With annual expenditure expected to reach close to SR140bn ($37.3bn) by 2017, Saudi Arabia is the biggest ICT market in the Middle East. At a time of shrinking hydrocarbons revenues, the government has identified ICT as a key driver of smart, cost-effective solutions for government and commerce alike, and as a major pillar of the Kingdom’s long-term development strategy, Vision 2030. However, there are also significant challenges related to data security, as well as the need to nurture the human capital required to serve the Kingdom’s rapidly developing digital economy.
“Business is changing at a rapid pace due to digital disruption coming from new platforms, such as the cloud, and mobility, which has enabled new business models,” Marwan Alahmadi, chairman and CEO of Al Khalijiah Consulting & IT, told OBG. “Those who are not flexible or willing to adapt and transform their businesses to capitalise on this mega-trend will struggle and potentially see their businesses attacked because of their obsolete business models. Examples from the sharing economy are hotels, which are losing a good part of their business to Airbnb, and the same is happening for taxis to Uber.”
Spending & Investment
The ICT sector in Saudi Arabia is regulated and overseen by the Communications and Information Technology Commission (CITC), which was originally created by the Telecommunications Act of 2001 as the Saudi Communications Commission. The commission changed its name to the CITC in 2003.
In 2015 the CITC published the results of detailed research it conducted on trends within the sector. Its data showed that in 2014, SR111.98bn ($29.9bn) was spent on ICT in Saudi Arabia, which was more than the combined ICT spend of the other five GCC member states. Of the total, 65% was spent on telecoms services, 23% on telecoms hardware, 8% on IT services and 4% on software. The CITC reported that in the same year ICT investments in the Kingdom totalled SR17.33bn ($4.6bn), with software developed in-house accounting for 47%, or SR8.39bn ($2.2bn), while SR4.58bn ($1.2bn) was invested in IT equipment and SR4.86bn ($1.3bn) on communications equipment, 26% and 27% of the total, respectively. The communications services sector was responsible for 25% of this ICT investment, with the central and local government, and health and education sectors accounting for a combined 20%, the oil and gas industry comprising 12%, and the financial sector behind 11% of ICT investment.
The CITC also calculated that the gross value added of ICT to the wider economy was SR26.57bn ($7.1bn), with telecoms accounting for 76%, and IT services, IT hardware and packaged software contributing 12%, 9% and 3%, respectively.
Telecoms
The Saudi telecoms sector is relatively young and vibrant. Saudi Telecommunications Company (STC), originally a department of the Ministry of Post, Telegraph and Telephone, was partially privatised in 1998 and remains the dominant fixed-line and mobile telecoms player. Although 16.2% of its shares are floated publicly, the balance is held jointly by the Public Investment Fund, the Public Pension Fund and the General Organisation for Social Insurance.
In 2009 a second fixed-line operator, Etihad Atheeb Telecom, was licensed, and trades under the name GO. The company had 200,000 customers across the Kingdom in 2015. Mobily, which was established as the country’s second mobile operator in 2004 by a consortium led by the UAE’s Etisalat and Etihad, won its licence through an auction and began operating the following year. The Kingdom’s third mobile network operator (MNO) is Zain, which is part of the Kuwait-based Zain Group The company began its Saudi operations in 2008, having also won its licence at an auction.
Following the April 2016 launch of Vision 2030, the Saudi government published its National Transformation Programme (NTP) in June 2016. The latter plan sets out a roadmap via which the objectives of the nation’s overarching development strategy might be realised. “Regulations need to reflect the central role of ICT in our national transformation goals. We ought to encourage greater investment and expansion of services,” Khalid Al Arfaj, CEO of ITCC, told OBG.
