04-2361-2010-1

MOBILINK: PRICING UNDER COMPETITION

“I need your final recommendations in an hour’s time folks,” said Zouhair A. Khaliq,
President and CEO of Pakistan Mobile Communications Limited, typically known as
Mobilink. He continued, “We cannot keep Cairo waiting for too long. In any case, we have to
meet the deadline for tomorrow’s newspapers regarding whatever announcement we decide.
Our ad agency people need their own ad finalization time.” Zouhair was talking to his
strategy team assembled in the video conferencing room on 14 March 2005 in Islamabad,
Pakistan.

The team had been engaged in lengthy discussions amongst themselves and with senior
managers in Egypt, via videoconference since morning. The debate was on how to respond to
Telenor’s launch of cellular services in Pakistan that morning. Telenor had used aggressive
pricing as an entry strategy much to the dismay of the industry leader, Mobilink. Now,
Mobilink’s strategy team, led by Rashid Khan, Chief Commercial Officer and Bilal Munir
Sheikh, Vice President Marketing, was debating which of the six pricing options to choose in
order to give a strong response to Telenor. Participants were divided over the cost-benefits
of various options. However, they had a deadline to meet.

COMPANY BACKGROUND

Mobilink started operations in Pakistan in 1994. They were the first cellular provider to offer
100% GSM technology in the country when earlier entrants were using older technologies.
Modern technology, wide network and focused marketing helped Mobilink capture 40%
market share by 2001 despite being a late entrant. In April 2001, Mobilink’s ownership
changed hands when Egyptian telecom giant Orascom obtained 89% share of the company
and management control. The backing of the Orascom Group brought an aggressive and
ambitious culture in Mobilink. Orascom had developed a reputation for investing in
Greenfield markets and growing them aggressively (see Exhibit 1). It also had the reputation
of being a tough and aggressive competitor that played to win.

After studying the market for a while, Mobilink initiated a massive growth programme in
2003. Frequent meetings with the Board were held to ready the company for a much larger

This case was prepared by Farid Ahmad, Head of Business Analysis & Planning, Pakistan Mobile Communications Limited
and Associate Professor Ehsan ul Haque at Lahore University of Management Sciences to serve as a basis for class
discussion rather than to illustrate either effective or ineffective handling of an administrative situation. This material may
not be quoted, photocopied or reproduced in any form without the prior written consent of the Lahore University of
Management Sciences.

© 2010 Lahore University of Management Sciences

 04-2361-2010-1

scale of operations and hundreds of millions of dollars were invested in state-of-the-art

network expansion. A business process reengineering unit was added to facilitate, according
to Zouhair A. Khaliq, “this aircraft carrier to become as nimble as a speed boat.” Mobilink
was betting on aggressive expansion of the market where mobile phones will be used by the
masses. Hence, management talent from leading universities and well-known fast moving
consumer goods companies were hired and provided a culture of excellence. All of these
efforts resulted in Mobilink taking the lion’s share of market expansion in the coming years
and by early 2005, it had obtained a commanding 63% market share. Mobilink’s brands,
Indigo in the post-paid segment and Jazz in the prepaid segment, dominated the market in
their respective segments. Its network covered 275 cities which represented about 85% of the
urban Pakistani population.

This rapid expansion had also brought with it a few weaknesses. As Mobilink had had to
constantly upgrade and expand its network, customers had sometimes faced quality and
connectivity problems. This had built a perception of poor service quality amongst
customers. Mobilink management was cognizant of this and expected that with the
completion of the network expansion programme both real and perceived service quality
indicators would improve significantly.

Zouhair Khaliq, a chartered accountant by profession, had a long experience of working in

the telecom industry both in Pakistan and abroad. He had moved back to Pakistan in 2003 to
head the organization. Similarly, both Rashid Khan and Bilal Munir Sheikh had significant
years of telecom experience in Paktel Limited in Pakistan. Both had spent time in the West
prior to coming back to Pakistan.

