Technological Risk Factors related to buying of Celtel shares

By Brenda Zulu

As Zambians await the listing of shares by Celtel Zambia on the Lusaka Stock Exchange (LuSE), it is a good time to look at the technological risks that are outlined in the Celtel Prospectus.

To start with, Celtel Zambia currently faces competition from two mobile phone operators, Cell-Z and MTN Zambia. It is important to note that Cell-Z is a government-owned, national operator, whose target has been low-end with a price sensitive market. On the other hand, MTN Zambia, previously Telecel, has increased its investment in Zambia since July 2005. Competition in this sector is, therefore, primarily on the basis of coverage, price, quality, brand, service offerings and customer service.

Increased competition, as well as an increasing proportion of poorer customers, may result in continuing declines in average revenue per user. Declines in ARPU, if not offset by reductions in operating costs and/or increases in customer base, may have a material adverse impact on Celtel Zambia’s business.

There is also a risk of system failure. A system failure or shutdown in Celtel Zambia’s networks of billing systems could interrupt its ability to deliver its services and generate revenues. It could also result in a violation of the terms of its licences and action by the relevant authorities.

Other technological risks include the rapid development of technologies and services offered. As a result, Celtel Zambia may face increasing competition from technologies which are currently being developed and may be deployed in the future by either existing competitors or by new market entrants. The application of new technologies and development of new services involve time, substantial cost and risks. If Celtel Zambia fails to obtain timely access to new technologies equipment, or if they fail to maintain timely access to provide services using these new technologies, Celtel Zambia may lose its customers and market share and become less profitable.

There is also an interconnection risk under Celtel Zambia’s interconnection arrangements with Zambia’s incumbent operator, Zamtel, for mobile-to-fixed-line and mobile-to-international service. Celtel Zambia cannot assure potential investors that its interconnection agreements will be renewed on similar or better terms and conditions at the end of their terms.

The Public Switched Telephone Network Interconnection agreement with Zamtel, which governed the routing calls between Celtel Zambia’s mobile network and Zamtel over its fixed line network and regulated Celtel Zambia’s access to the international gateway for sending and receiving international calls, was terminated by Celtel Zambia in January 2008. As required by law, interconnection continues, but it is uncertain what rates apply.

Celtel Zambia and Zamtel have been in dispute concerning the interconnection charging rates in this agreements but reference is made therto in the notes on contingent liabilities in its financial statements. Celtel Zambia has requested assistance from the Communication Authority of Zambia (CAZ) to facilitate or determine a new interconnection agreement between parties.

The other risk is that of renewal of the Celtel Zambia operational incense. This is because the operation of a telecommunications network and provision of related services in Zambia is regulated by the CAZ. The existing incenses are subjected to review, interpretation, modification or termination by the relevant authorities.

Celtel Zambia cannot assure investors that the relevant authorities will not take any action that could have a material or adverse impact on Celtel Zambia. The principle license expires in 2013, but it is renewal upon expiry, unless Celtel Zambia is in breach of the terms of license or the regulations of the Communications Authority.