Kuwait's telecoms sector adapts to increasingly digitised world

Characterised by high penetration rates, early adoption of new technology and healthy average revenue per user (ARPU), the Kuwait telecommunications sector is a small but profitable market in which three major regional providers compete. Faced with the erosion of traditional voice and text revenue streams, all three companies are focusing on strategies to improve services while also monetising data as they seek to carve out new roles in the digital lifestyle economy.

Customer Choice

Mobile phone users in Kuwait have a choice between the homegrown Zain; VIVA, majority-owned by Saudi Telecom Company (STC); and Ooredoo, a subsidiary of the Qatari parent company of the same name. As far as Kuwait operations go, Zain has a market capitalisation of about KD2bn ($6.6bn), compared to Ooredoo with KD615m ($2bn) and VIVA’s KD425m ($1.4bn). Zain was founded in 1983 and listed on the Kuwait Stock Exchange in 1985, and was followed by Ooredoo, which formed in 1997 and listed in 1999, and VIVA, which was established in 2008 and floated in December 2014.

According to the 2016 annual reports of the three companies, Zain has 3m subscribers, VIVA has 2.4m and Ooredoo has 2.3m in a country of 4.4m people, suggesting a total market of 7.7m, up from 3.9m in 2009. According to the UN’s International Telecommunications Union (ITU), the mobile penetration rate reached 232% in Kuwait at the end of 2015, the second-highest rate in the world after Macao, at 324%. By Zain’s reckoning, which would appear to be broadly in line with those customer numbers, the market shares in Kuwait have Zain with 38%, VIVA with 32% and Ooredoo with 30%. Research from the KAMCO Investment Company, based on annual reports from the three providers, shows that the last entrant, VIVA, has shaken up the market dynamics. In 2009 VIVA’s share of customers was only 14.9%, Ooredoo’s was 38.2%, while Zain had a commanding market lead with a 46.8% share of the customer base. Despite these gains in recent years, VIVA’s annual report for 2016 showed a small decline in its subscriber base, from 2.5m in 2015 to 2.4m in 2016. Successful marketing from Ooredoo saw it make up some ground on competitors, with its customer base growing by 3% in 2016.

Financial Performance

Zain’s Kuwait company had revenues of KD325m ($1.1bn) in 2016, 1% down on the previous year, and net income of KD90.7m ($300m). VIVA had revenues of KD279m ($923m), up from KD277m ($916m) in 2015, and a net profit of KD40m ($132m), down from KD43m ($142m) in the previous year. Ooredoo had revenues of KD201m ($665m), up 5% on the previous year, and earnings before interest, tax, depreciation and amortisation (EBITDA) of KD51m ($169m). Thus, by revenues Zain had a 40% market share in 2016, followed by VIVA with 35% and Ooredoo with 25%. To illustrate how the market has changed, the 2009 share was 58.8% for Zain, 34% for Ooredoo and 7.2% for VIVA, according to KAMCO. Overall revenues grew from KD598m ($1.9bn) in 2009 to KD805m ($2.6bn) in 2016, a compound annual growth rate (CAGR) of 4.34%.

ARPU Data

Although VIVA does not give figures for ARPU in its 2016 financial statements, its parent company, STC, states on its Saudi website that ARPU in Kuwait is the highest in the Middle East. In fact, research published by KAMCO suggested VIVA’s ARPU had overtaken Zain’s for the first time in the first quarter of 2016, when it registered a rate of KD9.6 ($31.70) per subscriber. Zain notes in its annual report that its ARPU in 2016 was KD8.22 ($27.19), down from KD9.13 ($30.20) in 2015 and KD10.96 ($36.25) in 2014, with consecutive annual declines of 16.7% and 10%, respectively. For Ooredoo, ARPU in 2016 was KD5.66 ($18.72), compared to KD5.98 ($19.78) in 2015 and KD5.49 ($18.16) in 2014. The range of prices reflects the spending power of different segments of the mobile market in Kuwait, from high-net-worth individuals to domestic staff.

KAMCO reports that in 2010, when VIVA had only been in the market for two years, ARPU for the three companies were: KD14.9 ($49.20) for Zain, KD11.2 ($37) for Ooredoo and KD7.2 ($23.80) for VIVA. In 2016 Zain reported that 26% of its customers were on post-paid contracts, and in research published in 2016, KAMCO noted that part of Zain’s strategy was to entice these customers to remain by upgrading devices while tying them to long-term contracts.

