A turning point: Operators look to higher-end services and tailored offerings to drive revenue growth in a changing market

In many ways, 2012 was a turning point for the telecoms industry in Dubai. While overall revenues rose by 10% to Dh26.9bn ($7.32bn), those from the fixed-line segment dropped by more than 8% and average revenue per user (ARPU) fell across the sector. As recent figures illustrate, parts of the sector that could once be relied upon for steady growth are becoming less important. As such, new strategies are being developed to monetise previous investments in infrastructure by providing higher-end services as well as tailoring plans and packages to meet the needs of different local customers. In addition, telecoms companies are looking to expand their operations into new areas, such as television and business information technology (IT) solutions, that have not traditionally been part of the industry, but can be easily packaged with their existing services. The telecoms market in Dubai, as elsewhere in the UAE, is dominated by two partly state-owned companies: Etisalat – formally known as Emirates Telecommunications Corporation – and du – formally known as Emirates Integrated Telecommunications Company.

Established Player

 Founded in 1976, Etisalat was the only telecoms provider in the UAE until du’s launch in 2007. The Emirates Investment Authority (EIA), the sovereign wealth fund of the UAE federal government, owns 60% of the company, while the rest is publicly traded on the Abu Dhabi Stock Exchange. Beginning in 2004 with its entry into Saudi Arabia, Etisalat has continued to expand its operations outside of the UAE, and by the end of 2012 it had 139m subscribers in 15 countries and total revenues in excess of Dh32bn ($8.71bn). Net profits before royalties were up 13% to Dh13.2bn ($3.59bn) in 2012, while net profits after royalties amounted to Dh6.7bn ($1.82bn), up from Dh5.8bn ($1.58bn) in 2011. The domestic market remained the main source of revenue for Etisalat in 2012, but its overseas operations grew by 11% during the year, bringing in Dh9.5bn ($2.59bn) and accounting for 29% of its total income.

Etisalat’s financial reports from the first quarter of 2013 show its international operations have continued to grow as well. Overseas revenues increased by 53% to reach Dh3.5bn ($953m) in the first quarter, accounting for 36% of the total, while revenues in the UAE grew at a more modest rate of 3% year-on-year to around Dh6bn ($1.63bn).

Late 2013 also brought news that the company’s international portfolio will soon be getting a boost, as the group agreed to buy French group Vivendi’s 53% stake in Maroc Telecom for an estimated $5.7bn. The deal will expand Etisalat’s reach in the region and add to its existing operations in Morocco, Gabon, Mali, Burkina Faso and Mauritania.

The New Guy

 Unlike its more established competitor, du has only operated in the UAE since 2007, but in the past seven years it has brought greater choice and competition to the market. It has been more successful in competing with Etisalat in the mobile market – claiming a 48.7% market share by the end of 2012 – than in fixed-line services, however. This is partly due to regulations that determine where each company can provide fixed-line services, while there are no such restrictions in the mobile market.

As a result, the Dh7.9bn ($2.15bn) earned from du’s mobile business operations accounted for 78.1% of its total revenues of Dh10.2bn ($2.78bn) in 2012. Net profits before royalties were up 55.8% from 2011 to Dh2.8bn ($762m), and earnings per share hit an alltime high of 43 fils ($0.12). Within the mobile business, both mobile data and post-paid subscribers were key to continued gains in 2012.

Mobile data brought in a total of Dh1.8bn ($490m) in revenues, up 74% from 2011, while post-paid subscribers contributed Dh1.9bn ($517.2m), or 25.4% of all mobile revenues. This represented a 46.2% increase from the previous year. Both of these areas are cornerstones of du’s strategy for growth and will likely be central to its success in the future, as high mobile penetration rates will limit access to new customers.

In many ways du’s strategy for its fixed-line business mirrors that for the mobile market: with limited access to new customers because of regulations, the company must focus on providing more services to its existing customer base. So far, the company has been successful in this effort, with fixed-line revenues increasing by 9.8% to Dh1.6bn ($435.5m) in 2012, almost half of which came from the higher-end services of broadband and television.

Like Etisalat, du’s largest stakeholder is the EIA, which owns 39.5% of the company, while the Abu Dhabi and Dubai governments own 20.08% and 19.5%, respectively. The remainder of the shares are controlled by private investors.

Penetration Rates

 Official penetration rates in 2012 for mobile, fixed-line and internet subscriptions in the UAE were all lower than 2011, but this was due in large part to adjustments in how users were calculated, as well as a change in the estimated population, and not a decrease in actual subscribers as such. Despite these adjustments, the UAE still has some of the highest usage rates and most advanced telecoms infrastructure in the region, and indeed the world. The country ranked second among Arab states and 25th overall out of the 142 countries included in the World Economic Forum’s Networked Readiness Index 2012-13, which is designed to measure a country’s ability to harness the power of ICT.

