ICT services expand and diversify in Oman

Developments in Oman’s telecoms sector in 2017 were centred on the announcement of a third mobile network operator (MNO) licence and an increase in royalty rates from January 1, which led to a 35-40% drop in net profits that year for the two existing operators, Omantel and Ooredoo. With market penetration in the mobile sector at close to 150%, the sultanate’s third licence – to be awarded to a consortium of local investment funds and a “strategic global partner”, still unidentified as of early 2018 – is expected to significantly tighten market competition.

In view of shrinking margins and expectations of higher competition, both of Oman’s major telecoms companies were reportedly reviewing planned capital investments moving forward. Each nevertheless continued to invest in expanding service coverage and upgrading infrastructure in 2017, providing a strong foundation for small and medium-sized enterprises (SMEs) at a local and regional level to offer services that leverage recent gains in connectivity. Looking ahead, the country’s operators recognise a need to diversify away from the near-saturated telecoms market and are pivoting to digital services, launching new subsidiaries and gaining footholds in regional markets through share acquisitions and strategic partnerships.

SECTOR STRUCTURE: Oman had two established domestic network operators in 2017. The first is 51% state-owned Oman Telecommunications Company, known as Omantel, and the second is Ooredoo Oman, 55% owned by Qatari incumbent Ooredoo. Two low-cost, pre-paid resellers or mobile virtual network operators (MVNOs) – FRiENDi Mobile and Renna Mobile, the latter acquired by Integrated Telecoms Oman (TeO) in mid-2016 – are active in the wireless segment.

The Telecommunications Regulatory Authority (TRA) facilitates growth by introducing regulations and rules to enhance competition. Broad objectives for the regulator include increasing local employment potential and developing skills for a knowledge-based economy.

Omantel (previously the General Telecommunication Organisation) served as sole domestic service provider for over 30 years before the telecoms market was liberalised under the TRA in 2005. In March that year Qatar Telecommunication Company (Qtel) and its partners entered the market with a Class I mobile licence, initially operating under the name Nawras and, from March 2014, as Ooredoo. This entity was awarded the second fixed licence in 2009, the same year Oman became the first country in the Middle East to introduce a “mobile reseller model”, which allowed new, smaller players to leverage host operator infrastructure. Ooredoo and Omantel have implemented digital transformation strategies to capitalise on their roles as integrated providers of communications services offering fixed and mobile broadband and fixed and mobile telecoms.

TERRAIN: The sultanate is sparsely populated outside its major cities, and its topography poses certain challenges for infrastructure development. Servicing remote rural communities far away from Muscat, Salalah and Sohar can be difficult for both fixed and mobile services, with the cost of extending network access reaching as much as 10 times that of extending the same service across mainly flat areas.

Lifestyle preferences also increase the costs of connectivity. Unlike in cities like Dubai, where one cable can be used to service 100 flats in a tower complex, in Oman most people reside in private villas and expect service to be connected to their individual units. Operators currently incur all expenses for connecting or dropping that line. If the customer cancels the service before the two or three years required to make back the initial investment, operators incur the loss.

Oman’s challenging topography, scattered population and preference for private villas among nationals all play an important role in determining the cost of infrastructure for telecoms services.

Localising the manufacturing of such infrastructure should help contain costs in the sector. To this end, a number of promising initiatives are under way in the design and manufacture of communications towers and related products. In October 2017 US-based Rohn Products International Holdings announced it had opened Oman’s first tower manufacturing plant in Sohar at a cost of $26m to service the telecoms sectors in Oman and the broader Middle East and East Asia regions. An initial monthly production capacity of 28 towers may be doubled based on demand levels following completion of Phase II in mid-2018. The facility will use Omani raw materials and special services that already exist in the country, and will employ a US-certified tower climber programme to train Omani technicians on how to safely climb, inspect and maintain towers in line with international standards.

SUBSCRIBER GROWTH: The number of fixed-line telephone subscribers grew to around 471,000 in the first seven months of 2017, up 11.5% on the previous December, according to the National Centre for Statistics and Information (NCSI). In the same period mobile phone subscriptions went up by 3.8% to 7.13m, yielding a penetration rate of more than 150%. Pre-paid subscriptions in the country totalled 6,422,006, and post-paid subscriptions stood at 631,721.

The country’s incumbent telecoms operator, Omantel, held a 58.9% mobile network market share ( including mobile resellers) and a revenue share of 59.4% in the third quarter of 2017, according to company financial reports. As of September 2017 its market share for fixed-line telephone subscribers (post-paid and pre-paid) was estimated at 77.2%, with a revenue market share of 84.1%. Meanwhile, the company’s domestic subscriber base (including both mobile and fixed businesses) rose to 3.57m (excluding mobile resellers) in that quarter, up from 3.32m in 2016.

ROYALTY RATE HIKE: Despite this growth in subscriptions, profits for telecoms operators were down in 2017 due to the rollout of scheduled royalty and corporate tax hikes. Effective January 1, 2017 the Omani Council of Ministers increased the royalty fee payable by all telecoms operators in the sultanate from 7% of gross annual revenues to 12%. The decision returns the country to the royalty rate applicable prior to 2007.

