The sector improves services at home and extends its reach abroad

The telecoms sector in the UAE benefits from some of the most comprehensive and up-to-date infrastructure in the world, as well as some of the most competitive prices for fixed and mobile voice services. As a key element of the government’s commitment to diversification, telecoms has attracted sustained investment at home, overseas and even in space, as the UAE expands its network of satellite communications services. Regulatory reform, meanwhile, is helping to create a mature domestic market, which is likely to see greater competition in broadband prices and a corresponding increase in internet penetration.

Secctor In Figures

The UAE telecoms sector is currently valued at Dh29.18bn ($7.9bn), or 3% of GDP, according to the industry’s regulator, the Telecommunications Regulatory Authority (TRA). The sector grew by 6.6% in 2013, which compares favourably with the country’s overall GDP growth of 5.2%.

Revenues of the two state-backed entities, Etisalat and du, increased considerably in 2013. Etisalat’s full-year consolidated revenue rose by 18% year-on-year (y-o-y) to Dh38.9bn ($10.6bn), while du’s revenues grew by 9.7% to Dh10.8bn ($2.9bn). According to the TRA, investment by licence-holders in the telecoms sector grew by more than 13% in 2013, reaching around Dh2.1bn ($580m). As of end-2013, the sector employed 7419 people, 43% of whom are Emirati nationals – a rise of 10 points on 2010, though the sector’s workforce declined in that period by more than one-third.

The UAE is competitive by global standards in both voice and data connections, and across both fixed and mobile platforms. By regional standards, however, it remains more competitive in voice than in data. According to the International Telecommunication Union (ITU), the UN body responsible for ICT, the UAE ranks first in the world ( jointly with Qatar) for price competitiveness for fixed telephones, measured as a percentage of GNI per capita. By the same measure for mobile prices, it ties with Qatar for fourth, at 0.3% of per-capita GNI. However, for fixed broadband it is 28th globally at 1.2% of per-capita GNI (against 0.4% for Kuwait and 0.8% for Qatar), and for mobile broadband it ranks 15th, at 1% of per-capita GNI (against 0.4% for Qatar, 0.7% for Kuwait and 0.8% for Bahrain).

Such variance is mirrored in figures for subscriber-ship, penetration and average revenue per user (ARPU). In November 2014 there were just over 2.1m subscribers to fixed-line services, compared with 16.96m for mobile services. The November 2014 mobile penetration rate of 201.2% reflects the fact that many UAE residents own SIM cards for both mobile service providers. This figure rose from a low of 168% in 2012 – a temporary dip most likely due to the government’s clampdown on unregistered numbers as part of its “My Mobile, My Identity” campaign (as of July 2014, 95% of SIM cards had been validated) – and reached 193% in 2013. Fixed-line penetration, meanwhile, as measured by the number of fixed telephony lines per 100 inhabitants, remained stable at 25.2%.

In contrast to the voice market, internet penetration remains relatively low at 13.1%, or 1.1m users, measured per 100 inhabitants. While raw user numbers have risen steadily on an annual basis, growing 6.3% y-o-y as of November 2014, this has barely kept pace with population growth, and broadband penetration has in fact fallen from a high of 14.8% in 2011.

ARPU tells a similar story: monthly figures for fixed and mobile telephony are Dh108 ($29) and Dh124 ($34), while that for internet services is about three times higher at Dh357 ($97). Declining internet penetration no doubt reflects the fact that some users are switching to smartphones for internet and data, owing to the greater competitiveness of that platform.

Market Structure

The UAE telecoms sector consists of two state-backed companies, Etisalat and du. Emirates Telecommunications Corporation, which operates under the brand Etisalat, is the more established of the two, having formerly been the state telecoms company, founded in 1976. The Emirates Integrated Telecommunications Company was founded in 2005 and commercially branded as du in 2006. Both firms are partially privatised, with 40% of Etisalat publicly traded on the Abu Dhabi Securities Exchange, and 20% of du publicly traded on the Dubai Financial Market. The other 60% of Etisalat is owned directly by the federal government, while the remaining 80% of du is divided between several state investment vehicles: 39.5% is owned by the federal government through the Emirates Investment Authority, a sovereign wealth fund; 20% is owned by the Abu Dhabi government through Mubadala Development Company, a state-owned investment firm; and 19.5% is owned by the Dubai government through EIT, a subsidiary of Dubai Holding.