In 2012, mobile subscriptions in the UAE actually increased by 17.5% from 2011 to reach 13.8m, but because of a jump of close to 3m in the official population estimate, the penetration rate fell from 199% in 2011 to 168% in 2012. Similarly, registered fixedline users were up to 2m, from 1.8m in 2011, but the penetration rate dropped from 31% to 24%.

In addition to the population change, internet penetration rates were also affected by an adjustment by the Telecoms Regulatory Authority (TRA) to only count dial-up lines that have been used within the last 90 days, a move which reduced the rolls of internet subscriptions from 1.3m in 2011 to 900,000 in 2012 and resulted in a drop in the penetration rate from 56.4% to 29.2%. Despite these across-the-board statistical reductions, the fundamental characteristics of the sector remain the same: Dubai has a mature telecoms market with very high mobile penetration and one of the highest fibre-to-the-home rates globally.

Regulations

The TRA supervises the sector and plays an active role in everything from licensing to approving price changes for services. Two key regulatory items that have been on its agenda for several years are mobile number portability (MNP) and fixed network sharing. Both of these potential changes would inject new competition into the market.

Fixed network sharing in particular would change the current market dynamic, in which regulations stipulate where each telecoms provider can operate. If enacted, both companies would gain access to the other’s current operating area and customers would have a choice of fixed-line providers for the first time in the UAE. While Etisalat currently controls most of the fixed-line market, and initially would stand to benefit less from the greater competition, du operates in the newer, high-growth areas that will become increasingly important in the coming years.

MNP would also boost competition, allowing customers to switch providers without losing their phone number, but with a mobile penetration rate of 168% and a near 50:50 market share split between the two providers, the impact would most likely be marginal. While neither regulation change appears imminent at the moment, there have been recent announcements by the TRA regarding preparations for fixed network sharing and it is possible the regulatory change could be enacted in 2014.

The government also announced a change in royalty payment requirements for both Etisalat and du in late 2012. To date, Etisalat’s royalty burden has been significantly higher than du’s, but in the proposed scheme they will become equal by 2016 and shift away from being solely based on profit. The announced end to preferential royalty treatment for du comes as the company has almost reached parity with Etisalat in the mobile market. The move was also seen as a safeguard against falling state revenues from Etisalat, which until 2012 had been required to pay 50% of its profits to the state. In recent years, as Etisalat’s profits have declined, so too have its payments to the government, which were down from Dh8.8bn ($2.39bn) in 2008 to Dh5.8bn ($1.58bn) in 2011.

The details of the new scheme will require Etisalat to pay 35% of net profit plus 15% of its revenue from 2012 to 2015, but will change to 30% of net profits and 15% of revenue in 2016. Meanwhile, du’s royalty requirement will increase annually, from 17.5% of net profit and 5% of revenues in 2012 to the same 30% of net profit and 15% of revenues that Etisalat will be required to pay in 2016.

Mobile Market

 Totalling Dh20.4bn ($5.55bn) in 2012, the mobile market accounted for more than 76% of revenues in the UAE telecommunications industry. The vast majority of mobile users – around 88% – prepay for their service, with many people owning and using more than one SIM card.

However, revenue streams do not follow the same trend, and post-paid users make up a significant portion of the money spent on mobile services. Despite accounting for 12% of the overall subscription base – just three percentage points higher than in 2009 – post-paid users generated 39% of revenues, up from 26% in 2009. Following international trends, this group consists mainly of higher-income users that are more likely to opt for large data packages and is an area of focus for both Etisalat and du.

This data-focused, post-paid user base is doubly important given the declines in voice minutes, SMS messages and overall revenue per subscriber throughout the market in the last four years. The challenge that both companies will face going forward is to provide attractive service plans for their high-spending users, who will in turn demand a more sophisticated, tailored service for their money.

As Matthew Reed, principal analyst for the Middle East and Africa at Informa Telecoms & Media, told OBG, “Both operators in the UAE have been making increased efforts lately to attract post-paid customers, by revamping their post-paid plans and by encouraging pre-paid customers to switch to post-paid. Locking customers into contracts helps to reduce churn and postpaid customers tend to be higher spenders.”

Fixed Market

 Fixed-line telephony services, internet and television are all provided by the two licensed telecoms companies. Both competition and growth are heavily affected by the separate operating areas established by the TRA, while greater mobile data and voice usage have an impact on the market as well. Despite a 26% increase in fixed-line telephone subscriptions since 2009, revenues fell by 30% through the end of 2012. By nearly every important measure – revenue, domestic minutes and international minutes – customers are using their fixed-line phones less, and the focus of the fixed-line business has shifted to the expanding demand for broadband and television packages. By year-end 2012, there were around 955,000 broadband subscribers in the UAE, a 9.3% increase from the previous year, as per TRA figures. As in the mobile market, du and Etisalat have focused their attention on the higher-end subscribers, and have been actively promoting their “triple-play” packages, which package broadband, television and telephone services together in one monthly bill. Industry data from 2012 shows that 31% of all broadband users were these higher-spending, triple-play subscribers, up from just 17% in 2011.

