Dual Mode Development

Kuwait experienced massive growth in mobile uptake in the last few years after the introduction of competition. The near-saturation of the market has forced the country’s two players to look for new sources of revenue. When further reforms will happen remains to be seen, however.

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By  Richard Agnew Published  July 28, 2004

|~||~||~|Kuwait can be seen as a somewhat paradoxical market. While mobile users are benefiting from intense competition between the country’s duopoly and internet uptake is growing, other developments relating to liberalisation haven’t yet happened. A comprehensive institutional framework isn’t in place that would oversee competition, including telecoms legislation and an independent regulatory authority. The country’s fixed services, which are still run by the Ministry of Communications (MoC), also display signs that they are based around public sector objectives and incentives, rather than those of a corporatised operator. “Since the [MoC] is under no obligations to publish financial and operational results, and to assess regularly the level of customer satisfaction, there [is no] firm basis to compare fixed services in Kuwait to other markets,” says Karim Sabbagh, vice president, Booz Allen Hamilton. “But one can observe the typical syndromes of under-priced local services, less flexible pricing on international services and lack of transparency in customer service and billing matters,” he adds. By contrast, the liberalisation of the mobile sector has probably made Kuwait’s GSM market the most advanced in the region. In a recent report, Arab Advisors referred to Kuwait as a ‘model for healthy competition in the Gulf,’ adding that mobile penetration had jumped from 28% in 2000 to 74% by the end of 2003. As a result of the near-saturation of the market, a race has developed between the two operators, Wataniya and MTC-Vodafone, to offer improved value added services (VAS) and cultivate new revenue streams beyond voice. Both have also expanded their businesses outside Kuwait and established themselves as strong regional players. Going forward, the operators are scrambling to achieve a technological edge within Kuwait. MTC-Vodafone, for example, is making preparations to add 2.75G and 3G infrastructure to its existing GPRS network. The mobile operator said last month that it would shortly start discussions with Kuwait’s government about gaining access to frequency spectrum that would allow it to deploy 3G. It also plans to add full EDGE capability to its mobile network by the end of the year. Wataniya, meanwhile, has various plans in the pipeline, primarily focused around the expansion of its VAS offering. The operator will shortly open an application development centre to support local software players and enterprises. It also teamed up last month with three other regional mobile operators — Qtel, Batelco and MobileCom — to collaborate on roaming and create a common market for mobile multimedia content. The operator has also already started to deploy EDGE, but has ruled out more pricey investments in 3G in the near future. “We face increased pressure to improve services without spiraling costs,” says Faisal Al Ayyar, chairman of Wataniya. “Today, we have over one million subscribers across all our regional operations and we expect this figure to increase substantially over the next few months,” he adds. The internet sector in Kuwait is also an area that would appear to have benefited from competition. Arab Advisors estimates that the country had an internet penetration of 25.2% at the end of 2003, which would make it the highest in the Gulf. Currently, the country operates a semi-tiered system, where three datacomm operators — Qualitynet, Fast Telco, and KEMS — have been allowed to build their own backbones and lease ports to sub-ISPs. In turn, they sell usage to end users on top of the main ISPs’ connectivity charges, mainly through pre-paid cards. Estimates place the pre-paid internet market in Kuwait at 85%, with subscriptions at 15%. Various players are also targeting the broadband space in Kuwait, including the main and sub-ISPs; internet arms of satellite TV operators such as Showtime’s ShowNet; and Arab Telecom, which offers broadband wireless connectivity to corporates. IDC estimates there to have been 28,000 broadband subscribers in Kuwait by the end of last year, of which 24,300 were connected to DSL. To ensure further growth, ISPs say that broadband prices will have to come down in relation to unlimited dial-up fees, which start from around US$15 per month. By contrast, DSL prices are around three times as high. “Because of the very low price of dial-up, the uptake of DSL is not as high as it should be,” says Rashid Abdullar, managing director of Qualitynet. While the price of DSL subscriptions has come down rapidly in Kuwait in the last couple of years, the ISPs also