Like everything else in Iraq, cell phones can be controversial. When a religious cell phone ring tone interrupted a parliamentary session in May, leaders from opposing religious groups left the meeting in protest. Outside the chamber, an MP’s armed bodyguard reportedly pistol-whipped the bodyguard of the offending MP over the gaffe.
Wildcatters, who have come to Iraq amid reconstruction in search of paying cellular subscribers, face worse hazards than this. Saad Al Barrak, CEO of MTC Group, a Kuwaiti company that runs MTC Atheer, Iraq’s third-largest cellular network, says his company has spent close to $20 million on network and staff security. The remark echoes a point made last year by Phil Moyse, CTO of Asiacell, Iraq’s second-largest wireless service run by Kuwait-based Wataniya—that the risk of bombings and kidnappings are part and parcel of running a wireless network in the country.
That’s on top of the usual political instability, disorganized regulatory frameworks, and rampant corruption. But for all the headaches, the market has grown to around 3.5 million to 4 million subscribers (top end, that’s 14 percent of Iraq’s 28.1 million people) in a little over two years. The figures suggest the cellular business could be spectacular if Iraq managed to achieve stability.
With that kind of potential, telecom companies aren’t sitting around. Asiacell, Atheer, and Iraqna received cellular licenses in late 2003 from the United States-led Coalition Provisional Authority and have each spent hundreds of millions of dollars building networks from scratch. Most of them seem to be making real money.
The cellular licenses awarded by the CPA in 2003 were originally set to expire last month, when they were supposed to be re-licensed by the new Iraqi-led National Communications and Media Commission. Delays have pushed deadlines back, as the NCMC grapples with various issues, including awarding licenses for Wireless Local Loop—technology designed to replace local phone lines. If all goes to plan, the NCMC could end up overseeing one of the first countrywide wireless deployments of this type in the world.
When all this will happen is unclear. In its fledgling state, the NCMC is struggling to determine the country’s telecom future with little experience and few resources. It also has the shadow of the old CPA licensing process to contend with, a system criticized for a lack of transparency.
Wireless War Zone
Many remember Nick Berg, the 26-year-old freelance telecommunications worker beheaded on camera by Islamic militants. The cellular networks, with large base stations dotting the landscape, are easy targets for groups looking to do harm to the country’s rebuilding process and to those doing the rebuilding.
Danger reaches beyond site engineers. Mr. Moyse, for instance, wouldn’t have business cards in case they fell into the wrong hands; he also avoided being photographed lest he became a recognizable target.
Besides the usual risks associated with the war, there have been accusations of assorted backroom deals over licenses and other things between operators and U.S. officials. Then standards came up for debate: San Diego-based Qualcomm was rumored to have lobbied hard for its CDMA technology—though the networks ended up with GSM, the prevailing standard in the Middle East.
Despite huge challenges, plenty of companies are fighting for a piece of the cellular market. For starters, Iraq is one of the larger countries in the booming Middle East telecom market. Together the Middle East and Africa are projected to generate $76.1 billion in revenue from telecom services this year, according to the Telecommunications Industry Association—$27 billion of that wireless.
Iraq, with 14 percent of the population on cellular at best, also has lots of growing to do—compared to Jordan with 30 percent, and Saudi Arabia with 44 percent, according to TIA.
That said, Iraqi subscribers deliver nice yields—thanks to war wiping out most of the country’s fixed-line infrastructure. According to top local provider Iraqna, owned by Egypt’s Orascom, the company brought in an average of almost $20 per person for its 2.17 million users in 2006—as against Orascom’s Egyptian network, which took in less than $11 from each of its 2.18 million subscribers. Its slightly larger Pakistani network took in $6 per subscriber over the same period.
Rogue Operators
The three already-licensed companies hope to expand their networks across the country, provided they receive new licenses. But they aren’t the only ones with that aim. Kurdish operators Korek Telecom (with subscribers estimated in the hundreds of thousands) and Sanatel—considered rogue companies despite substantial user bases—could also bid for licenses. The government’s fixed-line operator Iraq Telecommunications and Postal Commission, ITPC, could also bid for a license. Other companies like Turkey’s Turkcell and Russia’s Sistema Telecom are also rumored to be interested. That’s a lot of competition for a rocky country with fewer than 30 million potential subscribers.
