Hub of potential

Despite increasing competition, Saudi Arabia's telecoms market holds enormous potential for fixed and mobile operators, with low broadband penetration spurring a new wave of investment

Tags: Delta PartnersEtisalat International - UAELTEMotorola IncorporationSaudi ArabiaSaudi Telecom CompanyZain - Kuwait
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Hub of potential MEMBRILLERA: Demand for broadband is a key driver of growth.
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By  Roger Field Published  June 6, 2009 Communications Middle East & Africa Logo

Saudi Arabia's telecoms sector has made huge strides in recent years, moving from a monopoly in 2005 to become one of the region's more competitive markets just four years later.

With the country having added two mobile operators, Mobily and Zain Saudi Arabia to compete with incumbent STC, combined with the recent introduction of three licences for fixed operators, Saudi Arabia's telecoms sector is on course to become one of the region's most competitive markets.

While mobile services appear to have commanded the greatest attention in the past couple of years with Etsialat and Zain entering the fray, most industry insiders are now turning their attention to the country's pent up demand for data as the next frontier in the market.

With mobile penetration estimated to be in excess of 120%, mobile operators are increasingly looking at 3G and mobile data as being key growth areas, while keeping a close eye on developments in the fixed sector, where three companies are investing millions of dollars developing fixed wireless and fibre networks in the country.

While the mobile sector is saturated, broadband penetration lags behind most of the developed world at about 4%, compared with overall internet penetration of about 22%, according to March 2008 figures from the ITU. Meanwhile fixed-line voice penetration is also in decline, presenting an ideal opportunity for the country's new fixed licence holders to develop converged voice and data services.

Atheeb Telecom, PCCW and Verizon all secured fixed licenses in 2007. Atheeb Telecom became the first of the licence holders to start operations with limited WiMAX coverage to be expanded to the rest of the country through the course of 2009. The company's CEO, Dr. Ahmed Sindi says he sees huge potential for the company's offering of fixed voice combined with "portable" data services.

Atheeb Telecom's rivals, PCCW, which is expected to roll out a network using WiMAX technology, and Verizon, which is planning to deploy a fibre network in 2010, have been less vocal about their plans.

Milan Sallaba, partner, Oliver Wyman, sees most potential in Saudi Arabia coming from data. "The main opportunities today in the Saudi market appear to centre around broadband potential and growth opportunities that a young population with latent demand provides," he says.

"With new licenses being awarded in the fixed sector, a key opportunity in the Kingdom lies in broadband. The three recent fixed-line licensees plan to significantly shake up the market and they are expected to differentiate their offerings."

Sallaba added that the two WiMAX licences could help to "substantially boost" growth of broadband connections in the country owing to improved coverage and broadband speeds.

"Mobile broadband is expected to grow faster than fixed going forward, as it has several advantages for Saudi consumers: it is cheaper and easier to activate, and meets most user's current bandwidth requirements. The overall growth potential is high, as current broadband penetration sits below 10% of population," he adds.

Federico Membrillera, partner, Delta Partners, also sees huge potential in the broadband sector. He says that much of the demand is likely to be driven by demand for entertainment from young people.

"The demand is there. The internet plays a very relevant role by opening up the country to the world and there are not that many limitations in terms of what you can download and so on," he says.

Membrillera believes wireless broadband is the best option for operators. He points out that while the country is large and the population is quite concentrated in the main cities, there are also significant numbers of people living in more remote areas in the North and South of the country who could also benefit from wireless technologies such as HSDPA, WiMAX, and eventually LTE.

In terms of the type of technology that is being deployed by the fixed operators, Membrillera thinks that a "question mark" remains over the maturity of WiMAX, and that it could take another 12 months to see whether the technology will be up to the standards demanded by users.

Meanwhile, a potential barrier facing fibre is the length of time it will take to deploy. "It's going to take a long time, there are several operators deploying fibre but it is something that takes years - 10 to 15 years - to have well developed fibre network.

"The main benefit of launching fibre is that you can deliver broadband, voice, and IPTV, but most of the households in Saudi Arabia already have entertainment services through satellite," he says.

But ultimately, there is likely to be room for all types of broadband technology given the rapid growth of the sector and the diverse needs of users.

Content is king

While Membrillera still sees a "question mark" over the maturity of WiMAX, he agrees that the most important component of broadband is content, rather than the medium through which it is delivered.

"For me the biggest opportunity is this, once the connectivity which is the bread and butter is properly installed and developed across the Kingdom, then I think there is a lot of money to be made on the entertainment side," he says.

"Once the connectivity side is done - and the wireless technologies can play a role - there is a window of opportunity to capture the market, then whatever you put on top of connectivity, for example entertainment, it can also be extremely profitable because again there are not that many ways to have access to the outside world, and affordability isn't an issue in the country."

As one of the people involved in the roll out of infrastructure to provide telecoms services, Walid Roman, Motorola's country manager, KSA, agrees that content will be vital to the success of both fixed and wireless broadband. "I would say that data-based technologies such as broadband there is a huge amount of potential growth, both in mobile as well as fixed and all of the applications around this, triple play applications, mobile TV and so on."

