US embassy cable - 03AMMAN7392

UNCLAS SECTION 01 OF 05 AMMAN 007392 
 
SIPDIS 
 
SENSITIVE 
 
PASS TO EXIMBANK 
USDOC/4520/ITA/MAC/ONE/PTHANOS 
 
E.O. 12958: N/A 
TAGS: ECPS, EINV, JO 
SUBJECT: THIRD (OR FOURTH?) MOBILE LICENSE TENDER PROVOKES 
DEBATE 
 
 
1. (SBU) SUMMARY: Jordan's Telecommunications Regulatory 
Commission (TRC) has announced a tender for what is being 
billed as a third mobile telephony license in anticipation of 
the January 1, 2004 end of the current mobile telephony 
duopoly under its WTO obligations.  The tender has provoked 
unfavorable commentary from several observers, including the 
current duopolists and a start-up that plans to exercise its 
option to expand its current license to include mobile 
telephony.  Despite the flak, the TRC - with full support of 
the Ministry of Information and Communications Technology 
(MOICT) - appears determined to press on with a process that 
it believes will bring a necessary degree of competition to 
an undercompetitive market. END SUMMARY. 
 
--------------------------- 
THE EXISTING MARKET PLAYERS 
--------------------------- 
 
2. (SBU) Mobile telephony in Jordan was established by 
Fastlink, a consortium of several prominent 
Palestinian-Jordanian businessmen, in 1994.  Fastlink (later 
bought by Kuwaiti mobile duopolist MTC) held a monopoly in 
mobile telephony until 1999, when a second license was 
granted to MobileCom, a subsidiary of Jordan,s fixed-line 
monopolist JTC.  The entry of MobileCom into the market has 
had a substantial effect on mobile prices, reducing them by 
up to 50 percent in some cases.  However, MobileCom has never 
been able to present a serious challenge to Fastlink.  It 
currently holds a market share of 25 percent of mobile 
subscribers and 20 percent of mobile telephony revenues to 
Fastlink,s respective 75 percent and 80 percent shares. 
This ratio has stayed essentially constant since early 2002, 
and there has been almost no growth in the total number of 
subscribers ) approximately 1.2 million ) since the 
beginning of 2003.  Under Jordan,s WTO entry agreement, the 
mobile telephony market must be opened to free competition by 
January 1, 2004. 
 
3. (SBU) A related trunking license was granted in April 2003 
to paging service operator Mirsal, which transferred the 
license to the New Generation Telecommunications Co. 
(NewGen).  NewGen plans to build a national network of 
Push-to-Talk (PTT) operations, using Motorola,s iDEN 
technology to create a service similar to that offered in the 
United States by Nextel, and it has applied for Ex-Im Bank 
support to purchase its Motorola inputs.  The PTT services 
would likely be almost exclusively sold to the high-end 
corporate and government markets, but NewGen will have the 
option to provide other services, including broad-based 
consumer mobile telephony, from the beginning of 2004. 
 
----------------- 
THE MOBILE TENDER 
----------------- 
 
4. (SBU) On October 13, the TRC released a public notice 
outlining proposed terms and conditions for the issuance of 
another license for mobile telephony services.  A public 
forum held October 23 on the issue invited questions and 
comments on the structure of the license, before the 
structure was finalized October 31.  The TRC has structured 
the tender as a two-step process, in which a 
pre-qualification phase is followed by submissions for tender 
of pre-qualified applicants and their associated partners. 
These submissions will be evaluated in a "beauty contest" 
rather than in a straight bid.  The pre-qualification will 
exclude bidders without substantial previous experience in 
mobile telephony as well as those already owning a 
significant stake in a current mobile operator or another 
eligible bidder.  The pre-qualification submissions are 
tentatively scheduled to be due by mid-December, and the 
tender submissions by the pre-qualified applicants would be 
due by mid-February, 2004.  A decision would then be reached 
on the winner by the beginning of March 2004. 
 
