Missed Opportunities

By Khurram Baig – 

Is monopolization or cannibalization to blame? Whatever the case, the multi-billion dollar long distance call market will likely go un-tapped

Pakistan was, for many years, a model of cellular tech growth but we have not even moved on to 3G yet, a technology that will probably soon be obsolete. No new telecom player has entered the market for over three years now.

With the incredibly fast off take of cellular technology in Pakistan, the anticipated launch of 3G and the entry of new players in the market, was an opportunity. Vodafone and Orange were interested, very interested. They are not anymore.

The efforts to launch 3G in Pakistan started in 2006. Back then, this was an opportunity. The world now has 4G and will soon be moving past that. The opportunity is gone.

To add insult to injury let me add that Afghanistan has 3G, Sri Lanka and Bangladesh have 3G. Nepal has 3G.

The Pakistan Telecom Authority has failed to auction off the license vacated by Instaphone. Of the five telecom players in the market, only four are actively investing. Only two have made the investment and are actually fully geared up for 3G. But neither one of the two expects Pakistan to get on to the 3G bandwagon before 2014. This was an opportunity.

The Pakistan Telecommunication Authority has failed three times in trying to auction off 3G licences. It is hard to say if this was because of incompetence, like copying a 3G feasibility and tender document of an Indian website, or lack of initiative, or corruption, or all three.

The end to the ban on the entry of new Long Distance International (LDI) operators into the local market was an opportunity. Perhaps, it still is but the lustre is gone and new operators don’t stand to make the sort of killing they did a few years ago. The main reason for this is the International Clearing House. This was an initiative started by Pakistan Telecommunication Corporation Limited (PTCL) and the reason given was that it would help control gray traffic.

All calls now terminate with the ICH, and PTCL, which controls over 50% of the market, and the other, smaller players get a cut, based on their market size. One does not have to be an economist to figure out two things here. One, being the market leader, PTCL gets the lion’s share of the revenues, and two, this essentially means that the customer no longer has a choice. The LDI operators can set any rate they want, higher or lower and the customer has to grin and bear it.

This is pretty much like the collusion one can find in the fertilizer industry and also to a great degree in the cement industry.

The smaller players willingly jumped on board the ICH, assuming they would get a hefty chunk of the gray traffic coming into the country. Sadly that has not been the case. PTCL, being the dominant players gets the bulk of that. And that has not been the green pasture they thought it would be.

So it is no surprise that ever since the ICH regime became effective, call rates have spiked by about 300% to 800%.

Skype has also increased per minute charges for calls to Pakistan, which is now charging 14.5 $cents per minute as standard tariff. Skype has also taken back special calling plans (bundles) that it used to offer for Pakistani calls.

According to estimates, monthly incoming international traffic to Pakistan is around 1.5 billion minutes per month, which will translate into $120-150 million of increased burden on Pakistani expats for making calls to Pakistan.

The increase has been across the board but the effect has been greatest in the Middle East. The increase has not gone unnoticed, leading to other problems for Pakistani LDIs but more on that later.

It is perhaps, also not a surprise that ever since the ICH regime has come into effect, calls have dropped in number, significantly. People are looking for alternative avenues and according to the latest data available, the number of legal minutes fell from an average of 750 million minutes per month in the first quarter of 2012, to about 600 minutes per month in the first quarter of 2013. This is a stat from the latest figures released by the PTCL itself.

So PTCL is making hay while the sun is shining because it is still making much more per minute than it was before, to a degree compensating for the drop in minutes.

But the same is not the case for smaller LDI operators who are feeling the pinch in the drop in the number of minutes. Unfortunately, they do not have the same clout as PTCL in setting rates. But this clout has been challenged on several fronts. The Competition Commission of Pakistan has called the formation of the ICH an act of collusion and termed it the creation of a monopoly. The case is in court — for now the stay on the ICH has been vacated — but the grapevine has it that the CCP is gearing up for a major assault on the ICH and all the parties involved.

But that is not all. In an order issued by Federal Communications Commission (FCC), the international communications regulator in the U.S., it has raised concerns on the higher termination rates being charged by the LDI operators in Pakistan post-ICH. The order has been issued by the FCC in response to a petition filed by a U.S.-based provider of international communication services Vontage Holdings Corp.

In their order, FCC has said the new $0.088 per minute rate (post-ICH rate) is significantly above the previous level of approximately $0.02 per minute (pre-ICH rate) in October 2012. Since the increase is not cost-based, they have deemed this practice as anti-competitive and have prohibited U.S. telecommunication providers from paying above the pre-ICH rates (US$0.02 per minute) for calls to Pakistan.

It is true that inbound LDI traffic from the U.S. to Pakistan is not huge at about 11% of total incoming traffic but the precedent this action sets could well be a catalyst for more similar action from other operators in the Middle East and the Gulf Cooperation Council countries which generate the bulk of LDI traffic to Pakistan. This is especially so considering the fact that the hike in rates for calls coming in from this region is much higher.

Of course, there is also the flip side. The parent companies of most of the domestic telecom operators originate from the Mideast region, like Etisalat of UAE (PTCL), Abu Dhabi Group (WTCL) and OmanTel of Oman (WTL). They may well choose to not do anything since the higher call rates invariably beef up their returns.

If the companies from U.S. pay only $0.02 per minute to Pakistan Telecommunication Company their earnings per share is likely to be revised downwards, Global Research said in its report. Assuming 11% incoming international traffic is from U.S., the estimated revenue loss for PTC will be Rs3.1bn, it said.

The LDI operators in Pakistan, too, don’t seem too bothered about FCC’s order.

“Pakistani LDI industry will continue with the existing ICH arrangements for inbound traffic,” said Salman Mazhar, Manager Corporate and PR at Wateen Telecom. “Any adverse order passed in any territory outside Pakistan is of no legal and material effect and as such must not be relied upon for doing telecom business with Pakistani licenced operators,” he said.

“The U.S. pays $0.16 (per minute) in Afghanistan and $0.13 (per minute) in Saudi Arabia,” he said — apparently, justifying the increase in call termination charges.

But regardless of whether international operators act to force a reduction in charges or not, the fate of the ICH is too uncertain to build confidence among investors. The FCC order probably stems from an earlier petition filed by Vonage Holdings Corp filed on October 3, 2012. Vonage argued that Pakistani LDI operators formed an ICH arrangement to create a monopoly situation with a 400% increase in termination rates (adversely, impacting number of outgoing calls to Pakistan) had resulted encouraging anti-competitive environment.

This is also the view taken by the Competition Commission of Pakistan and the Supreme Court has said the fate of the ICH will be decided by the CCP. So it is interesting that the Sindh High Court has vacated the stay against the ICH and annulled the notices sent by the CCP to LDI operators. It will be an interesting battle.

In such a scenario, the multi-billion international call market in Pakistan is not likely to attract any new players. The future is too uncertain, even more than it generally is in Pakistan. It may be a multi-billion market, but the return on investment is very uncertain right now. There are no guarantees. What if the rates go back to pre-ICH levels? What if the ICH is blocked by local courts? There are way too many ifs here.

The writer is a print and broadcast journalist with expertise in information technology based in Karachi