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This case was written by Ch Sheeraz Saleem and Nighat Faiz, under the direction of
Asif Ali Rahman, Mohammed Ali Jinnah University. It is intended to be used as the
basis for class discussion rather than to illustrate either effective or ineffective
handling of a management situation.
The case was compiled from published sources.
Pakistan Stepping into
the Future:
The Cellular Industry of Pakistan
2004 Mohammed Ali Jinnah University, Islamabad, Pakistan.
Distributed by The European Case Clearing House, England and USA.
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2


Pakistan Stepping into the Future:
The Cellular Industry of Pakistan


PAKISTAN: AN INTRODUCTION

The Islamic Republic of Pakistan was founded on the 14
th
August 1947. Pakistan is
strategically placed at the crossroads of Asia, where the road from China to the
Mediterranean meets the route from India to Central Asia. The borders of Pakistan
encompass a total area of 796,096 square kilometers. Climatically, Pakistan enjoys a
considerable measure of variety. The vast plains of the Indus Valley are extremely hot in
summer and have cold weather in winter. Average rainfall is 762 millimeters per annum.
Archaeological sites richly illustrate Pakistans 4000 years history and imposing
monuments scattered the length and breadth of the country. Magnificent Muslim tombs
from the 12
th
century lie with the palaces, mosques and forts of the Moghul Emperors of
the 16
th
and 17
th
centuries.

Not withstanding with the downturn in many countries, Pakistans economy has
demonstrated greater resilience and improvement in overall macro economic fundamentals
of the economy. However, the events of September 11, and continuation of the
catastrophic drought conditions adversely affected the pace of economic recovery.
Particularly, the most impressive gain during the year appeared to be the tremendous
improvement in Pakistans external sector. Main factors strengthening the external sector
were improvements in trade balance and sharp increase in the inflow of workers
remittances.


PAKISTAN TELECOMMUNICATION AUTHORITY (PTA)

1
Pakistan at the time of its inception in 1947 owned a meager telecom base with just
14,000 operational telephone lines. Telecom service was meant just to meet the needs of
country administration. The year 1962 saw the first sector change when establishing
independent T&T and Postal Departments separated Post Telegraph & Telephone
services. Since the mid-1980s, a number of countries including Pakistan overhauled
telecommunications sector, to mobilize additional capital, improve performance of
operating enterprises and respond to rapidly growing pressures for more varied services.
The pace and scope of sector reforms has varied considerably in South, Latin America and
Asia. A number of countries opted to privatize their telephone entities. In the Far East
(early 1990s), there have been initiatives on partial privatization (Thailand & Malaysia

1
History of Telecommunications in Pakistan, www.pakistaneconomist.com, May 19, 2003
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The Cellular Industry of Pakistan
3
etc) including liberalization of non-basic services. The results achieved were found to be
beneficial. This brought the wave of change in South Asia also. To begin, Pakistan in
1990 also started taking gradual sector reform measures within the existing legal and
regulatory framework. In line with emerging trends, private sector participation and
deregulation initiatives were taken during 1989-91.

Pakistan Telecommunication Authority (PTA) was established on 1
st
January 1996 as a
central regulatory body. Government is now deregulating and liberalizing
telecommunications industry through privatization of state-owned monopoly i.e., Pakistan
Telecommunications Company Limited (PTCL) opening up the telecom industry for
private sector and international competition under the ambit of PTA as a regulator.
Currently, the six cellular companies (Mobilink, Paktel, Instaphone, Ufone, Telenor and
Al-Wareed Telecom) of the private sector work under the regulations of PTA along with
PTCL.


AN OVERVIEW OF THE TELECOM SECTOR

2
The current global telecom industry, is going through a phase of turbulence after years of
stability, the situation is changing radically. The industry is facing number of challenges;
the most pressing one is opening up of the telecommunication sector. It has led to evolve
genuine competition in many markets; the introduction of mobile, Internet together with
other value added services is rapidly creating new segments of market with very few
similarities with the traditional marketplace. Moreover, the convergence of services and
technologies in the developed economics is resulting in a totally different set of issues to
be addressed.

In line with these global trends the telecom sector of Pakistan is also being completely
deregulated and necessary preparations by all stakeholders are underway. In this regard
PTA has been working exclusively to address all anticipated issues for evolving a
comprehensive deregulation framework. Consultations with internationally renowned
telecom consultants have been carried out to chalk out a strategy for implementing
deregulation.

