Few would dispute that Iraq represents one of the Middle East region's last major growth opportunities for the telecoms sector. Not only has growth been strong in the past couple of years, but, with internet penetration chronically low, significant potential for further growth remains.
On the mobile side, Iraq has three main players: Zain, Asiacell, which is part of Qatar'sOoredoo, and Korek, which is part of Orange. On the fixed side there are a few players including ITPC, with approximately 1.7 million subscribers, and several WLL operators such as Kalimat, Itisaluna, Fanoos and Newroz.
According to Mark Kremers, partner, Oliver Wyman, Iraq's mobile subscriber base grew 8% in 2013. While this fell short of the previous year's 14% growth, Iraq remains among the fastest growing telecom markets in the region.
"Mobile penetration has now reached about 90% but one has to realise that there is a relative large 'multi-SIM' base – driven by aggressive on-net offerings of the different operators," he adds. "All three national mobile operators - Zain, Asiacell, and Korek - have expanded their network coverage extensively in 2013 to new areas and have launched new products and services.
Despite this, in 2013 mobile revenue grew by only about 6%, as ARPUs came under pressure, led by a drop in prices.
Mobile operator, Asiacell, says that the Iraqi mobile market reached the 30 million subscriber mark by end of September 2013. "The mobile market managed to add around 2 million new subscriptions in the first 9 months of 2013, estimated growth rate of 6% from the year 2012," says Amer Sunna, CEO, Asiacell.
However, he concedes that penetration has started to show some signs of saturation in the past couple of years, partly due to the "unstable situation" in Iraq.
"In spite of the increasing GDP annual growth rate of Iraq and the foreign investments pumped in the Iraqi economy, the growth in mobile sector and in telecom sector in general is slowing due to many barriers including: Unstable political situation and frequent security issues; absence of telecom law; a weak regulatory environment; and a lack of reliable fibre connectivity," Sunna adds.
Aside from growth statistics, 2013 was a busy year for Iraq's telecoms sector with numerous developments. For example, Asiacell experienced a successful IPO in February 2013, while Regional Telecom, which is owned by Newroz, launched 4G under the Fastlink brand in June 2013 in Kurdistan.
Kremers points out that the WLL operators have continued to grow their subscriber base, reaching about 1 million voice customers, mostly covered by CDMA solutions and some 400,000 broadband subscribers, covered through a mix of WiMax and CDMA.Fibre is also growing quickly: Iraq already has some 25,000 fibre subscribers and reports indicate that ITPC aims for 600,000 connections by 2015, according to Oliver Wyman.
Barriers to growth
However, while Iraq's telecoms sector has seen strong growth, there are numerous challenges. Santiago Castillo, engagement manager, Oliver Wyman, says that the geo-political situation and related security issues remain a significant concern, impacting quality of service, and access to talent.
"Furthermore, operators active in this environment typically deal with heavier cost structures, for example, utility costs, security costs, limiting free cash flow that can be re-invested to stimulate growth. Lastly, the poor state of the banking sector also impacts the growth of postpaid type of services," he says.
Furthermore, there are some specific growth barriers for both the mobile and fixed telecom space. For example, in mobile, the national mobile operators by now cover nearly 100% of the population, so they can no longer rely on geographical expansion to drive growth.
To grow the mobile penetration further, prices will have to come down to access less affluent segments in the market. This requires diligent trade-offs and pricing decisions to avoid cannibalisation of the current customer base, according to Oliver Wyman.
Furthermore, the lack of awarded 3G spectrum and low smartphone penetration levels are a barrier to mobile data revenue growth, which is well below the average of other Middle Eastern markets. While 3G has been late to get started in Iraq, there is some room for optimism. The three main operators claim to be ready for 3G, and it appears to be a matter of the regulator issuing the licences. Qian Bin, CTO of Huawei Iraq, agrees that among the main challenges facing the sector are its current inability to cash in on the rising demand for mobile data services and the limited availability of broadband services. However, he adds that Iraq's telecoms sector is, overall, "on the fast track of development".
This is partly due to current low internet penetration rates. Indeed, the lack of 3G means that there remains huge potential in Iraq once the licences are issued. Indeed, with less than 10% internet penetration, Qian says that operators understand the growth potential.
