GCC Telecom Report 2016 by Ravi Raman

DOSSIER

GCC TELECOMS REPORT

2016

EDITOR'S NOTE

WHAT WILL THE OPERATORS DO NEXT? PROFITABILITY CONCERNS WEIGH ON THE INVESTMENT CONVERSATION AND TELCOS HAVE TO MAKE A MOVE

DOSSIER

Chief Executive Sandeep Sehgal Vice President Ravi Raman

EDITORIAL Consulting Editor Shayan Shakeel

CONTRIBUTORS Adam Shamisay Cordelius Fotheringham

ART Art Director Steven Castelluccia Senior Designer Nadia Mendez Designer

Fahed Sabbagh

MARKETING AND SALES

ew in the telecoms arena aren’t keeping a nervous eye on their finances. Enthusiasm used to come naturally to operators in the good old monopoly days–but the internet, liberalisation and doubts about the regional economy have caused confidence to falter and conversations about optimism to turn into concerns about operating expenditure (opex). It’s not all doom and gloom though. Services that have been the bane of operators everywhere for the last decade were actually heralding a new age of digitisation. Projections about the number of connected devices online by 2020 vary at the whims of analysts, but even if Juniper’s 38 billion estimate holds true, and not the 50 billion previously floated by Cisco and Ericsson, it’s still a 285 per cent increase from the 13.5 billion devices online in 2015. And the GCC is bent on embracing the digital age first.

But tackling that tsunami of data with today's technology is like digging ditches to save the city from flooding. We need more pipes and a better understanding of network traffic flow–insights, analytics, investment. A new operator has to emerge to meet the onslaught, free from the operational structures that calcified under the weight of monopoly profit induced bureaucracy. How long operators continue to be at the centre of connectivity depends on if they choose to build their own empire to manage all that data, or hire one. With communications as a service, software defined networks and network function virtualisation becoming buzzwords of the 'hire as a service' era, opex budgets are squarely in focus. Our next issue in September will discuss which way the operators are moving and how. But it leads to another a question begging to be asked: could we soon see an 'operator as a service?' Shayan Shakeel

GCC TELECOMS REPORT

EDITOR'S NOTE

Assistant General Manager Poonam Chawla Deputy Sales Manager

Neha Sharma Marketing Coordinator Blossom Menezes Circulation Manager Rochelle Almeida Circulation Executive Rex Emmanuel

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NEWS Trends, agreements, launches, and the names behind them

REGIONAL OVERVIEW Gulf telcos' expansion abroad has barely boosted their profits

Gulf telcos are shifting their focus back to home markets but other issues continue to impact the industry including the introduction of a new industry watchdog in Kuwait, the "Chinese Invasion" in the smartphone industry and the regional push to digitise.

GCC TELECOMS REPORT

OPERATORS

VENDORS & SERVICE PROVIDERS

Telcos and their priorities in the new economic climate

Industry upheaval is defining the business pitch to operators

INSIGHTS

LAST WORD

Regulators, smartphones, OTTs and the impact on the industry

The need for a new pricing paradigm to counter mobile data

CONTENTS

NEWS

DU AND SAP LAUNCH CLOUD SERVICES IN UAE

strategic cloud partnership between Du and SAP will facilitate nationwide digitisation and innovation and allow UAE government enterprises to gain access to a host of smart applications in 2016. Du will provide UAE federal and local government agencies, as well as private enterprises, with SAP’s innovative private cloud-based applications hosted on a data centre in the UAE. Organisations using these applications will be able to leverage Du’s network infrastructure, combined with SAP S4/HANA business suite’s real-time analytics. With real-time private cloud applications, it is hoped government organisations can become more efficient, agile, scale easily, and gain in-depth insights into operations, employee productivity, and user experience. Being pay-as-you-go cloud solutions, organisations will not need additional capital investment in hardware, infrastructure, applications, or licences.

“We’re doing all we can to equip the UAE to become a global leader in innovation,” says Carlos Domingo, senior executive officer, new businesses and innovation, Du. "This partnership fast-tracks the adoption of world class digital services in the UAE by making them more cost effective and easier to attain. Now customers won’t have to face a massive up-front investment to increase their productivity with these services. They will only pay for what they use.” “With the market demand for private cloud applications growing in the region, SAP is further driving our co-innovation partnership with du to support the UAE’s digital agenda,” says Steve Tzikakis, senior vice president and general manager, SAP South Europe, Middle East and Africa. “By leveraging global best practices and solutions, SAP is committed to using the power of the cloud to allow employees and customers to more easily engage with organisations.”

AVAYA POWERS VIVA BAHRAIN’S UNIFIED COMMUNICATION CLOUD SERVICES IN MENA FIRST Avaya has partnered with VIVA Bahrain to offer Unified Communications-asa-Service (UCaaS) for businesses across the island. Avaya’s unified communications, video and contact centre solutions will be hosted by VIVA Bahrain and made available to enterprises in a cloud services model, enabling organisations to purchase the capacity and services they require, as and when needed, without large upfront costs. The UCaaS will offer businesses the ability to boost operational flexibility, respond to changing business demands, tweak customer experience, and manage costs more effectively with the promise of reduced total cost of ownership and better return on investment. “Avaya solutions, hosted by VIVA Bahrain, will give businesses the flexibility and agility to prepare for the digital transformation, at prices that suit their needs,” says Nidal Abou-Ltaif, president, Asia Pacific, Middle East, Africa and EU, Avaya. Ulaiyan Al Wetaid, VIVA CEO says, “With this, our business customers will be able to experience improved and streamlined access to their data through a consolidated process of IT systems and achieve their business outcomes, through high levels of services delivery.” GCC TELECOMS REPORT

NEWS

STC Bags Regional First with Tests for LTE LicensedAssisted Access Saudi Telecom Company (STC) successfully demonstrated licence assisted access (LAA) solutions with both Huawei and Ericsson this year, allowing it to deliver the fastest 4G-LTE data rates in MENA. STC and its two main suppliers will be capable of delivering extremely high user throughput, in real time while utilising unlicensed spectrum. The feat was made technically possible through the aggregation of LTE with two unlicensed carriers in the 5GHz band. LAA will contribute a better quality of service and will support STC’s declared strategy of offering advanced solutions and services to its customers, significantly enhancing end-user experience, with better utilisation of unlicensed spectrum along with licensed LTE spectrum in STC's network. It will also allow customers to use advanced services faster. Nasser Al Nasser, senior vice president for technology and operations at STC says: “The majority of network traffic comes from indoor users. Therefore, we need to accelerate our pace in technology innovations and focus our effort on improving the quality of indoor services and solutions. Using unlicensed spectrum for LTE is a very smart way to maximise the efficiency of the available spectrum. It will lead to successful deployments of advanced technologies, providing better quality services and maximising benefit of our valued customers.”

DU AND ETISALAT IN JOINT INITIATIVE TO DEPLOY TELECOM INFRASTRUCTURE IN THE UAE IP

u and Etisalat will partner in a joint initiative to support the government in developing smart infrastructure in more than 50 Projects across the UAE. Called the Taawun initiative, the project will see the deployment of telecom infrastructure in newly enveloped areas using fibre-optic and passive telecom solutions capable of carrying next generation voice and data services. The first phase of the programme is underway at the Dubai Sustainable

City. The development will have passive fibre optic infrastructure connecting residential units within the community. “Taawun marks a major milestone in our progress towards a fully competitive telecommunications market in the UAE. All new real estate developments across the UAE will be served by competitive state-of-the-art infrastructure and residents of these new development projects will now be able to make a choice between operators,” says Osman Sultan, CEO, Du.

“Customer choices will be key to the development of new telecom infrastructure in the UAE, embodied by the Taawun initiative, which is of strategic importance to the country’s telecom industry and real estate sector,” says Saleh Al Abdooli, CEO of Etisalat UAE. “It will ensure that the newly developed infrastructure will meet the current and future connectivity requirements of smart homes and systems in new property developments.”

OOREDOO AND HUAWEI TO OPEN NEW INNOVATION LAB IN QATAR Ooredoo and Huawei will partner to create a next-generation Innovations Lab in Qatar, according to an MoU signed during Mobile World Congress in Barcelona. Based at Ooredoo’s Qatar Data Centre 5, the facility will develop, test and demonstrate a range of next generation IT and communication solutions, including mobile broadband, 5G, proof of concepts, digital transformation, Internet of Things solutions, 4K video enhancements and more. As part of the agreement, Huawei will provide full technical support for Ooredoo’s research in the Innovations Lab, including offering training courses and supporting knowledge transfer between the two companies. “This is an important step forward for Ooredoo, for

DIGITISATION TO DRIVE SAUDI ARABIA’S $4 TRILLION ECONOMIC PLAN BY 2030 Digitisation will supercharge the Kingdom of Saudi Arabia’s potential $4 trillion non-oil economic investment needed through 2030, industry experts announced at the recent Mobile World Congress.

Qatar, and for our future young technology leaders, creating a research hub within our country that will explore the cutting-edge of network technology. We thank Huawei for their partnership on this project, and look forward to working with them to share knowledge and break new ground in network research,” says Waleed Al Sayed, CEO, Ooredoo Qatar. “Advances in network technology are delivering faster speeds and a better online experience, but more than that they are helping to transform our digital lifestyles and supporting the growth of the Internet of Things. We are proud that Huawei is making a significant contribution in Qatar through our joint work with Ooredoo,” says Eric Xu, rotating CEO of Huawei.