The sector’s structure reflects its historical formation. In mobile telephony, du has been able to obtain market share relatively quickly, and, according to the company, it had a 45.8% market share as of the third quarter of 2014 (again, chiefly through customers purchasing an additional du SIM card). In fixed telephony, by contrast, the market remains dominated by the former state provider, as Etisalat has fought to maintain control of its fixed-line backbone.

Alongside the two full-scale operators, the TRA has also awarded several licences to “niche” telecoms operators, mostly in satellite and TETRA radio services. These include, among others, Al Yah Satellite Services Company (Yahsat), a subsidiary of Mubadala that provides satellite broadband services; Thuraya, a Dubai-based satellite operator; and twofour54 intaj, the media broadcasting service at Abu Dhabi Media Zone.

Regulation Framwork

Regulation of the telecoms sector is the responsibility of the TRA, which was established by Federal Law No. 3 of 2003. The TRA is charged with meeting the UAE’s obligations towards fair competition in the telecoms sector.

The TRA licenses firms to operate in the sector, while the Ministry of Finance sets the structure of the royalties they are to pay. Telecoms royalties form a large part of the federal budget, estimated to make up as much as 20% of total federal revenues. As the newer entrant to the market, the current royalty structure favours du, which pays 25% on profits and 10% on revenues. Etisalat, by contrast, pays 35% on profits and 15% on revenues. The scheme, which came into force in 2012, is designed to equalise royalties in incremental steps so that the two operators reach parity in 2015, at 30% of profits and 12.5% of revenues.

Recent items on the regulatory agenda have focused on measures to increase competition between the two full-scale operators. Mobile number portability (MNP), which allows users to transfer their number from one operator to another, has been under discussion for many years. It was finally introduced in December 2013, and within two months operators had received over 60,000 requests to port numbers. MNP represents a boon for consumer choice since, as regulators explained to OBG, mobile numbers in the UAE are often used to obtain a wide range of public and private services, in effect “tying” users to their number.

Bitstream access has proved even more challenging than MNP. As might be expected of the former state telecoms company, Etisalat controls the majority of fixed-line connections, while du is largely limited to newer developments in Dubai. The result is an 86% fixed-line market share for Etisalat, which rises to 89% among business subscribers. The TRA has mandated that both Etisalat and du apply bitstream technology for several years, and a trial service commenced in 2012. Regulators said they were confident the measure would be introduced in the beginning of 2015.

If implemented, bitstream access will be one step on the road to greater competitiveness in the fixed- broadband market. Indeed, if it has a similar impact on internet price structures as did the introduction of a competitor in mobile telephony, then the UAE is likely to see a significant increase in fibre-broadband penetration. Further measures will nonetheless be required to make the sector fully competitive. The next goal for regulators is likely to be liberalisation of the so-called triple-play segment – the bundling of internet, telephone and television services.

Etisalat

Etisalat is one of the leading telecoms operators in the Middle East, as well as one of the region’s largest corporations in its own right, with a market capitalisation of nearly Dh91bn ($24.8bn) and some 182m customers worldwide. It runs operations in 19 countries, including Egypt, Pakistan and Nigeria, and employs nearly 42,000 people globally.

In 2014, Etisalat expanded its global operations into Morocco, with the acquisition of a 53% stake in Maroc Telecom from French media conglomerate Vivendi. The deal reportedly cost €4.14bn, and included a €3.9bn share purchase, with the remainder used to finance Maroc Telecom’s outstanding 2012 dividend payment. Prior to the agreement, Etisalat sold its West African operations to Maroc Telecom in a deal worth $650m in order to consolidate the two companies’ operations in those markets ahead of the merger.

