Zain Africa Done Deal Watch

Former Zain CEO Al Barrak - exit from Africa caused his departure?

During 2009 DevelopingTelecomsWatch became somewhat preoccupied with the fate of the African assets of MEA mobile powerhouse Zain. As speculation mounted about whether these operations were up for sale and, if so, who the prospective purchasers might be, DTW managed to churn out no less than thirteen Zain-themed articles, the first of these appearing on 12th June. Scratching away at persistent rumours like a mutt with fleas, this blog was still whining on about the story on 18th August.

The whole series of ramblings rejoiced in the clunky title 'Zain Africa Speculation Watch', which has been revived and paraphrased here with today's offering.

Along the way, a number of potential suitors for Zain's African opcos got a mention. These included France Telecom and Vivendi plus Indian operators Reliance Communications and BSNL.

All these months later, it seems fairly safe to assert that the speculation stage is finally over, with shares in another Indian cellco, Bharti Airtel, edging higher on the back of news that it will sign a USD 10.7 billion deal to acquire the Zain's African telecom assets later today.

If, as now appears to be virtually certain, the Indian MNO does manage to conclude this deal, it will be a case of third time lucky, as noted recently by Shalini Singh of the Times of India, who reminds us of Bharti Airtel's two fruitless attempts to engineer a tie-up with South Africa's MTN, another saga which had some coverage here at DTW. As well as observing that the Zain Africa purchase will "catapult Bharti to the rank of the sixth-largest telecom service provider in the world by number of subscribers", Singh feels that it is "an ironic twist of fate" that one of the Indian firm's major competitors in its new markets will be MTN.

With this mega-deal now on the brink of proceeding, perhaps the time is right to ask that Bharti Airtel has to gain (and lose) from competing in so many new markets at once, and to ask what motivated Zain to quit Africa less than five years after entering the continent's mobile arena via the acquisition of Mohamed Ibrahim's Celtel International.

James Middleton of telecoms.com writes that "for Zain, the deal represents a retrenchment of the company's strategy as well as good value." Middleton argues that while the company has succeeded in transforming its brand and in building up an impressive customer base across sub-Saharan Africa, it has struggled to operate profitably.

Quoted in James's article is his fellow Informa Telecoms & Media employee Nick Jotischky, a principal analyst with the firm. "Perhaps it turned to the managed services model too late in the day and failed to leverage its supplier relationships so as to build in sufficient economies of scale", says Jotischky, who suggests that this is where Bharti Airtel will focus its efforts.

"Whilst it will, no doubt, be confident of controlling its costs, Airtel will aim to build up its brand equity characterised by reliability very quickly," says Jotischky. "But reliability alone will not be enough – the newcomer will have to show itself to be innovative as well. In an already competitive marketplace, Bharti will not just be competing with other mobile operators for a share of wallet but with other brands in adjacent consumer goods sectors. This means that Bharti will be under pressure to offer services that are directly relevant to end-users and this will differ from market to market."

James Middleton talks up the chances of the Indian cellco maximising the value of this large new investment. "Bharti has a heritage in making network sharing and outsourcing deals work and will not be afraid of being aggressive on per minute pricing," he writes. "The company is also well versed in addressing the difficulties of serving a largely rural, high-churn, low-revenue market."

Inspired by this transaction, Informa's telecoms.com is currently running a series of articles offering 'ten tips for investing in Africa'.

Informa offer their first tip, that operators need to be innovative on pricing, while noting that mobile tariffs in much of Africa are high compared to those in some other emerging markets. "For example", runs the telecoms.com article, "Zain Kenya’s lowest tariff is about [USD] 0.04 per minute, for on-net calls.. compared to India, where Reliance Communications offers tariffs that are as low as [USD] 0.01 per minute, for both on-net and off-net calls." The article continues by pointing out that the fact that tariffs in Africa are relatively high is reflected in ARPU levels: "In 4Q09 blended monthly ARPU across Africa as a whole was [USD] 10.49 – but in India blended monthly ARPU in 4Q09 was much lower, at just [USD] 2.73, and falling.

However, the article observes that mobile tariffs have already come down in many African markets in the past couple of years as competition has intensified, often because of the market entry of new operators. Usage in Africa, meanwhile,  the article contends, has increased over the past couple of years too. African MoU, however, remains "half that of India's, which does suggest that there is potential for substantial further growth."

This growth opportunity notwithstanding, the gist of Infoma's 'tip' is that "African operators are probably best advised to avoid getting into the kind of price wars that are taking place in the Indian market", where ARPU halved during 2009, creating a big squeeze on  operators' profits.

Rather, Informa advises, "African operators should aim to demonstrate more of the innovation in pricing that is already evident on the continent through plans such as Zain's One Network, which allows subscribers to pay local rates when roaming, and MTN's MTN Zone, a dynamic tariff plan that charges lower rates when the network is not busy."

Let's see whether Bharti Airtel considers this to be sage advice as it embarks on its African adventure.

On a personal note, I will be interested to see whether the Indian cellco will make many changes to the management teams running its numerous newly-acquired opcos - and to listen out for a sense of how far Zain's people around Africa welcome the change of ownership. One opco CEO apparently quite upbeat about all of this is Zain Zambia MD David Holiday:




Presumably less positive about Zain's sales of its African assets is the man who masterminded their acquisition for the Kuwaiti group, former CEO Saad al Barrak, who resigned in February.

At the time, Emeka Obiodu, a senior analyst at Ovum, said: "Al Barrak championed this expansion push – buying Celtel, and aiming to make Zain one of the top ten mobile operators by 2011. But his whole ambition was blown to pieces by the owners who wanted to sell off in Africa."

