Iran business: Etisalat's new frontier


If Etisalat can avoid the perils of operating in Iran, its new mobile-phone business could flourish.

Widespread unease about Iran’s business environment, combined with the country’s problematic relations with the West, meant that the recipient of its third mobile-phone licence was always likely to be a cash-rich investor from the Middle East. With the global economy in a tailspin that likelihood increased, and so it was no surprise when earlier this week the UAE’s Etisalat was confirmed as the licence winner, having apparently beaten off competition from Kuwait’s Zain, Omantel, India’s Bharti Airtel and Telekom Malaysia.

The licence was offered for a fixed fee of €300m (US$400m), with the ranking of the bids based on the guaranteed minimum subscriber numbers and the share of revenue to be paid to the Iranian government—23.6% over the initial 15 years. Etisalat will have the right to provide both basic, second-generation (2G) voice, as well as more advanced, third-generation (3G) internet and email services, to its future Iranian customers. The Gulf company is likely to invest around US$1bn in constructing its network and expects to have a service ready in the next nine months.

Undoubted potential

The potential is plain to see. One of the biggest countries in the region, Iran is now home to some 73m people, and only about 40m are thought to own a mobile phone. That level of penetration is certainly higher than in places like India, but there prices are being driven down by vigorous competition, with a raft of competitors fighting over new customers. Iran, conversely, is currently being contested by just two operators—state-owned TCI and Irancell, a joint venture between South Africa’s MTN and the Iran Electronic Development Company.

Indeed, if the fortunes of MTN are anything to go by, the outlook is good. Just two years after entering the market, Irancell had captured a 30% share from TCI by offering more competitive tariffs and better all-round service. That led to a surge in revenues during the first half of 2008, rising 343.6% over the same period in 2007 to IR1,912m (US$190m). The company also turned a IR71m post-tax profit, having reported a IR344m loss during the first half of 2007. Given its balance-sheet health and overseas expertise, Etisalat is well able to launch an even lower-priced and higher-quality offer than its rivals. TCI’s network, certainly, is groaning under the weight of the traffic it bears, and yet little funding has gone into improving the infrastructure. That may partly explain why the Iranian government was recently trying to attract a bidder for a 5% stake in the company.

Etisalat will have another weapon in its arsenal when it deploys 3G, which it is entitled to provide on an exclusive basis for two years. The technology is not only cheaper to run than 2G but should hold considerable appeal in a country where fixed-line broadband is widely unavailable and more than half the population is under the age of 25—the demographic typically most receptive to new technology.

Risky business

Nevertheless, the risks are great. Critically, Etisalat will, like MTN before it, not be a majority shareholder in its new business. A 51% stake will be held by its local partner Taameen Telecom, a company owned by the Iranian Social Security Organisation, which administers pension funds for about 30m Iranians. Chances are that Taameen will defer to Etisalat on strategy, while welcoming the investment it supplies, but there is still the danger that Iranian state interference could hinder Etisalat ’s growth.

The gravest threat is that hardliners in the government might seek to tamper with the deal’s terms. A similar fate befell Turkey’s Turkcell, the original private-sector Irancell partner. After seeing its 70% stake slashed to 49% by Iranian conservatives claiming to be angered by Turkey’s ties with Israel, it effectively had its licence revoked when Mahmoud Ahmedinejad became Iran’s president. No wonder Mohammed Hassan Omran, Etisalat ’s chairman, appears so openly diplomatic. After receiving his award, he was quick to praise Iran’s Communications Regulatory Authority (CRA) for the transparency of the auction process and to proclaim Iran represented a ”very attractive investment environment”.

What’s more, given the level of investment needed to build a new mobile-phone network in such an expansive country, it could be some time before the business breaks even. The situation is made worse by the hefty share of operating revenue that the government will take. At first, Etisalat ’s focus will be on capturing customers, rather than growing margins, but it is slowly coming under pressure to spread its profits, the bulk of which are still generated in the rapidly maturing UAE market. The company has seen the global economic turmoil as an opportunity to buy on the cheap, recently adding a 45% stake in India’s Swan Telecom to its portfolio of 17 international operations and chasing opportunities in Iraq. But for all its current cash wealth, its 74m customers will mean little unless they can one day make it even more profitable.