Another key aspect of this change in growth dynamics is that it is mostly driven by residential subscribers. In fact, residential users are much more likely to have internet service of 4 Mbps-plus than businesses, and they accounted for almost all television subscriptions in 2012, according to the TRA. This will be an important trend to watch as du operates in many of the newer, higher-end residential developments in Dubai where these services are more popular.

Sattelite Services

 In addition to the two fully licensed telecoms operators, the TRA has also issued a limited number of licences to satellite providers in recent years. The only firm currently operating in the UAE, however, is Yahsat, which is fully owned by Mubadala, the Abu Dhabi government-owned investment firm. Yahsat already has data, phone and television services on offer, though higher costs for its internet and phone services have thus far limited any direct competition with du and Etisalat. However, it could prove to be a successful niche player by providing service to companies and individuals beyond the reach of the current service areas.

The only direct competition that du and Etisalat face from satellites comes in their television business. There are more than 600 free-to-air channels available in the region, and satellite is the most popular way to subscribe to television. Another issue that the telcos must contend with as they try to expand their triple-play services is illegal satellite hook-ups, which are popular among various expatriate communities. Groups from the sub-continent in particular are able to pick up satellite broadcasts from their home countries directly, and many potential customers prefer this to paying for programming that may not be targeted specifically towards them. It is unclear what impact this has had on the bottom line of either telco, though police have been stepping up efforts to address the problem throughout the UAE.

Hardware Bundeles

 With mobile data usage set to be the driver of revenue growth in Dubai, hardware is a key component for telecoms companies. According to research carried out by Google, the UAE is ranked number one in the world for smartphone penetration with a rate of 73%, while Ipsos, a market research firm, reports a slightly lower figure of 61%. In either case, the penetration rates are high and new strategies will be required to expand the market.

Attracting lower-end customers to smartphones and data usage will be an important next step, one that will require low-cost but appealing devices. Personal computer giant Lenovo recently used Dubai as a platform to launch its first smartphones sold outside of China, and included in its line-up a model that retails for just Dh499 ($136), which is well below the price of most smartphones on the market locally. Initially wary of entering the hardware segment, du and Etisalat have followed the lead of other mature markets and are now bundling the sale of discounted smartphones with a contract as a means to lock in revenue for months or even years.

Next Generation 

 Etisalat announced that is has readied its network to provide voice over long-term evolution (LTE), and that it should be available by the first quarter of 2014, marking the first time that LTE will be used for anything other than data in the emirates. While 4G LTE services have been available since 2012 in Dubai, it has been slow to take off and usage remains relatively low. Throughout 2013, both companies have made efforts to promote the use of the new technology through advertising campaigns and by offering phones that are capable of harnessing its capabilities. Already popular in other markets throughout the world, both telcos should be able to cash in on the network upgrades in the coming years.

VOIP: Voice over internet protocol (VoIP) continues to be semi-restricted throughout the UAE. In early 2013, popular services such as Skype and Viber were temporarily and partially unblocked by Etisalat and du, leading to reports that the TRA had lifted its ban on third-party VoIP services. The TRA, however, refuted this in an announcement in April, which stated that they remained blocked and du and Etisalat would have to seek approval to unblock the services, something they had not done. In reality, the services do work on a limited basis, from computer-to-computer, but remain blocked when trying to make “out” calls, or from a computer in the UAE to a phone. This is more significant for the industry in the UAE than in other places because of the country’s large expatriate population and the sizeable revenues that come from international calls. The TRA does, however, require both Etisalat and du to provide VoIP services, though neither is well advertised and most international calls are still placed via traditional phone services.

Entreprise Services

 With saturated mobile and fixed-line consumer markets, the providers are also turning towards enterprises as an underserved and potentially high-growth area. Services that have been rolled out in the last year include cloud computing, software as a service and IT security. Another avenue that both Etisalat and du are exploring is customising their products to meet the demands of specific industries, such as health care, energy and finance.

Outlook

Dubai’s telecoms market has matured in recent years and is in the midst of transitioning from a growth model based largely on expanding subscriptions to one centred around expanding services to current users. Having invested heavily in advanced and modern infrastructure, the challenge facing the telecoms operators in Dubai will be providing the right services to monetise the capacity of their networks. In both the residential and business segments this will mean attracting higher-end subscribers, while also engaging in efforts to expand data usage down the market through cheaper hardware and service plans.

As customers pay more for telecoms, their expectations of operators will also rise, both in terms of quality and efficiency. Etisalat and du will be looking to boost the sophistication of their operations and expand their business beyond traditional products and services by partnering with outside firms – from hardware suppliers to data solutions providers – to keep up with the demands of the changing market.

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The Report: Dubai 2014

IT & Telecoms chapter from The Report: Dubai 2014

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