Race for innovation: The sector is moving forward with new technology as competition heats up

A decade has passed since Bahrain’s telecoms sector was revolutionised by the liberalisation of the industry and the formation of an independent regulator. Over that time, the sector has evolved into one of the most open and diversified in the region. Fixed and mobile telephony and broadband services reach nearly every household, and many mobile users maintain multiple SIM cards, giving a mobile penetration rate well over 100%. A continuously evolving regulatory regime is ensuring that few barriers exist to customers who wish to change telecoms service providers.

Within such a highly competitive sector, telecoms companies are constantly pressed to find innovative ways to keep their share of the market. The ability to deliver next-generation mobile services, which are relatively undeveloped in the Kingdom compared to OECD countries and some neighbours in the Gulf, may be the most obvious way for telecoms companies to distinguish themselves from the competition going forward.

SECTOR HISTORY: Bahrain was the first country in the region to be connected to the international telecommunications network, with a link to the Indo-European undersea telegraphic cable completed in 1864. It also commissioned the Middle East’s first satellite station, at Ras Abu Jarjour in 1969, and was one of the first countries in the world to completely digitise its telephone switchboard. But perhaps the most important change to the industry came with the National Telecommunications Plan passed in October 2002. The plan resolved to “completely open the Bahrain telecoms market by July 2004”. In practice, this meant providing an alternative to the Bahrain Telecommunications Company (Batelco), which until that point operated a state monopoly on most telecoms services.

An auction for a second mobile licence and the establishment of the Bahrain Internet Exchange (BIX), an alternate internet service provider, kickstarted the sector’s diversification. As of January 2012, the TRA has licensed three mobile operators, two WiMAX providers and 40-plus Tier II providers, of which around 19 were active in January 2012, according to a Telecommunications Regulatory Authority (TRA) report issued that month.

In the mobile sphere, Batelco was the first to launch mobile operations, in 1994, and enjoyed monopoly status for a number of years. In an effort to increase competition in the sector, the TRA auctioned a second mobile licence in 2003. The winning bidder was Kuwait’s Zain Group, which established a subsidiary in Bahrain. In March 2010 a third operator, VIVA, backed by Saudi Telecommunications Company (STC), entered the already competitive market. This competition has had the predictable effect of driving down pricing and encouraging the development of alternative tariff plans among sector players. For example, to gain market share at its debut, VIVA offered low prices and a number of services, such as free calls within its network. Free intra-network calls have now become standard as the other operators have adopted more competitive pricing in a bid to maintain their market share.

A NATIONAL NETWORK: In the sphere of internet provision, the 2002 National Telecommunications Plan called for the creation of BIX, a government-owned nonprofit body which started operations in 2003 to enhance broadband services and reduce internet connectivity charges. Until that point, Batelco offered the only broadband network in the country. One of the BIX’s mandates is to establish the National Broadband Network, a comprehensive fibre-optic network that can be used by telecoms providers for competitive rates. While BIX has successfully established a competing broadband network, Batelco owns and operates the primary fibre-optic network in the Kingdom. For the most part, those who wish to provide broadband services rent or lease bandwidth from Batelco at wholesale rates, set by the TRA and commonly known as reference offers, and are then free to devise their own tailored packages.

However, this is changing rapidly. Some operators have begun to develop their own infrastructure, in particular last-mile connectivity from the main fibre-optic grid to businesses and residential buildings. Cable is either laid in ducts rented from Batelco or, in very few cases, in proprietary ducts laid by the operators themselves.

POST 3G: Of the BD360m ($950.5m) annual gross turnover in the telecoms sector in 2010, mobile services accounted for 44% of retail service revenues, according to the TRA market indicators report published in January 2012. This may be the fastest-evolving sector in Bahrain, as operators explore new technology and pricing options in a bid to gain market share. As in much of the world, a number of post-3G technologies have been tested in the Kingdom. Known variously as 4G, next generation or by names commonly associated with specific parts of the radio spectrum (such as long-term evolution [LTE] and worldwide interoperability for microwave access [WiMAX]), post-3G technologies offer higher access speeds and therefore increased ability to download information and stream video and music files. There is competition between three different 4G wireless broadband standards – Batelco and VIVA’s LTE networks, Menatelecom and Zain’s WiMAX network, and the Greensis mobile broadband wireless access (MBWA) platform. A decision by the TRA as to which frequencies on the mobile spectrum will be allotted for the development of post-3G technology will signal the next viable steps for broadband developers.

As Sheikh Mohamed bin Isa Al Khalifa, Batelco group CEO, told OBG, “Bahrain has one of the most advanced telecoms infrastructures in the region with very high penetration of mobile and fixed services. We believe that in such a competitive and mature market, the future of the industry will depend on availability of very fast broadband access and applications, to support customers to access everything from any device.”

Mohammed Zainalabedin, general manager of Zain Bahrain, said, “All mobile operators in the country are focused on the growth and development of broadband. Consumer habits have changed completely over the last few years. Data is the name of the game and consumers are thirsty for greater bandwidth. In one year the country’s bandwidth demand has grown eight-fold.”

