Breaking the duopoly

Mobile broadband and a lack of regulation are the defining characteristics of Kuwait’s telecoms sector.

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Breaking the duopoly Delta Partners’ Antonio Carvalho says Viva helped shake up the market.
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By  Roger Field Published  June 7, 2010

It was probably not surprising that many industry insiders had their doubts when STC paid some $900 million to enter Kuwait as the country’s third mobile operator back in 2007.

The KSA incumbent paid the fee for a 26% stake in the operation, valuing the licence at around US$3.5 billion, just a matter of months before problems in the US gave rise to the global financial crisis.

But while the state of the global economy might have put an end to telcos acquiring such expensive licences, STC has surprised analysts and its rival operators in Kuwait, where its local operation, Viva, has already managed to secure itself a market share of about 16%.

Ghassan Hasbani, CEO of international operations at STC, says that Viva’s network now has full population coverage and a “quite extensive” 3G capacity, and is also launching an HSPA network.

“We now have a proven record of customer attraction, we have attracted a very good share of the market, today we are above 16% market share approximately,” Hasbani says. “It is just over a year and it is quite an achievement.”

While being the third operator might make it almost impossible to lure many of the country’s higher ARPU customers away from market leader Zain, it does have some advantages. One is the fact that Viva’s network infrastructure, which was mainly deployed by Huawei, uses the latest technology, gives good quality and is easily upgradeable.

But it is mobile broadband that is attracting the most attantion from Kuwait’s operators, who view wireless data as the best means of growing their businesses amid falling voice ARPU.

“Kuwait is a good broadband market given that the fixed broadband penetration is not very high, and we are seeing a similar story to when fixed voice penetration was low and mobile came in across the region,” Hasbani says.

“We foresee a significant growth in data traffic in Kuwait,” he says, adding that the behaviour of data consumers is influenced by trends such as social networking.

“The proportion of non voice usage is becoming a significant portion of traffic - significant enough to really start planning for,” he says.

Aside from mobile broadband, which is experiencing solid growth in most Gulf markets, Hasbani also points to the general economy in Kuwait as a driver of growth.

“The main opportunities will come from the growth of the Kuwaiti market itself, the Kuwaiti economy,” he says. Indeed, even according to projections made following the credit crunch in 2008, the Kuwaiti economy was expected to grow at about 4% of GDP a year for the next five years.

“The growth of the economy is important and the large youth population that is entering the target markets for telecommunications is also a source of growth,” Hasbani adds.

In terms of challenges, Hasbani agrees that the absence of a proper regulator is a hindrance. “There is no clear independent regulatory authority that is regulating the market, so today it is self regulating in cooperation with the ministry,” he says.

The major problem that arises from this is a lack of will to drive new initiatives in the market or even to enforce and drive through regulations that are supposed to be enacted.

For example, Hasbani points out that the operators have been given guidelines and promises such as the introduction of mobile number portability within licence agreements, that are yet to be executed.

“It was part of the licencing mandate but hasn’t been executed yet, we are expecting it to happen sometime this year,” he says.

“This will help the market to grow to the next level and create a dynamic to serve the consumer and create more competition in the market.”

Another challenge is a lack of competition on international connectivity, which has left Kuwait with international connectivity charges which rank high compared with international norms.

For Hasbani, Viva has been successful in gaining market share in an already heavily penetrated market because it successfully marketed itself as offering customers a “transparent and simple” service.

One immediate change that the launch of Viva had on the market was to lead the existing operators, Zain and Wataniya, to stop call receive charges, which had long been an unpopular anomaly of the Kuwaiti market.

“Viva has been attracting people who want simplicity and transparency in their service offering with no complication on tariffs and no hidden price points.

“Also Viva has been quite innovative in the way it approached the market, simple but effective services for broadband and voice packages that are easily reached and easily understood,” Hasbani says.

Three’s company

Antonio Carvalho, a partner with Dubai based consulting firm Delta Partners, agrees that the entry of Viva into Kuwait changed the market significantly. “In particularly it broke up what I would call the duopoly that existed around that time in several ways.”

He also confirms Hasbani’s estimate of Viva’s market share, giving a figure of just above 15%. “It is quite a relevant share and remarkable in a market that was already more than 100% penetrated at the beginning of 2009,” he says.

While the launch of the third operator did not lead to a price war as has happened in other markets that gain a third operator, it did lead to a decline in prices and ARPU for the existing operators.

“Until the recent launch of Viva, you would pay for receiving a call, and calls made, and this represented a way for Viva to play a role of honesty and transparency in the market by destroying this,” Carvalho says.

“It is quite a small country so it is quite easy to understand each other’s tactics, so Zain and Wataniya realized that would be one of the angles of attack of Viva and around the time of its launch they erased this feature.”

Despite the lack of a price war, the effect of transparent pricing led to a dramatic fall in ARPU, partly owing to the fact that the market had been so overpriced before Viva’s entry.

“If you look at 2009, from a penetration perspective the market continued to grow, but from a value perspective, it shrank slightly,” Carvalho says.

Indeed, in 2008-2009, the market was at between $2.2 billion to $2.3 billion, while in 2009, it was worth $2.1, and may only reach the heights of the 2008 level later this year.

But the declining value of the market was not only due to falling tariffs. The high market penetration also meant that more of the growth was coming from low ARPU subscribers such as service industry workers and house maids.

“The types of clients you get are less valuable moving into the bottom of the pyramid,” Carvalho adds.

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