MOBILE TELEPHONY COMPETITION EXPANDS

C O N F I D E N T I A L SECTION 01 OF 04 AMMAN 005403

SIPDIS

USDOC 4520/ITA/MAC/OME/PTHANOS

E.O. 12958: DECL: 06/26/2009
TAGS: ECPS EAID PGOV KPRV JO
SUBJECT: MOBILE TELEPHONY COMPETITION EXPANDS

REF: 2003 AMMAN 7392

Classified By: AMBASSADOR EDWARD W. GNEHM FOR REASONS 1.5 (B) AND (D)


1. (C) SUMMARY: Jordan's Telecommunications Regulatory
Commission (TRC) has granted a new mobile telephony license,
on a preliminary basis, to a consortium of local Jordanian
businessmen and Kuwaiti investors. The new entrant should
further enhance the competitiveness of Jordan,s
telecommunications sector. However, the machinations and
recriminations surrounding the actual granting process are a
reminder of the King's essential role as Jordan's engine of
economic reform. They may also herald a fight ahead as the
TRC moves to end Jordan,s fixed-line monopoly. Meanwhile,
the promising launch of the new XPress combined trunking and
mobile telephony service threatens both the positions of the
incumbents and the viability of the new licensee. END SUMMARY.


2. After repeated delays, the TRC announced on June 7 that
Umniah Telecom and Technologies, a consortium 65
percent-owned by a group of Jordanian businessmen and 35
percent-owned by Kuwait,s Al-Ghanim group, had been selected
as the top choice for a new mobile telephony license. The
group, led by the former CEO of Jordan,s dominant mobile
provider Fastlink, has entered negotiations with the TRC on
the specifics of the license it will be awarded.

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LOW INTEREST LEADS TO A BUYOUT OFFER BY INCUMBENTS
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3. (SBU) While it now appears a fait accompli, the awarding
of a third (or fourth ) Reftel A) mobile telephony license
in a market as small as Jordan,s has been no easy task.
After tendering in November, the TRC was disappointed to
receive initially only six bids, with only four consortia
pre-qualifying. Of these four bidders, Bahraini monopoly
provider Batelco and a consortium made up of Qualcomm
(managing partner) and Saudi Oger (silent investor) decided
that the license was not worth further effort. Only two
bidders ) Umniah and the Luxembourg-based Investcom, backed
by the Lebanese Makati brothers ) chose to submit full
applications for the new license. The paucity of final bids
brought new worries to both the TRC and the government as a
whole and presented the incumbent mobile providers, MTC-owned
Fastlink and Jordan Telecom (JT)-owned MobileCom, with an
opportunity.


4. (C) According to a TRC source, shortly after the final
bids were submitted, representatives from Fastlink and
MobileCom approached Prime Minister Faisal Al-Fayiz with an
offer to pay the GOJ to cancel the new license. The
incumbents were prepared to offer a one-time transfer of $82
million to the Jordanian national treasury in return for the
cancellation of the tender. TRC CEO Muna Nijem, informed of
the offer, had the TRC staff calculate the potential value of
the deal for the incumbents. The TRC found that Fastlink
alone stood to gain over $200 million in profits from the
absence of a new licensee.


5. (C) The TRC presented its objections to the PM, who
reportedly still favored the proffered deal and set up a
meeting with King Abdullah. At the meeting, which included
the PM, Nijem, representatives from the two incumbents, and
Minister of Information and Communications Technology Fawaz
Al-Zou,bi, the PM reportedly presented the buyout deal to
the King in the context of the lack of bidder interest in the
license. The King then asked Nijem,s opinion on the deal
and, upon finding that she opposed it, told the PM that he
should support the decision of the regulator. The tender
went ahead over the continued objections of the incumbents,
but remained in some doubt up until the the actual TRC
announcement of the provisional winner.

