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

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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

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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

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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