Economic Update

Despite fierce competition in a crowded market, Saudi Arabia’s telecoms sector should see continued growth, driven largely by the expanding mobile internet and fixed broadband segments, according to recent reports from local investment groups. The Kingdom’s tech-savvy, high-income, younger generation, in particular, is earmarked to play a major part in boosting spending on data services and related products.

With rising smart phone penetration and upgraded networks, data fees will make up a greater portion of telecoms revenues in the coming years, Al Rajhi Capital said in a December report on the industry.

The Saudi mobile market is the most competitive in the Arab world, according to the Cellular Competition Intensity Index. While the mobile phone penetration rate stands at 181.6%, or nearly two subscriptions per individual, the still-young broadband market offers Saudi’s telecoms industry opportunities for growth. A report released in March by investment firm NCB Capital Total found that total revenue for the Kingdom’s three mobile operators, Saudi Telecommunication Company (STC), Mobily and Zain, is expected to increase 7% year-on-year (y-o-y) in 2013.

All three firms launched long-term evolution (LTE) networks in 2011, the service otherwise known as 4G. By the end of 2012, mobile broadband subscriptions had reached 12.3m, representing 42.1% of the population, and up from 9.7% in 2010, according to figures from the Communications and Information Technology Commission (CITC), Saudi Arabia’s regulator. Just over 40% of households had fixed broadband subscriptions in 2012, up from 27% in 2010.

The CITC attributes the uptick in data subscriptions in large part to growing smart phone penetration and competitive data packages being offered by providers. Both trends are expected to continue, with Saudi spending on ICT products forecast to grow by at least 10% in 2013. The regulator said spending would be spurred primarily by the purchase of smart phones, high-speed networks and interactive applications.

Saudi Arabia’s demographics are proving to be a key driver in boosting spending on data services and related products. Around 64% of its people are below the age of 30, giving the Kingdom one of the youngest populations in the world, according to an article published by the British think-tank Chatham House. The same article found that Saudis spent more of the day on the internet and used Twitter more frequently than their Arab peers. Data also showed that Saudi Arabia ranked first among countries for YouTube viewing.

Fierce competition for customers has led to telecoms firms increasing their focus on infrastructure improvements and incentives. “Broadband has become part of our daily life and the Saudi market is expected to grow by 8% by 2015,” Sacha Dudler, advisor to the CEO at STC, told local media in March. “The infrastructure will be an ongoing process by the telcos around the world and increase the broadband speeds and offer different packages.”

STC, Saudi’s former state monopoly holder and the Middle East’s largest phone company by revenue and market value, plans to reach 80% LTE coverage by the middle of 2014 and recently launched a suite of packages offering discounted or free Apple products.

Mobily, the Saudi arm of the UAE Etihad-Etisalat consortium, recently increased its revenue share to 41% of the telecoms market, compared with STC’s 48%. NCB Capital predicts Mobily’s revenue from data to increase 30% in 2013, up from 20-25% in 2012. Among its initiatives to attract more customers to its network, the provider awarded a $256m contract to Huawei and Ericsson in January to upgrade their high-speed network, while launching a data package with Google in 2012. More recently, it announced a promotional “Connect 4G” package offering three and six-month subscriptions at reduced rates.

Zain Saudi, a Kuwaiti-owned firm, is the newest provider in the Saudi market and has yet to turn a profit in the Kingdom. The company recently introduced a number of initiatives aimed at improving future performance, including teaming up with Microsoft to offer the Windows smart phone in MENA markets and pledging its first 100,000 LTE subscribers a lifetime deal of double the amount of data they pay for at no extra charge.

The CITC is paving the way for increased price-led competition by auctioning licences for three mobile virtual network operators (MVNOs). The structure of MVNOs, which lease network services from network operators, suggests these deals could offer potentially beneficial partnerships to the existing big three, according to the Al Rajhi report.

An additional challenge facing operators in the Kingdom is the need to balance the provision of content which consumers want with Saudi’s media regulations. The CITC made international headlines in late March when the commission threatened to block internet applications like Skype, Viber and Whatsapp. The content, however, was not blocked and the telecoms operators are expected to reach an agreement to better monitor the applications.

Whatever potential pitfalls exist in Saudi’s transforming data market, the fundamental growth potential remains sound. “We remain bullish on the Saudi telecom sector,” Al Rajhi Capital’s recent telecom report concluded.