Peter Kaliaropoulos is on the attack, and Bahrain’s Telecoms Regulatory Authority is his target. The BatelcoCEO talks controversy, cooperation and competition.
I’m such a happy person,” grins BatelcoCEO Peter Kaliaropoulos, “because I don’t have to deal with them any more.”
‘Them’ is Bahrain’s Telecoms Regulatory Authority (TRA), and Kaliaropoulos is candid in his condemnation of the independent body, long an object of his ire.
“I had to take a step back because the TRA and I didn’t see eye to eye,” he explains more firmly. “I think they’re unfair and they’re biased and they’re totally narrow-minded.”
If this is Kaliaropoulos happy, then I’d hate to see him mad. But this is just the latest boiling over of a simmering feud betwen Kaliaropoulos and his opposite number at the TRA, General Director Alan Horne.
In a war of words, each has accused the other of abusing his position to the detriment of Bahrain’s telecoms customers. The regulator has criticised Batelcofor “circumventing the regulatory process and misleading the general public”, while the operator has slammed “harsh, unfair and unreasonable regulatory measures” it argues have stymied innovation in the country’s market.
On the day we meet, the TRA is running a new advertising campaign on the front of the local daily newspapers. ‘I love my number’ reads the tagline, referring to a number portability service that will allow consumers and businesses to register their interest in keeping their mobile or land line telephone number when changing service provider.
“The TRA will say it’s acting in the interests of the consumer, but I’ve seen their latest advertising campaign, and in my view, what a waste of public funds,” says Kaliaropoulos dismissively. “At least, I’m a commercial organisation; when a government organisation has a new branding campaign, I’m not sure what value that is.”
The campaign may not impress Kaliaropoulos, but number portability is just the latest in a series of reforms that have ensured Bahrain is widely viewed as one of the region’s most dynamic telecom markets. It boasts two mobile operators — with a third due to launch later this year — several WiMAX players, and a laissez-faire policy towards VoIP.
Since the TRA was established in 2002, there has been a significant push toward liberalisation, but the arrival of so many players into the market has proved discomforting for the incumbent. Batelco’s market share is under threat, but according to Kaliaropoulos, the regulator is confusing market leadership with market dominance, and punishing Batelcounjustly.
“This is a small market with too much regulation; they’re just cherry-picking the latest regulation from every other market, and dropping it into Bahrain hoping that everybody’s going to come in,” he says. “It’s not right. Regulatory reform is very important, but so is the pace of that reform.”
In a population of around 1.1 million, mobile penetration in Bahrain hit 131 percent at the end of 2008. The island state has a high degree of broadband penetration, and the combined revenues of the country’s telecoms operators soared to $796m last year, a rise of 6.3 percent from 2007.
Batelcois doing well within that growth story, too. The operator enjoyed a record 2008, with net profit for the 12 months up 2.7 percent at $276.4m. However, Kaliaropoulos argues that future growth and development is being endangered by the TRA’s noninterventionist stance with regards new competition.
“A lot of operators are putting a business plan together, but then if all those plans were put together you’d think you were looking at a market of 20 million people,” he says.
Kaliaropoulos estimates that Batelco’s capital expenditure in Bahrain has dropped by as much as 20 percent so far in 2009, compared to this time last year. Put simply, why should the firm spend its money on infrastructure that will be piggybacked by dozens of smaller operators?
“With the regulation as draconian on us as it is, it takes away the incentive to invest a lot more,” he explains.
As a result, Kaliaropoulos warns that obsolete technology is not being replaced as quickly as it might were the incumbent more greatly incentivised to invest.
“I have to build infrastructure and I have to share it with others, while I’m stuck with the costs,” he shrugs. “I’ve gone out of my way to explain this with the TRA.”
Kaliaropoulos likens the conflict to a boxing match, and it’s a contest he claims Batelco is losing. Not through sluggishness, but because the regulator is landing punches that Batelcois powerless to repel. The way Kaliaropoulos sees it, he might as well be fighting with both hands tied behind his back.
“By nature our roles are to wear gloves, one in the red corner and the other in the blue corner,” he says. “It’s a boxing match, and if you look at the health of the company, at the growth in revenues and the market leadership, the scorecard puts us ahead.
“But then the moment we say that, the TRA accuses us of being dominant, and comes up with some new rule to score against us. What we call market leadership, they interpret as market dominance. The way the TRA makes its decisions, it’s more of a knockout.”
According to Kaliaropoulos, the relationship between the two parties has disintegrated to the point that the regulator communicates through legal orders. It’s less a dialogue, than a diktat.
“It has not been a constructive relationship, and the regulator has been totally inflexible,” he says. “He doesn’t bring us around the table to discuss issues, he says ‘I want this information, here’s the legal order, and if you don’t give it to me by a certain date in this format, I’ll take legal action against you’.
The TRA’s liberal approach has meant a stream of new entrants into Bahrain’s telco sector, but the most high profile is undoubtedly the arrival of Saudi operator STC, which in January acquired the state’s third mobile licence for $230m. The group has said it plans to start operations in Bahrain in the second half of the year, and aims to acquire a 20 percent market share over the next ten years from Batelcoand Zain.
Yet rather than bemoan the fresh competition, Kaliaropoulos is surprisingly enthusiastic at the prospect of STC’s arrival. He argues that STCwill represent “responsible” competition; that it is likely to compete on services as opposed to price, and is entering the market with a long term perspective and with a view to developing Bahrain’s telco infrastructure. And in the meantime, it will be a useful moneyspinner for Batelco.
