Growing market saturation in Dubai telecoms increasing competition for high-quality content

The emirate benefits from well-developed telecommunications infrastructure, with high penetration rates for both mobile and fixed-line services. These are delivered over a technically advanced network that is further enhanced by the emirate’s Dubai Smart City initiative (see IT overview). The local population is also highly concentrated, tech-savvy and global in both composition and outlook.

Yet the sector remains a duopoly, which poses certain challenges for businesses operating in the emirate, as well as for future competition and innovation. With saturation rates reached, companies are racing to create and provide new content – an arena in which large corporates sometimes find themselves lagging behind smaller, nimbler outfits.

How this will play out in the longer term remains to be seen, though for now the sector seems likely to continue to be the sole preserve of its two large players. With the local market providing less spectacular growth, operations overseas are increasingly becoming a major area for expansion.

Sector Governance

The main regulator in the sector is the federal Telecommunications Regulatory Authority (TRA), based in Abu Dhabi City. This was established under the 2003 Telecom Law, with a mandate to manage “every aspect of the telecommunications and information technology industries in the UAE”, according to its website. This includes issuing licences, enforcing regulations, promoting e-government and the sector as a whole, establishing access management policy, resolving disputes, and ensuring service quality and access equity.

The federal government, which includes the Ministry of Communications, progressively nationalised the telecoms sector in the late 1970s and early 1980s, establishing the Emirates Telecommunications Corporation (Emirtel, later renamed Etisalat) as the sector’s sole provider of telecoms services. Its ownership was split between the federal government (60%) and a group of UAE nationals (40%).

Etisalat was also the sector regulator at the time. Acknowledging that this created challenges for sector development, the UAE authorities began a process of market liberalisation leading to the creation of the TRA, which took over regulatory functions and licensed a second operator, the Emirates Integrated Telecommunications Company (du), in 2006.

While further liberalisation has been much discussed, it is unlikely to be carried out in the short term. Thus far, Dubai has opted not to follow regional trends like mobile virtual network operators (MVNOs), as seen in both Saudi Arabia and Oman. Regulations on over-the-top services have softened slightly of late, and voice-over-internet-protocol (VoIP) services like Skype have started to become available following a ruling that allowed licensed operators to provide such services in the UAE.

Main Players

While Etisalat and du are the main players in the sector, the TRA recently issued licences to some more niche outfits, such as Al Yah Satellite Communications, which offers satellite phone systems via Al Yah Satellite (YahSat) and Al Yah Satellite Advanced. Thuraya and Media Zone Intaj FZ also have licences to offer satellite services in the UAE.

According to the TRA, there were 2.13m fixed-line subscribers in the UAE in September 2014, along with 17.13m mobile users and 1.1m internet subscribers. In terms of penetration rates, the TRA reported 25.3% for fixed lines in September 2014, with recent growth due to bundling services for homes and businesses, while mobile penetration (which includes SIM cards inactive for up to a year) stood at 203.7% in the same month, up from 192.9% at year-end 2013.

The TRA figures show that fixed services brought in a total of Dh2.6bn ($707.8m) in revenue in 2013, while mobile earned Dh22.3bn ($6.07bn) and internet generated Dh4.3bn ($1.17bn), giving the sector combined revenue of Dh29.2bn ($7.95bn) for the year.

TRA data also show activity in line with global trends for service usage among telecoms customers. The number of SMS and MMS messages sent in 2013 fell by 13% and 23%, respectively, while international call minutes continued shifting from fixed to mobile. This accounted for most of the annual increase in mobile voice minutes, which rose from 23.5bn in 2012 to 26.18bn in 2013. International fixed-line voice services decreased 12% in the same period, while those on mobile increased by 36.7%.

International calls remain relatively expensive in Dubai and the UAE given the traditional restrictions on VoIP. Both telecoms companies benefit from high pricing in this area, particularly in Dubai, where a cosmopolitan population and a high concentration of offices for multinational corporations mean there is sizeable demand for international calls.

The TRA figures show marked improvements in the telecoms sector, as does the country’s performance in international telecoms rankings. In 2008, the UAE was ranked 29th in the World Economic Forum’s (WEF) Network Readiness Index (NRI), rising to 25th in 2013. The UAE also ranked number one in the world in 2013 for mobile phone network coverage and for government success in enhancing ICT on the NRI. According to the ICT Development Index from the UN International Telecommunication Union, the country stayed stable, at 33rd.

Sector Leader

The oldest and largest of the UAE’s telcos, Etisalat, reported that it had a total of 10.8m subscribers across the UAE in the third quarter of 2014, with this number taking into account revenue-generating mobile and fixed telephone, fixed broadband and eLife (double- and triple-play package) lines. Given that the most recent figures put the population of the UAE at around 9.4m at the end of 2013, this gives a penetration rate of over 100% for Etisalat alone. This figure was up 6% year-on-year ( yo-y), thanks to mobile and eLife additions, though down 4% over the quarter on low mobile additions.