The NTP’s interim targets are set for 2020, one of which is to “provide broadband services to all regions in the Kingdom by stimulating investment in infrastructure and developing tools, technical and regulatory frameworks”. More specifically, the aim is to have 80% fibre-to-the-home (FTTH) coverage in densely populated urban areas (up from 44%), 55% FTTH coverage in urban areas (up from 12%) and 70% wireless broadband network coverage in rural areas (up from 12%). “The pressure on the telecoms sector is increasing, and telecoms operators will not have the luxury to operate their business with the same structures, expenses and approach,” according to Mohammed Sadyeh, CEO of Qanawat Telecom Company. “Transformation to digital services is a must, mainly to serve the dynamic needs of customers and to support the internet of things and machine-to-machine segments. The latter is forecast to grow by between 20bn and 30bn subscriptions by 2021.”
Virtual Mobile
In 2014 two mobile virtual network operators (MVNOs) were licensed, with fixed ties to MNOs in the Kingdom. Virgin Mobile Middle East and Africa (VMMEA) works with STC, while Jawraa Lebara is linked to Mobily. The CITC is continuing the process of selecting a third MVNO to work with Zain. VMMEA announced it had passed 1m subscribers after its first year of operations, while Lebara, after slower growth in 2015, have bounced back and now has 1.3m subscribers.
Performance Indicators
According to CITC data, broadband subscriptions to mobile networks increased from 29.1m in 2014 to 33.4m in 2015, for a penetration rate of 106%, though these numbers dropped to 26.6m and 83.5% by August 2016. Meanwhile, the fixed broadband penetration of households increased from 43.2% and 3.03m subscriptions in 2014 to 49.7% and 3.56m a year later; however these figures also decreased slightly in the first half of 2016 to 41% and 3.06m. At the end of the first half of 2016, there were 22.4m internet users in the Kingdom, up from 21.6m in 2015.
CITC data also shows that mobile subscriptions fell from 53m at the end of 2015 to 48m by August 2016, of which over 84% were pre-paid, or pay-as-you-go. The total penetration of mobile phones was 152%, while the number of fixed lines was 3.62m, comprising 1.9m residential lines and 1.72m used by businesses. These figures represent a household teledensity of 31.1% and a population teledensity of 11.2%. The number of fixed-line subscriptions has fallen by 23% since 2013, with the CITC suggesting this was because consumers were cancelling their subscriptions and relying solely on their mobile phones.
Corporate Results
In a heavily pre-paid mobile market with very high penetration, there have been a number of claims and counter-claims over the exact market share of active SIM cards of each of the MNOs and MVNOs. According to a February 2016 report from Aljazira Capital, STC was the largest player in the sector with a market share of between 49% and 52% in 2015. This was followed by Mobily, with a share of between 25% and 28% and Zain, with a 23% share. STC is the most profitable operator when financial statements are compared. For 2015 the STC Group reported a consolidated net profit of SR9.3bn ($2.5bn), and revenue from domestic operations grew by 9% over the year. Mobily, meanwhile, posted a net loss of SR913m ($243.4m) and Zain had losses of SR972m ($259.1m) in 2015. However, both companies have invested significant sums recently in improving their infrastructure. In 2014 Zain signed SR4.5bn ($1.2bn) in contracts with Huawei, Nokia, NEC, Cisco and Alcatel-Lucent to improve capacity, coverage and speed throughout its Saudi network, and in the same year Mobily spent SR6bn ($1.6bn), with investments that included the construction of a Tier-4 data centre in Riyadh. According to Reuters, STC spent SR3.9bn ($1bn) to enhance its infrastructure for both mobile and fixed-line services in the second half of 2015, matching its spend in the first six months of the year.
Cheap Data
One of the most pressing concerns for all MNOs and MVNOs is fierce competition on price, which has driven down the cost of mobile data for customers in Saudi Arabia, thereby impacting average revenue per user (ARPU). “Saudi Arabia has one of the highest levels of consumption for data on mobile broadband, and the cheapest price per GB in the world thanks to very aggressive unlimited mobile broadband offerings by all operators in the market,” Sacha Dudler, corporate performance management general manager at STC, told OBG. “There are quite a few customers using 500-plus GB in downloads per week, burdening all operators’ network capacity and driving costly expansions,” he added.
