Sri Lanka: Etisalat entry to drive even fiercer price competition?

Etisalat: set to make life hard for Sri Lanka's cellcos?

This blog has recently taken an interest in the fate of the three Asian mobile operations put up for sale by Millicom International Cellular.

Late last month, as noted here, the global emerging markets player sold its 78% stake in Tigo Laos to Russia's Vimpelcom. Prior to that, DevelopingTelecomsWatch had noticed the sale of Millicom's stake in Cambodian cellco Cellcard to the Royal Group, a fellow shareholder in that operation.

This just left Tigo Sri Lanka unsold.

The Sri Lankan mobile market is currently contested by that operation and four other MNOs. In terms of the operators' shares of the country's estimated 13.6 million subscribers (according to WCIS), the competitors are ranked as follows:

1. Dialog Telkom - 46.33%
2. Mobitel - 24.14%
3. Tigo Sri Lanka - 17.44%
4. Bharti Airtel Sri Lanka - 9.46%
5. Hutch Sri Lanka - 2.63%

The last time DTW offered an opinion about how this competitive landscape might change, perhaps too much was made of the likelihood of the number of operators consolidating down to four. No very sophisticated analysis was made, nor any inside information sought. It was simply the case that the prospective purchasers of Tigo Sri Lanka getting the most media coverage at the time were companies already active in the island nation. I had noted, for example, that Bharti Airtel was rumoured to be interested in snapping up Millicom's operation there, having read an article by R. Jai Krishna of the Wall Street Journal which reported comments from an unnamed person close to the development. Suggesting that any deal would be worth USD 100-120 million, that mystery source had said "in Sri Lanka, if you need to be a significant player in the market, you need to do an acquisition... greenfield, you will not be successful," by way of explaining the rationale behind Bharti Airtel's rumoured move.

This has came to nought, however. The happy new owner of Tigo Sri Lanka is none other than Etisalat of the UAE.

Commenting on this latest purchase, Etisalat Chairman, Mohammed Hassan Omran said: "This new acquisition is a clear example of Etisalat’s international investments strategy of seizing distinctive growth opportunities and maximizing value to shareholders."

He added: "Entering the Sri Lankan telecom market is a logical addition to our interests in the Asia continent. The acquisition promises attractive returns as the Sri Lankan Government is increasing its effort to promote foreign investment in all sectors. The acquisition is of a mature operator with a strong reputation for its good network and quality of service. It also offers great opportunities for synergy with our other operations in the region, particularly in the UAE, Saudi Arabia and India. We also plan to invest in this company to ensure that it has the dynamism to take the leading position in the market in the next few years and that it continues its effective role in the development and growth of the telecommunications sector in Sri Lanka."

How far, then, will this transaction affect the Sri Lankan mobile market? Shortly after it was announced, Fitch Ratings reacted with a gloomy prediction, stating that the entry of Etisalat into Sri Lanka could further delay any prospects for recovery in the country's operators' profitability.

The ratings agency's statement notes that price competition in Sri Lanka has led to a rapid deterioration of tariffs over the last four years, weakening the profitability of the operators, especially in the wake of the licensing of the Bharti Airtel-owned fifth entrant in 2007.

Fitch notes that Etisalat has tended to enter other new markets late in the race and has generally pursued a course of aggressively challenging established operators. "If Etisalat's track record is anything to go by, it is possible that it may invest heavily to acquire more market share in Sri Lanka, which will intensify the challenges facing other operators," says Buddhika Piyasena, Director of Fitch's Asia-Pacific Corporates team. Certainly, I recall a conversation a few months ago with the marketing director of one of Afghanistan's cellcos. He spoke about how the arrival of the the Etisalat-owned operator in that market had caused the price of a voice minute to tumble, with the country's nascent regulatory regime offering little by way of protection for the longer-established players.

Fitch contends that something similar could easily unfold in Sri Lanka, where "apart from lax regulation, a major reason for the heavy price-based competition... is the absence of a framework that requires mobile operators to pay other networks for interconnection." The ratings agency argues that this allowed Bharti Airtel, which has "limited coverage", to challenge other operators to the point where a full scale price war resulted. As Fitch notes, a revision to the interconnection framework is currently on the telecom regulator's agenda. When implemented in 2010, Fitch expects this to ease further pressure on tariffs.

According to Fitch, however, operators may see subscriber acquisition and retention costs - including handset subsidies, and subsidised starter packs - increasing with competition intensifying for market share.

Fitch is also of the view that a higher level of regulatory oversight over the competitive practices of operators and some intervention on tariffs is required to ensure the financial health of the industry.

Etisalat has made this latest acquisition against a background of mostly positive coverage about the group's prospects. While Q3 revenue fell slightly vs. the same quarter last year, the company posted a 5% improvement in net profit.