Facing a volatile oil and gas market, and with half of the population under 25 years old, the kingdom’s economic transformation could double GDP by $800 billion, create 6 million jobs, and raise Saudi household income by 60 per cent, according to a new report by the McKinsey Global Institute. “By harnessing the potential of the Internet of Things era and hyper-connectivity with realtime analytics, and massive capital investment, the kingdom can supercharge its economy, unleash the private sector potential, and leapfrog

GCC TELECOMS REPORT

NEWS

established economies in raising productivity and investment,” says Ahmed Al-Faifi, managing director of Saudi Arabia at SAP, a leading technology company. Up to 75 per cent of productivity gains can be achieved by matching best practices, the report says. SAP is currently partnered in modernising a number of the kingdom’s major organisations, including telecoms STC and Mobily, Al Nasser Group, Bin Sammar Trading and Contracting Company, SABIC, and Saudi Arabian Airlines.

REGIONAL OV E R V I E W

GCC TELECOMS ECONOMY SAUDI ARABIA AND THE UAE LEAD THE REGION BY MOST METRICS, BUT OTHER COUNTRIES AREN'T FAR BEHIND SAUDI ARABIA

UAE

Population (millions)

KUWAIT

QATAR

OMAN

Population under 25 (%)

30 25 20

BAHRAIN

GDP Per capita ($)

50%

$100k

40%

$80k

30%

$60k

20%

$40k

10%

$20k

15 10 5 0

No. of mobile operators

Mobile penetration (%)

3 2

173% 180%

155%

179%

146% 218%

% of population

11.6

1.4

70% 60% 50% 40% 30% 20% 10% 0

Fixed-broadband subscriptions per 100 inhabitants

23.4

Mobile broadband (3G & 4G) 80%

9.9

4.5

Individuals using the Internet (%)

21.4

Fixed-telephone subscriptions per 100 inhabitants

12.3

22.3

14.2

18.4

9.6

21.2 0

GCC TELECOMS REPORT

REGIONAL OVERVIEW

100

RETREAT! BACK TO THE BASE IN A TROUBLED GLOBAL ECONOMIC CLIMATE, GULF OPERATORS ARE REALISING THEIR FOREIGN OPERATIONS AREN’T BRINGING HOME THE BUCKS THEY THOUGHT THEY WOULD

n asset-buying frenzy in the noughties established the Gulf’s former telecoms monopolies as significant international players, with operations spreading from the shores of the Atlantic to the Pacific oceans. Nearly a decade on, the process is reversing. These same companies are selling or seeking to offload underperforming units as the home markets they were once so eager to diversify away from become ever more important to their bottom line. The Gulf incumbents aren’t alone in finding foreign success more elusive than they had envisaged, but their difficulties show that

GCC TELECOMS REPORT

thriving as monopolies and then later dominant domestic players was scant preparation for operating in the low income, hyper-competitive markets of Asia and Africa. Retrenching in home markets makes sense– the Gulf is wealthy, with young, expanding populations and a high penetration of smartphones. But the sustained drop in oil prices could yet hurt their domestic resurgence. “Until about six months ago, the macroeconomic situation in Qatar, Saudi Arabia and the UAE seemed pretty good, with a decent recovery from the 2008 downturn,” says Matthew Reed, practice leader of Ovum's Middle East and

REGIONAL OVERVIEW

Africa regional research. “Operators from those countries benefitted from the boom, while a lot of their emerging market investments were proving problematic and not going as well as they expected.” That is probably a generous assessment of the Gulf ex-monopolies’ foreign mistakes. So numerous are these blunders it is difficult to list them all, but particular low points include the more than $1 billion the UAE’s Etisalat wasted in India before quitting the country, Saudi Telecom Company’s (STC) investments in India and Indonesia, and how Qatar’s Ooredoo has endured numerous calamities from tumbling emerging market currencies to Iraq’s disintegration. “Gulf operators have only really been successful in other markets in the Arab world–the investments in other regions have been disappointing to disastrous and they’re likely to be more cautious, especially with renewed uncertainty about the global economy,” says a regional industry source. “The problem was that these former monopolies were sitting on big cash reserves, had no debt and didn’t know what to do with the money so more often than not they invested it unwisely and destroyed shareholder value. Now, they’ve realised their most important market is their home market.” The ex-monopolies’ foreign fixation often allowed the second–and sometimes third–entrants a relatively easy beginning. These challengers were able to quickly build up market share largely using the same strategy of targeting lower income, pay-as-you-go subscribers and new migrants to the growing Gulf economies before seeking to also win over wealthier, less flighty customers. But that comfortable ride has become bumpier and the finances of the Gulf’s big three international telecoms operators–Etisalat, STC and Ooredoo–show the importance of their home markets and the turnaround these companies have managed to achieve domestically. Many of the foreign units owned by the Gulf’s former monopolies seem largely decorative, a means to colour in an extra

3.5 million

domestic Ooredoo subscribers

6.6

$ billion

24% of group revenues in the first nine months of 2015

86 % of group profit

GCC TELECOMS REPORT

�

Ross Cormack, CEO, Ooredoo Myanmar at a launch event

part of the world map when showing their footprint and to boost total subscriber base, even if in reality these add very little to the bottom line. Take Ooredoo, for example, which operates in 14 markets. Just 3.5 million– or 3 per cent–of its 115 million subscribers were in Qatar as of 30 September, yet its home market accounted for 24 per cent of the group’s total revenues of $6.6 billion in the first nine months of 2015 and a whopping 86 per cent of its $518 million profit. That is not a blip. In 2014, Qatar provided 22 per cent of revenue and 90 per cent of profit although the 2013 figures are markedly different with local revenue representing 19 per cent of the group total and profit only 53 per cent. To look at the figures another way, Ooredoo managed to increase its domestic profit from $377 million in 2013 to $527 million in 2014 and is on course to break that for 2015 with profits for the first nine months of last year standing at $443 million. Its foreign units fared markedly worse as the sustained plunge in the Indonesian rupiah, other currency woes in North Africa and the self-proclaimed Islamic State’s gains in Iraq ravaged their earnings. From generating a combined profit to Ooredoo of $331 million in 2013, this slumped to $59.2 million in 2014. Last year should prove to have been better–nine-month profit was $75 million, but still this represents a scant return for

REGIONAL OVERVIEW

“There’s usually a lag effect on telecoms from a macroeconomic downturn. For a while, businesses will carry on spending, but eventually they will cut back if the downturn persists and staff reductions and office closures will impact telecom operators.”

straight quarters of decline in profits for Du

Matthew Reed, practice leader, regional research, Ovum Middle East and Africa

the billions the company has invested to diversify its asset portfolio. “Ooredoo has showed that even if you have a well thought out international strategy and some of your foreign operations are doing well at a local level this doesn’t benefit the group’s bottom line because of foreign exchange issues,” says the source. “They (former monopolies) haven’t hedged their FX transaction exposure, either because they couldn’t or didn’t want to. That has hit them every quarter and operators now feel the volatility is too much to handle. “Add in heightened geopolitical risk in some of their markets, and the operators have figured it’s better to return to the bread and butter of their home markets. Domestic competition has picked up, but the former monopolies have fought back well to increase their market share.” Ooredoo’s average revenue per user (ARPU)–a key industry metric– fell from $36.25 in the first quarter of 2014 to $35.43 in the final three months of that year. But the firm’s aggressive approach had a more telling impact on rival Vodafone Qatar, whose ARPU dropped from 129 to 121 riyals over the same period, an Ooredoo presentation shows. Having launched services in 2009, Vodafone Qatar was close to breaking even by mid-2014, but Ooredoo

then upped the ante and its challenger suffered as a result, reporting widening losses for five straight quarters. Ooredoo is unlikely to ease up. In a May 2015 investor presentation, the state-run firm predicted its Qatar revenues would grow at a compound annual growth rate of 7.6 per cent between 2014 and 2019, the highest forecast for its various country units aside from Myanmar, which only began operations in 2014. Etisalat provides a similar narrative, with the Abu Dhabi-based firm’s domestic subscriber base of 11.6 million representing just seven per cent of the group total. Yet if the company had no foreign operations at all its overall profit for the nine months to 30 September 2015, would have only been 3 per cent lower than the $1.5 billion it reported. The UAE’s importance relative to Etisalat’s foreign operations has actually grown despite the operator splashing out $4.5 billion to acquire a controlling stake in Maroc Telecom in 2014. Home profit was equivalent to 88 per cent of group profit in 2012, 86 per cent in 2013 and 82 per cent in 2014. The above figures only tell part of the story. Perhaps more important to investors is how Etisalat has clawed back some of the market from rival Du by going toe-to-toe on pricing for domestic and international calls, especially in

