It is said that talk is cheap, but in Saudi Arabia consumers regularly get phone bills that break the bank. The Kingdom does not have the highest telecom rates in the region but there is still a lot of room for improvement in both rates and services. Looking at other regional markets such as Jordan, where it costs 10 cents a minute to call the US, gives some idea of the treats in store for Saudi consumers with the increasing liberalization of the Saudi telecom sector.
That liberalization began with turning Saudi Telecom Co. (STC) into a public company and it continued with the awarding of GSM and data licenses. Under the WTO agreement, within three years from accession Saudi Arabia will allow up to 70 percent foreign equity ownership in the telecommunications sector. This applies to both basic telecommunication services and value-added telecoms services.
“Do you remember when STC was alone in the mobile market?” asked Jawad Abbassi, GM, Arab Advisors Group. “People initially paid SR10,000 to get an Al-Jawal line. Now how much do they pay? Nothing. Because it doesn’t cost STC SR10,000 to provide a line. What happens with competition is that pricing becomes cost based rather than market demand based. The operators will not ask themselves how much is the market willing to pay for this service, but rather, how much does it cost us and what is the mark-up that we should put on it to sell it. Prices for telecom services will no longer be decided by market desperation.”
Prices for telecom services will never be sky high again and neither will the license fees that companies are willing to pay to become telecom operators in the Kingdom. Recently, Dr. Mohammed Al-Suwaiyel, governor of the Communications and Information Technology Commission (CITC), said that the commission would start preparations for a bidding process by the beginning of January for a second fixed operator but declined to say when it might be completed. “Worldwide now, fixed-line is not as attractive as mobile,” Suwaiyel told Reuters.
While Abbassi agreed with Dr. Al-Suwaiyel, he added that there still would be a demand for the license but that people should not expect that it would go for billions.
“Fixed service will always be with us,” he commented. “People need connectivity in their offices and in their homes. They will need access to broadband. The amount of available content is increasing and this is driving the demand for broadband bandwidth. However, don’t confuse the need for fixed services, be it voice or data or entertainment or international voice, with the technologies underlying these services. Basically the underlying technology currently is copper. WiMAX and other wireless technologies will also offer fixed services and we will continue to see the progression of technologies into more wireless adoption because the cost of laying fiber or copper in the ground is very prohibitive.”
In other words, we will see the coming of fixed wireless services. WiMAX is a powerful wireless technology that gives fixed-line telecoms the means to hit back at the mobile rivals who have long been eating into their voice revenues. The first WiMAX devices will be boxes fixed to the outside of homes or offices to provide broadband access. WiMAX is an industry standard also known by the designation “802.16.” The technology offers lightning fast wireless data communications over distances up to 50 km. While it is true that WiMAX is designed for data only, instead of voice and data, this is becoming less relevant now that operators and telecoms are keen to move voice calls completely onto the Internet, using the Voice over Internet Protocol (VoIP) technology, in an attempt to simplify to one IP network and dramatically cut costs.
WiMAX has potential but there are other technologies too. T-Mobile is building a nationwide wireless broadband network in the Czech Republic, using technology provided by IPWireless. The same technology, already deployed in parts of Germany, Britain and New Zealand, will also be used by Netcom Africa to provide wireless broadband access in Nigeria. A rival technology from Flarion will be used to provide wireless broadband coverage across Finland, initially in rural areas where fixed-line broadband connections are currently unavailable.
“So rather than killing the fixed-line business, wireless technologies will make the competition in the fixed services finally feasible,” explained Abbassi. “My own assessment is that if the cost to acquire the fixed services license is reasonable, many operators will try to enter Saudi Arabia. A fixed services licenses that allows the offering of broadband services will be in demand.”
He continued, “Let’s face it. The existing fixed infrastructure in Saudi Arabia is far from satisfactory when it comes to meeting the broadband demand in the country. Remember, we are talking about a huge country with a large population. The devil is in the detail. If the license would be, ‘You must cover the whole of the Kingdom, every single city, and you must pay us a huge upfront license fee,’ then chances are not many operators would be interested. But, if the license terms say, ‘You can choose which cities you’d like to serve and we have reasonable revenue sharing and a reasonable upfront license fee,’ many would enter.”
Abbassi pointed out that an adequate telecommunications infrastructure is essential for the sustainable development of the Saudi economy.
“To put it in context, the telecom sector is not just one economic sector but also an enabling sector for other economic sectors,” he said. “The nice thing about telecommunications is that in and of itself, it provides employment, it provides investment avenues and it provides taxation revenues for the government. Additionally, the presence of a good telecommunications infrastructure allows other economic sectors to prosper, such as finance or trade or even services.”
Unfortunately, despite the clear benefits of a liberalized, vibrant telecom market, Saudi Arabia was a bit slower than some other countries in the region in moving toward liberalization. On the positive side, the Kingdom has been faster than nations such as Qatar and the UAE. Part of the reason for the delay is that the government did not have an immediate financial need for privatization.
“Unlike Morocco, Egypt and Jordan, the Saudi government really didn’t need the privatization proceeds. It really didn’t need the money from liberalization,” emphasized Abbassi. “In the end though, the way the Saudi government liberalized the market is creating a truly competitive telecom sector that will enable growth in other sectors. The government realized that while short term they weren’t in dire need for money, long term, employment opportunities for Saudi youth and the economy at large needed liberalization.”
Right now, liberalization is still urgently required in some telecom services. There is a nasty bottleneck when it comes to broadband in Saudi Arabia. Abbassi believes that if the CITC moves quickly to make the second fixed license available, then in two to three years Saudi consumers will no longer face supply side problems in fixed services. Another area where the Kingdom’s telecom users will see improvement is in value added services and incentives from the mobile operators.
“Al-Jawal and Mobily are offering some incentives and enhanced services such as MMS, but there is more to come,” Abbassi said. “Consider the issue of free handsets. Handset subsidies happen when they are needed to drive growth in the market. It’s a competitive move by operators and it is costly. Operators would sacrifice maybe two or three months of revenue from that subscriber to give him a subsidized handset. But in return they get a one- or two-year commitment. You can expect this when the market becomes a lot more competitive in Saudi Arabia, probably with the entrance of the third cellular operator.”