As the largest telecommunications market in the Gulf region, Saudi Arabia also stands out as one of the region’s most competitive markets. Telecoms operators in the Kingdom were the first in the Middle East to launch latest-generation mobile broadband networks. Mobile subscription penetration rates are among the highest in the world, standing at close to 200%. Growth in mobile broadband use is booming and the post-paid market is continuing to see rapid growth. Competition is set to increase with plans to award virtual operator licences in the near future. The fixed-line market is also continuing to grow, albeit at a much more gradual pace, and usage of fixed lines remains heavy.
Regulation
The sector is regulated by the Communications and Information Technology Commission (CITC), whose responsibilities include granting telecommunications and IT services licences, managing the frequency spectrum and network interconnections, overseeing telecoms tariffs and providing internet content filtering. The commission describes its vision as “Universally available, high quality and affordable communications and information technology services.” The main legislation covering the sector is the 2001 Telecommunications Act and its bylaws, issued in 2002.
Mobile Market
After rising rapidly for years to reach one of the highest rates in the world, CITC data suggests that mobile subscription penetration may have at last peaked, having fallen back slightly from 188% at the end of 2011 to 181.2% by the end of the third quarter of 2012. Over this period, total subscriptions dropped from 53.7m to 53.1m. The number of total prepaid subscriptions was down from 47.1m to 45.4m; however, the smaller post-paid market continued to grow rapidly, from 6.6m at the end of 2011 to 7.7m in the third quarter of 2012, an increase of 16.7%. Over the longer term, prepaid subscriptions have grown faster than post-paid, with the latter’s share of total subscriptions falling from 23.4% in 2006 to a low of 12.2% in 2010, though it had regained some ground, hitting 14.5% by the end of the third quarter of 2012.
Mobile broadband use has exploded in recent years, with the penetration rate growing from just 0.2% in 2007 and 9.7% in 2010 to nearly 40% by the end of the third quarter of 2012. The uptake of dedicated mobile data subscriptions (principally dongles) has driven much of this growth; subscriptions went from being non-existent in 2009 to 7.06m in 2011, and 7.75m in third-quarter 2012, according to CITC. However, data suggests mobile broadband speeds could be faster; research by Google published in April 2012 showed the Kingdom had among the slowest mobile webpage download speeds worldwide, ranking above only the UAE, based on an average download time of 21.2 seconds.
Operators
There are three main mobile operators in the Kingdom: the state-backed Saudi Telecom Company (STC), which had a monopoly over the telecoms industry until 2005; Ethihad Etisalat (which trades as Mobily in Saudi Arabia); and Zain (whose full name is Mobile Telecommunications Company Saudi Arabia). In addition to these, there is also an iDEN push-to-talk (PTT) operator, focused primarily on the corporate market, called Public Telecommunications Company (known under its brand name Bravo), which operates under a build-operate-transfer licence agreement with STC.
The CITC in November 2011 said it did not have any plans to issue a fourth full mobile licence, preferring instead to bring virtual operators into the market. Competition between the existing providers is already intense; indeed in June 2012 the Arab Advisers Group ranked Saudi Arabia as the most competitive mobile market in the Arab region as part of its Cellular Competitive Intensity Index, based on factors such as the number of operators and subscription plans as well as the availability of international long-distance competition (which is available in the Kingdom).
Competition is particularly heavy in the voice sector, pushing down average revenue per user (ARPU). According to a recent report by NCB Capital, such competition is also beginning to affect prices in the mobile internet segment. Overall ARPU for the Kingdom’s mobile market as a whole stood at $22.96 at the end of 2011, according to the 2011 annual report by Zain.
Industry Players
The Saudi state remains a major player in the mobile market by virtue of its majority share in STC, holding a significant stake in Mobily and a smaller stake in Zain. STC is controlled by the Kingdom’s sovereign wealth fund, the Public Investment Fund, which owns a 70% holding in the operator. The General Organisation for Social Insurance (GOSI) also owns a 7% share of the company and the Public Pensions Agency (PPA) owns a 6.6% stake; the remaining 16.4% floats on the Saudi stock market (Tadawul). The largest shareholder in Mobily is the UAE’s Etisalat with a 27.4% share, while GOSI also owns an 11.4% stake in the company and the PPA holds a small stake in the firm. In July 2012 Etisalat said it was considering raising its ownership share in the firm. Kuwaiti operator Zain (Mobile Telecommunications Company) is the major shareholder in Zain Saudi Arabia, with a 37% share, having increased its stake from 25% in July 2012. In September of that year, Zain signed a deal with Vodafone that will allow it to use the Vodafone brand and offer access to Vodafone’s services and devices in the countries in which it operates.