GCC TELECOMS REPORT

REGIONAL OVERVIEW

11.6 million

Etisalat's domestic subscribers

82% of profit from domestic in 2014

terms of offering special rates to select destinations, data packages and improving its much maligned customer service. The results are impressive: Etisalat has raised its revenue share of the UAE’s mobile market from 60.1 per cent in 2012 to 65.5 per cent in the first nine months of 2015. It also grew its mobile subscriber share from 52.3 per cent to 57 per cent over the same period. Du, in contrast, has reported declining profits for five straight quarters. The case of the third major ex-monopoly, STC, is tougher to analyse because of lower disclosure standards. The most recent annual report available on its website is for 2013 and it only breaks down its revenue into domestic and non-domestic revenue, not profit. However, domestic operations consistently accounted for around 90 per cent of total revenue from 2012 to 2015, while domestic earnings rose 13 per cent over that period to reach $12.51 billion, so it’s probable the kingdom generated the vast bulk of the 28 per cent increase in net profit in that time. Gulf telecom operators’ valuations vary wildly. UAE telecom stocks–Etisalat and Du–are trading at premiums to their Gulf peers because they lack the uncertainty of other operators. For example, Qatar should be an attractive telecom market for equity investors because of its rapidly rising and wealthy population and big government spending commitments. But Ooredoo’s foreign woes and Vodafone Qatar’s widening losses mean such investors don’t really have a play on the country’s telecom sector. Etisalat trades at a trailing price-to-earnings ratio of around 18.1 and du at 13.2. That compares to Kuwaiti

Zain’s 8.9, Bahrain Telecommunication’s (Batelco) 10.5 and Ooredoo’s 15.5. “People are willing to pay a premium for Du and Etisalat, because they see the value for the companies comes from their domestic markets,” says the source. “The problem for Ooredoo and Zain is that their home markets aren’t their biggest in terms of revenue or subscribers, so investors are giving these stocks a discount despite both companies actually managing their international operations better than say Etisalat. Etisalat doesn’t deserve to have double the valuation of Zain, but markets are irrational.” The refocus to home has succeeded for the incumbents, but could that feel-good story be about to falter now that crude prices are skulking near 12-year lows? The answer is probably yes, even if telecoms is considered a defensive sector, providing relatively stable returns versus more cyclical industries such as petrochemicals and real estate. “The oil price drop has changed the macroeconomic picture and they [telecom operators] now have big worries about how this will affect their domestic business if the oil price slump is sustained–most likely it will have a big impact, with consumers less confident about spending and businesses cutting back,” says Ovum’s Reed. Lower business spending will be particularly troubling for telecom operators, which have targeted selling not just phone and data connectivity to corporate customers but also value-added services such as cloud computing, communications equipment and maintenance contracts as a means to offset slumping margins in the consumer market. “There’s usually a lag effect on telecoms from a macroeconomic downturn. For a while, businesses will carry on spending, but eventually they will cut back if the downturn persists and staff reductions and office closures will impact telecom operators,” says Reed. The GDP outlook, while gloomier than a few months ago, still shows the Gulf’s economies will expand this year according to official and independent economist estimates. Saudi Arabia’s economy is forecast to grow about 1.9 per cent in 2016, down from an earlier estimate of 2.5 per cent given last October. The UAE’s economy is seen growing 3 per cent in 2016, versus 3.3 per cent a year earlier, performing better than its Gulf peers due to a more diversified income base. “Companies will reduce their expenditure across all sectors and telecoms won’t be immune, although the impact will be less pronounced in Qatar and Dubai, where the governments are committed to significant spending ahead of the World Cup and Expo 2020,” adds the source. “Given the economic and political volatility elsewhere, I still think Gulf operators will prefer to rely on their home markets and preserve cash, rather than seek to expand abroad again.”

�

Etisalat’s headquarters in Abu Dhabi, UAE

GCC TELECOMS REPORT

REGIONAL OVERVIEW

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O P E R ATO R S

THE POCKETS ARE DEEPER IN SAUDI ARABIA STC

SYNERGIES AND ACQUISITIONS IN TURKEY AND KUWAIT MAKE STC’S KHALED BIYARI CONFIDENT IN HIS BUSINESS, BUT HE SAYS THE REAL MONEY IS AT HOME

elecommunications is at inflection point and operators have the opportunity to be a core component of the digital economy according to the vision laid out by Saudi Telecom Company's (STC) articulate and energetic chief executive, whose tenure has cemented the former monopoly’s domestic resurgence and canny realignment of its international priorities. Dr Khaled Biyari has been at the helm since April 2015, succeeding the company’s chairman Abdulaziz Al Sugair, who had assumed the position of temporary CEO about two years earlier and had launched the fight to re-establish state-controlled STC as the kingdom’s telecom provider of choice. Biyari’s vision, while domestically-focused, also has global scale and he sees STC better leveraging its investments in neighbouring markets such as Turkey, with its market of about 80 million people, and wealthy Kuwait. “We are living in an inflection point as it relates to the digital economy being a reality,” says Biyari. “It's time for telecom operators to start working hard to be relevant because the digital economy does require the connectivity infrastructure to be there.” As such, operators will invest in adjacent industries and he highlights cloud services, machine-to-machine connectivity and the Internet of Things (IoT) as becoming vital aspects of his company’s activities.

Pressed to reveal the nuts and bolts of STC’s strategy for 2016, Biyari says improving and enhancing customer experience would again be a key focus, particularly ensuring its networks, call centres and stores offer the best service in the kingdom. To this end, the company is also investing heavily to overhaul legacy computer systems. Another theme will be a renewed push for wholesales services–locally, regionally and perhaps internationally through its stakes in major submarine cables. And as for the business segment? “We want to continue our drive to provide our enterprise customers with new innovative solutions that can help them enhance their operations,” says Biyari, who last year oversaw the launch of STC’s cloud services on its cloud marketplace. “In addition, we will be investing in other major, what I call enablement platforms. That includes having IoT platforms and cyber security platforms that will enable partners to log in or to connect to our network to provide enterprise services to the enterprise market.” STC’s revenues have increased by about 60 per cent over the past decade, a time span that includes the launch of two rival mobile operators in the kingdom that ended its domestic monopoly–Mobily and Zain Saudi. The period is also seeing perhaps the biggest challenge the global telecom sector

GCC TELECOMS REPORT

OPERATORS

STC’s stakes in international operators include

19.25% Turk Telekom

100% Viva Bahrain

52% Viva Kuwait

has faced since the widespread “One of the main challenges take-up of mobile phones began in is managing the huge growth of the late 1990s, which is the surging data consumption in the kingdom demand for data and uptake of databecause that has an impact on cusbased applications that threaten to tomer experience. The kingdom make operators’ conventional revenue carries possibly the highest average streams of voice and text obsolete. data usage per customer I guess in “We see lots of opportunities in the world. This is clearly putting presthe Saudi market,” says Biyari, who sure, lots of pressure, on our mobile confirms STC will retain its domesnetwork in particular.” tic focus. That's not to say that we will The shift from being primarnot be looking for opportunities here ily engineering outfits to marketand there, but we think that geographing-led media, communications and ical expansion is not or will not bring in technology companies has somethe value that investing in the differtimes proved problematic for former ent verticals that we are doing right telecom operators. “As telecoms now. However, I'm not closing the starts moving into the digital era door. What I'm saying is that we will be and start focusing on new services, opportunistic as it relates to that.” clearly talent becomes an issue,” There are no official figures for says Biyari. “Therefore, we want to mobile subscriber share, but by ensure that STC becomes a magnet Dossier's calculations, STC’s revenue for talent, in addition to maybe share of the kingdom’s telecom retraining some of our staff to the sector–excluding minor players new realities of technology.” such as loss-making fixed line operSTC’s international footprint ator Etihad Atheeb–was 69 per cent includes an indirect 19.25 per cent in 2015. This compares with 21 per stake in former Turkish monopoly cent for Mobily and 10 per cent for Turk Telekom, full ownership of Viva Zain Saudi, so Biyari’s emphasis Bahrain and now a majority holding in on home is understandable, even if Viva Kuwait, having raised its holding the oil price slump has rattled confrom 26 per cent to 52 per cent earlier Khaled Biyari, CEO, STC sumer confidence and sparked this year. It sold out of Indonesia. savage spending cuts by the state. Biyari foresees greater cooperation “The telecom market typically is and coordination between STC and what they call a defensive market, so we don't see immedi- Turk Telekom, both having fixed and mobile networks and ate impact,” says Biyari. However, I think any slow down in being major internet providers. “We have lots of similarithe economy would definitely have an impact across all the ties,” says Biyari. “We have been working closely with our sectors. The telecom sector typically lags other sectors. colleagues at Turk Telekom across different fronts both on We are watching. We are looking at the situation.” the network side and on call centre side to not only share Telecom operators worldwide are wrestling with a seem- experiences, but also try to leverage the size of both organingly intractable problem: web-based applications such as isations to ensure we get the best value that we can, espeSkype, Whatsapp, Facebook, YouTube, and Twitter have cially on the procurement side. I also see lots of synergies all but ended SMS as a service and revenues from con- taking place between the two organisations.” ventional phone calls, which were especially important for Viva Kuwait has thrived since launching in 2008 as Gulf operators due to their large expatriate populations, Kuwait’s No.3 mobile operator, swiftly usurping Ooredoo have also plunged. True, these web-based applications Kuwait as the main challenger to Zain after real competihave led to surging data use, but the investments required tion was first introduced into the telecom sector of Saudi’s to upgrade networks to meet this demand do not generate northern neighbour. “The Kuwaiti market is very close to commensurate returns. Put simply, margins have declined us and has lots of the characteristics of the Saudi market. dramatically–STC is no exception and Biyari is cutting oper- Therefore, we believe there is synergy that can be exploited ating costs where it can. “A main theme will be to drive STC between the two markets. Primarily, that's the major reason towards being a lean organisation–we need to continue for STC's interest in raising its stake in Viva Kuwait,” says enhancing our operational efficiency,” says Biyari. “[It’s] very Biyari, who declined to comment on whether STC is conimportant we don't only focus on growth to bring in value, sidering selling any of its foreign assets. “We were satisfied but also to help our bottom line through cost efficiency. with the results of the offer.”

