Evolving dynamics: A market driven by network enlargement, data growth and two-way competition

In 1949 Qatar set up its first automatic telephone exchange, a 50-line network that helped the state reach what was then considered a major milestone in telecommunications: eliminating the need for human operators. In the 63 years since, alongside an economic surge fuelled by the energy sector and a growing population, the telecoms industry evolved into one of the region’s most dynamic. In 1976 the country’s first satellite earth station came on-line, and by 1994 the first global system for mobile communications (GSM) services was available.

TWO-HORSE RACE: The telecoms market entered a new phase in 2009, when Vodafone Qatar began to operate as the state’s second telecoms provider bringing an end to Qatar Telecom’s (Qtel) monopoly. Vodafone’s entrance has sparked more innovation and brought higher-quality service to the local telecoms sector, thanks to the active competition for customers between the two operators.

Not surprisingly, mobile usage has increased significantly in recent years. Qatar is one of the region’s most saturated mobile markets, with the sixth-highest mobile penetration rate in the Arab world, according to estimates from the UN’s International Telecommunications Union (ITU). According to the Supreme Council of Information and Communication Technology (ictQATAR) estimates, the mobile penetration rate in Qatar stands at 142%, showing more mobile phone subscriptions in the country than the number of people, with around 2.8m SIM cards sold yearly.

Two categories of mobile subscribers perpetuate this trend: users with multiple pre-paid SIM cards and customers who keep separate pre-paid and post-paid accounts. Those with multiple pre-paid SIM cards are typically price-sensitive consumers who like the option of using different carriers depending on the promotional campaigns offered at any given time. Users with both pre-paid and post-paid accounts are often those who have multiple communication needs, such as separate phones for business and personal use.

Between these two groups, the use of mobile phones that hold multiple SIMs is increasingly popular.

THE FIRST OPERATOR: Qtel, the largest operator in the country, was established by governmental decree in 1987 under Law No. 13. In 1994 Qtel launched its first GSM mobile telephony service called Qatarnet.

By 2006 it offered services such as MMS and 3G and was listed on both the London and Abu Dhabi stock exchanges. As of December 31, 2011, the company was 55% owned by the State of Qatar, with a 10% share held by the Abu Dhabi Investment Authority, a 13% share held by other Qatari government-related entities and the remaining 22% owned by others.

Qtel posted positive results in 2011. Customer growth numbers have remained relatively steady over the past three years, rising from 2.4m in 2009 to 2.43m subscribers by the end of July 2012, according to the company’s half-year report. Revenues continued to climb, up 2% year-on-year (y-o-y) between the fourth quarters of 2010 and 2011, from QR5.59bn ($1.5bn) to QR5.7bn ($1.56bn). Blended average revenue per user (ARPU), or the combination of postpaid and pre-paid ARPUs, grew 7.8% y-o-y between 2010 and 2011, and had reached QR154.3 ($42) by the end of the second quarter of 2012.

Vodafone Qatar, of the London-listed Vodafone Group, received a licence to become Qatar’s second public mobile operator in June 2008. By March 2009 the network was up and running, formally ending the monopoly of the state incumbent Qtel. The operator has recorded impressive growth in the three years since its launch. Between December 2009 and December 2011 total revenue grew more than four-fold from QR217m ($59.6m) to QR906m ($248.8m), according to the firm’s 2011 third-quarter financial statement (Vodafone financial years begin in April).

A growing customer base drives the revenue growth.

Between December 2009 and December 2011, subscriber numbers more than doubled from 354,000 to 797,000. By end-March 2012 it had reached 837,233. Market share expanded from 14.3% at the end of 2009, to 25.3% in 2010, and approximately 28% by year-end 2011. Even as customer numbers and market share grew, the company’s ARPU has remained relatively constant, despite minor discrepancies depending on calculation methods. The nine-month ARPU for April-December 2011 was QR111 ($30.48), a decline of 1.4% y-o-y, while adjusting that figure for changes in customer numbers generates an ARPU of QR113 ($31.01), a 0.4% increase y-o-y.

A stable ARPU shows that even with an increasing customer base, the company has not cut prices to any great extent. Overall, Vodafone’s financials showed a 63% improvement in distributable profits y-o-y and a 21% improvement in net loss y-o-y, according to data in the firm’s Q3 2011 financial statement.