OPPORTUNITIES IN THE CELLULAR MARKET

In early 2005, the Pakistani economy was showing signs of a strong recovery after some bad
years. The stock market was up, GDP was growing at a healthy rate, the foreign exchange
reserves were at a high level, foreign direct investment was growing rapidly and there was a
general sense of optimism about the economy. The one weakness was political risk. The
country had been repeatedly exposed to military coups and government dismissals. But even
as the governments changed hands between military and democratic governments, the hand-
over had been largely peaceful. The economic policies of liberalization, privatization and
deregulation, too, had remained consistent for more than a decade (see Exhibit 2 for
economic forecasts).

With a population of about 150 million, of which around 30% were living in the urban
centres, and a fixed land line penetration of approximately 4 per 100 inhabitants, the
opportunity for growth of the cellular market in Pakistan was forecasted to be tremendous
(see Exhibit 3). The market that had been slow to expand in the late 90s seemed to have
turned a corner since 2003. According to industry sources, several events, described below,
had triggered this growth:

Calling Party Pays (CPP): Prior to the close of 2000, the tariff structure in place was not
based on Calling Party Pays (CPP). This required the operators to charge both the caller and
-2-
 04-2361-2010-1

the called party in a call. People were reluctant to carry phones as they could be stuck with
large bills for receiving calls which they did not control. Once this was changed and the
entire call was charged from the calling party, it set the scene for a more affordable and
manageable cellular connection.

Ambitious Mobile Telephone Policy: Pakistan Telecommunications Authority spelled out a

Telecommunication Deregulation Policy in 2003 followed by an ambitious, investor friendly
Mobile-Cellular Policy in 2004. As a consequence, many licenses for Wireless Local Loop
(WLL), Long Distance International (LDI), and cellular operations were issued. The two
cellular licenses were auctioned off to Telenor Pakistan and Warid Telecom at prices that
surprised all industry observers. The two companies paid $291 million each for the licenses
even though the conventional wisdom before the bidding had put the price at no more than
$100 million. The licensees were mandated to initiate operations within one year.

Increased Investments: Till 2003 the investment sentiment towards this industry had been
cautious. Pioneering operators had shied away from moving to newer GSM (Global System
for Mobile Communications) technology. Others had been sporadic in their investments in
building capacity. Starting in 2004, the Orascom Group reversed this trend and bet heavily on
market growth – bringing in massive amounts of investment in capacity enhancements.

Industry experts felt that the Pakistani cellular market might follow similar trends of high
growth and penetration into lower income households as had happened in Europe or even in
next door India (see Exhibit 4).

COMPETITION

In 2005, competition in the cellular industry was expected to heat up. The impending arrival
of two new licensees who had paid a huge amount as entry fee had lent a certain urgency to
the growth plans of the existing players as they wanted to grab the maximum market share
before the new licensees started operations. In an underserved market, a ‘land-grab’ for
connections was considered the most effective strategy. However, the strategic intent of each
competitor was shaped by their own constraints and outlook. A brief overview of players in
the mobile sector is provided below:

Paktel Limited

Paktel initiated its operations in Pakistan in November 1990 as the pioneer of cellular
telephony in the country. It started as a Cable and Wireless Company but changed hands in
2000 when Millicom International Cellular acquired 98% ownership. Paktel started
operations using an AMPS (Advanced Mobile Phone Service) system and was relatively
slow in upgrading the technology. It converted to TDMA (Time Division Multiple Access)
technology in 2003 and launched operations on GSM technology only in October 2004. One
reason of this delay was Paktel’s long-running dispute with PTA over the correct amount of
payments for a GSM license. This dispute was resolved by late 2004.

-3-
 04-2361-2010-1

Paktel Limited offered two brands to the market; Paktel for postpaid customers (20%) and
Tango for prepaid ones (80%). While at one point in time Paktel was synonymous with
cellular phones, their brand name had diluted over the years on account of an old technology
image. AMPS/TDMA handsets were expensive and variety was limited which hampered
growth. Consequently, Paktel had steadily lost market share in the recent years maintaining
only an 8% share in early 2005. While Paktel had comprehensive nationwide dealer network
and long experience of operating in Pakistan their limited coverage of the GSM network
posed serious challenges for the future.

Pakcom Limited

Pakcom was also one of the pioneers of the cellular industry in Pakistan starting operations in
1991. Millicom International Cellular owned around 62% of Pakcom. Just like Paktel,
Pakcom had also started with AMPS technology which was upgraded to TDMA technology
in recent years. However, their plans to convert to GSM technology were unknown.

