Mohammed Omran, chairman of UAE-based Etisalat, the Arab world’s second largest telecom operator, sets the record straight on profits, products and price wars.

If there’s a silver lining to the downturn, Etisalat might be it. The UAE’s largest telecoms operator has proved a rare bright spot in the markets this year, securing a four percent rise in profit on the year to AED2.18bn ($594m) and luring 41, 000 new mobile users in the first quarter. If lean times show a company’s mettle, the Abu Dhabi-based firm has proved to be tougher than most.

But it’s far from the plane sailing that chairman Mohammed Omran had become used to. The firm’s 41, 000 new users pale in comparison to the 250, 000 netted in the previous quarter. More importantly, the number is dwarfed by the 250, 000 new mobile users that chose to sign up with rival du in the same three months; a period which also saw the Dubai-based newcomer swing to a Q1 profit of AED46.7m ($12.7m).

If that weren’t enough, the three-year-old du is nipping at Etisalat’s heels in other areas. The firm is keen to expand its broadband network beyond Dubai and has pushed to install a technical system that would give Etisalat users the choice to switch networks. The move would increase competition in the market, but Etisalat has resisted, arguing that the high cost of upgrading the network infrastructure is an “unfair burden” to place on the operator.

The UAE Telecom Regulatory Authority (TRA) last month fined Etisalat AED400, 000 ($109, 000) for stalling the changes.

Today Omran is sipping coffee on a sunny terrace overlooking the Dead Sea. He doesn’t look like a man who is feeling the heat, in either sense of the word.

“When there is somebody competing with us in the market this is good and healthy,” Omran insists. “There are many ways to add customers, and in the UAE we are doing much better than any one of the analysts expected.

“Last year we did much, much better than any analysts expected and even in the first quarter we did well.”

Although traditionally seen as a defensive sector, analysts agree that the UAE’s telecom players will face their fair share of challenges this year, not least because of the projected decline in the country’s population.

“The result of this crisis could lead to a reduction in population growth for the UAE, which has been one of the key drivers for increased subscriber numbers over the last few years,” Al Mal Capital analyst Irfan Ellam wrote in a research note at the end of the first quarter.

The UAE remains Etisalat’s biggest market, despite the operator’s aggressive expansion overseas in India, Afghanistan and several African markets.

Al Mal believes the UAE population could decline by 4.2 percent in this year and by a further 1.2 percent next year, before resuming growth by 3.0 percent in 2011.

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Add to that one of the highest mobile penetration rates in the world — the average UAE resident already has more than one phone — and operators are facing a rapidly shrinking market.

For Omran, the solution is to squeeze more money from existing users.

“The number of customers is not the most important thing, it’s the money coming from those customers,” he explains. “We focus on offering value customers better services and a variety of services. You have already seen us recently introduce the iPhone, and more things will be offered to our customers.”

The Apple handset was launched in the UAE to much fanfare but also with one of the highest price tags in the world. As a result, it seems to have hit the market with more of a fizzle than a bang.

Sales of the iPhone were “modest” in the UAE compared with Saudi Arabia after the February launch, Omran admits, but he predicts demand will rise following recent price cuts.

On May 5 the company slashed the price of its iPhone 3G packages in the UAE, which it said will save customers up to 22 percent from their initial asking prices.

However, the new tariff is still considerably more expensive than that of Etisalat’s Saudi affiliate Mobily. A 16GB version of the Apple handset costs $832 in the UAE on a prepaid contract, compared to $747 in Saudi.

“We introduced the iPhone in Saudi Arabia cheaper than in the UAE and we have seen good market growth there, while in the UAE it was modest,” Omran says. “When we equate the UAE with Saudi Arabia in terms of offering, we will be able to add more customers.”

The price cuts also highlighted that price competition in the country’s telecom sector is still very much staged. Etisalat was unable to lower the price of the handset before receiving permission from the TRA.

In a written statement, the regulator told Arabian Business that Etisalat is free to decide on its own pricing as long as it’s not below cost, but Omran says that is not an accurate description of the market.

“In the UAE it is public knowledge that the TRA decides on the retail price. We are unable [to do anything] without approval by the TRA,” he says.

Decisions made by the regulator in areas other than pricing could also have a major impact on the company’s activities. Half of Etisalat’s net profit is paid as a royalty fee to the government and a reduction would most likely boost the share price.

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Equally, any lifting of the UAE’s blanket ban on Voice over IP (VoIP) services such as Skype would slash the firm’s revenue from international calls.

“Definitely, if Skype or other types of VoIP is introduced in the UAE, that will affect the revenue not only for us, but for also for du,” admits Omran. “In the UAE, quite a good portion of the revenue comes from international calls and the tariffs in the UAE are still unbalanced.

“Local charges are much lower than cost, especially for fixed line.”

The cost of fixed line rental and local calls should be brought in line with that seen in other countries, Omran argues.

“We are below cost and normally this is partly compensated with international calls. We have called several times for readjustment of the tariff to link it with the cost, so that we would be able to lower the cost of international calls,” he says.

The company does not know whether, and when, VoIP software will be legalised in the UAE. “You need to ask the regulator,” Omran smiles.

Looking ahead, Etisalat is on track to launch its Indian operations in October and will be bidding for a 32 percent stake in Morocco’s Meditel, which Portugal Telecom is looking to sell.

The company is still interested in entering the Iranian market despite being stripped of the country’s third, potentially lucrative mobile license earlier this month after falling out with its local partner.

Omran says Etisalat is still in talks with the Iranian regulator despite an announcement that the license will now be awarded to a consortium led by Kuwait’s Zain.

“There are several people in Iran, almost everyone is talking to everyone,” he says, adding that it will take some time for the issue to be resolved. “Gauging from what happened during the last few months, it is not something that will be done soon.”

The company has also expressed its interest in the Syrian and Lebanese markets.

“In Saudi Arabia Mobily has announced very high results. In Egypt we are performing ahead of analyst expectations,” says Omran. “Overall, we are positive.”

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