Few residents of the UAE would dispute that the launch of the country’s second mobile operator, Du, back in 2007, helped to transform the country’s telecoms sector. And while cynics may argue that both of the UAE’s operators are partly owned by the state, the falling cost of services offered by both operators and the rapid growth of Du is testament to the power of competition.
In October, Du released its Q3 results, which beat analysts’ expectations as it reported a 50% rise in third-quarter net profit, driven by higher data revenue and contract mobile subscribers.
Buoyed by strong results earlier in the year, Osman Sultan, Du’s CEO said that his company aimed to seize more than 50% of the mobile market share in the next 2-3 years. The operator had an estimated 45% share of the mobile market in the country as September 30, 2011. Mobile subscribers, which accounted for more than 75% of quarterly revenue, rose 162,000 from the second quarter to 4.94 million at September end.
In its Q3 2011 results, Etisalat Group posted a net profit of AED5.13 billion ($1.39bn) for the nine months ending September 31, representing a decrease of 8.4% compared to the AED5.6 billion profit that the telco posted for the same period last year.
While Etisalat’s net revenue reached AED24.01 billion in the nine months to September 30 2011, an increase of 3% compared to the same period last year, the telco’s profit for the third quarter declined by just 0.9% compared to Q3 2010, to reach AED1.72 billion.
While it is fully expected that a new rival such as Du, growing from a low base, will dent the market share of an incumbent, the extent of Du’s growth in the UAE has surprised many analysts.
Mark Kremers, associate partner, Oliver Wyman, says that the way the market has evolved over the past couple of years has been “quite remarkable”. “Based on the intelligence that we have from several research firms we believe Du is currently hovering around the 40% market share in the mobile space,” he says.
Kremers says that the changing dynamics of the market has not only involved Du growing its market share. The second operator has also started to take a slice of some of the “traditionally very well protected and difficult for challengers to penetrate segments”, such as higher ARPU users. “The post-paid segment has in the past 12 months become a place where Du is a fierce competitor,” he says.
Indeed, in March 2011, Du doubled its share of the UAE’s post-paid mobile sector to reach about 28% in terms of subscribers.
For Kremers, this marked a turning point. Previously, Du has demonstrated that it was a strong challenger to Etisalat in terms of gaining volume share, and its rapid growth in the post-paid segment proved its ability to also compete with its bigger rival for higher value customers.
When looking at the consumer, SME, corporate and government segments, Taha Rangwala, senior associate, Oliver Wyman, agrees that Du to date has made the most headway in the consumer segment. “The consumer segment in the UAE now is at a much more mature and saturated stage than it was when Du entered. Growth levels are still positive but probably in the single digits and probably growth rates are likely to be dropping further over time,” he says.
Despite Etisalat’s declining profits, Taha Rangwala says that Etisalat is “doing well”, particularly in terms of tapping new revenue streams in the business and government sectors.
“They [Etisalat] are transitioning from operating in an environment where they were the sole provider to operating in an environment where customers have an increased level of choice, so that does bring a new competitive and operating dynamic into the market. Typically whenever this type of market is liberalised there is a bit of a downward trajectory on the incumbent or legacy players,” he says.
“Given the context I would say Etisalat has done quite well. They are now starting to realise that there is competition on services and they have been very smart about trying to open up more revenue streams for themselves, especially more revenue streams that focus more on the business-to-business segment.”
He adds that Etisalat has also developed its capability in various “technologically heavy and sophisticated segments” including advanced IT and ICT services, helping them to grow their revenues, despite the fact that the market is open to competition, according to Rangwala.
The business sector is where Etisalat appears to hold the advantage over Du. It’s advantage stems from the broader reach of its fixed-line networks and its existing long-term relationships with its business and government customers.
While Du might have to work harder than its bigger rival to move forward in the enterprise space, the good news for both telecom operators is that plenty of growth remains in the sector, according to Rangwala.
“The business sector is still expected to rise substantially. Although the UAE alrady has excellent nationwide broadband services and landline penetration, there are ample opportunities for both operators to extract more value from the corporate segment through additional services offered to the segment,” he says.
“In this space, SMEs and large corporates are looking for ways to outsource more of their communication and IT to partners – ie Etisalat and Du. In that context, we are still scratching the surface of the market,” he says.
The UAE’s TRA has been working closely with Etisalat and Du to implement fixed-line infrastructure sharing, which will allow both telcos to offer fixed services using each other’s network infrastructure.
Mohamed Al Ghanim, director general, TRA, told CommsMEA recently that his intention is to see competition in triple-play services, comprising fixed-telephony, internet access and IPTV.
In July, the TRA said that Etisalat and Du had soft-launched fixed-infrastructure sharing, allowing a select group of residents to choose their fixed-line provider.
The soft-launch marked the final stage of testing for fixed-infrastructure sharing and was designed to check that all aspects of the service, including the customer interface systems, inter-operator systems, order and provisioning processes were working properly.
The TRA is optimistic that the service, which uses bitstream technology, can be made commercially available to all UAE residents by the end of the year.
While Etisalat is no doubt concerned about the potential impact of infrastructure sharing given its significant investment in fibre in the past couple of years, Rangwala says that Etisalat is likely to retain its advantage over Du in the business and government sector, even after infrastructure sharing is implemented.
“After making significant fibre investments Etisalat looking to monetise those investments,” Rangwala says.
“Etisalat has made a lot of announcements about tie-ups and partnerships for M2M, with governments, for education in the past couple of years.
“Etisalat owns the infrastructure to a large part of the country. Most companies already have a relationship with Etisalat which gives them a strong advantage over Du.”