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Cablegate: The Sri Lankan Mobile Telecom Market: Growing

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R 141138Z OCT 09
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 0620
INFO RUEHKA/AMEMBASSY DHAKA 1945
RUEHIL/AMEMBASSY ISLAMABAD 8981
RUEHKT/AMEMBASSY KATHMANDU 7219
RUEHNE/AMEMBASSY NEW DELHI 3360
RUEHCG/AMCONSUL CHENNAI 9542
RUEHKP/AMCONSUL KARACHI 2538
RUEHCI/AMCONSUL KOLKATA 0428
RUEHLH/AMCONSUL LAHORE 0082
RUEHBI/AMCONSUL MUMBAI 6842
RUEHPW/AMCONSUL PESHAWAR 0362

UNCLAS SECTION 01 OF 02 COLOMBO 000948

SENSITIVE
SIPDIS

DEPARTMENT FOR SCA/INSB

E.O. 12958: N/A
TAGS: CE ECON ETRD PGOV EINV ECPS IN
SUBJECT: THE SRI LANKAN MOBILE TELECOM MARKET: GROWING
PAINS WITH EXPANSION AND INCREASED COMPETITION

1. (SBU) SUMMARY: There is increasing competition in the
Sri Lankan mobile telecommunications sector which has led to
more choice and lower calling costs for consumers. Mobile
service providers have struggled to maintain profitability as
competition has risen and prices have fallen. Cooperation
between providers remains limited and this has been an added
impediment towards achieving elusive profits and an even
playing field between competitors. Service expansion into
northern Sri Lanka remains more of a plan than a near-term
action. End Summary.

2. (U) BACKGROUND: Until 1989, Sri Lanka Telecom (SLT), was
the government monopoly provider of fixed line services.
There were no mobile or other operators in the market. Major
reforms began in 1989 with the entry of the first private
operator Celltel (later named TIGO). From 1989 through 1995,
three other operators entered the market (Dialog being the
last in 1995). In 1996, wireless local loop operators Suntel
and Lanka Bell entered the market. In 1997, SLT was
partially privatized with the government retaining a 61.5%
stake, of which 12.5% more was sold in 2003. In 2002, SLT
became the owner of Mobitel which allowed SLT to enter the
mobile market. SLT's monopoly control over primary
international switches ended in August 2002, which greatly
affected competitiveness within the telecom market. In early
2003, the GSL liberalized international telecommunications
and issued 29 gateway licenses. Since then, international
call rates have dropped sharply. Bharati was the most recent
entry into the mobile market with initiation of service in
early 2009.

THE FEISTY NEWCOMER TO THE SRI LANKAN MOBILE SERVICE FAMILY

3. (SBU) The most recent entry into the Sri Lankan mobile
telecommunications market is India's Bharati Airtel, now the
country's fourth largest mobile service provider. Airtel
obtained its license to operate in April 2007 and began
service to the public in January 2009. Airtel entered the
market at a time when many questioned the need for a fifth
mobile service provider. An Airtel executive recently told
Econoff that the company did not anticipate actually
receiving a license from the Government of Sri Lanka.
Company executives agreed with the popular belief that the
mobile communications market in Sri Lanka was already
saturated. Despite this, Airtel forged forward with its
business and by September 2009 Airtel had achieved 1.5
million customers. Airtel has developed its niche through
marketing for its brand appeal and low prices, two Rupees per
minute for a local call. Airtel,s prices are currently the
lowest in the Sri Lankan mobile telecommunications sector.
The standard demographic for Airtel are young customers
attracted by the company's edgy marketing, and transfers from
other providers which are attracted by lower costs. Despite
low prices and robust marketing, Airtel admits it is
struggling to become profitable.

THE DYING FATHER OF THE MOBILE SECTOR

4. (U) The venerable player of the Sri Lankan mobile
telecommunications sector is TIGO. TIGO currently has more
than 2 million revenue earning customers and charges 3.6
Rupees per minute for a local call. In an effort to remain
solvent, the company has resisted lowering its prices to the
same levels as Airtel. In 2005, TIGO charged 10 Rupees per
minute for local calls, so increased competition has rapidly
reduced per minute calling rates. Although usage has
steadily increased, the CEO of TIGO complained to Econoff
that companies have over-saturated the market and that
consumers look less at loyalty than rock-bottom calling
rates. TIGO's CEO also commented that Sri Lanka is a three
player market and even four mobile providers creates sector
unprofitability. Based on recent unprofitability and
seemingly low levels of cash reserves, TIGO has been forced
to seek acquisition by another mobile provider. Two
companies are currently on the short list of bidders:
telecommunications giant Etilsilat and local competitor
Airtel. A decision regarding which company TIGO will choose
to be acquired by is expected in mid-October. An acquisition
by Etilsilat will ensure that five mobile service providers

COLOMBO 00000948 002 OF 002


remain in Sri Lanka, whereas an Airtel acquisition would
likely result in four providers remaining.

LACK OF COOPERATION IN THE MARKET

5. (U) The Sri Lankan free market model is still constrained
because the five mobile providers often impede each other.
In response to Airtel's entry into the market, TIGO and
Dialog (the largest mobile provider) charged Airtel massive
interconnection fees to use their towers, likely in response
to Airtel's successful efforts to drive prices down for
consumers and rapidly gain market share. Unlike in the
United States, cell tower sharing is rare in Sri Lanka.
Sharing is most common in Sri Lanka's Eastern Province and
least common in the West and South of the country. TIGO
shares towers in areas where government regulation makes new
tower construction cost prohibitive. Overall, TIGO shares
only about 30% of its towers, primarily in eastern Sri Lanka.
Roaming is also an issue. Currently, mobile service
providers do not allow interconnection on their networks to
other providers. For example, if an Airtel customer travels
to Trincomalee where the company has no service towers, the
customer will be without reception because they cannot
connect calls using Dialog, TIGO, or Mobitel towers.
Regulation of the mobile sector by the Telecommunications
Regulatory Commission is largely ineffective, leaving
oversight or self-policing in the hands of the mobile
telecommunications sector itself.

EXPANSION INTO NORTHERN SRI LANKA

6. (SBU) The Sri Lankan mobile telecommunications sector has
requested permission from the Government of Sri Lanka (GSL)
to expand their networks into the northern portion of the
country following the May 2009 defeat of the LTTE. The GSL
continues to evaluate where to begin mobile phone expansion
as well as whether security can be maintained. The GSL has
received bids from seven companies to begin work on a
national broadband fiber network which should bring rapid
telecommunications development to northern Sri Lanka. The
contract will be awarded in January 2010 with phase 1 of the
project lasting two years, and two additional phases lasting
another four years. The World Bank is currently supporting
this initiative with a US $12.5 million grant. Once
completed, mobile service providers will be permitted to
purchase bandwidth from the broadband network. Mobile
service providers are currently unsure whether they will be
permitted to build their own service towers in northern Sri
Lanka. While all five mobile phone companies have submitted
plans to build new service towers, the GSL is weighing
whether to use a third party to construct towers and then
sell portions of the towers off to each company once
completed.

7. (SBU) Comment: Mobile telecommunication service expansion
in Sri Lanka has benefited customers who only a few years ago
had limited service options and were paying three or four
times current rates for local calls. However, increased
competition in the mobile sector seems to have over-saturated
the market and led to unprofitability across the board.
While various service providers complain about too many
players in the market, existing market players and the GSL
will need to become accustomed to increased competition and
strike a balance when dealing with each other to ensure
future profitability. End Comment.
BUTENIS

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