“A main theme will be to drive STC towards being a lean organisation. We need to continue enhancing our operational efficiency. It’s very important we don't only focus on growth to bring in value, but also to help our bottom line through cost efficiency.”

GCC TELECOMS REPORT

OPERATORS

ELECTRIC AMBITIONS VOICE WILL CONTINUE TO BE A MAJOR EARNER FOR TELCOS, BUT DUBAI’S DRIVE TO BECOME "SMART" IS PROVIDING DU WITH THE BEST EXCUSE TO MOVE INTO NEW BUSINESSES, SAYS CARLOS DOMINGO

ubai-based telecom operator Du is on a mission to be central to the Gulf business hub’s aim of becoming the world’s smartest city–an initiative that could slash energy consumption, extend free WiFi to most public places and even make traffic wardens an endangered species. Telcos had for decades been extensions of government departments. Innovation was anathema, until the liberalisation of telecommunications sectors worldwide required these firms to change their entire culture because even though phone calls are still their staple business, growth is only to be found in data-based services. Du never quite fitted the caricature, having launched operations less than a decade ago and introducing simple, but very welcome reforms such as per-second billing to the UAE market. The operator wants again to show its nimbleness when it comes to creating new services that can improve customers’ lives–and add to its bottom line. It’s evident when speaking with Carlos Domingo, senior executive officer of new business and innovation at Du. “My role is to drive the digital transformation of the company. I manage the digital experience, the online and mobile channels, business intelligence and big data, advanced analytics and all the new services beyond connectivity,” he says. The latter includes Du’s dedicated smart cities business unit. The smart city concept is not especially new or unique to the UAE, but where the country–and Dubai in particular–differ from the rest of the world is in the intent. Dubai is committed to becoming the smartest city in the world by 2017. “There’s a lot of momentum and push from different government entities to make this a reality,” says Domingo. To make a place for itself in the city to come, Du claims to have installed an Internet of Things (IoT) network on top of its existing 3G, 4G and fixed networks, dedicated GCC TELECOMS REPORT

to providing connectivity for various types of sensors. Domingo cites two particular sensor-based initiatives, for parking and for street lights, which Du is already installing in certain parts of Dubai. Parking sensors typically have a battery life of only a year and had to be dug up annually, but now network technology lowers battery usage so that they last about five times as long. The labour and materials required to replace the battery cost much more than the sensor itself, so the network-enabled versions provide significant time and cost savings–and benefits to car drivers. “There are lots of studies that prove 30-50 per cent of traffic in the downturn areas of a city is due to people looking for parking. Congestion primarily comes from people looking for parking and they don’t know where to go. In a mall, it’s the same story,” says Domingo. “If you can redirect people quickly to a parking spot, it reduces traffic, pollution and the need to increase infrastructure. People [or the authorities] will willingly pay to have such a service.” The sensors could also rid Dubai of the menace of traffic wardens–and make it even harder to get away without paying for parking. “Today, the way it’s done is there’s a guy with a tablet who walks around typing in the [car] plate number to see if the guy has paid through SMS or checking whether he has a ticket in the windshield. It’s inefficient and it costs a lot of money to monitor a few people,” says Domingo. “By logging movement in the parking slots you can take an area and know exactly how many cars have parked, how many have paid, and which one hasn’t.” In another initiative, Du has put sensors in street lights in Dubai Silicon Oasis so that these can be dimmed on demand using street-located pressure sensors that detect how many people are in the area. “With these two pieces of information and some algorithms, we can, in real time, change the intensity of the lights,” says Domingo. “There 20

OPERATORS

�

Carlos Domingo, senior executive officer, Du

Du’s total mobile customer base

7.72 million Q4 2015

Du’s Revenues 2015

3.36 billion

1.48 billion EBITDA 2015

are studies that show that people will continue to feel comfortable on a dimly lit street so long as there are other people on the street as well. The opposite is also true–if there are very few people on the street at any given time, they need brighter lights to feel more secure. If the street is deserted, we can reduce the lights to minimum intensity.” According to research done by the company, applying such technology can theoretically reduce energy consumption by about a quarter in the city. “These are all services that in one way or the other interact with other objects in the city, whether it’s traffic lights, parking slots or lighting,” says Domingo. “Sensors extract information in real time about the status of an object. This information can be turned into insights which can then be used to create services for people to consume.” There are a number of business models Du can employ as it deploys enabling technology across the city. Free, hour-long WiFi in 220 sites in the UAE allow more people to access the network in heavily trafficked areas such as Dubai Metro stations and Jumeirah Beach Residence. But customers can also pay for longer, faster network access. “It’s a freemium model. If only five out of a hundred pay, they cover the cost of the other non-payers,” says Domingo. Such initiatives “are not exactly a gift to the city,” says Domingo. Dubai’s wider agenda to become a smart city creates a financial case for Du to launch these services. “Telecoms operators are very well positioned to provide end-to-end managed services with partners filling in the gaps of GCC TELECOMS REPORT

OPERATORS

the technology we don’t have,” he says. “Typically, we have taken the IoT landscape which is very broad and for each application–whether it’s smart parking, smart lighting, smart building, smart meters, smart waste management–and have scanned the industry to look for who are the best-ofbreed providers for each service.” He concedes telecom operators would still rely on call revenues for the bulk of their earnings for the next few years, but pointes to the case of fixed-line phone services–often bundled in with broadband connectivity to essentially neuter the impact of Voice over IP–as an indication of the likely path for mobile services. “The traditional telco business is still the main business for any telco. In the next 10 years is that going to be the same? Probably, but the majority of the growth will come from new businesses,” says Domingo. “We are diversifying into other businesses because we want to get ahead of the problem of our core business eventually not performing as it used to.” Telecom operators have long complained that the data boom has mostly benefited the likes of Facebook rather than them as the network investors and owners. But some solace can be found in that operators are arguably best positioned to capture the shift to cloud ICT services. “Many [companies] traditionally managed IT on their own premises. This will disappear and everything will move to the cloud,” says Domingo. It’s like electricity he says. “People used to have their own electricity generators, this doesn’t exist anymore. If you want electricity you get it from the grid.”

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VENDORS & SERVICE P R OV I D E R S

SAP

GULF TELCOS, MEET GERMAN EFFICIENCY SAP'S SHERIF HAMOUDAH CLAIMS THE COMPANY CAN MAKE MORE MONEY IN THE MARKET DOWNTURN BECAUSE ITS PRODUCTS ARE MEANT TO DELIVER EFFICIENCY

he telecom operators’ conundrum is well known: Traditional revenue streams are providing diminishing returns and harnessing data isn't easy business. But according to German technology firm SAP's senior telecoms executive in the Middle East, it's the only way they can hope to make any money, and using high-margin managed services including software and cloud products is the way to do it. SAP may have a vested interest in such a prognosis, but telecom operators’ earnings from the consumer market are mostly in retreat and there is undoubtedly a regional focus on getting better aligned with corporate customers’ needs. “Telcos are evolving, to survive they need to be digital players and let go of their legacy systems and processes–traditional income sources such as voice and SMS are reaching saturation and shrinking in most countries worldwide,” says Sherif Hamoudah, head of telecoms for Middle East, North Africa and Turkey, SAP MENA Further acquisitions by the Gulf’s former monopolies seem unlikely after they often struggled to successfully manage units outside the region and no new mobile licences are likely or even desirable in such highly penetrated markets. “The only remaining non-traditional areas of revenue growth are enterprise and data. In data, connecting with end users requires a lot of investment in network resources and still doesn’t generate GCC TELECOMS REPORT

enough profit,” says Hamoudah. “So the only remaining area of growth is in enterprise Information Communications Technology (ICT)-managed services, software and cloud. This is where we are a major player.” Like those of the telecoms operators, SAP’s business model–and those of rivals such as Oracle and IBM–has also undergone a paradigm shift in recent years, changing from installing software at customer premises to delivering software over the internet, a switch that crucially also includes moving from up-front purchases to regular subscription fees. This evolution seems to be succeeding for SAP–in January, it raised the upper end of its 2017 sales forecast by seven per cent to $25.9 billion, a decision it said was due to the rising use of Internet-based software that produces more predictable revenue than traditional software licenses. SAP, which Bloomberg describes as the biggest maker of applications used by companies to manage processes from manufacturing to marketing, has three main objectives as part of its focus on digital and the cloud. These are to become the number one digital company by digitising all the businesses–an aim it hopes it can realise through a new product Edge for SAP HANA–to put all its networked system products onto the cloud and to harness big data. “The traditional way of searching for data involved indexing, sort of like books where you go to the index which records where

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“We are very much an efficient German company, have staff trained to analyse businesses and can help create efficiency as a fact.” – Sherif Hamoudah, head of telecoms for Middle East, North Africa and Turkey, SAP MENA

the data is and the go to the data you are looking for. With this product, the search goes directly to the data,” says Hamoudah. “The search engine is optimised and uses the power of the processor, not the the disk so the speeds are phenomenal.” He says this speed could enable telecom operators to create and provide new highvalue services to consumers and businesses. “Customer experience is now extremely important, has to be seamless, and must be able to give to the customer what they want before they ask for it,” says Hamoudah. “Opportunity needs to be captured by prediction. And this has to be done by analysing massive amounts of data in a few seconds to come up with a suggestion. “If the customer is in a mall spending considerable time shopping for jeans, then the WiFi can be analysed and discounts on purchases through special agreements with the store can be offered based on location, mall sensors and consumer behaviour.”

