Firm foundations: Advanced infrastructure and a liberalised mobile market augur well for the sector’s prospects

In many respects, Kuwait has established itself as a telecoms innovator in the region, becoming the first GCC country to license a second mobile operator (in 1999) and thereafter overseeing a new era of competition in the mobile segment. The government continues to play a dominant role in the fixed-line sector and has yet to follow its regional neighbours in establishing an independent telecommunications regulator. Recent announcements, however, suggest that the regulatory environment may soon change. In the meantime, the nation’s mobile operators forge ahead with new 4G networks that will bring greatly enhanced data transfer speeds and a raft of new services.

STRUCTURE: Kuwait’s oil wealth and consistent budget surpluses have meant that the government was well-equipped to provide high-quality infrastructure; for decades the nation’s telecoms backbone was built and operated by the state alone. However, in 1999 the government determined that the mobile sector would benefit from market liberalisation and privatised the Mobile Telecommunications Company (MTC), later rebranded as Zain, thereby removing barriers to new market entrants. The same year saw the entry of a second mobile operator, Wataniya, which ended the monopoly enjoyed by Zain and ushered in a new era of competition in prices and services. The new duopoly was to last for nearly a decade, until the arrival of VIVA in 2008, which brought the mobile market to its present state. Since that time, VIVA has been claiming market share from both of the established players, increasing its presence with aggressive marketing and bringing more competition in prices and services to the sector. However, market indicators suggest that there is growth potential for all three players over the coming years: mobile penetration as of the third quarter of 2012 stood at a relatively low 157%, according to independent ratings agency Capital Standards, and the national subscriber base continued to grow at a steady rate, from 5.21m cellular customers in the previous quarter to 5.33m – an increase of 2.4%. Examining mobile customer growth on an annual basis, meanwhile, reveals a year-on-year growth rate of 8.3% in the third quarter of 2012 from the 4.92m in the third quarter of 2011. In terms of market share, the first entrant, Zain, continues to dominate with 41.1% of total market share in the third quarter of 2012, followed by Wataniya (33.7%) and VIVA (21.2%).

KEY PLAYERS: Established as MTC in 1983, Zain is the oldest of Kuwait’s three mobile telecoms operators, as well as the oldest in the region. In response to the liberalisation of the market, it offset revenue loss in the domestic sphere by expanding overseas, a policy which allowed the newly privatised company to establish itself as one of the world’s leading telecoms brands. An expansion strategy implemented in 2003 added a number of Middle East and African operations to its roster, and in 2007 it adopted the label Zain as the new corporate master brand for all operations for the group. By 2008, it had become the fourth-largest mobile operator in the world in terms of geographical coverage, with operations in seven Middle Eastern countries and 15 African nations. However, the firm exited sub-Saharan Africa in 2010 to focus its attention on the MENA region, selling its interest there to India’s Bharti Airtel for $10.7bn. It now has a presence in eight countries (Bahrain, Jordan, Kuwait, Iraq, Saudi Arabia, Morocco, Sudan and South Sudan), a management contract in Lebanon and a subscriber base of over 42.7m as of December 2012. Despite the privatisation of the company more than a decade ago, the government retains a sizeable interest in it through the Kuwait Investment Authority (KIA), which owns a 24.61% stake. The other major shareholder is the Al-Khair National for Stocks Company, which has a 16.43% interest, while the public holds the majority of the remainder. Over the years, Zain has attracted considerable foreign interest, most notably in 2011 when Etisalat UAE sought to gain a controlling stake in the operation with a reported offer of KD3.3bn ($11.8bn); subsequently, it pulled out of the acquisition process, citing delays and disagreements.

The National Mobile Telecommunications Company, or Wataniya, became Kuwait’s second mobile operator after a 1999 initial public offering (IPO), which saw KIPCO, one of the MENA region’s biggest investment holding companies, acquire a 52.5% controlling stake in the operation. In 2007, however, KIPCO’s stake was bought out by Qatar’s QT el (recently re-branded as Ooredoo), which raised its stake in the company to 92.1% in October 2012 after a KD519m ($1.85bn) buyout of minority shareholders. The development saw the KIA, which had retained a stake of 23.5% in the firm, sell its entire interest to QT el and thereby sever the government link with the nation’s second-largest mobile operator. Like Zain, it has sought to grow its subscriber base through international expansion, and presently runs operations in Algeria (Nedjma), Saudi Arabia (Bravo), Tunisia (Tunisiana), Palestine (Wataniya Mobile) and the Maldives (Wataniya). Its consolidated subscriber base at year-end 2012 stood at 19.2m (up from 17.8m in 2011), while in Kuwait it has secured a subscriber base of 2m.

