Analysts Predict Bright Future for Saudi Mobile Users

ALKHOBAR, 15 February 2005 — The 3GSM World Congress opened yesterday in Cannes, France. The event will bring together over 28,000 telecoms players from over 173 countries. The congress is recognized as a place where representatives from the wireless industry can meet to debate their visions of the future of the industry. For daily reports from the congress go to http://www.3gsmworldcongress.com/2005/congress/default.asp.

By mid-2004, mobile phone subscribers around the globe totaled nearly 1.5 billion, representing about 25 percent of the world’s population, according to the International Telecommunication Union (ITU). The ITU said the growth in mobile phone subscribers had outpaced that for fixed lines, which totaled approximately 1.185 billion today versus one billion at the start of the century, and was also outstripping the rate of increase in Internet users. The value of global mobile business reached $414 billion in revenues in 2003, a tenfold increase in the decade, while over the same period the overall telecommunications sector grew by an average of 8.8 percent to reach $1.1 trillion.

As with the rest of the world, the Middle East’s mobile markets are seeing explosive growth. The Arab world’s media and telecoms landscape is massive. There are over 300 million people across 22 Arab countries. These are served by 43 mobile operators — with many more in the pipeline, 23 fixed operators, 36 datacomm operators and close to 300 ISPs. The Arab world’s audience is also served by more than 100 Satellite TV channels and over 90 FM radio stations.

Competition is driving much of the growth and many of the changes in the region’s mobile market. In the summer of 2004 Etisalat acquired Saudi Arabia’s second mobile license bidding against a large number of international consortia. Months on the dust has settled and Arab News spoke to several analysts about the winning bid and Etihad Etisalat’s (www.mobily.com.sa) positioning in the Saudi market.

Pyramid Research

Pyramid Research still supports their Fall 2004 analysis of Etihad Etisalat’s prospects.

“Given Etisalat’s $3.46 billion offer for the license, this ranks as the biggest telecoms deal ever made in the region. Indeed, the incentive for Etisalat to go for the Saudi market could hardly be greater, in view of the impending liberalization of the UAE communications sector and the relatively mature UAE mobile market. However, the license price makes Etisalat’s entry a risky venture and even in a best-case scenario, the company is likely to face a long payback period,” commented Pyramid.

“In a regional context, Etisalat’s final bid for Saudi Arabia’s second mobile license was staggering. However, it is worth noting that Etisalat was not alone in its assessment of Saudi Arabia’s potential, with the second-highest bidder, South Africa’s MTN, offering $2.94 billion. This raises the question of what underlying assumptions could possibly justify bids of such great magnitude. To be sure, Etisalat has high expectations on its ability to build market share and compete with STC, perhaps based on the perception of the incumbent as a relatively sluggish former state monopoly with limited ability to adapt to a competitive environment. It could also be the case that bidders were equally optimistic about the strength of the demand side, assuming a stable and positive macroeconomic outlook in the short to medium term. In addition, Etisalat may have put heavy weight on its statutory right to offer international calling services, the inclusion of a 3G license, as well as the right to utilize STC’s network infrastructure during the first four years of operation, with the potential for significant savings in operating costs. Considering all these assumptions, along with a relatively favorable revenue-sharing agreement, Etisalat’s bid could make sense. However, in our view, these assumptions may well represent a best-case scenario.”

Has Etisalat overestimated its future prospects in the Kingdom’s mobile market? Pyramid’s analysts believe that perhaps it has.

“Etihad Etisalat’s target of seven million subscribers by 2009 arguably suggests as much, for several reasons,” wrote Pyramid. “First, STC has taken the threat of competition seriously with reduced tariffs and a comprehensive operational revamp. This includes extended coverage, substantially increased capacity, continuous GPRS rollout and measures to improve its customer relation management (CRM). Secondly, there is arguably little scope for Etisalat to differentiate itself against the Saudi incumbent unless it applies a radically different business model to its Saudi operation as compared to that applied in its home market. In fact, the two operators have much in common: Lack of customer segmentation, no handset customization or subsidization, limited data content and a relatively passive approach to marketing. Third, despite some notable improvements, Saudi Arabia’s regulatory environment remains uncertain. It also remains to be seen how independent from STC and the Ministry of Communications the regulator (CITC) will be to make sure that the incumbent lives up to its pledge to share its network with Etisalat during the first four years of operation.”