According to the Telegeography GlobalComms Database, STC was the market leader with an estimated 26.3m mobile subscribers, or 47.2% of the market, as of mid-2012. Mobily followed in second place with 39.3% while Zain – the newest mobile operator, having entered the market in 2008 – stood in third position with 13.3%. iDEN operator Bravo had a share of 0.3%. While STC remains the industry leader, its market share has fallen significantly over the medium term, from around 75% in 2006. In addition to topping the Saudi market, STC is a major player in the regional telecoms market with a 100%-owned Bahrain affiliate (VIVA Bahrain), a 35% stake in the UAE’s Oger Telecom and a 26% interest in Kuwaiti operator VIVA Kuwait.
All three Saudi mobile operators launched long-term evolution (LTE, sometimes described as a fourth generation or 4G service) networks in September 2011, though uptake to date remains low (see analysis). While the launch of 4G offers the possibility of ever more sophisticated and advanced technology, operators are nonetheless still catering for users yet to make the leap to smartphones. For example, in September 2012 Mobily announced it had signed an agreement with the Myriad group to provide access to social networking site Facebook via SMS, allowing customers without smartphones or data plans to access and use the site.
Sector Financials
According to the CITC, spending on telecoms and information and communications technology (ICT) in 2011 reached SR83bn ($22.1bn). The regulator said it expected spending to rise by a further 12% in 2012. The CITC stated Saudi telecoms firms earned SR65.7bn ($17.5bn) in 2011 (not including revenue from foreign investments), up from approximately SR61bn ($16.3bn) in 2010. Of this, SR52.4bn ($14bn) was generated by mobile services, while SR13.3bn ($3.55bn) came from fixed and data services.
STC’s net income stood at SR6.88bn ($1.81bn) for the first nine months of 2012, up 28% year-on-year ( yo-y). Revenues stood at SR44.4bn ($11.8bn), giving it a revenue market share of around 67% for the period. Mobily’s net income for the same period was SR4.14bn ($1.1bn), up around 22% from the first three quarters of 2011. Mobily reported revenues of SR16.87bn ($4.5bn), giving it a revenue market share of about 26%. Finally, Zain Saudi Arabia made a net loss of SR1.31bn ($349m) in the first three quarters of 2012, a slight improvement from net losses of SR1.46bn ($389m) y-o-y. Zain’s revenues of SR4.68bn ($1.25bn) put it at approximately 7% of revenue market share.
Virtual Operators
In December 2011, the CITC announced that it would issue three mobile virtual network operator (MVNO) licences and, after public consultations held during 2012, the regulator published the official request for applications in January 2013. There are no current plans to offer mobile virtual network aggregator licences. The CITC based its decision to introduce MVNOs on what it described as “fewer alternatives than might be expected for a market serving 27m people” in terms of the number of operators. The introduction of MVNOs is also aimed at improving customer care quality, bringing down mobile broadband prices (which were described as still relatively high) and boosting service innovation. The regulator expects each mobile operator in the Kingdom to lease excess capacity to one of the three MVNOs (though draft guidelines on the CITC website suggest operators are not obliged to enter agreements if they are not “technically or commercially feasible”.) During consultations, it was also noted fewer licences may be issued should host operators fail to reach agreements with MVNO hopefuls. No operator will be permitted to host more than one MVNO. If operators fail to reach an agreement on their own, the CITC says that it “may choose to adopt further measures to encourage the introduction of MVNOs in accordance with CITC statutes”.
Progress
Mobily appears to have made the most progress towards partnering up with a virtual operator, having announced in September 2012 it had signed memoranda of understanding with a number of MVNOs, though it did not name the firms. In May 2012, Mobily awarded an Indian firm, Xius, a mobile virtual network enabler management contract in preparation for the launch of an MVNO. The mobile operator has said it expects MVNO services to be up and running by 2014.
On the other end of such deals, a number of firms have expressed interesting in launching virtual operations in the Kingdom, including Oman’s Renna Mobile, and UAE companies FRiENDi Group and Du. FRiENDi already operates a prepaid package in Saudi Arabia in partnership with Zain, albeit through an outsourcing deal rather than an MVNO agreement. The Kingdom will become the second GCC state to host MVNOs after Oman, where Renna and FRiENDi already operate.
Fixed-Line Market
Despite rapid expansion in the mobile segment, the fixed-line market has continued to hold its own in recent years. According to the CITC, the total number of lines stood at 4.7m at the end of the third quarter of 2012, of which 3.4m were residential and 1.3m were business lines. This was more or less unchanged from the end of 2011, but up slightly from around 4.1m at the end of 2010, and from 3.3m in 2001. Household teledensity fell back slightly by September 2012, to 68.5%, compared to 69.3% at the end of 2011, as the population expanded while subscriptions stood more or less still.
