Structural change under way to benefit Abu Dhabi's new knowledge economy

The UAE is at the forefront of developments in the regional telecoms market, boasting one of the highest smartphone penetration rates in the world, a reputation as a testing ground for emergent capabilities, and rapidly developing infrastructures for wireless broadband and fibre-optic services. At the emirate level, the Abu Dhabi Economic Vision 2030 established targets for investment in and adoption of new ICT infrastructure, such as increases in ICT spending and internet penetration to match the levels of international industry leaders Singapore and New Zealand. Similarly, the Abu Dhabi Plan, published in June 2016, outlines 25 goals – such as reducing unemployment, achieving full youth literacy and Emiratising the workforce – where success will depend on making advances in ICT infrastructure.

As is the case elsewhere in the region, the telecoms industry in the UAE is undergoing structural change, driven by rapid technological innovation, shifting consumer preferences, and the emergence of new digital platforms and over-the-top competitors. The sector’s transformation is most visible in surging demand from individuals and businesses for digital solutions and data plans that offer higher download speeds and lower latency rates, which has eaten into revenue from traditional, core telecoms services and required significant investment and refocusing on the part of service providers.

“All industries will eventually move to adapt IT as part of their operations. The speed at which some industries pursue digitalisation may vary, but ultimately they will all move in that direction,” Khaled Al Melhi, CEO of the ICT services provider Injazat, a wholly owned subsidiary of Mubadala, told OBG. He added, “Industries like telecommunications and banking have incentives to be early adopters, as otherwise they risk being left behind.”

Oversight

The industry is managed at the national level by the Telecommunications Regulatory Authority (TRA), which was established by Decree No. 3 of 2003, otherwise known as the Telecom Law, with mandates to act as the sector’s chief legal and policy-making body and as a facilitator for other federal entities in the field of smart transformation.

Among its roles, the TRA is charged with ensuring adequate telecoms service provision on a nationwide level; encouraging ICT uptake; promoting adoption of technologies that will transform the UAE into a regional ICT hub; issuing licences to providers and ensuring compliance; resolving disputes between operators; promoting training and development; overseeing spectrum allocation and infrastructure-sharing arrangements; and helping to review mobile tariffs to ensure competitive pricing.

The TRA is also responsible for maintaining digital infrastructure across the country, embodied through the Federal Electronic Network (FedNet) and its connections with local telecoms networks in Abu Dhabi and Dubai, as well as managing the official portal of the UAE government.

Uptake Breakdown

TRA data from August 2018 reflects mixed performance across ICT services during the preceding year. Active mobile subscriptions were down 4%, from 19.9m to 19.2m, although the rate of 216.9 subscriptions per 100 inhabitants still ranks among the highest in the world. Of the 19.2m total subscriptions, 15.7m, or 82.1%, were pre-paid plans, while the rest were post-paid.

In August 2018 smartphones comprised upwards of 80% of all registered mobile devices, and mobile services accounted for more than four-fifths of overall operator revenue. Fixed-line subscriptions, for their part, grew by 1.3% in the 12 months to August 2018, from 2.30m to 2.33m, with the number of subscriptions per 100 inhabitants holding steady at 26.3. Internet subscriptions, meanwhile, which include solely broadband connections, increased by 2.7% over the same period, from 1.32m to 1.36m, while the number of subscriptions per 100 inhabitants rose from 15.1 to 15.4.

Operators

The UAE telecoms market is dominated by two licensed service providers: Etisalat, established in Abu Dhabi in 1976, is the largest telecoms operator in the country, as well as one of the largest corporations in both the UAE and the GCC; and the Emirates Integrated Telecommunications Company, known commercially as du, which was founded in Dubai in 2005 and has grown to become the key rival to Etisalat in the domestic market.

In 2017 Etisalat brought in Dh51.7bn ($14.1bn) in revenue and earned a net profit after royalties of Dh8.4bn ($2.3bn), on the strength of 142m subscribers spread across 16 nations in MENA, sub-Saharan Africa and south-central Asia. However, subscriptions were down from 2016, when the company reported 162m users globally, owing to the firm’s exit from the Nigerian market.

