THIRD (OR FOURTH?) MOBILE LICENSE TENDER PROVOKES

UNCLAS SECTION 01 OF 05 AMMAN 007392

SIPDIS

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PASS TO EXIMBANK
USDOC/4520/ITA/MAC/ONE/PTHANOS

E.O. 12958: N/A
TAGS: ECPS EINV JO
SUBJECT: THIRD (OR FOURTH?) MOBILE LICENSE TENDER PROVOKES
DEBATE



1. (SBU) SUMMARY: Jordan's Telecommunications Regulatory
Commission (TRC) has announced a tender for what is being
billed as a third mobile telephony license in anticipation of
the January 1, 2004 end of the current mobile telephony
duopoly under its WTO obligations. The tender has provoked
unfavorable commentary from several observers, including the
current duopolists and a start-up that plans to exercise its
option to expand its current license to include mobile
telephony. Despite the flak, the TRC - with full support of
the Ministry of Information and Communications Technology
(MOICT) - appears determined to press on with a process that
it believes will bring a necessary degree of competition to
an undercompetitive market. END SUMMARY.

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THE EXISTING MARKET PLAYERS
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2. (SBU) Mobile telephony in Jordan was established by
Fastlink, a consortium of several prominent
Palestinian-Jordanian businessmen, in 1994. Fastlink (later
bought by Kuwaiti mobile duopolist MTC) held a monopoly in
mobile telephony until 1999, when a second license was
granted to MobileCom, a subsidiary of Jordan,s fixed-line
monopolist JTC. The entry of MobileCom into the market has
had a substantial effect on mobile prices, reducing them by
up to 50 percent in some cases. However, MobileCom has never
been able to present a serious challenge to Fastlink. It
currently holds a market share of 25 percent of mobile
subscribers and 20 percent of mobile telephony revenues to
Fastlink,s respective 75 percent and 80 percent shares.
This ratio has stayed essentially constant since early 2002,
and there has been almost no growth in the total number of
subscribers ) approximately 1.2 million ) since the
beginning of 2003. Under Jordan,s WTO entry agreement, the
mobile telephony market must be opened to free competition by
January 1, 2004.


3. (SBU) A related trunking license was granted in April 2003
to paging service operator Mirsal, which transferred the
license to the New Generation Telecommunications Co.
(NewGen). NewGen plans to build a national network of
Push-to-Talk (PTT) operations, using Motorola,s iDEN
technology to create a service similar to that offered in the
United States by Nextel, and it has applied for Ex-Im Bank
support to purchase its Motorola inputs. The PTT services
would likely be almost exclusively sold to the high-end
corporate and government markets, but NewGen will have the
option to provide other services, including broad-based
consumer mobile telephony, from the beginning of 2004.

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THE MOBILE TENDER
--------------


4. (SBU) On October 13, the TRC released a public notice
outlining proposed terms and conditions for the issuance of
another license for mobile telephony services. A public
forum held October 23 on the issue invited questions and
comments on the structure of the license, before the
structure was finalized October 31. The TRC has structured
the tender as a two-step process, in which a
pre-qualification phase is followed by submissions for tender
of pre-qualified applicants and their associated partners.
These submissions will be evaluated in a "beauty contest"
rather than in a straight bid. The pre-qualification will
exclude bidders without substantial previous experience in
mobile telephony as well as those already owning a
significant stake in a current mobile operator or another
eligible bidder. The pre-qualification submissions are
tentatively scheduled to be due by mid-December, and the
tender submissions by the pre-qualified applicants would be
due by mid-February, 2004. A decision would then be reached
on the winner by the beginning of March 2004.


