Exhibiting high mobile penetration rates and strong uptake of next-generation services, the UAE’s telecoms sector is advanced and expanding in line with population and economic growth. The two government-linked operators, holding public mandates, have made major investments in an extensive fibre-optic backbone, providing robust connectivity for broadband users.
The Market
The Telecommunications Regulatory Authority (TRA) is the main federal entity tasked with oversight of the sector. According to the TRA, investment in the telecoms sector during 2012 totalled Dh6.37bn ($1.73bn), down from Dh7.64bn ($2.08bn) the year prior. The sector also contributed about 5% to the UAE’s GDP in 2012, a 22% increase since 2007, when it contributed 4.1% of GDP. A total of 7961 people are employed in the industry, of which 40% are Emirati. The two main telecoms operators in the country are Etisalat, the market name assigned to the Emirates Telecommunications Corporation, and du, the commercially rebranded and publicly traded name of Emirates Integrated Telecommunications Company.
Etisalat, which was formerly the sole state telecoms company and is based in Abu Dhabi, was founded in 1976 and is today 60% owned by the UAE government, with the remaining 40% publicly traded on the Abu Dhabi Securities Exchange. As the incumbent, it enjoyed a 30-year monopoly until du launched its services in 2007. Headquartered in Dubai, du is roughly 40% owned by the federal government, while 20% is publicly traded, with the remaining 40% split between Mubadala Development Company and Emirates Technology and Communication Company.
Since its inception du has made strong inroads in gaining market share, with TRA figures indicating that it had captured a nearly equal (49%) share of mobile subscriptions by the end of 2012. Due to its strong terrestrial infrastructure legacy as the sole operator and developer of the national and international fixed-line network, Etisalat retains a dominant position for fixed-line voice and broadband services (around 95% and 84%, respectively). This could change should legislation enforcing the sharing of network infrastructure, in particular bitstream access, be implemented.
Uptake & Penetration
In line with an expanding population, mobile subscriptions in the UAE continue to grow, rising from 11.7m in 2011, to 13.8m in 2012, and then to 15.7m in October 2013, according to the TRA. Mobile penetration stands at 190%, one of the highest rates in the world. Fixed-line penetration is far lower, coming in at 24.9% for 2012, down from 31% in 2011. The decline, according to the TRA, is attributable to a change in the way the National Bureau of Statistics estimates the population.
Indeed, as foreigners account for around 88% of the UAE’s inhabitants, many of which are lower-income workers housed in shared accommodation, it makes implicit sense that mobile penetration far exceeds fixed-line penetration. The UAE’s demographics also help to explain the market’s segmentation into two distinct spending groups. Nationals and highly paid expatriates have the disposable income to own and make use of smart devices and handsets, which consume greater amounts of data, while lower-income earners are more sensitive to pricing and tend to have dual SIM cards.
Over 2012, monthly average revenue per user (ARPU) was Dh133 ($36) for mobile services, down from Dh148 ($40) in 2011. Fixed-line ARPU also dropped, from Dh138 ($38) in 2011 to Dh116 ($32) in 2012, although profitability is shifting from voice to value-added services, in particular mobile internet. Data as a percentage of revenues in the UAE is relatively low compared with markets of similar maturity in terms of smartphone penetration and access to 3G and 4G networks.
This can be attributed to the fact that voice charges remain relatively expensive and there is a high frequency of more costly international calls in an environment of voice over internet protocol (VoIP) restrictions.
Average revenue per minute for international calls in 2012 was Dh1.85 ($0.50) from fixed lines and Dh1.42 ($0.39) from mobiles. According to a TRA survey, six international calls per week are made from every mobile phone and four from every fixed-line phone, with 51% of all outgoing international call traffic destined for India, Pakistan, the Philippines and Bangladesh.