Regional Comparisons

All three telecoms providers in Kuwait have a significant footprint in countries across the region and further afield. Ooredoo had 138m customers across 10 countries in 2016, while Zain has 47m users in nine countries. The three companies also overlap in a number of markets: Zain has a business in Saudi Arabia, where VIVA’s owners, STC, are the dominant player, and STC and Zain both have businesses in Jordan and Bahrain. Ooredoo and Zain are both present in Iraq, while STC and Ooredoo compete in the telecoms market in Lebanon.

Of the 10 businesses Ooredoo operates in North Africa and Asia, the Kuwait company ranks sixth in terms of revenues, seventh in EBITDA and eighth in EBITDA margin. For the Zain Group itself, the Kuwait company produces the second-highest revenue, the highest EBITDA and the highest net income. VIVA’s growth in the Kuwait market has been a part of the desire of its parent company, STC, to further diversify its revenue streams beyond the borders of Saudi Arabia. STC first acquired a 26% share of Kuwait Telecom Company in 2007. In December 2015 STC offered KD1 ($3.30) a share to buy out the other VIVA shareholders, but settled instead to increase its stake in the company to 52% in 2016.

Mature Market

The net result in Kuwait is that three companies with significant international footprints and a depth of experience are in competition in a mature market where mobile penetration figures are slowly falling. KAMCO predicts that as more numbers are recycled, and as customers gradually upgrade or combine the functionality of devices such as phones and tablets, market penetration will gradually decline, but remain above 200% until 2020.

Although that rate is still one of the highest in the world, the opportunities for expansion in the three telecoms companies in Kuwait are limited. Revenues from voice have started to become irrelevant as subscribers use over-the-top (OTT) data alternatives like Skype, which has resulted in the country’s providers engaging in a sales and marketing contest based around bundles of data – a phenomena in the industry known as data commoditisation.

Alongside the slide in penetration rates, KAMCO is also predicting a softening in ARPU for all three operators, driven in part by strong competition. The investment company forecasts that Zain’s ARPU will decline from KD8.53 ($28.20) to KD7.92 ($26.20) between 2016 and 2020, while for VIVA it foresees a decline from KD9.29 ($30.70) to KD8.83 ($29.20) over the same timescale. During that period, KAMCO predicts consumers will make more accurate assessments of their data usage and requirements, and will subsequently shop around based on price rather than optimal data offering. In both 2015 and 2016 data revenues represented 36% of Zain’s total revenues in Kuwait. In 2016 Ooredoo completed the KD11m ($36.3m) acquisition of FAST telco, Kuwait’s leading internet service provider, in order to broaden its ICT offering and enhance its data services.

Device Desirability

Another key factor for mobile companies globally is the ability to offer new and desirable devices to customers, particularly considering that it has been some time since a game-changing mobile phone device has been launched. The specifications of each generation of Samsung’s Galaxy or Apple’s iPhone may have improved, but there has been no recent repeat of the feverish anticipation seen with the release of the first iPhone in 2007. At the Mobile World Congress in 2017, one of the big talking points was Nokia’s re-release of its 3310, which was being pitched as a “digital detox device” – a retro trend that will do nothing for mobile operators’ data revenues. Data from market intelligence group IDC shows that Android’s share of the world smartphone operating system market grew from 79.6% in the fourth quarter of 2015 to 86.8% in the third quarter of 2016, while Apple’s iOS saw its share decline from 18.7% to 12.5%, and Windows phones slipped from 1.2% to 0.3%. Android’s domination is less pronounced in Kuwait, according to Global Stats StatCounter, as Android had approximately 47% of the market share in May 2017, followed by Windows (22%) and iOS (20%).

Infrastructure

Kuwait’s telecoms market has also benefitted from years of infrastructure capital expenditure that has enabled each new generation of technology to be adopted. KAMCO reported that by 2016 customers of all three networks were able to access 4G services almost anywhere in the country, a result of the vast distribution of telecoms towers. Zain’s 4G long-term evolution (LTE) network utilises 2020 network sites across the country, offering LTE coverage to 98% of the population. In late December 2015 the company announced it had also successfully tested what it describes as the Middle East’s first 4.5G mobile broadband technology, which came as a result of its partnership with China’s Huawei. Speeds of 1 Gbps were reached, according to Zain, demonstrating that the company has the technology to support developments in internet of things (IoT) and machine-to-machine (M2M) applications.

