With domestic competition growing, the former monopoly operator has an ambitious expansion strategy.
Saudi Telecom generated $3.4bn in net profits in 2007, almost as much as its three closest rivals - UAE-based Etisalat, Kuwait-based Zain and Qatar’s Qtel - combined. But the former monopoly telecoms operator in Saudi Arabia is operating at well below its potential. Its shares are trading at SR43 ($11.40), only 72 per cent of their peak value of SR186 in January 2006.
Its domestic operations, which continue to generate the vast majority of its net profits, face increased competition over the next few years. Its mobile phone business has had to compete with Etihad Etisalat, the UAE group’s Saudi subsidiary, since 2005. Now Saudi Telecom has to compete with the local subsidiary of Kuwaiti group Zain, which launched in August 2008.
Saudi Telecom has a market capitalisation of $24bn, but has done little to adapt its structure to its newly competitive markets. It continues to split the organisation between its wireless and wireline business units.
The wireless unit oversees its mobile phone operator, Al-Jawwal (Arabic for ‘the mobile), while the wireline unit runs three fixed-line telecoms businesses. Al-Hatif (Arabic for ‘the phone’) provides fixed-line phone connections, SaudiNet provides internet services, and SaudiData offers services such as leased lines and virtual private networks to businesses.
|Main business sector||Telecoms|
|Main business countries||Kuwait, Saudi Arabia|
|Net profit in 2007||$3.4bn|
|Chief executive officer||Saud bin Majid al-Duweish|
Al-Jawwal is the main contributor to Saudi Telecom’s revenues, and probably also the largest contributor to the company’s net profits, but Saudi Telecom does not disclose the net profits generated by each operating company.
Al-Jawwal contributed 69-75 per cent of the overall company’s revenues between the first quarter of 2006 and the first three months of this year - the last time it disclosed financial results.Its contribution to revenues dropped to 69 per cent in the fourth quarter of 2006 when the mobile business recorded a sharp fall in revenues thanks to Etihad Etisalat’s successful launch of mobile phone services in the spring of 2005. Al-Jawwal generated $1.4bn in revenues in the last three months of 2006.
Revenues have since partly recovered. The mobile business generated $1.8bn in revenues in the first quarter of 2008. But net profits for the final three months of 2008 fell by 62 per cent to SR1.2bn. The company blames the unexpected drop on a SR2bn loss caused by foreign exchange movements. The three fixed-line businesses have generated a fairly constant $600-675m in revenues every quarter since the beginning of 2006, but their monopoly will end in the next couple of years.
In 2007, Al-Jawwal reduced charges for pre-paid customers. Calls on its pre-paid tariff, Sawa, which is used by most customers, were cut to SR0.55 a minute. The company had charged SR0.65 for calls to other Al-Jawwal mobiles and SR0.85 for calls to Etihad Etisalat numbers.
The charges for Al-Jawwal’s three post-paid packages - Jawwal 25, Jawwal 35 and Jawwal 45 - were left unchanged. The post-paid packages also charge more for calls to Etihad Etisalat mobiles. By contrast, Etihad Etisalat’s Khatty and Khatty Plus post-paid tariffs charge a flat rate for calls to both networks.
Saudi Telecom has continued to add mobile phone customers since Etihad Etisalat launched in the market. Al-Jawwal had 18.6 million customers at the end of March this year, compared with Etihad Etisalat’s 11.1 million at the end of December 2007, when the company last reported its customer numbers. However, Saudi Arabia’s telecoms regulator, the Communications & Information Technology Commission (CITC), has changed the regulations on reporting customer numbers so that both operators have to disclose only their active mobile phone customers - people who have made at least one chargeable phone call in the past three months.
Saudi Telecom says this will not affect it as it only counts active customers anyway. Etihad Etisalat, which brands its services as Mobily, freely concedes that “several million” customers will disappear from its total when the regulations come into force.
Saudi Telecom chief executive officer (CEO) Saud bin Majid al-Duweish has limited room for manoeuvre in the domestic market. However, he has set the company a target for its overseas operations. He wants 10 per cent of net profits to come from outside the kingdom by 2010.
While the 10 per cent target is considered small by Etisalat and Zain, it presents a challenge for Saudi Telecom. The company only made its first acquisition outside the kingdom in June 2007, when it bought a 25 per cent stake in Malaysian operator Maxis for $3bn. The Maxis operation gives Saudi Telecom exposure to operators in Indonesia and India as well as Malaysia. In December 2007, it bought a $2.6bn 35 per cent stake in Oger Telecom, the Saudi private company that holds controlling stakes in fixed-line operator Turk Telekom.
