Hold the phone: Data drives growth while the entrance of new providers should see competition rise

Saudi Arabia is an early adopter of telecommunications technologies. In 2011, for example, the Kingdom became one of the first countries in the region to launch long-term evolution (LTE) mobile broadband services, uptake of which is growing rapidly. Other new technologies and services such as fibre-to-the-home are also being rolled out, and smartphone ownership rates are among the highest in the world, leading to strong rises in data consumption. Operators are increasingly looking to data to drive revenue growth. as penetration in the voice segment appears to have peaked. Competition is set to grow with the launch of two mobile virtual networks in the second quarter of 2014 (with a third licence being re-tendered), though sentiments are divided on the prospects.

FIXED-LINE MARKET: The number of fixed telephone lines in the Kingdom stood at approximately 4.71m as of the end of 2013, down from 4.8m at the end of 2012, according to statistics from the Communications and Information Technology Commission (CITC). Of these, 3.3m were residential lines and 1.41m were business lines. This put household fixed-line penetration at 64.3%, down from 67.6% in 2012. The number of fixed lines had been slowly increasing in previous years, from around 4.1m in 2008; however, the prospects for further growth in the segment appear limited. “Fixed lines are not witnessing any growth, as mobiles now dominate all non-corporate business. This is an increasingly limited market given the high penetration rate of mobile phones,” Mohammed Sadyeh, CEO of Qanawat Telecom Company – a distributor for mobile operator Etihad Etislat (marketed as Mobily) – told OBG.

FIXED OPERATORS: There are two fixed-line operators in the Kingdom: the state-backed Saudi Telecom Company (STC) and, following its entry into the market in 2009, Etihad Atheeb Telecom (known as GO Telecom). STC continues to overwhelmingly dominate the market, with GO’s subscriptions standing at around 102,000 as of mid-2012. The main shareholder in GO is Atheeb Trading Company, with a stake of 25%, followed by Bahraini operator Batelco and Saudi holding firm Al Nahla Trading Company with stakes of 15% and 13.7%, respectively (the remaining equity in the company floats on the Tadawul stock exchange). In August 2013 Mobily, via its subsidiary Bayanat Al Oula, signed an agreement to acquire a controlling stake in the firm, which it intended to finalise by November; however, in January 2014 the firms extended the deadline for the completion of the transaction for a second time and by May the deal was reported to be cancelled.

MOBILE MARKET: The number of mobile subscriptions in the Kingdom stood at approximately 51m at the end of 2013, according to the CITC, down from around 53m at the end of 2012. This reduced the national mobile penetration rate to 170%, from 181.6% in 2012 and a peak of 188% in 2011. The CITC attributed the recent fall in subscriptions to three main factors, namely the deactivation of unidentified SIM cards following the introduction of new requirements for subscription holders to provide proof of identity; the exodus of a significant number of migrant workers from the Kingdom as a result of stepped-up enforcement of immigration rules by the authorities; and a move to end free international roaming that led some customers who had been using Saudi SIM cards outside of the Kingdom to cancel them.

Industry figures say that in practice, real penetration is likely to be around 20-25% lower than official figures, as inactive SIM cards remain counted in the figures for some time. Although their inclusion inflates penetration figures, it acts as a constraint on growth potential. Indeed, number planning is one of the regulatory issues sector players would like to see improved.

“Operators need more support from the CITC in regard to numbers; currently there are not enough available for new products,” Mohammad Abdel Jawad, CFO of Qanawat, told OBG. “Part of the problem is that the amount of time that passes before an inactive number is recycled is quite high, meaning that it can take some time for numbers to come back onto the market.”

The mobile voice market remains dominated by prepaid subscriptions, which stood at around 44m at end-2013, or around 86% of total mobile subscribers. Growth in the post-paid market was steady for the decade through 2012, though it dipped slightly in 2013 from 7.3m to 6.9m. Meanwhile, the number of prepaid subscriptions has fallen from a peak of 47.1m in 2011. The mobile data market is growing rapidly, both in the 3G segment and in the LTE/4G segment (see analysis).

SMARTPHONE USE: Smartphone penetration in the Kingdom is around 73%, according to figures cited by a Google study published in January 2014, one of the highest rates in the world. The study said that more web searches in the Kingdom are now conducted on smartphones and tablets than on personal computers, at rates of 45% and 42%, respectively. Half of time spent watching YouTube videos was also undertaken using mobile devices. Competition for smartphone sales is rising; for example, in July 2013 Mobily partnered with Chinese firm Huawei to sell its Ascend P6 handset.