Kuwait’s third mobile operator, VIVA, came into being with the promulgation of Law No. 2 of 2007, which amended the provisions of the existing telecommunications law to allow for a third “Kuwaiti shareholding company based in Kuwait” to offer mobile telephony services. The government retained a 24% stake in the new company; another 50% was offered to the public in an IPO and the remainder was auctioned off to regional giant Saudi Telecom (STC), which also maintains a presence in Europe, India, Malaysia, Turkey, South Africa and Bahrain. The company’s efforts to grow its subscriber base since its market entry have met with considerable success. It has grown its customer base from 1m to 1.6m between December 2011 and December 2012.This result represents a sustained trend: since the publication of subscriber data in 2009, customer numbers have risen 177%.

PERFORMANCE: Increased competition in the mobile market in recent years has put downward pressure on net profit, as operators invest in network upgrades and promotions in a bid to retain their customer bases. However, average revenue per user (ARPU) in Kuwait remains amongst the highest in the region, and revenues gleaned from the domestic market remain healthy. The Kuwaiti operation of the Zain Group put it in a solid performance over 2012, growing its customer base by 7% year-on-year and securing a 1% increase in gross revenues to reach $1.2bn. While ARPU has been decreasing over recent years, from $52 in 2010 to $42 in 2012, Zain Kuwait continues to enjoy one of the highest returns per customer within the group’s portfolio. Net profit for the year registered a 12% decrease on 2011, coming in at $408.3m. However, this was largely attributable to increased capital expenditures over the period, which climbed from $105.7m in 2011 to reach $161.2m, the bulk of which was invested in the enhancement of the network. Wataniya’s Kuwait operation saw a modest decline in revenues over 2012 – a 9% decrease to KD220m ($785m). Net profit for the year saw a more significant year-on-year reduction of 85% to come in at KD46.4m ($166m), a result the firm attributed to “a slowing economy and an increasingly competitive market with downward pricing pressures”. The company did, however, pass the 2m customer mark in 2012, as well as secure a 30% increase in postpaid customers and increase its data-on-smartphone service base by 250%.

VIVA’s performance over 2012 reflects the rapid growth of a newcomer to the market. In what the company describes as a “milestone” year, the operator achieved a profit for the first time since its inception, amounting to KD3.9m ($14m) after a KD14.4m ($51.4m) loss in 2011. Its market share increased from 21.2% to 29% and its customer base grew by 60%, making VIVA the fastest-growing operator in the sector. VIVA has emerged as a particularly strong contender in the broadband data services sector, where it is now the second-largest provider in Kuwait.

FIXED-LINE SEGMENT: The relative stagnation of Kuwait’s fixed-line segment stands in marked contrast to the dynamic mobile arena. The Ministry of Communications (MoC) remains the sole provider of fixed-line services in Kuwait, and data from the International Telecommunications Union (ITU) reveals little change in the market over recent years: in 2005 fixed-line subscriptions stood at 504,806, a figure which had only increased to 514,696 by 2011. Fixed-line growth over recent years, therefore, has been significantly lower than its mobile equivalent – over the two-year period between 2010 and 2012 only 0.2m fixed-line customers were added to the MoC’s system, compared to 0.9m cellular subscriptions. Kuwait’s fixed-line penetration rate of 18.26%, however, compares well with many of its neighbours, such as Iraq (5.49%), Saudi Arabia (16.5%) and Qatar (16.36%), and is only exceeded in the Gulf region by the UAE and Bahrain. Moreover, decades of government investment in fixed-line infrastructure have left Kuwait with one of the most robust networks in the GCC. “We have very good infrastructure in Kuwait. All our cables are ducted right up to the house, whereas in other countries this is reserved for main cables only, not the last 20 to 50 metres,” Hammed Ashkanani, an engineer and head of projects at the MoC, told OBG. Despite this infrastructural investment, the tariffs charged by the government are low: calls within Kuwait Mobile subscriptions, 2006-12 have been free of charge for decades, while calls to mobiles from landlines were made tariff-free in 2009 after VIVA’s initiative. In this respect, the fixed-line system has been run as something akin to a public service by the MoC, although the ministry’s sole control of the international gateway has allowed it to make a profit on calls to other countries. The possible privatisation of the fixed-line segment has been part of the public discourse surrounding the telecoms sector for many years, and the 2010 announcement by the MoC that it planned to privatise it within a period of two years rekindled expectations regarding sector liberalisation. While Kuwait has retained commercial, legal and technical advisors for this deal, no details regarding the size of the stake to be sold or who will able to bid in any future sale have been released.

NEW TECHNOLOGY: In the meantime, the MoC continues to upgrade the fixed-line infrastructure, and is currently in the process of replacing the existent copper network with fibre-to-the-home (FTTH) technology. The ministry is planning to convert all of Kuwait’s network to FFTH by 2020. Since 2005, some 44,000 plots (including single houses and multi-floor buildings) have been connected to a Gigabit Passive Optical Network (GPON), a point-to-multipoint access system with a downstream capacity of 2.48 GB per second. A second phase scheduled for tender in 2013 aims to add another 66,000 plots to the system, while the entire country is slated for connection by 2017. The wholesale conversion to FTTH in Kuwait will allow for a convergence of services through the new infrastructure, including voice calls, HDTV streaming, online gaming and other forms of data sharing (see IT overview).