Telecom companies operate their networks without any predictive planning or real time analysis of what is actually happening on these networks, Hamoudah claims. “They maintain all this inventory that they could do without. They segment customers on old lines of businesses, fixed line, mobile etcetera,” he says. “The new world is all about industries, services and organising resources efficiently. A lot of operators are moving in that direction but they carry a lot of baggage because of legacy and size. Because of the way they warehouse their data, there are bottlenecks and [for example] they would only be able to get the data to the CEO for assessment and decision-making after a couple days.” SAP began focusing on Gulf telecom operators about three years ago and now almost all of them have bought the company’s services. With Du, for example, the company has partnered to provide cloud and managed services to government departments. This model allows the client to pay for the service as an operational expense over many years, rather than as a one-off capital expense. Such staggered payment arrangements means these services are less vulnerable to spending cutbacks that could arise following the slump in oil prices. “Because our software is based on efficiency, we believe we can make more money in such a period,” says Hamoudah. “We’re increasing our investments in the region because we can make government entities more efficient, simplify their processes and save them money. “All of our sales are based on business cases and we can prove their operational expenditure would be reduced by employing us. We are very much an efficient German company, have staff trained to analyse businesses and can help create efficiency as a fact.”

GCC TELECOMS REPORT

VENDORS & SERVICE PROVIDERS

SAP’s 2017 global sales forecast was revised upwards by

7% to

25.9

billion

AVAYA

WOOING TELCOS WITH CLOUD DESPITE ECONOMIC UNCERTAINTY, THE CLOUD IS EXPECTED TO CONTINUE GROWING AND TELCOS ARE FACED WITH A FIGHT OR FLIGHT OPTION, SAYS AVAYA’S NIDAL ABOU-LTAIF

In 2015 Gartner estimated the global communications services market would be worth

1.49

trillion

A 7.2% decline from 2014 levels

vaya counts four-fifths of the Fortune 500 companies among its customers and the global communications solutions provider has big ambitions to expand its presence in the Middle East. The New Jersey-based firm describes itself as the world’s leading contact centre technology provider and is undergoing a transformation from hardware builder to software creator, which has enabled it to better serve its key sectors in the region–banking, government, education, healthcare, tourism and telecoms. Telcos especially have an opportunity to be a main player in the digital transformation of small and large businesses in the region, says Nidal Abou-Ltaif, president, Europe, Middle East, Africa, and AsiaPacific, Avaya. In the last few months, the company has seen a significant uptake in its software as a service, concluding strategic deals with Viva Bahrain, CAPITA in the UK, Telkom in South Africa and others. It’s seeing the strongest demand in the region for its products and services that require operational, rather than capital, expenditure by companies and its managed services business posted yearon-year growth of 16 per cent. It’s no surprise–Avaya is advocating it’s products via an “as a service” model towards digital transformation, “because of the benefits it brings not only to service providers, but also to enterprises who see relying on GCC TELECOMS REPORT

operating capital expenditure more suitable in light of the economic uncertainty,” says Abou-Ltaif. The traditional communications services market is steadily declining as a proportion of the total ICT market–last year, Gartner estimated the global communications services market would be worth $1.49 trillion, the largest segment of total ICT spending, a 7.2 per cent decline from 2014 levels, as price erosion and competitive threats hurt revenue in most national markets. Meanwhile, the cloud services market is going from strength to strength–IDC predicts expenditure on public cloud services in the Middle East, Turkey and Africa alone will grow 22.6 per cent this year. With cloud becoming increasingly crucial to business, telcos have a fight or flight option when it comes to providing cloud services, says Abou-Ltaif. Around the globe, telcos seem to have chosen the latter option. “We are increasingly seeing telcos in the Middle East and Africa region embracing the cloud as well, albeit at varying levels of maturity,” he says. “Operators today are seeing where best to position themselves,” he says. “At the most basic level, telcos are becoming cloud brokers by aggregating services, providing some quality of service on top and adding to their margins.” What they can do next, according to Abou-Ltaif, is to become platform enablers. Provide an

VENDORS & SERVICE PROVIDERS

services-oriented culture, and developing KPIs that focus on customer value. With its cloud service providers such as BT Wholesale in Europe, Abou-Ltaif expects this is where Avaya will best be able to appeal to telcos. “One of the ways telcos are looking to resolve their issues is by working with key partners, where they can integrate the vendor’s services into their overall network. This is where is Avaya is positioning itself to fit in. “In the last few years, we have acquired strategic tech companies that complemented our solutions,” he says. Saudi Arabia and the UAE are Avaya’s key markets in the Middle East in terms of revenue as public and private sector institutions evolve to meet the rising expectations of the two countries’ young and digitally savvy populations. “Both will continue to be key for us and are evolving in how they consume services and solutions, with delivery increasingly shifting toward the cloud across the region,” says Abou-Ltaif. Almost three-quarters of the company’s revenue in its fiscal first quarter came from software and services, while half of all sales were from new and cloud-enabled technologies. All of its solutions are open standard, enabling companies to retain and better exploit their legacy technologies, while Avaya’s global partners include HP, Oracle, Salesforce, Google and VMWare. “We believe we cannot do it alone, but have to build an eco-system that allows us to service our customers better. Through strategic partnerships and acquisitions, we continue to be relevant to the evolving needs of our customers and partners,” says Abou-Ltaif. He acknowledges the sustained slump in oil prices, which has hammered the state income of the Gulf’s major crude producers, will also affect corporate investments in technology. Yet the economic slowdown will also present opportunities. “While some companies might delay technology projects, these can’t be shelved indefinitely,” says Abou-Ltaif. “We are seeing organisations delaying investment in projects and revisiting priorities to see if they can 'do more with less'– again, this plays well with our strengths of helping our customers to boost productivity and efficiency, and to achieve sustainable business results.” “The trends of social, mobile, cloud and big data are driving evolution in citizens and consumers’ expectations and organisations of every size are trying to get ahead of the transformation curve.” For telcos, it is an exciting time, he says. While they face difficult challenges, for those operators that take the plunge and seize the opportunities presented, “the future is definitely bright indeed.”

ecosystem to leverage the telco’s assets and offer their infrastructure as a service.” It’s a market operators are well positioned to play in because “they own the networks upon which cloud applications and services are going to be delivered,” he says. “They also have experience in providing the wide area network solutions that corporate customers need, and managing large communication and hosting centres is in their corporate DNA.” In the past, telcos used complex, segmented infrastructure based on service-specific networks, but new technologies based on software-defined networks and network-function virtualisation can optimise performance for individual users based on their unique needs, he says. “Some customers will want only low-price connectivity, but others will pay more for network service that responds and adapts to their demands. So the infrastructure is largely in place for delivering cloud services.” However, while telcos have clear strengths that play very well in the cloud space, they also face significant challenges, warns Abou-Ltaif. “Delivering cloud services requires a fundamentally different business model than that established by telcos when they pushed into the managed services space, and on-premise, bespoke solutions," he says. Cloud services require a high degree of self-service, automation, and repeatability in the endto-end operating model. Traditional telcos are not well suited for a cloud model.” It’s a difficult and daunting task to transform to a new, more efficient operating model he says. Organisational, process and product management transformation is more challenging than infrastructural changes and building a cloud business requires developing new capabilities, such as professional services, introducing a

“Cloud services require a high degree of selfservice, automation, and repeatability in the end-to-end operating model. Traditional telcos are not well suited for a cloud model.” Nidal Abou-Ltaif, president, Europe, Middle East, Africa and Asia-Pacific, Avaya. 27

HUAWEI

BAHRAIN’S TELCO MUSCLE HUAWEI'S PAUL FENG NAN SAYS BAHRAIN'S TELECOMS ECONOMY HAS PLAYED A VITAL ROLE IN THE VENDOR'S EXPANSION INTO THE REGION

he world’s biggest telco, Huawei has more than doubled its share of phone shipments to the Gulf since 2013 according to IDC. with the Chinese technology firm’s diverse product range and aggressive marketing and customer service push finding a resonance with consumers. These achievements were plotted from its regional headquarters in Bahrain, a seemingly unlikely location choice when most international companies opt for Dubai as the emirate cements its position as Gulf’s financial and commercial hub. Yet for Huawei, a company that last year invested $6.3 billion in research and development, it was Bahrain that made the most commercial sense. “Bahrain’s economy is witnessing significant developments in the fields of industry, education, science, healthcare, and tourism,” says Paul Feng Nan, Huawei Bahrain's chief executive. He highlights government plans to invest $22 billion in infrastructure in the coming years, which he believes will enable Bahrain to become an even more attractive and sustainable business environment. “It is also a natural gateway to the rest of the GCC (Gulf Cooperation Council) and the wider Middle East region and is one of the most diversified regional economies,” says Feng Nan. “For Huawei, being active within Bahrain is an opportunity to help create a competitive marketplace, support local talent, and deliver excellent quality of services that are crucial to businesses and individuals seeking to embrace today’s digital transformation.” Today, Huawei Middle East employs 5,000 people across 10 countries, with about 600 employees located in Bahrain alone, having set up in the kingdom in 2004. Feng Nan also cites low operating costs, a liberal business environment and company-friendly regulations such as allowing full foreign ownership as factors in Huawei choosing Bahrain. GCC TELECOMS REPORT

More generally, Bahrain is credited with creating the most competitive telecom sector in the Gulf, allowing three mobile operators and 10 internet service providers to vie for customers on the island of approximately 1.35 million people. The kingdom has the highest penetration of fixed and mobile broadband in the Gulf at 89 and 74 per cent respectively, according to a 2014 report by the World Bank. This also showed Bahrain’s fixed broadband prices were at least 35 per cent cheaper than those of Qatar and the United Arab Emirates, providing a cost advantage to the island’s businesses. “In terms of fixed broadband prices, Bahrain has a more competitive market and also has lower prices,” the World Bank wrote. “Bahrain is the only country in the MENA region to have removed all barriers to entry in the telecommunications sector. It is also the only country in the region to have followed a market structure and regulatory model similar to the European Union.”