say that charges cannot be reduced much further. They have therefore been putting pressure on the MoC to reduce its fees for transmission and other services, which make up a large proportion of their costs. “The biggest cost to the main ISPs is [that] of services obtained from the MoC,” says Abdullar. “For transmission, I would say that more than 30% of our gross revenues go to the MoC’s pocket. If you add the licence fee, I would not be surprised if it jumps up to 50%,” he adds. Advances in Kuwait’s telecoms infrastructure are gathering pace, however. For example, the DSL market is expected to receive a boost once a project being run by the MoC to build an SDH fibre backbone in the country goes live. “This will interconnect all the exchanges and provide more capacity for broadband,” says Malaki. Although not on a countrywide scale, next generation IP networks are starting to make an appearance in Kuwait. For example, the Arraya Centre, an upscale residential, hotel and business development, recently announced that it had recruited Cisco to offer triple-play services to its tenants, including video on demand and gaming services within the hotel. Efforts are also being made to extend access in areas outside the reach of the MoC’s copper network. A CDMA wireless local loop network, supplied by ZTE, went live earlier this year around Kuwait City, with a capacity of 20,000 users. The MoC has also recently deployed point-to-point radio links from New Zealand-based wireless solutions provider, 4RF, to roll out services to suburban developments and newly-constructed homes without existing wireline connectivity to local exchanges. The main ISPs in Kuwait have also made efforts recently to reduce their vulnerability to downtime by creating new routes for international capacity. Kuwait, at the far end of the Gulf, is connected to the submarine Fibre Optic Gulf (FOG) cable. But FOG has proved to be prone to downtime, leaving providers with no alternative terrestrial links. “ISPs have been keen to get alternative routes and market those to customers, saying that they needn’t be afraid of disconnections,” says Malaki. Fastelco and Qualitynet, for example, recently announced that they had created connections through Saudi Arabia, while other projects are in progress to link Kuwait to Iran and Iraq. Kuwait is also thought to have expressed interest in participating in Falcon, a high-speed undersea network FLAG is planning that will link Egypt to Hong Kong. “Up until recently, the only way we could get out of Kuwait was through FOG,” says Abdullar. “When it went down, the whole country was affected, but now we have diversity through Saudi Arabia so it’s less critical,” he adds. As for a change in the regulatory environment and further liberalisation, Kuwait’s roadmap is less clear. Observers have highlighted a need for an independent authority — both to manage the relationship between the two mobile operators themselves and the MoC. “The operators are calling for an independent regulator but it doesn’t seem like the government is going with it yet,” says Malaki. “They can’t have the MoC offering them services like trunking, transmission and international gateways, and at the same time regulating the sector,” he adds. Conflicts that have emerged between the two GSM operators have also tended to draw out longer. “A case in point is the SMS service in Kuwait, which, till recent years, was limited to the network of each operator, meaning that the operators couldn’t agree on how to carry and terminate each others’ messages,” adds Sabbagh. A new player seemingly planned for the mobile sector may also add to calls for an separate authority. Although a third provider has been on the cards for some time, the move seemed more likely after the country’s Parliamentary Financial Affairs Committee approved new draft legislation in June. But for a further player to come in, the legislation will have to pass through parliament and government. Various social and economic issues could stand in the way of a possible restructuring of the MoC, such as its staffing levels. Observers also say that the process of further reform will be more difficult without a comprehensive institutional framework, including legislation and an independent regulator. “The institutional basis for managing the sector is relatively vulnerable compared to other markets, and would be challenged to sustain further deregulation,” says Sabbagh. Kuwait is thought to have been in discussions with the World Bank for some time now over how to implement more reforms, although it’s not clear when any of these will happen. But the feeling is that it will have to put something on paper by the next round of World Trade Organisation, probably scheduled for January next year. “By then, Kuwait and other Arab countries would have to present an explicit list of commitments,” says Sabbagh.||**||

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