Telenor Ltd and Space Telecom would comfortably make their position in cellular industry in the country as analysts expect that the number of users in five years would jump to 15 million from present level of 4 million as both are bound to provide quality service, reduction in tariff and better customer service.
Pakistan Telecom Authority auctioned two new GSM licences on April 14 @ $291 million per piece. The licences are for 15 years and are renewable after the period without any further payment.
The licence money is payable in two stages: 50 percent at the beginning, with the remaining amount being payable in equal instalment's over the next ten years.
The licence price has another significance. All the existing companies have to pay the same price at the time of renewal of their licences as they did not pay any such fee when they got their respective GSM licences.
The $582 million, raised through the auction of the two cell licences, is above analysts' and experts' expectations.
The target was a price of about $1 per capita whereas the successful bidders have paid about $2.01 per capita.
From a regional and global perspective, the price paid may not look out of scope as most emerging countries have seen prices as high as $3-4 per capita.
However, in the local market perspective, this price looks on the higher side. Sources indicated that PTA's price expectations were about $2 per capita and they have been able to achieve this.
Arshad Arif, head of research at KASB Equities, said that the last two years have been very exceptional for the cellular market. Since the introduction of the CPP regime, the local cellular market has expanded from 350,000 subscribers to over 4 million subscribers.
This exceptional growth is the largest contributor towards the high price realised for the two licences.
He said that the country's improving economy and increasing visibility in international politics has also lowered the traditional risks attached with the Pakistani market. The interest from foreign operators, like Telenor, is a direct result of this.
Arif said since this was the last chance to enter the Pakistani cellular market, investors showed significant interest.
According to PTA, it has no plans to issue more licences in the medium term. "The slower performance from the existing players in expanding their networks is another reason behind this increase. In particular, businesses sitting outside can easily visualise the growth potential if they look at the slow capacity expansions of Ufone and the continued poor quality service of a player like Mobilink," he said.
This high price has started a new controversy, where most of the industry watchers are speculating that Pakistan's market does not have adequate potential to justify a cost as high as $500 million (licence cost plus physical infrastructure cost).
"We have a contrary view", Arif said. "We believe that $500 million expected project cost makes some fundamental sense. If we assume $6 per month revenue per subscriber (which is below the average for the comparable countries) and a net margins of 35 percent (again on the lower side of the regional average), a company needs just 2.5 million subscribers to achieve an 8-year payback.
He said he believes that companies like Telenor and Space Telecom are aggressive enough to go for 2.5 million plus subscriber capacity base.
"Unlike the rest of the researchers, we are not advocating a cell density catch up potential within Pakistan vis-à-vis regional markets.
Unfortunately, such experiences have relatively little application in our market. We have used some basic numbers to support our argument that the Pakistani market has the potential to achieve a 15 million subscriber base over the next few years.
"If we assume that about 50 percent of the employed urban labour force in Pakistan gets cellular connections, the number comes to around 15 million subscribers.
In cell density terms, this is merely 10 percent. Given the ongoing economic recovery and inward capital flight, we feel that this number is even conservative.
We are overlooking the self-employed population, which is generally not reported in the economic surveys. And this segment also has a high propensity to spend.
"We foresee significant changes in the landscape of the mobile market in Pakistan. These changes range from an improvement in service quality, reduction in the tariff rates, launching of innovative products, product differentiation and better customer support", Arif said.
The focus of the most of the existing players has been on meeting demand rather than paying much attention to quality service.
Ufone is an exception. In particular, Ufone has been able to develop an image of "no compromise" on service quality, whereas the largest player, Mobilink, has been a poor quality service provider and is indeed the only company that has been penalised for its services.
On product innovations, Ufone appears to be leading with its offering of GPRS etc while Mobilink here is again concentrating on simply enhancing its subscriber base.
Some industry experts also believe that a lack of innovative services on the part of the local players has more to do with equipment suppliers to these operators.
In particular, the European suppliers have been lagging in terms of new service features vis-à-vis other suppliers and Pakistani companies working on European technology would suffer.
The tariffs have also been a non-issue for all the players as both GSM operators are charging almost similar rates for their services.
Probably the abundance of the unmet demand and relatively easy approach of the regulator has facilitated the existing players in continuing the existing tariff arrangement.
Instead of just meeting demand, the GSM operators are likely to shift their focus towards retaining their existing customers.
This would only be made possible by offering better quality services and reasonably good customer support.
At the same time, the market will see a whole series of new services likely to be offered by Paktel's GSM operations and Ufone after its expansion.
And these services will see further innovations once Telenor comes online, as the company is known for its premium quality service.
"In terms of rates, we expect Paktel GSM to be the first to come up with a 15-20 percent reduction in its call rates. This would push the other two GSM operators to follow suit. Mobilink has already sent a strong signal to the new entrants by slashing its existing connection charges to zero.
What we are hoping for at this juncture is that in order to facilitate customers, the government will also lower its own levies," Arif said.
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