The Maroc Telecom deal was accompanied by a multi-currency bond offering, which raised $4.3bn in four tranches (two of which were denominated in euros). The sale represented the Middle East’s biggest corporate bond issue, and was funded by a consortium of 17 international and local banks.

Alongside the bond, Etisalat also received a $500m grant from the Abu Dhabi government to help finance its purchase of Maroc Telecom. Although the bond offering was widely reported as off-setting the Maroc Telecom deal, Sanyalaksna Manibahandu, manager of research at NBAD Securities, saw it as chiefly a matter of balance sheet considerations. “The bond sale was a good deal for investors, and risk-free,” Manibahandu told OBG. “The company had net cash before the offering, so it was really about optimising the balance sheet, which was debt-free. It also gave Etisalat the option to increase the dividend, having not offered one for a few years,” he added.

In terms of domestic performance, Etisalat saw net profit after royalties rise by 5% in 2013 to Dh7.078bn ($1.9bn), largely as a result of reduced government royalties. Its performance in early 2014 was even stronger, with consolidated net profit rising some 27% y-o-y in the second quarter to Dh2.507bn ($682m) – a profit margin of just under 20%. This improved performance is due to a number of factors – not least, improved conditions in the wider economy. Also important, however, has been the company’s decision to refocus on its home market after several years of international expansion: the current CEO, Ahmad Abdulkarim Julfar, appointed in 2011, has focused in particular on regaining domestic market share.

Du

The UAE’s second telecoms group had a market capitalisation of Dh23.04bn ($6.3bn) as of the beginning of January 2015 and has thus far limited its operations to the UAE market, where it employs just under 2000 people. As of the third quarter of 2014, the company had a total of 7.5m mobile customers and 626,000 fixed-line customers. The mobile figures will be especially encouraging for du, as the previous quarter had seen the company lose almost 400,000 customers in that segment. As a result, du’s market share in mobile telephony has declined to 45.8%, having been as high as 49% in 2012. This decline represents a significant long-term challenge for the company, as the dominance of Etisalat in fixed-line services in the UAE, coupled with a lack of investments abroad, leaves mobile as the only competitive market in which du is currently engaged.

Despite the fall in its market share, du has increased revenues across its market line. Mobile data revenues, for instance, rose by 11% y-o-y in the third quarter of 2014 to reach Dh684m ($186m), while total revenues grew by 15% to reach Dh3.03bn ($825m). As a result, net profits after royalties reached Dh559m ($152m), or y-o-y growth of 18%, while the group’s current profit margin of 18.4% is only slightly lower than Etisalat’s.

By contrast, full-year figures for 2013 showed that net royalties after profits were flat at Dh1.99bn ($540m), as du’s royalty payments rose in line with the aforementioned 2012 schedule. Under the current schedule royalties will continue to rise for du until 2015. The combination of flat profits, falling market share and continuing royalty increases has perhaps been responsible for du’s recent stock performance, which fell from a high of Dh6.75 ($1.84) per share in December 2013 to a low of Dh5.00 ($1.36) per share in November 2014. This came despite interim dividend payments of 12 fils per share, and the announcement in March 2014 that the company had been able to lower its borrowing costs by as much as $9m over five years through a $1.17bn refinancing deal.

Mobile Broadband

With more customers relying on smartphones and tablets to access the internet and data, both Etisalat and du have invested considerable sums in rolling out the latest LTE technology. The first 4G LTE services were introduced to the country in late 2011, offering download speeds of up to 100 Mbps. The network for this operated on bands of 2600 MHz and 1800 MHz, which the TRA had specifically earmarked for the new service.

