Out of Africa: The Egyptian Telecoms ChallengerPublished: April 20, 2009 in Knowledge@Wharton
By all measures, the mobile telecommunications industry is rapidly approaching critical mass. More than 50 countries have a greater number of cell phone subscriptions than people. The U.S., with more than 270 million cell phone subscriptions (nearly 90% market penetration), has one of the lowest per capita subscription rates in the industrialized world. Global mega-firms such as Vodafone, Telefónica and T-Mobile now compete for dominance in an ever-shrinking list of countries that have yet to go wireless.
In this rapidly evolving industry, one Egyptian company is proving that it is never too late to go global. After consolidating its presence in Africa, South Asia and the Middle East, Orascom Telecom Holding (OTH) is now prepared to take some developed markets by storm. OTH, founded by Egyptian billionaire Naguib Sawiris, has experienced an impressive rise to world-wide prominence as the result of some extremely bold ventures. While the company initially lacked significant experience, it quickly learned the rules of the global telecoms game and then broke them with aggressive entry into such hostile operating environments as Iraq and Zimbabwe. The lessons learned from these experiences have helped transform OTH from an Egyptian domestic service provider to a global incumbent, serving more than 74 million subscribers worldwide.
According to Hassan Abdou, CEO of Weather Investments II (the parent holding company of OTH), becoming a dominant world player was not originally part of OTH's strategy. However, first-entry into emerging markets soon became a defining feature. When asked about the value of the first-mover advantage, Abdou stated plainly that in this industry "being the first-mover is everything." While this is certainly no secret, it raises the question of how far one is willing to go to secure this type of advantage. In the case of OTH, the answer is simple: Anywhere, even North Korea. In partnership with the North Korean government, OTH has launched that country's first commercial mobile telephone network. How did an Egyptian mobile service provider end up in North Korea? The story, like so many tales of antiquity, begins on the banks of the Nile River.
When the Egyptian government announced its plan in 1997 to issue a second license for mobile phone operations in addition to the government-owned license, Naguib Sawiris recognized the opportunity. However, despite his substantial personal and family holdings, he had no experience as a telecoms operator. So he enlisted the support of France Télécom in a competitive bid against Vodafone. He lost. Undeterred, Sawiris simply bought the government-owned company along with its license. That was the beginning of Mobinil, the network that has, according to Abdou, "enabled OTH to build a track record ... [from] which it could branch out and bid legitimately for other licenses in other countries." OTH wasted little time in doing so and, by 1999, had expanded into nearby Jordan. A year later, OTH simultaneously entered 11 different sub-Saharan African nations. While costly, this strategy of rapid expansion marked OTH's emergence as a global player.
The strategy was simple: to be the telecommunications provider to Sub-Saharan Africa. Sawiris envisioned a broad expanse of contiguous OTH coverage across the heart of the African continent. Mounting regulatory constraints imposed by tempestuous governments ultimately hampered this effort, but the rapid expansion into sub-Saharan Africa left OTH not only with the dubious prize of a struggling Zimbabwean operation, but also with a newfound appreciation for the importance of understanding the political environment of business. Sawiris and the rest of the OTH leadership are quick to admit that they were unprepared for sub-Saharan Africa, stating that their holdings in this region generated 10% of company revenues but took 95% of their management resources. They had already set up shop but then had to negotiate regulatory terms that would allow consumers to purchase phones. These negotiations rarely reached a satisfactory conclusion and, as recently as May 2008, Sawiris called "on African governments to reduce the taxation and regulatory burden on mobile users so we can maximize the positive impact of this investment."
In addition to regulatory woes, OTH also encountered meager average returns per user in the smaller sub-Saharan nations due to limited population concentrations with little money to spend on mobile phone service. Abdou suggested that, in hindsight, "a better strategy might have been to focus OTH resources on large population centers, such as Nigeria, rather than on numerous small countries." Major regulatory challenges, limited profitability, and growing debt led OTH to sell off the majority of its sub-Saharan telecommunications operations as 2006 approached. The firm streamlined operations and focused on its networks in Tunisia and Algeria, where operations were more profitable. This decision to prioritize its core African operations proved efficient for OTH as its Algerian network alone (popularly known as Djezzy) currently accounts for roughly half of all OTH profits.
Next on OTH's agenda was Iraq. Reeling from the U.S.-led invasion and spiraling into a bitter insurgency, the country was certainly not the most ideal investment environment in 2003. With the nation in ruins, OTH unveiled its most successful enterprise to date, the Iraqna network. Translated as "our Iraq," the brand became a symbol of solidarity in the midst of national crisis. Moreover, OTH's policy of hiring local labor and management gave the brand a local image and offered OTH a competitive advantage in the crowded telecoms marketplace over rival Vodafone. Where the British firm had developed a globally consistent brand name and logo, OTH now had a collection of local brands, each of which had a unique national appeal to its customers.