�

Paul Feng Nan, CEO, Huawei Bahrain

VENDORS & SERVICE PROVIDERS

Another area in which Bahrain excels is submarine cable connectivity–the backbone to the global internet. The five submarine cables that land in Bahrain provide a design capacity per capita of 10,020 kilobytes per second. That compares with 7,416 kbps for Oman, 2,672 kbps for the UAE, 2,106 kbps for Qatar, 1,520 kbps for Kuwait and 985 kbps for Saudi Arabia, according to the World Bank. “We have been impressed by the ongoing work of Bahrain’s Economic Development Board (EDB) which has managed to attract prominent foreign investors while allowing them to substantially gain business growth in the country,” says Feng Nan. “Attracting talent to Bahrain has also never been a major challenge for Huawei. But equally important to having the right global expertise is developing local talent and finding ways for local, regional and global teams to work together most effectively. That is something we have really focused on in recent years through initiatives.” Huawei’s hefty regional presence has enabled it to grow its smartphone shipments to the region by 70 per cent in the third-quarter of 2015 versus a year earlier, while its consumer business group, which includes smartphones, generated a 48 per cent increase in revenues in the Middle East and North Africa last year versus 2014. As is customary in the technology sector, Huawei declined to break down its finances by region. Worldwide, however, it shipped 108 million smartphones in 2015, up 44 per cent from the previous year, cementing its position among the top three in market share, according to a company statement. Huawei has more than doubled its share of handset shipments to the six GCC countries, from 4.2 per cent in 2013 to about 10 per cent in 2015, the manufacturer claims, citing figures from industry analysts IDC. In the Middle East, Huawei’s Honor range of phones was initially distributed solely online, a strategy that saw its Honor 4X and Honor 6 handsets sell out within the first week of their respective launches on Souq.com, according to Chris Sunbaigong, vice-president, Honor Middle East. “All our devices rank number one within their price

Huawei’s global shipments in 2015 were

108 million

handsets

44%

increase over 2014

GCC TELECOMS REPORT

category on Souq.com,” says Sunbaigong. “We are delighted with the progress we have made so far and are looking to double our sales revenue in 2016.” The company has since decided to also showcase the Honor range at select regional retailers. “From our own research across our social channels and consumer feedback, we have discovered that many consumers like to touch and feel the smartphone before making their final purchase decision,” says Sunbaigong. “In order to facilitate these users, a limited offline distribution will feature a small part of our overall strategy going forward.” The Honor range specifically, and Huawei in general, are bucking a slowdown in the smartphone sector. While global smartphone growth slumped last year, Honor’s unit sales doubled over the same period, reaching its annual revenue target of $5 billion by October with more than two months to spare. Huawei’s complete smartphone range saw sales surge 48 per cent in 2016. “The Middle East is an extremely exciting market for Honor as it has one of the highest mobile penetration rates and internet usage in the world. Compared to other markets around the world the average age of the population is a lot younger–particularly in Saudi Arabia,” adds Sunbaigong. “As we are targeting digital natives who live online, this highlights a huge opportunity for us to grow our consumer base and brand affinity.” The Chinese behemoth also has big ambitions for its adopted home in the Gulf. “Our future plans will focus on enhancing cooperation with Huawei local partners to build a better connected Bahrain,” says Feng Nan. “This will include trialling and testing new technologies like 4.5G mobile broadband and a host of smart city solutions and applications. We also plan to continue nurturing local ICT talent and strengthening the trainings offered in this field. “Contributing to Bahrain’s wider economic development vision, we welcome additional partnerships with local government entities, businesses, operators and industry partners who share a desire to contribute to Bahrain’s national ICT development.”

VENDORS & SERVICE PROVIDERS

ERICS SON

HOLDING ITS GROUND THE VENDOR SPACE IS IN A PERIOD OF UPHEAVAL, BUT ERICSSON’S PATRICK MELANDER SAYS HIS ORGANISATION HAS ITS EYES ON THE FUTURE AND IS DIVERSIFYING IN PREPARATION FOR IT

espite news of retrenchment and cost-cutting, 23-year Ericsson veteran Patrik Melander, who heads GCC and Pakistan, as well as the company's customer unit responsible for Zain globally, claims the vendor continues to innovate, and is the world leader in mobile broadband, telecom services, operations and business support systems. The company reported Middle East sales of approximately about $2.7 billion in 2015, up seven per cent from 2014, although sales did slow down in the second half of last year. “Ericsson’s role in the Middle East has been very strongly supported by our brand and we will keep using that and our presence in all markets around the world to bring innovations and capabilities to create value for our customers,” says Melander. “We have faced very strong competition, but we have throughout our 140-year history, and we will keep ourselves focused on executing our strategy and enabling the Networked Society.” Ericsson faces tough competition from global rivals who have their own plans to sync the world over the next few years and also see the Middle East ripe with opportunity. But the company has been holding its ground in the region. Melander cites Zain Bahrain winning the award for best network in the Zain group last year as one of his proudest moments in his current role–Ericsson delivers 100 per

cent of Zain Bahrain’s network and also manages it. Such success may have helped convince Muscat-based Omantel to recently sign a Memorandum of Understanding (MoU) with Ericsson to enhance the former monopoly’s network capabilities and services. Ericsson has also concluded three similar contracts with other customers, but was unwilling to share more details until the agreements are made official. While LTE, or 4G, handsets have only become the norm for smartphone users over the past couple years vendors are already looking towards 5G and Melander predicts this nascent technology could become the global and regional telecom industry’s “biggest revenue opportunity.” Such a forecast will please the Gulf’s mobile operators, which have yet to enjoy a commensurate return on their investments in building high-speed networks to meet customers’ surging demand for data. Put simply, data growth has far outstripped revenue growth. “Operators will continue to play an increasingly significant role in the transformation of industries into what we in Ericsson call The Network Society–where everything that benefits from being connected will be connected,” says Melander. The industry has been looking forward to it “for a very long time,” says Melander, but definitions vary as to what 5G

GCC TELECOMS REPORT

VENDORS & SERVICE PROVIDERS

3,640 Middle East employees span

countries

13% are women

In 2015 Middle East sales were

2.7

$ billion

Up 7% from 2014

Muna Al Hashemi, who is chief executive of Bahraini operator Batelco’s domestic unit, to Rafah Ibrahim, Ericsson’s own president for Middle East and Africa, plus Majd Shweikeh, Jordan’s minister of ICT, and her Sudanese counterpart Tahani Abdullah Atiya. “This speaks volumes about the prowess of women in the region,” says Melander. “The rapid pace of the industry’s evolution provides opportunities for everyone to demonstrate their capabilities. “Technical skills cannot be assigned to one gender more than another. While tech-related industries were traditionally reserved for men in the past, gender equality has clearly taken hold of the ICT industry in particular, and there are women leading the way across numerous aspects of this highly diverse sector.” “Ericsson was founded based on the insight that it is a basic human need to communicate,” says Melander, who joined the company in his native Sweden in 1993 Ericsson. “Since I realised what we do has profound positive impact on people’s life. I personally strive to be an orchestrator for my customer, team and family and I aim to make sure that the right people connect and work together,” adds Melander. Women account for 13 per cent of Ericsson’s 3,640 Middle East employees, who as a whole encompass 85 nationalities. For Melander, embracing diversity means much more than simply trying to reduce the gender imbalance. “This region has been extremely diverse by nature. For decades now, expatriates have permeated Middle East societies–and not just in the GCC, but throughout,” says Melander. “Organisations around the Middle East realised the benefits of a diverse workforce a long time ago.”

means–the sequential numbering of 1G, 2G and so on is essentially a marketing tool, with each ‘G’ representing an entirely separate technology–but most likely it will provide much faster network speeds and markedly lower latency, essential attributes if devices such as driverless cars are to become commercially viable. “Eventually, when more than 90 per cent of the worlds’ population has a mobile phone and access to mobile broadband and [there are] an additional 50 billion connected devices there will be an acceleration of innovation we have only seen the beginning of,” says Melander. “The Networked Society will transform industries and society as we know it. The high number of smartphone subscriptions and mobile technology is unlocking the potential for mass transformation, not just in the ICT industry but throughout different industries including utilities, oil and gas and transportation to name a few.” In the past, a number of Ericsson’s global senior executives including its president for Middle East and Africa, Rafiah Ibrahim, have stressed that the right human resource mix in the company will help it succeed in the market. The statements came amid a growing debate around the challenges involved in promoting diversity in an industry as technically intensive as telecoms. Were someone to visit to any of the Gulf’s numerous telecom conferences, they would get the distinct impression that the industry is overwhelmingly dominated by men, who usually make up more than 90 per cent of the audience at such events. But such an observation overlooks the rising importance and prominence of women in senior positions, from