Also encouraging is the performance of Mobily, the Saudi MNO in which Etisalat has a 27% stake. Q3 profits were up 49.7%, vs. Q3 2008, beating the most optimistic forecasts by about 10%.

Etisalat, then, is well-placed to compete extremely aggressively in Sri Lanka. Industry watchers will doubtless be interested to observe how seriously this affects the profitability of its competitors there.

Sri Lanka: Etisalat entry to drive even fiercer price competition?

Advice for emerging markets cellcos looking to replicate the success of M-Pesa

I am fortunate to be receive, on a regular basis, very insightful reports from the TIME practice of management consultants Arthur D. Little. The most recent of these is upbeat about m-payment services. Some advice is offered to the various value chain players in emerging and developed markets. For the former, the advice seems to be directed largely at mobile opertators, from which we might infer that MNOs have the opportunity to establish themselves as the key players in developing countries.

Mobile operators, attracted into the m-payment space by minimal competition from conventional payment-channels in emerging markets, are advised to take "an active role in shaping the regulatory environment" because the competing financial industry may lobby for policies and regulatory mechanisms designed to keep MNOs at bay. Mobile operators are also urged to "focus on low value/high frequency transactions and have a special focus on remittances". Finally, Arthur D. Little advise operators to continue to build up cross-border partnerships to ensure cross-border interoperability of remittance services across emerging markets.

In March telecoms.com ran a feature which noted that mobile financial services have continued to gain traction, particularly in developing countries.

"Mobile financial services fall into two distinct camps; additive and transformational banking", states that article. Additive banking is defined as "services targeted at markets that already have traditional financial services at their disposal." Transformational banking is defined as "the practice of extending banking and payment services to those people who do not have ready access to banking facilities" - i.e. largely people in developing countries or migrant workforces in more developed countries.

The article notes that transformational banking is currently grabbing a good deal more column inches than additive banking and cites the well-known example of M-Pesa, initially launched by Kenyan cellco Safaricom and later launched in Afghanistan and Tanzania by MNOs Roshan and Vodacom Tanzania respectively.

Advice for emerging markets cellcos looking to replicate the success of M-Pesa

Arab world and India: investments to flow in both directions?

Towards the end of February, I asked here whether 2009 would be the year that a prominent Indian mobile operator will make major moves on the world stage. I noted that the cellco I had in mind was facing a number of competitive pressures on the home front that might soon drive international expansion.

The operator I had in mind was Bharti Airtel, the country's mobile market leader (with 26.24% of the subscriptions on a highly fragmented market, according to WCIS). To date, the company's only significant foray beyond India has been the recent establishment of a subsidiary in Sri Lanka. In the February discussion, I noted that Bharti Airtel had failed in a previous bid to acquire South Africa's MTN. With no particular evidence to support it, I'd developed the gut feeling that if the big Indian cellco were to make a bold move into new territories, somewhere in Africa would be the likely target.

I was surprised, therefore, to read in a recent TotalTelcom article that a quite different Indian operator has turned its gaze to the African continent.

Apparently, state-owned BSNL (Bharat Sanchar Nigam Ltd.), India's oldest and largest communication service provider is likely to get involved in a bid for a telecoms licence in Tunisia. The operator's partner in the proposed bid is consultancy firm TCIL, a fellow state sector enterprise.

The TotalTelecom article contends that BSNL sees overseas expansion as an opportunity to increase revenues, having lagged behind private sector operators on the domestic market. The Tunisian licence, says the article, is of the unified variety, enabling a new entrant to offer mobile and fixed-line services.

A degree of skepticism is reported, with Jithesh K. Gopi, Head of Research at Bahrain-based investment bank Securities & Investment Co. B.S.C. saying "with the current level of penetration [in Tunisia], it won't be an easy market for a new entrant."

In the African context, Tunisia does have a high rate of mobile penetration - currently at 82.73% according to the World Cellular Information Service (vs. 40.16% for the continent as a whole).

In the cellular arena, any new entrant will be seeking to shake up a duopoly situation. The mobile market is presently split very evenly between state-owned Tunisie Telecom and Tunisiana.

My understanding is that it will become known quite soon whether BSNL will take the plunge in the possibly quite challenging Tunisian market.

In the meantime, I spotted news of monies being set to flow in the opposite direction, i.e from the Arab world into India.