VOIP
Officially, only licensed operators are allowed to offer internet telephony, enabling Etisalat and du to block common VoIP services such as Skype. In practice, however, this is not always applied, and internet users in the UAE are often able to make Skype-to-Skype calls. This is likely because frequent Skype users tend to buy larger data plans and because blocking VoIP outright is unrealistic as customers may opt to install virtual private networks as a way to avoid the restrictions.
Broadband
Broadband penetration for 2012 stood at 11.6%, with 92% of all home internet access coming via broadband, followed by dial-up (7%) and mobile broadband (7%). According to the “ICT – Household Survey 2012” put out by the TRA, in which over a third (36%) of households surveyed were from Abu Dhabi, between 2011 and 2012 the percentage of internet subscriptions using fibre technology increased by 37.2%. The TRA attributes this increase to the fact that broadband packages offer faster internet speeds at better pricing options than traditional dial-up plans.
Overall monthly ARPU for broadband rose from Dh331 ($90) in 2011 to Dh346 ($94) in 2012, while residential broadband ARPU grew from Dh252 ($69) to Dh261 ($71) and business broadband ARPU from Dh919 ($250) to Dh1001 ($272). This earnings growth is largely attributed to subscribers upgrading to higher speeds or switching to expanded service packages.
A total of 58% of residential broadband subscribers and 32% of business subscribers surveyed indicated that they have access to speeds exceeding 4 Mbps. According to broadband testing firm Ookla, which publishes a net index that compares and ranks consumer download speeds around the globe, the average download speed recorded in Abu Dhabi between September 14 and October 13, 2013 was 18.42 Mbps, which is above the global average of 15.34 Mbps.
This robust connectivity also makes it attractive and feasible for subscribers to make use of broadband coverage, as evidenced by the fact that 17% of subscription packages are triple-play, a bundled package that includes telephone, internet and television. In October 2011 Etisalat launched a dedicated internet television offering to complement its existing triple-play services, providing more than 350 new channels and an on-demand film service, with many of the channels also available on PCs and tablets. As of March 2012, the service had 99,000 subscribers. About 84% of broadband subscribers in 2012 were Etisalat customers and 14% or so were with du, with the other 2% using other sources, according to figures from the TRA and each company’s 2012 annual report.
Internet To Go
TRA surveys reveal that 45% of all internet users in the UAE access the internet via their mobile phones and that 47% also do so via PC data cards. The TRA has earmarked the allocation of further spectrum in the high-frequency 700-MHz and 800-MHz bands. This should allow the two operators, which have invested heavily in developing the long-term evolution (LTE) networks, to further roll out their 4G platforms. In 2011 Etisalat began offering a 4G mobile broadband service, having invested Dh6bn ($1.6bn) to upgrade its 4G network, which is currently available in more than 80% of the UAE, 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. Both operators claim that their newly built network infrastructure can offer consumers speeds of more than 100 Mbps, and the UAE, along with Saudi Arabia, is the first country in the region to have launched 4G networks nationwide. Uptake of 4G services was initially slow, but has since been gaining momentum as more subscribers upgrade to LTE-enabled smartphones, and 4G packages become less expensive and incorporated into more attractive bundled data plans.
The higher-end segment in the UAE is relatively tech-savvy and eager to adopt modern technologies early, and services such as video calls and on-demand television that require the higher speeds and better definition which 4G offers are growing in popularity.
Liberalisation
As the two licensees are each directly or indirectly majority government-owned, and with the incumbent Etisalat enjoying a virtual fixed-line monopoly outside of a few of Dubai’s newer districts and free zones, the TRA is looking to create an environment that fosters more competition. Changes including mandated network sharing and the introduction of mobile number portability (MNP) are under consideration or in the process of being developed. Timing for these reforms is yet to be fully determined, and implementation has fallen behind initial targets as a result of a combination of technical delays and what some observers deem to be reluctance on the part of the operators regarding the changes.
