Privatisation has lead to competition in Kuwait's telecoms and IT sector

The ICT market in Kuwait has grown at a rapid pace over the past decade. Access to the internet, and mobile communications technology in particular, has accelerated rapidly since the government liberalised the sector in the early 2000s, adopting policies and regulations to encourage greater competition and private sector participation in the market. In 2008 the addition of a third mobile operator catalysed a wave of market changes that have benefited end users. However, the government is still a major investor in the sector and has owned stakes in all three telecoms companies.

In early 2015 the Kuwait Direct Investment Promotion Authority issued the first licence to establish a 100% foreign-owned Kuwaiti entity to US-based IBM, allowing the company to establish IBM Kuwait and benefit from the incentives and exemptions granted under the 2013 Direct Investment Law. This followed $1.2bn in approved investments in ICT companies in the first quarter of 2015 alone, signalling growing opportunities for technology firms to enter the local market.

The growth in the number of users of ICT services has also been supported by major investments in advanced infrastructure. Following the broader trend within GCC countries, ICT spending in Kuwait has been strong in recent years as the country’s GDP has continued growing on the back of a decades-long oil boom.

Challenges

Despite growth in the ICT market, there are a number of challenges within the sector that the government is gradually addressing. The low level of regulation is foremost among these challenges, as private investors seek a more structured market due to the capital-intensive nature of the sector. The lack of an official regulator affects consumers in Kuwait as well, particularly because some services are controlled entirely by public sector entities. The limited competition within the fixed-line services market, for example, has had a negative impact on growth and innovation. That said, the Ministry of Communications (MoC) is addressing these challenges and is in the process of establishing an independent regulatory commission.

The adoption and use of ICT within business and commerce also remains in the nascent stages of development. The World Economic Forum (WEF) highlighted this trend in Kuwait in “The Global Information Technology Report 2013”, noting that the limited uptake of ICT among businesses and a shortage of ICT skills has had an impact on the economy.

However, in a bid to encourage greater use of ICT, the government is investing in shifting a number of core functions to online platforms. Mobile and electronic health, education and government services, for example, have grown significantly over the last decade. Furthermore, the gaps identified by the WEF and others indicate that there is significant room for growth in the ICT market. The market for digital and online applications, for example, provides a number of opportunities for local content developers.

Market Structure

Kuwait’s ICT market revolves around a vibrant telecoms sector, which has grown rapidly over the last decade. The country was one of the first GCC nations to embrace competition through private sector participation in the delivery of telecoms services. Kuwait initiated market reforms in the telecoms industry in 1999 by privatising the Mobile Telecommunications Company (MTC), the state-run telecoms monopoly that is now known as Zain.

In parallel, the government also enabled greater competition by reforming policies and laws on foreign ownership of telecoms operations, and by creating a system of licences for new operators. The telecoms sector reforms implemented in Kuwait were among the most liberal within the GCC, establishing few restrictions on private sector partnerships and allowing individual foreign ownership within the sector.

Following the wave of reforms, Wataniya Telecom was the first private firm to enter the sector. Zain and Wataniya dominated the market over the next decade and were central to the development of Kuwait’s telecoms industry. The number of mobile phone subscriptions under the two companies grew from about 300,000 connections in 1999 to over 1.8m in 2004 according to the International Telecommunication Union (ITU). Mobile phone penetration within the same period also deepened from 16.5 connections per 100 people in 1999 to 80.8 connections in 2004.

The years between 2004 and 2008 witnessed a major drop in the total number of mobile subscribers in Kuwait, dropping to a low of 1.18m in 2006. Mobile penetration rates also dropped below 49% within the same period. The entry of Kuwait’s third telecoms provider in 2008, however, disrupted the duopoly and helped inject momentum into the local market. The new provider, Kuwait Telecommunications Company, launched services under the brand name VIVA.

