Towards telecommunications growth

Outskirts of Cairo

Outskirts of Cairo

Since 2011, after Tahreer Square became a focus of the Arab Spring, Egypt has witnessed political instability that has affected its economy.  Political unrest has brought several challenges to the telecom sector and in May 2011 the government agreed to pay out $16.8 million to the mobile operators and ISP’s as compensation for the disruption to services during the revolution that began earlier in the year in the telecommunications sector specifically.

It is known to experts close to this sector that from a socio-economical point of view, Telcos suffer from a range of problems, all related to the country’s mobile infrastructure and equipment deterioration and lower consumer spending and this does adversely impact on domestic investment.

“Ongoing political instability has slowed down regulatory development of the telecoms industry.  Several key developments have been delayed, including the confirmation of plans for 4G licences.  The issue of a second fixed telephony licence was also postponed for several years, and it may be dropped because of the declining fixed voice market,” as commented by a telecoms analyst.

The sector nevertheless contributed more than $9.5 billion to the GDP at end 2013 and according to the current Egyptian Telecommunications Minister, the plan is to increase this contribution to $17.4 billion by 2016.

Operators are protecting their infrastructure in order to guarantee their services to customers, as analysts commented on the topic, adding operators installing protective measures so as to ensure connectivity continuity, can cost businesses, and therefore the economy, significantly.  “This is reflected in CAPEX which increased from $25.7 million in Q4 / 2012 to $227.2 million by end 2013.  However, despite the higher levels of security, incidents still occur and that is not out of the ordinary since the country is still in political turmoil and operators cannot prevent incidents from taking place.

The telecoms market in Egypt is dominated by 3G technology, nevertheless operators had to face a heavy cost for the upgrade to this network in 2006.  Apart from this fee imposed by the regulator authority, 3G operators are also required to pay annual royalties.  Mobilnil and Vodafone paid the fee for a 15-year 3G licence, having negotiated payment terms spread over four years.

Recently here has been a strong focus on promoting 3G services and devices.  However, she reckons some limitations to 3G growth in the market such as the price of 3G handsets or 3G data plans.

“I believe that over the next 12 months, the Egyptian market will continue to evolve toward data services, an increased focus on the quality of the service offered and the value of content to end users.  The opening up of the fixed market and the introduction of an MVNO is likely to spur competition.

Egypt will launch a licensing system for 4G mobile telecommunication technology next year as a step to increase state revenues and shrink the budget deficit as the Egyptian Minister of Finance, said on May 2014.

Analysts believe that 4G spectrum will not be auctioned until 2016, as operators are still investing on the enhancement of their 3G networks.  Also, customers are not economically ready to shift to 4G, as large parts of the Egyptian society cannot afford 3G handsets yet.  Experts forecast that 4G will initially be limited to high data users, for instance businesses, and the affluent.

Increasing competition

Telecom Egypt will pay €260 million ($347m) for a licence to offer mobile services in the country under the new unified licensing regime unveiled by the telecoms ministry, an agreement that has not been finalised yet.  This development will bring more competition and will reduce consumer prices, according to analysts.

It is in this context believed that the introduction of more competition into the marketplace can only have a positive impact.  By being made to rethink their strategies for marketing, operators will create more value for consumers.  It will also have a positive impact on the speed of technology evolution, as there will be more incentive to bring innovative solutions to the market as a distinguishing factor that is believed to be a crucial development.  It is likely that Telecom Egypt will provide mobile services hosted by Vodafone Egypt, and a reciprocal arrangement would provide MVNO’s with access to Telecom Egypt’s fixed-line infrastructure.

The granting of a unified license to Telecom Egypt will further stimulate competition in the mobile market.  The ARPU’s are already among the lowest in Africa, so we expect the mobile market to pose serious profitability challenges to Telecom Egypt.  The latter will initially piggyback on the other mobile operators’ networks, while gradually building its own network in provision of the 4G license.

The implementation of a universal license will give way for current mobile operators to operate their own fixed network and will end Telecom Egypt’s monopoly in the fixed sector in Egypt.

With the upcoming launch of a unified licence, Telcos in Egypt are now focusing on the roll out of next-generation networks to meet the huge demand for converged IP-based voice, data and entertainment services.  The country’s national broadband plan has set targets of 50% coverage and 100% coverage of 25 Mbps broadband by 2015 and 2021 respectively.

The telecoms regulator is pushing to have 90% of households covered by NGA fixed broadband by 2021.  Currently FTTx household penetration is still very low at 0.05% at end 1st Quarter of 2014, highlighting the fact that the country is lagging behind from its targets.

“Telecom Egypt and Palms Hills Development are the only two providers, with the latter based only within the upmarket Palms Hills Development area in Cairo,” as detailed by experts and that voice is still important in the region and will grow two times in the same period of time.