Continuing to mature, the telecoms market in the UAE exhibits a high rate of penetration and a keen appetite for new services, especially in data. Mobile demand, both voice and broadband, has seen a steady rise, in tandem with high population and economic growth. At the same time, the base of profitability, as measured by average revenue per user (ARPU) is shifting from voice to value-added services, especially mobile internet.

IN FIGURES: As part of the UAE, the industry in Abu Dhabi is regulated by the Telecoms Regulatory Authority (TRA), a federal body. According to the TRA, in 2011 the telecoms sector contributed 4.9% of the UAE’s GDP, and employed 10,798 people. Total investment in the sector in the same year amounted to $1.6bn. This compares with respective 2007 figures of 4.1%, 10,695 people and $2.2bn. In 2011 monthly ARPU rates in the fixed, mobile and internet segments were $37.60, $40.30 and $56.10, respectively, compared with 2010 figures of $50.10, $38.12 and $45.20, according to TRA figures.

There are two telecoms operators in the country, Etisalat and du. Etisalat was formerly the state telecoms company. Since 2002 the company has been listed on the Abu Dhabi Securities Exchange, the local bourse, and the federal government retains a majority (60%) stake in the company. Emirates Integrated Telecommunications Company, which trades in the public as du, based in the neighbouring emirate of Dubai, has been operating since 2006. The federal government holds a 40% stake, while the emirates of Abu Dhabi and Dubai each hold 20% through various investment arms. The remainder is traded on the Dubai stock exchange, and the firm is structured as a publicly listed company. Both operators offer mobile services throughout the UAE.

An additional operator is Al Yah Satellite Communications Company (Yahsat), a subsidiary of government-owned investment company Mubadala, which received a licence from the TRA in 2010. Although it provides communications services to the government, the company also provides home and enterprise services. These are geared towards information and communications technology (ICT), data and broadband rather than voice telephony, and its services tend to be aimed at both the business and consumer segments.

DEMOGRAPHICS: The number of mobile subscribers in the UAE continues to grow, rising from 10.9m to 11.7m between 2010 and 2011. Penetration saw a slight increase, from 197% to 199%, and the country continues to record one of the world’s highest penetration rates. The market is driven by high disposable incomes and the dynamics of the demographic mix.

According to the National Bureau of Statistics, foreigners account for just under 90% of the UAE’s 8.3m inhabitants, meaning there is a large market for international calls. While nationals and highly paid expatriates tend to enjoy high disposable incomes and have an appetite for new technology and services, there is also a substantial consumer segment, largely made up of lower-income workers from South and East Asia, who are more sensitive to pricing. The high number of expatriates also helps account for the relative popularity of prepaid over post-paid subscriptions – 10.4m compared to 1.4m – as these involve minimal paperwork to set up and are generally cheaper.

In July 2012 the TRA launched the “My number, my identity” campaign to raise awareness of new registration procedures being rolled out across the UAE. The new regulations aim to combat identity fraud by requiring each user to register a mobile subscription in their own name using a passport or UAE identity card. Registration is expected to be complete within 18 months.

OPERATORS: Etisalat forms part of the Etisalat Group, headquartered in Abu Dhabi, which is one of the biggest telecoms groups in the world. In July 2012 Etisalat Group counted 172m subscribers, with operations in 16 countries, across the Middle East, Africa and Asia, as well as a 27.4% stake in Saudi operator Mobily. In 2011 the group reported total revenues of $8.8bn, up from $8.7bn in 2010. Earnings before interest, tax, depreciation and amortisation (EBITDA) stood at Dh15.88bn ($4.3bn), down 12% from Dh16.56bn ($4.5bn) in 2010, while net profits amounted to Dh5.84bn ($1.6bn) in 2011, down 23% from Dh7.63bn ($2.1bn) in 2010. Etisalat announced a net profit of Dh1.87bn ($513.5m) for the second quarter of 2012, an increase of 3% over the previous quarter and up 17% from the same period in 2011. The company reported revenue growth as well, with the second-quarter figure hitting Dh8.25bn ($2.3bn), a rise of 2% on the prior quarter and 4% year-on-year.