Despite entering a fairly saturated market with two strong existing players, VIVA was able to compete with Zain and Wataniya through a strong marketing campaign. Since 2008, the three companies have more than tripled Kuwait’s mobile subscription customer base from 1.5m in 2008 to over 6.4m in 2013 according to data from the ITU. Mobile phone penetration data also points to a completely saturated market with over 190 subscriptions per 100 people in 2013. Zain reports that this figure has grown even further in 2014, and estimates mobile penetration to be approximately 224 per 100 people. This figure implies that most consumers in the country hold at least two connections.

The Incumbent

Kuwait’s first telecoms operator was established in 1983 as a publicly owned and managed telecoms utility. MTC, as it was then known, expanded its reach regionally and globally in its first two decades, establishing new operations and acquiring telecoms companies across the Middle East and Africa. At its peak, the Kuwaiti operator spanned 24 countries, with a total consumer base of over 70m subscribers. MTC initiated a shift in its strategy in 2007, following its rebranding as Zain in four of its core markets, with the new name gradually rolled out to its global operations.

Zain entered two of its biggest markets in the same year, winning the bid for Saudi Arabia’s third GSM licence and a 15-year licence in Iraq. In 2010 the company consolidated its global enterprises and spun off most of its firms in Africa in a $10.7bn deal with India’s Bharti Airtel. As of early 2015 Zain was managing operations in eight countries, including Bahrain, Iraq, Jordan, Kuwait, Lebanon, Saudi Arabia, South Sudan and Sudan, with a total of 46.1m customers.

Annual revenues have declined over the last five years, dropping from $4.7bn in 2010 to $4.3bn in 2014 according to the company’s annual report. The company points to foreign exchange challenges and sector shifts in Iraq and Sudan as the main reasons for the reduction in global revenue. Saudi Arabia represents the company’s largest market, in terms of overall revenue; however, Zain’s operations in Kuwait provide higher revenues per subscriber.

According to the company’s annual report, revenues in Saudi Arabia topped $1.7bn in 2014 while income in Kuwait was more than $1.2bn in the same year. Revenues per subscriber, however, were $190 in Saudi Arabia compared with $457 per subscriber in Kuwait.

Zain has continued growing its consumer base in its home country following the restructuring of the telecoms industry in Kuwait, but it has since lost its dominance in the local market. Zain had a 40% share of the Kuwait telecoms market in 2013, according to the ratings agency Capital Standards.

Shifting Hands

Kuwait’s second telecoms operator entered the market on the back of the sector reforms in 1999. Wataniya was able to grow its operations within Kuwait rapidly, challenging Zain’s dominance in the market and providing an alternative to consumers. The company managed 41% of Kuwait’s mobile subscriber base by the end of 2008, firmly in place as Kuwait’s second-largest telecoms operator.

Wataniya’s presence in Kuwait and its operations in Algeria, Saudi Arabia, Tunisia, Palestine and the Maldives made it an attractive proposition for the region’s growing telecoms industry. Qatar’s Qtel bought KIPCO’s 24% stake in 2007, part of an effort that garnered 51% of the firm, before expanding its holding to 92.1% in a $1.8bn deal in 2012, according to data from Capital Standards. The deal brought Wataniya’s Kuwaiti operations directly under the control of Qtel.

Qtel embarked upon a major global rebranding exercise in 2013, changing the brand name to Ooredoo in Kuwait and its other markets. The company’s subscriber base in Kuwait grew from 1.8m users in 2010 to more than 2.5m in 2014, according to the firm’s annual reports. This represents 3% of Ooredoo’s global customer base of over 96m subscriptions, but generates more than 7% of the company’s revenues. In 2014, Ooredoo’s revenues totalled KD168m ($578.8m) in Kuwait. Although the company has expanded rapidly globally, it slipped to third place in the domestic market in 2013, losing ground to Zain and VIVA, and had it not recovered as of mid-2015.