“We have faced very strong competition, as we have throughout our 140-year history, and we will keep ourselves focused on executing our strategy and enabling the Networked Society.” p

Patrik Melander, president, GCC, Pakistan and global customer unit Zain, Ericsson

GCC TELECOMS REPORT

VENDORS & SERVICE PROVIDERS

BLACKBERRY

CAN BLACKBERRY U U O O NC E E B N B C BACK? BLACKBERRY IS STILL MAKING DEVICES, BUT ITS SOFTWARE AND SERVICES DIVISION ARE ATTRACTING MORE ATTENTION, SAYS MIKE AL MEFLEH–AS IS ITS STANCE ON GOVERNMENT ACCESS TO PERSONAL DEVICES

lackBerry, the Canadian company that essentially created the smartphone market last decade, may have lost its lustre in terms of handsets over the past few years as Apple and the Asian manufacturers such as Samsung, LG and Huawei proved more adept at creating products that met consumers’ soaring data demands. Nevertheless, its smartphone division still accounts for 40 per cent of the Toronto-listed firm’s revenue, Bloomberg reported in December. However, despite falling EMEA revenues last quarter, its global software and services revenue surged 183 per cent to $162 million in the quarter ending 28 November and it is this segment that has analysts most excited with regards to BlackBerry’s prospects. In February, BlackBerry announced it would buy Encription, a British cybersecurity consulting company, and merge this with its own team of benevolent “white hat” hackers that will help clients probe the security capabilities of their computer systems. “BlackBerry is the leader in enterprise mobility, and we have been doing mobile security longer and better than anyone else,” says Mike Al Mefleh, BlackBerry’s product management director for the Middle East. “Today, BlackBerry provides a broad portfolio of multi-OS software and services that keep organisations secure and productive. BES12, a multi-OS Enterprise Mobility Management (EMM) solution, is the foundation for BlackBerry’s portfolio of value added solutions that span communications, collaboration and identity & access management.” The Encription acquisition, along with other recent investments, are seen as part of a move by BlackBerry to reinvent itself–at least in part–as a security-focused software provider for corporate clients. “The end-to-end GCC TELECOMS REPORT

BlackBerry environment remains the gold standard when it comes to mobile security,” says Al Mefleh. “All BlackBerry products and services–from BES12 to our handsets to our trusted global network–are designed to incorporate security from inception.” Prior to buying Encription, BlackBerry last year acquired Good Technology to provide what Al Mefleh described as the industry’s most complete end-to-end solution that secures the entire mobile enterprise. It also acquired AtHoc, which enables people, devices and organisations to exchange critical information in real time during business continuity and life safety operations, and WatchDox, a data security company offering what it claims is the most secure enterprise file-syncand-share (EFSS) solutions on any device. BlackBerry has more than 44,000 patents, a suite of smartphones as well as the most secure enterprise mobility management platform, according to Al Mefleh. The company’s other product lines aside from the handsets that made it world famous include BlackBerry Messaging (BBM), which is cross platform and available on BlackBerry, Apple’s iOS, Android and Windows Phone. BlackBerry Technology Solutions (BTS) is another. This unit comprises BlackBerry’s so-called innovative technology assets and includes QNX, which is embedded in the infotainment systems of 60 million vehicles, plus mission-critical systems for healthcare, defense, networking, and manufacturing. Among the other sub-segments are the sci-fi sounding Project Ion–an Internet of Things application platform–plus Certicom, which offers cryptography applications, and BlackBerry’s extensive patent portfolio. Apple’s spat with the FBI over whether the technology firm should provide the means to allow the law 32

VENDORS & SERVICE PROVIDERS

enforcement agency to unlock the phone of one of the perpetrators of a massacre in California in December has sparked a global debate over whether authorities should have the right to access individuals’ personal devices. BlackBerry CEO John Chen has taken a markedly different stand to Tim Cook, his counterpart at Apple. “We are indeed in a dark place when companies put their reputations above the greater good,” Chen wrote in a December blog post. “At BlackBerry, we understand, arguably more than any other large tech company, the importance of our privacy commitment to product success and brand value: privacy and security form the crux of everything we do. However, our privacy commitment does not extend to criminals.” He rejected the argument that technology companies should refuse reasonable, lawful access requests. “Just as individual citizens bear responsibility to help thwart crime when they can safely do so, so do corporations have a responsibility to do what they can, within legal and ethical boundaries, to help law enforcement in its mission to protect us,” added Chen. “However, it is also true that corporations must reject attempts by federal agencies to overstep. BlackBerry has refused to place backdoors in its devices and software. We have never allowed government access to our servers and never will.” In the meantime, Blackberry doesn’t plan to abandon its handset devices anytime soon–Chen is determined to return its handset division to profitability. Late in 2015,

it took what is being touted a revolutionary step when it launched its first Android-based handset, betting that the prospect of access to millions of apps and BlackBerry’s platinum-standard security features would prove irresistible to consumers and businesses alike. Chen in January revealed BlackBerry will unveil at least one more Android device in 2016. Switching to Android–for the premium-priced PRIV handset at least–should prove a smart decision, with the Google-owned open-source operating system the dominant player in the smartphone sector. Featuring a sliding keyboard–seen as a deal breaker by many executive-level users–and a 5.4 inch display, Tech Radar described the PRIV, which is short for both privacy and privilege according to the website, as the mullet of smartphones, providing business at the front and a party in the back too. That irreverent but undoubtedly complimentary description is unlikely to be uttered by BlackBerry’s developers themselves, but the sentiment will probably be appreciated. “In a sea of look-alike all touch smartphones, PRIV is a purposefully differentiated smartphone that delivers on performance, productivity, privacy and play,” says Mefleh. “PRIV combines everything expected from BlackBerry with the full eco-system of Android and its apps and is therefore a premium smartphone for uncompromising users who crave design, performance and productivity.” He describes PRIV as an enticing proposition for Android devotees that want enhanced security. Priced a little higher than the Samsung S6, BlackBerry is undoubtedly trying to woo the wealthier non-Apple smartphone user. “The device also targets high-tier BlackBerry device users who can now access the rich ecosystem delivered by Android, without compromising security and productivity and users that may or may not have used a physical QWERTY keyboard in the past and recognise the accuracy that comes with a physical keyboard but want a significantly bigger screen size,” says Al Mefleh. "And of course, BlackBerry devices powered by Android OS will Mike Al Mefleh, product management director, BlackBerry Middle also have a higher level of East security than off-the-shelf Android-powered devices.”

“The end-toend BlackBerry environment remains the gold standard when it comes to mobile security.”

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INSIGHTS

THE SMARTPHONE SCRAMBLE SMARTPHONES CONTINUE TO ADVANCE, BUT A REGIONAL SLOWDOWN AND THE GROWTH OF CHINESE HANDSETS IS FORCING EVERYONE TO TAKE NOTICE

he Gulf’s mostly wealthy, young consumer base has made the region a plum target for smartphone manufacturers and the rapid take-up of the latest devices has also abetted telecom operators in their desire to increase data revenues. But the worsening economic outlook has slowed handset sales growth and worse may be to come.

Smartphones accounted for 77 per cent of all handsets shipped to the Gulf in 2015, up from 73 per cent in 2014 and 71 per cent a year before. Better data packages from mobile operators and a decline in the average smartphone sales price pushed people to switch from basic feature phones to more advanced alternatives, according to global intelligence provider IDC. The number of smartphones shipped to the region in 2013 was 18.5 million, nearly double that of 2012, while 2014’s total shipment of 23.6 million was up 28 per cent year-on-year. Last year saw 25.3 million smartphones imported to the Gulf, an increase of 7 per cent, IDC estimates. Handsets retailing for under $200 constituted only a tenth of the market in 2013. Two years later, this segment accounted for 37 per cent. “There is huge market potential in the Middle East market as consumers are quite receptive to change and open to trying new things. Moreover, many smartphone users in the GCC have multiple devices,” says Ashraf Fawakherji, vice president of Huawei’s Middle East Consumer Business Group. “Consumers in the region are also experimental and attuned to industry trends–they are eager to try the latest developments in technology.” Yet this enthusiasm also led

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Cell phone shoppers throng retailers during Gitex 2015