Domestically, Etisalat reported a 3% year-on-year (y-o-y) increase in active subscribers in 2017, growing from 12.3m to 12.6m, driven by a strong performance in the mobile services segment. Domestic revenue was also up by 3%, rising from Dh30.3bn ($8.25bn) to Dh31.2bn ($8.49bn), aided by an uptake in customers choosing premium content and higher-speed packages. Etisalat continues to offer the widest 3G and 4G coverage in the country, with the company’s fibre-to-the-home and LTE networks now available to over 95% of the UAE’s population.

The UAE federal government currently holds a 60% stake in Etisalat, with 40% of the firm publicly traded on the Abu Dhabi Securities Exchange (ADX). A government decision in 2015 loosened ownership eligibility restrictions for company stockholders and permitted additional entities, such as local institutions, foreign investors and expatriates, to purchase up to half of its ADX value – or 20% of the firm.

Dubai-based du’s entry into the UAE telecoms market ended Etisalat’s domestic monopoly and was followed by the investment of an estimated $5.4bn during the first decade after its launch, as the firm has spent $545m per annum on network and infrastructure development. Revenue for the first three quarters of 2018 reached Dh10bn ($2.7bn), up 4.2% from the same period of 2017.

Meanwhile, net profit after royalties totalled Dh1.4bn ($381m) in the first nine months of 2018, up 7.7% from the same period of 2017. However, the changes in the firm’s subscription base were mixed between the third quarters of 2017 and 2018: mobile subscriptions fell from 9.1m to 7.7m, representing a decline of 15.4%, while fixed-line subscriptions, which tend to include larger ratios of high-dividend services, increased by 5%, from 724,000 to 760,000. du’s financial structure closely resembles that of its older peer. Shares of 39.5%, 21% and 19.5% are currently held by the Emirates Investment Authority, the Mubadala Investment Company – a strategic investment firm owned by the Abu Dhabi government – and Emirates International Communications, respectively, while the remaining 20% are listed for public trading on the Dubai Financial Market.

Investment Plans

After a long period of focus on expanding its operations in foreign markets, Etisalat is expected to concentrate on improving its digital service provision in the UAE in the near term. UK consultancy Ovum predicts that revenue from the entire UAE mobile segment will increase from $5.9bn in 2017 to $6.7bn in 2022, as earnings from non-SMS mobile data make up for losses in voice and text messaging services.

This projection comes despite a decline in smartphone sales across the GCC in 2017, as well as a prediction from the International Data Corporation (IDC), a US-based technology and telecoms market advisor, that sales will fall by a further 6.3% in 2018. Observers have attributed the contraction to several factors, including possible market saturation, low prices in global petroleum indices, reduced purchasing power resulting from depressed oil revenue and, in the case of the UAE, the introduction of a value-added tax (VAT) in January 2018, which was widely seen as a means of diversifying public coffers’ funding sources. The Federal Tax Authority has stipulated two applications of the VAT to ICT sales: post-paid services will be assessed a 5% levy of the total charged invoices, while pre-paid plans will be subject to a 5% fee on the cost of services used, rather than on the total uploaded amount.

Infrastructure Sharing

In early 2015 Etisalat and du reached an agreement to share the costs of developing greenfield, fixed-network infrastructure across the UAE. In 2016 du estimated lowering capital expenditure might reduce rollout costs by up to 60%. Moreover, a unified fixed-line and broadband system will improve market competitiveness, allowing consumers to switch between providers more easily, unlike in the former arrangement, wherein the two companies maintained separate grids.

4G

A report published in February 2018 by OpenSignal, a mobile application that crowdsources user data to map wireless service coverage worldwide, ranked the UAE highly on several measures of ICT quality. On network availability – a measure of the proportion of time services are available to users – the UAE’s score of 83.8% ranked it 22nd worldwide and third in the GCC, behind only Kuwait and Qatar. Similarly, the UAE came 23rd globally and first regionally on download connection speeds, registering a median rate of 27.5 Mbps.