MOBILE OPERATORS: The Saudi mobile market has three traditional mobile network operators, namely STC, Mobily and Mobile Telecommunications Company Saudi Arabia, which operates under the brand name of Zain. Zain is the newest entrant to the sector, having launched its operations in the Kingdom in 2008.

STC is the largest telecoms operator in the Middle East and North Africa and the sixth-largest Middle Eastern company by market capitalisation. It is effectively a state-owned company; the Kingdom’s sovereign wealth fund, the Public Investment Fund, holds a 70% stake in the firm and the General Organisation for Insurance (GOSI) and the Public Pension Fund hold equity stakes of 7% and 6.6%, respectively. The remaining 16.4% share of the firm’s equity floats on the Tadawul stock exchange.

In addition to its domestic operations, STC is active in a number of other markets in the region and beyond. One of its most prominent foreign holdings is in Turkey, via its 35% share in Oger Telecom; Oger in turn owns a controlling 55% stake in Turkey’s largest fixed-line operator by subscriptions, Türk Telecom, which also owns a 90% equity holding in Avea, one of Turkey’s three main mobile network operators. At the end of 2013, AVEA had a market share of 20.86%. STC is also active in Kuwait and Bahrain through its affiliate VIVA, as well as in Lebanon, Jordan, India, Malaysia, Indonesia and South Africa through various other affiliates.

The principle backers of the Kingdom’s other two mobile operators are foreign companies based elsewhere in the GCC region. For example, the largest shareholder in Mobily is Emirati telecommunications firm Etisalat, with a 27.4% stake, followed by GOSI on 11.4%; no other individual investor owns a stake larger than 5% of the company’s equity. Mobily itself holds stakes in a number of affiliates active in segments such as data service provision (see IT chapter) and in 2008 also acquired a controlling stake in Zajil, one of the Kingdom’s leading internet service providers. Zain’s largest shareholder is the Kuwaiti operator of the same name, with an equity stake of 37%.

A fourth operator, Public Telecom Company (known as Bravo), provides push-to-talk services using integrated digital enhanced network (iDEN) technology. Bravo was previously owned by Qatari operator Ooredoo, but was acquired by STC in October 2013. In September 2013 the operator had around 176,000 users.

MARKET SHARE & REVENUES: STC has the largest subscriber base of the three mobile operators; the firm put its domestic market share at 48% at the end of 2012 and the Telegeography Global Comms database estimates the figure at 47.4% as of June 2013 (up from 46.9% a year earlier), with total subscribers of around 28m. STC was followed in second place by Mobily, at 38.3%, and Zain in third place, at 14.1%.

According to the CITC, total domestic telecoms revenues in 2013 stood at approximately SR75bn ($20bn), up from SR71bn ($18.9bn) in 2012. Sector revenues grew at an average annual rate of around 10% over the previous decade. Of the total, voice calls accounted for SR54.7bn ($14.58bn) of sector revenues, down slightly from SR55.9bn ($14.91bn) the year before.

This was likely a result of the Kingdom’s mobile voice penetration rate reaching saturation levels alongside other factors outlined above, which led to slightly reduced penetration. Revenue from the data and fixed-line segments accounted for the remaining SR20.7bn ($5.52bn) of industry turnover.

Between them, Saudi firms also reported revenues of SR4.2bn ($1.12bn) from foreign operations in 2013, according to CITC figures, down from SR18.7bn ($4.99bn) the previous year.

REVENUE STREAMS: Average revenue per user (ARPU) stood at slightly less than $20 a month in 2012. The figure has fallen substantially over the long term, from around $70 a decade earlier; however, the rate of decline has been markedly slower in the last three years or so. A February 2014 investment update on the sector by Al Jazira Capital – the investment arm of Bank Al Jazira – forecast that ARPU would rise in 2014, largely on the back of increasing use of data services and growing usage of 4G devices in particular.

STC’s revenues in 2013 stood at SR46.6bn ($12.42bn), up 2% on 2012 figures, when the firm accounted for approximately 63% of total sector turnover. Mobily’s sales income for the year was SR25.2bn ($6.72bn), up from SR23.6bn ($6.29bn) in 2012 and SR12.9bn ($3.44bn) in 2009, while Zain KSA’s revenues stood at SR6.5bn ($1.73bn), up 6% on 2012. Zain does not currently turn a profit, recording losses of SR318m ($84.78m) in the first quarter of 2014, though the firm’s CEO Hassan Kabbani said in April that plans to reach profitability within five years remained on track.