Furthermore, despite very heavy mobile subscription penetration, according to a report published by STC in October 2011, “ICT in Saudi Arabia: A Socio-Economic Impact Review”, fixed-line usage is high by the standard of countries with similar levels of development (measured by GDP per capita) and in line with major advanced economies. The report stated that fixed-line use stands at around five times mobile use, at approximately 500 minutes used per subscriber per month. The report suggests that reasons for this likely include large family sizes – which leads to increased use as landlines tend to be shared within families, whereas individual family members are likely to have his or her own mobile subscription – and a continued large difference between mobile and fixed call costs. This price differential persists despite heavy competition and low ARPUs in the mobile voice market.
Fixed Operators
The CITC put in place the regulatory framework for local loop unbundling in 2009. Two firms, namely STC and Etihad Atheeb, which operates in Saudi Arabia under the name Go, currently have licences to provide fixed telecoms services. Both offer voice and internet services, STC over PSTN and Go via WiMax. Go, in which Bahrain Telecommunications Company owns a 15% stake, made a SR46.5m ($12.4m) loss in the financial year ending March 31, 2012. In 2012 the firm reduced its capital by 60% and held a SR1.2bn ($320m) rights issue to help it cope with repeated losses. At present only fixed-line service licence holders are permitted to offer voice over internet protocol (VoIP) services; of the two, Go currently offers the service.
Corporate Data Market
Corporate data has not traditionally been a major area of interest for the Kingdom’s major telecoms firms, but this is beginning to change. O.B Jacob, the technical director of local ICT firm Saudi Inteltec, told OBG that the main telecoms operators have not really been focused on the corporate data market due to its complexities, so it has largely been left to other smaller operators. “It’s only now that we’re starting to see a push by them, in particular by Mobily, which may see the situation change,” Jacob said. “However, the data market is unlikely to become their main focus. We continue to see operators lay fibre for the voice and residential market and sell on excess capacity to the corporate data market.” Mobily’s CEO told local media in September 2012 that the firm was increasingly focusing on the corporate market and data, aiming for data to account for 30% of revenues in 2012.
Other players are also aware of the potential. “Given factors such as a high increase of data usage from the private sector and a major push from government to promote a transition to electronic systems, the corporate telecoms market has substantial room for growth,” Fraser Mark Curley, Zain’s CEO, told OBG.
Satellite Connections
The very small aperture terminal (VSAT) satellite communications market was opened up to competition in 2003 with provision of five licences. Entry to the market is now fully liberalised, with around 17 licensed operators in existence, although personal use of VSAT connections is still illegal. Saudi Inteltec is the largest of these operators and, according to industry consultancy, Comsys, is also the largest provider in the Middle East. The VSAT provider is responsible for around 80% of the Saudi market in terms of terminals and operates around 7500 sites. According to Saudi Inteltec, banks are key users of VSAT connections and around 65% of the Kingdom’s automatic teller machines (ATMs) run on VSAT connections, a higher proportion than in other parts of the Gulf region. Jacob attributed this to the fact that the segment is more heavily regulated in most other Gulf states, with the exception of Qatar. The same technology is also used for some corporate data transmission and by government ministries, in particular by the Ministry of Defence, which uses VSAT for back-up connections. Turnover in the private sector VSAT market is estimated at around SR200m ($53.3m), and annual growth in the market is in the region of 12-15%, having dropped from 35-40% several years ago due to saturation in the ATM market.
Call Centres
The Kingdom’s call centre industry is largely focused on the domestic market. High wages and cost of living mean the Kingdom is not a likely candidate for growth in externally oriented call centres. In the region these centres are developing mainly in non-GCC countries such as Jordan, Egypt and Morocco. At the end of 2011, 10 companies had licences to provide call centre services (down from 11 the year before). Prominent operations include a 900-seat centre operated by Etisal (which is owned by Saudi conglomerate the Riadaa Group). Another key player is Contact Centre Company, a 50:50 joint venture between STC (which has a one-share majority) and global business process outsourcing firm Aegis. The firm has facilities in Riyadh and Jeddah and aims to create 10,000 jobs by 2017.
Outlook
Mobile penetration appears to have peaked, with the market reaching saturation levels, while fixed-line growth is likely to be slow, meaning future growth may not be dramatic. The arrival of MVNOs to the Kingdom is set to strengthen intense price competition, though there is little prospect of a fourth operator entering the market. As a result of this and low ARPUs in the voice market, operators will likely focus on further boosting the uptake of mobile broadband and next-generation services such as LTE (see analysis).
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