5. (SBU) The beauty contest conducted among the bids of the
pre-qualified applicants will be based on the proposed design
and implementation of the network (e.g., the proposed area of
coverage and proposed timetable for rollout of services),the
proposed marketing, pricing, and overall business plans, the
proposed provisions for customer care (e.g., the proposed
methodology for billing and collections),and a catchall
category labeled "Additional Measures to Benefit Jordan"
which would include such proposals as establishment of local
R&D facilities and telecom training programs or the extension
of telephony services to under-served segments of the
population such as rural residents or the handicapped. The
successful bidder will receive space in the 1800 or 1900 MHz
bands of the spectrum, currently used in part by the
Jordanian military, which will have to evacuate whatever
portion is eventually selected by the awardee. To partially
compensate the existing operators and to create a more level
playing field, additional spectrum will be made available to
the incumbents based on need, technology limitations will be
removed from existing licenses, and other license
modifications will be made if need is demonstrated by
incumbents.

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THE DUOPOLISTS RESPOND
--------------

6. (SBU) Fastlink and MobileCom have been quick to respond to
the October 13 TRC announcement. Fastlink has repeatedly
filed requests for consultations with the TRC and have met
with the regulators with no apparent success. They have
argued that the market cannot sustain another competitor and
that the introduction of such a competitor will guarantee at
least one bankruptcy, which could make potential investors
much more skittish about future investments in Jordan.
MobileCom has aired its concerns both privately with the TRC
and in public. Continuing bad blood between the two
duopolists, evidenced in a recent suit filed by MobileCom
against Fastlink alleging industrial espionage, has prevented
the competitors from cooperating very effectively, however.
In an interview with the press, the chairman of MobileCom,s
parent JTC commented that the third mobile license makes no
economic sense, but expanded on this point to imply that the
reason for market failure in the current duopoly had been
Fastlink,s predatory pricing and other anti-competitive
activities.


7. (SBU) The constant carping has grown annoying to TRC
Chairman Muna Nijem, who began the October 23 open forum by
announcing that the extension of a third mobile license was
decided and not subject to debate; therefore any input and
questions would have to address the specific terms and
conditions of the license rather than the advisability of its
issuance. She and the TRC are receiving strong support in
the decision to tender another license from Minister of
Informational and Communications Technology Dr. Fawwaz
Al-Zou,bi, who has supervisory authority over the TRC. At
the October 23 forum, Zou,bi praised the virtues of free
competition and stated that the decision to grant another
license was irreversible and not something that the GOJ was
being forced into by the provisions of its WTO accession.
Jordan had made a conscious attempt to add this provision to
the entry agreement, with the aim of creating the kind of
market-opening expansion that the TRC,s offer of the new
license means to achieve. Zou,bi reiterated this commitment
to the Ambassador in a November 2 meeting.

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IS THE MARKET UNDERCOMPETITIVE?
--------------


8. (SBU) Despite the duopolists, apparent surprise at the
launching of the third tender, the TRC had telegraphed their
move for quite a while. A study commissioned by the TRC and
carried out by USAID-funded AMIR program consultants reached
a conclusion, announced by Nijem in a speech in early
September, that the existing duopoly does not sufficiently
serve the Jordanian market, and that the addition of a third
operator would likely significantly reduce prices and
increase market penetration for mobile telephones. Jordan,s
rate of mobile penetration in 2002 compares unfavorably with
penetration rates for the Gulf states, some of which are
served by monopolies, and the duopoly in Lebanon. A
comparative study of small European countries that had
introduced a third operator showed that consumers had
realized substantial benefits from the increased competition.


9. (SBU) Fastlink predictably disagrees with the TRC,s
diagnosis of the market dynamics. Saad Abu Odeh, chief
strategist for Fastlink, says that comparison of mobile
penetration between Jordan and states in the Gulf and Europe
overlooks dramatic differences in culture, demography, and
wealth. Unlike in Europe, 38 percent of Jordan,s population
is under the age of 15 and therefore highly unlikely to be
able to pay for mobile phones or to receive them from
parents. The 27 percent of Jordan,s population below the
poverty line (part of which would overlap with the population
under 15) could also be counted out of the relevant
population of potential mobile telephone users. And lower
incomes of even those people above the poverty line creates
obstacles to mobile use not faced in Europe. A regression
run by Fastlink plotting telecom penetration against per
capita GDP for countries in the region shows Jordan to be
above the trend line; i.e., relatively over-penetrated. A
comparison of mobile telephony pricing by the Jordanian
duopolists with those charged by other operators in the
region showed the prices to be at the middle of the range,
outperforming duopolists in Morocco and Lebanon, for
instance, but falling short of the competitive rates charged
by monopolists in Bahrain (which will soon become a duopoly)
and the UAE.