In March 2018 the TRA launched a Coverage Centre that will use remote, mobile testing units – cars, drones and, in crowded cityscapes, backpacking pedestrians – to constantly monitor the country’s mobile connectivity, with the goal of eventually guaranteeing uninterrupted coverage. Per its director-general, the TRA is aiming to make improvements on wait times, download speeds and service quality that would serve to increase network coverage to 96%, a figure that would exceed the international quality standard of 92% and trail only South Korea in OpenSignal’s current accessibility rankings.

5G

In December 2017 the TRA gave telecoms providers du and Etisalat the go-ahead to begin deploying 5G networks. The new systems should eventually offer download speeds of 20 GBs per second, according to the standards defined by the International Telecommunications Union, which would be 50 times faster than existing 4G networks. While there is scepticism that the rates achieved in testing will carry over to high-traffic systems, there is broad consensus among industry observers that the improvement will support the introduction of emergent technologies like driverless cars and further the UAE’s efforts to become a regional ICT hub.

Etisalat announced in December 2017 its intention to make 5G services available to individuals and businesses, with higher speeds and lower latency than its 4G network, as well as new machine connections. At the time, Etisalat was among the first telecoms players in the world to provide 5G access. The firm subsequently launched a commercial 5G wireless network in May 2018, becoming the first telecoms provider in the MENA region to offer such a service.

According to the company, the system’s initial deployment will be a “major enabler” for the Fourth Industrial Revolution, creating new business opportunities for Etisalat’s partners throughout the UAE, including in areas like intelligent transport systems, internet of things (IoT) capabilities, autonomous cars, smart health and education.

Expo 2020 became the first major commercial customer in the MENA region to access 5G services, through its partnership with Etisalat. Nevertheless, du’s CEO, Osman Sultan, added a note of caution in February 2018, stating publicly that telecoms providers will need to price 5G services in a way that breaks from the pricing model of 3G and 4G mobile networks, which typically offered their providers low returns on investment.

VOIP

In December 2017 the use of the voice over internet protocol (VoIP) application Skype was blocked, adding the Microsoft division to a list of platforms, such as FaceTime and the call features on messaging platforms WhatsApp and Viber, that have already been blocked in the country. The decision to block these applications, which are popular among expatriates for offering virtually free calls to friends and family back home, follows a 2015 TRA policy clarification that requires telecoms operators to acquire local licences to provide VoIP services.

As these foreign services have been blocked, Etisalat and du moved to fill the service gap making deals with several VoIP applications – C’Me, BOTIM and, most recently, HiU – to sell their customers access to making in-country voice and video calls for Dh50-100 ($13.61-27.22) per month. Meanwhile, Hamad Obaid Al Mansouri, director-general of the TRA, announced in April 2018 that the telecoms regulator had begun discussions with Apple and Microsoft to lift the bans on FaceTime and Skype, though as of late 2018 no decision had been announced. Saudi Arabia lifted a similar ban in September 2017.

Regional & Local ICT Sales

ICT sales in the UAE reached a total of $4bn in 2016, on the strength of growing domestic demand for components integral to smart city solutions and IoT capabilities, as well as significant increases in exports of other ICT goods, especially automatic data-processing machines, to markets in Africa and Asia, according to a Dubai Chamber of Commerce and Industry analysis of data gathered by Business Monitor International and Euromonitor International.

Furthermore, manufacturers sold 3.5m units of computer hardware and related products, up 52% from 2012, with growth over the period especially concentrated in sales of tablets, which more than doubled their share of total sales volume, from 32% in 2012 to 67% in 2016. Spending on cloud computing, meanwhile, grew more than six-fold between 2011 and 2016, from $51m to $381m, at a compound annual growth rate of 49.5%.

