Creating new niches: As competition rises on the back of apps and the introduction of virtual operators, mobile providers are finding new sources of revenue

Faced with falling penetration rates and declining revenues from voice and messaging services, Saudi Arabia’s big three mobile operators are forging new partnerships and using innovative technology to maintain growth in overall sales.

The changing contribution made by voice services to revenues can be seen the data from the Communications and Information Technology Commission (CITC) for 2012 and 2013, which shows that while total revenues grew by 5.6% from SR71bn ($18.9bn) to SR75bn ($20bn), revenues from voice services fell by 2.2% from SR55.9bn ($14.91bn) to SR54.7bn ($14.58bn). Voice revenues’ contribution to overall earnings fell from 78.75% in 2012 to 73% in 2013.

OTT APPS: A contributory factor to this shift in the business model is the influence of free, or almost free, over-the-top (OTT) apps for messaging and voice calls, which are available to the 73% of Saudi mobile phone customers using smart devices. According to research from sector analyst Ovum, free apps such as these cost mobile phone operators $32.5bn globally in 2013, a figure that the firm forecasts would reach $54bn by 2016.

In May 2011 Microsoft bought the internet phone service Skype, which allows users to message each other and make video or voice calls, for $8.5bn. According to ITProPortal, an analysis website, Skype had 280m active monthly users globally in 2013, of which 55m were signed on and using the service at any one time of the day, up from 42m the year before, or a rise of more than 30% in active daily users.

Consumers have a wide range of choice when it comes to OTT services, including Google Hangouts, Viber, Tango, Line and Kik. However, the authorities are attempting to maintain control on the sector. In June 2013 the CITC banned Viber saying it had failed to comply with Saudi law. The combined impact of OTT services presents a threat to the bottom line for mobile network operators (MNOs), according to telco experts in the Kingdom. Dirk Doerrshuck, president and CEO of Detecon Al Saudia, told OBG, “One of the main challenges for telecoms operators are the OTT services such as Skype and WhatsApp. OTT apps generate revenues by providing telecoms-like communication services over the internet – riding for free on top of operators’ networks and competing with traditional telecoms providers. Telecoms operators are, however, the ones who have to pay for and invest in the upgrade and maintenance of the network infrastructure servicing the internet – OTT service providers do not do this.”

DATA POTENTIAL: However, MNOs can benefit from the increased data revenues that result from customers using these services. “Data is the future for the telecommunications sector all around the world,” Zain’s CEO Hassan Kabbani told OBG. “People are turning to online services more and more for music, email, communications through apps like Skype and WhatsApp, and e-services such as banking.”

With a reputation as early adopters of new technology, Saudi Arabia’s youthful and sophisticated consumers present multinational companies such as Zain with opportunities to adapt to emerging models of mobile phone usage. “The Kingdom is the most important market in the Middle East from a value perspective” Kabbani said. “It is worth putting forth the investment to be here, because the market offers significant opportunities given the demographics, economic growth and high usage of mobile phones.”

FIRECHAT: One example of the speed with which new technology is embraced in the Kingdom is the innovative communication app FireChat. However, as this service does not require internet access or data usage there is no potential revenue benefit for MNOs. Instead FireChat uses Bluetooth to connect devices at a range of 70 metres, and then adds each device to a mesh of other interconnected users. This means messages are not stored on a central server where records can be monitored. In July 2014, four months after the app was launched by San Francisco-based Open Garden, there had been more downloads in Saudi Arabia than in any other Middle Eastern country. Open Garden’s spokesman, Christophe Daligault, told OBG that Saudi Arabia was the 11th-largest market for the application in the world.

“The growth in Saudi Arabia has been steady ever since the launch in March 2014, unlike in Iraq or Iran were we have seen sudden bursts,” Daligault told OBG. “The Middle East represents 11% of FireChat’s total user base. This is quite strong and relatively unusual for mobile apps.” In July 2014 Saudi Arabia made up 17% of FireChat’s regional user base. The top five Saudi cities in terms of usage were Riyadh, Jeddah, Dammam, Makkah and Abha.

MVNOS: Another new income source for two of the Kingdom’s three MNOs, Saudi Telecom Company (STC) and Mobily, is set to come on-stream as their partner mobile virtual network operators (MVNOs) begin operations. In the biggest change in the mobile network market in Saudi Arabia in the past six years, the CITC invited bids for three MVNO licences in 2013 and in April 2014 announced that two applicants had been successful. Virgin Mobile MEA (VMMEA) will work with STC, while Jawraa Group, controlled by London’s Lebara, will be paired with Mobily. In April 2014 the CITC re-tendered the third MVNO licence linked to Zain’s network after Dubai-based Axiom Union Mobile announced it had been unable to supply the necessary documentation in time for the first round of applications.

Although CITC is issuing the licences to encourage more competition, the entry of these new players presents an upside for MNOs as they will be able to earn income from selling network services to the MVNOs at wholesale prices while making savings on marketing, sales and customer support for those services. The move is also expected to benefit the wider economy by creating new jobs. VMMEA’s CEO Mikkel Vinter said the company had received 35,000 CVs from people wanting to work for the company.

VIRTUAL OPERATORS: Virgin pioneered the MVNO business model in the UK in the late 1990s with the launch of Virgin Mobile. Now 30 years later the brand has almost 20m customers across Europe, Asia, South America and North America. Indeed, Virgin Mobile claims to be the biggest MVNO brand globally. VMMEA, which serves 1m customers across five regional operations, is backed by global and regional shareholders, including Virgin Group, Gulf Investment Corporation and ePlanet Capital.

London-based Lebara Group, which will work with Mobily under the Jawraa Group brand, is also a global player with operations in the UK, Germany, France, Denmark, the Netherlands, Poland, Spain and Australia. Yoganathan Ratheesan, CEO of Lebara Group, explained its target market would be the Kingdom’s expatriate workers. “We are excited about Lebara’s next stage of growth into the Gulf market. Lebara will initially and primarily provide low-cost and highquality mobile communication services to the migrant community and those with loved ones abroad.”

M2M: Mobily’s focus on exploring new and growing markets saw it sign a partnership agreement with Jasper Wireless of the US in February 2013. Jasper Wireless is a leading connected devices platform that enables machine-to-machine (M2M) communication. In what has been dubbed the Internet of Things (IoT), smart objects in the home or workplace “talk” to each other. Mobily launched its M2M services on Jasper’s platform in March 2014, thus entering what is expected to be a growth market in the region. According to research by Visiongain, a business information provider in the sector, the number of wireless connections in the Middle East is expected to reach 119.7m by the end of 2016.

The IoT is widely believed to have a number of business applications. “Working across such a range of vertical markets, from automotive and health care to construction and utilities, requires a level of flexibility and scalability that only a cloud-based platform can deliver,” Marwan Al Ahmadi, Mobily’s chief business officer, said of the partnership with Jasper.

TRACKING: Technological innovation is also giving STC Business a route into new business. The company signed a contract with the Kingdom’s Hail University in March 2014 to provide a system that will enable the institution to track its vehicles by satellite. Chips used in the vehicles will feed information back to a control centre via SMS to show the location and speed of any of the university’s vehicles. The system will also store details of the fleet’s maintenance and registration status.

The expansion of these kinds of business services give MNOs opportunities to leverage their networks and tap into new revenue streams. As voice revenues fall, operators will come under increasing pressure to add value to their services and expand offerings. As they invest in more advanced infrastructure, revenues from MVNOs are likely to come in handy, illustrating another way that MNOs are turning rising competition to their advantage.