The Middle East is now a competitive playground for a number of ambitious and well funded telecoms operators. Regional players like Etisalat, Zain and Qtel have all taken stakes in neighbouring markets, and are now looking beyond, to Africa and Asia, for further expansion. There are also opportunities closer to home that they, and other global operators, have started to dabble in despite the obvious difficulties they present.
The telecoms sectors of Iran, Iraq, Yemen and Afghanistan are all starting to exhibit signs of development, driving those of an expansionist disposition, and a necessary appetite for risk, to evaluate whether now is an appropriate time to converge on them, or whether waiting to see how they play out is a preferable stratagem.
“All these countries have low penetration of services and large populations,” says Andreas Hipp, CEO of international telco Epsilon Telecommunications. “The Gulf is all very well, but countries there mostly have populations of a couple of million. Opportunities for growth are forcing companies in the Gulf to look at neighbouring areas where there’s maybe less competition and fewer licences already granted.”
Not that these emerging economies are exactly untrammelled: “A play has already been made in some of these places by the big Middle East players,” says Mohsen Malaki, manager with Dubai-based analyst company Delta Partners. “These markets have been the focus of a lot of M&A activity for the last two or three years and will continue to be.”
Here we consider the markets of Iran, Iraq, Yemen and Afghanistan individually, and size them up for opportunity.
Iran
Iran has the most developed telecoms market of the four economies profiled in this article.
“There’s room for growth in Iran, but at around 50% penetrated it is already ahead of Iraq, Yemen or Afghanistan,” says Malaki. “These countries all have very low income levels, whereas Iran is middle income. It’s much more prosperous and stable, although there are trade embargoes so there could be a negative publicity issue if you are investing there.”
Iran is in the middle of a burst of deregulatory fervour. The monopoly of the incumbent, state-owned Telecommunication Company of Iran (TCI), in the mobile and fixed-line sectors was first challenged with the 2006 launch of competitive mobile operator MTN Irancell.
The entry of South Africa-based MTN in competition with TCI subsidiary Mobile Communications Company of Iran (MCI) gave mobile subscriber growth a much-needed shot in the arm, and it has been nearly doubling every year since, according to research company Buddecomm.
UAE-based operator Etisalat has just secured Iran’s third mobile licence against a raft of other bidders that included Zain, Omantel, Telekom Malaysia and Bharti Airtel. Its bid was a joint venture with local player Tameen Telecom, which is owned by the Iranian Social Security Organisation (SSO), a body that provides pensions for more than 30 million Iranians. As part of the deal, Etisalat can offer 3G services on an exclusive basis for a two-year period, and will also play in the 2G space with its two competitors. It will thus be the first company to offer video calls, mobile TV and mobile internet to Iranians.
More controversial and a good deal less clear is the future of TCI, in particular the issue of its ownership. A number of plans to privatise or part privatise the operation have been announced and then dropped by the Iranian government over the years.
In August 2008, a token 5% was offloaded to private interests. Now there are plans to find a buyer or buyers for at least 50% of the operation. A tender for the sale is set to be announced before the close of the current Iranian year, which ends on March 20.
The Iranian authorities are being coy about possible frontrunners in the sale, but say there has already been dialogue with telecoms operators from India, China, France, Russia, Turkey as well as the more prominent Gulf economies.
TCI currently has nearly 25 million fixed-line users, which in the context of Iran’s substantial population of around 70 million leaves room for improvement. The hope is that increased private ownership, whenever it comes, will drive the company forward and enable Iran’s inadequate infrastructure to catch up with that of the Middle East’s star economies.
Sanctions and content
Sanctions imposed on the country for its controversial nuclear energy programme have seriously limited TCI’s access to next-generation technologies, and a lack of unwired competition has generally dampened its appetite for progress.
On the positive side, a large proportion of Iran’s population is under the age of 25 and hungry for next generation services, so scope for continued market growth remains high, especially in the mobile sector. As it stands, a mere 1% of TCI’s turnover is derived from value-added services such as IPTV, video on demand and broadband internet.
