Ample room for continued expansion in Oman's ICT market

Consumer demand for data and improved connectivity is driving growth in both fixed-line and mobile services in Oman. Infrastructure providers face considerable challenges in rolling out high-speed services to all areas of the country, while increased competition in the mobile market is creating a renewed focus on customer service and offerings tailored to specific niches in Omani society. While many trends in the country’s telecoms sector reflect developments in the industry region-wide, there are distinct characteristics of the market in the sultanate. For instance, strict prohibition of voice-over-internet-protocol (VoIP) services such as Skype and Facetime limits the cannibalisation of call revenues that is seen in other countries.

Earnings

Data from the Telecommunications Regulatory Authority’s (TRA) 2015 annual and quarterly reports show combined revenues from fixed-line telephony and mobile services reached OR906.19m ($2.4bn) in 2015, a 12.8% increase on 2014, when it was OR803.54m ($2.1bn). However, the phone companies sacrificed average revenue per user (ARPU) to gain higher overall revenues. According to the TRA, ARPU fell from OR6.10 ($15.84) to OR5.40 ($14.02) for fixed-line telephony, from OR35.50 ($92.20) to OR32.70 ($84.93) for fixed-line internet and from OR10.80 ($28.05) to OR7.70 ($20) for mobile subscriptions.

Telecoms operators pay the Oman government 7% of gross revenues in royalties and are taxed on profits at a rate of 12%. In November 2014 the Economic and Financial Committee of the Majlis Al Shura suggested raising royalties to 12%, which has not been acted upon. In 2014 the Omani government collected OR47.67m ($123.8m) in royalties, a 6% increase on 2013, according to TRA’s 2014 annual report. It also collected OR3.1m ($8.1m) in royalties arrears from Ooredoo, covering the 2005-11 period. According to the two firms’ annual reports, in 2015 Omantel paid OR33.6m ($87.3m) in royalties and OR8.1m ($21m) in tax, while Ooredoo paid OR17.79m ($46.2m) in royalties and OR6.95m ($18m) in taxes: together, the two firms contributed some OR66.5m ($172.7m) to government coffers.

Market Structure

Although some locally-operating companies have rebranded in recent years, the two dominant players in the telecoms sector are Omantel, in which the state holds a 51% stake, and Ooredoo, a subsidiary of the Qatari firm of the same name. Both Omantel and Ooredoo provide fixed-line and mobile services, and the two businesses are listed on the Muscat Securities Market as OTEL and ORDS, respectively. In April 2016 a new entrant, Awasr, was awarded a licence to sell broadband packages to domestic and business customers with fixed-line, fibre-optic broadband. In the second half of 2016 during the first phase of expansion, Awasr’s services were limited to customers living in the Al Khoud, Maabilah, Al Hail, Al Mawaleh and Shatti Al Qurum communities of Muscat.

In addition, two mobile virtual network operators (MVNOs) have been reselling mobile telephony through their own branded prepaid SIM cards in partnership with Omantel since 2009: FRiENDIi and Renna. FRiENDIi is part of Virgin Mobile Middle East; Renna was part of Majan Telecommunications, but in June 2016 was bought out by another licenced Omani telco, Integrated Telecommunications Oman (TeO). In the short to medium term TeO plans to keep the Renna brand separate and to run the firm alongside its existing offerings: Allo, TeO Business and TeO Global. TeO is licensed as an international gateway operator, and its Allo service offers call packages to customers wishing to call internationally at discount rates. TeO Business and TeO Global sell telecoms and IT service solutions to the corporate sector, the latter on a wholesale basis.

Third Operator

The takeover of Renna puts the combined company in a favourable position to tender for a third mobile network operator (MNO) licence, and in 2015 there was some expectation that the government could announce the terms for a third operator licence. Companies in the sector were also anticipating that there might be a call for tenders in the near future. Generally, the telecoms industry falls under the Ministry of Transport and Communications (MTC), but since the 2002 Telecommunications Act was issued by royal decree, it has been overseen more by the TRA. In February 2016 the minister of transport and communications, Ahmed bin Mohammed Al Futaisi, made a statement via his official Twitter account urging the TRA to initiate the licensing process for a third operator, adding that this objective was included in MTC’s 2016 strategic plan, published that same month.

