Data services to drive growth in the Saudi telecoms sector

14 February 2011

With the mobile voice market reaching saturation level, future growth is set to come from data services. Operators will need to invest in technology to benefit from this demand

Saudi Arabia key fact

Mobile users are downloading 86 terabytes of data a day, up from 50 terabytes three months ago

Source: MEED

Saudi Arabia’s telecoms market is set to enter a new era of growth, amid rising demand for data services. 

Mobile penetration rates already exceed 177 per cent, with a total subscriber base of 47 million users. UK-based research firm Informa Telecoms & Media predicts that mobile penetration will break the 200 per cent barrier early this year. This will stagnate growth, particularly for voice revenues, and operators will be forced to differentiate their services within the data market.

[Zain] paid too much for the licence and is in great need of restructuring its balance sheet

Kunal Bajaj, HSBC

“Multiple subscriptions are common and such [high] penetration levels create a challenge for operators to offer more attractive services and a certain level of ‘end-user-experience’ that encourages subscribers to spend more on one particular network,” says Ali Eid, president and head of Ericsson Saudi Arabia.

Mobile operators in Saudi Arabia

The industry’s development has been driven by a competitive regulator, the Communications and Information Technology Commission (CITC), which has been keen to liberalise the market.

There are currently three mobile operators in the country. STC, one of the Middle East’s largest listed companies, is a part state-owned operator with the largest market share at just over 45 per cent. It was founded in 1988 and recently has focused on expanding outside the country in the wake of stiff competition from Mobily, a joint-venture between the UAE’s Etihad and Etisalat.

In order to retain customers, the operators will need to focus on quality of service

Ali Amer, STC

Mobily won the second third-generation (3G) licence in 2004, bidding $3.45bn. It now has a third of the mobile market and a three-quarter share of the 3G market. Since its arrival, Mobily has focused on offering a variety of services, particularly in the data market, and has invested in infrastructure to cope with demand. Mobily is also an internet service provider, having bought out Bayanat al-Oula for $400m in 2007.

Competition between the two operators has forced STC to look overseas to realise new revenue streams. The firm now has direct interests in Malaysia, Kuwait and Bahrain, through its Viva brand, and in Turkey and South Africa, through its 35 per cent stake in Oger Telecom.

Mobile broadband is the area of greatest growth because of its economic and social benefits

Ali Eid, Ericsson Saudi Arabia

The smallest operator in the market is Zain Saudi, part of Kuwait’s Zain Group, with less than 20 per cent market share. It won its 3G licence in 2007 for $6.1bn, almost twice the amount paid by Mobily. The company began operating in the kingdom in 2008 and has found it difficult to establish itself as a serious competitor.

“It paid too much for the licence and is in great need of restructuring its balance sheet,” says Kunal Bajaj, a telecoms analyst at UK bank HSBC. At the time, it was the world’s highest licence fee on a per capita basis, at $226 for every Saudi citizen.

Saudi fixed-broadband market share, 2010*
Other 2
*=2010. Source: Informa Telecoms & Media

The UAE’s Etisalat is carrying out due diligence to take over a majority stake in Zain Group and this is expected to be completed by the end of February. If the $12bn acquisition goes ahead, it will have a significant impact on Saudi Arabia’s mobile industry. Under current regulations, Zain Group will have to sell off its 25 per cent share in its Saudi unit, which it has valued at $733m, as Etisalat already has operations in the kingdom. “It is unlikely they will be able to get that much – it is in bad shape,” says Bajaj.

Prospective telecoms buyers

South Africa’s MTN, Qtel of Qatar and Bahrain’s Batelco have expressed an interest in acquiring Zain Group’s Saudi operations, but only the local Kingdom Holding, the public holding company of Prince Alwaleed bin Talal, has so far submitted an offer.

“If any one of these firms bought the stake, it would have different implications on Zain and the market,” says Matthew Reed, head of Middle East and Africa mobile research at Informa Telecoms & Media.

Fixed-broadband penetration*
(Percentage of households)
Saudi Arabia30.4
*=Second quarter 2010
Source: Informa Telecoms & Media

Besides Kingdom Holding, the other three are well-established regional players with knowledge of the market and the means to develop Zain’s position. “Kingdom Holding has good local knowledge and it has the means to provide low-cost funding to help Zain restructure its balance sheet, but it does not have a telecoms background,” says Bajaj.

It does, however, have the investment expertise and presents Zain with cross marketing opportunities with its investments in various sectors, including local media group Rotana.

Batelco and Qtel already have a presence in Saudi Arabia, so both offer the opportunity to consolidate services. Batelco is a major investor in the Etihad-Atheeb consortium, which won a fixed-line licence in 2007. Qtel is a major shareholder in Iden, a small mobile operator that is used mainly in industry. It is not a national operator.

Legal threats

Some analysts are sceptical whether Etisalat’s takeover of Zain Group will go ahead. The due diligence deadline has already been missed once and it may be missed again. And if it does go ahead, a few Zain Group shareholders are likely to create complications around the sale of the Saudi unit. Al-Fawares Holding, a Kuwaiti investment group that has a 4.5 per cent stake in Zain Group, has threatened to sue any potential buyers of Zain Saudi.

