News, views and commentary from the telecoms sector across emerging markets and developing countries worldwide

Thursday, 23 July 2009

Pakistan: 5 (really 6 [or 7?]) becomes 4 (or 5 or 6?)?

China Mobile: keen to drive consolidation of Pakistan's mobile market?

With a population of around 173 million and a mobile penetration rate of just 55.01% (according to WCIS), Pakistan would appear to be an attractive place to be for multinational telecoms groups. Some very significant individuals, however, have recently expressed the belief that market conditions are too tough to support the current number of mobile operators competing in the country. A specific suggestion about a possible merger between operators has also surfaced in the last few days.

According to Pakistani news portal, Telenor is considering selling its operation in Pakistan to China Mobile, which already has a presence in the market in the form of the MNO Zong. The article contends that the Norway-headquartered international telcoms group has been deliberating a withdrawal from Pakistan for some time because of "security issues".

Shortly after this report surfaced, Reuters was carrying a 'no comment'/denial from Telenor. The Reuters snippet notes that ARPU at Telenor Pakistan was the lowest of all its operations around Europe and Asia but that the number of subscribers grew by nearly 20% year-on-year. Why, then, would the Norwegian group consider this move?

Let me put forward a possibly outlandish theory, which also relates to security concerns - but security concerns in India rather than in neighbouring Pakistan.

A few days ago, the Economic Times ran an article about how the Indian Government has withdrawn approval for ByCell, a company "promoted by Russian businessmen", to offer telecoms services in the country. The company had planned to set up as a GSM mobile operator in areas including Assam, Bihar, Orissa and West Bengal, but seems to have endured a long struggle to get the green light to do so. As far as I can make out from this and other articles, the Indian Foreign Investment Permission Board (FIPB) has been concerned by the security implications of ByCell's ownership structure and its sources of funding for some time.

The same Economic Times piece also indicates that the FIPB is uncomfortable with the idea of Telenor increasing its stake (currently 49%) in cellco Unitech Wireless. Again, "security concerns" are the cause of the problem - in this case to do with the fact that Telenor operates in Pakistan, with which India has long had an uneasy relationship.

This, then, is my possibly highly simplistic and implausible theory: Telenor sees India as a far richer prize than Pakistan and therefore considers selling its Pakistani operation to China Mobile in order to pave the way for establishing a full controlling stake in Unitech Wireless. Crazy? Maybe. Or maybe I'm onto something. This is just a wild stab in the dark, so who knows?

Either way, China Mobile certainly seems keen to accelerate the growth of its share of Pakistan's mobile subs (currently estimated at 7.20% by WCIS) by acquiring a rival player and consolidating the market. Well, certainly if the article is to be believed. This contends that "before the merger talks with the Telenor group... China Mobile had offered to buy the management shares of Warid Telecom Pakistan" but could not settle on an acceptable price.

The article also claims that Pakistan's five leading mobile operators - Mobilink, Telenor Pakistan, Ufone, Warid Telecom and China Mobile's Zong - have reportedly all told the Pakistan Telecommunication Authority (PTA) that there is room for only four players. The further claim is made that a PTA official has said that by 2010 the country may indeed have just four mobile operators.

I have no idea of the source of this assertion, but it does now seem clear that Telenor Pakistan, at least, feels that the market is currently split too many ways. According to Mehtab Haider of the Pakistani newspaper the News, writing today, the cellco's CEO Jon Eddy Abdullah predicts market consolidation. In an interview with the News, Abdullah said Pakistan had the lowest call rates in the world and a continuous reduction in charges, as seen in the past, to attract customers was no longer viable. "This means that in the long term, having five operators in a market with intense competition and low prices may not remain feasible anymore," said Abdullah. "This can result in anything from mergers and acquisitions to [players] dropping out of the market," he added.

Abdullah mentioned two other significant challenges faced by operators in Pakistan - double-digit inflation affecting consumers' ability to afford services and the "overall law and order situation" limiting network expansion, restricting maintenance activity, increasing security-related expenses and dampening investor confidence.

The security situation in the country certainly does seem to present challenges for cellcos. Orascom Telecom-owned Mobilink, for example, has suffered damage to its network due the military opetation in Swat and Buner, where the army has been fighting with militant insurgents.

The Telenor Pakistan CEO was a little more upbeat about recent tax measures made by the country's Government - lower General Sales Tax; SIM activation tax slashed by 50%; the elimination of regulatory duty on handsets; lower customs duty on imported handsets.

"Although we consider these tax measures positive," said Abdullah, "we feel that there is more to be done. We are all aware of the impact of high tax rates on the industry, which depress growth in subscriber numbers, divert investments and ultimately discourage mobile usage."

"We also understand that when this industry flourishes," he continued, "it helps the economy by attracting foreign direct investment, contributing heavily to the national exchequer, generating employment and increasing productivity of almost every sector. Therefore, it is imperative that the taxation structure for the mobile industry is rationalised further."

Another telecoms industry leader seeminly keen to see cellular sector consolidation is Walid Irshaid, President and CEO of PTCL, Pakistan's incumbent wireline operator, in which the UAE's Etisalat owns a minority stake (but with management control), and of which MNO Ufone is a wholly owned subsidiary.

Farhan Sharif of Bloomberg, writing late last month, states that PTCL is in talks with several domestic companies to make acquisitions this year. "We’re already in discussions with various carriers and operators," Walid Irshaid said in an interview with Bloomberg News on June 16th during the CommunicAsia 2009 conference in Singapore. "The market must surely consolidate", continued Irsaid because he feels that Pakistan doesn’t need more than three GSM operators. He declined to name the companies with which he is in talks.

Between the Zong-Telenor takeover rumour and the comments of the CEOs quoted here, there does seem to be a body of evidence to suggest Pakistan's mobile market is set for consolidation.

So, how many cellcos would that leave? Thus far, this article has mentioned five currently in operation. There is, however, at least one more doing business in the country (which is why this article has a title that looks like a confusing equation).

One of these is rather unusual - the Special Communication Organisation (SCO), set up by the Government of Pakistan to provide services in Pakistan-occupied Kashmir and Northern Areas. According to one article I found, Pakistani army officers, both serving and retired, hold critical positions in the SCO.

One other cellco confuses me. Instaphone, a US TDMA network operator, was once part-owned by Millicom International Cellular (as was Paktel - sold to China Mobile and rebranded Zong). A slew of articles going back at least as far as January 2008 suggest the MNO had its licence terminated some time ago by the PTA for failing to make outstanding payments. However, the operator's website remains live and it still seemed to be fighting the PTA as recently as April this year. According to WCIS, the US TDMA operator currently has around 50,000 subs on its network - a market share of just 0.05%.

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