Instaphone was the brand name of Pakcom’s post-paid service. The prepaid service was
branded as Insta-one which was later changed to Insta-Xcite with the change in technology.
Prepaid customers were almost 90% of the subscribers. Just like Paktel, Instaphone had also
diluted its brand image and lost share steadily on account of old technology and in early
2005, their market share was only 6%.

Pak Telecom Mobile Limited (PTML)

A wholly owned subsidiary of government owned Pakistan Telecommunication Company

Limited (PTCL), PTML launched its GSM operations in January 2001. It was the first
operator to offer General Packet Radio Services (GPRS) and Multimedia Messaging Services
(MMS) to customers. Its brand, Ufone, was the first to target the middle and lower income
segments with an aggressive marketing campaign and the lowest prices in the industry. This
marketing strategy coupled with massive investments in expanding network capacity and
coverage led Ufone to overtake pioneers in the industry and become the second largest
operator with a market share of 23%. Almost 95% of Ufone subscribers were pre-paid
customers. Ufone also had an extensive dealer network to service its clients.

While Ufone had a lot going for it, by early 2005 it seemed to be losing steam. The primary
reason was the strong expectation for its privatization, along with its parent PTCL, within a
year or so. This uncertainty seemed to have led to low morale amongst top managers and
consequent inconsistent strategy implementation.

Telenor, Pakistan

Telenor, Pakistan was wholly-owned by the Telenor group of Norway which was founded in
1855 to provide telegraph services in the region. The Telenor group had extensive experience
-4-
 04-2361-2010-1

of the cellular industry both in Europe and Asia. In Bangladesh, they had partnered with the
Grameen Bank (world famous microfinance lender) to launch Grameen Phone and had
emerged as the market leaders.

Industry experts felt that Telenor, with its strengths of long telecom experience, reputed
operational excellence, European image and technological capabilities would soon become a
leading player in Pakistan. On the other hand, its weaknesses included lack of experience in
Pakistan and initial low coverage. It was rumored that initially Telenor would launch its
operations by offering coverage to only three major cities in Pakistan.

Warid Telecom

Warid Telecom was the other licensee who was expected to launch operations in mid-to late-
2005. Warid Telecom was backed by the Abu Dhabi group which was one of the largest and
most well diversified groups in the Middle East. They had operations in oil and gas,
financial services, automobile industry and property development amongst others. They were
one of the largest foreign investor groups in Pakistan and had taken licenses for other
telecom ventures as well. Warid’s weakness seemed to be their lack of experience in the
cellular industry. However, given the investments made in Pakistan Warid was expected to
be a long-haul player in the industry.

CELLULAR CUSTOMERS

Cellular customers in Pakistan had changed in much the same way as the market had evolved
in the developed world. Infact, since the density of land lines in Pakistan was pretty low;
cellular phones were the only hope of electronic communication for a large majority of the
people. Initially, on account of the high cost of the equipment and service, only the more
sophisticated corporate clients and affluent persons were subscribing to the services. This
trend continued till the early 2000. By 2005, however, the mobile phone industry had started
to penetrate the middle classes rapidly. Falling equipment and service charges as well as
specific targeting by brands like Ufone had fuelled this growth. The market was
predominantly a prepaid one with an estimated 95% market share of subscribers. The
postpaid segment was restricted mostly to corporate customers. Most of the growth was
expected to come from individual customers as more intense competition and consequent
lowered prices would allow affordability to lower socio-economic classes as well.

Mobilink conducted regular customer surveys to monitor their attitudes and opinions. Each
month, interviews with 350 Mobilink customers, randomly selected from the Mobilink
subscriber database, were conducted by an independent research agency. In 2005, Mobilink
customers seemed a bit unhappy with poor connectivity. This was primarily because the
ongoing physical infrastructure expansion could not keep pace with the rapid expansion of
customer base. Exhibit 5 presents other key findings from these surveys.

