Getting creative: The fight to maintain profits in the face of new competition

The entry of Viva, a third mobile operator, at the end of 2008 has ratcheted up the competition and lowered prices in a country which previously had some of the world’s highest average revenue per user (ARPU) levels. Revenues are still relatively high, but all three of the country’s mobile carriers are scrambling to get more creative and offer value-added services and content. As mobile internet is the wave of the future, increasing bandwidth capacity will be essential in the fight for market share.

COMPETITION: “The Ministry of Communication’s decision to allow in another telco stirred up competition for the incumbents,” Waqar Qureshi, senior manager of products and business development at Qualitynet, one of Kuwait’s four internet service providers (ISPs), told OBG. “Viva, backed by the STC Group, launched new services that Zain and Wataniya had to follow.” In addition to lower pricing plans, Viva also introduced the calling-party-pays mechanism, which makes incoming calls free, something the other operators were forced to adopt to stay competitive. Previously, the mobile-party-pays model had been used by Zain and Wataniya.

As the government also ruled in 2009 that calls from fixed lines to mobiles are free, many customers rely on this method, which gives the operators no opportunity to collect revenue.

As Kuwait’s mobile market is nearing saturation with a 129.9% penetration rate as of 2009, “any new operator will have to steal away some market share from the incumbent. Zain, the largest of them, stands to be threatened the most,” Qureshi said. Although it is a relatively small market, Kuwait has traditionally been a major revenue earner in Zain’s portfolio. In 2008, Kuwait accounted for 3% of the group’s subscriber base, but 19% of its consolidated revenues. The importance of the home market was amplified following the loss of around half of Zain’s subscribers with the sale of its African assets in 2010. Kuwait now accounts for 5% of the subscriber base and 26% of consolidated revenues. Profits, however, are declining in the firm’s home market. In 2008, Zain Kuwait posted ARPU of $69, making it one of only 20 global operators with an ARPU of above $50. Qatar’s Qtel is the only other subsidiary in an Arab nation to hold such a distinction. By 2010, Zain Kuwait’s ARPU stood at $52. Wataniya recorded a similar decline, although its revenues have traditionally been lower than Zain’s due to the fact that it has less post-paid plans, which tend to be higher revenue generators. In 2010, 15% of Wataniya’s plans in Kuwait were post-paid, compared to 30% of Zain’s, according to research by Naaem Holding. Wataniya’s ARPU dropped 8.6% from $39.6 in the first quarter of 2009 to $36.2 in the first quarter of 2010. Kuwait is the top contributor to the group’s revenues, but has decreased its share from 52% in 2007 to 41.1% in 2010 and 36.8% in the first quarter of 2011.

ROOM FOR GROWTH: Competition is mounting across the Middle East and North Africa region, where customers are rapidly transitioning to using their phones for more than just voice calls.

Oracle’s “Opportunity Calling: The Future of Mobile Communications” report from September 2010 found that the Middle East leads the world in terms of multiple use of handsets. Around 98% of the Middle Eastern customers surveyed use their phone as a communications device, 32% as an entertainment device and 39% as a mini-computer.

Despite declining ARPU, the market still has room for growth. At 129.9% as of 2009, Kuwait’s mobile penetration rate is also the lowest of the GCC countries – UAE has the highest at 232.1% for the same year. In April 2011, the Arab Advisors Group, a regional consultancy, published its annual Cellular Competition Intensity Index, which ranks countries based on variables such as the number of licensed operators, market shares, prepaid vs. post-paid plans, and the availability of extra services such as 3G. Saudi Arabia was found to be the most competitive with a 76.01% score, followed closely by Jordan (75.37%), Palestine (69.61%), Oman (69.52%) and Egypt (68.18%). Out of the 19 Arab countries surveyed in the report, Kuwait ranks 13th with a competitiveness score of 54.58%.

A large factor dragging down Kuwait’s score on this survey was the absence of long-distance competition, as the Ministry of Communications controls the international gateway. Additionally, there are only three operators and the variety of smartphone plans and value-added services on offer is not so wide. Another move that would help the sector mature would be for operators to institute tower sharing to bring down network costs. “There is currently very little shared infrastructure between operators, maybe less than 5%,” said Ali Alostath, CEO of Hayat Telecommunications, which provides around 70% of the country’s telecoms infrastructure, including 90% of Wataniya’s network.

However, Alostath predicts that in the next year, especially if a fourth operator is introduced, operators will opt to share infrastructure, as has recently occurred in Saudi Arabia between STC and Mobily. “Operators are being forced to look at their costs and sharing sites would give them two advantages: first, immediate cash, when they sell their towers to a new tower-sharing company and second, it would decrease their monthly operating costs,” he said. “There is a benefit for everyone.”

ADDING VALUE: Because Kuwaiti companies cannot compete on international calls, they have to focus on mobile internet and other value-added services. Blackberry, iPhone and iPad promotions, for example, are targeted at the youth and high-income segments of the population. Kuwait is a country of early adopters. Viva debuted the iPhone 4 in April 2011, a move followed by Zain in June.

In order to keep pace with the demand for high-speed mobile internet, the operators have upgraded to 3G networks. At present the fastest network speed is around 27 MB ps. Long-term evolution networks, also known as 4G, are the next step for mobile internet, allowing for faster streaming.

Viva will be the first to roll out a 4G network, having initiated a trial phase in 2010. 4G allows for download speeds of up to 360 MB ps, though Viva achieved just 70 MB ps in its trial phase. Zain has also done trials of a stronger 3G network, femtocell, which increases indoor coverage.

BUNDLING: Carriers have also gradually started to introduce promotional campaigns, including offering lower prices for two-year mobile subscriptions and bundling handsets with contracts.

“Diversification of services and product development is what will set one operator apart from another,” Qureshi told OBG. “Part of product development is creative bundling. Operators are seriously considering this now. Mobile operators are introducing new bundles with smartphones. On the other side of the ethernet cable are the ISPs that are creatively bundling with laptops, software packages, etc.”

SERVICE: However, Kuwaiti operators looking to earn customer loyalty and improve their margins need to focus on the basics in addition to flashy add-ons. “The stickiest of services is excellence in customer care. This will prove to be the biggest differential factor for any operator,” said Qureshi. Oracle’s report found that users in the Middle East are the “least satisfied” among global customers with their mobile providers. Globally, consumers responded that their top qualities for a provider are reliability (85%), price of phones and plan options (81%), ease of use (75%), and responsiveness in terms of sales, customer and technical support (70%). State-of-the-art technology ranked rather lower at 49%.

Whatever strategy the country’s operators adopt to entice new customers, it is clear that the days of sky-high ARPU levels are unlikely to return, despite the new interest in mobile internet. “Five years ago there were only two operators,” Alostath said. “Now there are three, so ARPU is not going to maintain its growth rate. It’s a fact. The only way for operators to maintain their profits is to reduce operating costs.”