Competition in Abu Dhabi's telecoms sector focusing on enhanced services

The UAE leads on many fronts in ICT rankings for the region, as well as on international indices, in no small part due to initiatives from Abu Dhabi acting as key drivers of the country’s overall performance. The emirate’s smart government initiative is a driving force behind growth in infrastructure and technology and, not insignificantly, on public take-up of smart technology for engaging with governance and other civic activities.

Underscoring the advancements in Abu Dhabi’s ICT evolution, the UAE is reportedly on course to become the world’s first country with nationwide 5G coverage, the roll-out of which should take place ahead of the Expo 2020 in Dubai, according to Ahmad Abdulkarim Julfar, CEO of Etisalat.

The Two Players:

The UAE telecoms sector consists of two state-backed companies, Etisalat and du. Emirates Telecommunications Corporation, which operates under the brand Etisalat, is the more established of the two, having formerly been the state telecoms company, founded in 1976. The Emirates Integrated Telecommunications Company was founded in 2005 and commercially branded as du in 2006. Both firms are partially privatised, with 40% of Etisalat publicly traded on the Abu Dhabi Securities Exchange, and 20% of du publicly traded on the Dubai Financial Market. The other 60% of Etisalat is owned directly by the federal government, while the remaining 80% of du is divided between several state investment vehicles: 39.5% is owned by the federal government through the Emirates Investment Authority, a sovereign wealth fund; 20% is owned by the Abu Dhabi government through Mubadala Development Company, the Abu Dhabi-based investment and development company; and 19.5% is owned by the Dubai government through EIT, a subsidiary of Dubai Holding.

The competition between the two operators is strong and frequently leads to rigorous marketing campaigns, infrastructure development, bundle offerings and technological innovation. Years-long negotiations for network sharing were met with breakthroughs in late 2015, in particular regarding bitstream access. Meanwhile, Etisalat’s plans in 2015 to see its 4G network coverage reach 99% of populated areas appeared on track.

Regulatory Context:

The main federal entity tasked with oversight of the sector is the Telecommunications Regulatory Authority (TRA), which was created in line with UAE Federal Law, Decree No. 3 of 2003-Telecom Law. The TRA’s stated aim is to provide an environment in which the UAE’s ICT sector “will emerge as a leader in the global market place”. This is to be achieved through its role in ensuring competition and protecting the rights of subscribers. The TRA also places great importance on the role of e-services and innovation.

Licences issued by the regulator are either classified as class licences or individual licences, depending on whether “scarce resources are requested” in terms of spectrum, frequencies or numbers, “and does not refer to an open class of available licences”, according to the TRA.

The regulator is required to assess all requests from UAE licensees to change retail prices. In 2014 the authority approved 85% of 269 price approval requests, according to its Annual Market Review report released in September 2015.

The report also states that there was a rise in the number of complaints from both residential and business consumers regarding licensees that year, a change the TRA sees in a positive light. The regulator attributes the rise to an increase in the overall number of users and to a heightened awareness of the TRA’s complaints procedures, according to the TRA’s market review.

The Ministry of Finance is responsible for the royalty structure, which makes up a significant part of the federal budget (up to 20%). The royalty rates were set in 2012, when it was decided that Etisalat would pay a royalty of 15% on its revenues and 35% on profits between 2012 and 2015. In 2016 Etisalat will be required to pay a royalty of 15% on revenues and 30% on profits. Meanwhile, du paid a 17.5% royalty on profits and 5% on revenues in 2012, with the company’s profit royalty rising to 30% in 2015. The fee it pays to the government on its revenue will increase to 15% in 2016.

The Sector In Figures:

Figures released by the TRA in its Annual Market Review in September 2015 showed that revenue for the year through 2014 from the telecoms sector at the national level reached Dh32.8bn ($8.9bn), a 12% increase over the Dh29.2bn ($7.9bn) earned in 2013. From this total, mobile services accounted for Dh25.5bn ($6.9bn). Internet services came in second place, with Dh4.6bn ($1.3bn), followed by fixed telephony services, which brought in Dh2.7bn ($734.9m), according to the TRA.

The UAE has one of the highest mobile penetration rates globally. According to the latest TRA’s figures, as of October 2015 the UAE had a total of 17.77m active mobile subscriptions, with 208.3 subscriptions per 100 inhabitants.

TRA’s data shows that mobile phone minute volume grew by 9.6%, and with active mobile subscriptions rising by 4.6%, mobile revenue saw an increase of 14.9% in 2014. Most of that came from pre-paid services, which experienced growth of 16.9% over 2013. Post-paid subscriptions made up 15% of total mobile subscriptions. Average revenue per user (ARPU) for mobile services was Dh126 ($34.30) per month. The TRA found that an average of 9100 subscribers switched between mobile operators each month over the course of 2014.

There were more than 2.1m fixed-line subscriptions in 2014, with fixed-line numbers growing by approximately 17,000 over the course of the year. As of October 2015 the number stood at 2.15m.

