Persian potential

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Mauricio Franca says operators have limited control over tariffs.

ADSL broadband is also a significant factor in Iran's broadband sector. PCI, which is Iran's only fixed line operator, has about 25 million landline voice users, or about 80% of households, and also runs the country's only ADSL service.

"The Iranian internet market is well positioned for future growth and massive uptake of services due to the high penetration of fixed lines and the high installed base of PC's. We also see mobile broadband as a potential growth market," says Huawei's Ghattas.

"Unlike many other countries in the Middle East and the rest of the world, we expect the fixed-line market will continue to grow for at least the next few years to come. Mobile broadband has great development potential due to the weak reputation of fixed broadband in the country," he adds.

Market challenges

But the many opportunities open to Iran's telecom operators are tempered by numerous challenges. One of the challenges for MTN and Etisalat in Iran is a law that demands private operators pay a share of their revenue to the government, which is extremely high compared with corporate taxes in most countries.

According to press reports in January, Etisalat's Jarwan said the company would pay 23.6% of its revenues to the government under the 15-year licence deal. MTN meanwhile is understood to pay about 28% if its revenue to the government.

"Most markets don't have such a high revenue share," says Franca. The way the revenue share is decided also complicates matters and makes business planning more awkward, according to Franca. Indeed, foreign operators must provide the government with a prediction of their projected revenues when they apply for a licence.

"If you don't hit your projected revenue numbers, you still have to pay a minimum of 80% of your projected revenue share. That is the minimum - 80% of your 23%. If you don't hit your target, your revenue share can effectively increase," he says.

Oliver Wyman's Sallaba adds that the revenue share also increases pressure for the foreign operator to gain "critical mass and market share" quickly in order to justify their investments.

As with most operators around the world, a further challenge for Iran's operators is declining ARPU. And the problem is exacerbated in Iran because ARPU rates are already quite low.

"With regards to ARPU levels, we have seen a gradual decline of around 5-10% since 2006 on an aggregate basis, translating into a market ARPU of a little under $12 per month at the end of 2008," Sallaba says.

"This slight downward trend, nonetheless, is expected with the growth in prepaid, and actually needs to be considered as quite stable taking into consideration the high market growth rate."

It is likely that ARPU will decrease further after Etisalat starts operations, according to Franca, although Sallaba adds that further price declines are likely to be fairly small given that current voice prices are fairly low already compared to international benchmarks.

Operators' ability to influence ARPU is also stifled by government control of pricing levels. Indeed, tariffs are set by the government, and the mobile operators' only room for maneuvre is within a 20% band on either side, according to Franca.

Another restriction for private operators is that the government keeps a monopoly on the international gateway. "If you have quality issues on international calls or you want more capacity, it is a bottleneck beyond your control," Franca says.

Aside from price issues and revenue shares, private operators entering Iran also face a potentially unstable political, regulatory and economic market. Sallaba points out that out of 182 countries rated by the World Bank, Iran ranked 142nd for ease of doing business, and 164th for protecting investors.

"As a result, reports are not uncommon of apparent government interferences and lengthy bureaucratic processes, as well as arguably surprising regulatory moves. A much cited episode is the reversal of Turkcell's original selection as Irancell's foreign partner, but there are appear to be many other examples," he says.

"Finally, the international row over Iran's alleged nuclear development programme does not help matters for private investors looking for a stable environment to do business in," he adds.

Franca says that the next six months in particular could be difficult for business in Iran. "If you look at the overall economy there is a general perception that the next six months are going to be rough: elections are coming and the oil price is down, the US is tightening up sanctions, so overall it is going to be tough," he says.

But while Turkcell's problems in Iran may have served as a warning to other operators, MTN appears to have progressed in the country with relative stability. "They have had their discussions with the regulator as always but things have been more or less stable," Franca says.

Franca also believes that Etisalat will manage to avoid any upsets. "They will be negotiating things well with the regulator. What you have to have in mind is that the government has its way of doing things. The government is very strong, they try to regulate the market a lot and that is a risk operators there have to accept."

Abbassi believes that with three operators in the market, the government and regulator will be forced to address any vagaries in the country's telecom law and regulation, leading to a gradual improvement in market conditions.

"There will be teething problems, but once you have three operators with conflicting interests and with the government having a natural stake in them through taxation and investments, the need to arbitrate the market will definitely arise. That will push the regulator in Iran and the regulatory authorities to move into clearing regulatory misconceptions or vagaries in the market. It is a good development for the regulatory framework there," he says.

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