Saudi Arabia’s telecoms sector confirmed its position as one of the region’s most competitive markets last year when it offered concessions for three MVNO licences.
But just as the winners of these licences are preparing to launch services, the overall number of mobile subscribers in the country is shrinking, owing to an ongoing push by the government to reduce the size of the immigrant work force.
Indeed, Saudi Arabia's mobile subscriber base has declined by some 10% in two years following a crackdown on immigration, according to a report from Reuters.
Saudi Arabia had 56.1 million subscriptions in 2011, the report states, giving it one of the highest mobile penetration rates in the world. But by September 2013 this figure had fallen to just 51 million, data from country’s telecoms regulator, the CITC, indicates.
For Saudi Arabia’s three main operators, the decline in subscriber numbers is an issue to take seriously, although its actual effect on the bottom line may be more muted than the numbers suggest. This is because many of the people who have left the country were low ARPU subscribers and also liable to churn.
“The Saudi telecom market has seen significant demand shocks during 2013,” says Abhishek Sharma, principal, Oliver Wyman. “While the registration requirements displayed some impact during the year, the immigration laws resulted in several users leaving the country and related businesses facing short-term labour pressures.”
Furthermore the country has started to show signs of saturation more than ever before, according to Sharma. Most growth estimates are now in low single digits for mobile and are single digit for the telecom market as a whole, he says.
However, mobile data has shown impressive growth and continues to grow in the vicinity of 30% annually, soon approaching 40% of the mobile revenue, research from Oliver Wyman indicates.
Hassan Kabbani, CEO of Zain KSA, the third mobile operator to enter the Saudi market, says there is every reason to be optimistic about the potential the country holds. “The Saudi market is the most important in the region from value, and we have an operation there as if we are sitting on a gold mine, so we’ll just have to do what is right in order to get the right return,” he says.
For Kabbani, the rising demand for mobile stems from the desire of customers to use smartphones as a tool for entertainment and information. “We are in a city where there is a huge demand for mobile telecoms. Saudis are using their phone not just as a telecom tool but also for access to information, entertainment, and access to the rest of the world. In a country where you don’t have cinemas, people use their phone for information, entertainment and whatever they need,” he says.
Yasser Alobaidan, CEO of Jawraa, a Saudi Arabia-based telecoms consultancy, is similarly optimistic about growth potential for the sector. He believes several factors will allow operators to continue to grow in 2014.
“All mobile operators in Saudi would complete building their LTE networks and this will enable them offer new mobile data and media packages that will flood the market with enhanced media deals.
“We anticipate mobile data traffic will continue to grow in 2014 driven by the significant increase in use of smartphones and their applications by end users,” he adds.
The fact that telecom operators in the market have overcome various challenges to turn in strong financial results, demonstrates their ability to tap new growth areas such as mobile broadband and enterprise applications, according to Sharma.
“Operators are battling several challenges including intense price declines, regulation driven changes and quite critically a dearth of sufficient talent, but have still managed to deliver strong results,” he says.
For example, he points to Mobily, which has shown more than a 40% increase in its revenues and profits in the past two years and seems to have won significant favour from the market. Indeed, its stock price has risen by more than 80%, according to Sharma.
STC has similarly found strong interest in the market, increasing its share price by about 60% on the back of continued growth on the large revenue base it enjoy as an incumbent, as well as its international investments, Sharma says. He adds that Zain has also shown distinct improvement on its previous results with a 15-20% recovery in its stock price.
“All in, an interesting year with the market throwing major challenges at the operators, but a determined fight back from the operators to keep the growth going and finding new avenues for expansion,” Sharma says.
Alobaidan agrees that operators are now looking for new growth opportunities: “We believe that the Saudi telecom market is very mature and had little growth last year compared to the years before,” he says. “We’ve seen telecom operators focusing more on FTTx services and triple play. We have also seen operators give more attention to corporate and SME business to have sustainable growth.
“We also anticipate that fixed line operators will continue to grow, at a lower scale than the mobile market, but mainly driven by their effort to expand in their FTTH / FTTB offerings,” Alobaidan adds.
