Three strong operators, a new regulator and incentives enable Kuwaiti ICT market's expansion

Kuwait’s traditionally telecoms-led ICT sector saw developments in the past year that could encourage continuing expansion in telecoms and spur progress in the industry. While three telecoms operators continue to compete for the country’s high-value consumer market, they have also partnered with global ICT firms to expand their enterprise businesses. The government, for its part, has taken on a larger role in supporting the sector. In 2016 it handed key oversight responsibilities over to a new ICT regulator, the Communications and Information Technology Regulatory Authority (CITRA). The government has also introduced new foreign direct investment (FDI) laws and a fund to support small businesses and start-ups, adding important legal and financial incentives to boost the country’s ICT business growth.

Market Structure

Kuwait’s ICT sector has for years benefitted from three major regional telecoms competing in its market. Kuwait-based Zain, formerly known as MTC, began as the Middle East’s first mobile operator in 1983. It continued expanding throughout the region in 2003, and has come to provide mobile and data services to 45.6m customers in eight countries across the MENA region. In 1999 the Kuwaiti telecoms market opened to a second operator, Wataniya Telecom, which was acquired by Qatar-based Ooredoo (then Qatar Telecom) in 2007 and subsequently rebranded to align with the Qatari company’s global brand in 2013. Subsequently Ooredoo paid $1.8bn to raise its stake in the Kuwait-based firm from 52.5% to 92.1% in October 2012.

Meanwhile, in 2007 the government announced plans for a third operator, Kuwait Telecommunications Company, and in November of that year awarded a strategic 26% share to Riyadh-based Saudi Telecom Company (STC) at a price of $980m. When the company released shares to the public in September 2008, they were distributed to nearly 1m people, following an offering that was oversubscribed by 240%. In December 2008 the company launched operations in Kuwait, operating under the name VIVA. Since then, VIVA has grown into a significant player, edging its way into the position of second-largest operator by customer share and commanding just under a third of the market. STC owns a 52% stake in VIVA, while the Kuwaiti government owns 24% through various public entities, and public shareholders – made up of individuals, companies, portfolios and funds – hold the remaining 24%. STC’s majority stake is the result of a recent acquisition, when the company doubled its 26% share through a voluntary tender offer in February 2016. As a result, it was able to purchase 128.86m shares in a deal worth over $500m, raising its stake to 51%. In December 2015 the Saudi telecoms operator had received approval to buy 74% of outstanding shares to gain a larger majority, and purchased 25.8%, giving it a controlling stake of 51.8%.

Room For A Newcomer

The results of competition are clear in each of the three firms’ shifting shares of customers and revenues. VIVA has shaken up the market since its entrance, growing its customer share from 14.9% to 32% between 2009 and 2015, according to data from KAMCO Research and the company’s quarterly financial data. During that period, both Zain and Ooredoo have seen their share of subscribers shrink from 46.8% to 38% in Zain’s case, and from 38.2% to 30% in Ooredoo’s. However, this is largely accounted for by the introduction of a successful new player, which invariably leads to a shift in the market – in absolute terms, both Ooredoo and Zain also saw significant growth in their subscriber bases.

Big Spenders

Indeed, Kuwait’s market has accommodated the increased competition from its switch to a three-player landscape in part because, despite its relatively small size, the country has the potent combination of high ICT penetration, dynamic population growth and strong average revenue per user (ARPU).

Both mobile penetration and population have grown significantly in the past five years. Penetration rose from 158% to 217% during the period, according to data from the IMF and the UN’s International Telecommunications Union (ITU). This means that, with more than two mobile subscriptions per person in the country, Kuwait has one of the highest penetration rates in the world, according to data from the World Bank.