Operators also experienced an increase in the corporate tax rate in 2017, from 12% to 15%. As a result of its new tax obligations, Omantel reported a 37% year-on-year (y-o-y) drop in net profits in the first nine months of 2017, from OR95.1m ($247m) to OR59.9m ($155.5m), despite its revenue growing by 3% to OR406.8m ($1.06bn). The company paid OR29m ($75.3m) in royalties over the first half of 2017, compared to OR17m ($44.1m) in the same period of 2016.

ZAIN ACQUISITION: Unlike other GCC operators, Omantel has largely kept its activities domestic. To diversify its exposure and mitigate the risk of operating in a single market, in 2017 Omantel increased its equity stake in Kuwait-based Mobile Telecommunication Company (Zain Group) to 21.9%, roughly equivalent to $2.19bn in equity value. The total purchase includes the acquisition of a 9.84% stake from shares owned by Zain in August 2017, and an additional 12.06% of shares from Kuwait-based Al Khair, an investment vehicle of the Al Kharafi merchant family, acquired in November.

The deal has made Zain the third-largest combined telecoms group in the MENA region, with over 52m customers, and provides Omantel with a unique opportunity to leverage Zain’s knowledge in digitisation and operations in high-growth-potential markets. The Kuwait-based firm is a market leader in five of the nine international markets in which it operates. Omantel also expects the transaction to yield operational synergies, particularly on wholesale and equipment purchases from technology vendors, where the ability to negotiate and receive better rates on network equipment will likely improve significantly.

Lastly, Zain’s accumulated experience in services that have not yet been introduced in Oman provides significant opportunities under Omantel’s Corporate Strategy 3.0, which is focused on transitioning the company from a traditional telecoms provider to a firm offering full digital services. By cooperating across commercial activities and through shared investments in research and development, Omantel gains access to a fast-growing and lucrative portfolio of diversified products and services that includes data monetisation, business-to-business services, fixed broadband, fibre-to-the-home and smart city initiatives.

THIRD LICENCE: The path to a third MNO licence took a few turns in 2017. Just days after the first share purchase by Omantel was announced in August, the TRA was scheduled to shortlist qualified applicants for the licence. The rationale behind tendering it had been to enhance competition and bring down tariffs in the mobile telecoms market. Mobile phone users in Oman had long complained about poor internet package offers, high prices, lack of mobile coverage and blocked internet calling services via voice over internet protocol. Customers even launched a daily two-hour boycott campaign against Omantel and Ooredoo in October 2016, prompting the TRA to issue a directive urging the incumbent network operators to speed up network quality enhancement, conduct a nationwide coverage survey and bring down the prices of services.

Many believe these challenges with operators will improve with the introduction of more competition. “The entry of a third MNO will undoubtedly benefit consumers, especially given that the mere announcement of an additional operator has prompted current ones to invest in improving their telecommunications services,” Said Abdullah Al Mandhari, CEO of Oman Broadband Company, told OBG.

The third MNO licence was initially scheduled to be awarded on September 4, 2017, attracting attention from regional operators interested in Oman’s market potential and proximity. The award process was later postponed to November, reportedly to give the TRA time to examine the potential implications of Omantel’s acquisition of a minority stake in Zain Group. Zain was competing for the licence in a consortium with TeO against rival bids from Abu Dhabi-based Etisalat, Saudi Telecom Company and Sudan’s Sudatel Telecom Group.

However, one month after delaying a decision on the licence, in October 2017, Oman’s Ministry of Transport and Communications directed the TRA to cancel the tender process and instead award the sultanate’s third MNO licence to a consortium of local investment funds and a “strategic global partner”, as yet unidentified in January 2018, with the aim of strengthening the role of wealth funds in the country and enabling them to contribute to economic growth. In early 2018 it remained an open question when the third operator would be introduced and what ownership structure will be adopted by the company.

MOBILE BROADBAND: The number of active mobile broadband subscriptions was around 4.4m in 2017, falling as low as 4.3m in June, a drop of around 10% compared to end-2016. In that period, penetration rates for mobile broadband dropped from 97% to 94.4%.

Ooredoo Oman continued to invest heavily throughout the year in expanding service coverage and upgrading sites to the 4G long-term evolution (LTE) mobile communication network. In the past three to four years the company has spent a total of OR150m ($390m) on the project, its CEO told a press conference in October 2017. He added that as of that month, Ooredoo 4G coverage extended across 55% of the country, with plans to expand the network to 1600 sites covering more than 90% of the sultanate by the end of the year. More than 70 sites for 4G LTE connection were laid every month in 2017, and Ooredoo was reportedly working with vendors and standards agencies to prepare for the launch of 5G technologies once the relevant guidelines are established. The availability of a range of additional radio spectrum for mobile networks is expected to facilitate new services, particularly in mobile broadband, for consumers in Oman.