MVNOS: With a view to boosting competition, the authorities have pushed the three main mobile providers to allow virtual operators to piggyback on their network infrastructure. In June 2013 the CITC announced a shortlist of three companies qualified to apply for mobile virtual network operator (MVNO) licences, each one tied to one of the three main operators. The prospective MVNOs are Virgin Mobile MEA (VMMEA), which was in negotiations to use STC’s network; Jawraa Group (controlled by London-based MVNO company Lebara), using Mobily’s network; and Axiom Union Mobile of Dubai, using Zain’s network.

In March 2014 the CITC awarded Virgin and Jawraa licences; however, it did not grant Axiom a licence, and in April 2014 the commission announced it would retender the licence for an MVNO operator to use Zain’s network, giving a new deadline of July 7 for bids. Axiom said it had been unable to provide all the documentation required by the CITC in time to meet the licence deadline and that it intended to reapply. The company does not appear to meet the CITC requirement that MVNOs in the Kingdom have prior experience in running virtual networks, though it has stated that it is partnering with an unidentified foreign MVNO in order to qualify under the Kingdom’s rules.

Virgin and Jawraa intend to launch operations in the second half of 2014. Jawraa has said it aims to target the Kingdom’s large population of migrant workers specifically, likely with the offer of cheap calls to their home countries. Industry players see such targeted marketing as key to the segment’s success. “For MVNOs to be successful here, they will need to focus on a specific segment of customers rather than trying to compete with operators across the board,” said Sadyeh.

However, even with such marketing strategies in place, some in the industry believe that the outlook for growth in the virtual operator segment is poor. “Most of the market niches being looked at by the MVNOs are already well served by the main operators, which have a large distribution footprint,” said Abdel Jawad. “The rates they are charging the MVNOs for network capacity are also quite high, so overall I believe the segment is going to have a hard time here.”

Other industry players are more optimistic, however, arguing that virtual operators could prove more appealing to customers than the network operators. “There is substantial room for MVNOS given the country’s large population size,” said Al Walid H Khairi, deputy CEO of local ICT firm Ajna United. “Furthermore the mobile operators are not always very customer-oriented, as the high levels of mobile penetration mean they don’t feel the need to fight for business; this has reduced competition between the traditional operators, which could boost the attractiveness of MVNOs to customers.”

CALL CENTRES: There were 15 licensed call centre operators in the Kingdom in 2012, up from 10 the previous year. Although the Kingdom is poorly placed to emerge as a significant centre for offshoring, given factors such as high wages compared to regional offshoring destinations, some major local firms are nonetheless looking to establish call centre and business-processing operations in the Kingdom, targeting the local market. In one of the highest-profile moves, in September 2013 a consortium of national oil company Saudi Aramco, General Electric (GE) and India’s Tata Consultancy Services (TCS) announced plans to launch a new women-only business processing centre employing 3000 people. TCS and GE will respectively take stakes of 76% and 24% in the venture, which will initially serve GE and Saudi Aramco, with the intention of bringing in other clients in the future. Other firms active in the segment include Contact Centre Company KSA, a joint venture between STC and global business process outsourcing firm Aegis that handles customer service calls for STC, and Etisal (part of local holding firm the Riadaa Group), which operates a 900-seat call centre, providing customer care for Zain.

OTHER SEGMENTS: The use of voice over internet protocol (VoIP) services is becoming increasingly popular in the business segment, in addition to retail use of VoIP services such as Skype. “The VoIP market is developing well, in particular with government institutions and medium and large companies,” said Khairi.

The very small aperture terminal (VSAT) market is fully liberalised, though personal use of VSAT connections remains illegal. As of 2012 there were 19 VSAT providers; major companies active in the segment include Saudi Inteltec. There are also 127 licensed bulk SMS service providers working in the Kingdom.

OUTLOOK: “There is major potential for further growth in the market, as Saudi Arabia tends to be an early adopter of technology; furthermore, large investments are being made in projects that will need telecoms services, such as new financial cities,” said Abdel Jawad, adding that he believed sector growth would be largely driven by the business segment. A recent example of this came in the form of STC’s announcement in December 2013 that it had signed an agreement to provide telecoms infrastructure for the Knowledge Economic City, including 40 km of fibre-optic cables.

The prospects for major additional growth in both the mobile and fixed-line voice segments appear limited, given high levels of mobile penetration and the competition fixed-line services face from mobiles and other segments such as VoIP. However, data use is likely to ensure continued growth in revenues; uptake of LTE mobile broadband services in particular is set to continue to rise rapidly (see analysis). The planned launch of MVNOs will bring further competition to the market, though it remains to be seen if they can take significant market share from the network operators.