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FASTLINK LASHES OUT AT THE TRC...
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6. (SBU) The dominant incumbent, Fastlink, has fought tooth
and nail, from the very beginning of the tendering process,
to stop the new entrant. As an adjunct to its unsuccessful
buyout of the new license, Fastlink applied a great deal of
pressure on the TRC to stop supporting the new license.
Throughout the period during which the licensees were being
considered, CEO Mohammed Saqer and other Fastlink executives
blasted the TRC both in the press and in private as a
shortsighted, compromised institution driving the industry to
ruinous competition that would result in a market failure for
at least one of the players.


7. (C) Fastlink also has embarked on a whispering campaign
portraying the TRC - ironically - as compromised by
non-transparent dealings. In separate meetings with USG
personnel, both Fastlink,s Deputy CEO Bassem Rousan
(explicitly) and its former Chief Strategy Officer (more
circumspectly) explained the new license as an attempt to
paper over the distortions created by a shady,
behind-the-scenes deal that produced the trunking license
held by XPress parent company New Generations
Telecommunications (NewGen). According to Rousan, Nijem had
initially (in 2002) tried to deny NewGen,s application for a
trunking license on a number of grounds. Jordanians involved
in setting up the corporation, however, had approached King
Abdullah at the World Economic Forum that year in Davos, and
had persuaded him (no mention was made of how) to support the
license. The King had then contacted Nijem directly and had
directed her to approve the license. Nijem, said Rousan,
unwillingly granted the license but knew that the
non-transparent way in which it had been granted would
eventually be discovered. She had therefore initiated a
tender to award an unneeded fourth mobile license in a fully
transparent manner, thereby diverting attention from her
supposedly less savory role in the NewGen license at the cost
of the health of the mobile telephony sector in Jordan. (A
TRC source confirms that the King intervened to support the
NewGen license, but says that the decision to grant a fourth
mobile license was taken before the trunking license issue
was resolved.)


8. (C) FastLink hints that its strategy in dealing with the
Umniah will be based primarily on denying the new entrant any
cooperation, in solidarity with MobileCom. "As long as
MobileCom does not panic," says Chief Strategy Officer Motaz
Hashem, "we don,t foresee any serious trouble."

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...BUT MOBILECOM HAS MORE TO FEAR
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8. (SBU) MobileCom has held its cards much closer to its vest
than Fastlink. Outside of its alleged participation in the
backroom offer to pay for suppression of the new license, it
has been virtually invisible in the debate. Executives have
refused to talk to either the Embassy or the press, other
than to express anodyne worries that Jordan,s mobile
telephony market has grown too heavily saturated. This
contrast with Fastlink,s slash-and-burn tactics may have
stemmed from MobileCom,s continued interest in pursuing
several long-sought-after measures that have now been granted
by the TRC in order to remove anti-competitive barriers that
would hinder market entry of the new licensee. These new
measures, which include mandatory reduced rates for calls
from Fastlink numbers to other networks, and, more important
number portability, diminish some of Fastlink,s incumbency
advantages which had aided it in retaining its command (a 75
percent share of subscribers) of Jordan,s mobile telephony
market.


9. (SBU) While TRC,s announcement of these new measures may
sweeten the bitter pill of the new competition for MobileCom,
the number two network is on much shakier ground than
Fastlink. In FY 2003, for the first time, MobileCom made an
EBITDA net profit; it is still well in the red overall. And
the focus of MobileCom,s parent company, Jordan Telecom
(JT),which has supported MobileCom through four years of
substantial losses, is being diverted by the coming end (at
the end of 2004) of JT,s own monopoly. MobileCom is
anticipating an IPO for some of its stock as JT attempts to
recoup some of its investment, and it is not in a very good
position to ward off yet another challenger.


10. (SBU) MobileCom is especially vulnerable to the business
plan that Umniah presented to the TRC. Umniah will focus on
pricing competition, targeting lower-income mobile users.
This entry will echo MobileCom,s own 1999 entry strategy,
which has left it with a disproportionately large number of
such users. And contrary to initial expectations, Umniah
plans to erect its own network rather than using spare
capacity from MobileCom,s network.