Price Benchmarking

The argument for a third MNO licence was given further impetus by a price benchmarking study conducted for the TRA by Sultan Qaboos University and UK research firm Strategy Analytics, which compared the services and tariffs being offered in Oman to its GCC neighbours, as well as Jordan, Tunisia, the UK and Malaysia. The study, released in early 2015, found that Oman’s customers were being charged similar tariffs to those in other countries in the survey for fixed-line voice services, but being offered the lowest average and maximum advertised fixed-line broadband download speeds, ranging from 2 Mbps to 60 Mbps. At the same time, fees for fixedline broadband services were among the highest for Omanis. Mobile customers in the country were also being offered lower average mobile download speeds at prices that were either below or equal to charges in other GCC countries, but paying above average for pre-paid voice services. However, Oman’s international call charges were lower than in other GCC countries.

The management team at TeO believes its acquisition of Renna, an MVNO with a track record of winning and retaining subscribers by competitive pricing and a focus on customer service, will give it more credibility in putting together its bid for a third licence. “When we prepare our application, we will do so with a strategic partner that has experience of a national rollout of a new service and give the TRA additional confidence that our company can guarantee the smooth introduction of a new service,” Darren Tong, chief operating officer and acting CEO of TeO, told OBG. TeO’s management had been tracking Renna’s performance closely for two years before the takeover, in which it acquired 100% of the company’s shares.

New market entrants and resellers have also adopted new approaches to business. “They are young, flexible and simple, and they are intended to avoid all the dissatisfaction points in the market,” Ayman Madieh, vice-president of technical solutions and marketing for Huawei Tech Investment Oman, told OBG. “They have recognised that the only differentiators between service providers are going to be flexibility in customer service and tariff simplification. The new business model is about being simple, smart and flexible.”

Mobile Subscriptions

Although the data was not broken down by company, figures for mobile subscribers published by the TRA in March 2016 showed that MVNOs accounted for a 15.7% share of the market in mobile subscriptions, or 1.04m people, and a 17.2% share, or 6.05m, of pre-paid SIM subscriptions. Omantel and Ooredoo are the only firms offering post-paid subscriptions and together shared 594,558 of these customers, accounting for less than 9% of the mobile market in Oman. The most recent available figures for market share released by the TRA show that Omantel remained the market leader throughout 2015, but that over four consecutive quarters MVNOs grew their share of the market from 11.9% in the first quarter of 2015 to 15% in the final quarter. Over the same period, Omantel’s slice of the market fell from 45.5% to 44%, while Ooredoo’s declined from 42.6% to 41%.

National Centre for Statistics and Information (NCSI) data comparing 2013 with 2015 show that while overall mobile subscriptions grew by 18% from 5.6m to 6.6m, MVNO subscriptions increased by 80% over the same period from 570,000 to 1.02m. That final quarter of 2015 marked the first time MVNO subscriptions in Oman passed the 1m mark, and resellers saw their subscriber numbers grow by 9%, compared to the previous quarter, while MNO’s witnessed a 0.19% fall in pre-paid subscriptions. Competition between rival operators can be measured by the numbers of new tariffs, tariff revisions and price promotions each year. Between 2014 and 2015 the number of price promotions expanded from 142 to 165 and the number of tariff reviews rose from 14 to 16, with the number of new plans declining slightly from 35 to 32. Oman allows consumers to port their mobile number from one provider to another, which should create more flexibility and competition in the market. According to the NCSI, in the fourth quarter of 2015, 11,701 mobile numbers were ported, representing 0.18% of total mobile subscriptions. In March 2016 the mobile penetration rate was 152.6%, revealing that many clients have more than one SIM card.

OTT Services

According to an April 2016 Times of Oman report, NCSI data revealed that by March 2016 45% of Oman’s population of 4.45m were expatriates, and TRA records show there were 248m outgoing international calls from mobile phones each quarter on average in 2015 and 7m international calls made from landlines. Although security concerns are cited as the main reason for the ban on VoIP services such as Skype, Facetime and Viber, there are clearly commercial concerns for both the operators and the government, which receives royalties on telecoms revenues.

