A turning point: Development focus looks set to shift to content and services

Boasting almost 13m mobile telephone connections, 1.9m fixed telephone connections and nearly 1m internet users, according to the Telecommunications Regulatory Authority (TRA), the UAE has one of the biggest telecoms industries in the MENA region. The sector plays an important role in the country’s economy, contributing almost 5% of GDP and employing over 10,798 people in 2011. This is slightly lower than the figures in 2010, which has been attributed to the ongoing effects of the global financial crisis. Total investments into the sector also dropped between 2009 and 2011, going from a high of Dh9.5bn ($2.59bn) in 2009 to Dh600m ($163.32m) in 2011, according to the TRA.

LANDSCAPE: Etisalat and du are the only telecommunications service providers in the UAE, and both are partially owned by the government. Public and private investments into the sector have ensured businesses and households have access to the latest telecoms technology, while simultaneous reforms to regulations are working to liberalise the sector and improve competition. The two service providers, however, still hold significant monopoly power over the sector and do not compete directly in all regions of the country. The TRA is negotiating an infrastructure sharing agreement to remove these barriers to competition, but has not specified when the reforms will be put in place.

Given the extremely high mobile penetration rates in the UAE, growth in the sector is expected to come from expanding high-speed broadband and internet subscribers and through value-added services across industries, particularly the media and banking sectors. Restrictions on services such as voice over internet protocol (VoIP) may dampen opportunities in certain segments, but Dubai’s business-friendly environment and dedicated free zones continue to attract businesses and investments into the sector.

SECTOR OVERSIGHT: The TRA was established in 2003 with the mandate of overseeing every aspect of the information and communications technology (ICT) sector in the UAE. It serves as an independent public authority and is free to develop regulations, monitor the market and provide consultation services in relevant fields. The TRA was responsible for initiatives such as the ICT Fund, a venture dedicated to advancing the sector, and is actively engaged in developing a cadre of qualified ICT professionals in the country. The Betha Scholarship Programme, for example, supports national education efforts by funding scholarships for students training in the ICT sector.

PROVIDERS: Founded in 1976 as the Emirates Telecommunications Corporation, Etisalat managed the UAE’s telecoms sector exclusively until recently. The firm launched the Middle East’s first mobile network in 1982 and has dominated the telecoms sector in the region since. Forbes Middle East has highlighted the telecom giant’s success, naming it the most powerful company in the UAE in 2012. Etisalat has assets of more than $20bn and annual revenues of some $8.7bn. It operates in 18 countries across Asia, the Middle East and Africa, and has a global customer base of more than 140m mobile, fixed-line and internet subscribers.

Etisalat has invested heavily in building telecoms infrastructure, with Abu Dhabi becoming the first capital city in the world to be fully connected with a fibre-to-the-home (FTTH) network. The firm has now commercially launched its long-term evolution (LTE) network. As of 2010 it had 7.8m mobile, 1.2m fixed-line and 1.3m internet subscribers in the UAE. Its e-Life double- and triple-play services are geared towards bundling mobile, voice, internet and TV services to cater to increasing demand. Etisalat recently launched a 3D-TV package, making the UAE among the first five countries in the world to offer such a service.

Etisalat’s expansion strategy is critical to its success as the TRA continues to implement reforms to liberalise the industry. The regulator was authorised to encourage private sector participation in the market and liberalised the sector in 2005, awarding a second licence to the Emirates Integrated Telecommunications Company, which operates under the brand of du. The ownership structure includes a 40% stake by the UAE government, 20% by Mubadala Development Company, 20% by Dubai Holding and 20% by public shareholders, according to its website. Despite entering a fairly saturated market, du has expanded rapidly through the UAE, attracting some of Etisalat’s customer base. In its first 12 months of operations, du captured close to 13% of the UAE’s mobile telecoms market, with nearly 900,000 subscribers by the end of 2007.