Fixed-line minutes in 2014 were dominated by calls made to mobile lines. Revenue from fixed telephony grew by 5.7% over 2014, to Dh2.79bn ($759.4m), but that figure does not take into account line rentals from double play (bundled with broadband) or triple play (fixed-line services that are bundled with broadband and TV). Average revenue per user for fixed telephony services stood at Dh110 ($30) monthly, and average monthly minutes per users at 116 minutes per month.

The latest TRA figures show that as of October 2015 there were 1.16m internet subscriptions in the UAE, up from 1.09m in December 2014 and 1.043m in 2013. The TRA’s survey showed a trend of higher-speed internet take up, with only 7% of customers subscribing to services with speeds of up to 512 Kbps, down from 37% in 2011. In 2014, subscriptions that were based on fibre technology grew by 14.7%, resulting in 88% of all internet subscriptions being connected by fibre in 2014. Triple-play packages made up just under half of all internet subscriptions, at 46%, according to the TRA’s statistics. Double play came in at 31% and stand-alone at 23% (2013: 37%, 39% and 24%, respectively). Total leased-line subscriptions grew to 53,403 in 2014 from 52,082 a year earlier, with revenue gain of 2.5%, from Dh1.24bn ($337.5m) to Dh1.27bn ($345.7m).

Subscribers:

Fixed-line numbers as of June 2015 stood at 25.3 per 100 inhabitants (2.2m fixed lines), according to figures by the TRA. In comparison, mobile subscriptions were at 202.3 per 100 inhabitants. This is divided into 2.7m post-paid, and 14.5m pre-paid, accounts nationwide.

In August 2015 it was announced that mobile subscriber numbers had reached 18.66m as of the second quarter, 1.08% growth over the same period in 2014. This was divided between Etisalat, with 11.3m subscribers, and du with 7.36m. This was up from 11.3m and 7.16m for the two telecom companies, respectively, for the same period in 2014. Compared to the first quarter of 2015, mobile subscribers declined by 1.16% from 18.88m due to the cancellation of many SIM cards under the “My Number, My Identity” campaign, which allowed subscribers to re-register SIM cards with the Emirates ID card.

International Comparison:

The International Telecommunications Union’s 2014 report “Measuring the Information Society” showed that the UAE had moved to the second-highest ranking in the GCC and Arab countries in the latest ICT Development Index (IDI).

The country improved its overall IDI ranking from 46th place the previous year to 32nd. The country was placed sixth globally for the mobile-cellular sub-basket, 14th for fixed-telephony and 55th for fixed-broadband in the annual ranking.

Meanwhile, fibre-to-the-home (FTTH) penetration in the UAE as a whole is the highest globally, a position the country has held since 2012, with the rate of FTTH penetration reaching around 70% in early 2015, according to the telecoms research company BuddeComm. du operates FTTH networks in Dubai’s free-zones, while Etisalat’s is available in the rest of the UAE.

Etisalat Performance:

Etisalat reported its consolidated revenue in Q2 2015 totalled Dh13.3bn ($3.6bn), a rise of 6% from Dh12.58bn ($3.4bn) during the same period in 2014. Its growth going into 2015 was led by a 9% year-on-year (y-o-y) increase in domestic turnover to Dh27.1bn ($7.4bn) in 2014 owing to a greater number of handsets sold, and from the completion of Maroc Telecom’s phased acquisition of Etisalat subsidiaries in six West African countries in January 2015.

The group saw its aggregate subscriber base rise by 14% to 169m at the end of 2014, up from 148m in 2013. This was reportedly a result of its purchase of Maroc Telecom, along with robust growth in Nigeria as well as at home. Local mobile customer numbers saw a rise of 7% y-o-y, exceeding 9m, while UAE fixed-line subscribers declined 5% due to the migration of customers to Etisalat’s eLife multi-play packages, which saw expansion of 16% for the year. Its mobile phone customer base in Nigeria saw expansion of 24% y-o-y in 2014, to reach 21.1m, while in Pakistan its customer base declined by 7% to 26.3m due to a subscriber registration exercise and intense competition.

By the end of June 2015 Etisalat’s aggregate subscriber base was down by 8% y-o-y, to 168m. Domestically, active customers numbers grew 0.4% y-o-y to 11.3m, with 9.4m mobile subscribers (up 0.4% y-o-y), and more than 1m broadband users (9% growth from mid-2014).

Etisalat’s subscribers in the Nigerian market increased by 18% in the year to June 2015, reaching 23m. Its consolidated profit after royalty was Dh1.53bn ($416.5m) in Q2 2015. This was down 39% mainly due to one-off items recorded in the quarter, as well as higher depreciation and amortisation expenses, lower share of profits from associates (including the impact of additional provision for accounts receivables for Mobily, a Saudi Arabian subsidiary), higher net finance costs, forex losses and higher federal royalty charges, according to an Etisalat earnings release.

DU Performance:

Du saw increased royalties impact its recent performance, with this amounting to an 8.3% y-o-y decline in second-quarter profit to Dh502m ($136.6m), compared to Dh547.7m ($149.1m) due to increasing royalty payments to the UAE federal government.

