egypt telecom sector further tariff cuts are not welcome

further tariff cuts are not welcome 03 June 2010telecommunications │ egyptMOBILE MARKET4Q2009 PRICE WAR - TARIFFS DOWN C32%As previously highlighted in our sector note “More Growth Than We Thought There Was”published on 4 February 2010, competition in 2009 reached its peak before and during themonth of Ramadan, which started in late August. This was triggered by Etisalat Misr’s offer ofEGP0.19 per minute cross-net (to any mobile or landline) which was lower than the two otheroperators' on-net offerings at that time. This offer initiated an aggressive counter-offer frommarket leader Mobinil during Ramadan, with an on-net tariff of EGP0.05 per minute from thethird minute during the day (6:00 am - 4:00 pm). Less than three days later, Etisalat Misrlowered its minute rate to EGP0.15, while VFE matched Mobinil’s offer.After regulatory intervention, the market returned to normal for some time, before a newwave of offers and promotions were launched in 4Q2009. For example, all three operatorslaunched an “unlimited” tariff plan in the fourth quarter, whereby subscribers paid a fixedsubscription fee on a monthly basis to have an "unlimited" number of minutes (keeping inconsideration the fair usage policy).At the end of November, Mobinil launched its "Al Masry" tariff plan, whereby subscribers paidEGP0.08 per on-net minute and EGP0.19 per off-net minute with a call setup fee of EGP0.10.VFE also launched its "Kol El Masryeen" tariff plan, which charged EGP0.19 per minute to anymobile or landlineAccording to our estimates, effective mobile tariffs in the market dropped by a significantc32% in 2009.We do not believe that2009’s price war willcontinue into 2010BUT NOT FOR LONGWe remain of the view that operators will not continue with 2009’s tariff slashes in 2010being value destructive. This view was reinforced by Mobinil’s 1Q2010 results, which saw itsvoice revenue come under pressure as its tariff cuts were not fully compensated for by a rise intraffic. Mobinil’s minutes of usage (MOUs), which measure traffic volumes, increased only by6% Q-o-Q. As a result, Mobinil saw its ARPU decline by a significant 13% Q-o-Q to EGP32.We expect ARPUs to pickup from 2Q2010, providing of course that there are no further pricecuts.Since the beginning of the year the mobile offers have been much less aggressive:International Minute Down to EGP1.99 - By all three operatorsIn early January 2010, Etisalat began offering a unified international minute rate of EGP1.99per minute, for a monthly subscription fee of EGP6.0. Shortly after this, VFE launched anidentical offer, but with a call initiation fee of EGP1.5 per call instead of a monthlysubscription fee. Less than a month later, Mobinil launched the same offer as VFE’s, but withan EGP1.0 call initiation fee.Some Temporary OffersVFE launched a temporary promotion in mid-January whereby for every three outgoingminutes per day, new prepaid subscribers received ten free on-net minutes per day to beconsumed within a month. Following this, Mobinil offered new “Al Masry” subscribers threefree minutes for every three outgoing minutes consumed, over a period of 90 days.2 / 26 pages