Interview: Akil Beshir of Telecom Egypt

Published on:

Akil Beshir is leading Telecom Egypt into a competitive world — though at home that will be 12 months later than he expected. Meanwhile the company is reducing tariffs in expectation of a new fixed-line operator and is building up its role at the junction of the world's biggest international cable networks. By Alan Burkitt-Gray

Akil Beshir

Akil Beshir: Vodafone Egypt is the best investment we ever made. It's a very profitable operation

The telecoms landscape in Egypt has changed dramatically over the past couple of years — and it is set to change even more over the next few. Though not as quickly as we expected when Global Telecoms Business arranged an interview with Akil Beshir, the chairman and CEO of Telecom Egypt, not only the incumbent but also a 45% shareholder in Vodafone Egypt.
One of the biggest issues on the mind of Beshir and his colleagues in Telecom Egypt is the arrival of a fixed-line competitor into the market. A total of 12 companies had bought the specification handbook from the National Telecom Regulatory Authority and many of them were expected to bid by the deadline, September 18 2008.
But about a week before that deadline, the NTRA decided to postpone the auction for a full year. Postpone, but not cancel: telecoms competition is gradually spreading throughout the world, and — as an attractive market — Egypt is firmly on the agenda for competitors.
Amr Badawi, head of the regulatory body, blamed the world's financial turmoil for the decision, following discussions between the NTRA and the 12 likely bidders. There are, he said, increasing inflation rates and the increasing prices in the international markets for computers and telecoms in Europe and the US, and companies are spending less than they might have.
And the second licence will be expensive — not necessarily the licence fee itself, but the capital investment that it will require. The NTRA puts this at $1 billion in the early years of operation.
Meanwhile, the NTRA is still looking at WiMax technology ahead of the auction, now expected in late 2009.
With 81 million people, of whom 31% are aged 14 and under, Egypt is and will continue to be a highly attractive market — not only to Telecom Egypt and the mobile operators, but to whichever company wins the auction next year.
Added to that is the fact that Egypt is at the junction of three great continents of the world: telecommunications cables from Europe to Asia — that is, the Gulf, India and further afield — and from Europe to Africa are naturally routed through Egypt and Telecom Egypt has a key role in connecting them together.
In 2008 alone, the company has announced participation in TE North, which will run from the north coast of Egypt, along the Mediterranean to southern France, and will also cross Egypt on land to the Red Sea.

Competition delayed

Back at home, even though the arrival of a second fixed-line operator has been delayed, "we need to adapt", says Beshir.
Telecom Egypt is now relishing its position as a wholesale operator — its position at the heart of those international cable networks has given it that experience — and the company is readying itself to work with competitive carriers in the Egyptian market, he says. "That's very important for the future for us."
Of course, TE is involved in the most vibrant section of the telecoms market in Egypt via its shareholding in the local Vodafone operation. "That is the best investment we ever made," he says. "It's a very profitable operation and it has a very positive contribution."
According to TE's latest results, Vodafone Egypt generated E£2.8 billion ($514 million) in revenue and E£737 million profit in the three months ending June 30 2008. The company has 15.2 million customers.
In comparison, TE itself produced E£2.4 billion of revenue in the same three months, with consolidated net profit of E£681 million — so, roughly comparable. That was with 11.2 million fixed lines.
Vodafone has a 42% market share in number of subscribers in Egypt, says Beshir. But higher revenues than its competitors mean it has a higher share of the revenue — about 56%, he calculates. "And 59% in profit. They are a much more profitable operation."
It is a joint venture, but the Vodafone group has a management contract, and supplies five of the nine directors on the board.

International partnership

"We have signed a cooperation agreement so they are using our international gateway, which is about 40% of the total international traffic for Egypt. We have also developed joint programmes on fixed-mobile convergence." And Vodafone shops also sell Telecom Egypt services. "We have a real partnership there," says Beshir.
Strictly this partnership applies to Egypt only, Africa and the Middle East are both fast-growing markets for telecoms, so could it extend beyond Egypt's boundaries?
"We are looking for international opportunities," he confirms. "If there is a mobile element we will discuss it with Vodafone. We don't have a case so far, but this is the agreement: wherever there is a fixed and mobile opportunity in the region we will discuss it with them."
We turn back to the fixed market within Egypt, and the arrival — later next year, now — of a competitor, along with local loop unbundling and all that goes with it. How are Beshir and his colleagues in Telecom Egypt preparing for that day?
"We are preparing for the arrival of a competitor in several ways — leveraging our infrastructure and increasing our wholesale revenues," he says. "The second operator will also be a customer. It will use our infrastructure for quite some time, and there will be unbundling of the local loop, which is being initiated."
For a period of time the second operator will not be able to offer international services to Telecom Egypt's mobile customers. Vodafone uses Telecom Egypt's gateway exclusively, but Orange associate Mobinil also has to use Telecom Egypt at the moment. And, in advance of the competition, Telecom Egypt is negotiating a deal with Mobinil to keep its international traffic.
The third mobile operator, Etisalat, has its own international gateway, but still uses Telecom Egypt for some incoming services.
"When the second operator starts, for two years it will not sell international service to mobile customers."

