Faster connectivity and an independent regulator are on the horizon

As the first GCC nation to break its single-operator monopoly, Kuwait’s telecommunications industry has evolved over the past 15 years into one of the region’s most mature and technologically advanced. The private sector has invested heavily in the latest mobile technology, including 4G LTE, and LTE-Advanced (LTE-A), with these services moving to replace the state’s dwindling fixed-line market, in addition to providing a much-needed alternative to low-capacity fixed broadband internet offered on ageing copper infrastructure.

Sector Structure

Although Kuwait is the only GCC country without a dedicated telecommunications regulatory authority, it has nonetheless moved forward on a number of consumer-friendly policies recently, including the introduction of mobile number portability (MNP) and the issuing of new licences for LTE services. Nevertheless, the industry remains highly centralised and government-dominated, which has limited growth among the country’s three mobile operators.

There are encouraging signs, however, that 2014 will be a year of reform, underpinned by new mobile broadband service offerings, potential commercial roll-out of LTE-A services, and most importantly, the long-awaited establishment of a regulatory authority. For now, the Ministry of Communications (MoC), established in 1956, oversees all telecommunications policy and implementation. It also serves as a regulator and fixed-line provider, as well as the sole operator of international gateways.

Key Players

Kuwait’s first telecoms firm, Mobile Telecommunications Company (MTC), was established in 1983 and privatised in 1999, with the state further reducing its stakes in the company from 49% to 25% in 2001. MTC rebranded itself as Zain in 2007, and has since become one of the world’s leading telecoms brands, with a presence in 24 countries providing services to 70m customers at the height of its operations.

In 2010 Zain sold 15 of its African licences to India’s Bharti Airtel for $10.7bn, intensifying its focus on the GCC while continuing to maintain operations in Sudan and South Sudan. Zain’s largest shareholder is the Kuwait Investment Authority, which holds 24.61% of shares, followed by Al Khair National for Stocks and Real Estate Company at 16.43%, with the remaining shares listed publicly. In 2011, after several delays and disagreements, the UAE’s Etisalat backed out of a $12bn deal to buy a controlling stake in Zain Kuwait.

The National Mobile Telecommunications Company, also known as Wataniya, became Kuwait’s second mobile operator with the advent of market liberalisation in 1999, launching an initial public offering (IPO) in which KIPCO, the state’s largest investment holding company, acquired a 52.5% stake. Qatar’s Ooredoo, then known as QT el, purchased KIPCO’s stake in 2011, increasing its share to 92.1% by the following year and effectively ending Wataniya’s shareholder ties to the government.

The nine-year duopoly between Zain and Wataniya (known as Ooredoo since June 2014) was broken with the 2008 establishment of Kuwait Telecommunications Company, better known as VIVA. The government holds a 24% stake in the company, with 50% offered to the public in 2008 under a KD25m ($87.9m) IPO. The remaining 26% was auctioned off to Saudi Telecommunications Company (STC). The firm’s entry led to increased competition for services and rates, prompting operators to introduce new value-added services, as well as mobile broadband packages.

Fixed Line

The MoC is the sole provider of fixed-line services in Kuwait, with the segment following larger global trends of stagnation and decline as mobile usage increases. According to data from the International Telecommunications Union, Kuwait’s fixed-line segment remained largely flat between 2000 and 2012.

In 2013 independent ratings agency Capital Standards reported that only 200,000 fixed-line contracts were registered between 2010 and 2012, compared to 900,000 new mobile subscriptions. This indicates that the migration towards mobile phones will continue to impact fixed-line subscription rates, despite the fact that fixed lines in Kuwait offer inexpensive services through set annual tariffs that include free calls to landlines and mobiles within the country. The fixed-line penetration rate stood at 17.6% in 2012, according to the ITU.