In February 2012 Etisalat Group announced it was pulling out of the Indian market after the country’s Supreme Court revoked 122 licences granted in 2008, including that of Etisalat DB, a joint venture between Etisalat and India’s DB Group, in which the UAE operator held 45%. The move obliged the group to write off $827m. The licences were issued by a cabinet minister accused of fraud, and were consequently deemed to have been awarded wrongfully, with the court ruling the licences should be put up for fresh auction. Another Gulf telecoms group, Batelco, also said it planned to exit the country subsequent to the ruling.

In September 2012 Etisalat announced that it would not be participating in India’s Ministry of Communications and Information Technology auction of spectrum in 1800 MHz and 800 MHz bands. During the same month, Etisalat also announced that it had finalised the sale of a 9.1% stake in XL Axiata, an Indonesian mobile telecoms provider. Following the sale, Etisalat retains a 4.2% ownership stake in the company.

Revenues for du reached Dh8.9bn ($2.4bn) in 2011, up 25% on Dh7.1bn ($1.9bn) in 2010, while EBITDA was Dh2.9bn ($790m), up 45% on Dh2bn ($545m) in 2010. Net profits after royalty payments to the federal government were Dh1.1bn ($300m) in 2011, compared to Dh1bn ($272m) in 2010, but this reflects an increase in the federal royalty. The company, which has been expanding aggressively in the mobile market, reported 5.75m subscribers in 2011, including mobile and fixed line, compared to 4.81m subscribers the previous year. According to the TRA, du now accounts for 46% of the mobile market in the UAE. Both operators pay royalty fees to the government, though not on an equal basis. In 2011 du paid 15% of net profits plus 5% of group revenues. When the authorities originally licensed du they exempted the new operator from paying royalties until it turned a profit, which it did not do until 2008. Since then, du’s annual royalty fees have been gradually increased, though not to the same level as Etisalat.

FIXED LINES: Fixed-line services in the UAE remain underdeveloped compared to mobile. According to the TRA, fixed-line penetration grew from 26% to 31% between 2010 and 2011. In absolute terms, there were 1.83m fixed-line subscribers in 2011, compared to 1.46m in 2010. Fixed-line prices are low by world standards, with free local calls and the cost of line rentals kept to a minimum by the government. On the other hand, there is little competition; du provides fixed-line services in the newer districts of Dubai and in the rest of the country Etisalat is the provider, reflecting its history as the incumbent. To date, subscribers can only choose their fixed-line provider in a few dedicated business districts. While domestic calls within the UAE remain economical, the international gateway is a government monopoly, and international call rates are relatively expensive. In 2008 the UAE banned voice over internet protocol (VoIP) providers such as Skype to protect revenues from the international gateway.

BROADBAND: This has a knock-on effect on broadband prices, which remain comparatively high as operators seek to recoup income from providing fixed networks at a low cost. One result of this is a relatively low penetration rate for fixed-line broadband, with cheaper dial-up connections still common. In terms of internet users, the TRA recorded that in 2011, there were 1.32m subscribers in the UAE, with 873,395 people accessing the web using broadband and 454,000 using a dialup connection. This compares with figures of 790,000 broadband users and 584,000 dial-up users in 2009. In 2011 the TRA recorded a broadband penetration rate of 14.8%, compared to 14.3% in 2010.

COMPETITION: Competition in the sector is characterised by offers and promotions rather than outright price cuts. This helps explain the UAE’s high penetration rate, since consumers often keep two mobile subscriptions and use whichever happens to have the better offer running at any given time. The authorities have obliged telecoms companies to invest heavily in infrastructure; the UAE counts the second-largest fibre network in the world, and the quality of the physical networks is generally considered excellent. The authorities fear that should there be a price war and a “race to the bottom”, it would eventually hollow out the revenue base required to sustain this infrastructure, obviating much of the original rationale behind introducing a second operator. Thus, despite the idea being raised from time to time, there are no plans to licence a third operator for the foreseeable future.

