Getting Ahead

Saudi Arabia's mobile market is experiencing rapid growth as monopoly operator, Saudi Telecoms Company, gears up for competition. However, it will not be plain sailing for the telco as a series of telecoms markets are also expected to open up over the next few months

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By  Richard Agnew Published  September 29, 2003

|~||~||~|Saudi Telecoms Company, (STC), the Kingdom's monopoly operator, faces at least three waves of competition over the next year or so. In preparation for this, and with demand increasing for more sophisticated services in the Kingdom, the operator has been investing in a massive overhaul of its network infrastructure and business processes.

Upwards of US$15billion per year is being spent on upgrading STC's network to increase efficiency and bring services to previously uncovered regions. And with a new entrant expected in the mobile sector by the end of 2004, STC's mobile division, Al Jawal, has been building a headstart and reducing its vulnerability to churn.

This effort has seen STC capitalising on latent demand. Earlier this year, the operator said it was signing up as many as 300,000 new mobile users per month, and considerable room for further increases is predicted. According to research house, Arab Advisors Group, the number of mobile users in Saudi Arabia will rise from 5million at the end of 2002 to about 19million at the end of 2007.

As a result, Al Jawal contributed significantly to the partly-privatised STC's profits in the first half of this year. Profit margins for the mobile division in H1 2003 rose to 32% from 12% in the same period a year before, and STC's total profits rose by more than US$757million on the back of GSM growth.

"Wireless services - mainly GSM - are leading the growth in STC's revenues, constituting around 65% of total operating revenues in the first half of 2003. [The mobile division also showed] an impressive growth rate, at 56% over last year's first half revenues," says Sami Sunna, senior research analyst at Arab Advisors.

Average spending by subscribers also grew rapidly, a trend all the more significant as Al Jawal's services are based purely on GSM. "ARPU is one of the highest in the region - around US$73," says Sunna. "[That's] impressive as GPRS has not yet been launched and STC has not even launched any value added services (VAS)," he adds.

Instead, this growth has been fuelled by the high purchasing power of Saudi's consumers and reduced pricing of international calls across STC's mobile network. As a result, the trend of fixed-to-mobile substitution is firmly in evidence in the Kingdom -fixed line penetration stood at 15% at the end of 2002, while 23% of the population owned mobile phones. Traffic patterns have also been altered with the number of international mobile calls growing by 305% between 1999 and 2001.

But despite these advances, STC is expected to lower its prices, sharpen its marketing strategy and launch a larger VAS portfolio before its monopoly position comes to an end. "Introducing VAS and GPRS is one step that would allow STC to compete, and it needs to implement major cuts in its service rates," Sunna argues.

Accordingly, the operator says it is trialling 3G services, and while GPRS was originally scheduled for launch this year, STC says it will now be unveiled before competition is introduced.

"It is envisioned that GPRS services will be fielded in 2004," says Khalid Al Molhem, president and chief executive officer, STC. "Al Jawal will [also] minimise market share erosion by offering and clearly communicating product packages that satisfy customer needs [and] price optimisation that guarantees value for money. [There will also be] effective advertising that both educates and attracts users, [and] customer retention programmes that minimise churn," he adds.

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The comparatively high levels and remaining room for growth in the mobile market will ensure that the sector will receive considerable attention, however. And another challenge for STC is that it has not yet been decided which form competition will face. While the new entrant is likely to take a mobile virtual network operator (MVNO) format, STC has been preparing its mobile business for various situations that could arise.

"[An MVNO] is a distinct possibility," says Al Molhem. "Al Jawal has done in-depth scenario planning towards most eventualities in the coming competitive arena. Among these would be our response to an MVNO entry into the marketplace," he adds.
In the shorter term, there are also rumours that Al Jawal will face competition in the form of a push-to-talk (PTT) operator using Motorola's iDEN technology, along the lines of a similar launch by mobile operator, Fastlink, and a new entrant in Jordan next year.

"There is potential for PTT in Saudi Arabia, as is the case in Jordan," says Sunna. "This technology [has not been] proposed by STC but it would have a strong potential if ever implemented in the future," he adds.

The iDEN service in Jordan is expected to be launched by Fastlink in early 2004 and is expected to benefit businesses with large fleets and field workers. In Saudi Arabia, a PTT operator would also be able to target customers outside the reach of Al Jawal's network. "Many companies with fleets exist with branches and operations across Saudi Arabia," Sunna adds.
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STC, accordingly, says it is working to expand its fixed and mobile networks into areas currently outside coverage. "STC will continue to aggressively invest into areas that will address the demand of our customers. [This includes] mobile network expansion [and] expansion of access in our land-line network in served areas to satisfy demand," says Al Molhem.