-5-
 04-2361-2010-1

PRICING IN THE CELLULAR MARKET

Pricing in the cellular industry worldwide was fairly complex and witnessed many price
wars. One reason for this was the relatively high cost of customer acquisition coupled with
high churn rates experienced by most players. In Europe and the USA, customer acquisition
costs varied from US$ 250 to US$ 500 and churn rates ranged from 20% to 40% per annum.
This led most companies to closely monitor the life-time value (see Exhibit 6) of acquired
customers. The other key reason for pricing turmoil in the industry was the nature of costs.
The cellular industry resembled several other services industries– like airlines and hotels – in
that it coupled a high initial fixed investment with a relatively small running cost of a
perishable commodity, i.e., time. This created tremendous pressure on operators to use all of
the available airtime as well as opportunities to benefit from economies of scale. A large
network with many subscribers and heavy usage yielded dramatically higher returns than a
medium network with few subscribers. The opportunity cost of an empty network was very
high. Consequently, it was possible to see Earnings Before Interest, Taxes, Depreciation and
Amortization (EBITDA) margins of as high as 50 % in this industry. Once the depreciation
and interest payments were taken care of, the business could generate very high positive cash
flows. This favoured larger and older players, who had crossed this barrier and therefore
could initiate or sustain price pressures better than any newcomers.

In Pakistan, a large majority of subscribers were prepaid customers and hence churn rates
were expected to be high. Mobilink, however, estimated its churn rate to be around 12% per
annum in 2005. Similarly, Mobilink’s customer acquisition cost was low as prepaid
customers were not provided any handset subsidy. The acquisition cost in 2005 was
estimated at approximately Rs 1,400 of which Rs 1,000 went to the government as tax, Rs
250 was paid to the distributor as commission and the remaining was for any allocated
advertising and/or SIM (Subscriber Identity Module) costs.

The pricing of cellular services was broken down to various elements depending on whether
the call was on-net or off-net, during peak time or otherwise, local or long distance, nature of
service package purchased, etc. Exhibit 7 provides the prevailing price structure of
competitors in early 2005. A brief description of each element is as follows:

On-net/ Off-net Prices: On-net calls were those calls where the calling party and the
receiving party were on the same network. Off-net calls were those when the two parties
were on different networks. On-net prices were lower than the off-net prices. In addition to
strategic reasons, this was also due to the interconnect fee of Rs 2 per call that was paid by
the network initiating a call to that terminating it. This interconnect price was determined by
the Pakistan Telecommunication Authority.

Peak/Off-peak Time: Various operators had categorized certain time periods as peak times
for their networks. The price of a call made during this time was higher than that made
during the off-peak time. This was primarily to reduce traffic congestion, and consequent
poor connectivity, during the busy business hours. Deep discounts during off-peak times
were also expected to generate significant demand at a more opportune time.

-6-
 04-2361-2010-1

Local/Nationwide Call: Following in the footsteps of landline tariffs, cellular tariffs also
charged lower rates for local calls as compared to long-distance calls within Pakistan. In
recent years, some operators had reduced this premium in order to reward on-net callers.

Prepaid Card Validity: Given the predominance of prepaid customers, one important aspect
of pricing was the duration of the validity of prepaid cards. Keeping unlimited validities for
these cards meant that many unprofitable customers could stay on the network for a long
time without making any calls. Consequently, the operator would continue to incur some
costs per customer while not earning any revenue. Most operators in 2005 limited the validity
to 180 days.

WAR GAMING AT MOBILINK

Ever since the announcement of the two new cellular licensees and the price that they had
paid, Mobilink management had started preparing for possible future scenarios. The strategy
team, comprising senior managers from Mobilink and Orascom, felt that they knew the
capabilities of existing players well as they had already been competing with them for years.
They expected the two new players to emerge as major competition. While Warid was an
unknown entity, senior managers were sent to countries where Telenor was operating to
assess Telenor’s strengths and weaknesses. Mobilink management felt that Telenor would be
a formidable competitor given its experience both in Europe and Asia. The big question was
what will be Telenor’s entry strategy. Opinions were divided on whether Telenor would try
to hit Mobilink on its current weakness of service quality or go for a low price strategy. They
had the financial muscle to fight a long price war but some managers felt that their European
experience would dissuade them from using price as an entry strategy and thus destroying
value for everyone. Pakistani market, in any case, was growing sufficiently rapidly for all
competitors to obtain decent market shares. Mobilink hired a reputed international
consultancy firm to assist in future strategy formulation. The consultants also suggested that
Telenor would not go for a low price strategy.

