Who dares wins

The licensing of a third mobile operator and first to offer 3G services in Iran this year, presents both an enticing opportunity and challenging proposition for foreign investors eager to participate in the sizeable market. With a significant population Iran is a country that offers would-be investors exposure to risk and reward in almost equal measure

Delta Partners’ Franca believes there is scope in the Iranian mobile market for the licensing of another operator beyond the third one that is being licensed currently

When news broke in August that Iran would license a third mobile player, regional operators Qatar Telecom and Zain were quick off the mark to signal their interest in the tender, alongside Russian operators VimpelCom and MegaFon. MegaFon is reportedly prepared to invest more than US$4.5 billion in the construction of a GSM network in the Persian country of approximately 70 million inhabitants.

Tender documents went on sale on September 6, yet details of when the process officially closes and what are the licence terms and conditions remain unconfirmed. Earlier advice from the Ministry of Communications and Information Technology (MCIT) noted that the new licence would include access to 3G spectrum for an exclusive period. As is the case with second mobile operator MTN Iran, foreign ownership of the latest licensee will be limited to 49 per cent, while Iranian companies will be able to participate individually or as consortia.

The third entrant will compete with the state-backed Telecommunications Company of Iran (TCI), which operates both a fixed-line and mobile network. The second operator is MTN Irancell, which is 49 per cent owned by MTN Group, Africa’s largest mobile outfit. Mobile penetration in Iran stands at around 50 per cent, with TCI serving 24.6 million subscribers and MTN Irancell having been able to garner 11.6 millions customers to end-June ,since launching late in 2006. Thus MTN Irancell enjoys a market share in excess of 30 per cent.

Some sections of the media have referred to the licensing of the latest concession as a tender for Iran’s fourth mobile licence, and Mauricio Franca, partner at Dubaibased telecoms consultancy, Delta Partners, confirms that there is currently a third smaller licensed mobile operator called Taliya that is operational.

“Taliya has a build, transfer and operate contract with TCI, meaning everything the company is building is going to be transferred back to TCI after 10 years,” Franca states. “We know that Taliya exists, but it has a very small market share and at some point it will be folded back into TCI.”

Franca says that in three or four years time there could be a bona fide fourth licensee, as he believes there is space for four players in the Iranian telecoms market, considering the size of the country and the potential in the market. Delta Partners’ forecast is that Iran could reach 64 million subscribers, reflecting a mobile penetration rate of approximately 90 per cent, within 10 years.

Franca foresees a race occurring between TCI and MTN Irancell to gain as many subscribers as possible in the time it takes for the new operator to come to market, with more than 30 million people in Iran yet to be connected to a mobile network.

“The third operator will have an advantage, it will have a 3G licence, which is not included in the licence that MTN and TCI have, so it can take advantage of this for some time, and that’s the idea the regulator has. I’m not sure what entry strategy the third operator will take, as on the one hand, the normal data strategy is to go lower on price, but it has 3G so it can differentiate itself more on the data side,” Franca suggests.

While the new entrant is only expected to come to market in the second half of 2009, the incumbents look determined to continue ontheir own business strategies in order to remain relevant in the market. MTN Irancell has been extremely successful so far in capturing 32 per cent market share within 21 months of operation to end-June. This success has been partly attributed to an aggressive ‘buy one, get one free’ campaign, competitive SIM pricing, strong branding and promotional tariff plans.

MTN Group chief executive officer Phuthuma Nhleko said after the release of the company’s Q208 financial results, that he was confident MTN Iran would gain 8.5 million subscribers in 2008, exceeding its growth target of seven million subscribers by almost 22 per cent.

“The key story is that since January, earnings before interest, taxes, depreciation and amortisation, and profit after tax, are positive,” Nhleko commented. “This is very good as we expected this outcome in 2009, but have managed to get into positive territory before the end of this year.”

Nhleko added that he expects data revenues, which currently comprise eight per cent of MTN Irancell’s income, to be substantially pushed up because of the large proportion of young people and lack of broadband.

MTN Irancell has been instrumental in lowering the total cost of ownership of mobile communications in Iran, and has also participated in the growth that has resulted from the lowering of the barriers of entry. Franca notes that there used to be significant mobile connection fees of anywhere up to US$300 per line prior to MTN Iran’s market entry.

Such connection fees have since been slashed to around one-tenth of that price, and currently amount to a much more affordable US$20-30.

However, the quality of both TCI and MTN Irancell’s networks still need to be improved, with a high rate of dropped calls and missed connections. Nhleko comments that it is not a case of not being able to offer a good quality service, but because, “it is a result of demand outstripping supply”.

“Once we increase our capacity in Tehran significantly, which we are working hard to do, I am sure that congestion levels will drop significantly,” Nhleko stated. “In Iran, we have faced a site acquisition challenge and it has been very difficult to establish a significant number of sites in certain parts of Tehran.”

MTN Irancell had increased its site coverage to 57 per cent of the nation by June 2008, up from 50 per cent in December. During this period 696 new base transceiver stations were rolled out to a total of 2,649. However, Franca points out that the issue of site acquisition continues to be a problem with both incumbent operators, and is likely to only accelerate with the entrant of a third player.

“Both TCI and MTN Irancell are growing so quickly, so I think both of them have had problems in keeping up with the quality of the network. It’s not always easy for them to acquire a licence to build new sites, because they have to receive approval,” Franca states. “If an operator wants to extend its network and build more sites it needs a licence depending on where the site is and who owns the property. Some of the sites are on government land and that’s a regulatory issue for growth.”

Iran’s regulator, which remains affiliated to the communications ministry, has not fared well in international rankings of regulatory independence, with Business Monitor International’s Iran Telecommunications Report Q308 stating that the country’s low score in the telecoms market category, “largely reflects the perceived impact of a number of recent moves by the Iranian authorities in favour of imposing stricter controls on the use of Internet and mobile data services”. Iran also continues to sit near the bottom of the table for general Business Environment Rankings in the Middle East, though, it is no longer in last place since the inclusion of Iraq in the latest set of figures.

Delta Partners’ Franca contends that the Iranian regulator is relatively strict, an example being the licence conditions needed for TCI to prepare for privatisation. The Iranian government began the process to sell off a five per cent stake in TCI in mid- August, offering 2.293 billion shares at US$0.157 each. This values the five per cent stake at around US$360 million, and the entire entity at US$7.2 billion.

“Operating conditions that came to light in the privatisation documentation are strict. TCI and MTN Irancell each have a 28 per cent revenue share with the government. That means that 28 per cent of all the revenues an operator generates goes to the regulator, which is a very high percentage compared to other markets. In some places you don’t have any fees, in others the fees are in the tens or twenties in terms of percentages, but 28 per cent is a very high number.”

Another concern Franca has with the regulator is with regards to price flexibility, where the operators have little discretion in raising prices – although there is no regulatory problem in lowering prices for a campaign.

“It is more of a market for consumers. Any regulator is concerned with price increases and that is normal, but in Iran it just seems a little stricter than what you would expect elsewhere.”

Internet in Iran

The number of Internet users in Iran stands at 23 million, with the country ranking seventeenth out of the top 20 countries in the world with the highest number of Internet users, according to the ministry of communications. The percentage of Internet users stands at 34.9 per cent and exceeds the global average of 21.9 per cent. However, the true rate of Internet penetration, taking into account multiple users per connection, is significantly lower.