An internal debate continues to rage in Iran about what sort of content – web, broadcast and print – is suitable for public consumption. Islamic hardliners and pro-reform organisations have been fighting it out for a number of years on this issue.
Access to foreign satellite TV channels is banned under the current regime, but is still widespread despite prohibition. Newspapers of a progressive hue come and go as censors battle liberal forces. For middle class Iranians that can afford it, the Internet is the least well guarded source of alternative opinion and varied content.
At a geopolitical level, Iran continues to have a critical role in the wider region. It borders many countries including Armenia, Azerbaijan and Turkmenistan to the north, as well as Russia and Kazakhstan over the Caspian Sea. Looking east it is neighbours with Afghanistan and Pakistan, and to the west with Turkey and Iraq. It plainly has a central part to play if all these countries are ever to be united by a seamless mesh of communications networks and services such as that enjoyed by Europe.
Iraq
Iraq’s telecoms sector has been, unsurprisingly, one of the casualties of the conflict that has ravaged the country since the US military invasion of 2003 and the toppling of Saddam Hussein’s regime. Domestic and international connectivity have both been seriously undermined by damage to infrastructure.
Iraqi government efforts to rebuild that infrastructure are still in progress, with repairs to switches and lines ongoing, and attempts to build new fibre optic connections moving forwards slowly. Wireless local loop licences have been issued in the hope of bypassing the lack of fixed-line links.
The lack of decent wired services has at least permitted Iraq’s mobile market to flourish unimpeded. From small beginnings, mobile services have grown rapidly and become one of the success stories of the country’s painful recovery.
The interim post-invasion government can be credited with breathing life into the market with the granting of three temporary mobile licences in 2003, each for a different segment of the country.
In August 2007, the Iraqi government took a further step with the auction of three full mobile licences, each successful bidder carrying the right to serve the whole country in competition with the others.
One winner was Asiacell, an original temporary licensee and now owned by Qatari incumbent Qtel. Some $1.25 billion was spent by Asiacell on its 15-year stake in the GSM market.
Iraqna, owned at the time by Egyptian operator Orascom, was another successful 2007 bidder, spending a similar sum for the privilege. Iraqna was subsequently bought from Orascom by Kuwaiti-based Zain, and merged with its existing Iraqi venture MTC Aheer, now trading as Zain Al Iraq. It is currently spending heavily on expanding into data and Internet services. The third 2007 licensee was northern Iraqi player Korek Telecom.
The high prices paid for licences in such an unstable country caused eyebrows to rise, but were no more than a reflection of the level of outside interest. Turkey’s Turkcell and Egyptian operator Orascom were also bidders in 2007’s auction until they pulled out as prices were driven up. Orascom, as one of the temporary licensees of 2003, had been tipped as a cert to re-enter the market in 2007.
Progress in Iraqi mobile services has not been a smooth affair. For a period Asiacell and Korek Telecom conducted a bitter rivalry, with neither’s subscriber base able to talk to the other’s until the 2007 auction forcibly put a stop to the feud.
Jockeying for a stake in Iraq’s mobile potential goes on: “You’ve got Zain and Qtel already there,” says Delta’s Malaki. “So now Etisalat is interested in acquiring there, and there’s speculation that it might be interested in Korek. You’ve also got a spread of Wimax in Iraq– for example from Kalimat Telecom in partnership with systems integrator Waseela.”
Fast-growing internet
The next growth phase of Iraqi market development is likely to be internet access, highly restricted prior to democracy, now growing fast thanks to the rise of satellite-based broadband access and the opening of internet cafes.
It is arguable that real progress won’t be seen in Iraqi telecoms until full international connectivity is realised in the form of a choice of major cable routes in and out of the country.
National security has improved, but until there’s evidence of a more permanent peace Iraq will probably remain no more than a plan on many a network map. At the moment Iraqi businesses can send traffic abroad through Kuwait or Saudi Arabia or via a terrestrial link with Iran, but it badly needs its own landings.
“Iraq is a challenging place to do business right now,” according to Paul Joseph, regional manager for the Middle East with Sprint International Markets. “But at least there’s competition in the market, and several carriers and providers are vying for new business. Mobile voice in particular is growing. That’s predominantly where subscriber growth is coming from.”