The strategy team at Mobilink, however, constructed a variety of scenarios and chalked out
possible counter-moves by Mobilink. Managers spent time debating and calculating strategic
and financial implications of various moves and counter moves. War room meetings were
held with senior management flown in from Egypt to finalize broad options. The objective
was to be ready with all possible options ahead of the coming launch. While several
scenarios were considered, the most likely scenario was considered to be a ‘bloodbath’ in
which the market would head into a tough price war.

TELENOR’S LAUNCH AND THE VIDEO CONFERENCE

Telenor worked towards its launch with a huge media campaign covering radio, television
and print. The ads, almost teaser type, informed Pakistanis of the impending arrival of high
quality European telecom service to Pakistan and asked them to ‘Expect More’. The
objective seemed to build hype towards the launch. Telenor SIMs became available for
purchase in the market late evening, 13 March 2005 and the next morning’s newspapers

-7-
 04-2361-2010-1

carried full page launch ads (see Exhibit 8). The launch was limited to one city, Islamabad,
with a couple more cities expected to join the network within the next few weeks.

It quickly became apparent to the Mobilink team that Telenor meant business. Using the
slogan of ‘honest pricing’ Telenor had offered a flat rate of Rs 3.99 per minute for all on-net,
off-net, local or nationwide calls. In addition, it offered unlimited validities to its prepaid
scratch cards and facilitated loading of accounts with amounts from Rs 10 to Rs 1000
electronically.

Mobilink’s strategy group assembled in the video conference room in the morning of 14
March 2005. Members from Egypt appeared on the screen and intense discussions on
Mobilink’s response started. The competition had played its cards and the fears of a
‘bloodbath’ were starting to look real. Everyone was aware of the enormity of the decision.
The stakes were clearly high. Given Mobilink’s 5.6 million customers, an aggressive price-
cut could potentially wipe-off millions of dollars from the revenue stream. At the same time,
a timid response could give the newcomer the all important strong start.

Several options were available to Mobilink. They could simply wait and see how the market
reacted to Telenor. Managers supporting this line of thinking pointed to the fairly limited
network capabilities of Telenor and high satisfaction rates of Mobilink customers. They felt
that not many Mobilink customers would switch and in any case Mobilink could always
revise its prices if the market seemed to respond positively to Telenor.

Bilal Sheikh, on the other hand, was very clear about his position. “We need to respond
quickly and decisively – this first move will set the scene for all future moves not only for
Telenor but also for Warid. We must send a signal that we are not going to let anyone play on
our turf. We will maintain our market leadership at any cost,” he added emphatically.

Rashid Khan, while agreeing with Bilal to an extent, was also very concerned about the top
line. Any price reduction would severely impact the average monthly revenue per user
(ARPU), an indicator that he monitored passionately. He was already concerned at the falling
ARPU trends of the industry. “What is the guarantee that all this ARPU loss would not be
completely unnecessary?” he asked, playing devil’s advocate. “Mind you, any reduction in
ARPU will also increase the CCPU (cash cost per user per month) as a percentage of ARPU.
Our CCPU is already hovering around 30% of ARPU,” he added.

“Our surveys suggest price is an important concern of customers,” Bilal Sheikh replied back.
“We do have a few unhappy customers who may want to switch. Some of them are even high
ARPU ones. Why should we give them any reason to switch? Why not give them the
reassurance that staying with Mobilink will always get them the best value on the market?
We cannot give price leadership to Telenor,” he added.

Managers who wanted to reduce prices were divided about the level of price reduction and
the structure of the offer. While any price reduction would eat into revenues, it could also
increase usage rates of current customers offsetting the ARPU dilution. In 2005, an average
Mobilink customer was using 50 minutes of local telephone time per month; out of which
-8-
 04-2361-2010-1

75% were for on-net calls. Different price reduction options under discussion, and their
impact on incremental minutes of local usage, are provided below:

Estimated Estimated
Proposed On-net Proposed Off-net
OPTIONS On-net Rate Incremental Off-net Rate Incremental
Usage Usage

(Rs/min) (min) (Rs/min) (min)

Wait and see 4.75 0 7.75 0

Match Telenor 1 3.99 6 3.99 10
Match Telenor 2 3.99 6 5.99 4
Match Telenor 3 3.99 6 7.75 0
Beat Telenor 1 3.50 8 5.50 6
Beat Telenor 2 3.50 8 7.75 0

In addition to on-net and off-net pricing, there was the issue of long distance call pricing.
Mobilink charged a higher price for off-net long distance calls. Opinions were divided on
continuing or reducing them. The ARPU impact of bringing them to the same level as local
calls was estimated at Rs 5.4.

