Dubai's ICT market pushes for greater competitiveness

The main backers of the UAE’s two telecoms operators are public entities, with the federal government being the main public shareholder of the Emirates Telecommunications Corporation (Etisalat) and owning a large stake in its rival operator, the Emirates Integrated Telecommunications Company (du), alongside the emirate-level governments of Abu Dhabi and Dubai (see overview). This, plus an historical tendency for the two companies’ fixed-line divisions to operate in distinct parts of the country, might suggest that the market lacks competition. However, market data and observers suggest the two operators do compete with one another, especially in the mobile arena. Average revenue per user (ARPU) in the mobile segment has eased for both firms, falling at du from Dh82 ($22.37) in the second quarter of 2016 to Dh78 ($21.23) in the same quarter of 2017, while Etisalat’s fell from Dh112 ($30.49) to Dh104 ($28.31) in that period. “There has been price competition in the mobile data segment, particularly over the last year,” Matthew Reed, practice leader for the Middle East and Africa at Ovum, a UK research firm, told OBG.

Saturation Point 

Several factors help sustain competition in the mobile segment. Chief among them is the extremely high rate of mobile penetration in the UAE. According to figures from the national Telecommunications Regulatory Authority (TRA), there were 226.4 subscriptions per 100 inhabitants in July 2017. The high rate of saturation means both operators must change their business models, as neither can rely on large organic growth in subscriptions. Revenue is therefore likely to depend on sales of new data-based services to existing clients, rather than additional uptake of mobile subscriptions. “The UAE market is quite mature, and as a result, both operators must work hard to generate continued growth,” Reed told OBG. “There is a particular emphasis on the development of digital strategies and new services, such as cloud services, fleet management and smart city initiatives.” Underscoring this, Osman Sultan, CEO of du, told local media in February 2017 that the sector’s expansion in the coming years will likely come primarily from non-connectivity-based product offerings, such as cloud and smart services.

Post-Paid & Corporate Markets

Given that the mobile market is quite saturated, corporate and enterprise services have stronger growth potential than retail. A related avenue for growth is to pursue more post-paid, contract-based subscriptions, which are more common in the corporate market. As is true of most emerging markets, pre-paid connections predominate: according to the TRA, there were 16.50m pre-paid subscriptions in the UAE in July 2017, compared to 3.26m post-paid connections. The development of post-paid subscriptions is particularly important to both operators, because spending in this segment tends to be higher.

New Brand

Operators are also experiencing strong competition in the retail market. In a move that responds to growing competition, which should further increase competitive pressures, du announced plans to launch mobile services under a new brand, Virgin Mobile, in January 2017. In most other countries, Virgin Mobile-branded services take the form of a mobile virtual network operator (MVNO), whereby a company piggybacks off an existing operator’s network. In the UAE, however, there is currently no regulatory framework for MVNOs, so the service will be fully owned and operated by du. Virgin Mobile plans to offer slightly lower prices than du-branded services, and aims to attract younger and more tech-savvy customers, for example by conducting all customer service through a mobile app. Customers will also be able to build customised plans, specifying their desired mobile data, voice call and SMS usage levels, and the company has pledged to deliver SIM cards to new customers within an hour of ordering. The brand had a soft launch in June 2017, followed by a full commercial launch in early September. According to industry players, the new brand is unlikely to bring dramatic changes to the mobile market, but is nonetheless a notable development as there is already high brand recognition in the country, thanks to the Virgin mega-store chain throughout the Gulf, as well as a Virgin Mobile-branded MVNO in neighbouring Saudi Arabia.

Increasing Efficiency

The two firms are responding to competitive pressures by streamlining their business models. Having experienced falling profits between 2015 and 2017, du is increasingly incentivised to do so, this drop largely resulting from a renegotiation of royalties it must pay to the federal government. Before 2016 the firm paid a lower rate than Etisalat, but both now pay the standard rates: 15% of domestic turnover and 30% of domestic net profit. Both companies announced in February 2017 that their royalty rates would be frozen for the next five years. In response to these pressures, du is attempting save Dh1bn ($272.2m) through cost-optimisation measures between 2017 and 2020.

Infrastructure Sharing

The fixed-line market has historically seen less competition than the mobile segment, with du having a network limited to certain areas and Etisalat effectively monopolising many other regions. According to its quarterly performance report, at the end of the first half of 2017 du had 714,000 fixed-line subscribers, up 4% year-on-year. Etisalat had 1.12m subscribers – 700,000 of which were triple-play customers, subscribing to telephone, internet and internet protocol TV (IPTV) services – up 2.8% from the same period of 2016. Du has seen stronger long-term growth rates for fixed-line subscriptions, which increased by 34.5% from 2011 to the first half of 2017, compared to Etisalat’s rise of 6.7% over this period.

Competition levels are reflected in telephony, which are higher in the UAE than in many nations. While the World Economic Forum’s “Global Information Technology Report 2016” ranked the UAE 41st of 139 countries in terms of mobile tariffs, the lack of overall affordability curtailed its performance: it ranked 120th in fixed-line broadband costs, and 122nd in internet and telephony competition. Mobile speeds are also substantially higher than fixed-line broadband speeds, partly due to historically higher competition in the mobile segment (see overview).

Efforts are thus under way to boost fixed-line competition. In 2015 du and Etisalat signed an infrastructure-sharing agreement that had been in the works since 2009, allowing customers to switch between the two operators under some circumstances. However, Reed told OBG it was unclear whether the goal was full infrastructure sharing across the country, and that, in practice, full competition in the fixed-line segment is unlikely for the foreseeable future.