A 2015 comparison of ARPU in 16 countries by the management consulting firm Arthur D Little found that the average ARPU of Saudi Arabia was $16.65, while it was $17.76 in Germany and $47.72 in the US. The CEO of Mobily, Ahmed Farroukh, identified unlimited data packages as an issue for the industry in Saudi Arabia. “ARPU here is pretty healthy, but if we can do away with unlimited data packages, then we can drive up ARPU even more, as this is a data-driven market,” Farroukh told OBG.
Strong competition on data pricing has also created a tough market for the two new MVNOs. “Everybody is losing money on unlimited data packages, and this has to change in order to create a healthier market,” Fouad Halawi, CEO of VMMEA Saudi Arabia, told OBG. He said that MVNOs could simply not survive on the lowest tariffs. “Price is not a point of differentiation anymore; the key is market segmentation and finding your niche.”
Keeping a clear focus and vision is also a central part of Lebara’s strategy. “You need to understand who you are targeting and what your segment is,” Mohammad Al Mohesn, chief marketing officer of Lebara, told OBG. “If I want to go and address the same market as the local traditional mobile service providers, I will definitely lose. Focus and optimisation are the name of the game for MVNOs; acting otherwise will be the best recipe for a market exit.”
For the CITC, however, lower prices represent a benefit to consumers, noting in its 2014 annual report that while the cost of living in Saudi Arabia increased by 30.1% from 2007 to 2014, the cost of telecoms fell by 6.3%, with telecoms firms reporting significant declines on voice and data revenues. “The decline is mainly due to the accelerating pace of competition in the ICT market and the diversity of promotions offered, which reflected positively on the prices of services,” the report said.
Converging Technologies
The combination of low margins on data packages and the challenge posed to voice and text revenues by apps such as WhatsApp, Viber and Skype has prompted telecoms companies to move into areas that were once the preserve of ICT companies. Both STC and Mobily see telecoms as part of a wider, integrated ICT offering, which includes data centres, and managed and cloud services. According to a 2015 report by the CITC, spending in these three subsectors of the ICT market reached SR609m ($162.4m), SR912m ($243.1m) and SR189m ($50.4m), respectively, in 2014. Between 2011 and 2014 growth in expenditure in each area grew by 48%, 55% and 373%, respectively, with the CITC anticipating this trend would continue. Indeed, by 2019 the market for data centres in Saudi Arabia is projected to reach SR1bn ($266.6m), with an additional SR1.4bn ($373.2m) for managed services and a cloud services market worth SR476m ($126.9m).
“In the business-to-business space, we will be focusing on cloud and managed services, in addition to the core telecoms services for our customers, as public and private sectors want to focus on their core businesses, outsource and move their IT spending from capital expenditure to operational expenditure,” Ismail Alghamdi, chief business officer at Mobily, told OBG. “Now, with these services, customers can bring their services and offerings to the market very quickly, in a matter of days rather than weeks or months. Therefore, IT services will be one of our main growth areas.”
STC also sees tremendous opportunities in providing these services to both the public and private sector, and to companies large and small. “There is a big push on digitisation, and so we see ourselves having quite a role in that through our data centres and network, but also through the services that sit on top of that, which can enable common systems for health, education and other government agencies,” Gregg Rowley, vice-president for strategy at STC, told OBG.
Other Providers
STC is one of three data service providers licensed by the CITC. Another, Integrated Telecom Company (ITC), is a subsidiary of Al Mawarid Group and was established in 2005. One of the Saudi conglomerate’s 27 businesses, it operates its own infrastructure with landing stations at Jeddah and Al Khobar, connecting submarine cabling to the 17,000-km Saudi National Fibre Network. ITC has strategic partnerships with many international technology companies, including Cisco Sun Microsystems, Oracle and HP. The other data service provider is Bayanat Al Oula for Network Services. Mobily bought 99% of the shares in this firm for SR1.5bn ($399.9m) in 2008.
