Saudi Arabia is yet to realise its full broadband potential
With Batelco Group and Kingdom Holding Company (KHC) holding firm with their $950 million bid for Zain KSA, it is clear that the Saudi Arabian telecom sector remains attractive for investors.
Indeed, despite a mobile penetration rate approaching around 130%, Saudi Arabia is widely viewed as a market that holds huge potential for operators, largely owing to relatively low broadband penetration, which is estimated to be about 12%.
Osama Ghoul, managing partner at Devoteam, a regional technology consultancy, points to the sheer size of the Saudi Arabian market as further evidence of the potential of the market.
"The Saudi market in terms of size represents more than 45%-50% of the telecom market in the region and today there is much competition taking place in terms of services and offers," he says.
Research from Dubai-based Delta Partners also indicates continued strong growth in Saudi Arabia's telecom market. In a recent report, Delta Partners indicated that Saudi Arabia's internet base almost tripled from 3.9 million to 10.2 million users between 2005 until 2009, while the broadband base increased almost ten-fold from 250,000 to 2.3 million users in the same period.
Furthermore, this growth trend is expected to continue over the next five years with around 4 million new internet users and 2.7 million new broadband users expected by 2014, according to Delta Partners.
"In Saudi Arabia, growth of the broadband market will further boost telecom revenues, making data revenues the main growth driver," Delta Partners said.
"This follows the trend of developed markets such as Western Europe, where data has been driving the growth of telecom revenues with voice revenues showing slow or declining growth."
Ghoul adds that Saudi Arabia's overall telecom sector will also experience huge growth in the next seven years, matching a predicted significant increase in the country's population from 26.1 million people in 2009 to 32.6 million in 2018.
"In parallel, telecom revenues will increase from SR53 billion ($14.1 billion) in 2009 to SR97 billion in 2018," Ghoul says. He adds that this will be accompanied by an increase in investments from some SR19 billion in 2009 to SR63 billion in 2018, with "considerable investments in nationwide fibre networks and 3G/4G and LTE wireless technologies" accounting for the rise.
Saudi Arabia's mobile sector is dominated by incumbent STC and second operator Mobily, which now commands about 40% of the country's overall mobile market and about 75% of the 3G market.
Zain, which paid an eye-watering $6.1 billion for a combined GSM and 3G licence in 2007, remains some way behind its bigger rivals, but experienced solid growth in the fourth quarter of 2010.
The company, which launched operations in 2008 and has more than 8 million subscribers, said its revenues for the fourth quarter of 2010 increased by 93% to reach SR1.7 billion, compared to about SR895 million for the fourth quarter of 2009.
Meanwhile, Mobily experienced a 39% increase in net income, which reached SR1.4 billion in Q4 2010 compared with SR1 billion for the same period in 2009. Incumbent operator STC posted mixed results for Q4 2010, with a 23% decline in net profit compared with the previous year, owing to a one-off gain in Q4 2009. Indeed, STC's net profit in Q4 was SR2.29 billion ($610.7 million), although its operating profit rose 15% to SR3.03 billion.
Like most incumbents in the region, STC faces tough competition from its rivals in the fixed and mobile space, although Ghassan Hasbani, CEO, international, STC said the results also reflected investments that are "skewed towards" long-term growth markets, which are mainly overseas.
With most of the pent-up demand in Saudi Arabia for broadband services, each of the three main mobile operators, as well as fixed line operators Integrated Telecom Company and Atheeb Telecom, have been investing heavily in their networks.
STC invested heavily in its KSA networks last year, deploying a pre-commercial LTE network in major cities, while Mobily awarded Ericsson, Huawei and Nokia Siemens Networks contracts worth $213 million for a country-wide capacity expansion of its mobile broadband network in November 2010.
But with broadband penetration so low, the country's operators have also been investing in fixed broadband networks. STC launched a FTTH service with speeds of up to 100Mbps in parts of Riyadh, Jeddah, Dammam and Al Madina last year, and Mobily and Zain have both also been investing in fixed infrastructure.
Zain started to build a WiMAX network in 2007, while Mobily's data subsidiary, Bayanat Al Oula, continued to deploy WiMAX infrastructure in Saudi Arabia's cities in 2010. Mobily also shares an extensive fibre network, known as the Saudi Fibre Optic Network, with Bayanet and ITC.
Indeed, ITC said in January that it had signed a SR4 billion ($1.1 billion) contract with Korea Middle East Engineering Co., or KOMEE, to expand its fibre optics network. KOMEE will expand ITC's network coverage by 10,000 km, according to ITC.
The project, which started in February, will be implemented in four phases, and follows the completion of the Saudi national fibre network, a 16,000km network that was built over a four year period to connect Saudi Arabia's main cities and provinces.