“Selling the unit just to meet regulatory laws could jeopardise the unit. We may not get the right price, so we will take anyone who tries to buy Zain Saudi to court,” the group’s financial controller Karu Naker told MEED in December.

Despite its poor financial state, Zain Group’s Saudi operations are likely to attract further buyer interest. “The opportunities in Saudi Arabia are substantial,” says Bajaj. “There is a very large young population, with a high gross domestic product (GDP) per capita.”

Average per capita GDP in Saudi Arabia is about $24,000. While Iran and Turkey have larger populations, it is the spending power of Saudi nationals that makes the kingdom such a lucrative telecoms market.

Fixed broadband in Saudi Arabia

Internet demand has been growing steadily. Fixed-line broadband penetration now stands at more than 30 per cent. Saudi Arabia ranks fourth in the Middle East in terms of fixed-broadband penetration, after Bahrain, which has a rate of 87 per cent, the UAE with 82 per cent and Kuwait with 69 per cent. By comparison, Saudi Arabia’s penetration is relatively low, but this is mainly due to large household sizes.

STC holds more than 80 per cent of the fixed-broadband market, mainly because it was the monopoly provider until 2008, when the CITC awarded three new licences.

Both STC and Mobily have increased investment in their fibre-optic networks and infrastructure to cater for this rising demand. STC has begun to roll out its fibre-to-the-home network to offer internet protocol television packages. Mobily’s broadband service now covers 90 per cent of the country. It has also invested $100m in its Wimax infrastructure, which now covers 20 cities, and has been seeking $3bn in refinancing to develop its broadband operations further.

Additional traffic

For all three operators, mobile broadband is the main growth area. According to Ericsson, there will be as much as 1,000 times more data and voice traffic across the world by 2020. In Saudi Arabia, mobile users are downloading 86 terabytes of data a day, up from 50 terabytes three months ago.

“Much of this demand is being driven by the growing convergence of media and telecommunications,” says Eid.

“In Saudi Arabia, mobile broadband is the area of greatest growth because of its economic and social benefits. The government and the regulator in the country have made it a major priority,” he adds.

There is huge demand for mobile broadband access, with a projected growth of 25.37 per cent in 2011 alone. “This demand is being driven by a combination of increasing internet literacy and the fact that consumers are intent on accessing rich online content,” says Eid.

By 2014, Mobily expects data services to account for 37 per cent of its total revenues.

“There is potential in different services; the most promising over the coming years are social services and social media, cloud computing, web applications, mobile applications and green ICT applications,” says Ali Amer, senior advisor at STC. Current network capacities cannot handle or cope with this growth, particularly for video services. “All three operators will need more capacity,” he adds.

Covering an area of more than 2 million square kilometres, the kingdom’s vast size and varied terrain presents many challenges to installing telecoms infrastructure. However, the strong demand for data and the falling voice average return per user (ARPU) is enough of an incentive to develop the required infrastructure.

Increased telecoms competition

“The main challenge will be to keep sustainable growth,” says Amer. “In order to retain customers, the operators will need to focus on quality of service. They will have to maintain ARPU levels through data services and network expansion in order to cope with new technologies.”

All three operators have trialled long-term evolution technologies. Mobily has been working with China’s Huawei; Zain tested the technology with the US’ Motorola; and STC has been working with France’s Alcatel-Lucent.

Despite the successful trials, CITC has not yet granted the operators permission or the frequencies to deploy the service.

Once these frequencies are awarded, competition is set to stiffen between the three operators as they focus on offering more innovative data and content packages.

STC focuses on overseas telecoms growth

Ghassan Hasbani joined STC in January 2010 as chief executive officer of the operator’s international division and has made growing the group’s overseas business a priority. In that time, the contribution the overseas business makes to total revenues has risen to 33 per cent, from 30 per cent. STC has operations in Kuwait, Bahrain, India, Indonesia, Malaysia, Turkey and South Africa.

“Our investments are in good net income cash generators and we are dominant players in those markets,” Hasbani tells MEED. “We are doing well on all fronts, particularly in Indonesia, where we have seen growth in revenues of close to 100 per cent since last year. We have focused on broadband given that penetration is low.”

In January 2011, STC embarked on a $280m shariah-compliant financing to fund its operations in Bahrain, with a focus on investing in three areas: innovation; technology; and infrastructure roll-outs for further growth.

“Our approach in Bahrain was value-creation, not a price war,” he says. “We created a new position in the market that had not existed before. It was the same in Kuwait. We proved that a new operator can perform well in a saturated market and can offer value to its customers in those markets without value destruction.”

The operator is now implementing the second stage of its growth plan. “This is where we consolidate what we have to make sure we’re operating in harmony,” says Hasbani. “We are looking within the current clusters we operate, to create synergies within them.”

The chief executive says the company will continue to seek new markets and opportunities. STC has already placed a bid for Syria’s third licence, which is due to be auctioned in April 2011. The firm is also considering further opportunities in Iraq and Asia.

“The Middle East is definitely a positive region,” he says. “STC missed the boat in the first wave of acquisitions in the region, but we managed to expand to Asia, which is a promising market.”

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