An aggressive pricing strategy that included per-second calling rates and an attractive branding initiative have been the main factors for du’s success. The newcomer now has over 5.5m mobile and almost 500,000 fixed-line customers, generating revenues of Dh2.5bn ($680.5m) in the third quarter of 2012. Its mobile business is the key revenue driver, with a 21.8% year-on-year rise in mobile revenue in 2011. Data services account for only 16% of the revenue and these are likely to be the major source of growth going forward.

REFORM: Du’s entry into the UAE telecoms market has not resulted in vastly lower prices for end-consumers because the two companies initially covered different regions of the UAE and did not directly compete for customers. The TRA, Etisalat and du are now working towards further liberalising the market by implementing reforms that will introduce bitstream network sharing technology, though that project has been delayed indefinitely. These changes, if made, will give business and residential customers a choice in which operator they use for fixed-line and internet services.

One issue that has been a point of contention is VoIP, which is tightly controlled in Dubai. This is particularly problematic because most residents of the emirate are expatriates and a lack of cheap internet calling options allows Etisalat and du to set special rates for international calls. This has spurred growth of an illegal market of VoIP operators. The TRA has yet to implement plans to lift these restrictions, however.

MOBILE COMMUNICATION: Despite the impact of the global economic crisis, the telecoms industry has been fairly robust and has witnessed continued growth in the mobile market segment. The UAE currently has one of the highest mobile penetration rates in the world, with almost 13m active mobile subscriptions in 2012 within a population of only 7.9m people, according to the TRA. This is from a baseline of only 7.7m subscribers just five years earlier in 2007. Informa Telecoms & Media, a provider of events, training and research in the media and telecoms sectors, estimates this market will grow further to over 16m subscribers by 2015. The Dubai Chamber of Commerce and Industry forecasts that the total sales of mobile phones in the UAE will go up from $349m in 2011 to $414m in 2015.

Etisalat continues to lead the market, with almost 7m subscribers, according to data from Informa Telecoms, but du is catching up to its rival, with an estimated 5.8m subscribers in 2012. The data also show that the vast majority of subscriptions are pre-paid accounts, which represent 88%, or 11.1m, of all subscribers. These figures are a factor of the UAE’s largely expatriate population and the number of tourists and professionals that fly into the country for short periods.

Revenues from mobile services increased from Dh13bn ($3.54bn) in 2007 to almost Dh20bn ($5.44bn) in 2011, according to the “Third Annual Sector Review” prepared by the TRA. This compares to just Dh17bn ($4.63bn) in 2008. The report shows that average revenue per user (ARPU) per month, however, decreased from Dh144 ($39) to Dh140 ($38) during the same period. Etisalat and du have rolled out strategies to increase data usage to improve earnings per customer. Despite accounting for 88% of total subscriptions, pre-paid mobile services contributed only 70%, or Dh12.3bn ($3.35bn), of total revenues with post-paid services generating over Dh5bn ($1.36bn) in 2012.

REGIONAL MARKET: Although there has been tremendous growth in the local market, the UAE’s mobile subscription base makes up just a small proportion of the MENA region, which provides vast potential for expansion for Etisalat, du and other players in the sector. According to recent forecasts by Informa Telecoms & Media, the Middle East will see over 270m mobile subscriptions by the end of 2012. This may rise to as many as 352m by the end of 2016. Iran and Saudi Arabia are the two biggest mobile markets in the region, with Iran estimated to have 83m subscriptions in 2012 and up to 122m by 2016, though collaboration with Iranian operators is unlikely given the current political environment. Similarly, Saudi Arabia will have almost 51m active mobile subscriptions in 2012, growing to more than 71m by the end of 2016.

Etisalat is actively pursuing a foreign expansion strategy, and currently has assets across the Middle East, Africa and Asia. According to its most recent annual report, the operator will “maintain its prudent approach to evaluating acquisition opportunities that are in line with its strategy to expand internationally and add value to its operational portfolio”. The report confirms that Etisalat’s international acquisitions will help the company diversify its portfolio, noting that, “The Corporation is in the process of evaluating and preparing for entry into new markets… when investment opportunities become available that would generate returns for shareholders, subscribers and the sector.”