RULES & REGULATIONS: The key government regulator for mobile and internet services is ictQATAR. Created by an Emiri decree, Law No. 36 in 2004, ictQATAR was established to act as a sector regulator and a government body that nurtures the growth of information and communications technology (ICT) development and use in Qatari society. The body oversees a wide range of activities, including those related to broadband access, digital broadcasting, Arabic digital content and cyber security. ictQATAR issued one of its highest-profile decisions in June 2011 regarding the unauthorised launch of Qtel-Virgin Mobile branded services in Qatar in 2010. Following a series of intermediary rulings, in June 2011 the government regulator ordered Qtel to close its Virgin Mobile-branded services and give customers the option of migrating their plans to Qtel or receiving a full refund for their SIM cards and unused balances. This event highlighted both the dynamism and competitiveness of the Qatari mobile sector and the ways market players are willing to experiment to hold on to market share. The case also proved the regulator’s efficiency in handling disputes where regulation is still under development.

Another issue ictQATAR is currently working to address is number portability, which allows customers to retain their mobile number when switching operators. In Qatar, where some consumers pay high prices for specific numbers, the ability to hold onto a number regardless of a carrier can encourage customer mobility and nurture competition.

However, although number portability regulation was meant to be in place by 2008, in time for Vodafone’s market entrance, legislation has been delayed, and the current target date is now by the end of 2012. “It is a multi-stakeholder process. Systems for number portability will have to be implemented,” Christa M Cramer, then the assistant secretary general at ictQATAR, stated in the local English daily Gulf Times in December 2011. “We are in the final stages of implementing those (systems) with the respective operators (Qtel and Vodafone).”

NETWORK UPGRADES: Qtel and Vodafone continue to upgrade their networks to provide customers the best available services. Both networks cover the entire country with at least 2G, or second-generation coverage. Although extending coverage over the total land area is not challenging, local architecture requires highly dense network coverage for indoor reception.

According to the company, between July and September 2011, Qtel installed new, updated technology across 500 of its base stations throughout the country to enhance overall coverage and 3G capacity. In July 2012 Qtel started to roll out its 4G long-term evolution (LTE) network after receiving the 800 Mhz and 2600 Mhz bandwidth frequencies from ictQATAR. As part of the build-up phase Qtel has installed 100 antennas throughout Doha. At the same time, Vodafone has been improving coverage on its network of 497 outdoor and 123 indoor cell sites since December 2011.

SITE-SHARING: As the two operators work to improve their networks, site-sharing has been presented as a way to cut costs and minimise the environmental impact of mobile towers. In site-sharing, network carriers install their own GSM and other technology kits at a shared location. This minimises the number of towers operators build, saving costs and preventing the visual pollution of excessive mobile towers. Operators with a larger network – usually incumbents – are often reluctant to allow other carriers to share their infrastructure, wanting to reap returns on the initial infrastructure investments it made. Instead, it is common for partial network site-sharing to occur, with operators cooperating by offering trades for use of each other’s physical towers.

As the new operator in Qatar, Vodafone has naturally been pressing for more site-sharing. Vodafone is keen to site-share because new towers must be built on public land, and obtaining the land and building permits can be a lengthy process as the government attempts to curb the proliferation of such structures. In recent years Vodafone has been working with Qtel and ictQATAR to hammer out a more comprehensive site-sharing policy. “There are quite a lot of pieces to it, and it has been a bit complicated, but we are getting to the point where we might see tower-sharing in the country,” Richard Daly, the CEO of Vodafone Qatar, told OBG. “I think we are making progress, and I think in the next 12 months we will see a lot more tower-sharing.” As of June 2011, Vodafone had secured the rights to share six sites with Qtel, and agreements for a further eight were in progress.

FIXED SEGMENT: As mobile networks continue to develop, the fixed segment has also experienced steady growth. In other parts of the world, landline telephone subscriptions are falling as mobile technology becomes more affordable and reliable and fixed-line services become less relevant. However, in Qatar, fixed subscriptions have continued to rise steadily. Between 2002 and 2011, the number of subscriptions climbed from 176,519 to 308,655.

The government considers fixed telephone service a right to which all Qatari residents are entitled. In addition to providing good quality fixed-line connection, current Qatari law requires licensed fixed network service providers to offer local, national and international calls, 24-hour emergency services, operator-assisted services and itemised billing.

ANOTHER FIXED-LINE LICENCE: Qtel was founded as a fixed-line telephone company, and has continued to provide landline services throughout its history. Vodafone Qatar announced in May 2010 that it received the second public fixed-line network licence from ictQATAR. The terms of the agreement covered 100% of the Pearl development, Qatar’s man-made residential island, including fixed broadband and fixed voice services. The country’s second telecoms operator had the soft launch of its fixed voice operations in the Pearl in the latter half of 2011.

Although landlines lack the portability of mobile phones, in Qatar they offer several advantages, including free calls within the state. With the infrastructure in place, relatively low costs and prevailing lower mobile penetration among older population segments, the fixed segment continues to enjoy steady growth for the time being.

