Iran Strips Etisalat of Mobile Licence and Awards to Zain

The recent winner of Iran's third mobile licence, the Taameen Etisalat consortium, has had its licence revoked by the Iranian telecoms regulator, according to Agence France-Presse (see Iran: 24 December 2008: Etisalat Wins Iran's Third Mobile Licence). Ministry official Mohammad Reza Farnaghi Zadeh said, "The Taameen Etisalat consortium has been stripped of the licence because it has not fulfilled its commitments." The consortium, in which Etisalat has a 49% stake, stated that it paid US$400 million for the licence, but this claim has been denied by Telecommunications Minister Mohammad Soleymani. The regulator's website quotes Soleymani as saying, "The Taameen Etisalat consortium has gone out of the tendering process because it has neither given the necessary guarantees nor paid the licence fee in time." Etisalat responded to the claim by saying that it is "weighing its options before responding officially", adding in a statement that it still considers entering the Iranian market an "important and profitable investment." The licence has now been awarded to the runner-up, Kuwait mobile operator Zain, which has teamed up with two state-run Iranian pension funds for its bid.

The Etisalat consortium announced the licence award in December 2008 with a validity of 15 years and a revenue share of 23.6% of an agreed business plan with the Iranian government. One of the key advantages of the licence was the two-year 3G exclusivity period.

Up until now, the Iranian mobile market has been underserved due to a lack of liberalisation and currently has only two main mobile companies. This has led to mobile penetration levels many times lower than neighbouring Arab countries. Currently, mobile penetration stands at around 41.8%, equivalent to 29.7 million users, measured at the end of 2007. Prior to 2005, the incumbent, Telecommunications Company of Iran (TCI), operated two types of mobile services, with one under the brand 'Taliya', providing pre-paid services, but limited to 6 million subscriptions and operated in only 15 cities. The second, Mobile Company of Iran (MCI), provided both pre-paid and post-paid services, as well as international services, and operated in 1,016 cities. This effective monopoly kept penetration levels below 15% until the entrance of Irancell, which is 49% owned by MTN. Irancell won a mobile licence towards the end of 2005 and began operations by the end of 2006. This stimulated the market and mobile penetration levels reached 23% in the year of its launch. As of April 2008, Irancell stated that it had a 30% market share and the MCI/Taliya partnership held the remaining 70% with around 23 million customers, compared to Irancell’s 9 million (see Iran: 1 September 2008: Qtel and Etisalat Consider Third Iranian Mobile Licence).

Outlook and Implications

The licence revoke has come as a major blow to Etisalat as it could have been its jewel in the Middle East. Entrance in Iran was a key part of Etisalat's Middle Eastern strategy as the country offers low mobile penetration and a high population (the highest in the Middle East). However, the news is clearly favourable for Zain, which is keen to expand in the MENA region. The licence will bring its Middle Eastern coverage to seven countries and its total to 24 countries in Africa and the Middle East.

• Zain Strategy: Zain has traditionally invested in markets with high populations and low penetration rates—typically emerging markets. Zain’s other Middle Eastern markets typically have very high mobile penetrations, mostly over 100%, but the Iranian mobile licence will offer significant diversity to its Middle Eastern investments. Zain also recently announced a new initiative, called 'Drive 2011', which is aimed at helping the operator reach its long-term objective of becoming a top 10 global mobile operator (see Middle East and North Africa: 5 May 2009: Zain Restructures Global Operations Through Launch of "Drive 2011" Initiative). Drive 2011 will advance Zain's operating margin by 5% in 12 months by improving operating efficiencies in managed outsourcing, centralisation and leveraging capabilities. Additionally, 13-15% of jobs will be shed across the group.

• Market Share Outlook: The second operator has done very well to take a 30% market share within a few years of operating, which is on a par with most other Middle Eastern operators that have broken monopolies. Etisalat's key benefits lie in its strong Middle Eastern brand and its entry into a low-penetrated market. The availability of new customers will mean that it can achieve a market share of almost 15% within the first year of operations.