Arab Advisors Group

“It’s a big license. It’s a big market. It’s a 25-year license in the largest Arab cellular market where penetration is only at around the 30 percent level and has no reason not to grow to 80 percent. So basically the real market is still not served,” said Jawad J. Abbassi, founder and president, Arab Advisors Group. “It’s not like entering into a saturated mature market. The average revenue per user — what people spend monthly on mobile services — is astronomical in Saudi Arabia compared to the rest of the world. The amount paid by Etisalat for the license may be on the high side but it does have a major business case supporting it. Etisalat is already in the UAE, so it’s already in the region and there was no political risk discount. The bottom line is that if things go badly in the peninsula for any reason, Etisalat will be suffering in its home market let alone Saudi Arabia.”

Abbassi added, “What Etisalat will immediately bring to the Saudi market is the recognition by Saudi Telecom (STC) that, if they don’t serve their clients those clients have an option to leave and that will raise the bar for STC and the new entrant. Customers will have choice and operators will have to improve service and customer relationships. The offers in the Saudi market will no longer be ‘vanilla offers’ — one prepaid, one post-paid and customers are stuck. There will be a lot more differentiation. The operators will look closely at consumers and see what they can specifically offer to even niche market segments.”

Informa Telecoms & Media Group

“The second GSM license in Saudi Arabia cannot be compared to the 3G licenses in Europe in 2000. At the time those licenses were awarded, European operators were then bidding for licenses to offer futuristic services for which there was no existing business model,” said John Everington, Senior Research Analyst, Informa Telecoms & Media Group. “Etisalat however has bought a license to offer basic voice services over GSM, which has a well-established and proven business model. Etisalat also acquired a 3G license, yet the license fee was only six percent of the GSM license fee.”

“The total size of the fee is indicative of the Saudi market’s perceived importance,” continued Everington. “The country is one of the last to introduce competition in its mobile telecoms market and at the same time has one of the largest populations and highest GDP per capita in the Middle East. The second license also represented one of the last major opportunities for international telecoms investors to establish a presence in the Middle East.”

While Everington is certain that Saudi consumers will benefit from the entrance of Etihad Etisalat to the market, any windfall for the new operator will be in the distant future.

“Call charges in the Kingdom will drop, even before Etisalat’s network is launched, as STC is sure to drop its tariffs in preparation for competition. In addition to lower national tariffs, Etisalat’s entrance is also likely to lead to improvements in areas such as Quality of Service (QoS) and customer care,” commented Everington. “In addition to its GSM license, Etisalat also paid SR753.75 million for a 3G license; yet it is unclear what sort of services the company will offer. Although the ban on camera phones has now been lifted, it remains far from certain whether there will be any real demand for 3G services in Saudi Arabia when Etisalat decides to launch them. If you look at Bahrain and the UAE, a year after MTC-Vodafone Bahrain and Etisalat launched W-CDMA, they still have less than 7,000 3G users between them. If there is such a low demand for 3G in two of the most developed markets in the Middle East, then the short-term prospects for 3G in Saudi Arabia look very uncertain.”

Issues With 3G in the Saudi Market

Why is it that revenues from 3G in the Middle East are still so poor when demand is rising in other regions? It’s a nasty little secret but in other parts of the world 3G operators are subsidizing handsets in order to earn substantial revenue from various forms of adult content — gambling, games and pornography. These are unacceptable in most Arab countries. This month Juniper Research released a new report predicting that the global market for adult-oriented mobile text, audio and video will increase by more than 50 percent this year, reaching $1.01 billion, and will top $2 billion by 2009. European users are currently the biggest spenders on mobile adult applications, spending an average of more than $34 a year for the content.

The significance of the lack of adult content in the Arab world cannot be overlooked as in other markets adult-oriented services are set to drive the increase in data consumption over mobile devices. This will most likely improve 3G services and bring down costs in those markets. Despite its somewhat less than wholesome image, adult entertainment has now been adopted by a number of mobile operators and content providers in other regions as a key revenue stream over mobile phones. For advanced mobile services such as 3G to succeed in the Kingdom, it will be necessary to provide highly desirable applications unrelated to adult content delivery and right now these are definitely in short supply.