5. (SBU) The beauty contest conducted among the bids of the 
pre-qualified applicants will be based on the proposed design 
and implementation of the network (e.g., the proposed area of 
coverage and proposed timetable for rollout of services), the 
proposed marketing, pricing, and overall business plans, the 
proposed provisions for customer care (e.g., the proposed 
methodology for billing and collections), and a catchall 
category labeled "Additional Measures to Benefit Jordan" 
which would include such proposals as establishment of local 
R&D facilities and telecom training programs or the extension 
of telephony services to under-served segments of the 
population such as rural residents or the handicapped.  The 
successful bidder will receive space in the 1800 or 1900 MHz 
bands of the spectrum, currently used in part by the 
Jordanian military, which will have to evacuate whatever 
portion is eventually selected by the awardee.  To partially 
compensate the existing operators and to create a more level 
playing field, additional spectrum will be made available to 
the incumbents based on need, technology limitations will be 
removed from existing licenses, and other license 
modifications will be made if need is demonstrated by 
incumbents. 
 
---------------------- 
THE DUOPOLISTS RESPOND 
---------------------- 
6. (SBU) Fastlink and MobileCom have been quick to respond to 
the October 13 TRC announcement.  Fastlink has repeatedly 
filed requests for consultations with the TRC and have met 
with the regulators with no apparent success.  They have 
argued that the market cannot sustain another competitor and 
that the introduction of such a competitor will guarantee at 
least one bankruptcy, which could make potential investors 
much more skittish about future investments in Jordan. 
MobileCom has aired its concerns both privately with the TRC 
and in public.  Continuing bad blood between the two 
duopolists, evidenced in a recent suit filed by MobileCom 
against Fastlink alleging industrial espionage, has prevented 
the competitors from cooperating very effectively, however. 
In an interview with the press, the chairman of MobileCom,s 
parent JTC commented that the third mobile license makes no 
economic sense, but expanded on this point to imply that the 
reason for market failure in the current duopoly had been 
Fastlink,s predatory pricing and other anti-competitive 
activities. 
 
7. (SBU) The constant carping has grown annoying to TRC 
Chairman Muna Nijem, who began the October 23 open forum by 
announcing that the extension of a third mobile license was 
decided and not subject to debate; therefore any input and 
questions would have to address the specific terms and 
conditions of the license rather than the advisability of its 
issuance.  She and the TRC are receiving strong support in 
the decision to tender another license from Minister of 
Informational and Communications Technology Dr. Fawwaz 
Al-Zou,bi, who has supervisory authority over the TRC.  At 
the October 23 forum, Zou,bi praised the virtues of free 
competition and stated that the decision to grant another 
license was irreversible and not something that the GOJ was 
being forced into by the provisions of its WTO accession. 
Jordan had made a conscious attempt to add this provision to 
the entry agreement, with the aim of creating the kind of 
market-opening expansion that the TRC,s offer of the new 
license means to achieve.  Zou,bi reiterated this commitment 
to the Ambassador in a November 2 meeting. 
 
------------------------------- 
IS THE MARKET UNDERCOMPETITIVE? 
------------------------------- 
 
8. (SBU) Despite the duopolists, apparent surprise at the 
launching of the third tender, the TRC had telegraphed their 
move for quite a while.  A study commissioned by the TRC and 
carried out by USAID-funded AMIR program consultants reached 
a conclusion, announced by Nijem in a speech in early 
September, that the existing duopoly does not sufficiently 
serve the Jordanian market, and that the addition of a third 
operator would likely significantly reduce prices and 
increase market penetration for mobile telephones.  Jordan,s 
rate of mobile penetration in 2002 compares unfavorably with 
penetration rates for the Gulf states, some of which are 
served by monopolies, and the duopoly in Lebanon.  A 
comparative study of small European countries that had 
introduced a third operator showed that consumers had 
realized substantial benefits from the increased competition. 
 
9. (SBU) Fastlink predictably disagrees with the TRC,s 
diagnosis of the market dynamics.  Saad Abu Odeh, chief 
strategist for Fastlink, says that comparison of mobile 
penetration between Jordan and states in the Gulf and Europe 
overlooks dramatic differences in culture, demography, and 
wealth.  Unlike in Europe, 38 percent of Jordan,s population 
is under the age of 15 and therefore highly unlikely to be 
able to pay for mobile phones or to receive them from 
parents.  The 27 percent of Jordan,s population below the 
poverty line (part of which would overlap with the population 
under 15) could also be counted out of the relevant 
population of potential mobile telephone users.  And lower 
incomes of even those people above the poverty line creates 
obstacles to mobile use not faced in Europe.  A regression 
run by Fastlink plotting telecom penetration against per 
capita GDP for countries in the region shows Jordan to be 
above the trend line; i.e., relatively over-penetrated.  A 
comparison of mobile telephony pricing by the Jordanian 
duopolists with those charged by other operators in the 
region showed the prices to be at the middle of the range, 
outperforming duopolists in Morocco and Lebanon, for 
instance, but falling short of the competitive rates charged 
by monopolists in Bahrain (which will soon become a duopoly) 
and the UAE. 
 