REGULATION: While Kuwait has been a regional leader in terms of telecoms market liberalisation, breaking the cellular monopoly and establishing price competition between operators, it remains the only GCC country without an independent telecoms regulatory authority. In the absence of such a body, the MoC acts as both quasi-regulator and provider of all fixed-line services. Industry observers point out that the liberal market which persists in spite of the absence of a designated regulator has allowed Kuwait’s mobile operators to secure some of the highest ARPUs in the region; on the other hand, it is frequently asserted that the lack of a regulator, the continued dominance of the government in the fixed-line segment and the MoC’s control over the international gateway for overseas calls combine to prevent the sector from reaching its full potential. In June 2013 the MoC announced that parliament had approved the establishment of a Telecommunications Authority. Similarly, the MoC announced in April 2010 that it was in the process of finalising a new telecommunications law that would fill legislative gaps in the current legal framework. One of the provisions contained in the proposed law calls for the establishment of a shareholding company to offer competitive international call tariffs, 50% of which would be owned by the public, 24% retained by the government, with a further 26% to be offered to a strategic investor. While this ambition has yet be realised, the government’s relinquishment of the international gateway would be welcomed by mobile operators, which have hitherto seen revenues suffer as a result of the monopoly.

However, despite the lack of progress in changing the regulatory environment, the MoC has succeeded in addressing a number of important industry issues through direct legislative intervention in the mobile market. The most important move in recent years regarded mobile number portability (MNP); both Qatar and Oman have already adopted the policy by which mobile subscribers are able to switch providers while retaining the same phone number free of charge, and many in the Kuwaiti sector viewed the absence of a similar provision in the domestic market as a hindrance to growth. The issue rose to new prominence with the entry of VIVA to the market, when the ability of customers to switch providers easily was viewed as crucial to the newcomer’s success. VIVA, however, proved itself capable of growing its customer base without the policy in place, as it was not until September 2012 that Minister of Communications Salem Al Othaina announced that the ministry’s decision to introduce MNP had been put into law. Under the new regime, customers will be able to switch operators whilst retaining their numbers free of charge. Operators are obliged to carry out the transaction within 10 minutes. The development is expected to further increase the sector’s competitiveness, although its implementation has been delayed by a number of operational factors. The MoC revealed that the service has been implemented and that around 1100 customers have switched as of late June 2013.

FUTURE GROWTH: The MoC’s control of the fixed-line segment means telecoms sector expansion is largely driven by the activity of the mobile operators. The increasing competition in this segment has encouraged Zain, Wataniya and VIVA to seek innovative routes to customers and revenue, making Kuwait one of the most dynamic mobile markets in the region. Customer service has emerged as an important battleground, with all three operators highlighting excellence in this area in their 2012 annual reports. Wataniya launched its Customer Experience Revolution Programme as a means to refine its approach to service. Zain claims to have achieved a response time of three to four seconds for its Kuwait call centre, while VIVA has taken its customer relations further still with the launch of VIVA Elite, a concierge service that provides a wide range of extended services such as travel bookings and restaurant reservations. Customer loyalty programmes are also playing an increasing role in the sector. Wataniya, for example, has partnered with international brands such as IKEA and Jazeera Airways in its Wataniya Rewards programme, by which members can redeem reward points for goods and services from participating companies. New end-user technology is driving growth in the sector, and smartphones such as the iPhone 5 and Samsung Galaxy family have driven revenue expansion for all three operators, as have value-added services.

However, the most promising source of revenue growth for Kuwait’s mobile operators comes in the form of a new network standard, fourth-generation long-term evolution (4G LTE). The MoC approved the new technology for use in the local market in October 2012, and Zain followed the successful implementation of its 4G LTE network in Saudi Arabia to become the first operator in Kuwait to make it available to its customers. Both Wataniya and VIVA have plans to roll out 4G LTE networks of their own in 2013, and the greatly enhanced data transfers that the service brings will allow all three mobile operators to offer new services to customers with compatible devices (see analysis.) OUTLOOK: While Kuwait’s mobile telecoms market is highly liberalised and competitive, its relatively low penetration rate by GCC regional standards suggests there is significant opportunity for future growth in this segment. The advent of 4G LTE technology in the market is likely to strengthen an existing trend towards smartphone purchases and postpaid bill payment, both of which promise revenue growth. However, as new technology increases the range and complexity of potential services, the need for an independent regulator becomes ever greater, and many in the industry see the absence of one as a potential hindrance to sector innovation in the short term. The MoC’s plan to create a new regulator and loosen its grip on the international gateway is therefore central to the long-term growth prospects of the mobile segment. The possible liberation of the fixed-line market represents another driver of sector expansion, and the exact shape that this move towards privatisation will take remains one of the most intriguing questions regarding the sector today.

Fixed-line subscriptions, 2006-12