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NEWGEN: NOT JUST TRUNKING
--------------


10. (SBU) Besides, says Abu Odeh, there already is a third
mobile licensee: NewGen. When NewGen completes its network
it will have full capability to offer consumer mobile
telephony services at relatively minimal additional expense;
given the small size of the high-end trunking market, it will
quickly look to mobile telephony as a source of additional
revenue. Nashat Masri, son of a former Jordanian prime
minister and the Jordanian partner in the primarily
Saudi-funded NewGen consortium, confirms that the expansion
of services from a PTT base to full mobile telephony services
is already part of NewGen,s business plan, though he claims
that this "Phase 2" was not originally envisioned by the
consortium.


11. (SBU) Development of competing PTT services on GSM will
allow Fastlink to deploy PTT by as early as March, possibly
before NewGen is able to enter the market. While NewGen,s
iDEN technology will allow it to provide higher-quality
service than that provided by Fastlink, Fastlink will still
enjoy incumbent advantages that will make it difficult to
displace, especially as it will be offering services similar
to those that will be offered by NewGen. Also, says Masri,
the Jordanian military, which had originally seemed to be a
very large potential client for the PTT services that NewGen
would offer, has obtained approval to erect its own
proprietary trunking network. Both of these developments
will cut into the revenues that NewGen had counted on in its
original business plan. Masri expects the company to be able
to maintain profitability by exploiting its high-end
corporate niche. However, "the sustained double-digit profits
that foreign investors expect" are unreachable without moving
to expand the customer base by including regular mobile
telephony services quickly.


12. (SBU) Minister Zou,bi was questioned about this
possibility by the Ambassador. Zou'bi said NewGen,s plan
makes little long-term business sense, since iDEN technology
will be unable to make the jump to third-generation mobile
telephony, expected to be present in Jordan in 10-12 years.
He said that he had tried to get that message to NewGen after
their initial application for a license. Masri says that the
prospect of the eventual extinction of iDEN technology makes
it even more critical that NewGen,s network, once built, be
exploited to its fullest extent ) by expanding services to
include mobile telephony.

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WHO WOULD LOSE?
--------------


13. (SBU) Expecting that a four-player mobile market will not
survive for long, observers are speculating about which
player would be the first to drop. MobileCom is seen to be
in as much danger as any new licensee. Unable to make money
even in a restricted market, MobileCom has an under-utilized
network (Fastlink estimates 40 percent utilization) and a
relatively price-sensitive customer base. Unlike NewGen, it
will have no high-end niche to rely on to support it through
the inevitable price wars caused by the new entries; in fact,
MobileCom is expected to retain few, if any, of its corporate
clients in the face of PTT competition from both NewGen and
Fastlink. While MobileCom has the backing of JTC (and
through JTC, France Telecom),JTC is unlikely to continue to
subsidize a money-losing subsidiary indefinitely, especially
given the scheduled end of JTC's own fixed-line monopoly on
January 1, 2005.


14. (SBU) MobileCom is putting a good face on things. Its
statements of regret at the TRC's decision are pro forma when
compared with those of Fastlink. Ahmed Salah, MobileCom's
Strategic Director, told us that while it would be impossible
for another mobile operator to recoup the cost of erecting
yet another network, it might be possible for a new entrant
to make money by using extra space on an existing operator's
network. As Fastlink's network is already almost fully
utilized, only one network is currently available to be used
in this way: MobileCom's. If such an arrangement were made,
it might even lead to a merger.