In late 2010 the MoC announced it planned to privatise the fixed-line market before 2012, announcing simultaneously that the state would not license any new internet service providers until the establishment of a regulatory authority. Neither of these plans has yet come to fruition, with analysts forecasting limited growth potential in the fixed-line market, given the consumer preference for mobile devices and the state’s increasingly interruption-prone infrastructure. “While telecom operators may be able to charge customers for making calls from fixed lines (which is free of charge currently), they still would have to make relatively high capital investments,” stated Capital Standards’ 2013 “Kuwait Telecom Industry Market Report”. “The privatisation of the fixed-line sector could improve the penetration rate, but only to a very small extent,” it added.

Mobile

Determining Kuwait’s mobile penetration rate without a regulatory authority in place has proven a challenge: while Capital Standards reported that mobile penetration was 150% in September 2012, research firm Business Monitor International claims it stood at 215% in 2013. In its most recent annual financial report, VIVA noted that Kuwait’s mobile market grew by 14% in 2012 to reach 5.8m subscribers, representing a penetration rate of 178%. Meanwhile, Zain has reported that its 2.52m customers represented a 39% market share in 2013, which would put the total number of subscribers at 6.47m, equal to a penetration rate of 166%.

One of the key roles that the proposed regulator is expected to adopt is the setting of statistical standards for sector operators. At present there are no enforced rules in terms of keeping track of customers, which has frequently lead to inconsistencies. Many organisations supply information about the market, but the values change depending on who is providing the data. A regulator would help clarify this situation.

According to the World Cellular Information Service, mobile subscriptions in Kuwait are expected to grow by 7% annually over the short to medium term, supported by strong growth in population, GDP and data usage. Although Kuwait’s overall average revenue per user (ARPU) fell below $30 for the first time in 2013, according to research firm Informa Telecoms & Media, it is the second-highest in the region behind Qatar.

Number Portability

In perhaps the most significant development of 2013, the MoC introduced MNP in June 2013, which offers customers the freedom to switch between any of the country’s three operators without losing their phone number. Operators agreed to waive a KD5 ($17.58) phone number transfer fee proposed by the MoC, with subscribers who choose to switch providers doing so free of charge, and transfer fees levied instead against the recipient company.

While Zain and VIVA reported that MNP did not have a negative impact on revenues or subscribership, with Zain reporting that its customer base grew following the introduction of MNP, Ooredoo experienced a decline in customers, revenues and profits in 2013, partially attributed to the advent of MNP. The introduction of the MNP has caused some initial rebalancing within the market; however, the change is set to have more significant long-term effects. The move is expected to empower customers and create an environment in which operators must pay more attention to meeting the needs of all customers.

Market Share

Both Zain and Ooredoo have faced stiff competition from VIVA in terms of promotions, reduced tariffs, and customised internet and data packages. While Capital Standards reported that VIVA had grown its market share to roughly 20% by September 2012, Zain Kuwait’s 2013 annual report found that VIVA’s market share stood at 32%, with Zain holding a 39% share and Ooredoo 29%. This represents the first time in its history that Ooredoo has fallen to third place in terms of market share. Zain and Ooredoo together comprise 98.2% of the overall market capitalisation of the domestic sector, and 18.9% of the leading GCC telecoms brands, according to Capital Standards.

Performance

Listed on the Kuwait Stock Exchange (KSE) since 1985, Zain had a market capitalisation of around $11bn at the end of 2013. Its revenues rose by 1.09% in 2013 to reach $1.2bn, although net profits fell 7% from 2012 to hit $377.9m. Zain has also reported a 25% decrease in ARPU between 2011 and 2013, which slid from $49 in 2011 to $42 in 2012 and $39 in 2013, driven by intensifying competition.

Although its market share has been steadily declining since 2008, the company reported a 12% year-on-year increase in its customer base in 2013, with 2.52m subscribers reported as of December 2013, compared to 2.25m in 2012. Data services represent Zain Kuwait’s fastest-growing segment, comprising 29% of total revenues in 2013, and rising by 21% over 2012. This expansion can be largely attributed to Zain’s newly launched 4G LTE network, which came on-line in 2012 and now covers the entirety of Kuwait via 1740 network sites.

