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Etisalat v Du

telcom, Etisalat, Du, UAEFebruary was when the UAE’s second mobile service provider entered the market. February was when UAE mobile subscribers were offered a choice of service provider for the first time. What has changed? Not a great deal, it seems. In a pattern replicated the world over whenever a new entrant takes on an established incumbent, Du has struggled to enlarge its presence in the public mind beyond its impressive launch campaign. Etisalat continues to be the bulwark - some say the bully - having largely retained its market dominance. Amid contrasting strategies to capture the most cosmopolitan market in the region, the UAE’s Telecommunications Regulatory Authority (TRA) has done its best to stay neutral. Meanwhile, consumers, mostly expatriates looking for a cheaper way to keep in touch with their families back home, wait for the day when the ostensible competition translates into reduced tariffs.

Du entered the market at a time when Etisalat boasted a market capitalization of 77.4 billion dirhams ($21.07 billion), the UAE’s mobile penetration rate had already reached 122 percent, with about 5 million mobile phone subscribers for a population of 4.1 million. But numbers were not what Du was worried about. It was the attitude of the incumbent operator, which had held a monopoly for a long time, and liked it.

The first round went to Etisalat, which, some allege, did its best to delay the launch of Du and made things difficult for them when they did launch. Industry watchers largely agree that it was a far from smooth transition but insist the TRA was bipartisan. “Etisalat did not have the TRA on their side but they made life difficult for Du. They did not deliver what was promised but that is competition for you,” says Wael Ziada, a telecoms analyst at regional investment bank EFG Hermes. “The launch date was delayed and whatever Du had initially thought would be granted did not happen. They had to be more dependent on the incumbent Etisalat and that was definitely a reason [for the delay]. The other reason was that the courier company they hired to deliver starter kits did not deliver properly,” says Ziada. He defends Du’s policy of not getting into a price war: “When you are a small competitor you don’t compete on price, especially in a market with penetration rates of 120-130 percent of which the incumbent had some 100 percent. You tend to pay more attention to innovation and market segmentation and appealing to different market segments.”

Did Etisalat engage in dirty practice? A telecoms industry analyst who preferred to remain anonymous says dirty is a matter of interpretation. “What I can tell you is that it is natural that when you enter into a new market, the incumbent operator tries to resist your entry. But at the end of the day there is a regulator that is watching what is happening and it has to ensure that rules and regulations apply. So I cannot accuse Etisalat of delaying the entry because what Etisalat did was in the interest of its business. This is what any other company would have done. Du should have expected this and should have been more aggressive,” he says.

Blunder wonder

Consumers wonder if Du blundered by going in for clever pricing instead of wooing customers with offers of better service. The net result is that pricing is competitive but has settled at a point higher than consumers might have hoped. Surprisingly, some analysts think this is a good thing. “The talk of tariff slashing should not be given undue importance because it will cause the destruction of the value of the industry,” said one.

Besides, it’s still early days. Ziada contends Du is doing perfectly well for a start-up, and is already ramping up the extent of its coverage. “Its market share in less than a quarter of operation has still exceeded 10 percent. Operational indicators say it has been quite successful,” says Ziada. He maintains that Du gained valuable experience During the pre-launch campaign that has enabled the company, according to one estimate, to register more than 553,000 subscribers by the end of June.

Federico Membrillera, a partner at Delta Partners, a leading telecoms advisory and investment firm based in Dubai, says making life difficult for a new operator is a weapon that all incumbents have and there are many ways of doing it. “When the regularization of the fixed lines was happening in Europe, incumbents tried to stop the entry of the new entrants in the market by using every single way - from having better offers to trying to stop them on the technical side and even inter-connection delays,” he says.

Membrillera believes customers can only benefit from the competition. “Etisalat has moved quite a lot in terms of customer service in the last 24 months and that is clearly the effect of Du. You can see the change in the image of the company; customer service is much better than it used to be,” he says. Like most industry watchers, Membrillera champions competition as good for the industry and consumers: “The industry has grown in terms of penetration. According to the last figures, the penetration rate in the UAE is almost 160 percent while last year it was 130 percent. This almost 30 percentage point of penetration growth wouldn’t have happened without competition,” he says.