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UMNIAH,S STRATEGY GELLS
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11. (SBU) Umniah,s entry strategy into a tight market is
becoming more clear. Chinese telecom equipment maker (and
accused Iraq sanctions buster) Huawei has taken a small stake
in the Umniah consortium and will likely provide the majority
of the new licensee,s inputs at low cost. This should keep
down the initial cost of installing network infrastructure,
though the JD 250 million ($352.5 million) Kuwaiti investment
would in any case be able to cover the costs of a build-out.
It also marks another step in Huawei,s aggressive expansion
in the Middle East.


12. (SBU) Umniah appears to be positioning itself as a
"Jordanian" alternative to the Kuwaiti-owned Fastlink and the
heavily French-influenced MobileCom. It forced local papers
to publish a correction to an article that Umniah claimed had
overemphasized the substantial Kuwaiti investment in Umniah
at the expense of the Jordanian dominance of the
consortium,s ownership structure. Upcoming IPOs on the
Amman Stock Exchange for both incumbents may conversely be
intended in part to reverse this perception.


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A SUCCESSFUL LAUNCH FOR XPRESS
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13. (SBU) XPress launched its nationwide Push-to-Talk (PTT)
trunking service June 6, after a massive advertising blitz.
The service, recipient of a $49.4 million loan from Ex-Im
Bank because of its heavy use of US-manufactured Motorola
inputs, has targeted the high-end corporate market with flat
monthly fees for PTT services and promises of enhanced
customer service. Handset costs are being heavily subsidized
for early buyers in an attempt to expand the network of users
quickly and create economies of scale. However, with
start-up capital of $80 million substantially multiplied by
low-cost financing such as that provided by the Ex-Im Bank
loan, expenditures to date of only $60-70 million, and
deep-pocketed investors likely willing to tide the company
over its early period, there seems little likelihood of a
default of any kind by the company.


14. (C) XPress has so far built only the first phase of its
network, but it already provides network coverage from Irbid
in the north to Aqaba in the south, an area containing 95
percent of Jordan,s population. Further planned phases of
the network, over the eastern desert to the Saudi and Iraqi
borders, would serve the needs of XPress, two most strongly
desired potential customers: the Jordanian Armed Forces (JAF)
and the Public Security Directorate (PSD ) the national
police). The JAF is considering the purchase of the phones,
which have a walki-talkie capability, and is testing them,
planning to make a decision over the next week, while the
less well-funded PSD has no plans to buy them at this time.
Already, both the Royal Court and the General Intelligence
Directorate have signed purchase agreements with XPress,
reinforcing the perception of royal links with NewGen.
Whether XPress turns early to competition in traditional
mobile services may hinge on whether or not it gets the JAF
and PSD contracts that it desires ) filling such large
orders and building the network infrastructure to meet those
organizations, needs will require a focus that would scotch
an expansion in mobile services for a while, at least.

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COMMENT
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15. (C) The addition of two new market entrants into
Jordan,s small mobile telephony market could create the most
competitive such market in the Middle East ) a success story
for the TRC and the resolutely pro-competition Minister
Zou,bi, whether or not all of the new entrants survive. The
background of this success, however, is slightly more
worrying, though not entirely surprising. That the PM was
willing to call off a major economic reform initiative called
for in Jordan,s WTO accession agreement because of an
attractive buy-off option is problematic. That the ground
rules for how to proceed on market liberalization in the
telecom sector are sufficiently unclear that the PM and the
TRC CEO had to take their dispute to the King for
adjudication is problematic. And while the product of the
King,s intervention in the Umniah license was an encouraging
sign of his support for an independent regulator, the King,s
intervention in the NewGen license had the unintended effect
of undercutting the regulator,s independence. Many factors
have created an encouraging constituency within the GOJ for
IT and telecom reform. But from the evidence of the mobile
telephony sector, Jordan,s ability to make difficult
decisions on liberalization and transparency in this sector -
as in others - ultimately depends on the leadership and
engagement of the King.
GNEHM