Finally there was the issue of validity limits of Mobilink’s prepaid scratch cards. One school
of thought was to match Telenor’s unlimited validities. Managers in favour felt that after
having seen Telenor’s offer, customers would not accept anything less. Those against
worried that this will give license to customers to delay recharging indefinitely causing
ARPU to decline dangerously. The connection recharging behaviour of Mobilink prepaid
customers showed that there were many who waited till the last day (see Exhibit 9).

After a long discussion Zouhair Khaliq promised the Orascom management that Mobilink
will get back to them with their final recommendation within one hour. He asked the finance
and marketing people to recheck the ARPU and lifetime value impacts of various options 1.
On their part, the Orascom management committed to respond back immediately so that any
decision could be implemented straightaway. Mobilink had planned to go to the newspapers
with advertisements of their response within 36 hours of Telenor’s launch.

1
In 2005, the relevant interest rate for Mobilink was around 10% per annum.

-9-
 04-2361-2010-1

Exhibit 1 (p 1 of 2)

MOBILINK: PRICING UNDER COMPETITION

Excerpts from Economist’s Article on Orascom

The new Pharaohs

As Middle Eastern economies start to boom, so do the Sawiris family's firms

FROM the pyramids to the Citadel, Cairo's skyline features some of the most famous silhouettes in
the world, reflecting past periods of might and prosperity. More recently, a new monument to a
contemporary power and success has sprung up along the Nile—the gleaming twin towers that house
Orascom, a business group owned by the Sawiris family.

What began 50 years ago as a small construction firm, founded by Onsi Sawiris, is now a commercial
empire worth over $12 billion, controlled by his three sons. Naguib, the eldest, runs Orascom
Telecom Holdings (OTH). The strategies of the various Orascom businesses are said to reflect the
different personalities of the Sawiris brothers. “Naguib is a racing car” laughs Samih Sawiris.

OTH has ridden a rollercoaster. Starting in 1998 as a partner in Egypt's first mobile-phone operator,
MobiNil, OTH expanded rapidly, buying licences—often at absurd prices—across the Middle East
and Africa. By 2002 it was operating in 22 countries, but it was also deep in debt and, amid global
gloom about telecoms, its share price was plunging. So Naguib Sawiris sold off various operations,
including its Jordanian business for $424m. OTH now operates in just nine countries—where it has
11m subscribers and, estimates Karim Khadr, a telecoms analyst at HSBC, made a profit of around
$370m last year.

Naguib now aspires to make OTH one of the world's leading mobile-phone operators, with a hugely
ambitious target of 100m subscribers by 2010. He has no regrets about his earlier purchases, arguing
that even the small ones gave OTH a “footprint” and credibility in larger markets. Still, he claims to

-10-
 04-2361-2010-1

Exhibit 1 (p 2 of 2)

MOBILINK: PRICING UNDER COMPETITION

Excerpts from Economist’s Article on Orascom

have come to appreciate the value of financial restraint: as proof, he points to last year's loss of
licenses in Iran and Saudi Arabia to higher bidders. Nevertheless, that still leaves OTH in markets
with a combined population of more than 500m, few fixed-line telephones and only 5% mobile-phone
penetration. And, while OTH may expand further into Africa and south-east Asia, Naguib himself has
an eye on Europe, where he is investing his own money in consortium bidding for Wind, an Italian
mobile-phone firm valued at €12 billion ($16 billion).