Two licences for sections of the WiMAX frequency have already been auctioned and are in use. However, their licensing only allows the two operators, Menatelecom and Zain, to offer internet services. Mobile phones which operate on the WiMAX network have been tested in Russia and the US. It is unclear whether the TRA will allow the existing licensees to offer mobile services or if mobile WiMAX technology will be developed, given the existence of alternatives such as LTE and Greenisis. Establishing the wireless frequency is a high priority for Bahrain. Neighbours Saudi Arabia, Qatar and the UAE have licensed parts of the 4G spectrum, and carriers have rolled out next-generation technology. In March 2012 the TRA announced that Bahrain plans to auction two tranches of the post-3G spectrum starting in the first quarter of 2013 (see analysis).

GETTING ABROAD: Bahrain, like its neighbours in the Gulf, has a high population of expatriates, many from the Asian subcontinent. The telecoms needs of this segment of the population are largely for international calls to keep in touch with relatives and friends at home. According to the TRA’s January 2012 market indicators report, 80% of international calls made in 2010 were to South Asian countries.

The introduction of prepaid calling cards in 2006 transformed the international calls market. The cards take advantage of voice over internet protocol (VoIP) technology, where the user dials a domestic number and then is routed through an internet connection to their international destination number. These calls can also be made through tools like Skype, which allows users to employ VoIP technology from their computer.

In the two years from the introduction of prepaid calling cards to 2009, average revenue per minute for international calls dropped by half as operators strove to make their international call services competitive with prepaid calling cards. This effort has been largely successful. Despite the popularity of prepaid calling cards, direct dial international traffic has continued to grow, with volume up 35% between the end of 2009 and 2010. Furthermore, the number of international direct dial outgoing calls originating from mobile phones represented 60% of total international traffic in 2010, up 23% from 2009 levels, according to the TRA.

According to a report by Teligen, a telecoms analytics firm, which compared call pricing throughout the Middle East, Bahrain is consistently among the cheaper places to make international telephone calls from fixed lines. In the mobile sphere, however, Bahrain falls squarely in the middle. The trend for consumers is positive, with prices decreasing consistently.

Thanks to an increasing volume of calls, total revenue for operators serving the international calls market has increased, if not consistently: at BD72.1m ($190.4m) in 2010, international calls revenue is up some 32% since 2005, but down 5% from a peak of BD75.8m ($200.1m) in 2009. Revenue per minute for operators dropped from 22.6 fils ($0.06) in 2005 to 3.6 fils ($0.01) in 2010, according to figures from the TRA.

FIXED ON IMPROVING: While the vibrant mobile market has driven prices down to very competitive levels, fixed-line internet services are generally considered expensive when compared to rates in Europe and the US, and even in the GCC. This stems from the fact that there is comparatively little internet capacity coming into Bahrain from abroad: three main landing cables account for nearly all Bahrain’s internet capacity, with satellite playing a very minor role.

This looks set to change, however, as the number of fibre-optic cable landing points is set to expand from three to five in the first half of 2012. The increased capacity may see the prices of broadband services decrease by up to 50%, according to the TRA.

CABLES & CONNECTIONS: Bahrain’s three cables are provided by Tata Communications, Flag Telecom and Saudi Telecom. The FOG cable, operated by Tata Communications, is a joint venture of the national telecoms carriers of Kuwait, Bahrain, Qatar and the UAE and has been operational since the late 1980s. The Flag cable is known in Bahrain as the Falcon link and is controlled by the BIX. The Saudi fibre-optic cable, also known as the GCCIA cable, runs along the King Fahd Causeway and is operated by VIVA.

The first expected addition to Bahrain’s connections will be the Gulf Bridge International (GBI) cable. The landing station for the cable will be provided by Batelco. The second addition to the Kingdom’s broadband capacity will come from a cable being laid by BIX in conjunction with India’s Tata. Like the FOG cable, it will reach all the GCC countries. From the landing point, branches will extend to BIX’s points of presence in Seef and Juffair. This double connectivity will ensure that the network has capacity in case either line is compromised. While internet access may be comparatively expensive, it is also considered reliable and secure. Both BIX and Batelco have invested heavily in developing redundancy (known as multihoming), centralised monitoring and access control services, backup power and dedicated customer support, all benefits which Bahrain’s internet service providers pass along to their customers.

As of July 2011, there were five companies acting as transit providers from these three cables. Competition between them is strong. According to a report commissioned by the TRA from Renesys Corporation, a US-based internet analysis company, “Bahrain’s largest providers market share continues to fall, suggesting that competition among service providers is preventing any single provider or pair of providers from achieving a dominant on-net share of the national market.”

With 27% of the market in July 2011, VIVA has the largest market share, albeit by a narrow margin, followed by Zain Bahrain (26%), Menatelecom (24%), Batelco (20%) and BIX (17%). Because some customers use multiple providers for multihoming, the total percentages add up to more than 100%.