Saturation

Operators are aware that penetration growth is not endless. Indeed, the market showed signs of saturation, with penetration easing slightly from 218% to 217% between 2014 and 2015. While such a high rate may create the appearance of a zero-sum game among the operators, the reality is more complicated. For instance, such logic assumes a static market size; in reality, in 2011-15 Kuwait’s population steadily increased, growing from 3.7m to around 4m, according to IMF estimates. Each of the operators, in turn, saw overall growth in its subscriber numbers during this period. VIVA’s subscribers grew the fastest, at 316%, buoyed by its low base as a newcomer. Yet both Ooredoo (67%) and Zain (61%) also grew their subscriber numbers significantly during the five-year period, according to KAMCO.

It is also important to bear in mind that different kinds of customers spend differently. In consumer mobile markets like Kuwait’s, telecoms operators have been increasingly competing more for postpaid subscribers. While prepaid subscribers still make up the bulk of customers in various markets, those with post-paid contracts are typically higher spenders committed to long-term contracts. As a result, these customers offer the opportunity to generate more ARPU and present less risk of switching to a competing carrier.

Thanks to generally high incomes and strong demand for mobile and telecoms services, Kuwait has been and continues to be a regional leader in ARPU. In 2014 the country’s GDP per capita was the fifth-highest in the world when measured in 2011 dollars at purchasing power parity, according to World Bank data. In addition, Kuwait’s constitutional monarchy redistributes a large portion of that wealth to its nationals, who as a result have higher discretionary spending budgets. Consumers in Kuwait generated an ARPU of KD8.80 ($29.10) in the first quarter of 2015, one of the highest in the already high-spending GCC region, according to data from KAMCO Research and operators’ financial statements. It is important to note, however, that Kuwait’s average ARPU has been decreasing at an average rate of 8.4% per year since 2010. Other high-income telecoms markets in the region have seen similar effects: in Qatar, market maturation and carrier competition has lead to a steady decrease in ARPU.

By The Numbers

Results from the past year reflect the sector’s continuing maturation. Incumbent Zain’s revenues eased 7% to total KD323m ($1.1bn) between 2014 and 2015, while net profits fell 15% to KD94m ($310.9m). The decreases came as a result of stiff competition within the market, as well as competition from outside the market in the form of over-the-top services, the firm said in its 2015 fourth quarter earnings release. Indeed, telecoms companies around the world say that revenue patterns are shifting, as services like Skype and WhatsApp drive user demand towards more data consumption and away from traditional legacy services like voice and SMS.

The change can hurt operators’ bottom lines, because voice and SMS services generally carry higher profit margins. Despite the effects of competition from both within and outside the market, Zain raised its share of subscribers from 35.1% to 38% by year-end 2015, retaining its position as market leader by subscriber share.

Ooredoo reported some positive results at the end of 2015, with revenues from its wireless business segment rising from QR2.149bn ($589.7m) to QR2.275bn ($624.3m) year-on-year. Though its ARPU fell by 44% from KD11.2 ($37.10) to KD6.2 ($20.50) between 2010 and 2014, according to KAMCO data, the Qatar-based company reversed this downward ARPU trend in the latter half of 2015, lifting its riyal-denominated ARPU from QR65.10 ($17.90) to QR71.70 ($19.70) between the first and fourth quarters of the year, according to its quarterly financial results. While Ooredoo’s customer base eased slightly from 9.8% between the fourth quarters of 2014 and 2015, it was able to boost overall revenues by 11.9%, from KD188.1m ($622.2m) to KD166m ($549.1m), and net profits by 16%, from KD14.9m ($49.3m) to KD17.8m ($58.9m), the company said.

As for VIVA, the company reported largely positive results for 2015. Subscribers increased by 2% from 2.4m to 2.5m between 2014 and 2015, according to its fourth quarter earnings statement. Revenues increased from KD239m ($790.5m) to KD277m ($916.2m), while net profit rose from KD40m ($132.3m) to KD43m ($142.2m). With a record of continual subscriber and revenue growth, the newcomer has proved it is a strong player in a highly competitive sector.