For its part, the TRA hasn’t been soft on Du merely because it is the new entrant. Within months of the launch the TRA sounded a warning to Du for failing to provide the fixed-line service that, per the license agreement, should have been in place by July 12. Du complained that Etisalat had not cooperated and therefore its competitor should be held partially responsible. Etisalat, as might be expected, rebuffed the charge. On network sharing, the two operators appear to have been more conciliatory. The two operators have reached an agreement on a network site sharing mechanism, and the TRA has set up a committee to oversee the sharing of network sites between the two. At present, the two operators share about 30 mobile sites across the UAE and the regulator expects the number to triple before the end of the year, with more than 200 sites under consideration.

The TRA’s treatment of Du recalls the last few months of Etisalat’s monopoly, when the authority blocked a promotion marking the network operator’s 30th anniversary celebrations. The TRA said the promotion was in violation of the Telecoms Law and of the terms of the license, and that it was also in breach of the TRA’s policy on price regulations. The regulatory body even called for an urgent meeting of the Supreme Committee for the Supervision of the Telecoms Sector and contemplated imposing a fine but then let off Etisalat with a warning. Etisalat was instructed to withdraw the offer which was attractive but amounted to locking customers into a contract with Etisalat ahead of the opening up of competition.

And on this last point, the TRA cannot escape having a blot on its record - the inordinately long delay in allowing a second operator to enter the market, especially when compared to elsewhere in the region. Membrillera, of Delta Partners, says that at the time the UAE had one operator, some countries with a lower GDP and a smaller per capita income had two or even three operators.

“They [the UAE government] wanted to protect the incumbent but I think they opened the market later than they should have. If you compare with what happened in Europe and in other markets in the region you can see that even Jordan brought free play when the penetration level was a little bit above 50 percent,” says Membrillera. He cites Bahrain and Kuwait as regional examples. “You have Kuwait - a large market not only in terms of population but also in terms of value - which has had two players for a long time,” he says.

Paying in kind.

If Etisalat bulldozed Du in some respects, Du has paid back in kind. The new operator has reportedly used its influence in TECOM, the UAE free zone telecoms service provider - which owns 20 percent of Du - to restrict Etisalat’s access to Dubai Internet City and Dubai Media City. However, TECOM and Du deny playing hardball.

For all practical purposes, Etisalat is the third largest Arab telecoms company by market value. The company registered first-half growth of 33 percent compared with the corresponding period last year, recording a profit of 3.72 billion dirhams. Its consolidated profit for the period was 10 billion dirhams, showing an increase of 2.3 billion dirhams, or about 30 percent, over 2006. The company has expressed a desire to allow foreigners to own shares, something that is not allowed at the moment, and is said to be in talks with the government on the issue. The UAE government owns about 60 percent of the company. It has also made giant strides in countries such as Egypt and has also launched GSM service in Afghanistan.

However, it is yet to deliver on a promise made last December to charge mobile calls by the second. Du introDuced its per second billing system at its February launch.

Some industry watchers think a third operator is what is called for, to accelerate what has transpired between Etisalat and Du. “If you look at the confrontations between them, this is normal part of true competition. None of them, especially Du, should expect to be pampered by the regulators or the government just because they are the new entrants. It doesn’t work that way; you need to fight for your interests,” says one.

Says Membrillera: “In principle, in a country with four and a half million inhabitants growing at the rate that it is there should be place for a third operator. If you compare these with Europe you will find countries with around the same population with even more than three players.” But, he says, given Etisalat’s strong position, a third entrant would find the going very difficult. “I don’t know how attractive the market is going to be for a third operator. It is becoming more and more a question of how to improve the customer experience than opening the market just for the sake of opening it,” he says.

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