A maturing market: Intensified competition, lower prices and room for growth

In 1999 Kuwait became the first GCC nation to license a second mobile carrier, which gave its domestic industry a head start on becoming the relatively sophisticated telecoms market it is today. Though the local market is relatively small, the country has long been a profitable place for its leading mobile operators, Zain and Wataniya, with one of the world’s highest levels of average revenue per user (ARPU). However, competition intensified with the arrival of a third mobile operator, Viva, in 2008. With tightening margins, value-added services have become the primary battleground in the fight for revenues (see analysis). Demand is high among Kuwait’s young, wealthy population for fast broadband access, and operators are scrambling to roll out high-speed networks. At 129.9%, Kuwait’s mobile penetration rate lags behind other Gulf nations, suggesting that there is still room for growth. Further market liberalisation will be needed if the country is to achieve its goal of becoming a regional centre for telecommunications. Kuwait is the only GCC nation to lack a telecommunications authority, with the Ministry of Communications (MoC) regulating the sector as well as maintaining a monopoly over the fixed-line segment. Fortunately, the government has announced plans to establish a separate regulating body in the next two years, and no new internet service providers (ISPs) will be licensed until this happens.

MAJOR PLAYERS: According to Global Investment House, a regional investment company, there were 4.59m registered mobile subscribers in Kuwait as of the end of first quarter of 2011. This is up from 4.09m a year earlier, representing an annual growth of 12.2%. Kuwait-based Zain is narrowly the leader with 1.89m subscribers, or 41.1% of the market. Wataniya, a subsidiary of Qatar Telecom since 2007, has 1.87m subscribers and a 40.8% market share. These two operators maintained a duopoly until 2008, when Viva, which is 24% owned by the Kuwaiti government, entered the market. It now has 830,000 subscribers, or an 18.1% share.

According to the most recent statistics from the International Telecommunications Union in 2009, the country has a mobile penetration rate of 129.9%. However, this statistic is somewhat inflated due to the prevalence of Kuwaitis carrying multiple SIM cards for business and personal calls. Other countries in the region have achieved much higher penetration rates, including Bahrain (177.1%) and the UAE (232.1%), indicating that the Kuwaiti market is likely far from saturated. According to Capital Standards, a ratings agency, at a compound annual growth rate of 14.1% between 2004 and 2009, the expansion of the Kuwaiti mobile segment was the slowest of the six GCC countries.

Revenues, meanwhile, are on the decline since the entrance of a third operator. For a long time, Kuwait was an extremely lucrative market, but there are signs that those heady days may be drawing to a close. In the first half of 2008, Zain Kuwait recorded the highest ARPU among operators from 19 Arab countries at $69, according to a report by the regional research firm Arab Advisors Group. In contrast, Zain’s Iraq subsidiary had an ARPU of $13 that year and its Nigeria subsidiary $9. In 2010, however, Zain Kuwait’s ARPU had dropped to $52, while Wataniya reported an ARPU of $36.20 in fourth-quarter 2010.

MARGINS: One of Viva’s first moves was to introduce a calling-party-pays model, which means that incoming calls are free, and the other operators followed suit, losing a source of revenue. In early 2009, the government removed the fee charged by operators to connect to a landline, further affecting margins. Additionally, there has been increased price competition among carriers, although an all-out price war has not materialised. While ARPU levels are still high compared to other countries in the region, a focus on value-added services such as mobile internet will help the firms to attract new customers.

MOBILE OPERATORS: Kuwait opened up its mobile market in 1999 by issuing a licence to Wataniya. Founded as Mobile Telecommunications Company in 1983, Zain has always been the larger operator, although the arrival of a third carrier has chipped away at its position. In the first quarter of 2010, Zain had 45.9% of the market, compared to Viva’s 14.4% and Wataniya’s 39.7%. That year, however, the majority of new subscribers chose Viva or Wataniya, a trend which has continued in 2011. In the first quarter of 2011, Wataniya received the highest number of additional subscribers at 92,300, followed by Viva with 30,000, while Zain attracted 17,000.

Zain posted KD1.4bn ($5.05bn) in consolidated revenue from all its operations in 2010, a 7% increase over the previous year. This figure, however, includes the capital gain from the Bharti Airtel sale. In the first quarter of 2011, the company reported KD324.4m ($1.17bn) in consolidated revenue, up 1% year-on-year (y-o-y), while its first-quarter net income was up 40% y-o-y at KD69.9m ($251.99m). At the end of the third quarter of 2011, the company announced revenues of KD988.1m ($3.56bn), up 2.2% over the nine-month period, while net profit was up 7% to KD762.5m ($2.75bn). Third-quarter profit came in at around KD70m ($252.35m), despite a $100m loss on currency movements, according to the firm.

The group had a total subscriber base of 41.4m at the end of September 2011. This is down from a peak of around 63.5m, as the company sold the majority of its African subsidiaries to India’s Bharti Airtel in 2010 for $10.7bn, but up 17% from end-September 2010. The company maintains operations in Bahrain, Saudi Arabia, Iraq, Jordan, Lebanon and Sudan in addition to the Kuwaiti market.

The chief operating officer of the company, Barrak Al Sabeeh, told local press at the start of 2011 that Zain had plans for expansion in other emerging markets, such as South-east Asia, which it would finance through the sale of a 46% stake to the UAE’s Etisalat for $12bn. However, as of March 2011 it was reported that the deal had fallen through. In September 2011 Saudi Arabia’s Kingdom Holding and Bahrain’s Batelco Group announced they would not proceed with their planned joint $950m bid to buy a 25% stake in Zain’s Saudi Arabian subsidiary. The companies said terms for the deal could not be met.