In a January 2018 interview with Gulf News, Jyoti Lalchandani, vice-president and regional managing director for IDC, stated that he expected spending on ICT in the Middle East and Africa to reach $230bn in 2018, up 2.7% y-o-y, with growth mainly driven by the expansion of third-party platforms, such as cloud storage equipment and services, big data analytics, mobile services and social media, as well as emerging technologies like artificial intelligence, robotics, IoT capabilities, augmented and virtual reality, 3D printing and blockchain. He added that he expected UAE spending in the domestic ICT market to increase by 4.8% in 2018, from $7.3bn to $7.7bn, owing mostly to robust growth in services and software, even as sales of peripherals and displays, as well as PCs and tablets, see marginal declines.

Domestic growth will be driven in large part by what Lalchandani called an acceleration of the ongoing transformation of telecoms operators into ICT players. The UAE’s two service providers, du and Etisalat, are pushing hard to establish their positions as sellers of wider ICT solutions for enterprise customers, which offer higher margins than traditional telecoms services. Etisalat launched its digital division in October 2016, while du did the same in 2017. du’s ICT solutions department is designed to deliver managed IT and telecoms services to governmental agencies and private enterprises, focusing on technologies like enterprise networks, security, data centre services and cloud services. The company aims to have such services account for 15% of revenue by 2021, up from 2.5% in mid-2017.

E-Government

As part of its overall efforts to develop the emirate’s e-transformation strategy, the Abu Dhabi government established the Abu Dhabi Systems and Information Centre (ADSIC) in 2005 with a mandate to build a state-of-the-art, user-centric e-government platform. Online public resources and information pages have evolved steadily since then, and in February 2018 the Abu Dhabi Systems and Smart Services Authority (ADSSSA) replaced ADSIC to oversee the launch of the local government’s unified service platform. ADSSSA was founded to work with other public agencies to build smart systems for government services.

Moreover, ADSSSA gathers a range of the emirate government’s resources onto a single portal and makes it available to all customers, including UAE citizens, residents, visitors and investors. The agency is also tasked with drafting policies at the emirate-level, along with strategic plans and providing operational support for ICT integration.

In April 2018 ADSSSA completed the first phase of AD Connect, an integrated, emirate-level project that aims to, among other things, digitise more than 80% of the documents involved in Abu Dhabi government services. The first phase included the digitisation of nine government-held forms: registration documents; registration summaries; title deeds; land plans; commercial licences; vehicle ownership; water and electricity bills; passport and residence documents; and medical check-up certificates. The process was estimated to equate to annual savings of Dh900m ($245m), as well as 9m client visits and over 80,000 working days for Abu Dhabi government employees. AD Connect is part of a broader effort to develop e-government and smart city initiatives across the entire UAE. “The government, both at the federal and emirate level, is engaged in a number of smart city initiatives and is looking to find synergies and reduce waste through common network infrastructure, which would facilitate the sharing of information among government entities,” Hassan Al Naqbi, CEO of Khazna Data Centers, told OBG.

The firm, which was founded in 2012 as a subsidiary of Mubadala and now operates two facilities in Meydan City, Dubai and Abu Dhabi’s Masdar City, lays claim to being the only dedicated, commercial wholesale data centre provider in the UAE. The company has expanded from an initial delivery capacity of 6 MWs of IT load to 10 MW at present, with plans to expand its operating capacity to 25 MWs by the end of 2019. Naqbi added, “International players, whether telecoms operators, cloud providers or content creators, are entering the UAE market to serve the region and be closer to clients. All of this is driving demand for data centre infrastructure.”

Cloud Services

One area of particular focus in the ICT markets of Abu Dhabi, the UAE and the wider region is cloud-based technologies. The market for cloud services in the wider Middle East grew by 22% in 2017 and is expected to grow from $2.7bn in 2017 to $8.8bn by 2022, according to a report by the industry research consultancy MarketsandMarkets. Meanwhile, an estimate from Frost & Sullivan found that the cloud service market in the UAE will grow from Dh952m ($259m) in 2017 to Dh1.1bn ($299m) by 2020, as the technology is adopted by businesses operating in sectors such as finance, hospitality, media and entertainment, oil and gas, and retail.