Ooredoo Kuwait’s customer base decreased by 3% in 2013 to reach 1.97m customers, according to the company’s annual financial report, with revenues dropping by 11.7% to $690.8m, and net profits falling from $164.3m in 2012 to $52.4m in 2013. The company attributes these losses to a number of factors, including delays in the nationwide delivery of mobile broadband infrastructure and intense competition exacerbated by the introduction of MNP. Nonetheless, Ooredoo announced in 2013 that it had completed a $400m network modernisation programme, rolling out an advanced 4G LTE network with plans to introduce LTE-A services in the near future (see analysis).

In 2013 VIVA saw significant growth in its operations and customer base, posting a net income of $85.7m, up from $13.7m in 2012. VIVA reported that its customer base had increased to over 2m from 1.6m subscribers at the end of 2012, while its market share rose from 29% in 2012 to 33% in 2013. Revenues grew by 33% in 2013 to reach KD182.4m ($646.6m).

Plans To Visit

VIVA’s position is expected to be further bolstered as the company moves closer to listing on the KSE, a plan that has been in the works for six years. Despite its IPO being heavily oversubscribed, plans to list on the KSE had been delayed by several years of operating losses, as well as the exchange’s relatively poor performance prior to 2013.

However, shortly before announcing its 2012 financial results, the company applied to the Capital Markets Authority for a KSE listing. While the Kuwaiti government and STC have no plans to sell their shares, the company will likely issue new shares, offering these to shareholders on a pro-rata basis, meaning the existing owners could either pay more money into the company, or have their holdings diluted. Analysts predict that STC would likely meet any shortfall, meaning its stake in the company would increase with a KSE listing.

Mobile Broadband

With much of the state’s copper internet infrastructure prone to service disruptions and becoming increasingly outdated, Kuwaiti consumers have been quick to snap up the latest in mobile broadband technology, including new 4G LTE offerings, which have expanded rapidly in the state in recent years, underpinning mobile growth and representing a significant opportunity for future expansion.

Mobile operators are well positioned to profit from the deployment of new mobile broadband services, given their generally superior download speeds compared to fixed broadband internet, as well as the consumer proclivity for accessing online services through mobile devices. Although costly infrastructure is often cited as a stumbling block in 4G LTE development, Kuwait’s smaller geographic area and operators’ heavy capital expenditure in network construction should help the industry overcome these challenges.

The MoC granted formal approval for telecommunications companies to implement 4G LTE services in 2012, although VIVA had already launched commercial 4G LTE services offering speeds of up to 100 Mbps in December 2011. Zain followed with its own 4G LTE network launch in November 2012, and Ooredoo then presented a limited 4G LTE network for testing a month later in December 2012. After completing testing, the company rolled out commercial services in selected areas in July 2013, and plans to expand 4G LTE coverage across the country in 2014, hoping to eventually offer customers speeds of up to 150 Mbps.

4G Penetration

The introduction of 4G LTE services has been welcomed in Kuwait, where consumers have quickly embraced faster, smoother mobile internet services on smartphones and tablets. In 2013 Kuwait was in sixth place worldwide in terms of 4G LTE penetration, reaching 535,700 users, or 15.9% penetration, according to Informa Telecoms & Media.

Zain is Kuwait’s leader in mobile broadband deployment, with a market share of around 39%. The firm reported in November 2013 that nearly 10% of its mobile customers had migrated to 4G LTE. Now partnered with Chinese telecoms firm Huawei, the company recently announced plans to launch a commercial LTE-A network in Kuwait, which will eventually deliver speeds of up to 300 Mbps, double what is currently possible on existing LTE networks (see analysis).

Developing 4G LTE networks is often costly for operators – Ooredoo, for example, spent $400m to upgrade to an LTE network, expenditure that could be a cause of its recent decline in revenues, while VIVA sought $270m in financing from the National Bank of Kuwait in June 2013 to expand its 4G LTE network and upgrade services, adding five new branches in November 2013.