Saudi Telecom faces a tough challenge to retain and grow customer numbers in its home market as new operators target Saudi Telecom users. Zain has operations in 20 countries spread across the Middle East and sub-Saharan Africa. It has been successful when it has acquired companies and has done just as well with new operations. The Kuwaiti operator is one of the best Arab companies at marketing to consumers.
Saudi Telecom has operated mobile phone services in Saudi Arabia for the past 10 years. However, it has yet to launch its first tariff for a niche market. Etihad Etisalat has a tariff called Fallah for younger Saudis. Calls made on the Fallah tariff cost SR0.35-0.65 a minute, giving young Saudis potentially cheaper calls than their parents. Both operators charge a flat rate of SR0.55 a minute for their standard pre-paid packages.
Zain has come to market with at least a couple of points of difference between itself and Al-Jawwal. If Saudi Telecom has been unable to respond to Etihad Etisalat after three years of competition, it will struggle to prevent customers moving to Zain.
Drop in fourth-quarter net profits - 62 per cent
Assets - SR18.2bn
The sum bid for Bahrain’s third mobile licence - $230m
Regional expansion analysis
The auction for Kuwait’s third mobile phone licence in November 2007 was an unusual one for the region. For the first time in years, a competitive auction was held without either Etisalat or Zain winning at least one licence.
Even more unusual was the fact that the company to end Etisalat’s and Zain’s stranglehold over mobile phone auctions was Saudi Telecom, the only major Middle East operator that had failed to expand beyond its domestic market until that moment.
Saudi Telecom won the auction with a KD248.7m ($908m) bid for a 26 per cent stake in Kuwait’s third mobile phone licence holder. Its bid comfortably beat a rival offer of KD195m from a consortium led by Kuwait Finance House. Etisalat came third with a KD180m bid.
For Saudi Telecom’s first start-up in a foreign country, it will have to compete with the two incumbent licence holders, Zain and Wataniya, which is itself 51 per cent owned by Qtel. Both companies have abundant experience of competing with different operators in multiple markets. Zain has 20 markets and Qtel has seven. This will increase to eight when it finally receives the go-ahead to launch mobile phone services in the West Bank and Gaza.
But Saudi Telecom has reason to hope that its Kuwaiti subsidiary, Kuwait Telecom, will prosper. Kuwait is the least penetrated mobile phone market in the GCC, with about 80 per cent of the population owning mobile phones, according to Egyptian bank EFG-Hermes. Even Jordan, with its far lower gross domestic product (GDP) per head, has a higher penetration rate than Kuwait. Less developed markets, such as Algeria and Tunisia, are not far behind Kuwait and have grown more quickly over the past few years.
Why have Zain and Qtel been relatively unsuccessful in Kuwait when they have done so well elsewhere? Both companies have used their Kuwaiti operations as platforms to finance their expansion into other markets. They have been able to compete in other countries because they have not needed to compete at home.
Wataniya was an independent Kuwaiti company until Qtel bought a 51 per cent controlling stake in the business in March 2007. By then, Wataniya had already used its established operation in Kuwait to expand into North Africa in much the same way as Qtel had used its base in Qatar to launch its Nawras mobile phone subsidiary in Oman.
Unfortunately for Saudi Telecom, Zain and Qtel’s mixed performance in Kuwait can also be attributed to a second factor that will have a negative impact on its business just as it has the incumbents. Kuwait’s Communications Ministry is unique among the GCC countries because it has retained control over both the country’s fixed-line network and its international gateway - the telecoms switch that enables calls to be routed to people in other countries.
The charges levied on these services provide a generous stream of income to the ministry. If the mobile phone operators become annoyed by these charges, they can complain to the regulator, which is also the Communications Ministry.
State interference has held back the development of services in Kuwait. Zain has been unable to include Kuwait in its innovative One Network, which covers Iraq, Jordan, Bahrain, and soon Saudi Arabia. The mobile operator says its operations in all these countries have signed up new customers because the One Network allows them to make international calls when they travel abroad while continuing to pay local-rate tariffs. The Communications Ministry has so far prevented Zain from launching the One Network in Kuwait.
Saudi Telecom may have submitted an expression of interest to bid for the second licence in Qatar, although it did not prequalify for the competition. Neither the company nor the Qatari regulator will say whether it wanted to take part in the auction. Saudi Telecom could still be successful in Kuwait, but its management team will need to think like a start-up operator rather than a state-owned former monopoly.
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