Source: Reprinted with permission from The Economist (print edition), March 10 2005

-11-
 04-2361-2010-1

Exhibit 2

MOBILINK: PRICING UNDER COMPETITION

Pakistan’s Macroeconomic Climate

2000 2001 2002 2003 2004f 2005f 2006f 2007f

Population (mn) 137.5 140.4 143.2 146.0 148.7 152.0 155.3 158.7

Nominal GDP (US$bn) 72.9 65.7 73.2 83.4 93.9 104.5 113.9 124.0

GDP per capita (US$) 530.1 467.6 511.2 571.2 631.4 687.6 733.4 781.3

Real GDP growth (%) 3.9 1.8 3.1 5.1 6.4 6.0 6.1 6.4

Consumer Price Inflation (avg. %) 3.6 4.4 3.5 3.1 4.6 7.8 5.0 5.0

Exports (fob, US$bn) 8.57 9.20 9.13 11.16 12.27 13.87 14.84 16.18

Imports (cif, US$bn) 10.31 10.73 10.34 12.22 15.47 17.95 19.38 21.32

Trade balance (customs, US$bn) -1.74 -1.53 -1.21 -1.06 -3.20 -4.08 -4.54 -5.15

f: BMI forecast

Source: BMI Research

-12-
 04-2361-2010-1

Exhibit 3

MOBILINK: PRICING UNDER COMPETITION

Pakistan Telecom Sector Historical Data & Forecasts

2001 2002 2003 2004f 2005f 2006f 2007f 2008f

No. of Main Telephone Lines in

3,400 3,940 4,250 5,960 7,600 9,100 11,300 12,000
Service (‘000)

No. of Main Telephone Lines/100

2.4 2.8 2.9 4.0 5.0 5.9 7.0 7.2
Inhabitants *

No. of Cellular Mobile Phone

812 1,715 3,450 7,970 16,500 26,100 37,000 51,000
Subscribers (‘000)

No. of Mobile Phone

0.5 1.2 2.4 5.4 10.9 16.9 22.8 30.7
Subscribers/100 Inhabitants

No. of Mobile Phone

Subscribers/100 Fixed Line 23.9 43.5 81.2 133.7 217.1 286.8 327.4 425.0
Subscribers

No. of Internet Users (‘000) 500 1,000 2,600 4,800 9,000 11,000 15,000 18,200

No. of Internet Users/100

0.3 0.7 1.8 3.2 5.9 7.1 9.2 11.0
Inhabitants

No. of Broadband Internet

0 3 15 40 150 200 380 600
Subscribers (‘000)

No. of Broadband Internet

0.0 0.0 0.0 0.0 0.1 0.1 0.2 0.4
Subscribers/100 Inhabitants

No. of PCs (‘000) 600 610 625 700 800 1,100 1,500 2,200

No. of PCs/100 Inhabitants 0.4 0.4 0.4 0.4 0.5 0.7 0.9 1.3

f: BMI forecast
* Ratio of telephones and population

Source: BMI research

-13-
 04-2361-2010-1

Exhibit 4

MOBILINK: PRICING UNDER COMPETITION

Indian Cellular Market Growth

Source: Company Documents

-14-
 04-2361-2010-1

Exhibit 5 (p1 of 2)

MOBILINK: PRICING UNDER COMPETITION

Customer Research

Mobilink Customer Satisfaction

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Jan '04 Apr '04 July '04 Oct'04 Jan'05 Mar'05

Not Satisfied Just OK Satisfied

Reasons for Satisfaction

80%

70%

60%

50%
Network
40% Connectivity

30% Image

20% Voice clarity

10%

0%
May-04 Aug-04 Nov-04 Mar-05

Source: Company Documents

-15-
 04-2361-2010-1

Exhibit 5 (p2 of 3)

MOBILINK: PRICING UNDER COMPETITION

Customer Research

Reasons for Dissatisfaction (Feb '05)

90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Poor Connectivity Poor Coverage High Price / Rates Over Charging Bad Voice Quality

Chance of Switching

5%

4%

3%

2%

1%

0%
Sep, 04 Oct, 04 Nov, 04 Dec, 04 Jan, 05 Feb, 05 Mar, 05

Source: Company Documents

-16-
 04-2361-2010-1

Exhibit 5 (p3 of 3)

MOBILINK: PRICING UNDER COMPETITION

Customer Research

Preferred Company for Switching

90%
80%
70%
60%
Ufone
50%
Paktel
40%
Instaphone
30%
Any New Company
20%
10%
0%
Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05

Main Reason for Switching (Feb '05)