APPLICATIONS: Capitalising on improvements in connectivity and access, local and regional companies are stepping up efforts to provide mobile application solutions in sectors as varied as education and retail. For example, in 2017 Omantel launched a digital inclusion strategy called Education as a Service – a programme serving the education sector that allows access to online materials both at schools and remotely. A number of regional tech start-ups in the education space also entered the Omani market in 2017, including the newly launched Darisni (Arabic for “Teach me”), which provides families and students with the opportunity to access qualified online private tutors in subjects such as mathematics, English and Arabic. These initiatives are already yielding positive results.

“The availability of local IT talent has been noticeably growing in the last few years, though more is needed in the area of app development,” Alain Sawaya, managing partner of Oman Data Park, told OBG.

Online retail in Oman is similarly poised for a breakout year in 2018. While internet spending in the broader Middle East is booming, with e-commerce in GCC countries expected to hit $41.5bn by 2020, web sales and home delivery make up less than 1% of all purchases in Oman, a situation analysts say is partly due to the lack of a unified postal address system. However, this could soon change. In 2017 the NCSI submitted the National Infrastructure for Geographic Information Project to Muscat Municipality, which detailed a four-stage plan to introduce a unified address system in time for the 2020 Census.

Once in place, this is expected to streamline various logistics issues, speeding up home deliveries and driving rapid growth in online spending and e-commerce. Mall of Oman, a large bricks-and-mortar shopping centre scheduled to open in 2020 in Muscat, has already announced plans to capitalise on the anticipated improvements by launching a mobile app that can deliver purchased items to any residential address – for which having a unified postal system is crucial. Similar systems have been successful in the Kingdom of Saudi Arabia and other countries, improving the efficiency of e-commerce deliveries.

VIRTUAL PERFORMANCE: Oman is also home to two providers in a category known as mobile virtual network operators (MVNOs). Oman became the first country in the Middle East to introduce a mobile reseller model in 2009. Class II licences, known internationally as MVNO licences, are operated under the mobile reseller framework, whereby an MVNO in effect purchases the service capabilities of a hosting operator and sells them on to consumers. The two resellers active in the sultanate – FRiENDi and Renna – arrived on the scene in the second quarter of 2009 and have since experienced growth that has far outstripped demand for the services of the two incumbent network operators. In the 12 months ending June 2016, the combined subscriber base of the MVNOs rose by an impressive 30.4%, while Omantel and Ooredoo together registered an increase of just 0.1%.

Such virtual players have since shuffled operations further. Renna was acquired by TeO in 2016, which was itself launched in 2010 as Samate under a Class II reseller licence. TeO also operates a Class I International Gateway (IGW) licence, which enables the company to conduct international wholesale business with Tier 1 operators including Vodafone, Bharti Airtel and Singtel. Using the infrastructure afforded by the Class I IGW licence, the firm launched Oman’s first calling card service, Allo, in 2014. Having submitted a bid with Zain for the withdrawn 2017 MNO licence tender, TeO is now focusing on rebranding for growth within the constraints of the licences and services it already owns. These include an international voice gateway and a licence to operate international voice services, including the ability to terminate voice traffic coming into Oman and running through TeO infrastructure.

Both FRiENDi and Renna today own a combined 20% of the mobile user market share at roughly 600,000 customers each, many drawn from lower-income groups including migrant workers and teenagers. The popularity of relatively affordable MVNO services was also aided by the drop in oil prices, which has reduced overall spending power in the population. The re-sellers are expected to continue to experience strong subscriber growth in the coming years, spurred on by their launch of 4G services in May and June 2016.

Whereas FRiENDi and Renna compete largely on cost, other firms have successfully positioned lifestyle sub-brands. These include Oman Ooredoo, whose youth-focused Shababiah sub-brand recently passed the 1m-customer mark. The pre-paid plan, which caters to “tech-savvy millenials”, has gained traction by marketing itself as a “lifestyle partner”. With a third network operator coming on-line, Oman’s telecoms companies are expected to continue innovating as they vie for subscribers.

OUTLOOK: With two domestic operators and two MVNOs serving a population of roughly 4.75m people, Oman has some industry observers questioning whether the market has enough room for a third full-service operator. Some suggest that the increased competition and pricing pressures from the entry of a third operator will lead to reduced margins and diminished investment capacity for incumbent providers, which could upset the delicate balance between pricing, service quality and investment.

Both Omantel and Ooredoo have been investing at some of the highest capital expenditure ratios in the world, at up to 29% of revenue in 2016. If the market entry strategy for the new player is to initially depend on existing networks and compete on lower prices, its ability to match investments in network expansion will be constrained. “Though more competition is better for consumers, the arrival of a third operator may be too soon,” Talal Said Marhoon Al Mamari, CEO of Omantel, told OBG. With 4G coverage in the country at 80% and 3G coverage at 92%, Al Mamari said the third operator announcement could be better timed when coverage ratios are closer to 100%.

Still, the announcement of a third player has directed attention to the need to improve service quality. While the new provider may cut into the incumbents’ revenues, its impact is likely to be softened by their transition to integrated services, which is already under way.