“We’re looking forward to STC, which will be one of the biggest customers we’ve ever had,” says Kaliaropoulos. “On the wholesale side, we will supply them with a lot of services and infrastructure.
“We have offered all our existing towers, and that makes common sense because companies like STC are not fly-by-night,” he explains. “The best thing that can happen to Bahrain is a formidable player like STCcomes in. Why? They’re a rational operator. STCwill have the long term interests of the industry and the market, and [none of] STC, Zainor Batelcowill walk away.”
Kaliaropoulos reveals that the two are in negotiations over the sharing of Batelco’s infrastructure; an agreement that would speed STC’s roll-out as well as reduce the incumbent’s cost structure. It is a smart model, he suggests, and makes more sense than the three mobile operators each installing their own infrastructure island.
“We have a wholesale agreement on prices that the regulator has approved. The price list is out there, so the negotiation is not really too complicated: it’s up to them if they want 50 or ten towers.”
“If you pay $230m and then you’ve got to build a network, it’ll cost you somewhere between $120 to $150m for infrastructure, IT systems and all of that,” he says. “Throw on top of that a couple of years of operating losses, and basically the entry price was $400m to enter the market.
“So $400m to enter a market approaching 140 percent mobile penetration and with 1.1 million people? I probably wouldn’t be able to take that business case to my board,” he continues.
Nevertheless, with an increasingly complex local landscape, the Batelcois looking beyond Bahraini borders to ensure a healthy future. According to Kaliaropoulos, around 70 percent of the firm’s profitability currently comes from its home market. However, that will change.
He outlines a three-phase expansion strategy. The first stage was to consolidate
’s operations in the Middle East, and so the group entered Jordan, Kuwait, Yemen, Saudi Arabia, and Egypt, all the while developing its offering in Bahrain itself.
“Then we asked: in this industry, where is the growth coming from in the world today? The answer is China, India and Africa. But China is a closed market for everyone; you can’t play there.
“We targeted India for a number of reasons as the next big opportunity. We’re looking at broadband services and 3G services, and we’re looking to grow.”
In May, it was announced that Batelcohad finalised the acquisition of a 49 percent shareholding in S Tel Limited, which has licences to operate in six Indian states. The stake cost Batelco $225m, and the Bahraini firm has since been assisting S Tel in the rollout of network infrastructure in readiness for its launch before the end of the year.
“It’s on track, and we’re very confident that we will start in October in at least three circles,” says Kaliaropoulos.
With the population in the six states at around 230 million, and mobile penetration at less than 20 percent, S Tel aspires to grow rapidly, particularly now that Batelcohas signed a one-stop-shop agreement with Tata Communications, a member of the India-based $62.5bn Tata Group.
“[Mobile penetration is growing by] 11 to 15 million customers every month, so the first challenge we’re faced with is purely logistics,” suggests Kaliaropoulos. “You’ve got to recruit enough people, you’ve got to find enough towers, you’ve got to get the suppliers to send you the GSM equipment, you’ve got to actually dig up the land, and so on. The challenge is how quickly can you actually get your infrastructure operating?”
Kaliaropoulos emphasises that despite the low penetration rate, S Tel will face intense competition for new subscribers. In addition, he acknowledges that the new operator will have to work hard to educate potential customers as to the benefits of S Tel services.
“With the Indian customer, as with every other customer in the world, the rules apply — if you think that people will come and buy your product just because you have a network, you will fail,” he says. “The customer does have a choice in those markets. You’re not the second or third operator, you’re the sixth operator.
“Indians are very smart people: if you offer something that doesn’t work well then they’ll think they’re getting ripped off, and they’ll drop your product,” he adds. “These are lessons we’ve learned in other markets — don’t overpromise and under-deliver. Make sure that whenever we go to market, whatever we offer works, and it works when we say it’s going to work. Because if they don’t like their first experience, they’re going to walk away.”
Despite these challenges, Kaliaropoulos anticipates S Tel will be Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) positive in 2012, and “bottom line absolute positive about 12 to 18 months after that”.
After India, the third phase of Batelco’s expansion will take place in Africa, and Kaliaropoulos confirms the operator will spend as much as $2bn on acquisitions in North Africa over the next twelve months.
“We’re looking for a cluster; we will probably invest in four or five operations [in North Africa],” he suggests. “My preference is to buy into an operation that has been going for one or two years, and you apply the afterburner. You help them grow very, very fast, because we know how to restructure the business.
“A year ago the prices were sky high, but now we’ve got banks coming to us and saying ‘we’ve funded this shareholder and this investor, but now they can’t pay their interest bill’,” he adds. “There are quite a few bargains in the market; my CFO calls them distressed assets. Whoever says they’re not in the market right now, is not telling the truth.”
Kaliaropoulos says that Batelcohas no fears over funding, and reveals that the group has proposals on the table equating to “billions of dollars”. “The challenge has never been the money,” he insists. And looking further down the line, the CEO makes clear that Batelco’s strategic investments will be tailored towards the future consolidation of telecoms markets around the world.
“If I look three to five years out, I’d be expecting the Batelco group to have operations in 12 or 13 countries, with 15 to 20 million customers,” he says. “I’d expect [the group] to enter into an equity agreement with an operator in Eastern or Western Europe, and create a bigger company through sharing with each other and enjoying synergies.
“We’re starting to put ourselves in a better position so that when we sit at the table to discuss opportunities with another company, we’ll be taken a bit more seriously,” Kaliaropoulos adds. “It’s not just the manufacturers that are consolidating; the operators will too, because once growth disappears we’re all going to become dividend stocks, and you’ve got to manage your costs. It’s a sea change for the industry.”
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