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WHY ISSUE ANOTHER LICENSE?
--------------


15. (SBU) There is no shortage of conspiracy theories
purporting to explain the new license. Masri claims that the
TRC has been pressured to issue another license by a
government that wants to prove that it is serious about its
WTO commitments, even at the cost of opening the possibility
of "ruinous competition." Abu Odeh believes that the TRC
wishes to bury the mistakes it made with NewGen ) the lack
of transparency in the granting of a license and the decision
to give NewGen exclusive rights to use iDEN technology ) by
granting a new license, awarded transparently. Other
observers cast doubt upon the transparency of the process
itself. According to Motorola country manager Motaz Hourani,
there are rumors that the limited publicity of the new tender
and the short deadline for application are intentional,
because the TRC has a favored candidate ) perhaps original
Fastlink investors such as Ziyad Abu Jaber and Habib Ghawi )
who will have a greater chance of winning a bid if interest
is low. (Hourani adds that the named parties may be
spreading this rumor themselves in order to attract foreign
partners.) The subjectivity of a beauty contest has fed this
perception, though it seems to make the most sense given
Jordan,s current telecom outlook.


16. (SBU) In defense, TRC's Nijem cites multiple expressions
of interest that she has received from both local and
international companies (the approximately 100 guests who
attended the public forum on the license appear to bear her
out). South African mobile provider MTN is interested in the
deal. They are said to see it as a low-cost way to enter the
region, from which they could expand to build networks in
other countries as their sectors begin to liberalize.
Bahrain's Batelco has entered discussions with at least one
local group. Jordanians interested in the license calculate
that even with the acknowledged limitations, there is a
potential market of one million Jordanians (out of five
million residents) that is not being served and that could be
divided profitably between three operators. None of these
potential bidders seem to have factored into their business
plans the prospect of a NewGen entry into the broad mobile
telephony market. Abu Odeh dismisses the optimistic
predictions if these bidders: "There is a lot of 'stupid
money' out there, and it should be TRC,s role to protect the
sector from it and the investors from themselves."

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COMMENT
--------------


17. (SBU) The decision to license a third/fourth mobile
provider is made. It has the commitment of the TRC and
MOICT, has generated interest from domestic and foreign
potential investors, and has been approved in its finalized
form. The issuance of the tender is a strong sign of
Jordan,s commitment to its WTO obligations and the free
market. The pre-qualification requirements would seem to
preclude bids by consortia without a good understanding of
the economics of mobile telephony. Still, it is difficult to
see how four mobile providers will survive in a market that
has seen one of its duopolists unable to profit in the three
years it has had a network. A failure in this sector will
not be a disaster, however. The outright collapse of an
operator is less likely than the sale or merger of a less
successful mobile service to a more potent competitor. The
outcome should be a reduction Fastlink,s dominance and
creation of a more level playing field that will stimulate
competition, benefiting the Jordanian consumer and the
economy as a whole. Meanwhile, the process is whetting
appetites for the end of Jordan,s fixed-line monopoly on
January 1, 2005 (septel).


18. (SBU) Conspicuous by its absence in this controversy is
any strong indication of GOJ ofiicials' interference or
favoritism in the decision to bid. There has been no strong
governmental pressure to protect the interests of the
incumbents, including NewGen; neither is there any convincing
evidence that any particular potential bidder has an "inside
track." While this is an encouraging sign of the
independence of the TRC and of maturity on the part of other
actors in the GOJ, it is not necessarily a harbinger of the
end to political involvement in commercial matters in Jordan.
Both Fastlink and MobileCom are now primarily foreign-owned
without a strong and involved local partner to call in
political pressure on their behalf. Even NewGen - which
received a license with very good terms in a backroom deal
early this year - is primarily funded by Saudis and locally
partnered with the Masri family, a clan that no longer
exercises the influence it held under the previous king.
GNEHM