Quality Versus Price
Tariffs for fixed-line and mobile telephone services in the UAE compare favourably to the rest of the GCC, ranking first in both categories according to a 2011 price-benchmarking study conducted by Bahrain’s Telecommunications Regulatory Authority. The rankings are bolstered by the fact that fixed-line rentals include free local calls and have a low line rental cost. In terms of broadband costs, the UAE placed fourth and third in the GCC when measuring fixed and mobile broadband service prices, respectively. In global terms, when comparing against the OECD average, for instance, broadband service, while reliable and available in high speeds, is seen as costly.
When it comes to the emirate’s ambitions of establishing itself as a regional business centre, the question authorities are faced with is whether overall prices for telecoms services, in particular broadband, might serve as a deterrent to attracting foreign firms, or if the assurance of network quality is a more important factor for firms considering setting up shop locally. If the latter is true, the current operating environment in the sector, in which both operators carry out public mandates, might actually be preferable.
Indeed, favourable operating conditions and government support have enabled the two operators to invest substantially in infrastructure and innovation. The UAE possesses the second-largest fibre network in the world, and in 2011 Abu Dhabi became the first capital city in the world to be completely linked via fibre-to-the-home connections, a feat that might not otherwise have been undertaken by Etisalat – Abu Dhabi’s sole fixed-line infrastructure provider for the time being – given purely commercial considerations. In addition, a substantial portion of the profits generated by its domestic operations are being used by Etisalat to gain stakes in foreign operators and establish a presence in developing markets that are far from saturation and offer higher growth potential – a strategic global expansion mandate which also supports the emirate’s broader ambition of spreading its corporate brand and business presence internationally.
Royalties
Estimated to make up for around 17% of the entire federal budget, the structure of the royalty payments regime is set by the Ministry of Finance and differs by operator to reflect the differences in their longevity and market positions. In 2012 a new scheme specifying the fees each operator must pay came into effect, whereby until 2015 Etisalat’s royalty payments will amount to 35% of its net profits plus an amount equal 15% to its revenue, with the payment on net profit lowering to 30% in 2016. Meanwhile, du will pay 17.5% royalty on profits and 5% on revenues in 2012, with the two rates rising incrementally to 20% and 7.5% for 2013, 25% and 10% for 2014, and 30% and 12.5% for 2015.
The rationale behind the different royalty rates makes implicit sense, as it allows for du, as the newer entrant, to play catch up with the incumbent and is intended to reflect du’s changing status and maturation from a start-up into a profitable entity. However, there remain some ambiguities over how the figures to which the royalties are applied are calculated, with the operators negotiating that some revenue categories, such as interconnection charges and earnings from handset devices sold as part of bundles, not be included in the final tabulations, according to a July 2013 press release from the International Business Times. There is also debate over whether in the case of Etisalat royalties should include global as well as domestic earnings.
Network Sharing
Broadband prices in the UAE remain relatively high, as operators seek to recoup income from providing fixed voice networks at a low cost. As a result, fixed-line broadband penetration is limited and cheaper dial-up connections are still common. Most internet users are currently not able to choose providers, with the majority of homes supplied by one of the two operators, but not both. Bitstream technology allows providers to effectively share their networks by renting out capacity to each other, in turn allowing customers to select between operators. The TRA, going on a few years, has been seeking to make wholesale bitstream access compulsory – a reform that is in line with International Telecommunication Union recommendations and which has been introduced in many markets across the world, most recently Bahrain. Bitstreaming has been tested in some trial locales in order to iron out any technical issues.
Assuming all technical glitches are resolved, the two operators would then need to agree on the commercial terms of network sharing. The wholesale rates agreed will have a major impact on the degree to which prices will be driven down and customers incentivised to switch providers. Both operators would likely be reluctant to enter into an environment of heavy price competition, while the regulatory authorities would also be keen to avoid an all-out price war that impedes the operators’ ability to reinvest in their networks.