Regional Standing

A study released by Boston-based consultancy Arthur D Little in February 2016 found that resistance to such over-the-top (OTT) services is widespread in the MENA region, but that a defensive stance may not make commercial sense in the longer term. The study indicated that the use of permitted OTT apps, such as WhatsApp or Facebook messenger, have already had an impact in Oman. Its findings show that for the 2010-14 period the average number of messages per capita per month in Oman dropped from 185 to 90, or 31%, and that average messaging revenue per capita fell by 17.8%, with total messaging revenues declining from $157.5m in 2010 to $100.7m in 2014. Interestingly, despite the ban on VoIP services, the report also found that decline in revenue for voice usage has been more rapid in Oman than in any other GCC country. From 2010 to 2014 the ARPU across the Gulf fell by 5%, but in Oman it had declined by 10.4%, alongside a 6.2% fall in average voice minutes used per capita and a decline in voice revenues from $863.6m in 2012 to $795.6m in 2014.

The Arthur D Little report also pointed out that, despite the official rejection of VoIP services, the statistics suggest consumers are finding ways around the ban, and that use of OTT services is already widespread. “Users in the [MENA] region have become savvy at using illegal virtual private networks (VPNs) on their smartphones in order to circumvent any restrictions,” the report stated. It recommended that regulators and operators work in cooperation with OTT developers, rather than banning them, and reap a profit from the share in the increased data usage that these services are likely to prompt. It added that there is an opportunity for a regional Arab network in OTT video services such as Netflix to emerge, and that telecoms companies would do better to accept the inevitable encroachment of disruptive OTT services on traditional revenue streams, and to realign their business offerings away from a reliance on voice and text revenues.

It is an approach that has some champions in Oman. “I see the demand for VoIP services as a good opportunity for operators to focus on enabling and promoting data connections and creating specific applications, but it will require time to change the mindset of operators,” Madieh told OBG. Tong meanwhile believes that the ban on VoIP apps has created a grey market in illegal use of VPNs, which he said is more of a challenge for security services to monitor than the open use of such apps would be. He, too, sees the commercial potential, telling OBG, “It is clear that VoIP is an opportunity that will drive further use of data.”

Mobile Data

The use of data services and the increasing prevalence of smartphones at most levels of society is also driving growth in mobile broadband in Oman. According to the TRA, by March 2016 there were 3.38m active mobile broadband subscribers in the country, leading to a penetration rate of 77.62%. From the fourth quarter of 2014 to the same period a year later, mobile broadband subscriptions grew by 12.5% from 2.89m to 3.25m. Tong believes that Renna accounted for 215,000 of the new subscribers in 2015 and attributed the company’s success to tailoring its pricing to suit less-affluent sectors of the expatriate community. “The market dynamics were such that the ARPU levels for this segment were not attractive to Ooredoo and Omantel,” Tong told OBG. “But at the same time, smartphone handsets suddenly became much more affordable for blue collar workers, creating exponential growth in demand for data services.”

Fixed Line

Alongside the burgeoning growth in mobile subscriptions, Oman is also witnessing significant growth in fixed-line usage. According to the NCSI, the number of fixed lines in Oman grew by more than 15% in 2015, from 375,000 to 434,000. By March 2016, the number of fixed lines had grown to 446,918, representing a penetration rate of 10.27% and a household penetration rate of 77.72%. Of the total number of fixed lines, a small proportion, 13%, are served to customers on a pre-paid basis, while the remainder are regular post-paid contracts. Both pre-paid and post-paid packages saw growth each quarter in 2015, a pattern that was repeated in the indicators released by the TRA in January and March 2016, with pre-paid subscriptions growing by 2% between those two months and post-paid by 3.8%. In data for the fourth quarter of 2015, residential fixed lines accounted for 61.1%, while businesses made up 38.9% of fixed lines. Over that final quarter in 2015, residential fixed-line use grew by 0.36%, compared to 5.5% in the business segment. However, over the course of 2015 the number of business lines grew by 45%, from 116,247 to 169,144. Most fixed-line services are supplied by Omantel, although Ooredoo claims an 18% share of this segment of the market.

