PTA AWARDS TWO NEW CELLULAR LICENSES

Can the customers expect improvement in quality of service and reduction in tariff?

By SHABBIR H. KAZMI
Apr 26 - May 09, 2004

The Pakistan Telecom Authority (PTA) auctioned two new GSM licenses on April 14, 2004. Against general expectations of about US$ 300 million, the regulator raised US$ 582 million from two successful bidders, Telenor and Space Telecom. Therefore, there is a need to look at the auction details, potential size of Pakistani cell market, opportunities and threats for the new and existing players, impact on the existing player and PTCL, which also owns 100% take in a cellular phone company.

The licenses are for 15 years and are renewable after the expiry of this period without any further payment. The license money is payable in two stages: 50% at the beginning and the balance amount payable in equal installments over the next ten years. The license price has another significance. All the existing companies have to pay the same price at the time of renewal of their licenses as they did not pay any such fee when they got their respective GSM licenses.

The high bid price can be attributed to a number of factors:

1) MARKET HYPE ABOUT GROWTH POTENTIAL

The last two years have been very exceptional for the cellular market. Since the introduction of the CPP regime, the local cellular market has expanded from 350,000 subscribers to over 4 million subscribers. This exceptional growth is the largest contributor towards the high price realized.

2) IMPROVED COUNTRY RISK PROFILE

Pakistan's improving economy and increasing visibility in international politics has also lowered the traditional risks attached with the Pakistani market. The interest from foreign operators like Telenor is a direct result of this image change.

3) ENTRY BARRIERS IN FUTURE

Since this was the last chance to enter into the Pakistani cellular market, investors have shown significant interest. The PTA had declared that it had no plans to issue more licenses in the medium term.

4) SLUGGISHNESS OF THE EXISTING PLAYERS

The sluggish performance by the existing players in expanding their networks is another reason. In particular, businesses sitting outside can easily visualize the growth potential if they look at the slow capacity expansions and the continued poor quality service of existing players.

THE WINNERS

Telenor from Norway is a medium sized European player with a clear focus towards mobile telephony. The company has interests in the regional markets as well. Telenor operates in 16 countries with major interests in Asian markets like Thailand and Malaysia. It also has an exceptional record of working on Greenfield mobile operations. Reportedly, Telenor is expected to set up its operations in Pakistan within one year. Space Telecom is a consortium dominated by local companies with an international operator. Pakistan Oilfield and Attock Refinery are the local partners, while Syria Telecom is the operator for this consortium. Reportedly, the operator also has a stake in the consortium. The main sponsors do not have any experience in handling the telecom business. Space Telecom plans to start operations within the next 18 months.

PRICE JUSTIFICATION

Some of the industry analysts believe that the Pakistani market does not have adequate potential to justify a cost as high as $ 500 million (license cost plus physical infrastructure cost). However, Arshad Arif of KASB Securities has a contrary view. He believes that such a project cost makes sense. If one assumes US$ 6 per month revenue per subscriber (which is below the average for the comparable countries) and a net margin of 35 per cent (again on the lower side of the regional average), a company needs just 2.5 million subscribers to achieve an 8-year payback. The companies like Telenor and Space Telecom are aggressive enough to achieve such a subscriber base.

POTENTIAL THREAT

The only threat to the mobile market in Pakistan is the progress on the WLL segment, which allows local loop operators to offer limited mobility within their respective areas. However, no significant growth in the capacity build-ups within this segment is expected due to 1) the WLL startup costs are relatively higher than the fixed line and cellular networks, and (2) the companies owing these businesses are not very aggressive.

CURRENT MARKET

The focus of the most of the existing players has been on meeting demand rather than paying much attention to quality service. One of the largest players has been penalized for its poor quality services. Some industry experts believe that the lack of innovative services on the part of the local players has more to do with equipment suppliers to these operators. The tariffs have also been a non-issue for all the players as both the GSM operators are charging almost similar rates for their services. Probably the abundance of the unmet demand and relatively easy approach of the regulator has facilitated the existing players in continuing the existing tariff arrangement.

FUTURE SCENARIO

Instead of just meeting demand, the existing operators are likely to shift their focus towards retaining their existing customers. This would only be made possible by offering better quality services and reasonably good customer base. The market will see a whole series of new services likely to be offered by the players and further innovations once the two new companies commence operations. The tariffs are also expected to come. One of the companies has already sent a strong signal to the new entrants by slashing its existing connection charges to zero. It is also expected that in order to facilitate customers, the government will also lower its own levies.

MESSAGE FOR NEW PLAYERS

The Pakistani market has three basic areas that a new operator can exploit 1) catching up with the potential cell density level (about 10%), which requires targeting of new clients along with the existing players, 2) targeting the high end of the existing cell operator's clientele, who are not satisfied with the service quality they are getting and who would opt for a switch, 3) competing with PTCL if they decide to lower the tariffs to PTCL's level. For new entrants, the opportunity lies more in improving service quality along with targeting high revenue subscribers from the existing players.

AMPS-BASED OPERATORS

No immediate and significant impact on the AMPS based operators is expected. They are likely to confine themselves into their existing business segments where their focus will remain low price, wider area coverage. Owing to shifting issues onto GSM network, their subscribers may stay with them. However, additional growth in the subscriber base may not be seen owing to the availability of GSM capacities.

IMPACT ON PTCL

Being a 100% owner of a cellular company, PTCL will be a gainer. In particular, the realizable value of the cellular subsidiary will be up by the time value of the money which needs to be paid a few years down the road and is a potential liability now (mainly license value). Moreover, interconnectivity charges will give PTCL another boost in its local revenues. The greater the number of cell users, the more the call traffic, the more can be generated to and from PTCL's backbone.

AREAS OF CONCERN

An expansion within the cellular market will eventually pose a challenge to PTCL, as the cell infrastructure stands larger than the fixed line infrastructure. If the cellular operators start cutting tariffs and bring them in line with PTCL, it would be difficult for PTCL to compete with the cell operators in the urban areas. At present, nearly 20% of international incoming traffic is terminating on mobile phones where PTCL is paying just Rs 2.00 per minute to the cell companies. With an increasing subscriber base this ratio will go up to about 40%. This would place the cell operators in a position where they can a demand relatively larger share in the TAR, which is close to Rs 10 per minute for PTCL. This could, to a large extent, damage PTCL's Rs 18 billion revenue base for incoming international traffic.