PRICE COMPETITION: As in the mobile market, VIVA has been able to offer competitive prices to draw market share. A year after its debut in July 2010, the firm had already picked up Menatelecom, Kalaam Telecom, Real Time Solutions (RTS) GCC Next Generation Network Solutions (GCCNGN), Etisalcom Bahrain and Zain Bahrain as customers. About 5% of VIVA’s service is drawn from the Flag cable, with the rest backhauled to Saudi Arabia through the GCCIA cable. This close relation with Saudi Arabia’s bandwidth availability may mean that price drops there could translate to more competitive prices in Bahrain.

It should be noted that although average broadband prices in Bahrain are considered higher than world and regional averages, there are exceptions at various usage levels. The cost of residential broadband, for example, has fallen faster than that of business services, according to a “Price Benchmarking Report for Arab Countries” commissioned by the TRA from the consultancy Teligen and published in September 2011. Residential broadband is also priced lower than some GCC countries in lower speed brackets. However, higher speeds (above 2 MB ps) and higher usage (above 18 GB per month) drives prices up faster in Bahrain than in the average Arab country. This holds true across both fixed and mobile broadband.

Telecommunications in the Arab region as a whole tend to follow slightly different trends than those in OECD countries. Residential fixed-line calling costs are cheaper in the Middle East region than the OECD average, but business costs tend to be higher, particularly in the highest usage bracket, according to the Teligen report. Mobile services are almost universally more expensive than developed-world norms.

HIGH PENETRATION RATES: Bahrain, however, ranks well above Arab world norms in terms of penetration and cost competitiveness. The Kingdom has among the highest penetration levels for both telephony and internet services. While less than a third of the population in the Arab region was online at the end of 2011, according to figures from the International Telecommunications Union, and fixed broadband penetration stood at just over 2%, nearly 95% of households in Bahrain have fixed broadband access.

The Kingdom’s eGovernment initiative, which aims to move many government services (such as utility bill payment, licence applications and appointment scheduling) online, has helped drive demand for faster and more comprehensive internet services.

MAJOR PLAYER: As Bahrain’s flagship telecoms company and owner of much of the country’s fixed infrastructure, Batelco remains integral to the sector. In 2011 Batelco saw 20% growth of its subscriber base, raising its numbers to 11m users across its regional network; expansion of its mobile and broadband users accounted for 21% and 8% of this rise, respectively.

This growth in overall subscriber base came to pass against a slight downtick in overall revenue and profitability, which the company ascribes to broader market trends in the region: the group announced gross revenues of $867m and net profits of $212m, a decline of 4% and 8% from 2010, respectively. However, the firm boasts a solid financial position and healthy balance sheet, holding no debts and a significant cash balance of $286m at end-2011. Batelco’s growth was affected by increased competition in a well-saturated domestic market, where it has lost 4% of its domestic mobile user base and has seen a nominal increase in its broadband subscriber numbers.

However, the strong growth seen by the company’s foreign subsidiaries and joint ventures in Jordan, Kuwait, Egypt, Saudi Arabia and Yemen in 2011 has helped to offset the challenges within Bahrain. In 2011, 37% of Batelco’s revenues and 30% of its operating profit came from these international enterprises.

Citing a desire to increase profit growth in 2012, Batelco sold off its 43% ownership stake in the Indian telecoms provider S Tel (whose Indian licence was revoked in the wake of a corruption trial) in early 2012, netting $175m and recovering the initial investment it had made in 2009. It also announced a $152.8m dividend in the same month, a 72 % payout at 40 fils ($0.11) per share; the group’s dividend yields are among the highest in the GCC telecoms sector.

Batelco’s strategy is particularly aimed at expanding its share of the mobile broadband market, which it expects to be a major driver of growth in the future. In 2011 its mobile broadband user base was up 50%.

Batelco also secured its first public debt ratings from Fitch and Standard & Poor’s, a move that is expected to signal a bond issuance (most likely for an acquisition) in the future. According to Batelco’s corporate website, the company was given a BBB- rating by Fitch, while Standard & Poor’s granted the company an A-3 short-term foreign and local currency corporate credit rating and BBB- long-term rating.

OUTLOOK: Bahrain’s TRA has helped foster a telecoms market notable for its transparency, fair business practices and eligibility for investment. While investors in the sector face a saturated market with a high degree of competition, the relatively underdeveloped mobile broadband segment holds great potential for growth. In 2011 mobile phone rates decreased by 25% while broadband prices fell by 40%, signalling the already high rate of innovation in this segment of the telecoms sector. According to Ulaiyan Al Wetaid, the CEO of VIVA Bahrain, “Competition in the sector has drastically increased and in 2012 all of the industry players will be competing to maintain their respective market shares. We expect to see a lot of innovation and new services coming into play in 2012, especially as operators seek to increase their higher-value data revenues.”