TELECOMMUNICATIONS: A BOOMING SECTOR

By SHABBIR H. KAZMI
Aug 29 - Sep 04, 2005

At present telecommunication is the fastest growing sector of Pakistan's economy. There was a latent demand, evident from poor tele-density and quality of services, but slow decision-making process was the biggest drag. With the shift in government policy huge investments started flowing into the sector and the results are evident. The biggest beneficiaries of the paradigm shift are subscribers, quality of services is improving and tariffs are coming down. On top of this the growth in telecom is creating new job opportunities.

The story of fast-paced growth of telecom sector can be best sum up in three words, liberalization, deregulation and privatisation. The sector has moved on from a state-owned monopoly to a large number of players belonging to the private sector. The objective of privatisation of the biggest player, Pakistan Telecommunication Company (PTCL), has been achieved. Sale of 26% shares of the company yielded about 2.6 billion dollars. Pakistan Telecommunication Authority (PTA) has also mobilized millions of dollars from auction of operating rights. However, influx of billions of dollars was never the sole objective. The key objective is to ensure world-class services to the domestic subscribers at competitive rates, which is being achieved to a large extent. It is expected that the tariff would come down further and quality of services will be at par with the developed countries.

However, some of the critics are of the view that the process of liberalization and deregulation of the telecommunication sector has been rather slow. They attribute this slow process to the reluctance on the part of economic managers, who did not have faith in the capabilities of Pakistan's private sector. Some of them still believe that PTCL should have remained in the public sector. They feared that PTCL would become a private sector monopoly after privatisation. They were also not in favour of ending PTCL's monopoly status. However, the government withstood its commitment of privatisation of PTCL and has also succeeded in establishing regulatory structure to protect the interest of all the stakeholders. The overall consensus is that PTA is discharging its duty prudently. However, there are still some areas, which need greater monitoring and penalizing those working in the grey-area.

The growth in the population of cellular phones is amazing and proving all the forecasts wrong. At present total number of cellular phone subscribers is estimated close to 15 million and growth is still in double-digits. At present there are six cellular companies operating in the country. These are Mobilink, Instaphone, Paktel, Ufone, Telenor, and Warid, the last two being the latest entrants. However, Mobilink continues to enjoy the largest market share. The competition is heating up but marketing is still aimed at attracting new subscribers rather than any efforts to snatch share from other players.

One may say that subscribers have started switching over from one service to another. However, this move is not a switchover but availing premium services, through obtaining an alternate connection. Having more than one connection is becoming a norm in high net worth clients. One cannot switchover from one service to another service overnight. He/she has to retain the connections in use for uninterrupted connectivity, though the number of outward and inward calls reduces substantially on the earlier number.

To understand the growth of telecom sector in Pakistan, in its true perspective, it is necessary to peep into the history of last one decade. Some of the people still may have in their memories the days when having a fixed line connection been considered a privilege and mark of elitism. People had to wait for years to get a connection and some of them hardly getting a connection despite spending time and money. The glimpses of even fewer elites displaying their cellular phone may also be in the memories. However, the global revolution in the telecom technology, starting less than a decade ago, has also changed the entire telecom landscape in Pakistan. The most surprising story is the growth of cellular phone population, which is growing at a rate of one million new connections every month.

Besides technology, declining rates of services, both for fixed land and mobile telephony, prices of handsets have also come down to a level affordable for a vast majority of people. Tariff of mobile telephony has also declined by almost 50% during last one year. Along with this, NWD call charges have been reduced by about 30% by PTCL. Installation of payphones, being operated as public call offices (PCOs) has also become a source of massive employment. Many business areas have turned into markets for telecom and information technology related products, also creating new employment opportunities. The presence of half a dozen mobile telephone companies also offers opportunities to the subscribers to select a service provider offering attractive package.