I have, of late, been taking advantage of an excellent newsletter from Blycroft Publishing - Africa & Middle East Telecoms Week. The latest edition carries an article about the UAE's Etisalat, currently a minority stakeholder in Swan Telecom, planning to invest a further USD 1 billion in India's telecoms sector. The Etisalat Chairman is quoted as revealing that the company's investments in India "would complement its investments in other countries having growth potential, such as Pakistan, Afghanistan and Indonesia" and that "the current economic meltdown has provided an opportune time for investing in different areas, and Etisalat is ready to exploit the situation and bolster its global presence." For some time now, I've held the belief that the current downturn is set to stimulate acquisition activity on the part of well-funded telecoms groups from the Middle East. This latest tip about Etisalat's plans seems to be in line with that.

Arab world and India: investments to flow in both directions?

Iraq and Afghanistan: rewarding markets, but not for the faint-hearted

Former Taliban official Abdul Salaam Zaeef: loving his iPhone
PICTURE FROM THE METRO NEWSPAPER

Several times over the last few years, I have had the opportunity to chat with people who have worked for mobile operators in countries where the security situation is extremely challenging. Afghanistan and Iraq naturally stand out. Something which I've found interesting is the consistent nature of the answers I've received when asking how often telecoms networks and the personnel responsible for them come under violent attack. Such attacks, I have been told, are rarer than those of us living in safer parts of the world might imagine. Why? Well, I remember being told by someone with Afghanistan experience that those engaged in armed conflict with US and UK forces were enthusiastic users of mobile phones and were therefore not very interested in destroying the infrastructure carrying their own calls and messages.

That particular conversation, however, was in March or April 2007. Since then, I have seen reports of Afghanistan's mobile networks being targeted by the Taliban. In the first quarter of last year I noticed a report from Radio Free Afghanistan story about Taliban demands that networks be shut down overnight because "U.S. and NATO forces track the [them] through their phone signals and then launch attacks on their hiding places." When these warnings went unheeded, attacks on tower sites followed on February 29 and March 1. A third attack on March 2 was said to have "destroyed" a tower in the Sangin district.

One former Taliban official who seems not to be hostile to mobile communications is Mullah Abdul Salaam Zaeef who, according to a recent article in Britain's Metro newspaper, is an enthusiastic convert to the wonders of the iPhone. Zaeef, who spent four years in Guantanamo Bay but is now "reconciled with the Afghan government after being released from US custody", uses his Apple handset to surf the Internet and find difficult locations, employing the built-in GPS. "He even checks his bank account balance online," chuckles the Metro.

The article goes on to make the case for communications technology possibly helping "to break the cycle of 30 years of relentless warfare." An example cited is that of the Afghan Star singing competition, inspired by the likes of croon-athon/Simon Cowell-ego-vehicle American Idol. The Afghan version draws millions of viewers each week and just like similar shows around the world, fans vote for a winner by text messaging. Shukria Barakzai, "a female lawmaker and former newspaper editor", is quoted as believing that this helps to promote the democratic practices. I must confess to wearing a wry smile when I read this. Here in the UK, home of the so-called Mother of Parliaments, young adults voting in greater numbers for X-Factor contestants than in the General Election is an oft-repeated (though apparently untrue) piece of 'evidence' for the notion of we Brits going to hell in a handcart.

Iraq, too, has recently been the scene of acts of violence directed at mobile operations and their staff. The news item which set me off on the chain of thought explored here today was Monday's Cellular News piece about Asiacell towers and personnel being struck in the province of Kirkuk. A spokesperson for the cellco has said that one of their security guards was killed as a result of the attack, while another suffered serious injury. According to the article, this is one of several attacks waged against the company, including the bombing of the company's customer service center in Mosul and several of its offices in Baghdad, the arson attack of the company's warehouses in Tikrit, and the destruction of the company's headquarters in Mosul.

"It is indeed unfortunate that the wave of attack against Iraq's larger companies - and Asiacell in particular, continues to be carried out by groups who seek to unsettle security and mar our national unity," said Asiacell's CEO Dr. Diar Ahmad. "I still fail to understand what these individuals gain by slaughtering innocent civilians who are guilty of nothing but undertaking their responsibilities with loyalty to Iraq first and the company second."

This, and other complications around doing business in Iraq, do not seem to have deterred Etisalat. A February update on the UAE-based telco, written by Dario Talmesio of Middle East and Africa Wireless Analyst, indicated that a deal enabling Iraq market entry was imminent. Talmesio reported that Etisalat CEO Mohammad Al Qemzi had recently announced that the operator was about to sign a joint-venture deal with Korek Telecom, which operates in the Iraqi Kurdistan region. Korek Telecom, noted Talmesio, intends to operate a nationwide network but has not yet found a suitable financing partner.

Afghanistan and Iraq - not for faint-hearted investors and certainly not for faint-hearted individuals when it comes to running operations on the ground. Both markets, however, continue to prove sufficiently attractive for certain telcos to look for ways around these numerous challenges.

Iraq and Afghanistan: rewarding markets, but not for the faint-hearted