Demonstrating the sector’s continuing strength, investors snapped up telecom shares on the Saudi stock market’s first trading day after the Eid Al-Fitr holiday last month. The Saudi Telecom Co. (STC) was a leading performer.
“Long-term investors are looking at the telecom sector,” says Jamil Matar, regional manager for Emaar Financial Services. “It is underdeveloped in the Gulf and there is a lot of potential for growth, especially in Saudi Arabia.”
Telecom stocks took center stage following a report in a Kuwait newspaper that Saudi Telecom had bid for Kuwait Projects Company’s stake in Wataniya. Saudi Telecom, the Arab world’s largest telecom company in market value, denied the report. Shares of Etihad Etisalat (Mobily), the Kingdom’s second mobile phone service operator, also strengthened.
The STC was the Kingdom’s first telecommunications company. It is still partially state-owned and competes with Mobily for the country’s fast-growing mobile services market. The company posted a profit of SR10.013 billion for the first nine months of 2006, registering a 9.1 percent increase over last year’s SR9.176 billion. The telecom giant attributes the growth in profits to an increase in the number of clients and a subsequent rise in both domestic and international calls. However, its revenues for the third quarter declined by 1.8 percent to SR3.2 billion compared to SR3.26 billion last year. The company blames the decline on higher international interconnection charges. These have been rising in Europe and the United States in particular.
Nevertheless, the number of STC’s mobile phone subscribers has reached 13 million. A recent comparison rates the business eighth among world telecom companies and 121st among the Top 500 international companies in terms of market value.
STC has improved its services in the face of stiff competition from its rival Mobily, which earned a third-quarter profit of SR217 million compared with a SR166 million loss in the previous (start-up) year.
“Our objective is to upgrade our customer services systems to be on par with other international systems promoted by other telecom companies,” says STC President Saud ibn Majid. Mobily entered the Saudi market when STC’s monopoly business had around 9.7 million subscribers and a market penetration of about 41 percent. Mobily was able to add more than 2.2 million subscribers in its first six months of operations. In September 2006, Mobily’s subscribers numbered 4.8 million, representing a market share of 28.4 percent and a penetration rate of some 67.1 percent.
“Mobily has been the fastest-growing company in the Middle East and North Africa region in terms of subscriber acquisition during its first year of operations,” says Humoud Al-Ghobaini, Mobily’s public relations and media manager.
Moreover, Mobily has around 200,000 3G subscribers, representing approximately 4.2 percent of Mobily’s total customer base and making it the Kingdom’s largest 3G mobile operator. “Mobily’s sales have been growing at exponential rates since it launched its operations in May 2005,” says Al-Ghobaini.
Mobily was first able to break even in the first quarter of 2006. The company’s profit margins increased by about 7-10 percent during the period.
Mobily recently apologized to its subscribers and users for the failure of its network. It blamed the problem on STC with whom it shares the system. Mobily then revealed it was planning to set up its own network which would gradually cover the entire Kingdom.
Both STC and Mobily have upgraded their equipment and are offering the 3.5G technologies internationally.
“Mobily provides 3.5G technology with unique services that are applicable to both pre-paid and post-paid users,” says Al-Ghobaini. Its 3G international calls can be made with subscribers to Etisalat in UAE, Vodafone in Italy, Smart-tome in Hong Kong, Vox mobile in Luxembourg and H3G in Australia. “This unique service will enable subscribers on both sides to make live video calls,” says Al-Ghobaini.
With the introduction of 3G or 3.5G services, mobile markets across the Kingdom and elsewhere in the Middle East have opened up to fierce competition. The rivalry is expected to become greater with the expected introduction of a third mobile service operator in the Kingdom early next year.
Meanwhile, current GSM (global system for mobile communication) services are expected to keep dominating the revenue forecasts for telecom operators in the Kingdom and the rest of the region for several years to come. Further, investment in GSM technology is set to continue over the next five- to eight-year period by way of new coverage and network upgrades. According to consultants Booz Allen Hamilton (BAH), during this period a gradual deployment of wireless broadband technologies is also expected to take place.
Four countries in the region have already deployed 3G, EDGE and WiFi (wireless Internet) technologies and more are expected to follow. Although the roll-out has so far been limited to specific areas, coverage is set to increase with new market entrants. WiMax (4th generation communication technology) is already being trialed in the region. It is not a question of which technology will dominate the marketplace. It could very well be a mix of all of them. Much depends on the availability of practical user devices. Full mobility will always remain a key factor. Wireless technologies that do not cater for the practicality of small, easy-to-carry devices will face difficulties breaking into the mass market.
Mobile broadband provides freedom of movement and practical access to entertainment, information and other subscribers, whereas wireless broadband offers “portability” and high-speed connectivity for applications requiring slightly larger devices such as a laptop.
“As competition increases, new operators are looking to build their subscriber base while those already established are defending their market position and minimizing losses,” says BAH Senior Associate Hilal Halaoui. “In a drive to defend the home market, the incumbent operators are looking to enhance their network infrastructure and develop new services to reward their customers.”
Some of the schemes have proved successful and could be effective in slowing, if not stopping, the damage caused by competition. Loyalty programs, for example, have become popular with operators. New technology is also allowing companies to introduce services that significantly broaden customer choice. As mobile devices become more sophisticated, the user experience is changing. Operators are evolving their services to deliver entertainment and information to mobile phone screens. In the last four years, SMS traffic has increased significantly on mobile networks in the region. As more bandwidth becomes available with the introduction of GPRS, more complex messaging can be supported, hence the introduction of MMS (multimedia messaging).
Today, most networks in the region have introduced GPRS standards and a large number of successful operators offers MMS services. Many thematic TV broadcasters have emerged recently to offer music content with continuous SMS-based message boards and downloads, along with MMS. Traditionally, content providers commanded a significant share of the revenue in return for their copyrights. However, according to BAH Vice President Karim Sabbagh, telecom operators are now realizing the importance of their role as the ultimate owner of the relationship with the end user. As messaging and interactivity services become more widely spread, revenues to mobile operators will become more significant. Many are increasingly sourcing content directly from the developers, while others are looking at entering the content development industry themselves and producing their own libraries to capture a larger portion of revenues.
Interactive television in the region is highly successful, with shows creating significant revenue opportunities for TV broadcasters, beyond traditional advertising income. This is made possible by the telecom operators, who may at some point in the near future also investigate the possibility of expanding their operation into this part of the media part of the value chain.