In March 2014 the Zain Group also obtained a fiveyear, $800m revolving credit facility to meet general corporate funding requirements, with this thought to be a replacement for an $867m facility that matured in the same month. Zain Kuwait’s capital expenditure hit $161.2m in 2012, compared to $105.7m in 2011, before dropping to $93.6m in 2013. The peak in 2012 was likely driven by its 4G LTE upgrades.

Growth Drivers

With a total land area of just 17,820 km, and uptake being spurred by an insufficient fixed broadband network, Kuwait is well positioned to expand construction of new mobile broadband networks, compared to some GCC neighbours.

The competitive pricing of 4G LTE data plans is also supporting growth. In March 2013 VIVA announced it was upgrading all existing internet customers to its 4G LTE network at no extra charge, and Zain offers a 30-GB 4G LTE plan for KD16 ($56.26) per month, and 80 GB for KD19 ($66.81), or $1.88 and $0.84 per GB, respectively; both plans offer substantially lower rates than the global average of $4.86 per GB. While there is little doubt that demand for data is set to increase, operators are still determining how best to monetise this growth. Balancing the competitive pricing environment with the costs of rolling out the most advanced technologies will be a key factor to consider.

Operators could see revenues improve on the back of increased data consumption as the country moves to bring the massive Middle East-Europe Terrestrial System fibre-optic network on-line in 2014, offering a major uptick in available bandwidth (see IT overview).

Expat Challenge

One potentially serious challenge facing telecoms growth is the government’s plan to reduce the number of expatriate workers in the country. While earlier plans had foreseen a reduction in Kuwait’s expatriate workforce by 100,000 annually over the next decade, in February 2014 MP Khalil Abdullah called for the government to significantly raise the rate of expatriate reductions within a shorter timeframe.

Under the proposed new plan, 280,000 expatriates would leave the country annually over the next five years, bringing the number of foreigners living in the country down to 1.1m from the current 2.5m. While this plan is intended to increase “Kuwaitiisation” and reduce a shortfall of affordable housing, it could have serious implications for the telecoms industry.

“Reducing the number of expats will most likely result in a decline or plateau of mobile subscriber growth, similar to what we have seen in Saudi Arabia, where the number of mobile subscribers declined due to a crackdown on the number of illegal immigrant workers, along with new restrictions on the number of migrant workers allowed,” Paul Budde, managing director of telecommunications research firm BuddeComm, told OBG.

Operators are therefore expected to work towards service and portfolio diversification in order to offset an anticipated decline in revenues from traditional services. As such, future service development could increasingly focus on wireless data services and high-capacity broadband, bundled with pay-TV services.

Regulator

The MoC’s plans to establish a telecoms regulatory authority date back to November 2010, when the ministry announced it would establish an authority before 2012 as part of ongoing efforts to privatise the sector. Operators have been awaiting its arrival since then, with several promising developments in 2013 and 2014 contributing to the expectation that the regulator will be created within the next year.

In June 2013 a draft law was passed to establish a regulator, with further positive developments emerging in March 2014, when the National Assembly approved the draft bill’s first reading. The assembly’s speaker Marzouq Al Ghanim said he hoped to schedule a second and final reading of the bill at a March parliamentary hearing, although there have been no further developments since the March announcement.

The authority is expected to act as a regulator for mobile, fixed-line and broadband sectors, although the exact scope of its supervisory powers remains unclear. Nonetheless, industry stakeholders have welcomed the announcement with open arms.

The proposed regulator is expected to help in three key areas: first, to provide a legislative and regulatory framework; second, to ensure fair competition and encourage innovation and growth; and third, to instil a sense of collaboration among different stakeholders. Without a central regulator, many of these types of initiatives have lacked the needed focus and direction.

Outlook

Kuwait’s telecommunications sector is rapidly evolving to become a regional leader in mobile broadband delivery. As the MoC works towards the establishment of an independent regulator, the industry is poised to benefit from legislation and regulation that will ensure fair competition and accurate measurements of key performance indicators.

The advent of MNP, coupled with new service offerings, should ensure that consumers continue to enjoy an increasingly liberalised market, while operators capitalise on a surge in data uptake, boosting revenues and allowing for further investment in new technology.