 and will acquire mobile telephones as they grow older – if they do not already own them already. The second factor, multiple SIM ownership, is increasingly common internationally, and particularly in emerging economies that have very price-sensitive telecoms markets, like Egypt. In 2013, 1.16m new SIM cards were sold to Egyptian customers who already owned at least one, accounting for some 40% of all sales.

Customers will often have two or more SIM cards to take advantage of significantly lower on-network tariffs – for example using their Mobinil SIM to call a friend on that network, then switching to their Vodafone SIM to call family who are also Vodafone subscribers.

Small businesses will often run two or more mobile telephone numbers in order to make it cheaper for customers on different networks to contact them. Multiple SIM card ownership is also boosted by subscribers buying a new SIM to take advantage of an operator’s special offers. Sometimes these SIMs are discarded after a short period – the level of SIM card ownership overstates penetration levels, as it takes time for a SIM to be deactivated due to lack of use.

Finally, particularly among more affluent subscribers, multiple SIM ownership is very common in situations where a customer has multiple devices – for example a company smartphone for work, another handset for personal use and a USB modem (or dongle) to connect a laptop to the internet.

Penetration Growth

As appears to be the trend in a number of Middle Eastern and African markets, the proportion of the population that does not have an active SIM card will likely fall to nearly zero by the end of the decade. HC, for example, forecasts real penetration rising to 91.7% by end-2014, 93.1% in 2015 and 99.7% by 2020. By the start of the next decade, only a tiny number of Egyptians between the ages of 10 and 70 will not have a mobile telephone. The reason for this growth will be economic – mobile telephony becoming affordable to even the very poorest – and cultural, as having a mobile will be seen as indispensible.

As real penetration nears 100%, market growth will become more dependent on increasing the number of SIMs in the hands of those who are already connected, even with Egypt’s population growth and youth bulge taken into account. In 2013, some 40% of “market adds” – that is, new subscriptions – were to customers who already had at least one SIM, according to HC. This proportion is expected to rise to 45% in 2014 and then 57% in 2015, the year when TE’s mobile operator is expected to be in full operation.

Pricing & ARPU

Egypt has some of the lowest mobile call rates in the world and also among the lowest ARPU. The entry of newcomer Etisalat to the market in 2007 has helped serve as a catalyst for the intensive price competition that has brought this situation about.

Special holiday tariffs go as low as three piasters (LE0.03, $0.004) per minute on-network and ten piasters (LE0.10, $0.014) off-network. There is little price elasticity of demand – price cuts do not greatly encourage higher usage, but are a tool for increasing and defending market share as footloose consumers shift to whichever operator can offer them the lowest tariffs.

Sector ARPU has become harder to calculate since Mobinil’s delisting and without Etisalat’s declared statistics. However, the blended figure, taking into account both pre- and post-paid subscribers, is likely to stand around LE20 ($2.80) or just above.

Vodafone is regarded as having the highest sector ARPU – LE24.30 ($3.45), according to CI Capital, an Egyptian investment bank – while Mobinil has the lowest, at around LE18 ($2.56), Ahmed Adel El Kassaby, an analyst at HC’s brokerage division, told OBG. ARPU among those who use the least can be below LE15 ($2.13), he adds. “The problem is that all operators compete for the low end of the market, sacrificing tariffs and sacrificing margins,” El Kassaby said.

However, margins remain respectable, ranging around 30% for Mobinil to the mid-30s for Vodafone. Despite efforts by operators to boost ARPU through expanding take-up of value-added services (VAS), in the next few years until 2020, estimates for blended ARPU from a variety of sources indicate expectations of a slowdown to LE17.60 ($2.50). Further intensification of competition from TE’s mobile operator is likely to be the main factor behind ARPU decline. The entrant is likely to pitch its offer with low prices to attract subscribers.