While Al Barrak and his strategy do appear to have some detractors, Obiodu does not seem to be among them: "He’s taken MTC, this small company from Kuwait and transformed it into Zain, a global mobile powerhouse. He didn't bite of more than he can chew, but his vision diverged from the vision of the owners. When we did some financial analysis on Zain, the company wasn’t doing particularly badly. It wasn’t like he ran the business into the ground, although you have to concede that some of the small markets in Africa were seriously under-performing."

Now we will see whether Bharti Airtel has the patience and vision to stay in these numerous African markets for longer than Al Barrak's former company elected to do.

Zain Africa Done Deal Watch

Unsurprising news of the week

India's Communications & IT Minister: summoned to explain falling revenues at BSNL

To my mind, the least surprising news item so far this week comes from Mansi Taneja of India's Business Standard, who reports that state-owned Indian state-owned telco BSNL is likely to exit a consortium that has been aiming to acquire a 46% in pan-MEA mobile group Zain. According to Taneja, MTNL, the other public sector operator party to the consortium, is also likely to exit since it had agreed to follow BSNL’s lead in the deal.

DevelopingTelecomsWatch has no axe to grind with regard to these two telecoms enterprises, but it won't have escaped the notice of regular readers that this blog has observed some pretty strong criticisms of their performance in their domestic market, most notably in an article written in August.

It was partly with these criticisms in mind that DTW was unsurprised when Etisalat rather than BSNL prevailed in the scramble to acquire the Sri Lankan mobile operator previously owned by Millicom International Cellular. It would, then, cause raised eyebrows at DTW HQ were MTNL to win what looks to be a hotly contested scramble to buy a controlling interested in Zambia's soon-to-be-privatised incumbent fixed line operator, Zamtel. As a recent Cellular News item points out, the list of other interested parties contains some formidable names including Orascom Telecom, Telkom of South Africa and Russia's pan-CIS cellco Vimpelcom, which has recently expanded its footprint into Southeast Asia.

Lest anyone feel that this blog returning quite regularly to the troubles of India's two major state-owned telecoms enterprises is somehow unwarranted, it is worth noting that concern about their prospects has been expressed in the highest circles in the south Asian country. Monday's Economic Times, for example, reported that Prime Minister Manmohan Singh is likely to meet the BSNL's management along with Communications and IT Minister A. Raja to look into the causes of the company's falling revenues and to find ways to improve its performance.

According to the Economic Times, BSNL says the loss in net profit and revenue is due to huge wage costs and customers deciding to terminate their fixed line subscriptions. The article states that the company has been struggling with the problem of landlines being surrendered for years now, due to a combination of the increasing popularity of mobile phone and its own service levels falling below customer expectations. In the past three years, the article reports, 6.3 million landline connections have been terminated.

This blog has also documented the company's struggles to capitalise on first-mover advantage in the 3G mobile services space or to take make much of a similar head start with WiMAX broadband services.

In light of all this, DTW remains wary of any claims that BSNL makes about ambitions to grow its business into unfamiliar overseas territories.

Unsurprising news of the week

Canada's 'thirdworldish' policies to stifle wireless competition?

Naguib Sawiris: planning to shake up Canada's wireless market

DTW’s recent article on international ambitions of India’s two major state-owned telecoms operators mentioned that one opportunity they are considering is the acquisition of a controlling stake in Zamtel, the incumbent fixed-line operator in Zambia. It remains to be seen if this joint bid from BSNL and MTNL will succeed and it does look as though some formidable players are also interested.

According to a recent Cellular News article, other interested parties include Telecel Globe (a subsidiary of Orascom Telecom), Telkom (South Africa’s incumbent fixed-line operator) and Russia’s increasingly expansionist Vimpelcom, all of which, the article states, officially began due diligence this week.

Interest in Zamtel is by no means the biggest recent news item about Orascom Telecom and might well have escaped the notice of North American readers whose attention has probably been drawn more readily to the challenges the Egyptian firm is facing in Canada.

Globalive Communications Corp. of Toronto was established in 1998, since which time it has offered competitive long distance plans. Ten years later, the company successfully made a purchase in Industry Canada's radio spectum auction, which paved the way for the creation of a challenger - Globalive Wireless - for the country's established mobile operators, including Telus Mobility, Rogers Wireless and Bell Mobility. The joint efforts of these three major carriers and regional players such as SaskTel have failed to drive national mobile penetration beyond 66.65% according to WCIS. This seems very low for a G8 country that ranks among the world's top ten trading nations. In an interview for Huawei's Communicate magazine earlier this year, Bell Mobility CTO Stephen Howe attributed this state of affairs to three factors: the relatively late licensing of digital wireless spectrum in Canada; Canada' s huge geographical area; the country's robust and unlimited-usage wireline networks.

Globalive Wireless, backed by Orascom Telecom and which had earlier this year announced its intention to launch services under the Wind brand familiar in Italy and Greece, has been led by CEO Ken Cambpell since October 2008. Cambell, whose former roles include a stint running the BITĖ Group, the Vodafone partner network in Lithuania and Latvia, would take issue with Stephen Howe's explanation for Canada's status as a wireless industry laggard. Speaking with Michael Bettiol of Boy Genius Report last month, Campbell lays the blame squarely with the country's wireless carriers:

"Here we’ve got a situation where we pay twice as much as they do in the US, our minutes of use are half of what they are in the US, and wireless penetration is at 65%. Clearly it is a market that is under-developed and where customers simply overpay. The other thing is that in Canada our customer saturation numbers are extremely low. We’ve got a very disenfranchised and very frustrated customer base that is really ripe and in need of competition. The other thing you should know is that this country is dominated by three carriers, but if you look regionally, it is typically two carriers that dominate regional markets. Canada is effectively an oligopoly and in many regions pretty much a duopoly. There is definitely an opportunity with consumers and the numbers speak for themselves."

If, as Michael Bettiol contests, Canadians have "long craved for a new wireless carrier to bust onto the scene and break up what is often described as the anti-competitive practices of [the] incumbents", there must surely be much excitement in the country about the market debut of Wind.