DATA SERVICES: The advent of smartphone and tablet computing provide additional opportunities for the telecoms industry. Smartphone penetration is already very high in the UAE and is forecast to continue rising. Informa Telecoms & Media estimates penetration to exceed 47% in the UAE and estimates the market will expand further to 70% by the end of 2016.

There are more smartphones than data subscriptions in the UAE, indicating that some people are using their smartphones for traditional phone calls and texts, and not to access data. Data services account for a small proportion of revenues in the region, estimated to be only 13% of mobile revenues in the Middle East in 2011, according to Informa Telecoms. Africa is the only region that has a lower ratio. The UAE compares favourably in this sector, with 1.7m Blackberry, smartphone and mobile data connections as of December 2011.

Increasing revenues in this segment will be important for the region’s telecoms industry, and the gaps in the market provide significant opportunities.

ROOM FOR GROWTH: While the hardware has been distributed widely, there is still a lot of room for expansion in developing content that harnesses the full potential of mobile broadband. Some firms have developed applications that run on smartphones, but most do not have a dedicated mobile and digital strategy. The UAE’s free zones will play an important role in attracting global players to fill this gap in the market. Facebook, for example, recently opened an office in Dubai to help the global social-networking firm expand into the valuable MENA market.

Not all foreign operations, however, have been successful. Online deals giant, LivingSocial, for example, pulled out after just one year of operations to cut its losses. This is one indicator of the difficulty of entering the local market. Despite some failures, however, the future of the mobile segment in the UAE remains bright. In a recent statement, Informa Telecoms & Media pointed to the “impact of competition, the availability of new data-based services, increasing affordability and population growth” as factors that will contribute to ongoing growth in subscription numbers in the region. The statement went on to add, “Markets have become tougher as they have become more competitive and mature, and operators have been seeking to cut costs where possible; put more effort into customer retention; and focus more on the main clear growth area, which is data services.”

FIXED LINE: The fixed-line telecoms market accounts for a small segment of the sector, but represents a relatively steady revenue stream for du and Etisalat. The TRA reports that the number of fixed-line subscribers continues to grow, increasing from 1.5m connections in 2008 to over 1.9m in 2012, covering some 31% of the national population. Businesses accounted for the majority of connections in 2010, but residential fixed lines moved ahead in 2011 due in part to the inclusion of double- and triple-play subscribers, who were not reported in earlier years. According to statistics from the TRA, there were 639,000 residential fixed-line connections in 2010. This increased dramatically to 970,000 in 2011. Conversely, commercial connections only rose from 822,000 in 2010 to 839,000 in 2011.

Revenues generated from fixed-line telephone services totalled more than Dh2.8bn ($762.16m) in 2011, according to the TRA. Du has gradually captured the bulk of this market, with revenues from fixed lines almost doubling from Dh830m ($225.93m) in 2008 to almost Dh1.5bn ($408.3m) in 2011. This is mainly a factor of operating zones that were imposed on Etisalat and du, which restricted Etisalat’s expansion capacity. The TRA is likely to lift these restrictions, allowing both companies to compete directly across the country. The two operators are currently rolling out infrastructure-sharing technology to this end.

International phone calls, which can be very expensive within the UAE, account for the majority of revenues in the fixed-line segment. This stream of income is likely to be less secure as competition increases and cheaper calling options are developed. Furthermore, the average margin per line has also dropped, slipping from Dh273 ($74) in 2009 to Dh198 ($54) in 2011. This trend points to lower margins in the fixed-line segment going forward. However, Etisalat and du have strategies to boost demand for fixed lines and raise the number of subscriptions. Etisalat, for example, is planning on cutting the cost of calls to certain countries by up to 50% and is also working on launching “smart land-telephones” that will enable access to the internet.

