Saudi Shake-Up

The long-awaited liberalisation of Saudi Arabia’s telecoms sector is now well underway, with new VSAT operators setting up in the Kingdom and various candidates competing to enter the mobile and datacomm markets. The incumbent operator, STC, has been given a longer period to get ready for competition than some of its peers. But the market, considered by many to hold the most potential in the region, is still expected to hold rich rewards for the bidders that get access

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By  Richard Agnew Published  March 7, 2004

Performance|~||~|Abbassi: "The introduction of pre-paid services has hugely benefited STC"|~|Saudi Arabia has been slower than many of its neighbouring countries to open its telecoms market to competition, having focused instead on improving the performance of incumbent operator, Saudi Telecoms Company (STC). But now that STC has commercialised its operations and invested huge sums in the modernisation of its sprawling networks, major restructuring of the Kingdom’s telecoms sector is on the way. Four very small aperture terminal (VSAT) providers were handed licences to provide domestic services in the Kingdom recently, and initial bids are due in this month from applicants vying to enter the datacomm and mobile sectors. Of these three, the mobile sector — in which a single licence is being offered for now — will arguably provide the most exciting opportunities. GSM services have been the main driver behind STC’s revenue growth over the last few years. The launch of pre-paid services in 2002 proved a tipping point for the operator in the mobile space, allowing it to accelerate its acquisition of subscribers after lowering the entry barrier for those without a credit history and less cash to spend. Reflecting this, mobile services provided the main thrust behind a 129% rise in STC’s net profit to US$1.7 billion in the first nine months of 2003, and subscriptions are expected to continue to increase rapidly during 2004. “The introduction of pre-paid services has hugely benefited STC, as well as its better segmentation of the market,” says Jawad Abbassi, president, Arab Advisors. “Wireless services accounted for 65% of STC’s revenues [in the first nine months of 2003] and its revenues have grown by 45% over the last year,” he adds. With STC’s GSM unit, Al Jawal, estimated to have signed up around 25% of a population of over 23 million, there is expected to be ample room for the new entrant to tap into subscription and voice revenue growth. And while the operator says it will increase its mobile data portfolio this year with the launch of various applications such as SMS-based TV voting and mobile banking, the newcomer is expected to keep an eye on pent-up demand for value added services (VAS). The licensing process, announced in January, allows candidates to put forward ideas for the potential launch of a 3G network and the new entrant will be able to overlay its GSM infrastructure with GPRS and EDGE. But a ban on camera phones, the remaining room for growth in voice and the eventual winner’s position as only the second player in the sector makes it unlikely that it will overly focus on the high end of the market, at least in the near term. A dual-purpose strategy is therefore expected. “The new entrant is likely to leverage the expected high subscription growth rate in the early years of its launch by endeavoring to attract a large number of new customers via pre-paid services,” says Mohsen Malaki, senior telecoms analyst at research group, IDC CEMA. “The new entrant will also attempt to churn high-spending subscribers from STC in order to avoid being pigeonholed as a low average spending per subscription [ASPS] operator,” he adds. ||**||Geography|~||~|Offering a wide geographical footprint is expected to be crucial for the new operator|~|The high level of interest in the licence reflects not only the significance of the opportunity in Saudi’s mobile sector, but also presents the first of many challenges the eventual winner faces. The selection of pre-qualified candidates for the licence is expected this month, followed by ten weeks of bidding. Once it has been selected, the new entrant will have to focus on rapidly building up its network coverage, as an offer of national roaming across STC’s network is deemed unlikely by observers. Offering a wide geographical footprint is therefore expected to be crucial for the newcomer in attracting high value subscribers and positioning itself as a provider of quality of service (QoS). STC, however, is already making efforts to increase the reliability of its network and to expand it to new areas. For example, telecoms solution provider, Protek, is currently working on a vast project to improve the management of the telco’s PDH microwave network. By connecting sites to the vendor’s Unified OSS network management system, STC’s network operations centre can identify faults that occur more rapidly than before. “The project will manage around 1,500 remote sites. It is a multi-vendor environment, so it is a challenge. But we are expecting to finish the project later this year,” says Raed Awartani, regional manager, sales and accounts, Protek Middle East. The incumbent also holds other advantages resulting from the licensing process. One by-product of the liberalisation timetable adopted by the Communications and Information Technology Commission (CITC) is that STC has had a longer period to prepare its marketing strategy for competition. While the new operator is not expected to be up and running until the end of 2004 at the earliest, STC has already made various efforts to increase its subscriber base, including the reduction of mobile handset activation fees and deposits. According to IDC, the operator will press on with this strategy over the next few months by addressing its notoriously weak customer care, expanding its distribution channels and introducing new services that present it as innovative. “[STC] is expected to focus on retaining and expanding its market share through streamlining of costs, improvement of service offerings, and targeted tariff reductions,” says Malaki. “This will be balanced with better understanding and segmentation of the customer base and continued expansion of direct and indirect sales and distribution channels for both contract and pre-paid subscriptions,” he adds. The datacomm sector, meanwhile, is another area where STC has been refashioning its approach with a view towards impending competition. The telco officially launched Saudi Data, its stand-alone datacomm division, in February, after an 18-month process of planning and re-organisation. “STC has been getting ready for competition,” says Dr. Abdullah Al-Musa, acting VP, Saudi Data, and VP for Saudi Net, the PTT’s ISP arm. “This was the first move by STC to get ready for competition and will separate the business unit from the rest of STC, so we have more transparency,” he adds. According to Al-Musa, the division has various plans to upgrade and expand its datacomm network and services over the next few months. In the offing, for example, is an expansion of the operator’s Frame Relay and DSL networks, and an effort to make better use of its ATM backbone infrastructure by employing it to carry traffic from its legacy networks. “The major things for this year are to reduce access bottlenecks and merge our backbones by utilising our ATM capacity,” says Al-Musa. “The ATM network is under-utilised in the backbone. We are also going to provide more features such as QoS in our MPLS network and expand our geographic coverage to make the network closer to our customers. [These moves] will provide more value to our customers by making it easier for us to operate the network,” he adds.