Although the next generation of technology (5G) is anticipated by 2020, telecoms companies are confident this next step-change can be achieved through adaptation or upgrading of existing infrastructure, rather than through building new towers. As a result, the companies stand to reap the benefits of recent investments for years to come, particularly given that there is expected to be a reduced requirement for capital expenditure in the future.

Zain’s most recent annual reports revealed capital expenditure of $137m in 2014, rising to $153m in 2015, before dipping to $101m in 2016. In those three years, capital expenditure on network enhancements accounted for $104m, $118m and $87m, respectively. Ooredoo reported it had upgraded its network to LTE/LTE-A technology in 2015, and had almost 2000 tower sites in 2016, the year in which it won the Ookla Speedtest Award for fastest network in Kuwait. In its 2016 annual report VIVA revealed that the company had spent KD284m ($939.5m) on infrastructure since its inception, including KD12.6m ($41.7m) in 2016 and a further KD15.4m ($50.9m) during 2015.

According to KAMCO, the majority of telecoms providers globally are increasingly outsourcing maintenance of infrastructure, while focusing on improvements to customer service. In 2015 Ooredoo Kuwait and Huawei signed a five-year agreement for managed IT and network services. Huawei provides an ICT converged operation, where it manages IT and telecoms equipment to improve both operations and customer experience for Ooredoo. In 2016 Ooredoo also signed an agreement with Ericsson to provide its Device Connectivity Platform (DCP), which will be used to enable and enhance IoT and M2M applications. KAMCO reports that in some of its markets, Zain may be considering the purchase and lease back of tower sites, along with site sharing, as part of a plan to reduce infrastructure costs.

Technology Partners

The mobile operators are also using many of the same technology providers to improve the quality of their networks and service offerings. In March 2017 Zain and VIVA announced that they had been working with Huawei to offer the MENA region’s first voice-over-LTE (VoLTE) interconnection. The development, which was launched commercially in March 2017, allows customers of the two networks to talk directly to each other via the VoLTE-to-VoLTE connection. The technology is designed to offer a clearer connection without time lag, and allows customers to continue working online while talking. Executives from Zain and VIVA said that by cooperating they were both able to offer their customers an enhanced service. In 2016 Huawei and Zain signed a memorandum of understanding to explore a range of business-to-business (B2B) applications that could be used to enhance Zain’s corporate offering. The plan was to use the Zain network to test technologies for IoT, emergency communications and public safety.

Zain International

Zain has been the leader in the domestic market, but it is also the leading international telecoms company from Kuwait. Zain owns 100% of the equity in its businesses in Sudan and South Sudan, 96.52% of its Jordan company, 76% of the Iraq firm, 55% of Zain Bahrain, 37% of Zain in Saudi Arabia and 15.5% of the venture in Morocco, while it also has a management agreement to provide telecoms services in Lebanon.

While the Kuwait business provides significant cash flows from high ARPU figures, the market with the most potential is in Iraq. If long-term political stability can be restored there, Zain can play a leading role in developing its telecoms infrastructure, which lags by at least a generation in terms of mobile technology. In 2016 Zain had 12.7m customers in Iraq, making up 40% of market share in a country which, according to World Bank estimates, has a population of 36.42m. This means Zain has more customers in Iraq than in any other country, compared to its 12.5m customers in Sudan, 10.7m in Saudi Arabia, 4.3m in Jordan and 2.95m in Kuwait. Zain’s customer numbers in Iraq grew by 14% in 2016. The Iraqi market was responsible for the Zain Group’s highest revenues in that year, generating $1.08bn, or 30% of total company income. However, despite the promise of Zain’s presence in the market, the company’s 2016 Iraq revenues were down 11% compared to 2015. Zain recently invested $96m in expanding its network coverage, particularly in the north of Iraq, giving it 4327 telecoms towers across the country. While data accounted for just 9% of revenues in Iraq, this represented growth of 21%. By comparison, data represented 36% of revenues in Kuwait, demonstrating the potential for growth as the Iraq network modernises. KAMCO estimates that if and when political stability returns to Iraq, it could take five to seven years for the market to catch up to others in the region, noting that peace in the country would bring a considerable dividend for the Zain Group’s international operations.