According to Muneeza Imtiaz of AKD Securities, "With an addition of 1.2 million cellular subscribers in July this year, the country's overall mobile phone penetration now stands at 12.5%." Among the recently launched services Warid recorded the highest addition of about 300,000 new connections. However, she also said, "While these numbers paint very promising picture the understanding is despite addition of such a large number of subscribers there has been hardly any improvement in ARPUs. In fact the subscriber base is increasing but ARPUs are falling. However, given low penetration levels it is believed that aggressive marketing may raise the overall penetration to 24% over the next five years."

According to another analyst the number of cellular subscribers has already surpassed the number of fixed line subscribers. But PTCL continues to get the largest share of the total revenue generated by the telecom sector. Cellular phone is still an alternate number and bulk of the outgoing calls is still being made from fixed line number, simply because the cost per minute is much lower. The management of PTCL is responsible for the prevailing state of the affairs. The single largest reason is the monthly line rent being charged by the PTCL. The growth in cellular phone subscribers belong to the category of pre-paid customers, who have to pay no line rent and the validity of Rs 600 card ranges from six months to one year. One of the new entrants also offers indefinite validity.

One of the questions arises, how the earnings of PTCL will be affected with the growing population of cellular phone subscribers? The immediate response is that PTCL will continue to generate handsome revenue from the host of services it offers. And the government being the stakeholder of 64% interest in the company will continue to benefit, despite its privatization. However, the new management has to come up with higher value-added services to further increase its overall share in the telecom market.

The telecom deregulation policy was announced by the government in 2003 and since then a lot of achievements have been made. The policy has not only brought millions of dollars foreign direct investment in the country but also provided a fresh impetus to the economy of the country. This is the beginning of a new era in the telecom history of Pakistan. The auction of two cellular licenses alone had brought US$ 582 million. The establishment of infrastructure by these two companies and expansion by the other existing players, to expand and upgrade their infrastructure, would also result in huge investment.

The PTA collected Rs 30 billion from the issuance of new licenses for various telecom services. The new GSM cellular operators have launched their services and other newly licensed telecom operators, including WLL are fast rolling their operations. The licenses of new GSM operators stipulate that within two years these operators have to cover 70% of Pakistan's 297 tehsil headquarters. The process would help in spreading modern telecom facilities to every village and city of the country and bringing them at par with the bid cities.

The PTA has once again slammed down the request of WLM operators to allow multiple cell mobility. It decided to adhere to its initial policy, which allows WLM operators to provide service within a single cell. The WLM model becomes unviable as the operators face quality issues, particularly in the urban areas. The Code Division Multiple Access (CDMA) as a technology cannot be restricted to one cell only. The WLM operators' model can only work successfully in the urban areas if the PTA allows multiple cell mobility. However, this seems a remote possibility due to strong lobbying of cellular operators, who have invested millions of dollars. In the prevailing scenario PTCL once again emerges successful because it is focusing the rural areas as against some other operators who have decided to launch their service in the urban areas.

Though, the data is a little outdated but certainly exhibits the contribution of telecom sector in government's revenue. According to the details Rs 15.6 billion was collected from July 2004 to April 2005 in terms of GST/CED, whereas share of mobile sector in GST was Rs 7.7 billion. The telecom revenue swelled to Rs 110 billion in year 2003-04, which was Rs 9.1 billion in year 2002-03.

The advantage of growing telecom sector is that end-users are being benefited the most. They have option to choose the service provider, get the benefit of innovate telecom products at reduced tariffs and better service quality. Not only urban subscribers are drawing the benefits of telecom boom, which will continue to impact their life style positively but economy at large is getting the benefit.

According to an analyst the driving engine in today's telecom market is 'convergence'. The Internet wired and wireless is gradually becoming the primary, low-cost mode for not only data transfer but also voice and other services. This convergence has blurred the lines between telecom companies and system integrators as they pursue opportunities once regarded outside their domain. Telecom companies are branching out into network design and value-added services and system integrators are chasing telecom contracts.

According to Muhammad Ahsan Jafri, Director General (Technical) of PTA, "The general trend in cost reductions has allowed entry of more competitors in many components of telecommunications network and an intensification of competition. Mandatory interconnection of public telecom networks and the use of common standards for interconnection and operatibility have created a 'network of networks'. The open architecture allows the entry of new competitors for particular components, as well as in markets for integrated end-to-end services."