Considering that Etisalat controls most fixed broadband access, it would be du that has more to gain from bitstream access coming into effect. Etisalat, meanwhile, having invested in more network capacity to date, would in exchange likely wish to receive commensurate compensation for allowing access to its competitor.
The degree to which bitstream access could disrupt the current broadband market is uncertain, as global studies indicate that compared to mobile services, people tend to churn less among their fixed-line providers than they do between mobile service providers. According to a TRA survey, 65% of current internet subscribers would not switch from their current providers if given the choice, while 11% would and 24% responded that they “have not yet decided”. Regardless of the extent to which customers switch providers, by virtue of being afforded more choice in the providers they select, a layer of additional competition will be introduced, and in turn, price and service should stand to improve.
Dark Fibre
In addition to price rationalisation, network sharing should lead to other market efficiencies, especially greater utilisation of network capacity, which could in turn contribute to better network performance. While UAE subscribers can access packages with speeds of up to 50 Mbps, most customers, constrained by price, opt for 1-2 Mbps deals, leading to vast underutilised fibre capacity. Alongside bitstream access, wholesale rates for dark fibre – a term that refers to unused fibre – were originally due to be set in 2011, though discussions have since subsided as bitstream access has emerged as the more pressing priority. When and the degree to which dark-fibre access will be opened depends on the success of bitstream.
Mobile Number Portability
Similar to bitstream and dark-fibre access, the introduction of MNP – an initiative which allows pre- and post-paid subscribers to switch providers free of charge while still retaining their phone numbers – has been discussed for a number of years. On October 21, 2013, the TRA announced that within two months consumers in the UAE would be able to change service provider while keeping the same number. This service will be handled by the customer’s new provider, rather than the latter being required to contact their previous provider.
The results of studies to date assessing the impact of MNP in markets where it was instituted vary significantly, with some patterns emerging in markets where considerable churn was experienced. With a 32% multiple SIM ownership rate, it could be assumed that around a third of customers in the UAE would not be overly loyal to a particular number, and are already used to switching between providers, making them less inclined to port numbers if given the choice.
However, one trait particular to the UAE that could predispose it to significant porting as a result of MNP is the high proportion of subscribers (86%) on pre-paid packages. As such, most subscribers, should they wish to port, would not be locked into a long-term contract that likely includes a termination clause associated with ending their contract early. In addition, as many government departments and agencies require residents, in particular new arrivals, to register for documentation by providing a mobile number (correspondence is often done via SMS and calls in lieu of post or email), individuals tend to become tied to and associated with a particular number in government information systems.
Re- Registration
Another factor that influences the impact of MNP roll-out is the ease with which new SIM cards can be acquired and the hassle associated with registering to transfer a number. Launched in 2012 and expected to run until the start of 2014, the TRA is in the midst of a campaign to have all existing subscribers update their personal data and re-register their SIM cards to their names based on their passport or UAE identify card in a bid to crack down on fraudulent activity and combat identify fraud. According to figures released by the TRA in August 2013, the campaign, dubbed “My number, my identity”, has thus far re-registered 12m subscribers, with Etisalat and du collectively suspending service for around 3m accounts that failed to meet the directive.
Regional Agreements
Looking to adopt an initiative under way in the EU to streamline its telecoms sector, and in line with a wider mandate to open up trade flows and mobility among its members, the GCC has agreed on a schedule to reduce international roaming charges across the region. This includes talks and studies to assess whether the agreement should be extended to eventually also cover SMS, MMS, incoming calls and, importantly, data. Another area of coordination among GCC member states involves “mobile services spill-over”, with measures being adopted to address interference among frequency bands that can disrupt services around border areas.
Outlook
Although there are potential legislative changes in the offing that could lead to further liberalisation, the telecoms industry is far from underperforming, with corporate and retail consumers able to access next-generation services and reliable mobile and fixed-line networks. The market, while mature and displaying high penetration levels, still offers channels for increasing ARPU, as participants continue to introduce new value-added services and bundled packages.
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