Sharma agrees: “Fixed line has also shown strong growth with strong fibre roll-outs taking place in the market. With more than 600,000 households coverage claimed by STC and more than 500,000 claimed by Mobily, KSA is rapidly catching up on the fibre story it had missed in the previous years,” he says.
Aside from broadband, there are other areas for optimism for Saudi Arabia’s operators. “There are several growth areas that still exist in the market, some of them still in early stages. However, four specific opportunities appear as interesting bets in 2014-15,” Sharma says.
These pockets of growth include mobile financial services, cloud services, and IT enabled services (ITES). “Given the current state of the payments and banking infrastructure in the Kingdom, mobile banking and mobile payments could be an attractive market in itself and as an enabler for the core mobile business of operators,” Sharma says.
While cloud remains at an early stage and currently accounts for less than 3% of the ITES market, Sharma says that the market needs to be “acclimatised” to cloud offerings. In the retail sector, it could be an attractive area that could also bolster connectivity revenues.
“The entire ITES market is another interesting story which is worth looking at in more detail,” he says. “While the telecom spend as a share of GDP for KSA is around the global average of 2-4%, the ITES spend is estimated by most sources to be significantly below the
This opportunity has been spotted by some players, including Mobily, which has been expanding its data centre space consistently, with reports claiming it had 38 data centres by the end of 2013, Sharma says. “Again, cloud services could well change the evolution of this industry, leapfrogging the typical growth path, just as mobile data did on the broadband connectivity growth,” he adds.
Saudi Arabia’s government is investing heavily in infrastructure including smart cities, and this is also an area that offers growth potential for operators.
“Significant government and private capital in KSA is committed to infrastructure expansion such as real estate mega-projects, healthcare expansion and education eco-system upgrade,” Sharma says. “Several of these projects have already been signed and have contributed to the revenues of telecom operators this year. The trend looks likely to continue for several years to come,” he adds.
Indeed, according to a recent report from Australian research firm Buddecomm, Saudi Arabia’s Ministry of Health has devised a 10 year e-health strategy with a road map of specific projects to fulfill strategic objectives. “E-education holds much promise given Saudi Arabia’s young population and its desire to diversify and develop a knowledge-based economy. From its 2013 budget the government allocated SR204 billion ($54.4 billion) to education, 25% of its entire budget and the single largest spending item,” the report states.
“Ecommerce holds much promise given demographic and economic factors but faces the challenges of access to payment gateways, lack of clear regulations, cultural, trust and privacy issues,” the report adds.
Mobily, the second mobile operator to enter the market, is experiencing strong growth in the enterprise and government sector. Marwan Al Ahmadi, chief business officer, Mobily, says that the company is achieving “double digit growth” in this area and expects to continue this level of growth for the next three to five years. “We also continue to do high double digit growth for the B2B segment,” he says.
But it is MVNOs that will define Saudi Arabia’s telecoms market in 2014, and perhaps act as a template for other countries to follow. “The major development in the Saudi telecom market was the appointment of three MVNOs,” Alobaidan says. “The Saudi regulatory body, the CITC, is expected to issue the licences within the coming few weeks which will make 2014 see the birth of the three MVNOs.”
The licences were awarded in June 2013 to Virgin Mobile MEA, which will partner with STC, and London-based Jawraa Lebara, which will partner with Mobily, and the UAE’s Axiom Telecom, which will partner with Zain KSA.
Alobaidan appears optimistic about the development. “The new MVNOs will enter into the highly competitive Saudi market and will try their utmost efforts to capture highest possible market share, this will put more fuel to competition and will significantly contribute to the telecom market growth in the Kingdom of Saudi Arabia,” he says.
While some analysts have voiced concern that the Saudi market may not be able to sustain three MVNOs, the country’s three main operators appear to be upbeat about the initiative. For example, Zain Saudi Arabia’s Kabbani says that he views the MVNO as a wholesale activity. “We have a network infrastructure and we have a partner who will represent wholesale activity for us. The more our partner is successful the more our network will be utilised,” he says.