Pakistan telecommunication and IT sector despite going through a major structural shift,
has grown and developed in the last few years. The key highlights of the telecom sector
can be depicted as the state-owned monopoly PTCL has earned over US $1 billion
revenue in FY 2001-02 while preparing for a deregulated scenario. Internet access has
expanded over 1000 cities and towns across Pakistan. Internet bandwidth capacity
availability has increased to 400 mb/s and 250 cities are connected through fiber optics.
PAKSAT-1, Pakistan's satellite has been launched to further strengthen the
telecommunications infrastructure. Cellular penetration is now 1.3 million and is expected
to grow to 3 million by the next year. In 2004, it has been projected that the cellular
subscribers will reach the figure of 25 million by the year 2018, due to the entry of new
players in the market. Cost of making domestic and international calls dropped between 40
and 60 percent. Internet bandwidth rates slashed down from US $90,000 to US $3,800 per
month.

2
Pakistan Telecommunication Authority, www.pta.gov.pk
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The Cellular Industry of Pakistan
4
THE CELLULAR INDUSTRY OF PAKISTAN

3
The cellular telephony sector is one of the fastest growing high-tech areas of
todays time. Right now in Pakistan the investment in this industry is around a billion
dollars with more than 3 million subscribers. With the existing operators planning further
investments to expand their infrastructure and subscriber base, it is safely assumed that by
the end of the year 2004, the cellular subscriber base in number terms would leave fixed
telephony line subscriber base way behind.

4
A few years ago the addition of Ufone as the fourth entrant in the industry was hailed as a
good move. However, the decision of issuing two more licenses on the basis of the
projected figure of 25 million potential subscribers by the year 2018 is debatable. Even if
the figures are accepted, one can always argue that in China where already the customer
base is very large compared to Pakistan, there are only four operators who expand
according to the dictates of the market.

Cellular industry of Pakistan comprises of four companies namely Mobilink, Paktel,
Instaphone and Ufone with an addition of two more players in 2004, Telenor and Al-
Wareed Telecom. The industry has shown tremendous growth in the year 2001-2002 as
the subscriber base increased from 0.7 million to 1.2 million (70 percent increase).
However, this growth rate is lower than the previous years growth rate (Exhibit 1 & 2).

Mobilink and Ufone are using digital technology (GSM) for its cellular service. Lately
Instaphone introduced digital version of its analogue technology, D-amps, (Digital
Analogue Mobile Phone System). Exhibit 3 shows the market share of cellular companies
with respect to the number of subscribers.

PTA played a major role in increasing the growth rate of the industry. A transition from
MPP (Mobile Party Pay) to CPP (Calling Party Pay) made incoming calls free. Moreover,
PTA gave incentive to the cellular companies by reducing royalty, interconnection charges
and airtime tariff. All these factors made mobile phone affordable for a common man.

Pakistan cellular industry at the moment is experiencing growth explosion. Though the
existing players are trying hard to meet the growing demand, still there is a huge unmet
demand in the country vis--vis the supply of connections by the operating cellular
companies. Recent example of this potential demand can be seen in the prepaid cellular
connections by Ufone, which claims that they have sold 100,000 connections in just 100
hours. Major reason for the unfulfilled demand is the lack of investment on the part of
existing players to increase their network capacity and the use of obsolete technology that
is AMPS instead of moving to GMPCS/GPRS. Moreover, no fresh foreign investment has
come up in the form of new players up till now. It is desirable that the existing companies
should upgrade the technology and more licenses should be issued to the international
cellular companies, so that the local demand can be met.



3
Telecom in Pakistan, The News, January 19, 2004
4
Currently, there are four cellular companies operating in Pakistan, Mobilink, Paktel, Instaphone and Ufone.
Recently, two new cellular companies have entered Pakistan, Telenor and Al-Wareed Telecom.
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The Cellular Industry of Pakistan
5
RECENT TRENDS IN THE CELLULAR INDUSTRY OF PAKISTAN

Pakistan has witnessed a number of recent trends in the cellular industry for the past
couple of years. Some of them are listed below:

Reduction in the Activation Charges by the government:
5
Telecom analysts have recently welcomed a 50 percent cut in the activation charges for
cellular firms but say the volume of the reduction is not in line with what was proposed to
the government this year, since users who want to switch over from one network to
another still have to pay the old activation charges. Pakistan Telecommunication Authority
has proposed to the finance ministry to remove the activation charges of Rs 2,000 on new
mobile phones and those who switch over from one network to another. A PTA source has
asked the finance ministry to abolish or cut both taxes but the tax on switching
connections is sill there. The source said that they had tabled the proposal because those
taxes were major hurdles in the growth of the cellular industry.