||**||Big Interest|~||~|Al-Musa: "We are also investigating some technologies such as long reach DSL that will help us overcome the distance problems we are facing"|~|New services expected to be launched this year by the operator include SDSL, tele-conferencing, managed IP VPNs and DSL LANs, to provide connectivity for businesses that cannot afford leased lines. The operator adds that it is adopting a more efficient approach to provisioning its services than it did previously. “We are putting more emphasis [on the] VPNs and MPLS and ATM networks by identifying the market demand for them at a more granular level than before,” says Al-Musa. Going on the evidence of the VSAT licence tender carried out in Saudi last year, however, there are expected to be several candidates lining up to exploit gaps in STC’s portfolio. Even though they did not allow for international provision, 27 groups pre-qualified for the four VSAT licences on offer. These were handed out to Nasser Al Harbi for Trading; Detecon Al Saudi; Saudi International Telecommunications and Electronic Company; and High Capabilities Technologies, after a tender in 2003. Among those that have indicated that they will bid for the two datacomm licences in play are Bahrain’s PTT, Batelco, along with shareholder, Cable & Wireless; current Saudi ISP, Nesma; and TE Data, Telecom Egypt’s datacomm division and ISP. But several more firms are expected to apply. “There was a lot of interest in the VSAT tender even though there was not the option to offer international connectivity,” says Abbassi. “That stems from the fact that Saudi is a huge market. With VSATs, even just nationally, you can provide connectivity between the distant cities and bypass STC’s monopoly over leased lines,” he adds. Another expected impact of the move are improved services and downward pressure on pricing for the Kingdom’s corporates and ISPs, which currently rely on STC for both infrastructure and bandwidth. “Effectively, the ISPs are just resellers of STC, so to have infrastructure-based datacomm licences is a major development,” says Abbassi. “The advent of the new licences, in addition to STC and the VSAT licencees, will at long last bring prices down and enhance service offerings. You will see a lot of VAS and the attitude of the data operators will be to come in with an end-to-end solution. They have to augment technology with services, as well as management and consultancy,” he adds. While the new licences are expected to regularise, to some extent, the situation where some of the leading ISPs offer datacomm licences as part of their portfolio, many service providers are also anticipating the possibility of reduced prices for bandwidth. According to the CITC, the new datacomm licencees will be allowed to establish their own international gateway and transmission networks at the backbone and access levels of their infrastructure. “We are hoping that the opening of the market will give us a better edge,” says Yaqoob Al-Awadhi, executive director of Atheer, an ISP joint venture between Batelco and Saudi-based IT group, Jeraisy. “The advantage of the new provider is that it will create competition for ISPs such as ourselves. Instead of relying on one source and having expensive bandwidth, we will have more options to choose better prices and services,” he adds. Another effect of the changing landscape is that STC has been prompted to extend its DSL coverage across the country and into areas outside the 5km radius of exchanges. The VSAT operators, in particular, are expected to pitch themselves as an alternative to companies wishing to have access to broadband services in areas outside the reach of STC’s DSL network. In response, having employed Alcatel in October last year to expand its DSL network to a further 38 locations across the country, the telco is planning to extend DSL to 40% more of its ports this year. Additionally, it is trialling fixed wireless and other technologies to solve access bottlenecks and to expand its broadband infrastructure into new areas. “We are also investigating some technologies such as long reach DSL that will help us overcome the distance problems we are facing. Our cities sprawl horizontally and it’s not strange to find a line that is about 10km away from the exchange. We are looking at the whole network and trying to resolve these issues,” says Al-Musa. On the retail level of internet provision, the telco says it is also working with ISPs and vendors to reduce the time it takes to provide DSL to customers once they have applied for a broadband subscription. “The problem with DSL is the way it is provisioned,” says Al-Musa. “We would like to automate provisioning as much as possible and have done some automation [work] to allow local loop qualification tests online,” he adds. Also on the horizon, meanwhile, is a possible restructuring of internet charges for consumers. The situation where customers are subject to fees from both ISPs and STC is, according to Al-Musa, currently being re-considered by the CITC, along with a reduction in backbone and retail charges. “Customers would like to have one bill and not worry about paying multiple charges to multiple parties. The CITC is studying restructuring of the [internet] business model in the Kingdom and if the recommendations it reaches [are agreed] with STC and the ISPs, I believe there will be major reductions in the cost of internet services,” he adds. In the longer term, and if these price reductions and improved services emerge, the mobile and datacomm liberalisation could provide a blueprint for further reform. The CITC is sure to make the management of the licensing process a priority this year, considering its stated aims to bring in a third mobile operator in 2006 and open up the landline market by 2008. If all goes smoothly, the size of the market should ensure it receives plenty of bidders, despite the slower path to liberalisation that the Kingdom has employed. “Saudi has always been late in adopting [new trends], such as the internet,” says Abbassi. “However, that serves it in knowing what works in its favour. The market is also very profitable to be in, so there will always be huge interest,” he adds.||**||

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