UAE firm Thuraya Telecommunications is the Kingdom’s only licensed mobile satellite communications company. Additionally, there are 50 companies licensed to offer internet services, 19 very-small-aperture terminals for satellite services, 89 automatic vehicle location providers and 24 companies licensed to operate call centres.
Strategic Partnerships
Licensed ICT firms can act as bridges to the Kingdom for international technology firms seeking strategic partnerships with businesses that have a thorough understanding of the domestic market.
“We can offer hybrid solutions with these global cloud companies, adding value to their offering through data localisation, customisation and support selling these services in the local markets,” Amjad A Hafez, CEO of NourNet, a private IT services firm that offers cloud services and data storage, told OBG. “International companies are talking to us about this. We have value here because of the customer relations we have and the local understanding. Having local support is also a significant advantage for any global company, especially when you consider that Saudi Arabia represents 75% of the Middle East ICT market.”
Land Of Opportunity
Khaled Al Dhaher, managing director of HP Enterprise in Saudi Arabia, sees four areas of focus in the market in Saudi Arabia: the infrastructure for cloud services, including data centres and disaster recovery; big data and analytics; mobility and the opportunities it presents to offer first-rate services across the Kingdom using technology and sector-specific apps for health, education or other sectors; and security. “Technology has become such a building block for everything, and of course, it enables you to do more with less,” he told OBG.
Security Issues
Although countries around the world are dealing with data security issues, Saudi Arabia faces unique challenges and threats, according to those working in the ICT sector. “People do not realise the scale of the issue, and the need to detect and handle threats,” Al Dhaher told OBG. “Businesses and government departments may think about the perimeter, but with so many people coming to work with their own devices, they also have to think about what is going on inside their organisations.”
Cybersecurity has come to the fore in the Kingdom after a spate of breaches, underscoring the need for greater investment in protective measures and skills development to help thwart hackers. In mid-August 2015, 23 government websites were breached over the course of two hours, exposing state education, health, sports, and municipal and traffic websites, among others.
With ICT spending increasing from SAR111.98bn ($29.9bn) to SAR120bn ($32bn) between 2014 and 2015, and global market intelligence firm IDC forecasting spending across 2016 to exceed $35bn, greater investment in cloud computing and analytics, reinforced security systems and support services could feature prominently on corporate shopping lists in the near future. The need for improved protection and risk-awareness also extends to the private sector. While cybersecurity levels vary across the Saudi economy, the financial sector is seen as being better shielded against risk. However, according to industry participants, despite the fact that the nation’s banks are seen as having strong firewalls, these institutions will likely need to continually re-evaluate existing practices in the face of ever developing threats.
NourNet’s Hafez told OBG he believes Saudi Arabia is one of the biggest targets in the world for cyberattacks, and that although many breaches come via trojan horses or malware, awareness needs to be raised about new threats posed by cybercriminals, particularly to mobile devices. “Training and awareness campaigns are a simple first step to counteract a good deal of these,” he told OBG. “The danger of cyberthreats is increasingly shifting towards mobile devices, as people use them more and more for work. Currently, they are not secured like the computers in an office are, and so we need to better protect users.” With growing day-to-day reliance on technology and the strong emphasis on ICT in the Saudi economy, the need for adequate infrastructure and training for cybersecurity professionals is expected to increase in the coming years.
Identity Concerns
One response to concerns about cybersecurity and state security taken at the start of 2016 was a CITC directive ordering all MNOs and MVNOs to collect fingerprint authentication from customers buying SIM cards. The fingerprint data is being collected using electronic devices linked to the National Information Centre to enable the country’s security agencies to identify and track mobile phone users. Customers had previously been required to provide proof of their identity using a passport or residency permit.