70%

60%

50%

40%

30%

20%

10%

0%
Connectivity Over billing Customer Services Poor Coverage High tariffs

Source: Company Documents

-17-
 04-2361-2010-1

Exhibit 6

MOBILINK: PRICING UNDER COMPETITION

Customer Lifetime Value (CLTV) Calculations

Companies in the cellular industry typically spend a significant amount of money to acquire a
customer. The hope is that future revenues from the customer will not only help recover the
original acquisition cost, but also provide a continuous cash stream. However, this assumes
that the customer will not switch service suppliers. Unfortunately, cellular industry is
notorious for high customer defection generally known as churn rate. If the customer leaves
too soon there is a danger that the initial investment in acquiring a customer will not be
recovered. This has led cellular managers to use the discounted cash flow method to calculate
the lifetime value of a customer. The typical formula for calculating CLTV:

N
( M a ) r (a −1) − AC
=
CLTV ∑
(1 + i )
a
a =1

Where:

N is the number of years over which the relationship is calculated

Ma is the margin the customer generates in year ‘a’. This is calculated from monthly margin
which is ARPU – CCPU*
r is the retention rate which is equal to (1-churn rate)
r(a-1) is the survival rate for year ‘a’
i is the interest rate
AC is the acquisition cost

If one assumes that:

i. margin is relatively fixed across periods; and
ii. infinite economic life of customer ( N→ ∞ );

the formula can be simplified to the following approximation:

M
=
CLTV − AC
1− r + i

*Average Revenue Per User – Cash Cost Per User

Source: This exhibit has been adapted from HBS Note 503-019 on Customer Profitability and
Lifetime Value and HBS case 504-028 Virgin Mobile USA: Pricing for the very first time.

-18-
 04-2361-2010-1

Exhibit 7

MOBILINK: PRICING UNDER COMPETITION

Market Prices on 1 March 2005

Local NWD (average distance band)

Company On-Net Off-Net On-Net Off-Net

Peak Off-Peak Peak Off-Peak Peak Off-Peak Peak Off-Peak

Mobilink 4.75 4.75 7.75 7.75 4.75 4.75 13.00 12.25

(10pm –
7am)

Paktel – 3.75 0.99 5.75 2.99 3.75 3.75 5.75 5.75

GSM (12pm – (12pm –
7am) 7am)

Ufone 3.00 1.50 6.75 6.75 3.00 1.50 11.00 9.5

(10pm – (10pm – (10pm –
7am) 7am) 7am)

Note: Prices/per minute

Prepaid Scratch Card Validities

Mobilink Card Ufone Card

■ Rs 300 – 30 days ■ Rs 200 – 45 days

■ Rs 625 – 180 days ■ Rs 500 – 180 days
■ Rs 1000 – 180 days ■ Rs 1000 – 180 days
■ Rs 1500 – 180 days

Paktel Card

■ Rs 300 – 45 days
■ Rs 600 – 180 days
■ Rs 1500 – 180 days

Source: Company Documents

-19-
 04-2361-2010-1

Exhibit 8 (p1 of 2)

MOBILINK: PRICING UNDER COMPETITION

Telenor Launch Print Advertisement

Source: Company Documents

-20-
 04-2361-2010-1

Exhibit 8 (p2 of 2)

MOBILINK: PRICING UNDER COMPETITION

Telenor Launch Print Advertisement

Source: Company Documents

-21-
 04-2361-2010-1

Exhibit 9

MOBILINK: PRICING UNDER COMPETITION

Mobilink Recharge Trends

A recharge card had two associated time periods that determined how often the customer had
to recharge and what happened if he did not recharge.

• Validity Period: User could make and receive calls

• Grace Period: User could only receive calls. This was 15 days for all of Mobilink’s
cards. If a customer entering the grace period did not recharge within 15 days, his
account would become inactive.

The recharging behaviour of a sample of Mobilink’s grace period customers is provided

below:

Customers Recharge Daily Recharge Trend within Grace Period Deactivated

Entering within
Grace Grace
Period Period Days Days Days Days
1-3 4-6 7-10 11-15

4493 2,307 901 511 414 481 2,186

100% 51% 20% 11% 9% 11% 49%

Source: Company Documents

-22-