As the expiration of its Iraqi license neared, OTH faced the decision of whether or not to continue operating in the ravaged country. Although the venture had been wildly profitable, deteriorating security conditions had taken their toll on management. OTH employees endured threats, attacks and kidnapping at the hands of insurgents. At one point, 75% of OTH's employees in Iraq were security guards. Despite this, Sawiris wanted to continue operating the Iraqna network. The decision to sell the network came only after OTH's license expired. In the bidding cycle that ensued, OTH set a hard limit on what it was willing to pay for the new license. When the price exceeded this limit, OTH recognized that the time had come to walk away. According to Abdou, OTH sold the Iraqna network for $1.2 billion in 2007, a 350% return on its investment. With proven success in building, operating and divesting a network in such a hostile environment, OTH now headed east to take advantage of one of the few remaining untapped telecoms markets.
Since the first-mover advantage is of such value to OTH, it has invested $400 million to establish the first commercial cellular network ever launched in North Korea, dubbed Koryolink. In lieu of a licensing fee, Sawiris devoted some of his private capital to North Korean development projects in exchange for a 25-year operating license with a four-year exclusivity clause. On December 15, 2008, a year after opening its North Korean headquarters on the top three floors of the 103-story Ryugyong Hotel in Pyongyang, OTH announced the commercial launch of CHEO Technology.
This new subsidiary is a 75/25 joint venture between OTH and the North Korean state-owned Korea Post and Telecommunications Corp. "We are making history in a country that is developing and opening up in a remarkable way," noted Sawiris. As a further expression of confidence in the economic prospects of North Korea, OTH opened Ora Bank in Pyongyang the following day. The new financial institution, also a joint venture with an existing government enterprise, will process Koryolink subscription payments and handle remittances from abroad. Despite Sawiris' faith in these investments, to what extent North Korea will open its economy remains to be seen. Regarding Koryolink, a report from the Korean Central News Agency on the network launch "provided no details on the terms of service, the types of phones it might accommodate or who would be able to utilize it." At present, North Korean citizens face restrictions on purchasing and owning cellular phones and are not permitted to make international phone calls. This fact alone was enough to dissuade other potential entrants from seriously considering North Korea.
When asked to explain what led to the decision to invest in such an isolated and foreboding telecommunications environment, Abdou argued that "with no competition and no licensing fees, it was a golden opportunity for OTH." The venture, he added, "is, in fact, relatively low-risk when compared to the potential reward. In most other countries, the licensing fees are a significant portion of the initial investment, but in this endeavor there was no such cost." Should the country open up to international business in the future, OTH will be years ahead of potential competitors, with its only investment being the fixed cost of developing and maintaining the network.
Entering North Korea
From the perspective of a company that is willing to accept risk and stake a claim in one of the world's few remaining telecoms greenfields, the timing and circumstances of entry into North Korea are as good as they are ever likely to be. Abdou estimates the potential value of the North Korean telecoms market at $3 billion to $5 billion. If the market does hit that target during the company's exclusive license period, OTH stands to reap a huge return on investment, one that would rival the landmark Iraqi venture. With everything in place for success, OTH is now waiting for the inscrutable course of North Korean politics to run in its favor.
In an interview with CNBC Europe earlier this year, Sawiris stated that "the world is coming to an end when it comes to mobile telephones, so the opportunities are very scarce. You really have to go wherever you get a chance and [North Korea] is one of the last."This realization has coincided with a cultural shift at OTH. After the sale of Iraqna, the work environment at OTH changed. The entrepreneurial spirit that had characterized the company during its period of rapid expansion was replaced by a more conservative mood as the company matured in its business approach, internal systems and size.
However, the entrepreneurial spirit, tempered by experience, lives on in another part of OTH, Telecel Globe. With a management team of three, the new entity is designed to be lean and cost-conscious. Its goal is to develop a localized entry strategy for small to medium emerging markets. Telecel Globe has lately acquired networks in Burundi and the Central African Republic, and is rumored to be searching out markets as far-flung as Mongolia and Cuba.
According to the OTH website, "We believe that by positioning ourselves as the primary provider of communication services, we are shaping the future of the markets we serve." Once a late-coming emerging market operator, OTH has now turned itself into a global telecoms innovator. With its recent foray into banking, OTH plans to pioneer mobile tele-banking. Abdou explained the potential of this new business on OTH's Pakistani Mobilink network as follows: "Half of our profits come from Algeria, but half of the subscribers are in Pakistan. With 35 million subscribers in Pakistan alone, if even 1% of our subscribers take advantage of [mobile tele-banking], that's 350,000 customers."
Through its trials in Africa, Iraq and North Korea, OTH has established itself as the upstart emerging-market service provider. While Telecel Globe scours the world for the last remaining patches of greenfield, OTH has now entered the developed North American marketplace through acquisition of a Canadian network, Globalive Communications. In an industry with rapidly diminishing room to accommodate late-comers, OTH grew up quickly and has elbowed its way to global prominence, where it now stands ready to shape not only the local markets in which it operates, but also the future of the telecoms industry worldwide.
This article was written by John Ihlenfeldt, Kristian Karafa, Katie McCord and Farheen Qadir, members of the Lauder class of 2010.