“A major focus is how we can embrace this technology, and use it in terms of cost reductions and the manner in which we buy IT. These moves are going to be driven by industry trends, rather than by general IT requirements,” Feras Al Jabi, senior vice-president at Advanced Technology Consultancy, an Abu Dhabi-based systems integrator, and Digital Okta, a cloud-focused solutions provider, told OBG.

Other industry stakeholders, however, are more cautious. “Most clients nowadays, particularly governments, have concerns related to security and how their data is being stored. To be able to convince entities to migrate into cloud infrastructure, these platforms must be customised to meet client demands and concerns,” Khaled Al Melhi, the CEO of Injazat, told OBG. “Expenditures in digital platforms and the cloud are on the rise, generating significant opportunities, but the ability of providers to customise their solutions will be key to them being more competitive,” he added.

Cybersecurity

The adoption of cloud storage and other ICT resources has been accompanied by growing concern about digital safety. According to Norton’s “2017 Cyber Security Insights Report”, 3.7m UAE consumers were subject to Dh3.9bn ($1.1bn) in credit and debit card fraud and spent an average of 47.9 hours dealing with cybercrime in 2017.

As a result of this, the government has taken steps in recent years to secure the public against such risks. In 2012 the UAE established the Signals Intelligence Authority (SIA) and tasked it with protecting the UAE’s critical information infrastructure and improving overall national cybersecurity. Central to SIA’s mission is the issuance and enforcement of the Information Assurance Standards (IAS), a list of controls and protocols published in 2015 to help public entities to identify pertinent cyberthreats, conduct risk assessments and establish priorities in decision-making to protect their digital assets.

In 2018 Decree No. 5 of 2012, commonly known as the Cybercrimes Law, was amended to impose harsher punishments, such as longer prison sentences (10-25 years) and steeper fines (Dh2m-4m $544,000-1.1m) on those convicted of producing or distributing electronic information supportive of terrorist groups. Additional provisions in the amendment include new sanctions on defamatory speech, digital invasions of privacy – including via social media sites – and, quite broadly, online acts that endanger national security and public order.

“The [IAS] released three years ago represented a watershed moment in the UAE’s national efforts to inform government entities and critical infrastructure that the country is serious about cybersecurity and that there are regulations in place that organisations must follow,” Eric Eifert, senior vice-president of Managed Security Services at the Abu Dhabi-based cybersecurity firm DarkMatter, told OBG. “Since then, we have seen a lot more focus on cybersecurity as an essential business requirement, which is the first phase of the maturation process. The last couple of years have been focused on educating organisations about cyberthreats, as well as helping them to understand both their security posture and how to mitigate these risks. In the last 12 to 18 months, we have also seen their budgets start to catch up to meet those requirements.”

DarkMatter more than doubled its revenue in 2017, to over $400m, an indication of the growing local interest in using products like theirs to protect data and privacy. The development of cybersecurity is expected to be particularly important to sustaining the development of the UAE’s nascent e-commerce sector, which was expected to exceed $10bn in value in 2018, up more than 400% since 2014, according to an analysis from Frost & Sullivan.

Outlook

The growth prospects for the ICT sector were well-summarised by Salem Al Noaimi, chairman of the publicly traded investment firm Waha Capital, who told OBG, “One needs to look at the fundamentals of the economy and long-term growth drivers. We see very high potential for investment opportunities in technology, as the UAE is a very receptive market for innovations.”

With the UAE continuing to spend heavily on its ICT infrastructure and move towards more robust adoption of 5G and cloud-based services, there are plenty of investment opportunities across ICT and various cross-over segments. Abu Dhabi is well-positioned to benefit from increasing public and private spending in areas like data storage and cybersecurity, particularly in the development of ICT infrastructure, the distribution of services on 5G mobile networks and the technologies integral to the growth of smart cities. Meanwhile, with a digitally savvy population, the emirate will further its transition towards a knowledge economy, as it adopts cutting-edge tools that will help it to draw in investment, companies and entrepreneurs looking to make their mark in the ICT market of tomorrow.