For now, however, any excitement must be deferred a while. Globalive Communications has been in a state of limbo since late last month, when the Canadian Radio-television and Telecommunications Commission ruled that the company is effectively under the control of its Egyptian-based financial backer (Orascom Telecom) and is therefore in breach of rules on foreign ownership and control.

Terence Corcoran of the National Post despairs of the resulting "wireless mess":

"Globalive Wireless has just pumped more than half a billion dollars into the Canadian economy. That includes paying Ottawa $442-million last year for the right to new wireless spectrum, cash now already spent by the federal government stimulating road work in Saskatchewan and writing giant cheques to constituents in Nova Scotia," writes Corcoran, who also notes that "Globalive has also invested another hundred million or more preparing a new Canadian wireless network".

"Having taken Globalive's money", Corcoran continues, "Canada is now telling the company the deal is off."

Corcoran argues that the large spectrum auction fees collected by the Canadian Government would have been far more modest had the participation of Orascom Telecom supremo Naguib Sawiris not been authorised in the first place. Corcoran says that Sawiris has every right to feel mightily aggrieved:

"Whether or not it's possible to sue Ottawa over this thirdworldish policy switch and bureaucratic camel-trading, complete with secret meetings and rule-bending approval processes, it certainly looks like Globalive and its owner, Mr. Sawiris, have a case of some kind, politically and morally, if not legally. Ottawa led Globalive into bidding for spectrum and a major role in the Canadian wireless market, and then it pulled the carpet out from under the company.

This wrangle is a fascinating one for me. In the course of my work, I have spent considerable time networking with telecoms executives from Europe, North America and the Middle East who make their living running operations in less developed countries. I have lost count of the number of times I've heard (doubtless justified) complaints about the complexities and pitfalls of doing business in such markets - regulatory agencies that can be erratic and less than even-handed; taxation policies which stifle growth and innovation; foreign ownership rules which can prove limiting. It is with interest, then, that I read of a company rooted in Egypt encountering in Canada some of the problems I usually hear attributed to much less affluent and developed societies.

Canada's 'thirdworldish' policies to stifle wireless competition?

Knocked back in Sri Lanka, India's state sector telcos continue to eye international expansion opportunities

BSNL: global ambitions?

DevelopingTelecomsWatch has followed, with some interest, suggestions that India's two major state sector telecoms operators - BSNL and MTNL - might be aiming to become international players.

In September, this blog went on a meandering tour of emerging markets M&A rumours, during which it was mentioned that BSNL's bid for Millicom International Cellular's Sri Lankan MNO had been unsuccessful. Tigo Sri Lanka, as reported more recently here, was eventually acquired by Etisalat of the UAE, in a move which prompted some analysts to express fear for the profitability of the island nation's other mobile operators. These commentators have noted that Etisalat tends to compete fiercely on price when coming late to a cellular market.

In the same September M&A tour, DTW also quoted industry watchers who were warning both BSNL and MTNL to steer clear of reported attempts to acquire a stake in Kuwaiti-owned pan-MEA mobile group Zain. A Mint article by Shauvik Ghosh was referenced, in which an anonymous analyst said that BSNL would be advised not to purchase a stake in Zain. "BSNL has a lot of cash on its books but it lacks the ability to execute," said the mystery man. Not shy of the odd split infinitive, the unknown analyst said "Africa is not a market for an operator to just add some revenue to its balance sheet. They have to first show that they can execute in India with the opportunities already in front of them like broadband and 3G before they can venture into bigger game like Zain." A previous DTW article discussed at some length the view that the two public sector telcos have perhaps not yet demonstrated that ability to "execute in India" to anything like a satisfactory degree.

There is evidence, though, from as recently as mid-October, that BSNL and MTNL have not been deterred by such criticism and that the two companies continues to investigate both the Zain opportunity and other potential foreign adventures.

Writing on 15th October, Mansi Taneja of the Business Standard reports that a consortium led by Delhi-based Vavasi Group is in discussions with both BSNL MTNL for a majority stake in a special purpose vehicle that is being formed for a bid for Zain.

Taneja quotes "a top source close to the consortium" who has said: "Our talks with BSNL and MTNL are on track, but we don’t have any exclusivity contract with them. We are also holding informal discussions with other telecom companies, including China Mobile, in case talks with BSNL and MTNL do not fructify."

(note to self: attempt to use the word 'fructify' in conversation this week)

Is it unfair on the two Indian operators to venture the suggestion that the giant Chinese cellco might be a far more powerful player to have involved in an audacious bid to acquire operations and subscribers across Africa and the Middle East? Way back in 2002, the Chinese operator stole Vodafone's crown as the world's leading mobile operator in terms of subscriber numbers. Vodafone was subsequently seen to stake out its credentials as the world's largest cellco by revenues. Finally, in September this year, this accolade was also swiped by China Mobile.

If the Vavasi Group does turn out to be more impressed by the credential of the world's most gigantically-huge-mobile-operator-by-every-measurement-ever than by what BSNL and MTNL can bring to a bid for Zain, where else might the two Indian operators look for overseas growth opportunities?

One possibility, again aired by the indispensable Business Standard, is a much more modest foray into Africa, namely the acquisition of a majority stake in Zamtel, the state-owned incumbent telco of Zambia, which competes in the mobile space and is the monopoly fixed-line operator. On 15th September, the Government of the landlocked southern African country announced its intention to part-privatise the telco through the sale of up to 75% of the company’s equity. Industry watchers Buddecomm, in their Zambia profile, describe the country's wireline infrastructure as "at a very low level of development, which in turn has impeded growth in the Internet sector." Zamtel's monopoly in this space is set to be threatened, continues the Buddecomm profile, which notes that "the country’s ISPs are rolling out wireless broadband networks, which will also position them as competitors in the telecoms sector once VoIP is fully liberalised", something which is meant to be "a key component in Zambia's new ICT Policy."