Newcomer

Zain and Ooredoo’s assured dominance in Kuwait’s telecoms market was challenged in 2008. The newcomer, VIVA, has invested millions of dollars in establishing its presence in Kuwait. According to the company’s annual report, total investments to date have reached KD193m ($665m).

The company invested significantly in an ambitious and fresh marketing campaign and introduced a number of services and plans tailored specifically to segments within Kuwait’s local customer base. VIVA launched its services on December 3, 2008 with a campaign that netted almost 250,000 customers within the first three months of launching operations. The company had taken over 15% of the local market by the end of its first year and emerged as Kuwait’s second-biggest telecoms provider by 2013.

VIVA faced early pressure because its network of 500 transmission sites led to a number of operational problems, such as dropped calls. However, the company was quick to respond and has since been rapidly adding new subscribers, growing its consumer base over 25% between 2012 and 2013. Revenue growth has followed suit, increasing by 31% since 2013 to reach KD239m ($823.4m) in 2014. The company functioned at a loss for the first three years of operations, but has been profitable since 2012, when it posted a profit of almost KD4m ($13.8m). In 2013 this figure rose by over 500% to KD24.2m ($83.4m).

The telecoms operator consolidated its six-year growth trajectory by listing on Kuwait’s stock exchange in December 2014. The listing is a positive indicator that investors believe the company will maintain its track record and continue growing as Kuwait’s telecoms industry matures. The company's stock price increased rapidly between the listing and the end of the first quarter of 2015, rising nearly 100%. VIVA’s single-market status gives it the advantage of being able to focus all its resources on Kuwait, which suggests that it is likely to remain competitive going forward.

Fixed Line

Despite the wide-ranging reforms to ensure private sector investment and operations in the mobile telecoms segment, the government plays a direct role in managing some telecoms services through the MoC. Fixed-line telephone services, for example, fall under the exclusive purview of the ministry, and the lack of competition has hampered growth in this segment. The ITU reports that the number of fixed-line connections has grown negligibly over the last decade, increasing from 467,000 connections in 2000 to only 508,000 connections in 2013. The number of connections has actually been dropping from its peak in 2007, when there were 538,000 connections across the country.

Growth in the overall population has outpaced the fixed-line market, with the penetration of fixed-line connections dropping from just under 25% in 2000 to only 15% in 2013, according to the ITU. The migration towards mobile services will continue to affect fixedline subscription rates and there have been discussions to privatise the industry since 2012, though the government has yet to implement a plan to that effect.

Sector Spending

While deregulation and the shift toward greater private sector participation has ensured private operators have been the primary investors in the telecoms sector, the government has continued to play a significant role, assisting the development of all three operators. Different arms of the government have held varying financial interests in all three companies since MTC was privatised.

The Kuwait Investment Authority (KIA), for example, held a 23.5% stake in Wataniya before selling this to Qtel in 2012, and the authority still owns a 24.24% share of Zain. A number of government entities also own 24% of VIVA’s shares, including 6% each by KIA and the Public Institution for Social Security, and 4% each by Awqaf, the Public Authority for Minors Affairs and Bayt Al Zakat, the state charity.

Similarly, the government has also been a critical investor in developing the infrastructure required to support the ICT industry. The Kuwait Financial Centre (Markaz) reports that Kuwait is the third-largest spender on ICT infrastructure in the GCC region, with spending growing by a compounded annual growth rate of 12.6% between 2003 and 2011.

Markaz’s research arm anticipated ICT expenditures in Kuwait to decrease marginally between 2011 and 2015, but still expected investments to touch $28bn for this period. The bulk of these expenditures were expected to be directed towards the communications segment followed by the sale of computer hardware and software. The UN Economic and Social Commission for Western Asia supports these figures, and estimates Kuwait will spend $16.5bn on ICT infrastructure between 2013 and 2016, of which $12.7bn will be directed towards the communications segment.