Ringing the changes

The emergence of Atheeb Telecom and the continued growth of mobile data services from the mobile operators is already having a positive impact on the market, according to Sallaba. "Arguably, we are already seeing early signs of a shakeup in the Kingdom, as STC recently announced major price reductions for fixed broadband, slashing prices in some cases in excess of 50% for common connection speeds," says Sallaba.

With Saudi Arabia's two leading mobile operators, STC and Mobily increasingly battling falling ARPU and rising competition following the entry of Zain into the market in 2008, all three operators are now looking to offer more innovative services to gain and retain customers, and revive revenues.

"The main challenges facing operators in Saudi are the beginning of market saturation, contracting margins, and increasing churn pressures," Sallaba says. "High penetration and geographic dispersion have also recently started to constrain growth."

Sallaba adds that to counter this, operators will need to be "increasingly innovative" and up-sell to create additional revenue opportunities with services such as BlackBerry and iPhone at the top of the value chain, while also offering innovative pricing packages and value added services to customers across the value chain.

Indeed, 3G and 3G+ services are one area of growth potential for mobile operators, with 3G penetration relatively low. For example, Mobily revealed that 300,000 subscribers has signed up for HSPA (high speed packet access) broadband in the last eighteen months since it launched the service in mid-2007. 3G services can also give operators scope to include additional value added services.

But aggressive pricing packages can also create problems if they are not properly considered, according to Sallaba. "Extensive mobile promotions and price reductions both in fixed and mobile services result in likely margin squeeze across the board. In a context where additional top-line growth could be restricted, this may become a serious challenge. To protect value, operators are required to be increasingly thoughtful about their promotions and pricing, and more rigorous on general cost management," Sallaba says.

He adds that churn rates have increased significantly over the last three years and "may become a major concern for the market" as new competition and promotions have spurred Sim card replacement and certain users appear to have started switching between Sim cards purely to make use of the latest offer.

"As a result, operators are advised to more closely manage their churn numbers, as well as tightly controlling their acquisition and retention cost to minimise an otherwise adverse bottom-line impact," Sallaba says.

A further challenge that faces the mobile operators, and STC's fixed line operation, is VoIP. While VoIP services may help ISPs by giving consumers, and particularly expatriates, a strong reason to take a broadband connection it can further erode revenues for traditional operators.

As Noel Kirkaldy, director of wireless broadband for Motorola Home & Networks Mobility in Middle East says, part of the challenge for operators is to take a "different stance" in terms of their revenue.

"We are starting to see disparity between voice-based focus of the industry and ever decreasing ARPUs, and the potential of the VoIP cloud hanging in the background and how they handle that, as opposed to realising that operators need to move into new forms of revenue such as dual play, which is voice and data, and triple play which is voice, data and video.

"People realise they need to take a different stance from a voice focus to move into broadband and then into the video side, which is starting to have a major effect on all telecoms operators. It is not just media and telecoms, it is all one with the various technologies," he adds.

"Voice traffic has risen exponentially in the past two and a half years, we have seen it in regional markets like KSA. Two issues, one is the ecosystem the cost of the devices as well as the liberalisation that has really taken effect and KSA is a classic example going from 2-3 operators."

But while the mobile sector presents its share of challenges to operators, it is also clear that there remains plenty of potential. Aside from having a population of more than 28 million people and GDP per capita of some $20,700, Saudi Arabia also has a large population of young people and a steady inflow of expatriates.

"The mobile side is definitely an opportunity," Membrillera says. "It has been a huge business and will continue to be a relevant business for several reasons, some of them linked to social elements and others to the economic development - it is a country that is still pumping in people, there is a lot of growth in front of the country and telecommunications is a basic need."

The "social elements" that Membrillera refers to mainly concern the perceived lack of entertainment available in Saudi Arabia, which leads to people having more disposable income to spend on telecoms. "Telecoms covers a social need, it gives some freedom," he says.

The importance of branding and the aspirational value of telecoms was partly demonstrated by the success of Zain. Since the Kuwaiti mobile operator entered Saudi Arabia's already saturated mobile sector in August 2008, it has managed to take a 10% slice of the market, with what Membrillera describes as "quite healthy ARPU."

For Membrillera, Zain's ability to attract customers also shed light on the importance of branding in a country like Saudi Arabia, demonstrating the need for operators to differentiate themselves.

"The brand has a lot of attributes, it's fresh, it's new, it's aspirational and that is something that is properly crafted," he says.

"They have managed to capture the attention of the Saudi market and on top of this they have launched something which works which is quite basic.

"But if you compare this to the Mobily launch: Mobily launched when the market was less developed, but it was not to the level of what Zain did."

Fixed-line focus

While figures from Kuwait-based Global Investment House put the rate of decline in fixed-line subscribers in Saudi Arabia at 6.9%, from 5.8 million in 2006 to 5.4 million in 2007, Dr Ahmed Al Sindi, CEO of Atheeb Telecom, is convinced that his company can buck the trend.

"We are not offering only the typical fixed-line services, we're offering these services in addition to a portable broadband service.

"The real focus is on portable, nomadic broadband services - that includes VoIP - and this is where the real growth is, and this is where we see a lot of pent-up demand. The penetration of broadband is still very, very low - less than 4% - and we hope to address a pretty good portion of that demand."

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