PAK TELECOM SECTOR SLUMPS

UNCLAS SECTION 01 OF 02 ISLAMABAD 000442 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON ETRD PREL PK SUBJECT: PAK TELECOM SECTOR SLUMPS ¶1. (SBU) Summary: Based on conversations with several telecom executives and the Pakistan Telecommunications Authority (PTA) Director of Economic Affairs Muhammad Sargana, the telecommunications sector in Pakistan is suffering from market saturation and the general economic downturn. Telecom companies are looking at value-added and broad-band services as areas for further expansion, but are hampered by a lack of available credit. Rumors of the demise of the largest cellular phone company in Pakistan may be exaggerated, but the large cellular companies clearly are suffering financially. PTA also imposed new SIM card registration requirements for security reasons, leading it to block 15 million unregistered SIM cards in February. End summary. Telecom Market Overview -------------- ¶2. (SBU) Pakistan Telecommunications Authority (PTA) Director of Economic Affairs Muhammad Sargana told econoffs February 24 that the economic slowdown has affected the previously robust telecommunications sector, although foreign direct investment continues to flow for telecommunications related infrastructure. Expansion of broadband and value added services could prove a bright spot in the market. ¶3. (SBU) Pakistan's tele-density is approximately 60 percent, well above Bangladesh and India, at 25 and 20 percent, respectively. The number of cellular subscribers grew more than 80 percent annually over the last few years, then dropped to 40 percent last year. One telecom executive quipped that "even the man who cannot feed himself and sleeps on the street has a cell phone." The sector is now plateauing, however, due to market saturation and the economic slowdown. ¶4. (SBU) Cellular phones currently comprise 90 percent of the telecommunication market share, Sargana said. However, four of the five major cellular companies in Pakistan reported losses in 2008. Of the five major cellular companies - Telenor, Mobilink, Zong, Warid and U-Phone - only U-Phone was profitable in 2008. U-Phone, controlled by the Emirates Telecommunication Corporation since 2006, when it bought the controlling share of the Pakistan Telecommunications Company Limited (PTCL),is one example of successful privatization by the Pakistan government. U-Phone has been able to take advantage of pre-existing PTCL infrastructure and facility access to quickly become a market leader with relatively low entrance costs. 
Trouble on the Horizon? -------------- ¶5. (SBU) Mobilink, owned by Egyptian based Orascom Telecom, remains the largest cellular company, with 30 million subscribers and 31 percent share of the total market. However, Mobilink market share is declining, and press rumors persist that Mobilink dealers are going on strike and that Mobilink will soon cease service. Mobilink currently provides service for all of the US Embassy cell phones. ¶6. (SBU) Sargana insisted that the press reports of Mobilink's imminent demise were not reliable; however, he stated that Mobilink undoubtedly is suffering due to a decrease in subscribers. (Comment: Mobilink also lost its Chief Financial Officer in the Marriott hotel bombing last September. End comment.) All of the cellular phone company executives queried stated that the cellular market in Pakistan is saturated and that fierce competition among the existing companies for a shrinking customer pool has led to very low profit margins and little variability in pricing options for providers. ¶7. (SBU) Most executives stated that they would be pursuing more value-added, broadband and wireless internet services to try and increase their shrinking revenues. The density of high-end cellular and wireless services in Pakistan is still relatively low and subject to expansion. ¶8. (SBU) At an event hosted by the Foreign Commercial Service (FCS) on February 26, telecom executives were openly soliciting assistance ISLAMABAD 00000442 002 OF 002 from bank executives and the USG through econoff to keep their businesses viable. Two telecom executives spoke with econoff about the need for more capital to expand operations. One solicited a meeting with a U.S. bank executive to speak about his company's immediate needs. Another quipped that "we prefer to borrow money from U.S. banks, but it seems that the Chinese are easily able to promise and deliver any amount of money." ¶9. (SBU) One newer mobile phone company, Zong, owned by China Mobile Pakistan, increased its market share from 1 percent to 6 percent in the last two years. Some telecom executives stated that they thought Zong's position in the market is tenuous due to high entry costs; however, the company recently promised to invest $550 million in additional infrastructure in Pakistan this year. SIMS and Security -------------- ¶10. (SBU) Sargana highlighted one notable recent PTA policy change, which requires purchasers of SIM cards to call and verify their identity with the Pakistan National Database and Registration Authority (NADRA) before the SIM card will be activated. Previously, users turned in written information to the SIM dealer, who then forwarded it to PTA. In the mean time, the SIM was active. ¶11. (SBU) PTA found that the written data provided by SIM users and dealers was often inaccurate, and Sargana said that the real-time NADRA database check was an effort to enhance security and traceability in the cellular phone system. As a result of the new SIM registration requirement, PTA has blocked approximately 15 million unregistered or inaccurately registered SIM cards since the beginning of February. ¶12. (SBU) Comment: The deregulation and privatization of the telecommunications sector and its rapid growth thereafter was one of the Musharraf government's success stories. However, we cannot look to the previously robust services sector to contribute significantly to GDP growth, as the telecommunications sector is suffering. The saturated market and general economic downturn, as well as tightening credit conditions for both consumers and businesses, is causing losses across the board. The credit crunch may lead telecom companies to seek financing from sources they otherwise would not use, like Chinese firms that seem to have capital on hand. Although the new PTA policy requiring registration for activation of a SIM card may cause difficulties for the providers, we view it as a positive step in that it increases security in the cell phone system and accountability in cellular phone usage. FEIERSTEIN