Pakistan's mobile market hit by high taxes and fierce competition - World's tenth-largest mobile market shrinks in fourth-quarter 2008

Pakistan has grown quickly to become the tenth-largest mobile market in the world, prompting numerous international operators to invest in the market. However, after many quarters of strong growth, the market saw a decline in the number of mobile connections in the last quarter of 2008. According to GSMA Intelligence data, connections shrunk by 0.33% in Q4, 2008, due mainly to declines at Mobilink, the market leader. On an annual basis, the market still grew by almost 17% but this was almost half the growth rate seen a year earlier.

The declines in the market can be attributed to a number of factors. Firstly, the Pakistan Telecom Authorities (PTA), the local regulator, recently introduced more stringent guidelines around how operators report subscriber information. Under the new regulations, operators are forced to remove subscribers that are deemed inactive for more than 90 days. Telenor, for example, said it has removed more than 400,000 subscribers as a result of this policy.

The market has also been impacted by a sizable consumer tax on mobile phones. Classed as a "luxury item" in the country, the government recently increased the so-called "activation tax" on mobiles from (an already controversial) PKR500 (US$6.3) to PKR750 in 2008. This tax, alongside the wider effects of the global economic downturn and high inflation in the country, appears to have led to a significant tightening in consumer spending with regards to mobile services.

Meanwhile, the country's mobile operators are also facing fierce competition and pricing pressures, an unfavourable regulatory environment (most notably a reduction in interconnection fees), a volatile political situation, and higher taxes of their own (taxes on mobile services were raised by 5% in 2008). These factors have served to significantly impact profitability, leading to ARPU that is among the lowest in the region. China Mobile, for example, has said that ARPU at its Pakistani subsidiary is around US$3 per month compared to around US$13 per month in China.

The market is highly competitive with six established mobile networks and several major WiMAX deployments. In almost all cases, the mobile networks are controlled by major foreign firms. The telecoms sector has been a major focus for international investment in the country. According to the PTA, mobile firms invested US$2 billion in Pakistan in 2006, accounting for 54% of all foreign direct investment. All the international operators have been hit recently by the decline in value of the Pakistani Rupee against the US Dollar.

The market is currently led by Orascom Telecom's Mobilink, which operates under the "Indigo" (postpaid) and "Jazz" (prepaid) brands. It also operates a WiMAX network in the country's capital, Karachi. However, as market- leader, Mobilink has suffered most from fierce competition in the market, losing almost 3 million customers in Q4.

The current downturn in the local mobile market looks set to lead to a significant movement in market shares. This month, Warid Telecom received a further US$250 million cash injection from its two major shareholders (investment firm Abu Dhabi Group and Singapore's SingTel) and pledged to become "the number one GSM operator in Pakistan" despite currently being only the fourth-largest player in the country.

Further competition arrived in 2007 in the shape of China Mobile, the world's largest mobile operator in terms of subscribers, which acquired Paktel in March 2007 for US$400 million, becoming the operator's first (and, to date, only) venture outside its domestic market. China Mobile has invested a further US$1.2 billion in the network, which it rebranded as "Zong" last year, but - like many of its competitors in the market - it does not expect to see a return on its investment in the near term, despite the fact that Zong is currently the fastest-growing network in the country.

Matt Ablott, Analyst, GSMA Intelligence:

The decline in Pakistan’s mobile market is attributable to a slowdown in consumer spending caused by high inflation, high taxes and the wider economic situation. Despite a nationwide mobile penetration rate of just 52%, the market is unlikely to grow further until the situation improves. This creates further pressure on the country’s mobile operators, which were already operating in a fiercely competitive, high-cost, low-margin market. The situation also appears to have stalled plans to issue 3G licenses in the country, which were at one stage expected to be issued before the end of 2008. However, the prospect of cash-strapped operators investing in high-speed networks now seems unlikely in the short-term. As a country that has greatly profited from mobile services in recent years, it is hoped that the Pakistani government will soon take measures to relieve the regulatory and economic pressures on its operators in a bid to stimulate the flagging market.