Saudi telecom: gearing up for a third operator

Saudi Arabia is the biggest among all Middle Eastern countries, with a population of 25 million inhabitants, who enjoy high income levels supported by a steady annual economic growth that has hit six per cent over the past three years.

Saudi annual population growth amounts to 2.5 per cent and 70 per cent are under 25 years old. With such a huge, wealthy population, there is plenty to attract mobile operators.

Analysts say the country has the highest revenue generated per user (ARPU), but a low mobile penetration. Hisham Tuffaha, Market Analyst and Division Head - Investment Research & Financial Analysis, Bakheet Investment Group, said: “Penetration is only 85 per cent, but that is the percentage given by the current two operators and it’s based on the number of mobile lines not the number of customers.

'I think that the actual access percentage is only 70 per cent and it’s very low compared to other countries in the region.”

According to Dr. Abdull Rahman Al-Ja'fari, governor of Saudi Communication and Information Technology (ICT), the number of mobile phone subscribers in Saudi Arabia crossed 20 million in 2007. But a survey conducted by the Arab Advisory Group last year, showed that 40 per cent of Saudi mobile users have more than one mobile subscription.

And while the survey put this down to the increased competition and promotions, it has also sited a percentage of users who prefer to have a separate line for business and personal use. With this in mind, the accurate penetration might even drop to 60 per cent.

Busy schedule for Zain

To get an idea of how attractive the Saudi market is to mobile operators, just look at the winning SR23bn ($6.16bn) bid from the Zain Consortium for the third GSM licence in the kingdom in July 2007.

As per the licence requirement, Zain must allocate 40 per cent of its capital to the public in an initial public offering (IPO).

“We have already submitted all papers and legal work to the Capital Market Authority (CMA) and are waiting for the CMA to allocate the IPO time. We are aware that the CMA has a busy schedule for upcoming IPO’s and we are confident that the it will allocate the right time for each IPO, depending on the size and first come first serves basis” said Dr Marwan Al-Ahmadi, CEO of Zain.

Al Ahmadi underlines the importance of the Saudi Market in the Middle East in that it has given Zain the reach from the Atlantic Ocean to the Arabian Gulf by providing a geographic fit with the company’s other 21 markets.

“Saudi Arabia has seen unprecedented growth in mobile penetration in recent years. However, the current mobile penetration is relatively low compared with the penetration rates for the UAE and 118 per cent for Bahrain. On the other hand, the kingdom’s ARPUs, around $33, are relatively high compared with other GCC and Middle Eastern markets” Al Ahmadi addsed

Targeting Youth

Saudi Arabia has 21 million mobile users generating annual profits of SR13bn ($3.48bn). Out of that, Saudi Telecom Company (STC), which has long enjoyed a monopoly of the Saudi telecom market, holds a 90 per cent share of the market. The second operator, Mobily, has a 10 per cent share of the market, having grabbed a third of Saudi mobile users in its first year of operation.

During the first nine months of 2007, Mobily’s profits rose by 134 per cent compared to the same period in 2006. Yet, STC has shown no fall in its operating revenues, despite two years of fierce competition with Mobily. And to Tuffaha, this shows the ability of the market to contain more than one or two operators especially when they develop new added-value services and products.

STC has diversified its portfolio, targeting specific segments of society, mainly youth between 18 and 25 years old. New 3G services offered by the company included Mobile TV, internet access over mobile and video calls.

Targeting youth is a common approach that will be increasingly adopted in Saudi Arabia. Al Ahmadi believes that the young are historically early adopters of innovative ‘infotainment’ value added services, especially in Saudi Arabia.

The value of competition

With no competition until 2005, there was little incentive for innovative services in the kingdom. Since the monopoly was broken as services opened up, third generation and broadband technologies started to appear in the kingdom.

Khalid Al Kaf, Mobily CEO believes that more mobile network operators are important to provide competition and add value to the sector. For him, operators need to be given time to truly establish themselves after being given mandates to improve the quality of what they offer before they concentrate on winning market share and price competition.

Now, as Zain prepares to enter the Saudi market, competition is expected to intensify, resulting in more advanced technologies and diversified products. So what does the new operator have up its sleeve?

“In order to capture a market share, Zain Saudi Arabia is expected to focus on offering innovative products and comprehensive high quality services. We do believe the competition will be centered on high quality products and services rather than entering a price war,” said Al Ahmadi.

Zain Group was the first mobile operator in the region to launch MMS, the first with mobile data services, live TV-to-mobile, mobile banking partnerships, and the first 3.5G network anywhere in the world.

So it would be no surprise to see more services appearing in Saudi Arabia. Zain is expected to extend its ‘One Network’ for Iraq and Jordan to include Saudi Arabia and Bahrain once it starts operations in the kingdom. Al Ahmadi claims the ‘One Network’ will completely remove traditional roaming charges for Zain customers travelling in these markets.

Sustainability issue

Not long time ago, Saudi Arabia had poor infrastructure that slowed down its telecom industry movement. However, Zain considers itself to have a track record and the experience to successfully enter competitive and challenging mobile telecommunications markets with poor infrastructure.

“Zain KSA has comprehensive capabilities to build a strong and successful mobile operator in the Saudi market. Furthermore, Zain Group has a 20-year track record in deploying and managing networks in all kinds of market conditions, from the most advanced, state-of-the-art networks in Kuwait and Bahrain to the most challenging market environments in Iraq and Sudan” Al Ahmadi claims.

Infrastructure development in Saudi Arabia is heading in the right direction, as more investment seeps into the sector.

However, it network problems are not limited to Saudi Arabia. All over the region people are still saddled with slow broadband access speeds and relatively high tariffs compared with other regions in the world.

According to Al Kaf, telecom operators and regulators need to look towards sustainable growth in the sector, providing high quality services and only once networks have been rolled out and the best coverage is in place should we look to mobile virtual network operators, perhaps two to three years down the line.

The combination of a strong economy and low mobile penetration means there is still plenty of room for mobile expansion in the kingdom. The industry itself expects the Saudi market to be one of the fastest growing in the world, with penetration reaching 100 per cent by 2010.

STC was contacted several times but did not respond to requests for an interview.

Additional reporting: Jonathan Sheikh Miller