Network shutdowns hurt Iraq telecoms but 3G offers some solace

The network of Zain Iraq is suspended in parts of Mosul, Salahaldin, Anbar and Tikrit

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The financial damage to Iraq's mobile phone operators from the war against Islamist militants is likely to worsen in 2015, but the recent launch of long-awaited 3G services in government-controlled areas should soften the blow.

The Islamic State of Iraq and Syria (ISIS), which controls swathes of northern and western Iraq, has destroyed transmitter towers in its territory and people under their rule face harsh penalties if found using mobile phones. The group fears users could give information to its enemies.

The network of Zain Iraq, which has an estimated 42 percent share of Iraqi mobile subscribers, is suspended in parts of Mosul, Salahaldin, Anbar and Tikrit, a company spokesman said via email. All those areas were seized by ISIS, many around June last year.

"We have some operational difficulties in certain areas and have limited access to those scattered locations," the spokesman added. "We are working on improving service and securing coverage wherever we have access."

Zain Iraq's net income sank 29 percent to $256 million in 2014, Kuwaiti parent Zain's financial statements show; the parent's 2014 net profit was $649 million. Zain Iraq has about 400 sites "off air", according to a February presentation to analysts.

The network of Asiacell, which accounts for 39 percent of Iraqi subscribers, is down in the same areas, a presentation by majority owner Ooredoo shows.

"Asiacell may be unable to exercise control over some property and equipment in certain locations," said Ooredoo's earnings statement, which gave assets in those areas a book value of $134 million.

The parent's profit from Asiacell was $181.5 million in 2014, according to Reuters calculations, down from $299.4 million in 2013. Ooredoo's total net profit for 2014 was $585 million.

Analysts say the financial impact on operators is likely to worsen as ISIS digs in, despite some military gains by government forces in recent months. Network problems worsened as 2014 wore on.

"Iraq offered Ooredoo and Zain the biggest opportunity within their portfolios, but now it's become their biggest challenge," said Nishit Lakhotia, head of research at Securities & Investment Co in Bahrain.

"The impact from network disruptions will continue in the Q1 and will likely be more severe than the fourth quarter of 2014."

However the two biggest operators, plus the third biggest firm Korek, will find some solace in January's launch of 3G services allowing mobile Internet after years of delay in obtaining approvals from the government, though the benefits would be greater if Iraq were not embroiled in civil war.

"This should stabilize revenue and profit this year, but the bigger impact will come in 2016 when they could achieve high single-digit revenue growth," said Omar Maher, EFG Hermes telecommunications analyst.

"Political uncertainty makes it very difficult to give an accurate or reasonable outlook for the telecom operators, but they appeared to underestimate the possibility of service disruptions from conflict in the country."

Operators were already facing intensified competition as each sought to attract more subscribers away from their geographical strongholds.

"The conflict looks like it will continue for some time, so parts of their networks are likely to remain non-operational in 2015," added Maher.

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