Third Saudi mobile operator makes it mark

13 March 2009

A reduced roaming call price offer from new arrival Zain has sparked fierce competition between the kingdom’s telecoms licence holders.

Of the three men competing for dominance in the Middle East’s wealthiest telecoms market, Saad al-Barrak is by far the most high profile. The chief executive officer of Kuwait’s largest mobile phone operator, Zain, moved the company’s head office to Bahrain in early 2008, after executives from some of the company’s African subsidiaries had difficulties getting through customs at Kuwait International airport.

So it was always unlikely that Zain’s launch in Saudi Arabia in August 2008 would be free of controversy. But thanks to Al-Barrak’s leadership, Zain is determining the shape of competition in Saudi Arabia. Its two rivals, Saudi Telecom and Etihad Etisalat, the local subsidiary of the UAE’s Etisalat, have both scrambled to introduce cheaper roaming rates for subscribers visiting other countries.

Cheaper calls

Saudi Telecom has announced discounts for calls made using the networks of 30 operators outside the kingdom, while Etihad Etisalat, which trades as Mobily, has set up deals covering 56 countries.

Both companies are reacting to Zain’s One Network, an innovative scheme that allows its customers to make international calls at local rates whenever they travel abroad. Saudi customers can make local rate calls when they visit Jordan and vice-versa.

The One Network covers Bahrain, Iraq, Jordan, Saudi Arabia, Sudan and large parts of sub-Saharan Africa. The service is not available in Kuwait or Lebanon, although Zain manages networks in both countries, because the national governments control access to international gateways.

Unless Etisalat and Saudi Telecom remove the premium they charge for international calls altogether, they will be unable to compete with the One Network on price.

The next phase of the One Network is taking shape. Zain has no hope of acquiring a licence in Egypt or the UAE, the two largest Arab telecoms markets after Saudi Arabia, as there is no new licence up for auction, so it has done deals with operators in both markets - Du in the UAE and Mobinil in Egypt - to bring them at least partly into the One Network.

“I think for Zain, the UAE and Egypt are two key markets; they are the two missing pieces of the puzzle,” says Simon Simonian, telecoms analysts at Dubai-based bank Shuaa Capital.

Etisalat has mobile phone businesses in both countries, but Saudi Telecom does not, so Zain’s two alliances appear designed to make it competitive with Etisalat, rather than the much larger Saudi Telecom. Zain has yet to say how far call costs will fall for customers roaming on Du in the UAE or Mobinil in Egypt.Du is an independent business, so it has nothing to lose by reducing international rates to local pricing levels.

Mobinil is jointly owned by France Telecom and Egyptian conglomerate Orascom Telecom. But both companies might impose limits on how far their investment can co-operate with a regional rival.

How has this tussle over international call rates affected the three Saudi operators’ financial health? Zain Saudi Arabia has yet to report its first financial results. The parent group is due to disclose its full-year numbers in March. Etisalat reported a 139 per cent improvement in its fourth-quarter net profits, but it is still a young company that should be expected to grow quickly.

The business generated SR778m ($212m) in net profits in the final three months of 2008 from revenues of SR3.1bn, which were up 53 per cent on the previous year. The company is growing too quickly for outsiders to tell whether falling roaming prices are having an effect on profits.

Saudi Telecom is a different story. After double-digit growth in net profits in the first three quarters of 2008, the group’s profitability plummeted in the final three months of the year.Net profits were SR1.2bn, down 69 per cent on the SR3.8bn generated in the same period of 2007. The poor last quarter dragged down full-year profits by 8.1 per cent to SR11bn.

This could be the effect of Zain targeting Saudi Telecom’s customers in the months after its August 2008 launch. However, the company told analysts in January that the fall in profits was caused solely by the depreciation of both the Turkish lira and the South African rand against the dollar in the final quarter.Saudi Telecom has exposure to both currencies through its $2.6bn acquisition of a 35 per cent stake in Oger Telecom, in early 2008.

“[Saudi Telecom] said its domestic business had beaten all targets,” says Nadine Ghobrial, telecoms analyst at Egyptian investment bank EFG-Hermes. “Actually, we are still positive on the mobile market in Saudi [Arabia], especially because the broadband and data penetrations are really low, at less than 5 per cent.”

The main risk to Zain comes from the local regulator. The Saudi Communications & IT Commission is investigating a complaint about One Network that Saudi Telecom issued soon after Zain Saudi Arabia started operations.

The scrap over roaming rates could be referred to the courts, meaning Saudi Arabia’s newly competitive telecoms market could be undone.

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