The Zambia Development Agency (ZDA) makes a more upbeat assessment of the Zamtel fixed network, claiming that it connects all major population centres and is undergoing a substantial upgrade, with over 80% of switching infrastructure now digital, and DSL capacity being rolled out. The ZDA claims that Zamtel’s primary fixed-wireless network is also being upgraded and expanded, with coverage and capacity expected to more than double within the next twelve months. Zamtel’s secondary fixed-wireless network, based on WIMAX technology, is designed to cover the whole of metropolitan Lusaka, and is scheduled to go live during 2010, says the ZDA.

In the mobile space, Zamtel lags a long way behind its competitors in terms of market share. The stats, estimated for September 2009 by WCIS look like this:

1. Zain Zambia - 72.17%
2. MTN Zambia - 23.12%
3. Zamtel - 4.71%

Zamtel, then, is struggling to compete effectively against two of Africa's leading mobile groups. There is, however, room for all competitors to grow, with Zambia's mobile penetration rate currently standing at just under 33% according to WCIS. Whether BSNL and MTNL are ideally suited to improving the fortunes of the company, however, could be questioned in light of some of the criticisms aired here about their performance in their home market of India. According to the Business Standard, the two public sector telcos are joined by seven other companies or consortia from in having successfully prequalified to participate in a bid for Zamtel.

Should both the relatively modest aspiration of buying control of Zambia's incumbent operator and the rather more grand designs on Zain both come to nought, MTNL and BSNL do appear to have ambitions to establish a presence in other regions.

Again, I am indebted to India's Business Standard for an update. According to an article of October 23rd, the two operators, along with the Vavasi Group, are planning to set up new operations in Russian and western Europe.

Under this deal, the article states, Vavasi "is acquiring frequency spectrum and licences for Russia and several western European countries" and "the same [special purpose vehicle] that is being formed to acquire a majority stake in Zain will be used to invest in the Russian operations."

Confirming the development, a senior Vavasi executive is quoted as having said: "We are in the process of acquiring a licence for the new generation (NG)-1 technology and have applied in Russia and four other European countries."

This is where I betray the fact that I am not an engineer by wondering about this "NG-1 technology". What is it? The Business Standard article claims that "NG-1 technology is an alternative to GSM and CDMA and was developed in the US universities" and that "Vavasi claims that the network needs lower capital expenditure as well as operating expenses."

I'll hold my hands up. This is a new one on me.

An inspection of the Vavasi website reveals that NG-1 is a proprietary wireless access technology the company has developed itself and which it claims "understands the need of both rural and urban areas". Impressive sounding claims are also made for the spectrum efficiency and eco-friendly credentials of the technology.

NG-1 sounds wonderful - but can proprietary kit from India really prevail against global standards such as WiMAX, HSPA and LTE?

Some grand claims, then, are being made about the ambitions of India's two major state sector telecoms companies. Some of these claims seem to be articulated rather more loudly by the Vavasi Group than by the telcos themselves. I wonder how much there is in all of this. Can two operators that have attracted much criticism in their home market really be set to emerge as global players?

Knocked back in Sri Lanka, India's state sector telcos continue to eye international expansion opportunities

Mobile industry nicely balances profit motive with improving lives: not everyone agrees...

It has been a tendency of this blog to eulogise the ways in which telecoms companies with business units in developing countries are able to reconcile efforts to alleviate poverty and misery with their need to turn a profit and grow shareholder value.

I therefore tend to be very encouraged when I read articles such as that written in April by Rohit Singh of the Overseas Development Agency (ODI), a British think tank focused on international development and humanitarian issues. Singh writes about the numerous studies which support the idea that a rapid increase in mobile penetration contributes significantly to economic growth. He discusses the incremental, tranformational and production benefits brought by mobile phones:

• Incremental benefits: improving what people already do – offering them faster and cheaper communication, often substituting for costly and risky journeys.
• Transformational benefits: offering something new such mobile banking, enabling the unbanked to store value.
• Production benefits: resulting from the creation of new livelihoods, not only through professional telecommunications jobs but also through activities like re-selling airtime or phone cards.
  

Much praise, then, has been directed by DevelopingTelecomsWatch at the efforts of mobile operators worldwide, notably in Africa. None of what has been written here suggests that there might be a possible downside to the rapid growth of mobile infrastructure and services in the places where the world's least affluent people live their lives.

There are those, however, who voice precisely that concern. Notable, I think, is Steve Song, who spent ten years working on ICT for Development issues at the International Development Research Centre (IDRC), a Canadian state-owned enterprise whose role is to help developing countries use science and technology to find practical, long-term solutions to the social, economic, and environmental problems they face. Song is now based in Cape Town, where he has taken up a fellowship with the Shuttleworth Foundation, an organisation which works to drive social and policy innovation in the fields of education and technology through policy dialogue and practical projects.

I was very interested in Steve Song's reaction to Kenyan cellco Safaricom winning a UN-HABITAT award for its M-Pesa mobile money services. This got a mention in the recent discussion here about whether mobile banking and money transfer services branded and run by cellular operators in developing countries might be vulnerable to a competitive threat from apparently operator-neutral solutions such as the one recently announced by Monitise. My own reaction to a cellco being lauded for how its services improve the lives of poor people is always very positive - it makes me pleased to make my living in and around an industry whose technologies can be a force for good. On hearing about Safaricom's award, Steve Song, however, was prompted to consider, not for the first time, "the effective monopolies/oligopolies" that mobile operators in Africa have become.