MOUNTING COMPETITION: Wataniya has also transformed itself into a regional player, with operations in Algeria, Saudi Arabia, the Maldives, Tunisia and Palestine. It maintains a strong presence on the home market and has been making gains against long-time leader Zain despite new competition from Viva. Founded in 1997 in Kuwait, Wataniya has been majority-owned by Qatar Telecom since 2007.

According to its annual report, Wataniya’s consolidated revenue increased by 13.5% in 2010 from KD475.5m ($1.71bn) to KD539.4m ($1.94bn). Earnings before interest, taxes, depreciation and amortisation grew 15.5% from KD187.6m ($676.3m) to KD216.6m ($780.84m). In 2009, Wataniya won a legal dispute over a licence fee with Kuwait’s MoC and received KD49.9m ($179.89m). Excluding this one-off sum, the group’s consolidated net profit grew by KD21.8m ($78.59m) in 2010 to KD78m ($281.19m), up 38.8%. The firm continued its expansion in 2011, increasing its subscriber base to 1.94m as of the end of the third quarter, up 12.7% y-o-y. Revenues for the first nine months of the year from local operations were KD185.5m ($668.73m), up 13.4%, with net profit of KD321.1m ($1.16bn). Including its international operations, the group reported a total subscriber base of 17.4m as of third-quarter 2011, up 7.2% y-o-y, with revenues of KD540.2m ($1.95bn) and consolidated net profit of KD324m ($1.17bn) over the first nine months of the year.

THE CHALLENGER: While the Kuwaiti government is a stakeholder, Saudi Telecom has the major interest in Viva (officially known as Kuwait Telecommunications Co.). It is the only operator not currently listed on the bourse, but at the start of the year announced that it was finalising the procedures to do so. Viva recorded a net loss of KD20m ($72.1m) in 2010, but increased its infrastructure investments to KD61m ($219.9m).

FIXED LINE: The country’s landline penetration rate is approximately 16%, according to a 2010 report by the Kuwait Financial Centre (Markaz). Though low internationally, this is about average for the region, and given the large size of Kuwaiti families most people have access to a landline. A slight uptick in usage was seen in 2009 when the government decided to make calls from landlines to mobile phones free, which has pinched revenue for the country’s mobile operators. Calls between fixed lines are also free.

According to the most recent report by the UN Economic and Social Commission for Western Asia for 2009, Kuwait’s information and communication technology infrastructure includes 31 switchboards with 776,000 lines, out of which only 518,000 are in use. In 2010, the MoC signed contracts worth KD7.84m ($28.26m) to upgrade the landline network, which faces connection problems. Kuwait Public Telephone, which is overseen by the MoC, exercises a monopoly over fixed-line services. In November 2010 the minister of communications, Mohammad Al Busairi, told local press that the government planned to privatise the fixed-line network, which could rejuvenate interest in the segment. However, not much money stands to be made by private operators unless the MoC also relinquishes control of the country’s international gateway. The ministry now collects a fee for calls made to other nations. As a result, Kuwaitis pay more for international calls than customers in other GCC states and mobile operators miss out on a potential revenue source. Though Zain Kuwait may be the group’s flagship subsidiary, it is not part of its One Network, which offers free roaming between member countries. The GCC communications ministers met in June 2011 to discuss reducing roaming fees, and that same month Kuwait’s MoC passed a decision which local press reported would set a fixed rate for mobile calls within the GCC.

REGULATOR ON THE WAY: Kuwait is alone among the GCC countries in not having an independent regulator for the telecoms industry. While plans for a Telecoms Regional Authority (TRA) were drafted in 2007, no concrete progress has been made thus far on realising that goal. “While the industry enjoys strong fundamentals, thanks to robust demand, a relatively low penetration and an attractive ARPU, the sector lacks a holistic regulatory framework,” Salman A Albadran, CEO of Viva, told OBG.

Now that there are three mobile operators competing in the Kuwaiti market, this is viewed as a significant impediment to development, as the MoC functions as both sector regulator and monopolist in the fixed-line and international call segments.

“There needs to be clarification on whether the TRA is meant to be a telecoms regulator or telecoms player,” Nael Al Awadhi, general manager of Qualitynet, one the country’s four ISPs, told OBG. The MoC stopped issuing ISP licences in November 2010 until a separate body is established to perform that role, signalling that a regulatory authority was imminent. However, any lag time could further impede sector growth. “Governmental hold-ups and legislative ambiguity could mean a significant delay in advancement,” said Al Awadhi.

MOBILE NUMBER PORTABILITY: Sector growth has been further hampered by the lack of mobile number portability. Kuwait has a high post-paid segment by regional standards, at 27.5% in early 2010, and discounts are offered by operators for post-paid subscriptions. While this should have resulted in downward pressure on pricing, this has not been the case in part as mobile users are unable to retain their old number if they switch carriers and are thus reluctant to try out rival providers. Several countries in the region have adopted number portability, which has prompted carriers in some markets to offer better services and prices to foster customer loyalty. Local press reported at the start of 2011 that the MoC was in talks with operators to institute this service and will charge a small fee to manage it. Customers will have to pay KD5 ($18) to retain their numbers while switching to another operator.

OUTLOOK: Kuwait is on its way to becoming a more mature market with increased competition among operators and lower prices. “Free incoming calls is a simple recent example of how consumers can benefit from a little healthy competition,” Waqar Qureshi, senior manager of products and business development at Qualitynet, one of Kuwait’s four ISPs told OBG. Mobile number portability may also prompt an improved offerings. However, the country still has a way to go to return to the forefront of the region. “Kuwait cannot afford to drag its feet on the development of telecom technologies. If it does, it will fall behind globally and in the region. As such, the government should do what it can to keep the industry competitive and innovative,” said Al Awadhi. Instituting a regulatory authority would enable the sector to make the biggest leap forward in the coming year.