BROADBAND EXPANSION: The fixed-line telephone network has been useful in propelling the use of broadband internet in Qatar. However, this role is set to change in light of a national broadband network being spearheaded by ictQATAR. The $550m public fibre network, known as the Qatar National Broadband Network (Q.NBN), is scheduled to provide more than 95% of the state’s population with connection speeds up to 100 megabits per second (Mbps) by 2015. The idea is to lay down the backbone of an open-access fibre network, which can then be leased at wholesale rates to internet service providers. In this way, the state hopes to kick-start the fixed broadband market instead of waiting for private investors to lay down the network in phases based on market opportunities (see analysis). Qtel, for example, launched a fibre programme in January 2012 with the aim of covering the whole of Qatar by 2014.

As fixed broadband undergoes major upgrades, changes are also under way in the mobile broadband segment. Both Qtel and Vodafone have seen data usage rise, with rates as much as doubling within the past year. To meet demand for growing users and higher speeds, carriers are working on 3G LTE services, more commonly known as 4G. Both Qtel and Vodafone are licensed to build these services.

Qtel fired up its 4G network in October 2011, delivering speeds of up to 150 Mbps, far faster than current 3G technology, which tops out between 1 Mbps and 10 Mbps (see analysis). Full commercial launch of this service is set for the end of 2012.

SMARTPHONES: The increasing adoption of smartphones is one factor driving growing data usage rates. Although the overall mobile penetration rate stands at 142% by ictQATAR’s measurements, smartphone penetration was 75% in Qatar, according to a study by commissioned by ictQATAR in February 2012. The study, undertaken by global market research firm Nielsen, showed that mobile phone models without a touch screen are the more popular smartphone variety popular, holding 46% of the market, while smartphones with touch screens captured 29%.

The 15-34 age demographic is the largest consumer of smartphones in Qatar. For this group, as well as those 34-54 years of age, the most commonly reported reason for not owning a smartphone is cost, according to the Nielsen survey. As technological innovation, infrastructure development and competition between Qtel and Vodafone continue, costs will likely fall. As prices come down, smartphone penetration could see significant growth in the coming years.

Alongside the potential for smartphone penetration, there are perhaps even more opportunities in the mobile application segment. As many as 67% of participants in the Nielsen survey said they did not have any added applications on their phones, while 73% said they had not downloaded or purchased one in the past 30 days. This relatively low penetration rate translates to a largely untapped market for mobile phone applications, which could grow rapidly as smartphone usage gains speed (see analysis).

OPERATIONS ABROAD: Both carriers are international providers. Qtel’s reach extends across three continents, and Vodafone runs one of the largest mobile telecommunications operations worldwide. As it grows, Qtel Group has become an international group with a customer base of 83.7m as of June 2012. It operates seven brands in the Middle East and North Africa and South-east Asia: Qtel, Indosat, Asiacell, Wataniya, Nawras, Nedjma and Tunisiana. The Qatari market remains one of its most profitable.

Revenues from its home market were the third-highest, at QR3.07bn 842.5m) for the first six months of 2012, after QR4.1bn ($1.12bn) in Indonesia and QR3.3bn ($913.6m) in Iraq. The company’s financial resources are equally diverse, with 82% of 2011 revenues coming from outside of Qatar, Qtel’s chairman, Sheikh Abudullah bin Mohammed bin Saud Al Thani, told shareholders in March 2012. At the meeting, the company’s general assembly approved a 40% rights issue (two shares for every five shares held, after distribution of bonus sales) with the intent of shoring up resources for further expansion by acquisition.

Allowing the firm to build up larger customer bases elsewhere in the world seems logical given the relatively small size of Qatar’s domestic market. This strategy also allows carriers to import innovations and best practices acquired abroad to the Qatari market. Additionally, ownership and relationships with foreign networks could facilitate lower roaming rates and better services abroad, a feather in the cap of any carrier looking to compete in an increasingly global communications market.

OUTLOOK: The Qatari telecoms market is still relatively young in terms of market-driven competition. Great strides have been taken by ictQATAR to establish a legal and regulatory framework that promotes competition and a robust telecoms market.

The market is by nature a dynamic one, and as technology continues to develop, its stakeholders will continue to chart new territory. Given the already high penetration rates, future competition between Qtel and Vodafone will likely be intense, which should lead to improved services and other benefits. The rise in smartphone penetration and data usage should be a major catalyst for sustained competition between network providers. Operators can be expected to devote more resources to attract new business by maintaining high levels of reception quality, customer service and packages that fit consumers’ needs. In the long run, market competition will pay off in the form of a dynamic sector driven to innovate in order to grow, benefitting operators and consumers alike.