Fixed Line

As of late 2014, TE was still the monopoly fixed-line telephone operator, and none of the existing mobile firms had launched the fixed-line service that they are entitled to under the unified licence regime. Fixed-line business had been declining for some years; however, this trend has recently been reversed by attractive pricing and double-play offers from TE, and subscriptions are on the rise again.

CI Capital expects TE to have 6.8m voice and 1.97m ADSL subscribers by end-2014, rising to 6.38m and 2.39m, respectively, in 2015. CI forecasts very modest voice subscription compound annual growth of 0.5% between 2015 and 2018 – but still a reversal of the previous decline – while fixed broadband subscriptions will rise by 15.7% per year in the same period. Both are likely to be helped by TE’s new ability to offer bundled packages that also include mobile services, once the company’s mobile operator is up and running.

Fixed broadband growth will also be supported by TE’s capital investments, such as in its broadband-supporting infrastructure. Under the current programme, TE is set to spend LE2.6bn ($369.2m) between 2014 and 2015. This marks a substantial rise from the LE700m ($99.4m) committed in 2013, though capital expenditure is expected subsequently drop to LE1bn ($142m) per year. “Copper infrastructure is very expensive and hard to maintain, thus we expect fibre-optic cabling to dominate new network investments,” Atef El Barkouky, CEO of Barkotel Communications, told OBG.

These capital investments will be necessary if TE is to retain its fixed-line customers – particularly if one or more of Egypt’s mobile operators launches a competitor. “The future for fixed line has always been in delivering broadband to homes,” Tarek Aboualam, a former TE CEO who is now CEO of Mobiserve, a telecoms services company, told OBG. “TE needs to keep an edge in price and quality of service.”

TE Prospects

While TE’s move into the mobile space gives the operator a wholly-owned revenue stream that many other legacy operators – such as South Africa’s Telkom – have sought to leverage, shareholders will be wary of the changing market dynamics in the coming years, including from regulatory changes linked to the universal licence issue. Growing competition for international traffic, for example, could impact the company’s revenues over the next decade.

However, the TE mobile operator is expected to evolve fairly rapidly following its launch, and should involve minimal capital expenditure, at least initially. In the first phase, effectively as a mobile virtual network operator, it will provide mobile services without owning spectrum, which will be leased from other providers.

Following this period, when 4G/LTE licences are issued, TE is expected to bid for one, obliging it to own its own spectrum, although the upcoming licence issue could also weigh heavily on TE’s bottom line. As El Kassaby points out, these licences will potentially be very costly: Vodafone and Mobinil paid LE3.4bn ($482.8m) for their 3G licences, with spectrum.

VAS

With ARPU low and possibly trending downwards, operators are keen to focus efforts on increasing use of data and VAS that can increase revenue flows and bolster margins. Operators have been looking to boost VAS take-up for some years now, and growth of data usage has been respectable, but comes from a low base. Operators still generate less than 10% of their revenues from data, below the 20%-plus global average. To make data services more accessible, companies have cut prices significantly, and are likely to cut again once TE launches its operator, competing strongly both on price and bundled services including internet.

Boosting VAS take up will be central to the future of mobile operators in Egypt, but at present they are still in a position in which voice ARPU continues to decline, without this being offset by rising data usage.

This may change as more subscribers go online. El Kassaby estimates that around 25% of mobile subscribers are data users, although they may go online irregularly. The growth of usage of social networks such as Facebook and Twitter during and since the revolution of 2011 has helped enhance the profile and desirability of mobile data, as has the ever-growing body of Arabic-language content, the paucity of which had previously discouraged some from connecting.

Smartphones

For years one of the biggest hurdles to increasing VAS penetration has been the number of smartphones in Egyptians’ hands. But now that smartphone ownership is growing, the next challenge is getting customers to use the devices for data regularly.

In September 2014, research and information company Nielsen estimated that smartphone penetration had reached 54% in Egypt. Smartphones are getting cheaper and cheaper as technology advances, with some Android models now available for $70-80, while more basic models with internet and email access costing even less. Meanwhile, non-internet handsets are becoming increasingly less common.

