Kuwait telecoms duopoly faces up to competition

16 November 2007

Dominance in the Kuwaiti market has proved highly lucrative for mobile phone operators Zain and Wataniya, but profits are likely to fall when a third operator enters the market next year.

In early 2008, the duopoly serving Kuwait’s mobile phone market will come to an end. Zain and Wataniya, the two beneficiaries of the Kuwaiti market, will be joined by a third operator. Etisalat from the UAE, Turkcell and Saudi Telecom Company (STC) are among firms competing to win the right to sell their first mobile phone subscriptions in the country. The only way for the winner to build market share quickly will be to cut prices, boosting competition in Kuwait.

The existing duopoly has benefited Zain and Wataniya. Both companies were set up to serve the domestic Kuwaiti mobile phone market. Zain was the first operator in the Middle East to offer mobile phone services using the now ubiquitous GSM standard. Because Kuwait matured faster than its neighbouring countries, its domestic operators were ideally positioned to expand across the Middle East.

Zain, which was known as MTC until September 2007, was the first to expand when in 2003 it bought a stake in Fastlink, Jordan’s largest mobile phone operator. In the same year, it bought the second mobile phone licence in Bahrain. It pays the Bahraini telecoms regulator just BD 100,000 ($265,956) a year for the right to continue operating this licence.

In December 2003, a consortium of investors, fronted by Kuwaiti company MTC-Atheer, moved into Iraq, winning one of three two-year licences. The consortium signed its first customers in 2004. In June 2004, MTC won a four-year management contract for one of the Lebanese government’s two GSM mobile phone networks. In 18 months, MTC went from being a single-country operator to a regional business operating in five Middle East markets. Its expansion has continued and in July 2007 it was awarded the third mobile phone licence in Saudi Arabia after bidding $6,100 million.

Wataniya has been just as busy. The smaller of the two Kuwaiti operators also won a two-year licence to operate in Iraq in December 2003. However, the deal ended in failure. Wataniya held a 40 per cent stake in the Asiacell Cayman consortium of investors that won the licence to operate in the north of the country. But the Asiacell Cayman venture collapsed earlier this year and a liquidator is preparing a report on what went wrong.

Overseas diversification

Wataniya has, however, succeeded in diversifying into North Africa. In Tunisia, it operates a 50:50 joint venture with Egypt’s Orascom Telecom under the name Tunisiana. It also owns Algeria’s second-largest mobile operator Nedjma.

Underlying these successful expansion plans is the strength of the Kuwaiti market. At the end of June 2007, Zain’s 1.5 million customers in Kuwait accounted for less than 5 per cent of the group’s total customer base of 32 million. The Kuwaiti business, however, generated 22 per cent of group revenues, the largest contribution to its coffers by any single country.

Zain generated $613.3 million in revenues from Kuwait in the first half of 2007, out of total revenues of $2,766 million. Wataniya, which is a much smaller company than Zain, generated first-half sales in Kuwait of $367.5 million, about 55 per cent of total group sales of $664 million. Kuwait has provided both companies with stable cash flow and a large profit margin that has enabled them to finance takeovers of smaller companies in less stable markets.

The financial returns from operating in the Kuwaiti market have continued to improve over the past few years. Zain’s average revenue per user in Kuwait was $71 in June 2007. In June 2006, it was $67. No other mobile operator in the Middle East comes close to matching this. Average revenue per user for Saudi Telecom was $39 in June 2007, while for Orascom Telecom it was just $11. Wataniya’s average revenue of $54.80 also eclipses its rivals elsewhere in the region.

According to the GSM Association, Kuwait has one of the world’s best mobile phone networks. About 99 per cent of the land is covered by 2G and 3G networks. Most of Kuwait’s territorial waters have the same level of connectivity as Kuwait City. Expensive additional services such as video calling and mobile email using Blackberry devices have proved popular. The country’s oil wealth has enabled its government to pay generous salaries to people who do not work.

Revenue reduction

According to analysts, 2007 will be the last of the good years for Zain and Wataniya in Kuwait. Gulf Capital Group, a UAE bank, forecasts lower revenues and profits for Zain’s Kuwaiti operation in 2008 because a new operator will enter the market with an incentive to cut prices so it can build its market share. While revenues are forecast to recover to their 2007 levels by 2011, earnings before interest tax depreciation and amortisation (Ebitda) are expected to keep falling.

“We expect Zain to lose market share gradually over our forecast period in spite of rising penetration rates,” says Omar Rana, managing director of Gulf Capital Group. “Average revenue per user may face downward pressure as competition settles in. While revenues may be supported by increasing penetration rates in the country, Ebitda and net income margins are expected to decline.”

Zain and Wataniya have already protected themselves from the arrival of the third operator by diversifying into as many international markets as they can. They have enjoyed their duopoly of the Kuwaiti market for longer than expected because of the authorities’ failure to grant the third mobile licence more quickly. The Communications Ministry proposed to licence a third operator in the summer of 2006. The licence will only be awarded some time after 18 November 2007, when the deadline for bids passes.

The licensing process has been controversial. Etisalat, which announced its intention to bid for the licence in the summer, says it feared the Kuwaiti authorities would prevent a foreign bidder from winning the auction.

“We did not have to tie up with any local partners [when the rules first came out],” says Jamal al-Jarwan, chief executive officer of Etisalat International Investments. “But the government announced changes to allow only publicly listed companies in Kuwait to bid.”

The Establishing Committee, which was created to run the auction process, says foreign companies will be allowed to win the third licence.

“Any company may bid for the licence,” says Fuad al-Hajri, organiser of the Establishing Committee. “A foreign operator can win the licence. Why not?”

However, foreign operators are apprehensive about the auction process. Interested bidders have only been able to view the tender document after paying a non-refundable fee. Kuwait has a growing reputation as a country where it is difficult to do business, and businesses are voting with their feet.

During the auction process, Zain said it would move its headquarters from Kuwait City to Bahrain. It says its African employees are finding it increasingly different to obtain work visas to enter the country.

Wataniya is already run from outside Kuwait after Qtel, Qatar’s monopoly telecoms operator, bought a 51 per cent stake in the company for $3,700 million on 15 March 2007. The international arm of Wataniya is moving from Dubai to Doha.

Independent regulation

The chief executive officers of both Zain and Wataniya have criticised the Kuwaiti authorities for failing to create a modern regulatory environment for the telecoms sector. Both businessmen have called for an independent telecoms regulator, something the Communications Ministry raised as a possibility earlier this year.

Kuwait is the only GCC country that has yet to establish an independent regulator, despite calls for this going back more than 20 years. The only other countries in the region that lack an independentregulator- such as Sudan and Yemen - have far less mature telecoms markets than Kuwait.

In September, Saad al-Barrak, chief executive officer of Zain, said: “They have been saying there will be an independent regulator for the past 22 years. There will be peace with Israel before there is an independent regulator in Kuwait.”

“We would very much like to see the government and the legislators work together to establish a regulatory body to ensure a fair and equitable playing field for all parties,” says Khalid al-Omar, acting chief executive officer of Zain’s Kuwaiti business. “We would expect a telecoms regulator to provide the freedom for us to offer complementary technologies, a dedicated international gateway and to become an internet service provider.”

When the third mobile phone operator begins operating, Kuwaiti consumers will start to benefit from cheaper tariffs. Unfortunately, they will not feel the full benefits of competition between three different operators until the authorities liberalise the market. The government in Kuwait still controls the international gateway needed to make calls to different countries. Until it ends such restrictive practices, Kuwait will remain an expensive country to be a consumer.

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