Number portability, which has a proven track record in helping to spur competition by lessening the inconvenience of changing operator, was due to be introduced in 2010, but was postponed due to technical issues. According to the TRA, these have now been largely overcome and number portability is due to be introduced soon, although no firm date has yet been set. However, given that many consumers already keep both an Etisalat and a du subscription, it may have less of an impact in the UAE than in markets where it is usual for people to maintain just one mobile line.

TRENDS: As elsewhere in the world, voice services are becoming less and less attractive, as competition forces prices downwards, albeit slowly, and data services account for an increasing share of profits. Operators in the UAE have been investing heavily in developing long-term evolution (LTE) networks – a form of so-called “fourth generation” or 4G network, which allows for faster speeds and better definition, especially important for offering services such as video-calling or on-demand television, which have grown in line with the popularity of tablet computers and smartphones. In 2011 Etisalat initiated a 4G domestic broadband service, having invested Dh6bn ($1.6bn) on upgrading its network, while du announced in March 2012 that it was to partner with Cisco to develop its own LTE network, and started offering 4G services in June of that year.

In October 2011 Etisalat launched a new internet television service, eLife TV, to complement its existing triple-play services, offering over 350 channels and an on-demand film service. In March 2012 the company reported that this service has reached the 450,000-subscriber mark. Then in July 2012, the company won three awards at the Mobile World Congress in Barcelona, two for its Mobile Baby programme, an app that won best health care product and best women’s product, while Etisalat Commerce, a payments platform, won in the best mobile money innovation category. In addition to its LTE network, in April 2012 du introduced a very small aperture terminal service platform, allowing it to offer a variety of data services and integrated solutions to corporate users. In January 2012 du launched a new television package aimed at the Russian community in the UAE, with at least eight Russian channels.

NETWORK SHARING: While the rapid deployment of 4G technology is testament to the technical sophistication of the UAE’s telecoms networks, the performance of these networks does not always reflect this, due to underutilised capacity. To gain more consistent quality across the network and promote competition, the authorities are keen to encourage the two operators to share their networks, by eliminating underused capacity in fibre-optic cables and enabling bit-stream access. Discussions between the TRA and the operators to establish wholesale prices acceptable to all parties are ongoing. Both operators, having invested major sums in developing their networks, wish to receive commensurate compensation for allowing access to their competitor. However, the technical issues are largely resolved, and bit-stream access could be implemented as early as the end of 2012 (see analysis).

In September 2010 the GCC agreed in principle to an agreement to limit roaming charges between member states, with benchmark rates finalised in June 2011. While Gulf roaming charges generally remain high compared to OECD markets, this agreement is due to be implemented across the GCC by the end of 2012. However, in February 2012, ratings agency Moody’s warned that reduced roaming rates could have a negative impact on operators across the Gulf region. Given that competition for market share remains intense, the reduction in charges would contribute to decreased profit margins in operators’ domestic markets, which have historically generated a great deal of cash for Gulf operators, in turn enabling many to expand abroad. According to the agency, strategies to compensate for lost roaming income are likely to result in tighter margins across the industry. In early 2012 Etisalat announced it would reduce its roaming rates by 26%, bringing them in line with du’s charges. Although the GCC agreement applies to voice calls only, data services are also expected to come down in price. Over the long term, roaming rates to countries outside the GCC may also fall as operators seek to maintain market share, but look unlikely to drop markedly over the short term.

Gulf Bridge International announced in February 2012 that its subsea fibre-optic cable of the same name was open for business. Providing a fast link between the UAE, Qatar, Saudi Arabia, Bahrain, Kuwait, Iraq, Oman and farther afield to Europe and India, the cable has an initial capacity of 5.18 Tbps and is designed to accommodate rapid future expansion of the network.

OUTLOOK: Continuing economic and population growth in the UAE mean the telecoms market is set to grow, both in terms of value and the number of subscribers. Take-up of data services remains high, and these, rather than voice services, are increasingly driving profitability. In particular, multi-platform services, such as mobile broadband and triple-play services, are assuming greater importance. With operators moving towards sharing their networks, competition in fixed-line should intensify, benefitting broadband and business consumers.