Though difficult, Iraq is by no means an impossible place to prosper in, judging by the experience of Martin Browne, CEO of interconnect and billing solutions vendor I-conx.
“We haven’t found Iraq too much of a problem,” he says. “Palestine is a different matter, as it’s laborious to get in and out of with all the border crossings. We’re in northern Iraq, in Kurdistan, and there are no issues there. There’s lots of new operators in the region, so hopefully plenty of new business there in the future.”
Browne says that success in some of these more marginal Middle East economies has been the result of a period of patient relationship building founded on its links with Du in Dubai: “After three years we’re on the radar now,” he says. “Reputation is very important in this part of the world. I see other vendors go in very hard-nosed. If you’re operating a service there, you’ve got to please customers every month. It’s like a restaurant where serving one great meal is not enough.”
Yemen
The penetration of fixed-line phone services in Yemen is among the lowest in the Arabic-speaking world, and this is a reflection of the country’s slow economic development and its status as the Gulf’s poorest economy.
Besides its thin domestic coverage, Yemen has not traditionally been first on the list of Gulf nations when a major multinational enterprise looks to establish a regional hub, so the drivers for better international connectivity than it already enjoys are not strong.
But for a small market, Yemen does boast some reasonably impressive infrastructure. Its government has been engaged with the modernisation of the national communications network, and ADSL services are now available in places.
Just like any emerging market around the world, it is in mobile services where Yemeni telecoms growth is really happening. Yemen now has four competing mobile operators, and subscriber levels are growing fast from an admittedly rock-bottom base.
The four mobile players are Yemen Mobile Phone Company, which is part-owned by Bahraini incumbent Batelco, Sabafon, MTN Yemen, formerly Spacetel Yemen, and latest entrant Y with its Hits Unitel brand. “With four mobile licensees, Yemen is more or less done as an opportunity, with no room for new operators,” says Delta’s Malaki.
The stranglehold of incumbent Yemen Telecom on the market for wired services has been acting as something of a brake on progress in other areas, says Paul Joseph, regional manager for the Middle East with Sprint International Markets. But he is encouraged by general market developments: “In Yemen, demand for services coming out of the country is small at the moment, but it’s certainly there,” he says.
Window on the world
The Falcon subsea system, owned by Indian player Reliance Globalcom, formerly Flag Telecom, lands in Yemen, where its main job is to pick up voice traffic going around the world for the benefit of Yemen’s substantial expat population. There are sizable Yemeni populations not only around the Middle East but in Indonesia, Pakistan, Israel, the horn of Africa, the US and the UK.
The Falcon landing gives Yemen a window on the world of global communications denied thus far to many other emerging economies, and thus affords some hope for the future.
If Yemen is ever to become a key hub for traffic passing through the region then the unlocking of that potential lies with its geography and its history. For thousands of years, Yemen has made the most of its position at the crossroads of Africa, the Middle East and Asia. The ancient spice routes all passed through. A steady stream of immigrants from Africa now find Yemen convenient as a staging post en route for the oil-rich Gulf or Europe.
Latterly however a war between traditionalist North Yemen and Marxist South Yemen cut it off from world affairs until peace was declared and the two were united to form the modern Republic of Yemen in 1990.
Since unifying, Yemen has been modernising and opening itself up to the world, while also holding on to its traditional identity. As something of an anomaly, it is the only republic on the Arabian Peninsula and the fastest growing democracy in the Middle East.
As well as modernising its infrastructure, Yemen is trying to diversify its economy. In 2006 it embarked on a series of reforms designed to reduce its oil dependence and attract more foreign investment.
Yemen is not an entirely open society though. The country’s Ministry of Information administers all broadcasting and has a hand in the production of most newspapers. With illiteracy common, TV and radio are arguably more important sources of news.
According to the ITU, around 320,000 Yemenis are now online, although the content they can see is heavily filtered.