New Regulator

Both telecoms and IT sectors are set for a shift in their regulatory environments with the launch of a new independent regulator, CITRA. The new body took over certain oversight responsibilities from the Ministry of Communications in February 2016. In the mobile sector, CITRA aims to establish new regulations in time to guide the rollout of future mobile broadband technologies like 5G. In the fixed sector, it aims to encourage the upgrade and expansion of fixed broadband infrastructure. CITRA’s assumption of overall regulatory duties for the fixed market removes the potential for conflicts of interest, since the Ministry of Communications had previously been tasked with both regulating and operating fixed services (see analysis).

This change is expected to be a positive one for Kuwait’s fixed broadband segment, which is ripe for growth. In the early 2000s, Kuwait had the third-highest number of fixed broadband subscriptions and the second-highest number of subscriptions per 100 inhabitants among GCC states, according to data from the ITU. However, since 2010 it has continuously ranked sixth out of six states on both metrics, and has even seen a decline in subscriptions per 100 inhabitants. It remains to be seen how the new ICT authority will approach fixed-broadband expansion.

Local players, for their part, believe that new regulations would encourage more fibre infrastructure investment and expand services on offer. “The authority has a number of important decisions to consider, including the licence for international gateways and creating a fibre-optic network across the state,” Mohammed bin Abdullah bin Mohammed Al Thani, CEO and general manager of Ooredoo Kuwait, told local media in a March 2016 interview. “They should also look into allowing virtual network partnerships and providing support for fixed infrastructure investments and internet service providers.”

Enterprise Services

As operators eye potential opportunities in fixed broadband, they are also expanding their offerings in enterprise services using machine-to-machine (M2M) communications. All three local telecoms operators have signed partnership agreements with global firms recently: Zain announced an M2M agreement with UK-based global telecoms operator Vodafone in October 2015; Ooredoo announced a partnership agreement with Sweden-based Ericsson to launch the latter’s connectivity management service in Kuwait in March 2016; and VIVA, for its part, is working with China’s Huawei to expand its own M2M offering, the company said in February 2016.

The development of relations between Kuwait’s operators and global ICT firms could offer an avenue for expansion outside of tightly competitive consumer markets. With some of the best mobile broadband infrastructure and highest usage rates in the region – thanks in part to carrier competition in the consumer market – the Kuwaiti market could offer significant growth potential in the business solutions segment, including services such as M2M, cloud computing, e-commerce and security. “E-commerce is a rapidly growing way of doing business in Kuwait, with over 800 merchants in the country now making business transactions online,” Abdulla Khaled Al Ajmi, CEO of KNET, an online banking service, told OBG. “The adoption of e-commerce will serve as a prime driver of economic growth moving forward, and several examples of corporations shrinking or abandoning physical retail presence in favor of e-commerce have already taken place.”

Attracting Investment

The creation of the Kuwait Direct Investment Promotion Agency (KDIPA) has also helped bring about positive changes in the ICT sector, attracting global technology majors IBM and Huawei to set up operations in the country. In April 2015, US-based hardware and consulting firm IBM announced that it would be opening an office in Kuwait. The company pointed to Kuwait’s high mobile and smart-phone penetration rates, along with the creation of KDIPA, as factors that affected its decision to invest. “The KDIPA has been a key supporter in facilitating IBM’s presence in the country,” Amr Refaat, general manager of IBM Middle East and Pakistan, said in the announcement of the Kuwait operation. “We believe that Kuwait is a particularly important geography within the Middle East, given a diversifying economic landscape and the continued maturity of the country’s IT sector.” The new office is a sales and customer service hub, out of which the company plans to offer cloud, big data, security and other services to clients in the region.

Meanwhile, in June 2015 KDIPA announced that it had issued an investment licence for hardware and telecoms player Huawei to invest KD353m ($1.2bn) in a fully owned limited liability firm in Kuwait. The firm, which was officially launched in October 2015, will focus on providing technical services, communications systems, networks and supplies. Like IBM, Huawei has also pointed out the importance of the different incentives and exemptions provided by the new KDIPA process for incorporating a foreign-owned business.