------------------------- 
NEWGEN: NOT JUST TRUNKING 
------------------------- 
 
10. (SBU) Besides, says Abu Odeh, there already is a third 
mobile licensee: NewGen.  When NewGen completes its network 
it will have full capability to offer consumer mobile 
telephony services at relatively minimal additional expense; 
given the small size of the high-end trunking market, it will 
quickly look to mobile telephony as a source of additional 
revenue.  Nashat Masri, son of a former Jordanian prime 
minister and the Jordanian partner in the primarily 
Saudi-funded NewGen consortium, confirms that the expansion 
of services from a PTT base to full mobile telephony services 
is already part of NewGen,s business plan, though he claims 
that this "Phase 2" was not originally envisioned by the 
consortium. 
 
11. (SBU) Development of competing PTT services on GSM will 
allow Fastlink to deploy PTT by as early as March, possibly 
before NewGen is able to enter the market.  While NewGen,s 
iDEN technology will allow it to provide higher-quality 
service than that provided by Fastlink, Fastlink will still 
enjoy incumbent advantages that will make it difficult to 
displace, especially as it will be offering services similar 
to those that will be offered by NewGen.  Also, says Masri, 
the Jordanian military, which had originally seemed to be a 
very large potential client for the PTT services that NewGen 
would offer, has obtained approval to erect its own 
proprietary trunking network.  Both of these developments 
will cut into the revenues that NewGen had counted on in its 
original business plan.  Masri expects the company to be able 
to maintain profitability by exploiting its high-end 
corporate niche. However, "the sustained double-digit profits 
that foreign investors expect" are unreachable without moving 
to expand the customer base by including regular mobile 
telephony services quickly. 
 
12. (SBU) Minister Zou,bi was questioned about this 
possibility by the Ambassador.  Zou'bi said NewGen,s plan 
makes little long-term business sense, since iDEN technology 
will be unable to make the jump to third-generation mobile 
telephony, expected to be present in Jordan in 10-12 years. 
He said that he had tried to get that message to NewGen after 
their initial application for a license.  Masri says that the 
prospect of the eventual extinction of iDEN technology makes 
it even more critical that NewGen,s network, once built, be 
exploited to its fullest extent ) by expanding services to 
include mobile telephony. 
 
--------------- 
WHO WOULD LOSE? 
--------------- 
 
13. (SBU) Expecting that a four-player mobile market will not 
survive for long, observers are speculating about which 
player would be the first to drop.  MobileCom is seen to be 
in as much danger as any new licensee.  Unable to make money 
even in a restricted market, MobileCom has an under-utilized 
network (Fastlink estimates 40 percent utilization) and a 
relatively price-sensitive customer base.  Unlike NewGen, it 
will have no high-end niche to rely on to support it through 
the inevitable price wars caused by the new entries; in fact, 
MobileCom is expected to retain few, if any, of its corporate 
clients in the face of PTT competition from both NewGen and 
Fastlink.  While MobileCom has the backing of JTC (and 
through JTC, France Telecom), JTC is unlikely to continue to 
subsidize a money-losing subsidiary indefinitely, especially 
given the scheduled end of JTC's own fixed-line monopoly on 
January 1, 2005. 
 
14. (SBU) MobileCom is putting a good face on things.  Its 
statements of regret at the TRC's decision are pro forma when 
compared with those of Fastlink.  Ahmed Salah, MobileCom's 
Strategic Director, told us that while it would be impossible 
for another mobile operator to recoup the cost of erecting 
yet another network, it might be possible for a new entrant 
to make money by using extra space on an existing operator's 
network.  As Fastlink's network is already almost fully 
utilized, only one network is currently available to be used 
in this way: MobileCom's.  If such an arrangement were made, 
it might even lead to a merger. 
 