It is expected, however, that the operator's lack of geographical reach in some areas will prove an advantage for new, very small aperture terminal (VSAT) operators, when licences are awarded by the end of 2003.

While only four licences with limited scope will be awarded, the government received applications from some 27 potential providers. The new entrants will be restricted to providing national services and any international connections will be obliged to go through STC. The incumbent will also retain its monopoly over services including X.25, frame relay and ATM.

Nevertheless, the new operators are expected to put pressure on STC's VSAT pricing, as well as the broadband offering of its ISP arm. Currently, ADSL has seen slow uptake in Saudi Arabia, as some 50% of subscribers' applications are rejected due to the fact that their premises are located outside five cable km of STC's exchanges.

"The VSAT operators are expected to set their prices at least 10% lower than STC's current prices," says Sunna. "VSAT services are currently expensive in Saudi, and at the same time, ADSL is not available in all areas in Saudi because it is restricted. Many corporations could use VSAT for broadband, so it could hit both STC's provision of DSL services and at the same time affect its VSAT offering," he adds.

STC, therefore, is seeking to cover off as many customers as possible with its existing infrastructure in a variety of ways, before competition is introduced. The operator is investing large amounts in updating its network from copper to fibre by 2005 to help ramp up its data services. It is also looking at alternative means of increasing the availability of broadband, considering the 5km limit.
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"This is a difficult problem," says Dr. Abdullah Al-Musa, head of Saudi Net, STC's internet service provider (ISP) division. "The large cities in the Kingdom are spread horizontally [which] presents a challenge for broadband services such as DSL," he adds.
STC, however, says technologies, including broadband wireless, are being considered to overcome the limitations. Another measure being investigated is the negation of distance limitations through the connection of potential customers using Remote Access Nodes (RANs). "[This will] support DSL connectivity [but] is limited to the availability of a RAN in the area," Al-Musa adds.

In the area of dial-up, meanwhile, STC has long been linked with adoption of the subscription free model to foster growth in the market. Arab Advisors predicts that the number of internet users in Saudi Arabia will increase from 1.5million last year to 3.8million in 2007. However, the number of ISPs in business in Saudi Arabia reduced from 30 in 2001 to 23 in 2002, with more consolidation expected.

Internally, STC has also been looking to trim down and cut costs in preparation for a more cut-throat environment. While it says its early retirement programme has created efficiencies, the operator has also invested in solutions to improve its network performance. For example, the operator recently announced the implementation of an integrated test laboratory to allow it to emulate typical live network environments, minimise downtime and help with problem diagnostics.The lab will also allow the operator to reproduce network problems and analyse field test results.

In May, STC also announced a major project to connect 1450 sites across the Kingdom through data communication network (DCN) equipment from vendor, Protek's, Unified OSS network management system. The solution can be viewed from the telco's network operations centre (NOC) and will extend management capabilities to its microwave network. The full rollout of the solution, following a pilot project involving 14 sites, will take place over the next year.

In the meantime, with STC facing further competition in the data comms sector next year, the operator has been restructuring its business to align itself for the new environment. As the data comms sector is opened up, four additional licences will be offered by the end of 2004. Two licencees will be allowed to install their own infrastructure, while the other two will be confined to reselling services based on STC's network.

Accordingly, STC set up a stand-alone data communications division, called Saudi Data, which will sit separate to its internet service provider (ISP), Saudi Net.
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The division is expected to employ around 6,000 people and will offer products including Wasel, a point-to-multipoint internet solution which offers bandwidth of up to 2Mbits/s; Alwaseet, a data solution geared towards electronic funds transfer point of sale (EFTPOS) applications; Attareeq, a digital leased line service; a DSL (digital subscriber line) broadband offering; and Madar, a range of high-speed network solutions capable of delivering speeds of between 2 Mbits/s and 155 Mbits/s.

STC will also be forming a marketing and pricing strategy to cope with the new competitors. "The establishment of the Saudi Data business unit [is] part of our response to the coming competition," says Al Molhem.

"It has not been fully determined in what form data competition will arrive in Saudi Arabia, [but] during Saudi Data's competitor scenario planning we have covered most logical eventualities. Our strategies include aggressive pricing and customer premise packages, as well as a dramatic change in customer service and relationships with companies," he adds.

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