As of January 2015, new residence permit applicants have also had fingerprints taken, but the authorities remained concerned that SIM cards were still being obtained fraudulently. Saudi Arabia already collects and stores fingerprint records of business visitors and tourists, and the Ministry of Interior is also collecting fingerprint records for citizens applying for passports as part of its efforts to maintain security while introducing more effective smart government solutions. “We are constantly using technology to enhance and improve the speed, efficiency and security of our service, and the electronic passports we are introducing in 2016 are an excellent example of this policy,” Suliman Alyahya, general director of the passport department at the Ministry of Interior, told OBG. “The electronic passports will have a chip inside containing fingerprint data.”
At the same time, applicants over the age of 20 will be eligible for 10-year passports rather than for five years, and when they apply for renewal the process will be completed online within two to three days using the submitted fingerprint data. Registered users of the Ministry of Interior’s Absher portal and its mobile app are also able to complete many transactions, such as the renewal of their residence permit or multiple-entry visas, in a secure and transparent fashion online. “We have 6m registered users of Absher, and every day the portal is handling 60,000 transactions, tasks that would have been done manually in the past,” Alyahya told OBG. Alongside the advent of these technological advances, the passport department is working to improve the quality of service its staff provides to customers and clients entering the country. In September 2014 Saudi graduates wearing national dress replaced the uniformed men who had previously checked passports at the country’s international airports. Under the Hayyak programme, the new staff were encouraged to greet visitors with a smile. This also improved staff morale, and Saudi newspapers have reported that the arrival process has become quicker.
Smart Synergies
Yesser, a programme that was established by the Ministry of Finance and the Ministry of Communication and Information Technology in 2005, has been tasked with ensuring the smooth adoption and integration of e-government practices in Saudi Arabia. Yesser deals with no fewer than 170 government agencies and has departments responsible for building ICT skills and capabilities, thereby ensuring Saudi Arabia conforms to international standards and improves its ranking in international indices, while also promoting research and innovation. The research and innovation department is considering ways to ensure government departments use ICT to make savings and improve security, but also to develop the way they interact with residents and citizens. “Much of our work involves moving the focus from the old concept of e-government to smart government, where we can use developments in mobility, big data analysis and social media to be more responsive, but also to anticipate citizens’ needs so that we can approach them before they approach us,” Majid Aldraehim, research and innovation manager at Yesser, told OBG.
The Youth
A challenge for government agencies and the private sector is to manage the technological expectations of a young population. With more than half of the population under 25 and two-thirds under the age of 30, Saudi Arabia remains a nation of early adopters of technology. CITC data on mobile use published in 2015 showed that 82% of people in Saudi Arabia had access to smartphones and that 47% had access to both smartphones and tablets. The survey found that 91% of people aged 15 to 35 used smart devices, compared to 55% of people aged 45 and above.
Outlook
However, ownership of smartphones does not necessarily mean the devices are being used in a way that will boost productivity or prepare graduates for a career in ICT. The CITC mobility report published in 2015 found that productivity-enhancing apps such as calendars and to-do lists languished behind video, photography, messaging, email and social media when users were asked about how they used their devices. “The fact that we have a lot of young people that are tech savvy is a very important starting point, but using technology is different to developing technology,” Al Dhaher told OBG.
There were about 165,000 professionals working in the ICT sector in 2014, the CITC noted in a 2015 workforce report. This number accounted for almost 1.5% of the total economically active population, with Saudis making up almost half the ICT workforce. Demand from government and industry is projected to drive employment growth in the sector, which is forecast to grow at a compound annual growth rate of 9% over the next three years. The sector is expected to reach 196,000 and 213,000 professionals in 2016 and 2017, respectively. With increased spending creating new positions, if young Saudis are more prepared to train and enter ICT professions, they could claim a higher proportion of these jobs. Furthermore, the McKinsey Global Institute estimates that the Saudi workforce will grow from 5.6m in 2015 to 10m in 2030. Based on this figure and the government’s push to boost private sector employment, the ICT sector could feasibly become a significant employer of domestic workers.
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