Infrastructure

The growth in usage in the telecoms sector is underpinned by continuous investment in new technology and equipment by the main telecoms providers. According to the TRA’s 2014 annual report, the telecoms segment saw a 40% growth in investment, from OR156.53m ($406.5m) in 2013 to OR219.71m ($570.6m) in 2014. In 2014 investments in mobile accounted for 62% of the total, with 29% directed to fixed telephony and 8% to fixed broadband. A significant proportion of the investment involved improvements to the technology used to deliver 4G services.

In May 2016 Omantel announced it had spent OR120m ($311.7m) in 2015 on improving the 4G LTE network, which was first introduced in 2012, enabling the firm to offer 4.5G download speeds of up to 200 Mbps starting in April 2015, as well as expanding its 4G LTE network to cover 86% of the population of Oman. That same month Omantel re-seller Renna Mobile announced it was able to offer a 4G service to all of its customers. Ooredoo also reported improvements to its 4G services, due in part to the release of increased spectrum frequency, LTE 800, by the TRA, which Ooredoo said would reduce the impact of 4G services on the battery life of smart devices, which were previously drained quickly as mobile phones switched between 3G and 4G. In June 2016 Ooredoo reported an 80% increase in use of data on its mobile devices and a 40% rise in the use of fixed data. In the 12 months to May 2016, the company announced that it had seen a 60% increase in its 4G coverage. In its 2015 annual report, Ooredoo reported that 48% of its revenues were driven by demand for data services by fixed-line and mobile customers. Although the company’s overall capital expenditure on mobile networks was lower than the OR68m ($176.6m) 2014, in 2015 it still spent OR59m ($153.2m) on mobile, as well as OR8m ($20.8m) on fixed lines, down from OR16m ($41.6m) the year before. In addition, its acquisition of additional LTE 800 spectrum cost Ooredoo OR9.8m ($25.5m).

Company Performance

Data from the two firm’s 2015 annual reports showed that while Omantel’s revenues were twice that of Ooredoo’s, its operating costs were more than three times as high and its net profit was OR48.5m ($126m), compared to OR41.6m ($108m) for Ooredoo. Omantel’s 2015 revenues of OR514.3m ($1.3bn) was a 7% increase from OR481.2m ($1.2bn) in 2014, while Ooredoo’s revenues were OR252.1m ($654.7m), up 11.2% from OR226.7m ($588.8m). Operating expenses for Omantel totalled OR392.3m ($1bn), up nearly 12% from OR350.8m ($911.1m) in the previous year. This compared to operating costs of OR122m ($316.8m) for Ooredoo, which was up 5.2% on OR116m ($301.3m) in 2014. Ooredoo’s earnings before interest, tax, depreciation and amortisation (EBIDTA) was OR137.5m ($357.1m), up 16.8% on OR117.7m ($305.7m) in 2014. Omantel’s EBIDTA was OR248.9m ($646.4m), up 2.3% from OR243.2m ($631.6m).

However, Omantel’s reduced profitability owed more to the performance of its subsidiary in Pakistan than to domestic market operations. In its accounts, OR72.3m ($187.8m) is recorded as an impairment in its investment in Pakistani subsidiary Worldcall Telecom, and OR19.4m ($50.4m) is listed as a loss in foreign currency as a result of this investment in Pakistan. In August 2016 Omantel announced that talks aimed at disposing of its share in the company had failed. An additional expense reported in its 2015 results was an impairment of OR12.6m ($32.7m), which was due to a voluntary end-of-service agreement with 266 employees from its parent company, which will be implemented over seven quarters starting in 2016. Omantel employs 2680 people, while Ooredoo has a staff of 1024.

Outlook

Given its relatively small population for the region, Oman’s telecoms sector is both competitive and profitable. The anticipated introduction of a third operator into the market could create greater competition and potentially cheaper prices for customers. At the same time, the growing dominance of data over voice, as in so many other markets around the world, looks set to open up new forms of consumer behaviour that will require operators to shape their strategies around the supply of smart solutions, applications and connectivity.