While Song acknowledges "the miracle that mobile phones are" and says that "there can't be many people who still doubt the direct value that mobile phones provide to people", he is concerned that the wealth that is being generated by cellcos in Africa is being distributed too unevenly. To support this assertion, he cites the case of South Africa's MTN apparently acknowledging that is subsidises 3G data traffic with revenue from its core voice and SMS business. This means, says Song, that when it comes to communication, "the poor in South Africa are effectively subsidising the wealthy".

Song also invites us to consider "the microeconomics of the edge cases of mobile access" - the case of a remote village served by a single cell tower. He contends that in this scenario, the majority of calls made would be to other users in the same area, i.e. local calls. Song also asserts that people in Africa "are spending substantial amounts of their disposable income on access." So, he argues, if, say 50% of the phone calls made in a remote village are local and if people are spending 50% of their disposable income on mobile access, "that means that 25% of their disposable income is being siphoned out of that village."

Perhaps with my own mobile bill in mind, I initially wondered whether it could really be true that even very poor people could possibly be spending as much as 50% of their disposable income on voice and SMS. Apparently so, according to a 2008 report from Research ICT Africa, a twenty-country network hosted by the EDGE Institute in Johannesburg and funded by Steve Song's former employers, the IDRC.

We can see from the table below that the report has indeed identifed African countries where consumers spend more than 50% of their disposable income on mobile services. These include Kenya (52.5%), Nigeria (52.4%) and Zambia (60.3%). According to this study, for the same three countries, the percentage of disposable cash spent on cellular services for the bottom 75% of the population by disposable income rises to 63.6%, 60.9% and 73.9% respectively.
Is this phenomenon - people spending such a major chunk of their incomes on mobile phone charges - purely an unavoidable consequence of how poor these people are? Or might more competitive mobile markets deliver considerably lower prices, thereby freeing up African consumers' cash to be spent on other items?

Several times, a DevelopingTelecomsWatch piece has focused on a particular country and voiced the idea that perhaps that state's mobile market is currently contested by too many cellcos - too many in the sense of not all of them being able to turn a profit and justify further investment. In the few months since this blog's inception, that question has been raised about Cambodia and Sri Lanka and about Tanzania, Burundi and Gabon.

Along the way, I've sometimes been quite critical of operators with aggressively low pricing. Metfone (the Cambodian subsidiary of Vietnamese MNO Viettel) is one example. I have expressed the view that Metfone's distribution of free SIMs and airtime is a "disruptive" market entry strategy which is "very nice for quickly building a subscriber base, but taken to its logical conclusion this can seriously erode overall market value for all players."

What I've had in mind is an idea I've heard articulated countless times at many, many telecoms industry conferences - that telecoms groups will only invest in and improve the communications infrastructure of those countries where good profits can be earned; that most operators naturally settle around a band of prices which enable profitable operation and happy shareholders for all competitors; that operators which sell their services below the lowest end of that band of prices can be accused of destroying martket value and threatening the ability of others to keep investing; that regulators/governments which allow any market actors to do this are not acting responsibly.

Steve Song would presumably not sympathise with these sentiments because he rails against the failure of telecoms regulators in Africa either to license enough new market entrants or to curb the excesses of incumbent players with significant market power. He feels that this has led to a situation where existing operators "collude to maintain high profits", citing the global price of SMS per byte vs. the true cost of delivering text messages.

The ODI's Rohit Singh also deals with the role of telecoms sector regulatory agencies in developing countries. He writes about how governments should oversee such issues as interconnection between the operators, spectrum allocation, and access to the international gateway. He argues that the importance of this role is shown when, in the absence of regulated interconnection tariffs, dominant firms charge high prices for connecting calls from other networks. Singh asserts that this limits effective competition, with dominant firms earning monopoly profits, keeping their prices high, and having little incentive to expand or innovate.

Without effective regulation, Singh continues, ownership of bottleneck infrastructure by dominant firms can diminish the developmental impact of the mobile sector by pushing up prices and restricting coverage.

When Singh reaches for an example of this kind of failure of regulation, he thinks of Zambia, where he says international calls are very expensive because the state-owned fixed-line operator charges high tariffs to private operators to access the international gateway. This distortion, he argues, then affects the domestic calls market, because private operators have to subsidise their international calls to compete with the public sector firm. In this characterisation, private sector mobile operators are the good guys of the piece, forced rather than inclined to charge high prices for their services. My feeling, then, is that Rohit Singh and Steve Song have quite different views of the optimally desirable interplay between telecoms operators and regulators.

Going beyond the issue of pricing, in an earlier blog post, Song expresses concern about how mobile operators in developing countries might conceivably take advantage of the ways in which cellphones have become indispensable in people's lives. Drawing on a March 2009 presentation by Nathan Eagle, the developer of crowdsourcing application txteagle, Song observes that no one in Kenya can afford not to have a mobile phone because "even if you are digging a ditch by the side of the road, day labour is now organised via SMS." Song feels that this means that mobile operators have Kenyans by the throat. To support this argument, he discusses another anecdote from Nathan Eagle's talk, which concerns a water pump manufacturer in Kenya that, by combining an M-Pesa-enabled, solar-powered metering system with their water pumps, has completely changed its business model. This company is apparently now giving water pumps away for free and then making a profit by selling access to water through the M-Pesa service. In his presentation, Eagle observes that Michael Joseph, the CEO of Safaricom, "loves this because you have to have a Safaricom account to get water."

Steve Song ask whether he is alone in finding this a little disturbing and feels that there is something wrong about a single mobile operator acting as the gatekeeper to water supply. Song argues that "for any village in this situation, Safaricom can charge whatever they like".

When I stumbled upon Steve Song's blog, I felt it would be interesting to draw attention to the uncomfortable questions which he raises. After all, DevelopingTelecomsWatch was never intended as a cheerleader for a particular view of the role of the communications sector in developing countries and emerging markets. So, for anyone else who has so far been unaware of Song's writing, I hope it has been refreshing to consider the ideas of someone who observes the actions of mobile operators with a critical eye. What I like about Song's writing is that his arguments are not weakened by an unattractively shrill tone. However, if you're curious to hear from someone who really doesn't mince his words about cellcos, I'd suggest you read a recent article by Llewellyn Kriel about South African operators and the country's telecoms regulator.