The company’s first-quarter 2015 revenues increased 3.2% y-o-y, from Dh2.96bn ($805.7m) in Q1 2014 to Dh3.05bn ($830.2m). Net profit after royalty was flat on the year at Dh487.1m ($132.6m) in Q1 2015, largely result of higher royalties and a small downward shift in mobile users. Mobile services accounted for Dh2.23bn ($607m) of total revenues, which were stable from a year before, while revenue at the fixed-line division increased 20.5% to Dh616.1m ($167.7m), according to the company’s Q1 2015 published financial results.

Recent royalty rate rises also led du to announce a reduced dividend payout in March 2015. The total dividend for 2014 was 32 fils ($0.087), down from 41 fils ($0.111) the year before (including a 10 fil, $0.027, special dividend).

This was despite net profit rising, after royalties, by approximately 6%, to Dh2.1bn ($571.6m) in 2014. With the y-o-y royalty fees rising by 55%, this meant that du and Etisalat were in fact neck and neck in terms of dividend payouts.

Royalty Rates:

A longer-term question is whether royalty rates might be increased further for both companies. With declining prices of crude oil cutting in on government revenue, the telecoms sector could be seen as a potential source of new income for planned development projects going forward. The rate is fixed until 2016, according to Sanyalak Manibhandu, head of research at NBAD Securities, but after that stage the picture is less clear. It is questionable whether Etisalat will see its rate raised as it already pays a higher amount than du. Moreover, there is an interest in keeping Etisalat’s royalties down as it opens up to foreign investors. If a rise were to take place, it may nevertheless be delayed in order to help maintain attractiveness to potential investors over the short term.

The matter may also arise when it comes to decreased roaming and data rates. A new set of intra-GCC roaming regulations will be coming into force in April 2016, leading to reduced charges for voice calls, SMS and mobile data services. Looking ahead to the potential for royalty rate hikes, this would therefore be a tough sell to the telecoms companies, particularly if they are expected to simultaneously reduce revenue from customers through lower tariffs. What this likely means for the foreseeable future is that competition, not government intervention, “will be the thing that helps bring down prices”, as Manibhandu told OBG.

Competition:

Within the duopoly context, cost is a critical area, especially for du. With a mobile phone market nationwide of around 16m (out of a total UAE population of around 9m as of 2014, according to the World Bank) and a mobile penetration rate of 199.3%, the market is saturated. Thus competition focuses on price and special offerings. This also makes sense from a marketing perspective, as consumers increasingly rely on their smartphones for an ever-expanding range of data-heavy services, including television, as well as for everyday activities such as making payments.

Etisalat’s global reach also means that it faces challenges outside the UAE’s competitive space. In Africa, where Etisalat has a strong presence, vulnerabilities also include political risk including government instability and regulatory inconsistency.

Migration 

While mobile portability was introduced in the UAE in 2013, the TRA has been working since 2009 with both operators to implement network sharing infrastructure.

According to Manibhandu, both companies see incentive in network sharing, but it is arguably du, as the newer entrant, which would gain the most through wider market access.

Competition is set to intensify in the fixed-line segment, with Etisalat and du signing a bitstream network sharing agreement in October 2015. Network sharing is being introduced in phases, with the first phase allowing competition in fixed-voice and internet only. The second phase will allow TV services to be provided. According to local press reports, as of late 2015 the two operators were ready to offer broadband and fixed voice services to residential customers across the country.

Welcoming Foreign Investment:

In June 2015 Etisalat announced that it would open 20% of its stock to foreign ownership by the end of the year. According to Manibhandu, Abu Dhabi has long sought to open up its capital market, and Etisalat is in many ways the missing link to taking this to the next level. The shares began trading on September 15, 2015. Foreign investors are limited, however, in that they will not have voting rights, and the government remains the biggest shareholder and retains veto rights. Shares are open to foreign individuals, corporate entities, UAE free zone companies, and businesses incorporated in the UAE.

After Etisalat opened its stock to foreign investors, index complier MSCI announced in mid-November 2015 that it would add the company to its Emerging Markets Index.

Smart City Framework:

Investment into new infrastructure and technology is directly encouraged through the high levels of competition between the two companies. It is also driven by the government’s initiative to spur economic growth and in particular the drive to develop Abu Dhabi’s Smart City ecosystem (see IT overview). This includes the phasing out of cash and instead using smartphones for payments for everything from parking meters to utility bills.

Outlook: 

Abu Dhabi’s telecoms sector looks poised for increased competition as the government pushes forward with its drive for economic diversification. Pressure may mount to bring down some of the more cost-restrictive barriers, such as high internet costs for business. New options for consumers mean that both telecoms firms are likely to seek greater innovation in terms of technology, infrastructure and attractive offerings.

That Etisalat has opened its shares to foreign investors is but one indication of the confidence in the telecoms sector and the long-term view of maintaining – and building on – Abu Dhabi’s and the UAE’s growth climate. Telecoms and ICT more broadly will no doubt play key parts in this drive.