ONLINE ACCESS: Providing internet access across a variety of fixed and mobile platforms is increasingly replacing voice services as the telecoms industry’s core business. The sector is characterised by a shift towards transmitting text and images. The TRA estimates there are currently fewer than 1m internet subscribers in the UAE. This demand is forecast to explode as more people purchase devices that connect to the internet over fixed or mobile broadband networks.

Although most internet users in the UAE are connected through a broadband subscription, there are still almost 5000 dial-up connections in the country. However, there is room for further growth as there are still only an estimated 11.5 broadband internet subscribers per 100 inhabitants. Interestingly, there has been a sharp drop in the number of dial-up connections since 2009, but there has not been a corresponding increase in broadband connections. It is likely that these figures were heavily influenced by the population shifts as a result of the global financial crisis.

Despite fluctuations in the number of internet subscribers, total revenues have been growing steadily in recent years, increasing by over 90% from Dh1.7bn ($462.74m) in 2008 to Dh3.3bn ($898.26m) in 2011, according to the TRA. This growth is attributed to services such as internet protocol television (IPTV) and to growth in the number of broadband subscriptions. ARPU varies significantly between business and residential connections. The TRA estimates that monthly ARPU for residential connections has more than tripled from Dh78 ($21) in 2008 to over Dh252 ($69) in 2011. Monthly ARPU for commercial connections is vastly higher but declined by more than 66% during the same period, going from Dh2642 ($719) in 2008 to just Dh919 ($250) in 2011. This is likely due to drops in the cost of and demand for international calls.

MOBILE & IP TV: The UAE has a robust pay-TV market. Both Etisalat and du have invested in shifting their customer base towards IPTV by bundling voice and internet services. Etisalat’s eLife digital cable TV service, for example, had an estimated total of 425,000 pay-TV customers in 2011, up from 290,000 in 2008. The company introduced the IPTV platform in 2009 and has grown its base to over 250,000 customers since then, with only 175,000 remaining on cable. Similarly, du had 103,600 IPTV customers by the end of 2011, compared with only 45,000 in 2008.

Both operators are investing in FTTH networks that will ensure the UAE has the infrastructure to support growth in the segment. The UAE jumped two places in the FTTH Council Europe’s rankings for FTTH deployment, with over 56% of homes connected to the network throughout the country. As with other services, however, the bigger issue is to work with partners to develop content to drive demand and advertising. Foreign media companies are starting to tailor content to cater to the Arab market. The BBC, for example, is developing an Arabic version of its “Question Time Show”.

Mobile TV is also an increasingly popular service, with both Etisalat and du currently involved in the market. Du provides over 28 live streaming channels for Dh10 ($2.72) per month per channel. Services include entertainment, news, sports and music channels in over 10 languages. Dubai One, Al Jazeera, BBC World and Zee TV are just a sample of the options available. Etisalat also offers similar services, but these do not support Blackberry and iPhone handsets. Both services have become cheaper and more streamlined since their introduction; however, both will need to expand the content available to attract more paying customers.

OUTLOOK: Dubai’s telecoms sector is well positioned to continue growing rapidly. In addition to the UAE’s broader economic and demographic growth, the emirate provides a highly competitive commercial environment and is well regarded as a regional business hub. The sector is now at a turning point where the focus looks likely to shift from building infrastructure to developing content and services to leverage the hardware segment. UAE free zones such as Dubai Internet City and twofour54 are increasingly serving as centres of innovation and development for these goods and services. Access to finance, a critical factor for business development, is competitive in the UAE, which is ranked as one of the top countries in the world for access to venture capital by the World Economic Forum.

As with many other sectors, a focus on ensuring a supply of qualified local professionals to support the industry will be necessary. Local knowledge will be critical to the success of business in the UAE. Finally, given the population size and diversity, companies with a regional or international outlook should be better placed to access and serve a larger customer base.

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The Report: Dubai 2013

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