Mobile industry nicely balances profit motive with improving lives: not everyone agrees...

Zain (Africa) Speculation Watch: Episode 13

Anil Ambani, Reliance Communications: eyeing Zain's African operations?

The newswires have been humming with more than enough Zain-related information over the last few days to justify this thirteenth episode of our mini-series following the summertime rumours around the Kuwaiti telecoms firm.

On Sunday, Eman Goma of Reuters reported that the pan-MEA mobile group has asked shareholders to vote on removing certain ownership restrictions, a move that would pave the way for selling a large stake. This seems to have prompted a Sunday surge in Zain's shares on the Kuwaiti stock exchange, as speculation rose that the move could allow an outside investor to take a large stake in the company.

In the most recent chapter of the Zain (Africa) Speculation Watch story, we considered the possible sale of the 24.61% stake in the operator held by the Kuwait Investment Authority (KIA) (the Gulf state’s sovereign wealth fund) - Kuwaiti newspaper al-Rai, had reported that "the KIA has no objection to discussing any offer to buy its stake in Zain whether made by the UAE’s Etisalat or others under the condition that the offer would be serious and with attractive returns."

Without expressing an opinion about possible purchasers of that stake, it now seems that Zain's management would welcome the opportunity to part ways with the KIA. As a Cellular News article reported this week, Zain CEO Saad al-Barrak has said that he wants to see the sovereign wealth fund sell its stake in his company as soon as possible. "I wish they would leave tomorrow, and I am working on this," he said. He added that the motivation was to ensure the company could operate without political interference.

Whatever the future holds for the group as a whole, stories continue to bubble up about Zain's African portfolio. Only yesterday, that man Eman Goma was reporting comments made by Barrak to al-Rai, to the effect that the company is in talks with three major telecoms firms, including one from India, to sell all or part of its African operations.

Which companies are being referred to here? One of them might be France Telecom. Ten days ago we noted here that in a recent Reuters note on the French incumbent telco's need to limit margin erosion, Finance Director Gervais Pellisier was quoted as saying that the company "might look at some of the African assets of Kuwait's Zain if the latter decided to sell them in parts."

What about the unnamed Indian party? Could that be Bharti Airtel? Back in February, I would not have hesitated to offer that name as my best guess. An article by a former colleague of mine, Nick Jotischky of Informa Telecoms & Media, prompted me to write my own piece about whether India's market-leading cellco might be driven to more aggressive international expansion by the numerous competitive pressures it faces in its home market.

Since then, of course, the Indian mobile operator has been involved in lengthy talks with South Africa's MTN group about a possible tie-up between the two. Given the apparent complexity of those discussions, is it naïve of me to assume that simultaneous talks with Zain would not be feasible? After all, my understanding has always been than an exclusivity agreement has been locking Bharti Airtel and MTN out of discussions with other prospective bedfellows. Earlier this month, the Bharti Group announced the extension of this exclusivity period through to 31st August, and the Economic Times has reported in the last few hours that Bharti Airtel is now very close to raising the funds needed for what would India’s biggest cross-border deal to date, surpassing Tata Steel’s acquisition of Corus for USD 12.2 billion in 2007.

Even if it were possible for India's leading mobile operator to discuss any interest in Zain's African assets at the same time as working on its mooted tie up with MTN, another complication would be that the Kuwaiti group and the South African group have somewhat overlapping footprints. The two companies compete with each other in Congo, Ghana, Nigeria, Uganda and Zambia.

As Eman Goma's article noted, this issue of overlapping assets would also have to be taken into account in any approach Etisalat may make for Zain. Goma quotes Prime Holdings analyst Sleiman Aboulhosn, who says that the Emirati group may be content to cherry pick some of Zain's assets in the region, given regulatory restrictions on a wholesale purchase. "Etisalat cannot buy the ones that co-exist with its own assets, for example in Nigeria," he said in Dubai. "So they might be interested in some parts."

If Bharti Airtel is currently an unlikely suitor for Zain, which other Indian companies might be making the enquiry mentioned by Saad al-Barrak? One possible candidate is state-owned telco BSNL. In June, Reuters reported comments made by the company's Chairman, Kuldeep Goyal, who said the the public sector telco is looking to expand to Africa by acquiring new licences or stakes in firms. "We are looking into various options there... getting into new licences, which are being issued, or partnering with existing licencees (and) taking a stake," Goyal told reporters. Asked whether BSNL, which has cash stockpile of more than USD 6 billion, was ready for a big acquisition, he said: "Yes, why not?"

The positive assessment of the state of BSNL is not shared by Kunal Kumar Kundu of consulting and IT services firm InfoSys. In our most recent article here at DTW, I quoted Kundu's recent Asia Times article, which is nothing short of a gloomy assessment of the health of the state-owned operator, which he feels is set to go the way of struggling government-run Air India, "which has had to crawl cap in hand for a state bailout to survive."

If Kundu's analysis is correct, and if this would prevent any ambitious foreign adventures by BSNL (rather than perhaps actually making it imperative to consider them), perhaps Reliance Communications is a more plausible prospective purchaser of some or all of Zain's African assets? Towards the middle of last year, the Anil Dhirubhai Ambani Group-owned operator withdrew from inconclusive talks of its own with MTN. Another Economic Times article written in the last few hours suggest that the Indian operator's interest in Africa has not waned since then. Amrita Nair-Ghaswalla writes that "sources" have named Reliance Communications as the Indian company currently in discussions with Zain.