Reduction in the Airtime Charges by the cellular companies:
Four cell phone operators had pushed PTA to propose elimination in activation and
switchover charges. Industry officials say they are disappointed that their proposal was not
incorporated in the budget. We were informed by the PTA a few months ago that it has
forwarded the proposal for removal of both activation and switching over charges, a
senior official at one of the firms said, asking not to be quoted. But the budget
announcement has not really satisfied us, the official said. He said companies would soon
approach PTA to take up the issue with the finance ministry. A senior PTA official said
following a 50 percent reduction, the cell phone companies should now reduce their
airtime charges.

Not much offered: But industry officials say the
6
budget has not offered due incentives to
the growing industry.

Exemption of Customs Duty:
Executive official from another company have asked for high-tech industry classification
in order to avail exemption from Customs Duty on infrastructure imports. Cellular
technology is one of the fastest developing technologies in the world and equipment is
mostly IT based and highly sophisticated, he said, adding that the four companies had a
share of around $1 billion in infrastructure development investment. He justified the
industrys demand by saying the country was going through rapid development in terms of
new systems, new features and new functionality which required constant upgrades in
existing platforms and systems. The federal government, in an attempt to facilitate the
high-tech industry, had issued SRO number 439(I)/2001, which outlined exemption of
customs duty on plant, machinery and equipment (not manufactured locally) imported by
high tech industries, priority industries and value added industries.

The list of high tech industries in the SRO includes industries like IT, process control
equipment, power tools, powder metallurgical industry and the manufacture of alloys and
stainless steel. We strongly feel the SROs details support clear classification of the

5
Cell phone firms not satisfied, seek more incentives, The Daily Times, June 14, 2004.
6
In Pakistan, the annual budget is presented in June each year.
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The Cellular Industry of Pakistan
6
cellular telecommunications technology as part of the high tech industry, the company
official said.


THE NEW ENTRANTS

7
Two new cellular companies would deposit another 25 per cent license fee and hoped that
they would commence operations soon. The two companies have deposited US $72.7
million, which is 25 per cent of the total license fee. They would pay an additional 25 per
cent and hopefully start operations within six to eight months," the chairman PTA said
while addressing a press conference here at the PTAs regional office.

The new entrants Telenor and Al-Wareed Telecom - had to pay a total of $291 million
each for the cellular operation licenses in the country, 50 per cent of which would be
payable within 15 years. The PTA, last month, awarded licenses to two new companies for
$ 291 million each in an open bidding in Islamabad. Telenor from Norway and Space
Telecom - a Syrian consortium of Pakistani and foreign investors were the winners among
nine bidders.

However, the whole episode took a new turn later when Space Telecom failed to deposit
25 per cent of the license fee within the given deadline. The unexpected situation paved
the way for UAEs Al-Wareed Telecom, which had offered $280 million in the open
bidding.

The PTA clarified that the Authority had put in place a transparent process and the
eleventh-hour withdrawal of Space Telecom from the process was a totally internal matter
of the consortium and had nothing to do with the regulators. The two new companies have
started setting up their networks and are actively surveying the country to kick-start their
operations.


FUTURE PROSPECTS

8
The two new companies would compete with the existing four players in the country. As
per the governments estimates, the countrys cellular customer base is expected to
increase to 15 million within the next four to five years from the current around four
million.

7
The PTA informed that the Authority had already sought Expressions of Interest for
landline operations from willing local and foreign operators and had received robust
response from both sides. They have registered 92 companies for LL (local loop
operations) and around 25 for LDI (long distance international) operations. It shows the
investors confidence in the policies.


