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DE RUEHLM #0948/01 2871138
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R 141138Z OCT 09
FM AMEMBASSY COLOMBO
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RUEHIL/AMEMBASSY ISLAMABAD 8981
RUEHKT/AMEMBASSY KATHMANDU 7219
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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