The last time DTW visited the topic of all this speculation about the future of Zain, much was made of the impresssive performance of the company's stock since the rumour mill really got churning around mid-May. I even considered whispers passed to a loyal DTW reader - and then to me - to the effect that "the whole Zain thing" has merely been a highly successful attempt to manipulate the Kuwaiti group's share price. If there is anything in that suggestion, the success of any such ruse would appear to have come to a halt around a week after we discussed it here, should we choose to heed the warning noises emanating from Dubai-based investment bank Shuaa Capital. Late last week, Ramya Dilip of Reuters noted that the bank had downgraded Zain to "sell" from "neutral," saying the risk-reward profile of the shares were no longer attractive at current levels.

Around the same time, another Reuters piece carried quotes from analysts who could see the logic of selling the African assets and predictions about Zain's ongoing strategy in the wake of any such sale.

"The African operations are the major contribution to the revenues and subscriber base," said Jithesh Gopi, head of research at Bahrain-based Sico Investments. "But as far as net profit ... they have not been a contributor to the group."

According to this article, African markets account for about 62% of Zain's 64.7 million customers, but only 15 % of the group's net profit, as of the end of March. Seven out of 16 African operations, the article states, made a first-quarter net lost. In the Middle East, only the Saudi Arabian operation was loss-making.

"It's going to be a company that's refocused on the Middle East with a series of very strong franchises," said Simon Simonian, a telecom sector analyst at Shuaa Capital.

If Simonian is correct, Zain's growth plans would be downgraded as the majority of the Middle East markets served by the group are mature to the point of saturation, the exceptions being Jordan and Iraq, where operators face security issues, a relatively unpredictable regulatory/licensing environment and the prospect of a new entrant in the mobile space.

In that scenario, Zain would presumably focus primarily on upgrading existing networks and increasing revenues from mobile broadband multimedia services.

Work of this kind is naturally ongoing across the group's Middle Eastern operations. The Saudi opco, for example, last week announced that it had secured a USD 2.5 billion Islamic loan facility (Murabahah), which will be used to repay an existing Murabahah facilitating network expansion and future growth.

In Bahrain meanwhile, writes Roger Field of ITP, Zain is planning to upgrade its network with LTE technology in a bid to "future proof" its operation and gain an advantage over rival operator Batelco and the new entrant cellco owned by Saudi Telecom. Field observes that Zain Bahrain has failed to provide a timeframe for the network upgrade, but notes that similar projects in other parts of the world are expected to take more than a year to complete, from the time they were announced.

This wraps up another episode in this ongoing saga. Perhaps the fact that Zain's own Saad al-Barrak seems to revealing snippets to the Kuwaiti press suggests that the story is moving beyond the speculation stage. Whether this means we can expect to see imminent announcements about the future of Zain and of its African operations remains to be seen. Keep watching.

Zain (Africa) Speculation Watch: Episode 13

Kenya: Zain and Yu cut costs through infrastructure sharing

Having very recently been to Kenya for the first time, I now find stories from that country catching my eye.

One which has broken since my trip, reported by Telegeography among others, concerns a network infrastructure sharing deal struck by Zain Kenya and Essar Telecom Kenya (until recently known as Econet Wireless Kenya).

In February, I asked here whether 2009 will see arrangements of this type having a major impact in emerging markets worldwide. I cited recent examples from India, Bangladesh and Panama, but noted that in Zambia, Zain had declined to become involved in a network sharing project recommended by that country's telecoms regulator in order to boost rural coverage. Zain Zambia and prospective network sharing partner MTN Zambia preferred to spurn the approach from the regulatory agency on the grounds of guaranteed quality of service being a difficult issue.

Zain's Kenyan operation appears to have no such qualms, with reduced base station operating costs being cited in local reports as the principal driver for the cellco entering the infrastructure sharing deal with the Yu-branded recent entrant.

This presumably meets with the approval of the Communications Commission of Kenya, whose Assistant Director Susan Mochache spoke at the East Africa Com conference I recently attended. Ms. Mochache's presentation made mention of infrastructure sharing as a plank of the Commission's wider strategy of promoting competition. Ms. Mochache was asked during the conference about whether network sharing was something the Commission would be merely recommending or whether it might do some degree become mandatory. The answer, however, was not immediately clear to me. I think I understood that this is an issue which is still under discussion.

Kenya: Zain and Yu cut costs through infrastructure sharing

Infrastructure sharing to have a major impact in emerging markets in 2009?

More details are emerging about the long-expected infrasructure sharing deal between Indian cellcos Reliance Communications and Swan Telecom, the operator in which Etisalat took a 45% stake in September for USD 900 million. According to an Economic Times (India) article last week, the two companies are now expected to finalise a fifteen year deal.

Swan Telecom plans to launch mobile services in the second quarter of this year and has licences to offer mobile services in 13 of the total 22 'circles' (markets) in India.

The article also states that Reliance Telecom Infrastructure Limited (RTIL), which is the spun off tower business of the Anil Ambani-owned MNO, is also discussing similar passive infrastructure sharing arrangements with other new players such as Datacom, Sistema Shyam Teleservices and Loop Telecom.

The Reliance-Swan deal is not the only infrastructure sharing arrangement recently worked out in India. Another of the greenfield MNO's, Telenor-backed Unitech Wireless was reported by Global Mobile Daily in late January to be finalising an agreement with the Tata Teleservices tower arm Wireless-TT Info-Services Limited.

Globally, we might expect more deals of this kind. Back in March last year, the ITU expressed the view that telecoms regulators are increasingly agreeing on the need for infrastructure sharing. This was apparently a major topic of discussion at the annual Global Symposium for Regulators (GSR-08) in Pattaya, Thailand. "Pro-competitive and open access strategies are needed to cut the cost of deploying ICT networks - and thus take a big step towards achieving the targets set by the World Summit on the Information Society as well as the United Nations Millennium Development Goals," commented ITU Secretary General Dr. Hamadoun Toure at the time.