Tariff rebalancing

Of course, the biggest effect of competition is on pricing — and Telecom Egypt has anticipated the arrival of a second operator by introducing new tariffs in July 2008.
"The most important element of this was reducing the connection fee by 50%." The company charged E£500 ($91) to install a new line and this is now E£250, "to catch all the remaining demand in the market", he notes.
"We have also reduced the fixed to mobile tariff." The company has seen a shift from fixed to mobile services — mobile substitution, in other words — because of low tariffs for calling mobiles from mobiles. "We are now positioning our tariffs in a way that the fixed line would be competitive with mobile."
The rebalancing wasn't all downwards: the monthly subscription fee went up, and local call rates — once very low — went up.
"The other area we're focussing on is broadband," says Beshir. "We can see the growing need for broadband. Penetration was limited by the cost of connections, and the affordability of a PC."
Both areas have been addressed, he says: "We now have very competitive monthly subscriptions for broadband and there are several initiatives for having PCs."
Telecom Egypt has two roles in the broadband market: it is a wholesale provider to independent ISPs, but it also has its own ISP, TE Data, which has a 66% market share. There are now about 450,000 DSL customers in Egypt. "That is very low but it is growing at 25,000 every month."

Subsidised broadband

About two-thirds of these subscribers are connected at 256 kilobits a second, the entry level. "This service is subsidised by the government." It is sold at the equivalent of about $8 a month.
And people in Egypt, as in many other emerging markets, share their broadband connections, he says. "The estimate is about three to one," making the total broadband availability around 1.2 million homes if his figures are right. "Two thirds of them are not paying," he adds. "One person in the building has the subscription and then shares it with the neighbours." An ISP is paid a subsidy of E£25 for each entry-level subscription.
In order to reduce misuse, there is a monthly limit of two gigabytes, he says. That's tending to encourage customers who used to share to get their own connections.
One of the standard features that incumbents have to face when meeting competition for the first time in years — "154 years", steps in Beshir: that's how long ago the old Department of Telegraphs started business — is that they have fairly aged equipment, because they haven't been in a competitive environment. Does that apply to Telecom Egypt, and does that mean he has to do some fundamental restructuring — including of areas such as staffing and customer service as well as technology?
"We started this journey eight years ago," says Beshir. That was when Telecom Egypt was preparing for a share flotation — delayed, as it happens, because of the dotcom crash. Now the company is quoted on the Cairo and London stock exchanges. "It was not until December 2005 that we could have our IPO, when the government divested 20% of the shares," he says.

Manpower challenge

"But we started the transformation journey at that time" — in 2008. "We got a whole new board." The new directors, including Beshir, came from the private sector. "The more difficult challenge was the manpower."
At that time the company employed 57,000 people. "We started a very attractive early retirement plan, and more than 8,000 people took that. But the challenge was that not only were we overstaffed but that we had a great shortage in many skills — such as engineers. So we had to hire 10,000 people with the right skills."
Now the company employs 54,000, but productivity has more than doubled "because we have more than doubled the number of lines that we had at that time with fewer people", he adds. "We are still overstaffed but not grossly. We have started another early retirement plan. We intend to lose about 5,000 people over five years."
The labour cost is about 17% of revenues, says Beshir, "which is not alarming", and labour costs are stable. And those who retire are not being replaced.
The network has been 100% digital since 2004, he continues. "It's a modern network and there's very little we need to do now." The company "cannot afford to be pioneers in new technology", but it looks at new investments carefully. "We want them to be well proven in other markets."
So, the network needs very little investment, he adds. "Our capex is decreasing dramatically." For about three years it was about E£3 billion a year, but in 2006 it was E£2.7 billion and in 2007 it was E£1.4 billion.
"Right now we have more than 25,000 kilometres of fibre optic cable covering 95% of the populated land of Egypt." The rest of the population is being addressed by CDMA wireless technology: Egypt, of course, has a population that is highly concentrated along the River Nile, the delta and along the Mediterranean coast, with a very low density elsewhere. "It is very difficult to wire, or not economic. Those areas are being addressed by a CDMA wireless network."
On the whole, Egypt "is a very easy country to wire", he admits: "It's very flat, with the exception of very few areas, and most of the population lives on 5% of the land."
Some of the rest of the capex is being spent on IT, he adds: a new billing package from Convergys is to be introduced in January 2009, "because we are introducing new services, and marketing initiatives, and different plans for our customers".

Equipment vendors

And the company is spending on revenue assurance and fraud detection, he notes.
The company has traditionally used a number network equipment vendors — Alcatel-Lucent, Ericsson, Nortel and Siemens — now NSN — with one, NEC, no longer supplying the company.
"We hope to introduce Huawei and ZTE," says Beshir. "This CDMA network — most of it is Chinese. It's very complex, and they're good."
Meanwhile Beshir is looking forward to the implementation of the new international cables. "I cannot think of any cable, east to west or north to south, that does not pass through Egypt," he says with a little exaggeration.
Telecom Egypt is usually a partner in club cables going through Egypt, but what prompted the idea of TE North was a study of the expected internet traffic that would be generated in Asia — especially India and China — in the next few years, "and we realised there would be a shortage of capacity". He expects that India and China will generate about 35 terabits a second of data by 2012 "and we estimate one third of that will go in this direction".
Telecom Egypt owns 100% of the TE North cable. "We are building a cable starting from the eastern side of the Red Sea, directly into Egypt." It will reach the Mediterranean at Sidi Kerir, near the port of Alexandria, from where it will cross to Marseille.
Telecom Egypt has already sold about 30-35% of the capacity of the cable to three operators with connections further afield, and has recovered its planned investment. The revenue from those operators is about $170 million — comfortably exceeding the $125 million the company is spending with Alcatel-Lucent on the submarine stretch and $15 million on the part across Egypt.
That means a paper profit already of $30 million. Not bad for a company about to face the rigours of competition at home. GTB 

Operational highlights for Telecom Egypt

Operational highlights for Vodafone Egypt