Telecom Market Opportunities In Iran

Via TMT Finance, a look at Iran’s telecommunications market:

The nuclear deal inked by Iran and the world powers has opened up the Iranian economy to global capital. The agreement has attracted the attention of some of the world’s richest people, as executives embarked on a flurry of trips to Tehran this summer. Further up the chain, foreign ministers from France and Italy and Germany’s economic minister have all already paid visits to Tehran for trade-related meetings, while a Spanish delegation has one queued up.

The excitement surrounding the potential economic rewards of this agreement is not without just cause: if all goes well, Iran promises to blossom into one of the most lucrative frontier markets in the world. Its demographics bespeak potential growth: over 60% of its population of 81 million is under the age of 30; nearly three-fourths of the population live in urban areas; nationwide literacy is close to 87%; and, like millennials in the West, Iranian youth are thoroughly wired. Although reliable statistics don’t exist, the percentage of Internet penetration is likely between 30 and 50. A US venture capitalist recently returned from a trip to Iran gave his appraisal of the telecom usage there: “nearly 65% of homes have broadband access. Mobile penetration is more than 120%, meaning people have more than one phone or SIM card. Iranians are now using 40 million smartphones.”

This robust consumer base has long pined for fast Internet speeds and top-tier mobile devices, denied it by sanctions now on the chopping block. Market demand for these items often overrode the artificial constraints imposed by the international sanctions regime. The same Western investor was told that the country is awash with 6 million iPhones.

The linking of this market to outside capital, however, will face yet more obstacles. Iran has made good progress towards privatizing its telecom industry, but the state is still a predominant force that will likely seek to protect its interests from foreign competition. Iranians have made a strong profit in the industry. The average rate of return on investment was 33.4% for 2014.

The desire of state institutions to guard their stakes in this semi-privatized industry also dovetails with some salient security considerations. As a magnet for foreign espionage operations, the Iranian state is keen on controlling the telecom industry. A decade long effort to contain Iran’s Internet within a closed system network is near completion. The state, moreover, has developed national Internet speeds at a deliberately slow pace. Use of virtual proxy networks has grown pervasive as Iranians skirt the government’s ban on major platforms of social media, such as Facebook and Twitter.

The government itself, however, has produced confusing and mixed signals about its intentions in this area. The highest echelons of government have de facto accepted the uselessness of censorship efforts, creating official accounts on Facebook, Twitter, and Instagram. 

Future development of the telecom sector may turn on the political fortunes of the Rouhani administration. Up for re-election in 2017, President Rouhani must deliver on former campaign promises to increase social freedoms.

Many of his supporters, perhaps a critical mass, expect fast Internet and unimpeded access to information and goods. President Rouhani will start homing in on such issues. This will entail attempts to liberalize the telecom industry. His right-hand man for these matters, Minister of Communications and Information Technology Mahmoud Vaezi, is a long-time, close ally of the president. In announcing the administration’s objectives for communications and IT, Vaezi pledged to focus on “people’s rights and expectations.”

More conservative state institutions will favour a controlled and gradual approach for adapting Iran’s telecom sector to a warming investment climate. Conversely, more progressive political voices may well start declaiming on the need for outside investment in the sector on behalf of the consumer. Neither will govern outright what happens in this sector, for already ownership is split across lines both private and public and foreign and domestic.

The telecom industry in Iran is marked by limited yet growing competitiveness. The Telecommunication Company of Iran (TCI) exclusively serves the nation’s fixed line market. Once a state-run monopoly, TCI was publicly offered in 2008 and acquired by Etemad-e Mobin, a consortium connected to the Islamic Revolutionary Guard Corps (IRGC), an elite military and internal security force. A subsidiary of TCI, the Mobile Telecommunication Company of Iran (MCI), leads the mobile market, although by a narrowing margin. MTN Irancell, 49% owned by South Africa’s MTN Group and 51% by local investors, trails MCI by a few million clients. Both companies have recently begun offering 3G and 4G wireless broadband. These two wireless operators share something close to a duopoly over the market. Two other operators, Tamim Telecom and Taliya, serve a remaining 5 million estimated customers. TCI has the second largest market capitalization in Iran while MCI has the fifth largest, as of June 2015.

In an encouraging piece of news for foreign investors, the sector is soon to become more completely privatized. Etemad-e Mobin announced in summer 2015 plans to sell off its shares, 50% plus one of the total, in TCI. It set the floor for bidding at the original buying price, $7.8 billion. The decision to sell, and to place this massive Iranian company firmly in the hands of the private sector, could indicate a trend towards increased privatization in the wake of sanctions relief. 

Foreign companies will enjoy the right to compete for these TCI shares. The company will likely go to the highest bidder, and Iran’s foreign investment law allows for complete ownership by foreign companies. During past transactions the state has sometimes intervened in order to exclude foreign companies, but this time it seems poised to facilitate a smooth bidding process. Etemad-e Mobin’s decision reflects concordance with elites, since the consortium represents powerful state interests. 

Despite the coming of an end to international sanctions on Iran, Western telecoms must still take care to not run afoul of the US sanctions remaining in place. A host of European telecoms were berated as news transpired that Iranian law enforcement had used their technology to locate and spy on political activists. Soon after those reports, the US Congress passed a series of sweeping sanctions legislation. The bite on those sanctions reached foreign third-party firms by hindering or revoking their access to US markets. Under these “secondary” sanctions, European companies faced penalties for engaging in business outlawed by the US, even if legal in their home country.

Many US secondary sanctions, such as those predicated on charges of human rights abuses or terrorism, will stay in place, as will their penalties for third-party firms. Sanctions passed in 2010 require the U.S. government to proscribe any entity that exports sensitive telecom equipment or technology to Iran. The president is required to terminate government contracts with any foreign or domestic company supplying goods used to “restrict the free flow of unbiased information in Iran” or to disrupt or monitor the speech of the Iranian people. A further act of Congress in 2012 applies the most severe form of sanctions to any company transferring goods or technologies “likely to be used by the government of Iran…to commit serious human rights abuses.”

As the EU and US slapped sanctions on Iran, European telecom companies lost market share to China. In 2010, TCI signed a $130 million contract with China’s telecom giant, ZTE, for the purchase of computer networking equipment. Able to flout US pressure, China has cornered the market for now. The Hong Kong-based Huawei, a global telecom leader, named Iran its largest foreign market after selling it 5 million phones this last year.

The swift and unexpected conclusion of the nuclear deal with Iran has created business opportunities of a magnitude not seen in recent years. As if by accident, world powers have unlocked one of the most dynamic and promising markets in the Middle East. Notwithstanding the political uncertainties outlined above, Iran will attract foreign capital to its telecom sector by the sheer strength of market demands for high-quality services. Never was there a better time than the present to start testing the limits of what is possible in Iran.

This entry was posted on Wednesday, December 30th, 2015 at 6:06 am and is filed under Iran.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

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