IRAN: TELECOM GROWTH VICTIM OF CONGESTION AND POLITICS

C O N F I D E N T I A L SECTION 01 OF 04 RPO DUBAI 000035 SIPDIS NOFORN E.O. 12958: DECL: 2020/02/15 TAGS: PGOV IR ECON PREL EINT SUBJECT: IRAN: TELECOM GROWTH VICTIM OF CONGESTION AND POLITICS REF: DUBAI RPO 31 CLASSIFIED BY: Vinay Chawla, Economic Officer, DOS, IRPO; REASON: 1.4(B),(D),(E) ¶1. (C) SUMMARY: In Iran, a large number of private-sector telecom companies offer a multitude of services including mobile, Internet access, and Voice over IP. While the private sector offers a dynamic set of services, all telecom services terminate or are routed through the government-controlled telecommunications backbone, which means the government and the IRIG is able to slow broadband adoption, monitor traffic and limit service when it deems necessary. Additionally, the failure of government investment to keep up with the pace of demand means service quality continues to deteriorate. ¶2. (C) According to telecom executives, consumer and business demand remain high and companies continue to push the government to both build more capacity and provide more bandwidth. At the same time, they understand that government investment or its relinquishing control of the telecom backbone will be slow in coming. Consequently, many are investing in building out their own networks for the last mile (ie the connection between the telecom backbone and the local point of service). This leg of a 'connection' is relatively unregulated and provides an opportunity for providers to improve service and attract additional customers albeit on the margins. IRPO contacts that follow the sector suggested that the combination of private-sector solutions for the 'last mile' and the widespread demand for telecom services, have created a market for an alternative backbone 'plug-in.' Specifically, they suggest satellite-based service would circumvent congestion on the government backbone and provide a larger swath of Iranians high-speed and unfettered access to the Internet free of political interference. END SUMMARY. STRONG DEMAND FOR TELECOM SERVICES ¶3. (C) EconOff recently talked to an executive at the country's second-largest ISP, Pishgaman Kavir Yazd Cooperative (PKY) (reftel). According to the executive, PKY offers ADSL (high-speed Internet access) in all but one of Iran's provinces with plans to go nationwide this coming year. ADSL service packages range from 128 kbs/sec (with 1 GB download cap) for 6,000 touman/month (USD 6/month) to 1 Mb/sec (with unlimited download) for 22,000 touman/month (USD 22/month). (Note: ADSL is a high-speed internet protocol that rides (light-wave) on top of established copper telephone lines. It is similar to the high-speed internet service provided by traditional telephone companies in the United States like Verizon. In order to activate ADSL, a provider must make an investment in hardware at a node that serves a certain number of users (eg neighborhood). An ADSL modem is attached at the receiving end that already has a telephone connection and a high-speed connection is established over the copper line. End Note.) ¶4. (C) The executive also discussed PKY's Voice over IP (VoIP) business (ie routing telephone calls over the Internet),a subsidiary of the parent company that he manages. He said the company pays the government approximately USD 100 million a month license fee to offer the service. Callers dial a prefix before the international number they want to call using a traditional telephone. The call is routed from a caller's residence or business to the switch where PKY takes the call and then carries it on bandwidth rented from the government and then connects it to international carriers who then carry the call to its final destination. As a result of the alternative service, the company can offer calls from Iran to the UAE for 80 Touman/min (USD 0.08/min) which is half of what the government charges. Calls to the US are even cheaper at 40 Touman/min (USD 0.04/min). ¶5. (C) The executive claimed that demand for both ADSL and VoIP are high. For ADSL, he said the company receives approximately 2 million connection requests for service a month. His company's business analysis shows that 75 percent of Iranians are educated DUBAI 00000035 002 OF 004 and at least 25 percent of that population uses the Internet in some capacity and demand for personal access among them is booming. The executive also believes the difference between the country's low broadband penetration rate (number of subscribers/100 inhabitants) of 2 percent and the high number of Internet users (34 users/100 inhabitants) is a strong indicator of latent demand and hence a strong business opportunity. The executive emphasized high-speed Internet/ADSL is a relatively new product in Iran (4 to 5 years old) and growth possibilities are enormous. Similarly, the company's VoIP service is growing at 20 percent a month with users placing nine to ten million calls using VoIP daily. He expects the company will be making a profit on its admittedly high USD 100 million monthly license by April of this year. (Note: The figures provided on the VoIP license fee and the number of calls placed were provided by the executive and IRPO has no means to corroborate them. End Note.) GOVERNMENT IMPEDIMENTS TO GROWTH ¶6. (C) The executive blamed the increasingly congested government network and the country's politically-motivated regulations as the biggest hurdles to providing more users with Internet services. High-speed home and business Internet service requires access to fixed lines owned by the government carrier Telecommunications Company of Iran (TCI). According to the executive, while PKY receives 2 million requests for Internet service a month and has been granted the rights to 6 million ports under its ISP license, the government only makes about 7,580 available monthly. Additionally, he complained about an arcane government rule that prohibits ISPs from officially advertising speeds higher than 128 kbs/sec for residential use, which makes ISPs dependent on word-of-mouth advertising and customer initiative to sell higher-level services. ¶7. (C) Beyond the government's politically-motivated aim to limit broadband adoption, the executive argued the number and speed of Internet connections is limited by antiquated infrastructure. Comparing the country's telecom backbone to a small house that cannot hold more furniture, the executive said the government's access to international gateways is simply not adequate to meet the number of users who want to access the Internet. Lack of investment is compounded by the government's inability to negotiate reasonable