By service type, 7.45m of the company’s subscriptions were pre-paid mobile as of the third quarter of 2014, up from 7.01m the year before, while 1.42m were post-paid mobile in the third quarter of 2014 – up from 1.25m y-o-y. Fixed-line subscriptions stood at 1.01m, down from 1.06m the previous year, while fixed broadband subscriptions totalled 960,000, up from 890,000. Meanwhile, the eLife subscription figure increased from 650,000 to 750,000 y-o-y. Average revenue per user (ARPU) in mobile was Dh119 ($32.40), down from Dh124 ($33.75), while the ARPU for fixed-line services improved from DH108 ($29.40) to Dh127 ($34.60) over the period.

These figures added up to some 10% y-o-y UAE revenue growth for the company, with net profits up 9% from Dh1.57bn ($427.4m) to Dh1.7bn ($462.7m). This increase contributed to improved earnings before interest, taxes, depreciation and amortisation (EBITDA) of Dh3.85bn ($1.05bn), up 8% from Dh3.58bn ($974.5m). Yet higher interconnection, termination costs and ICT costs saw the EBITDA margin in the UAE fall by one percentage point y-o-y.

Etisalat also boosted its capital expenditure over the period, with extra investment going into modernisation and expansion of its fibre-optic networks. The company’s capital expenditure in the UAE rose by 65% y-o-y in the third quarter of 2014, from Dh404m ($110m) to Dh665m ($181m).

With more than 90% of its 180m subscribers from outside the UAE, Etisalat is truly an international operator. In Egypt, the company recorded 98m total subscriptions and a 24% market share in the third quarter of 2014, while in Afghanistan, Pakistan and Sri Lanka, Etisalat had a total of 34.7m subscribers at the end of the third quarter of 2014; and another 51.3m subscribers across 12 African countries.

With respect to its African footprint, the company operates through Etisalat International North Africa, which bought French telecoms company Vivendi’s 53% stake in Maroc Telecom in May 2014 for Dh20.15bn ($5.48bn). This went hand in hand with the consolidation of Etisalat’s African business, which yielded positive results for its bottom line on the continent. The company also operates in Nigeria, where it had some 19.9m subscribers in the third quarter of 2014, up from 15.8m in the third quarter of 2013.

Competitive Edge

Ownership of Etisalat’s rival, newcomer du, is divided between the Emirates Investment Authority, which holds a 39.5% stake; Mubadala Development Company, with 19.75%; Emirates Communications and Technology, with 19.5%; and the public, via a listing on the Dubai Financial Market. Both telecoms companies are UAE outfits, though du has a stronger presence in Dubai and Etisalat is stronger in Abu Dhabi. History has also given Etisalat some distinct competitive advantages, with federal government telecoms contracts generally awarded to the company. At the same time, there is some cross-ownership at play. For example, Mubadala, an investment firm owned by the Abu Dhabi government, also has a stake in Etisalat Nigeria.

As of the third quarter of 2014, du had 626,000 fixed-line subscribers, up from 588,000 in the third quarter of 2013. Meanwhile, the number of mobile subscribers rose from 6.9m to 7.51m over the same period. Together, these subscriber numbers come to 8.14m, or around 86% penetration in the UAE.

In terms of revenue, fixed-line subscriptions contributed Dh598m ($162.8m) in the third quarter of 2014, up from Dh439m ($119.5m) for 36.4% y-o-y growth, while the mobile segment saw revenue grow from Dh2.05bn ($558m) to Dh2.24bn ($609.7m), a 9.2% improvement, over the same period. Viewed in terms of ARPU, however, mobile fell 4.4%, from Dh106 ($28.90) to Dh102 ($27.80).

According to third quarter 2014 figures from du, the company had a 45.8% share of the UAE’s mobile subscribers market and a 30.3% share of total revenue in the mobile market, illustrating the company’s ability to compete despite its later market entry. Mobile contributed 73.7% of du’s revenues, with fixed-line services adding 19.7%, wholesale 5.1% and broadcasting 1.3%, with du terminating television services in the fourth quarter of 2013. For its part, data revenue continued to increase. In its 2013 annual report, du stated that it had seen a 33.8% hike in the segment between 2012 and 2013, from Dh1.77bn ($481.8m) to Dh2.36bn ($642.4m), with data contributing around 27.7% of mobile revenue in 2013, up from 22.6% the year before.

According to TRA figures, the two market leaders made combined capital investments in the UAE of Dh2.14bn ($582.5m) in 2013, up from Dh1.88bn ($511.7m) in 2012. The two employed some 7419 people, down slightly from 7961 in 2012 and a recent peak of 11,528 in 2011. The Emiratisation rate has been increasing, reaching 43% overall in 2013, up from 40% in 2012 and 33% in 2011, indicating that expatriates accounted for the bulk of the job losses, with many of these likely employed on a temporary basis for infrastructure rollout.