More than three licenses would be a threat to the three incumbents, and they haven’t been shy about saying so. Iraqna and MTC Atheer have posted comments on NCMC’s web site that urged the agency to keep the re-bidding process relatively closed.
But John Everington, an analyst at Informa Telecoms and Media, says re-bidding on licenses is an important process that “to a large extent will determine the future of telecommunications for the country.” And he commends the NCMC for its efforts to make the exercise transparent. Yet he wonders if current plans are practical, given the unstable situation.
“A telecom franchise in a post-conflict economy can be a license to print money,” says Ken Zita, founder of consultancy Network Dynamics Associates. Mr. Zita knows of what he speaks, having played a role in shaping Afghanistan’s telecom and Internet environment. (After spending over $180 million building its network, Afghan operator Roshan claims 1 million customers, occasioning the firm’s CEO Karim Khoja to claim in April that his company is doing no less than “building the middle class in Afghanistan.”)
Mr. Zita, in fact, turned down opportunities to help the U.S. government on Iraq’s telecom reconstruction because he opposes the Iraq war. But he says Iraq’s new regulatory agency needs a firm road map to transition between the CPA and Iraqi organizations like the NCMC. And beyond the upside of entering emerging markets, Mr. Zita warns investments in these high-risk areas can vanish in a flash if the political, regulatory, or security situation changes dramatically. He compares Iraq’s regulatory uncertainty to China’s in the mid-1990s, when several companies made investments in the emerging cellular market and lost millions.
Certainly, Iraq’s three cellular operators aren’t afraid to invest. MTC Atheer has spent $430 million on its Iraq network since March 2004 and plans to spend more as demand grows for services across the country. A year after Asiacell launched its network in October 2003, the company had spent $135 million (more recent figures aren’t available); and Iraqna spent $29 million on capital expenditures in this year’s first quarter alone.
Global wireless infrastructure companies like Motorola and Lucent are also getting a piece of the business, working with the carriers to build the networks. Motorola could not be reached on the subject of Iraq for this story, but MTC Group says its contract with Motorola in Iraq is worth $170 million. Asiacell has stated it has contracts with China’s Huawei and Germany’s Siemens for its telecom infrastructure.
Every company dreams of making it big in a virgin market. If Iraq’s cellular operators can get around the bombings, the politics, the backroom deals, and the chaos, it’s conceivable they could win big. And if they succeed in rolling out extensive networks, the Iraqi people could end up the biggest winners. High time they won something.
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Crying Poor?
How do you prepare the ground for a high-growth wireless market? Get the United States to bomb the country’s landline network to smithereens first, goes one theory.
Certainly, wireless investments in Iraq look like they are starting to pay off—within just two years of going up. Egyptian telecom Orascom attributes 13 percent of its first-quarter 2006 revenue to its Iraqi wireless unit, Iraqna, which brought in $125.23 million during the period—up 100 percent from the first quarter of 2005. Iraqna’s EBITDA came to $67 million for Q1 2006, 79 percent up on Q1 2005.
Kuwait-based MTC Group reports its Iraqi mobile subsidiary MTC Atheer brought in $69 million in revenue, or roughly 9 percent of group revenue, for the first quarter of 2006—up 240 percent from a year earlier. This year’s Q1 EBITDA was $26 million.
Publicly traded, Kuwait-based Wataniya, which owns 40 percent of Asiacell, reported its Iraq investment reaped $37.3 million in revenue and $7.6 million in profit for the first quarter of 2005.
But incumbent cellular operators say earnings are not as high as they appear, and neither MTC nor Orascom reveal net income in their earnings releases for their Iraqi cellular subsidiaries—and MTC CEO Saad Al Barrak says, “For the time being it is impossible to make a profit in Iraq” because of capital outlays and security costs.
Iraq’s regulator disagrees. Siyamend Zaid Othman, CEO of the National Communications and Media Commission (NCMC), was quoted in RCR Wireless, a trade publication, as saying the incumbents were crying poor to stall upcoming licensing hearings and to keep competition out. “Ask any of these mobile operators, ‘Have you recouped all of your investments and made huge profits in just under two years?’ Now this is phenomenal,” he told the publication. “I don’t think this has happened elsewhere.”
MTC dismisses the claim. “We have been extremely cooperative with NCMC,” Mr. Barrak counters. “No company can stall the government in a vibrant sector such as telecoms.”
In the industry’s less vibrant days, state and private monopolies did exactly that for years, of course.
Contact the writer:editorial@RedHerring.com