7
New cell phone may start by year end, The Daily News, May 12, 2004.
8
Government to issue two new licenses, The Daily Times, December 17, 2003.
7
Awais expects $1.74b investment through open Cell Phone policy, www.dailymailnews.com

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The Cellular Industry of Pakistan
7
The PTA had set $10,000 license fee for LL and $0.5 million for LDI operations.
However, the latter would have to deposit a $10 million bond. As per the policy, no
particular criteria had been set to award landline operation licenses but the authority had
the right to check history and track record of the applicant. Currently, PTCL is the only
incumbent service provider for the provision of fixed line telecommunications.

The cabinet approved the first-ever mobile cellular policy formulated by Ministry of
Information Technology on January 28, 2004. The main objectives of the policy were to
promote cellular sector for the national benefit, ensure broad coverage at affordable prices,
increase Tele-density, increase choice of services for customers, increase private
investment in cellular mobile, recognize the rights and obligations of operators, establish
and maintain fair competition amongst mobile and fixed operators, ensure uniform policy
and regulatory regime with certainty for the future in line with international best practices
and achieve spectrum efficiency.

Under the policy the existing licensees are being given the option to immediately adapt to
the new policy even for the remaining term of their existing licenses after matching the
winning bids so that all mobile licensees could have certainty and operate under the same
policy with immediate effect.

Minister for IT and Telecom expressed satisfaction that the Mobile Sector Policy prepared
by the Ministry based on best international practices had lived up to the expectation and
had been supported by investors as reflected in the bidding.
It had achieved the desired objectives of attracting foreign investor and additional
competition in the sector would drive the prices down and help increase mobile Tele-
density from 2 per cent to about 10 per cent in the next five years. He further said people
could now get better quality of service, wider coverage at an affordable and competitive
price.


CONCLUSION

There is great potential for expansion of cellular mobile industry in Pakistan as is
reflective from the 500 percent increase in the number of mobile phone users with the
introduction of Calling Party Pays regime over the last two years. Pakistan
Telecommunication Company Limited (PTCL) has taken a number of steps to meet the
growing demand of the customers. These include 50 to 60 percent reduction in charges on
nation-wide and international calls and 99 percent digitalization of its network. The entire
set up would be made digital by the end of this year, achieving a unique feat in the region,
fixed phone trend is being changed and demand of cellular phone is increasing day by day,
by 2006 mobile phones would dominate fixed line phones in Pakistan. Cellular industry of
Pakistan holds great promise in the future. The advent of new technologies, rigorous and
innovative marketing, efficiency and cost saving can lead to a rapid and consistent growth
in this sector.

It is seen that new companies are taking a keen interest in the cellular industry of Pakistan
and will invest to the tune of US $800-1000 million over next 3 years in terms of network
expansion which will result in over 20,000 jobs and a tremendous economic activity in the
country. This investment will provide a tough competition among the existing cellular
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The Cellular Industry of Pakistan
8
companies in the country.
8
If we assume that the future cellular coverage reaches 95% of
all urban population and 30% of rural population and taking into account the relative
geography and population density of all the four provinces of Pakistan, there is a potential
demand of approximately 25 million cellular subscriptions by 2018. With technology
breezing through the way it has been, it is guaranteed that there will be new products, new
services and more cell phone users than ever before.


8
IT and Telecommunication Division,www.pakistanlaw.com
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The Cellular Industry of Pakistan
9
Exhibit 1
Cellular Subscribers in Pakistan

Year Instaphone Mobilink Paktel PTML
(Ufone)
Total Growth rate
percent
1995-96 20,950 16,385 30,703 -- 68,038 --
1996-97 43,029 52,600 39,398 -- 135,027 98.4
1997-98 53,184 82,912 6,000 -- 196,096 45.2
1998-99 108,058 87,556 70,000 -- 265,612 35.4
1999-2000 112,000 114,272 80,221 -- 306,493 15.4
2000-2001 220,000 309,272 96,623 116,711 742,606 142.0
2001-2002 319,926 570,888 206,109 141,679 1238,602 66.79
2002-2003 581404 1014710 340947 511337 2448398 --


Exhibit 2
Cellular Subscribers in Pakistan
68038
135027
196096
265612
306493
742606
1238602
1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-2002














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The Cellular Industry of Pakistan
10

Exhibit 3
Market Share of the Cellular Operators in Pakistan (Subscribers)
Paktel
17%
Instaphone
26%
Ufone
11%
Mobilink
46%

Source: Pakistan Telecommunication Authority