Afghanistan
Yemen at least is rebuilding its economy and improving communications infrastructure with a period of internal strife behind it. No such luck for Afghanistan, where progress must be managed against a backdrop of violent unrest.
But with the worst of the violence restricted to certain areas, recovery of a sort is now taking place. It looks as though the Afghan government realises that the rebuilding of telecoms infrastructure and the establishment of a properly functioning basic network with national coverage is a prerequisite to general economic recovery. Its work is cut out. There is little fixed-line connectivity, internet access is rare and computer literacy and PC ownership rates are tiny.
Mobile phones were unknown in Afghanistan until the fall of the Taliban in 2001. Now mobile services are one of the fastest-growing and most profitable sectors in the nation’s economy.
The two mobile market leaders are Roshan and Afghan Wireless Communication Company (AWCC), both of which announced the passing of the two million subscriber mark in 2008. These two now compete with two more GSM operators: South Africa’s MTN, branded locally as Areeba, and Etisalat Afghanistan.
“It is interesting to note that Etisalat is already involved with the Afghan market, along with MTN,” says Malaki of Delta. “Russian companies are also now looking at investing. Megafon is believed to be interested in the market, and may be looking at a potential acquisition of Afghan Telecom.”
Paul Joseph, regional manager for the Middle East with Sprint International Markets, singles out Roshan in particular for its success in rolling out services under difficult circumstances.
“Roshan has done a remarkable job of expanding its network around the country in some chaotic conditions,” he says. “They’re extending their network year on year despite everything. It’s not just a matter of coping with a war zone or the rough terrain, you have to ensure nothing’s happening to your cell towers, and that you’re paying the right kind of tax to the right people locally. It’s a serious challenge that can hardly be imagined.”
“This is not an achievement for Roshan,” the company’s chief operating officer Altaf Ladak said modestly in a statement last year to mark the two million subscriber milestone. “It is an achievement for the nation and for the people of Afghanistan, because it marks how much progress has been made in the reconstruction and rebuilding of the Afghan economy.”
It certainly isn’t just Roshan battling the odds. In March 2008 a cell tower in the western province of Herat belonging to MTN Areeba was burned to the ground by insurgents as a warning to all phone companies to shut down their operations at night. Other Areeba towers, as well as ones owned by Roshan, have been damaged in attacks.
The Taliban believes coalition troops are using mobile phone networks to coordinate attacks against them. The Taliban themselves reportedly rely on mobile phones to coordinate operations.
A few positives
On a positive note, Roshan last year announced the launch of Afghanistan’s first mobile money transfer system. Branded M-Paisa, it aims to provide financial services for those without access to banks thus stimulating economic activity in the region.
Connections between Afghanistan and the rest of the world are unsurprisingly sparse. At the moment international traffic is mainly taken by satellite link into Pakistan and from there on to the rest of the world.
“As a country, it’s in a category of its own,” says Joseph of Sprint. “But there’s certainly more significant traffic in and out than you might think.”
There are some signs that, given time and further improvements in stability and security, Afghanistan may start to flourish commercially and realise the benefits of its unique location – being both a bridge from east to west, and from south and central Asia and the Middle East.
Thanks largely to international aid, Kabul now has a small but growing financial services sector. Since 2003, over 16 banks have opened offices in the country including Standard Chartered and First Micro Finance Bank. There are plans for a $9 billion urban development project in the capital. The City of Light Development, still at blueprint stage, is envisaged as a multi-function commercial, historic and cultural centre aimed at stimulating business and preserving heritage.
Conclusion
Impoverished economies with a history of violent unrest are not going to be everybody’s cup of tea. The latent possibilities of Iran, Iraq, Yemen and Afghanistan are clear enough, but not necessarily sufficient to justify a punt for people with an active stake in more stable places.
“We’re not so keen on markets like Afghanistan and Iraq,” says Gurkan Ozturk, vice president for global sales and marketing with Verscom Solutions, which provides infrastructure solutions for operators like Turkcell and Telecom Egypt. “If you’re brave enough then you could make big money there. There’s big potential. But we’ve got plenty of business every day that keeps us busy in neighbouring markets like Jordan.”