Focus On Service

Etisalat and du have made major investments in their services in recent years, rolling out long-term evolution (LTE) networks. Competition is running high between the two, both of which are aiming to provide the fastest download and upload speeds. Etisalat announced the launch of its 4G LTE mobile broadband at the end of 2011, with around 700 base stations and initially available in around 70% of the UAE’s urban areas.

The following year, du launched its LTE network, covering over 35% of urban areas and promising speeds of up to 150 Mbps – faster than most devices were capable of at the time, but building in room for future development. Etisalat then moved to match the speed offered by du, announcing in late 2012 that it had achieved a world record of 300 Mbps in laboratory testing and was awaiting the commercial availability of devices capable of coping with such speeds before rolling out the service to the general public. In October 2014 du announced that it had achieved successful testing of the world’s highest processing rate – 900 Mbps – just as Etisalat made public that it was beginning a phased upgrade of its network to 4G LTE-A – or LTE Advanced – which is capable of handling speeds of up to 700 Mbps. Not surprisingly, this race to the top has been broadly welcomed by Dubai’s telecoms customers.

With Etisalat established in the market for considerably longer than du, the existing competitive environment has been characterised by the newcomer’s efforts to lure newly arrived expats as customers, thereby producing a geographical split. Older neighbourhoods – those that existed before du entered the field in 2006 – tend to have fixed-line connections from Etisalat, while du has made an impact in newer districts. Indeed, the rapid growth of new construction has made Dubai a more competitive place than other parts of the UAE.

Another major development in this geographical split may be on the cards for 2015, as a long-awaited introduction of competition in the fixed broadband network may soon come to pass. Negotiations between du and Etisalat on this development have been ongoing since early 2009. Although in theory a new subscriber could purchase services from either Etisalat or du, the fixed-line infrastructure in certain areas belongs to just one of the companies, effectively giving that firm a local monopoly over service.

While details of such a move had yet to be announced at the time of writing, the changes would likely see du able to offer double- and triple-play packages on Etisalat’s infrastructure (and vice versa), which should help bring down prices for consumers. At present, broadband connections remain quite expensive: Etisalat currently offers a home 10-Mbps triple-play package for around $95 a month, while du’s 8-Mbps triple play costs around $91. The hope is that the geographic monopoly each enjoys might be broken by the changes, though the companies understandably have concerns over such a move.

Craving Content

Like other emirates, Dubai has a youthful population, with 29% of residents between the ages of 25 and 34, according to the Dubai Statistics Centre. Thanks to this demographic make-up, the domestic market continues to enjoy organic growth, providing a useful buffer for Etisalat and du in terms of local revenue and net profit expansion.

In addition to competing on service speed, the two telecoms giants have also been rivalling each other on quality and variety. This usually involves the delivery of new applications and packages to customers, not only to encourage new entrants to subscribe, but also to convince old ones to switch. This latter battleground has been more of a focus since mobile number portability was introduced in December 2013. Indeed, according to reports from the TRA in February 2014, demand for this service was strong, with some 61,000 requests already made in the two months after portability was introduced.

Increasingly, du has been making efforts to expand its customer services by increasing staff numbers and improving employee training. More flexible packages for customers have also been a strategic play – although price has not been an area of competition to any great extent, as both players recognise the disadvantages inherent in a war over prices.

Given the high capacity of the 4G LTE network and the emirate’s fibre-optic fixed lines, much is possible in terms of delivering new services. The UAE has seen the growth of e-commerce in recent years, as well as the launch of online services such as icflix, which streams TV and film from Bollywood, Hollywood and “Jazwood” – the Arabian Peninsula’s film industry. Etisalat is reportedly one of several regional telecoms companies looking to invest in this kind of online venture as part of its efforts to expand its ability to provide online content and streaming, with this area still holding plenty of promise in the Dubai market (see IT analysis).

Outlook

The year 2015 will likely see both telcos record more organic growth, with the resurgent economy adding to a generally positive market outlook. The introduction of infrastructure sharing in fixed-line services may also bring a burst of competition in the double- and triple-play package arena, as well as in more general fixed broadband provision, although the details and timelines on this were yet to be announced at the time of writing.

In the mobile segment, competition for customers will likely continue to focus on the provision of more attractive packages, including new content, as a way to encourage existing customers to switch. Given the potential capacity available, the level of technical sophistication and the growing demand from a young and tech-savvy population, data is likely to see substantial development in the period ahead.

For Etisalat in particular, the saturation of the local market will likely ensure a continued focus on the development of international operations, with its Maroc Telecom deal and the consolidation in Africa likely to open up new avenues for growth. Operations in Asian markets may also see expansion.

However, for many domestic customers in Dubai, few major changes are likely to be seen in the near term. The market’s competitive environment is likely to remain steady, translating into continuing health for both of the telecoms companies’ bottom lines.