He says that in 2013, Huawei has seen an uptake of a variety of new technologies in the country such as FTTH and 3G. "One of the latest progresses is that almost all GSM operators are starting to test and deploy 3G networks, laying the right foundation for the future development once the 3G licences are issued," he says.
Qian says that, due to the lack of 3G in the market, backhaul is not yet a big problem. But this is a situation that looks set to change. "Under the current EDGE/GPRS network environment, only limited data services have been provided by operators," he says. "But with 3G networks being commercially launched, the whole industry will need collaboration to tackle the MBB traffic flood, including mobile operators, fixed operators, and regulator."
Qian says that the 3G operators need to look into various ways to obtain sufficient IP bandwidth and microwave spectrum to provide quality data services for their subscribers. "For instance, by renting the existing backbone DWDM network from fixed operator, mobile operators will have more bandwidth to support MBB development. In the meantime, the regulator is encouraged to plan more microwave spectrum for the IP backhaul."
He adds that a National Broadband Network (NBN) is another way to drive broadband penetration in Iraq. Moreover, with the growth of internet traffic and expansion of nation-wide DWDM network, Iraq will play a great role in transiting the international data traffic between Asia and Europe, Qian says.
Meanwhile, in the fixed-line sector, limited copper infrastructure is hindering ADSL potential. According to Oliver Wyman, fibre deployments are still in the early stages - and although growing rapidly - the rollout of these networks is subject to complex right of way access permissions. On top of this there is limited activity in the WiMax space.
In terms of backhaul, operators are using a mix of microwave, fibre, and VSAT infrastructure. Due to a lack of infrastructure and competition on the backhauling market (only ITPC and Newroz are providing wholesale services), operators are expected to face suboptimal quality and relatively higher price levels.
Ashraf Yostos, country senior officer for Egypt, Iraq and Jordan, Alcatel-Lucent, says that, in addition to problems with backhaul, there are also issues with the backbone. "The fibre backbone remains under a monopoly of the incumbent operator, which is not able operate or to maintain its own weak backbone."
In terms of telecoms regulation, Thibault Werle, engagement manager, Oliver Wyman, says that there are three parties that play a role: the CMC, which is the national telecoms regulator; the National Ministry of Communications (MoC), which manages ITPC, the incumbent fixed-line operator; and the Ministry of Communication of the Kurdish Regional Government (MoC-KRG). Although the CMC awards national licences, the MoC-KRG awards licences independently of CMC for the Kurdish region. This creates at times some confusing situations: for example, the MoC-KRG awarded a 3G licence to Mobitel in 2007 and in early 2013 it awarded Newroz a licence for 4G. Meanwhile, on the national front operators are still eagerly awaiting 3G and 4G spectrum allocation.
Newroz and Kurdtel own the fixed infrastructure in Kurdistan, while "national" ITPC owns and operates the fixed infrastructure in the rest of the country.
Despite their national licence, fixed wireless operators, such as Kalimat and Itisaluna have not rolled out in the Kurdish governorates.
There are also some claims that there is interference between the frequencies awarded by the CMC and the MoC-KRG.
Most commentators are optimistic about Iraq's telecoms sector in 2014. "2014 should be an exciting year for telecoms in Iraq," says Oliver Wyman's Kremers. "We expect the CMC to finally award 3G licences to the existing three national mobile operators, which will accelerate broadband adoption in Iraq.
"Furthermore we expect a fourth national mobile operator to come into play, likely in consortium with ITPC – like the set-up in Lebanon - and what is targeted for Libya, to further boost competition in the sector, possibly further stimulated by an introduction of MNP."
Moreover, with parliamentary elections scheduled for April 2014, Kremers says that he expects these changes to come into effect soon after. "On the fixed side we would welcome increased infrastructure competition on the fibre backhaul market to stimulate infrastructure investment in the country."
Other significant events to watch out for in 2014 include Zain Iraq's IPO, and the rebranding of Asiacell as Ooredoo. Huawei's Qian is also excited by the prospect of 3G coming to Iraq. "With the commercial launch of 3G and mobile broadband networks in the near future, there will be an increasing demand for end-user data services in Iraq," he says. "Taking a look at the country's consumer market, the smartphone penetration has reached more than 35% in 2013, almost the same as the countries around; but the internet penetration is much lower."
Qian predicts that with the adoption of 3G, Iraq's internet subscriber base will increase rapidly from its current low base.