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OUT OF AFRICA: THE EGYPTIAN TELECOMS CHALLENGER

DBR | 1호 (2008년 1월)
By JOHN IHLENFELDT, KRISTIAN KARAFA, KATIE MCCORD and FARHEEN QADIR
A version of this article was originally published by Knowledge at Wharton
 
By all measures, the mobile telecommunications industry is rapidly approaching critical mass. In this rapidly evolving industry, one Egyptian company is proving that it is never too late to go global. After consolidating its presence in Africa, South Asia and the Middle East, Orascom Telecom Holding is now prepared to take some developed markets by storm.
 
OTH, founded by Egyptian billionaire Naguib Sawiris, has experienced an impressive rise to worldwide prominence as the result of some extremely bold ventures. While the company initially lacked significant experience, it quickly learned the rules of the global telecoms game and then broke them with aggressive entry into such hostile operating environments as Iraq and Zimbabwe. The lessons learned from these experiences have helped transform OTH from an Egyptian domestic service provider to a global incumbent, serving more than 74 million subscribers worldwide.
 
When the Egyptian government announced its plan in 1997 to issue a second license for mobile phone operations in addition to the government-owned license, Naguib Sawiris recognized the opportunity. However, despite his substantial personal and family holdings, he had no experience as a telecoms operator. So he enlisted the support of France Telecom in a competitive bid against Vodafone. He lost. Undeterred, Sawiris simply bought the government-owned company along with its license. That was the beginning of Mobinil. By 1999, OTH had expanded into nearby Jordan. A year later, OTH simultaneously entered 11 different sub-Saharan African nations. While costly, this strategy of rapid expansion marked OTH's emergence as a global player.
 
The strategy was simple: to be the telecommunications provider to Sub-Saharan Africa. Sawiris envisioned a broad expanse of contiguous OTH coverage across the heart of the African continent. Mounting regulatory constraints imposed by tempestuous governments ultimately hampered this effort, but the rapid expansion into sub-Saharan Africa left OTH not only with the dubious prize of a struggling Zimbabwean operation, but also with a newfound appreciation for the importance of understanding the political environment of business.
 
In addition to regulatory woes, OTH also encountered meager average returns per user in the smaller sub-Saharan nations due to limited population concentrations with little money to spend on mobile phone service. Major regulatory challenges, limited profitability and growing debt led OTH to sell off the majority of its sub-Saharan telecommunications operations as 2006 approached. The firm streamlined operations and focused on its networks in Tunisia and Algeria, where operations were more profitable. This decision to prioritize its core African operations proved efficient for OTH as its Algerian network alone (popularly known as Djezzy) currently accounts for roughly half of all OTH profits.
 
Next on OTH's agenda was Iraq. With the nation in ruins in 2003, OTH unveiled its most successful enterprise to date, the "Iraqna" network. The brand became a symbol of solidarity in the midst of national crisis. Moreover, OTH's policy of hiring local labor and management gave the brand a local image and offered OTH a competitive advantage in the crowded telecoms marketplace over rival Vodafone. Where the British firm had developed a globally consistent brand name and logo, OTH now had a collection of local brands, each of which had a unique national appeal to its customers.
 
The decision to sell the Iraqi network came only after OTH's license expired. In the bidding cycle that ensued, OTH set a hard limit on what it was willing to pay for the new license. When the price exceeded this limit, OTH recognized that the time had come to walk away. OTH sold the Iraqna network for $1.2 billion in 2007, a 350 percent return on its investment. OTH now headed east to take advantage of one of the few remaining untapped telecoms markets.
 
Since the first-mover advantage is of such value to OTH, it has invested $400 million to establish the first commercial cellular network ever launched in North Korea, dubbed Koryolink. In lieu of a licensing fee, Sawiris devoted some of his private capital to North Korean development projects in exchange for a 25-year operating license with a four-year exclusivity clause. On December 15, 2008, a year after opening its North Korean headquarters on the top three floors of the 103-story Ryugyong Hotel in Pyongyang, OTH announced the commercial launch of CHEO Technology.
 
This new subsidiary is a 75/25 joint venture between OTH and the North Korean state-owned Korea Post and Telecommunications Corp. As a further expression of confidence in the economic prospects of North Korea, OTH opened Ora Bank in Pyongyang the following day. The new financial institution, also a joint venture with an existing government enterprise, will process Koryolink subscription payments and handle remittances from abroad.
 
Should the country open up to international business in the future, OTH will be years ahead of potential competitors, with its only investment being the fixed cost of developing and maintaining the network.
 
The entrepreneurial spirit, tempered by experience, lives on in another part of OTH, Telecel Globe. With a management team of three, the new entity is designed to be lean and cost-conscious. Its goal is to develop a localized entry strategy for small to medium emerging markets. Telecel Globe has lately acquired networks in Burundi and the Central African Republic, and is rumored to be searching out markets as far-flung as Mongolia and Cuba.
 
Through its trials in Africa, Iraq and North Korea, OTH has established itself as the upstart emerging-market service provider. While Telecel Globe scours the world for the last remaining patches of greenfield, OTH has now entered the developed North American marketplace through acquisition of a Canadian network, Globalive Communications. In an industry with rapidly diminishing room to accommodate latecomers, OTH grew up quickly and has elbowed its way to global prominence, where it now stands ready to shape not only the local markets in which it operates, but also the future of the telecoms industry worldwide.
 
John Ihlenfeldt, Kristian Karafa, Katie McCord and Farheen Qadir are members of the Lauder class of 2010.
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