“When you buy a new phone, you buy a smartphone by default,” Aboualam told OBG. “Increasing data penetration is just a matter of time.” While it is still easy to buy a non-smart handset in the country, and the cost barrier to acquiring an internet-ready telephone is still high to the many millions of Egyptians subsisting on $2 or less a day, smartphone ownership is nonetheless only likely to rise and become increasingly affordable for everyone except those with the very lowest incomes.

Network Infrastructure

One of the most significant trends now emerging in the Egyptian telecoms sector is a shift away from operators owning their own network infrastructure and equipment. Instead, they are increasingly sharing it – for example by “co-locating” towers – or relying on service companies to provide it, and then renting the capacity. The latter model also involves operators selling their infrastructure to service companies, and then leasing it back. This trend is likely to be accelerated by the establishment of a new national infrastructure company as part of the package of reforms introduced with the unified licence launch. The new company will be launched with a licence fee of LE300m ($42.6m) and all mobile operators, as well as TE, are invited to lease the towers. The company is expected to be ready to launch by early 2015.

Benefits Of Sharing

By sharing or divesting themselves of network infrastructure, operators can reduce their capital expenditure and refocus the resources onto operational expenditure. This makes sense in a highly-competitive market that is about to become even more competitive with a new entrant, and in which operators are increasingly working to differentiate themselves with better services and marketing, requiring higher operational spending. In an environment with ARPU among the world’s lowest and falling, market players having overlapping capital-intensive infrastructure makes little sense. High interest rates in Egypt also make borrowing for capital investment more expensive. The regulator has been actively encouraging greater infrastructure sharing for some time, but operators were initially reluctant, partly because of the intensive rivalry between them. One of the companies active in constructing and operating independent telecoms towers is Mobiserve, headed by former TE CEO Aboualam. Mobiserve has a number of towers spread across the country and Aboualam says that banks have been enthusiastic about financing independent towers, which operate on long-term contracts and thus have low risk.

With LTE expected to roll out in the next two to three years, and the government anxious to expand broadband access with the help of privately owned network equipment, the next few years could see a surge of investment in a variety of infrastructure. “We expect investment in more towers – a lot of investment needs to happen,” Aboualam told OBG. “Currently, service is not the best, but operators can’t afford not to have a good network. There are 15,000 towers in Egypt, which is not enough. GSM sites and fibre cables need investments due to the growth of the data market. The challenge is to connect everyone in Egypt, for which you need towers and fibre, and establishing tower companies would be a game changer for the sector.”

Outlook

The long-awaited green light to universal licences will trigger some of the most significant changes in the Egyptian telecom market’s recent history. Competition will rise, potentially dragging prices and ARPU down further. Operators will continue efforts to increase VAS take-up to support margins. These will face constraints from competition on that front as well, in addition to limitations from low income levels, but data use is likely to continue growing strongly.

Beyond the impact on the competitive landscape that the new mobile operator is likely to have, other major changes will take place with 4G licences and new IGW licences to be issued in the next three years. These present changes both opportunities and challenges to sector players. The new licensing regime will lower the IGW licence fee per subscriber some 55%, and allow Etisalat to terminate calls for the other mobile operators at a low cost. This is expected to hit TE’s outgoing call revenue, CI Capital says, though its bilateral deals with international carriers will help it continue to compete on incoming revenue. Vodafone and Mobinil are expected to switch over to Etisalat’s IGW if it offers them lower rates than TE, or haggle with TE for lower fees for using its gateway. Alternatively, the two firms could acquire their own IGW for half of what it cost the other companies. From a different angle, if TE acquired Vodafone, the new mobile entity would automatically get an IGW through TE’s existing licence, making that acquisition and merger more attractive.

In this context, there will be a desire to lower capital expenditure, which will provide opportunities for the new infrastructure firm and other players offering network equipment. Infrastructure development will be vital for supporting the expansion of 4G and bearing higher data volumes over the medium to long term.