rates for access to international gateways. For example, the executive delineated PKY's successful negotiations for 250 STM-1s (an industrial-size Internet access pipe to underwater fiber-optic lines) with FLAG (submarine fiber-optic cable provider) at USD 2,000/STM. The IRIG's negotiated price was 10 times higher, and it in turn sought to rent it to ISPs like his for USD 38,000 a year. ¶8. (C) PKY has leveraged its relationship with fiber-optic gateway providers to negotiate directly for international access from Iran's port cities. It has hopes that its ability to obtain pricing at 10 percent of what the government wants to charge (through TCI) will encourage the government to want to increase the bandwidth in and out of the country and would be willing to utilize PKY's negotiated prices passing on more bandwidth to PKY as a result. In the interim, the company will continue to sign up residential and business customers throughout the country at the maximum numbers the government allows. STRENGTHENING THE LOCAL LOOP ¶9. (C) Asked what plans his company had in place to increase business if government constraints are not eased, the executive said the company could do no more than urge the government to build more capacity by trying to negotiate on the government's behalf with international Internet-access providers. In terms of new business ventures, he said the company would be bidding for a 3G mobile license in the next six months and had long-term hopes of DUBAI 00000035 003 OF 004 offering service packages that included internet, telephone, television and mobile. In the short-term, he said, the company's best opportunity was in the mobile sector, where it could capitalize on demand without government limits on the number of customers it can enroll. He added 3G mobile internet access could also provide another avenue to broadband albeit to the same government backbone. The executive acknowledged that constraints on service, like cutting off SMS and other features, would be a constant risk as long as the government owned the network. ¶10. (C) Although ADSL is the main form of broadband internet connectivity, other broadband technologies to connect the last mile have emerged and have the potential to grow in significance, with wireless technologies like WiMax being one example. Laser Company (a Tehran-based ISP) announced in January 2007 that all of Tehran's districts had been covered by its WiMax-based wireless broadband network. In March 2009, it was reported that WiMax licenses had been awarded to four companies, enabling them to launch services in specific provinces of Iran including mobile operator MTN Irancell. It is understood that a fourth operator, Mobin Net, with possible IRGC connections, was licensed to provide WiMax services in all of Iran's provinces. Mobin Net's Hosein Riazi was quoted by Mobna news agency as saying that, "preliminary works for WiMax service have been carried out and Mobin Net is completing testing in 30 provinces." The service offers a cheaper and easy way to implement broadband that goes around the government-owned fixed-lined ADSL network but like all other services licensed in Iran it is subject to government limits on the number of customers it can enroll and must terminate all traffic on the government network. ¶11. (C) A business executive based in Tehran who depends on Internet access for his business told EconOff that in addition to ADSL and WiMax, a number of other unregulated wireless technologies are used by ISPs to provide access to the Internet. When he needed an Internet connection, in order to circumvent the long wait for an ADSL and WiMax connection, he paid for a wireless transmission signal to his business which used unlicensed frequency. The signal eventually terminates on the government backbone but it allows ISPs to sign up new customers without waiting for the government to provision additional ports via ADSL or WiMax. A USG ROLE? ¶12. (C) Outside industry analysts are skeptical that even with the pro-active actions of ISPs and other telecom providers in Iran to increase service to meet high demand, there will be no meaningful change in market dynamics. All agree that demand for access to broadband and faster Internet speeds is high in Iran and very few businesses, let alone private citizens are happy with their current Internet speeds. One IRPO contact argued that "the state has specifically decided not to invest in the last mile (the most important network component for high speed access) to keep speeds from increasing in order to maintain access to information." Further, he argued, since all STM-1 and Internet traffic "goes through a centralized fiber optic connection through Tehran and then out of Iran, filtering, and slowing down access to the Internet is easy since there are so few access points. All ISPs are subject to the same regulations and restrictions." Most analysts believe that the only real solution is to circumvent all state-owned network assets in order to allow total access to the Internet. ¶13. (C) One industry executive in the US who follows Iran's telecom sector believes by providing satellite-based Internet services, the state will have no control or access to block the Internet. According to the executive, who manages a telecommunications fund, "This type of access is common in rural and remote areas in the US and Canada, and although expensive, it provides an opportunity to provide un-filtered and higher speed access." Since many households already have "illegal" satellite TV services, adding another dish to rooftops could be accomplished, especially if people are told DUBAI 00000035 004 OF 004 that free Internet exists and all they need is the hardware installed -- just like satellite TV is not a paid service in Iran, but remains highly popular, he said. ¶14. (C) COMMENT: While private-sector providers in Iran are attempting to expand their user base by extending the local loop especially in dense-urban centers like Tehran, IRPO contacts who monitor the industry believe that fundamental market dynamics -- the government's absolute ownership and weak investment in the country's internet backbone as well as its continued restrictions on connectivity will only hamper the ability of Iranians to get online for the foreseeable future. According to at least one industry expert, the most promising solution for providing a larger swath of Iranians high-speed and unfettered access to the Internet and circumventing the government-owned telecom backbone is satellite-based technology, but that will most likely require assistance from outside Iran to make it a viable alternative. END COMMENT. EYRE