Although it will take time to see the extent to which the legal adjustments continue to attract firms, indications so far are positive. IBM and Huawei’s decision to invest heavily demonstrates the potential of the country’s new regulations. Combined with the Kuwait market’s affluent spenders and the country’s strategic location near other high-spending and high-growth markets, KDIPA’s new investment incentive structure should prompt more international ICT firms to invest. This in turn will help Kuwait to reach the major goals it has laid out in terms of foreign investment, attracting jobs for nationals and enabling technology transfer for the sector as a whole.

Building An Ecosystem

In addition to welcoming multinational firms from around the world, Kuwait’s ICT sector is also witnessing a gradual shift in its tech start-up ecosystem. Governments worldwide are trying to buoy budding ICT sectors by adjusting legislation and supporting the creation of funding opportunities for start-ups and small and medium-sized enterprises (SMEs). Kuwait’s SMEs are largely concentrated in retail and non-financial services, and account for about 3% of GDP. That rate leaves substantial room for growth: in other high income and emerging economies, SMEs contribute between 40% and 50% of GDP, according to the World Bank. In 2014 the World Bank surveyed over 500 Kuwaiti SMEs, and over a third of respondents saw government red tape as the key obstacle to growth, suggesting that changes were necessary to address licensing and permit acquisition procedures, labour regulations and regulatory uncertainty.

The government has already begun to make changes that could enable more SME development in the country. In April 2013 a law was passed to create the National Fund for SME Development to support SMEs, thereby combating unemployment and driving growth in the private sector. As an independent public corporation endowed with KD2bn ($6.6bn) from the state, the fund aims to offer SMEs, which it defines as companies of between one and 50 employees, 80% of start-up capital, up to a total KD500,000 ($1.6m).

Assistance

In November 2013 the World Bank partnered with the fund in a two-year technical assistance project to help develop its executive regulations, strategy and organisational structures. The idea is to help create a one-stop shop for start-ups to acquire operating licences, obtain support services like training and networking, and meet with other small businesses. For tech SMEs in particular, these changes have the potential to greatly improve conditions by adapting Kuwait’s legal structure to accommodate start-ups. “In Kuwait, having a healthy, vibrant, barrier-free SME ecosystem is critical to economic development,” Anabel Gonzales, the World Bank’s senior director for trade and competitiveness, said in a speech to Kuwaiti ministers and other stakeholders in October 2015. “In fact, the private sector is anticipated to provide employment opportunities for a rapidly growing Kuwaiti labour force and to lead economic activities in various sectors to reduce the country’s heavy reliance on oil resources.”

Outlook 

Although developments in Kuwait’s ICT sector have traditionally been driven by telecoms, the continuing convergence of telecoms and IT will create opportunities in both the consumer and enterprise segments. Among telecoms operators, tight competition has helped drive the development of the sector, affording Kuwait one of the world’s highest broadband penetration rates and an impressive mobile broadband network. As long as individuals continue to use more data-hungry services like apps and streaming media, and enterprises opt in to services like cloud computing and M2M communication, demand is likely to increase.

As for the fixed segment, the creation of an ICT regulator – CITRA – is a promising sign and should facilitate more coordinated investment in fibre infrastructure. CITRA’s management plans to reverse the falling fixed penetration trend by encouraging the development of fixed infrastructure through these investments in fibre. Given the downward trend in fixed penetration in recent years, growth potential in that segment is strong. As for the country’s tech ecosystem, much seems to rest on the government’s initiative. Recent changes in FDI laws and the creation of a start-up fund signal more opportunities for firms of all sizes.

With these changes in place, the key moving forward is to maintain strong momentum through the implementation phases and sustain close communication between firms and the government. Such efforts will mean that the sector’s overall business environment can continue to see robust growth.