In 2014, however, both Etisalat and du began trialling the new LTE-A (“advanced”) technology, which can offer download speeds of up to 300 Mbps. The new services operate on a lower frequency, using bands of 1800 MHz and 800 MHz, the latter of which the TRA freed up in anticipation of advanced 4G technology in 2009, by ordering analogue terrestrial television broadcasters to vacate the 790- to 862-MHz range. The shift to the lower frequency ranges brings the UAE in line with ITU regions 1 (including Europe) and 2 (including the US), enabling consumers to benefit from smartphone technology designed for both regions. The UAE is the first country in ITU region 1 to make both bands available for mobile broadband. Trials of the new LTE-A system were held in April 2014 by Etisalat (using an Alcatel-Lucent system), and in July by du (using a Huawei system), with the former firm announcing in October 2014 that it would begin rolling out the new technology nationally.

How popular LTE-A will be with customers remains an open question. Figures from Informal Telecoms and Media show that just over 50,000 users across the MENA region currently subscribe to LTE services, owing to the high cost of services and the limited availability of devices. Nevertheless, Cisco expects the Middle East and Africa to have the strongest growth of any region for mobile data traffic, at a compound annual growth rate of 70% for 2013-18, compared to Central and Eastern Europe (68%) and Asia Pacific (67%).

Satellite Networks

Another form of wireless web connectivity seeing major investment in the UAE is satellite broadband. “The development of a domestic satellite industry fits very well within the UAE’s diversification ambitions,” Masood Mahmood, CEO of Yahsat, told OBG. “It helps Abu Dhabi build up its ICT capability and creates a demand for ICT professionals, local support services and equipment.” Yahsat, the world’s eighth-largest satellite operator by revenue, has launched two satellites since it was set up by Mubadala in 2007, and is set to launch a third in late 2016. Called Al Yah 3, it will be dedicated entirely to satellite broadband and extend the company’s commercial Ka-band coverage to another 600m people in 17 countries, reaching 60% of the population in Africa and 95% of the population in Brazil. Plans for Al Yah 3 were announced in June 2014 and, the following September, the company revealed its partners in the project: Orbital Science Corporation, a US-based manufacturer, and Arianespace, which will send Al Yah 3 into orbit from French Guiana. “The launch of satellites beyond our borders is a significant stride towards economic diversification,” said Mahmood. “It not only boosts the ICT sector, but, more importantly, exports a service which in turn brings money back to the emirate.”

As of the first quarter of 2014 the company had 20,000 subscribers to its YahClick satellite broadband service, generating monthly ARPU of $100-125. At that stage the service had only been rolled out in 12 of the 28 countries in which the firm has a footprint – including Turkey, Yemen, Iraq and Afghanistan – but was already operating at 90% capacity. Potential is strong in the sub-Saharan African market: a quarter of YahClick’s users are based in Nigeria, while the highest ARPU is in Angola. Besides consumer broadband services, Yahsat offers television broadcasting, voice communications and internet protocol services.

Satellite technology is seen as a major potential growth sector within the UAE. The Abu Dhabi and Dubai governments are both investing in Thuraya, an Emirati mobile phone provider that currently has two satellites in orbit. While there are some outlying areas of the UAE that benefit from satellite coverage, the most promising markets are Africa, Asia and Latin America, where fixed-line infrastructure is often scarce, and terrestrial coverage intermittent.

Outlook

The UAE’s telecoms sector has emerged as a global leader in terms of technological investment and – in the case of voice services – value for money. The sector’s dominant operator, Etisalat, has also managed to establish itself on the international stage as a major investor in emerging markets and one of the Arab world’s most recognisable brands. Industry indicators suggest that profitability will remain strong, with du, for instance, able to protect revenue growth in the face of stiff competition.

However, segments such as fibre-broadband – in which great sums have been invested on infrastructure – remain under-utilised. The regulator’s efforts will be critical in opening the market to competition. As the mobile sector has shown, the entry of even one additional operator can have a significant effect on competitiveness, and both du and Etisalat can benefit from a larger market for internet services. Finally, the introduction of further competition to the fixed-line segment – when it eventually takes place – may provide an incentive for operators to begin bringing to the retail market products that focus on the quality of service, an area in which the current market structure has thus far provided relatively few incentives.