Hits Telecom

Another telecoms company headquartered in Kuwait, and listed on Boursa Kuwait, is Hits Telecom Holding Company. With a market capitalisation of KD44m ($145m), Hits was initially established in 1999 as an educational services company, but changed direction to focus on telecoms in 2007 following a change in shareholders and management. It was listed on the exchange in 2004, while in 2017 the company’s principle shareholders were Al Madina for Finance and Investment Company, with 17.52%, and the Tabat Al Kheir Holding Company (5%). Hits Telecom’s focus is on emerging markets, with the company’s investment strategy built around acquiring stakes in mobile network operators in countries with low penetration and ARPU. It has in the past also looked to invest in mobile virtual network operators where penetration is higher, however this generally occurs only when a clear and underserved niche market can be identified. At the start of 2016 Hits had assets of KD76.5m ($253m).

Fixed Line

Although the mobile telecoms market in Kuwait is made up of three main companies, the Ministry of Communications (MoC) provides the country’s fixed-line services. The MoC operates 32 digital exchanges, with the number of fixed-line subscribers per 100 people dropping from 15.25 in 2008 to 11.24 in 2015. According to the Central Statistical Bureau, the number of fixed lines in Kuwait declined from 507,680 in 2012 to 483,957 in 2014. The MoC also controls the international gateway and receives revenue for overseas calls. In 2015 international calls cost KD33m ($109m), with calls to Egypt and Saudi Arabia accounting for KD5.3m ($17.5m) each, the Philippines and the UAE for about KD3m ($9.9m) each, and calls to India and Ethiopia each generating earnings of more than KD2m ($6.6m).

MoC data shows that in 2015 there were 41.09 mobile internet subscriptions per 100 inhabitants, as provided by mobile phone companies, fixed-line customers with a subscription through an internet service provider accounted for three out of 100 inhabitants, while fixed-line internet subscriptions were used by 15.19 people per 100 inhabitants. In 2016 it was reported that fixed-line telephony might be privatised in Kuwait to encourage investment, help develop a broadband strategy and increase fibre connections to businesses and homes. Privatisation of the international gateway has also been discussed.

Regulator

In 2014 an Emiri decree called for the establishment of a regulator for telecommunications and information technology, taking that function from the MoC. As a result, the Communication and Information Technology Regulatory Authority (CITRA) began operations in February 2016. In the telecoms sector, CITRA took over responsibility for competition policy and regulation, price control, licensing, dispute resolution and spectrum management. The telecoms companies themselves would like to see CITRA giving clear guidance on fair marketing and competition practices in order to take some of the intensity out of competition between them, while they have also expressed a desire for the authority to further promote Kuwait as a country at the forefront of technological change and innovation.

Revenue Streams

Zain, VIVA and Ooredoo are looking to new revenue streams to make up for the impact OTT services have had on their traditional bundles of minutes and texts. All three companies are selling data bundles to their customers, but at the same time they are looking for increasingly sophisticated ways to collect, analyse and ultimately monetise the data they possess about network users. “I think that mobile network operators know more about their customers than almost anyone, and they are looking at pursuing the same models that have been adopted by Google, Facebook and others to leverage this information. But first of all, they need to install a fully privacy-compliant ecosystem, where personal information is anonymised and hidden to any human observation,” Yahia Ben Hassine, senior manager of base management and customer value management operations at Ooredoo, told OBG. Additional propositions for mobile operators are in the field of content creation, as well as in developing their role in the increasingly connected 5G world of smart cities, IoT and M2M. Kuwait’s mobile network operators are aware that a failure to capitalise on these changes will result in them following in the footsteps of fixed-line firms that were overtaken by their own more innovative mobile businesses.

Outlook

Despite offering similar services, all three mobile phone firms are enjoying healthy revenues and profits. Kuwait is a mature market where each of the three operators know success will likely depend on how they adapt to – and generate revenues from – the next generation of change in an increasingly digitised society. A new industry regulator could also further shape the business practices of major players as they build connections with international technology partners to gain a competitive edge.