Tough Going for Iran's Tech Sector

The country is rich in IT brainpower; its people want cutting-edge devices. But political factors have restricted tech-sharing and investment

They may not boast the star power of established tech titans like Cisco Systems (CSCO) and Hewlett-Packard (HPQ) or emerging telecom players like China's Huawei Technologies or ZTE. Yet a handful of small, private, high-tech companies from the Islamic Republic of Iran have come to the ITU Telecom World forum in Hong Kong to strut their stuff, make contacts, and chase some deals.

It has been tough going. The talk of the conference has been the explosive growth of the Internet and mobile telephony in China, India, and other emerging markets, and telecom execs haven't been exactly flocking to the modest Iranian exhibit.

It's true that Iran boasts some of the best electrical engineers on the planet, many of whom are graduates of top technical schools such as Stanford University, the California Institute of Technology, and Massachusetts Institute of Technology. Yet nobody would call Iran an emerging market leader in information technology.

A Drought in Tech-Sharing

An unimaginative telecom regulatory regime at home, and the country's controversial image in the U.S. and parts of Europe because of Tehran's hostile stance toward Israel and its suspected nuclear weapons ambitions, have diminished access to fruitful technology-sharing alliances that are streaming into other emerging markets, particularly by makers of wireless-network telecom equipment and mobile handsets.

"The hunger for improved connections is strong" in the developing world, notes Gartner analyst Jouini Forsman, who just published a report that forecast emerging markets will account for 87% of the additional 1.5 billion in worldwide mobile phones predicted by 2010. (Worldwide, there are about 2.1 billion mobile-phone users now.)

Iranians definitely share that same desire for cutting-edge digital devices and blisteringly fast networks, though it may be tough for the country to pull them off, at least in the short term. "The fact is that we aren't spending nearly enough on research and development" in new telecom and IT technologies, laments Ali Fotowat Ahmadi, managing director of the Tehran-based KavoshCom R&D Group.

In the U.S., He'd be Rich

Ahmadi is a highly-credentialed engineer who earned his doctorate at Stanford, and a former professor at Sharif Technical University, considered the MIT of Iran. KavoshCom pulls in about $17 million a year in revenues from consulting and chip design and spends about 6% of its revenues a year on product development.

It has developed chip sets for low-powered global positioning satellite applications that can be embedded in watches—one potential application is to keep track of the whereabouts of family members—and has developed a radio frequency identification (RFID) reader device that could help Iranian companies track inventory and sales more efficiently. He freely admits he'd be a rich man had he stayed in the U.S. "If I did this in San Jose, I would be running a $200 million-a-year company."

Part of the problem, he says, is the failure of Iranian President Mahmoud Ahmadinejad's government, particularly Iran's Ministry of Post, Telegraph, and Telephones, to recognize the economic payout of investing heavily in high-speed data networks and local tech companies.

Government Investment Gap

To make his point at the forum, Ahmadi pointed at the jam-packed and LCD-screen-festooned Dynamic Korea pavilion right across from Iran's that showcased the country's latest in next-generation wireless network equipment and other digital devices now under development. South Korea's state-run Electronics & Telecommunications Research Institute (ETRI) spends $500 million a year on seeding and promoting the country's IT and telecom sector. "Our counterpart agency is spending one-tenth of what ETRI does," Ahmadi says.

None of this is to say that digital age is passing Iran's 70 million-plus population by completely.

Iran's Internet user base is 12 million, while the number of mobile-phone subscribers is nearly 10 million, representing a penetration rate of 14.4%. Iran has a vibrant blogging community, as well.

Yet Internet and mobile phone penetration is far below that of Turkey, a country of similar size that moved faster to deregulate its telecom sector. Saudi Arabia and the United Arab Emirates, on much better political terms with the West, have spent heavily on improving their countries' IT infrastructure by buying the best network equipment in the world. Iran's fastest broadband networks offer speeds of only 128 kilobytes per second, which is far from world-class.

Embargo Hampers U.S. Companies

Nor has Iran come close to fielding a global high-tech player like Cairo-based Orascom (ORSTF), whose mobile telecom empire stretches from North Africa to Iraq to Pakistan and Bangladesh (see BusinessWeek.com, 7/31/06, "Orascom: This Mobile Upstart Really Gets Around").

Iran's international political standing prevents the kind of IT and telecom foreign direct investment that could change all that. Potential U.S. investors like Cisco, Lucent (LU), and Intel (INTC), of course, are off limits thanks to a series of restrictions on general trade and investment imposed by Washington on Iran starting in 1987 and culminating in a near total embargo that took effect in 1997 and remains in full force today.

Even Europeans Are Wary

True, European high-tech players such as Siemens (SI), Nokia (NOK), Alcatel, and Ericsson (ERIC) have received telecom contracts from the government.

Still, given their huge business presence in the U.S., these companies and others in Europe are reluctant to arrange tie-ins with private Iranian companies that might draw the wrath of Washington, says Hamed Movasagh, chief executive officer of Asr Gooyesh Pardaz, a Tehran firm that has developed a line of speech-recognition software applications in Farsi and English.

"Some of the companies that we talk to (about tie-ins) always say at some point they have a problem with politics," says Movasagh. Until that changes, Iranian high-tech companies may face a tough slog ahead.