Entry and competition has been facilitated due to the open architecture of the networks and its increasing digitization. At present all voice messages are digitized close to their origination and are carried in digital form over most of the network. The data and voice networks are one, with voice treated as data with specific time requirements. This has vital implications on pricing and market structure.

The elimination of price discrimination between voice and data services can lead to drastic cut in the tariff of voice calls precipitating significant changes in market structure. These changes were evident in the emergence of Internet. Although, the Internet was not intended to be used in real-time telecommunications, despite the loss of packets, presently telecommunication companies use the Internet to complete ordinary voice calls.

OUTLOOK

The real impact of liberalization, deregulation and privatisation is not evident for the time being, at least. The most talked about impact is financial or influx of FDI. Telecommunications industry is experiencing an unprecedented revolution, which is also changing the life style of people. The development and implementation of the Internet, as a worldwide communication, is bringing people closer irrespective geographical and political boundaries. Access to information has been made possible for all. The ultimate benefit depends on the ability to get/deliver the right information, through an enabled network to the right access device, at the right time.

The fast changing telecom scenario presents enormous opportunities as well as challenges. The service providers have to maintain an edge to cater to value seekers. Mobile telephony and data communication are providing the new impetus. Ability to support a flexible and dynamic architecture has become vital. The exciting and growing trend of outsourcing among the enterprises is giving birth to 'Virtual Enterprise' with emerging category of hosted applications and communication solutions. The key requirements and differentiators for service providers may lead to delivery models to serve the virtual enterprises.

VoIP is likely the largest potential threat to the market share of local exchange carriers. The cost differential of offering VoIP vis-a-vis traditional wire line service is stark. Globally people save 90% percent off incumbent rates on calling charges but the same is not encouraged according to the existing rules and regulations. As the Internet is not necessary for VoIP network, other networks like cable television may also be used. Therefore, VoIP appears a possible facilities-based alternative to both traditional wire line and wireless telecommunication service.

While the growth of VoIP may not be significant under the prevailing regulatory regime, another area offering enormous is DSL. The deployment of DSL is growing at a fast pace and having a major impact on the market. Sector analysts are of the view that Pakistani companies will be forced to respond to the need by cutting tariff of their services. Wireless broadband technologies are being deployed and utilized by consumers and corporate sector equally. The potential of wireless broadband facilities in the rural areas is enormous, simply being cost effective.

Growing competition is driving the deployment of new technologies and service providers are responding to the emerging demands. They offer some services that are at par with international standards but they also have to excel in other areas. Since the demand is price elastic users also have advantage of moving from one service to another and from one technology to another.

It is true to say that PTA has been responding to the fast changing telecom scenario in the country and also being responsible. However, some experts believe that the regulatory regime has to be more flexible. All service providers offering comparable services, regardless of the technology platform they deploy, have to be treated in a comparable manner.

Computers are also playing a major role in the growth of telecom sector. Computer-based telephone interfaces are becoming a norm. Entities enjoying edge in computer interfaces are playing a major role in giving telecommunication a new shape. Hardware manufacturers, producing switches and local networks are playing a major role.

It is expected that slowly but steadily telecommunication will move away technical standards of signalling system seven. This is being facilitated because of development of different methods of transmission and switching. The transformation of telecommunication from traditional quite landscape of regulated utilities to the mad world of software and computer manufacturing offers new opportunities. It paves way for new entrants but also posses serious challenges to the traditional telecom companies.

With the deregulation of telecom sector right of way is emerging as a new profit centre and a new industry. The issue is emerging both at local and international levels. Telephone companies seeking permits to build wireless towers or bury wires under streets are being charged very heavily. Some of the concern segments of society are resisting the construction of wireless towers in populated areas. The awareness about the hazards is still low but once these are known to all the charges may become punitive.

Further development of telecom sector is dependent on the regulatory structure. Some analysts say, "Whatever the outcome of the legal battles may, the existence of arbitrage and the intensification of competition demand cost optimization. Prices will have to be based on cost that too has to be optimized.