 
-------------------------- 
WHY ISSUE ANOTHER LICENSE? 
-------------------------- 
 
15. (SBU) There is no shortage of conspiracy theories 
purporting to explain the new license.  Masri claims that the 
TRC has been pressured to issue another license by a 
government that wants to prove that it is serious about its 
WTO commitments, even at the cost of opening the possibility 
of "ruinous competition."  Abu Odeh believes that the TRC 
wishes to bury the mistakes it made with NewGen ) the lack 
of transparency in the granting of a license and the decision 
to give NewGen exclusive rights to use iDEN technology ) by 
granting a new license, awarded transparently.  Other 
observers cast doubt upon the transparency of the process 
itself.  According to Motorola country manager Motaz Hourani, 
there are rumors that the limited publicity of the new tender 
and the short deadline for application are intentional, 
because the TRC has a favored candidate ) perhaps original 
Fastlink investors such as Ziyad Abu Jaber and Habib Ghawi ) 
who will have a greater chance of winning a bid if interest 
is low.  (Hourani adds that the named parties may be 
spreading this rumor themselves in order to attract foreign 
partners.)  The subjectivity of a beauty contest has fed this 
perception, though it seems to make the most sense given 
Jordan,s current telecom outlook. 
 
16. (SBU) In defense, TRC's Nijem cites multiple expressions 
of interest that she has received from both local and 
international companies (the approximately 100 guests who 
attended the public forum on the license appear to bear her 
out).  South African mobile provider MTN is interested in the 
deal.  They are said to see it as a low-cost way to enter the 
region, from which they could expand to build networks in 
other countries as their sectors begin to liberalize. 
Bahrain's Batelco has entered discussions with at least one 
local group.  Jordanians interested in the license calculate 
that even with the acknowledged limitations, there is a 
potential market of one million Jordanians (out of five 
million residents) that is not being served and that could be 
divided profitably between three operators.  None of these 
potential bidders seem to have factored into their business 
plans the prospect of a NewGen entry into the broad mobile 
telephony market.  Abu Odeh dismisses the optimistic 
predictions if these bidders: "There is a lot of 'stupid 
money' out there, and it should be TRC,s role to protect the 
sector from it and the investors from themselves." 
 
------- 
COMMENT 
------- 
 
17. (SBU) The decision to license a third/fourth mobile 
provider is made.  It has the commitment of the TRC and 
MOICT, has generated interest from domestic and foreign 
potential investors, and has been approved in its finalized 
form.  The issuance of the tender is a strong sign of 
Jordan,s commitment to its WTO obligations and the free 
market.  The pre-qualification requirements would seem to 
preclude bids by consortia without a good understanding of 
the economics of mobile telephony.  Still, it is difficult to 
see how four mobile providers will survive in a market that 
has seen one of its duopolists unable to profit in the three 
years it has had a network.  A failure in this sector will 
not be a disaster, however.  The outright collapse of an 
operator is less likely than the sale or merger of a less 
successful mobile service to a more potent competitor.  The 
outcome should be a reduction Fastlink,s dominance and 
creation of a more level playing field that will stimulate 
competition, benefiting the Jordanian consumer and the 
economy as a whole.  Meanwhile, the process is whetting 
appetites for the end of Jordan,s fixed-line monopoly on 
January 1, 2005 (septel). 
 
18. (SBU) Conspicuous by its absence in this controversy is 
any strong indication of GOJ ofiicials' interference or 
favoritism in the decision to bid.  There has been no strong 
governmental pressure to protect the interests of the 
incumbents, including NewGen; neither is there any convincing 
evidence that any particular potential bidder has an "inside 
track."  While this is an encouraging sign of the 
independence of the TRC and of maturity on the part of other 
actors in the GOJ, it is not necessarily a harbinger of the 
end to political involvement in commercial matters in Jordan. 
 Both Fastlink and MobileCom are now primarily foreign-owned 
without a strong and involved local partner to call in 
political pressure on their behalf.  Even NewGen - which 
received a license with very good terms in a backroom deal 
early this year - is primarily funded by Saudis and locally 
partnered with the Masri family, a clan that no longer 
exercises the influence it held under the previous king. 
GNEHM