Led by Sethaporn Cusripituck of Thailand's National Telecommunications Commission, the Global Symposium delegates reached a consensus on a set of best-practice guidelines aimed at offering affordable broadband access through innovative infrastructure sharing and open-access strategies relating to spectrum. According to a Global Mobile Daily report on the Symposium, "one of the more-radical ideas... was that to encourage universal access to communications services and address the 'digital divide' separating urban areas with telecoms coverage from rural areas without, regulators should consider offering incentives for operators to share infrastructure, including financial subsidies on a competitive basis."

Presumably the two recently asgreed deals in India have met with the approvel of Nirpendra Misra, Chairman of the Telecommunication Regulatory Authority of India, who said at the Symposium that "sharing is key to promoting ICT access at affordable prices in rural areas" and recommended that sharing of both passive and active mobile and backhaul infrastructure be encouraged. "Operators will automatically receive subsidies for the deployment and management of towers, funded by the Universal Service Obligation Fund, as long as operators share the towers with three other operators or service providers," said the TRAI Chairman.

This is in line with recommendations outlined in the ICT Regulation Toolkit, a joint production of infoDev and the ITU, which state that "because of the cost savings, infrastructure sharing may be a pre-requisite for receiving Universal Access and Service Fund (UASF) support into new areas."

Infrastructure sharing involving mobile operators, especially in emering markets, might not only be to the advantage of the cellcos themselves. In the same section of the ICT Regulation Toolkit, the argument is put forward that where mobile operators are dominant service providers, "at least one mobile operator may have a near-ubiquitous national transmission network that has potential usefulness beyond the narrow needs of mobile service provision. This network could include the provision of digital backbone facilities from widely dispersed POPs for ISPs. Even if the existing capacity is limited for broadband, an upgrade to provide broadband may be significantly more economic than a completely new network."

India is not the only South Asian market in which mobile infrastructure sharing has been embraced. In September 2008, Global Mobile Daily reported that the Bangladesh Telecommunication Regulatory Commission had unveiled passive infrastructure sharing guidelines aimed at reducing network duplication. The guidlines read: "Operators shall jointly develop, build, maintain and operate new passive infrastructure for providing telecommunication services to the subscribers... However, an individual operator may build passive infrastructures with the permission of the Commission." Tariffs and charges for infrastructure sharing should be mutually agreed among operators, according to the BTRC.
"In case of any dispute regarding the tariff and charges the decision of the Commission shall be final and binding upon the parties," say the guidelines.

At least two of the country's six mobile operators already had network sharing plans in place. In June Warid Telecom's Bangladesh operation and CDMA operator Citycell signed a network infrastructure sharing agreement which sees the two operators sharing the passive elements of around 350 of their combined base stations. Warid Telecom also gained access to a fiber network operated by Citycell for backhaul and bandwidth purposes.

Meanwhile, in the Western Hemisphere, I know of one market where all four mobile operators competing there are set to share infrastructure. In Panama, as reported by BNAmericas in November, the local subsidiaries of América Móvil/Claro, of Digicel, of Telefónica/Movistar and of Cable & Wireless have worked out deals. The article indicates that Claro and Digicel have reportedly already agreed to sharing their infrastructure and that newer entrants Movistar and C&W, which entered the market last year, having been awarded the country's third and fourth mobile operating licenses in May, will also be involved.

Not all operators agree that infrastructure sharing will always offer them substantial cost savings. In a BNAmericas interview in December, Digicel's Luis La Rocca, said that the process is not without difficulties. Speaking about Panama, he said "not many towers were built in the past to accommodate two carriers, so structures will have to be put in place to make this sharing possible." La Rocca was asked if infrastructure sharing helps to reduce initial deployment costs for a greenfield operator, with the interviewer noting that the deployment cost for Digicel in Honduras was USD 450 million versus UDS 350 million in Panama. La Rocca replied that investment had been higher for Honduras because geographically it is a much larger country with a larger population. He indicated that infrastructure sharing had "not substantially" saved Digicel money in Panama.

Another concern could be maintaining quality of service. In August 2008, according to Global Mobile Daily, the local units of Zain and MTN in Zambia declined to share network infrastructure, with both operators claiming it would be difficult to maintain quality assurance. The GMD article indicated that the country's telecoms regulator the Communications Authority of Zambia had urged the sharing of infrastructure as a way of boosting the expansion of services in rural regions.

With varying degrees of enthusiam for network sharing across emering markets worldwide, I wonder how far developments in the largest market of the lot, China, will influence regulators which have yet to rule on this issue. Nicole McCormick of Informa Telecoms & Media wrote in October that the Chinese Government had issued a policy statement requiring mobile operators to share passive network infrastructure, expressing the view that the move could lead to a reduction of about 15% in the 3G capex of China's three operators China Mobile, China Unicom and China Telecom. McCormick noted that a possible downside would be that this could add to the delays in the process of rolling out 3G networks, "since operators will have to spend time hashing out the terms and practicalities of sharing networks."

In the same month, another Informa commentator, Kriz Szaniawski, noted that at a recent conference he had attended, someone suggested that network sharing is a bit like healthy eating in the UK: Everyone talks about it obsessively and watches endless TV shows about the subject, but nobody actually does anything about it." Szaniawski feels that there have been "suprisingly few examples of successful deals worldwide, with a few in Australia, Spain and Sweden. Most others are still at too early a stage to fully assess, and some have clearly struggled." However, Szaniawski feels that an extended economic downturn could well drive network sharing deals worldwide.

With the governments of major markets such as China and India backing network sharing, 2009 may be the year that deals of this kind have a major impact on operators' bottom line and on the extended availability of services in emerging markets.

Infrastructure sharing to have a major impact in emerging markets in 2009?