These figures mirror the broader trend within the GCC region, where Markaz estimates ICT spending will exceed $318bn between 2011 and 2015. According to Markaz, Saudi Arabia will account for 50% of this investment. Markaz notes “the pace of growth in IT spending will decelerate, compared to the 2003-10 period, because of decelerating GDP growth, reducing average revenue per user and a maturing phase [within the GCC]”.

SMART DEVICES: The use of tablets, smartphones and other mobile-ready devices is growing rapidly within the Middle East. Global telecoms advisor, Analysys Mason, reports that smartphones will account for 34% of all active handsets in the Middle East and North Africa region by 2018, up from 15% in 2013. Kuwait already has one of the highest smart device penetration rates within the region, with 69% of the population using a smartphone in 2013, according to data from Ipsos MediaCT, representing growth of over 40% in the previous year. Saudi Arabia and the UAE are the only GCC countries with higher smartphone penetration rates, with 79% and 72% coverage, respectively.

Similarly, 25% of the population in Kuwait owns a tablet computer. Only the UAE and Bahrain has a higher penetration rate with 35% and 29% penetration rate, respectively. Apple’s iPad was the region’s most popular tablet device, according to the European Travel Commission, followed by Samsung’s Galaxy Tablet.

High Speeds

The trend in the growth of smart devices is set to continue as the cost of smartphones and tablets declines, enabling a greater proportion of the population to purchase the devices. Telecoms operators in Kuwait have been investing heavily in meeting the network demands for all these devices. The MoC approved the rollout of 4G long-term evolution (LTE) services in 2012 and all three telecoms operators have since launched services on these networks. VIVA was the first to offer 4G LTE services for its commercial clients, providing data speeds of up to 100 Mbps in December 2011. Zain followed in November 2012 and Ooredoo added LTE services in July 2013.

Despite VIVA’s first mover status, Zain is currently the market leader in rolling out 4G LTE capacity. The company reports that its 4G LTE network covers the entire population through 1830 network sites and that it was able to shift almost 10% of its client base to the network in the first six months it was operating. This increased to over 20% of its subscribers by the end of 2014, according to Ovum Metrics.

VIVA and Ooredoo are also rapidly catching up with providing these high-speed data services to all their customers. According to RCR Wireless, every telecoms operator in the Middle East now deploys LTE networks. However, the slower pace of penetration is possibly linked to the fact that operators do not distinguish between the cost of service packages for 3G and 4G LTE. VIVA, for example, offers its high-speed mobile network without any additional fees; however, it is likely that this practice will shift going forward as the quantity of data being used skyrockets. Zain, for example, reports that LTE subscribers already account for over 41% of its data traffic, despite representing a small percentage of their subscriber base.

Outlook

Kuwait’s telecoms market has grown rapidly over the past decade. Market liberalisation reforms have enabled the growth of a vibrant and competitive marketplace for telecoms services. At the same time, Kuwait’s mobile subscriber base has expanded to the vast majority of the population, with most clients holding more than one SIM card. Despite the saturation, there is still room for growth in the smart device segment, though current trends suggest that it will not be long before nearly all consumers also use these devices.

While the most recent phase of development within the telecoms industry has focused on building networks and adding subscribers, telecoms operators are expected to shift their focus towards services that leverage their high-speed data networks. The saturation of subscribers in the mobile market implies that there will not be much opportunity for operators to add to their client base. Instead, operators are working to identify transformative areas of growth. Non-mobile ICT solutions, such cloud as computing and data security services, are one avenue of growth.

One practical problem that is expected as operators gear up to continue expanding high-speed coverage and service offerings is bandwidth limits. Decisions and regulations on increasing bandwidth for data transmission rest with the MoC, which points to the renewed need for a regulator to oversee private operations in the telecoms industry. The government has moved closer to establishing an oversight commission for the sector, approving a bill to create an independent telecoms regulator in April 2014. These developments will provide momentum for the industry going forward.