“Huawei is the one Chinese brand which successfully eroded the negative image of 'Chinese branded phones' with the highly brand sensitive population of the GCC.” Nabila Popal, research manager, MEA and Turkey, IDC Charles Yang, President, Huawei Middle East

to the smartphone segment swiftly becoming saturated, as shown by the slowing shipment growth, with fewer people remaining who have yet to upgrade from feature phones. The latter will likely continue to hold on to a total market share of about 20 per cent because a significant minority of the Gulf residents are very low paid migrant workers for whom even a $65 smart phone is beyond budget. The cheapest feature phone sells for $12, IDC says. Rival research firm GfK looks at retail sales, rather than shipments, and so includes the so-called grey market–devices that were not designated for sale in a particular country but were sold there nonetheless–and its data also shows handset sales growth is waning, or worse. “The smartphone market overall shows much higher rates of growth than in other markets tracked by GfK such as IT and consumer electronics,” says Paul-Henri de Quatrebarbes, business group manager for telecoms, GfK. “However, a number of markets are showing decreasing growth rates. Saudi Arabia is showing a drop in sales and flattening of the market possibly owing to the macroeconomic situation.” A crackdown on illegal workers has led an estimated 1 million people to leave Saudi Arabia, hitting both phone makers and telecom operators, especially for lower-end handsets and pay-as-you-go subscriptions. The UAE is a seasonal market, marked by surges GCC TELECOMS REPORT

in sales during particular promotions such as the Gitex technology exhibition and Dubai Shopping Festival (DSF), which is similar to the January sales in Europe. But sales fell 15-20 per cent during this year’s DSF versus the 2015 edition, the first time smartphone unit sales have declined in the festival, says de Quatrebarbes. “Consumers might be acting more cautiously,” he says. That wariness is understandable as governments, which are the biggest employers in the Gulf, slash spending, cut back on subsidies and increasingly talk about introducing taxes. Brand-wise, Samsung remains the Gulf’s number one smartphone maker, although its shipment share slumped from 60 per cent in 2013 to 45 per cent in 2015, according to IDC. Apple is ascendant, upping its market share from 14.8 per cent to 19.5 per cent over the same period following the launch of its larger-screen iPhone 6 and 6S. “Apple is always a brand that sustains its prices in the market. Samsung on the other hand faces a lot of price erosion,” says de Quatrebarbes. Yet Apple is in peril thanks to increasing popularity of online retailers such as Souq.com and Jadopado that offer prices below the set tariffs for the UAE and these virtual stores now account for about three to four per cent of total sales. “This is very new to Apple and so we’re seeing a bit more price elasticity with Apple devices. Apple sales were also affected because of a smaller perceived difference between 37

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Hayssam Yassine, directors of telecommunications, Samsung Gulf speaks during the Note 5 launch in Dubai in 2015

the 6s and 6 as opposed to the 6 and 5s,” says de Quatrebarbes. Globally, Apple’s lustre is starting to dull. Its shares tumbled in January after the Californian firm forecast its first sales decline in more than a decade. Apple’s profits are still dizzying–its net income for the three months to December 31 was $18.4 billion from $75.9 billion in sales, but the company is facing headwinds as the global economy falters, Apple chief financial officer Luca Maestri said at the time, highlighting softness in China and Hong Kong. “The smart phone market has become very competitive–there is a growing number of producers, often China-based, including Huawei, Lenovo, ZTE, Xiaomi and Tecno, which have won market share and put pressure on the likes of Samsung,” says Matthew Reed, practice leader of Ovum's Middle East and Africa regional research. The biggest gainers from Samsung’s Gulf travails have been China’s Huawei and Lenovo. Huawei more than doubled its shipment share from 4.2 per cent in 2013 to 10.1 per cent in 2015. Similarly, Lenovo’s share jumped from 1.2 per GCC TELECOMS REPORT

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cent to 9.4 per cent over the same period. “Their growth can be attributed to coming into the market with good channel strategy, and most importantly, hitting the market with low priced yet good quality smartphones,” says Nabila Popal, IDC research manager for the Middle East, Africa and Turkey. “While Lenovo continues to only be dominant in the low- to mid-priced segment, Huawei in recent years has actually succeeded in entering the high-priced segment as well.” Huawei’s Ascend P7, P8 and Mate series were supported with clever marketing that featured the likes of Lebanese singer Nancy Ajram. “Huawei is the one Chinese brand which successfully eroded the negative image of Chinese branded phones with the highly brand sensitive population of the GCC. Growing in the high-priced segment will continue to be their focus going forward,” adds Popal. Huawei’s smartphone shipments to the Middle East and Africa rose 70 per cent in the third-quarter of 2015 versus a year earlier, while its consumer business group, which includes smartphones, generated a 48 per cent increase in revenues in the Middle East and North Africa last year versus 2014. As is customary in the technology sector, Huawei declined to break down its finances by region. Worldwide, however, it shipped 108 million smartphones in 2015, up 44 per cent from the previous year, cementing its position among the top three in market share, according to a company statement. “The Middle East as a region is a competitive market for devices and in comparison to the global arena, it sees significant levels of devices shipped,” says Huawei’s Fawakherji. “Huawei's expansion in Middle Eastern and African markets is very important to the brand's global strategy as the smartphone market growth in the region is higher than that of any other.” Saudi Arabia accounted for a fifth of Huawei’s handsets shipped to the Middle East, in 2015 while shipments increased 9.5 per cent year-on-year. “So far, we have secured a strong footing in the

“Emerging Chinese brands such as Obi, Oppo and Wiki offer strong deals which help draw buyers to their value, though without strong distribution in independent retail, those prices aren’t sustainable for very long.” Paul-Henri de Quatrebarbes, business group manager for telecoms, GfK

mid-range and high-end device market. Our high-end smartphones–especially the Mate and P series have made solid progress,” says Fawakherji. “These developments have allowed us to enjoy quality and sustainable growth in the consumer business which we hope will continue throughout 2016.” Lenovo is the biggest market share gainer in percentage terms, which perhaps goes some way to justifying its $2.9 billion purchase of Google’s Motorola Mobility phone unit in 2014. Lenovo was already a smartphone manufacturer before the acquisition, which was seen by analysts as largely a means to own the Moto brand. “The regional economic situation is also affecting the consumer replacement cycle which has slowed down the growth,” says Sharay Shams, Lenovo’s business head for its mobile business group in the Middle East and Africa. “We feel that mid-tier price points will continue to grow and you will see consolidation of the brands in the smartphone space in 2016. Lenovo is very well poised to take advantage of this and grow within this mature market.”

Smartphone Declining consumer confidence could shipment growth is hurt sales of mid- and high-end smartphones, but sales of cheaper models decelerating YoY: should prove more resilient, says GfK’s de Quatrebarbes. “Emerging Chinese brands such as Oppo and Wiki offer strong deals which help draw buyers to 2013 their value, though without strong distribution in independent retail, those prices aren’t sustainable for very long,” he added. The rapid take-up of smartphones and associated applications on these devices have proved to 2014 be both a boon and a curse to 2015 mobile operators in the Gulf. Most significantly, web-based services including Whatsapp and Skype have ravaged old income streams such MARKET SHARE as texting and conventional interna2013 2015 tional calls, both of which were especially important to the Gulf operators because of the region’s large expatriSAMSUNG ate populations. Revenues from texting– which were almost entirely profit–have all but vanished, while consumers are willing to accept lower call quality if it means they can phone home for free on internet-to-internet connections for a fraction of the usual cost on internet-to-mobile or landline calls. Yet smartphones have also pushed consumers to take up data packages, which while not as profitable as the traditional money-spinners have diversified oper% % ators’ revenues, and to increasingly APPLE commit to monthly contracts rather than pay-as-you-go subscriptions. The rise of monthly packages has helped to reduce customer churn, whereby users switch between provider depending on which % % has the best offers. “Data revenues have increased HUAWEI between 25 and 30 per cent with most Gulf operators’ revenues, and this has partly compensated for the drop in traditional call and SMS revenues,” says a % % regional industry source. “Cheaper smartLENOVO phones have promoted rising data use as people as continue to realise that the cost of a data-enabled handset can be more than offset through their ability to use tar% % iff-free calling and messaging apps.”

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99%

28% 7%

14.8 19.5 4.2 10.1 1.2

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9.4

Smartphone sales fell by almost

20%

during DSF 2016, compared to DSF 2015

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Ashraf Fawakherji, vice president Huawei Consumer Business Group Middle East at the Mate S launch in January 2016

Data is expected to eventually reach about 50 per cent of revenues, so data growth will continue for many years because there are a lot of people that have yet to shift to data, while new, more advanced applications should encourage existing data users to consume more. This will help operators recoup some of their massive capital expenditure to build out 3G and 4G networks. “For operators, it’s beneficial that handsets have become more affordable because there is less of a barrier to becoming a data customer,” says Ovum's Reed. “A few years ago, the talk was whether there would be a 3G device for less than $100, now there are LTE handsets for that price and basic smart phones for around $50 and that’s given operators a means to get a new group of lower income customers onto data networks," he says. That's particularly significant for emerging market operators where consumers are very price sensitive.” Gulf operators had long been loathe to follow the European model of offering handset subsidies as a means to get consumers onto data-heavy high-end GCC TELECOMS REPORT

smartphones, but they have mollified their stance in recent years as the game moved from maximising subscriber market share to focusing on revenue share. Rather than offer outright subsidies, the Gulf operators have allowed subscribers on monthly contracts to repay the cost of their handset over the duration of the agreement, although Kuwait’s Zain seems unenthused. “We’ve had to protect our market share and we haven’t really lost high-end customers because we’re giving out long term contracts, 18-month or two-year,” Zain chief executive Scott Gegenheimer told an analysts’ call to accompany Zain’s Q3 results. “It has hurt the bottom line because of the subsidy on the handsets.” Some operators, most notably in Africa, are selling handsets under their own brand, which could also appeal to the Gulf’s very low-wage earners. “They can create a device they think has the right price point and specifications to appeal to consumers that otherwise would not be able to buy a data-enabled device,” adds Ovum’s Reed. “Such consumers probably feel more confident about a smart phone from an operator like MTN than a relatively unknown manufacturer.” 40

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KUWAIT FINALLY GETS A WATCHDOG WITH A REGULATOR IN PLACE, ITS SUCCESS WILL DEPEND ON WHAT KIND OF REFORMS IT PLANS TO IMPLEMENT AND THE SPEED AT WHICH IT DOES

ore than a decade after it was first mooted, Kuwait’s telecoms regulator, Communication and Information Technology Regulatory Authority (CITRA), began operations in February in what could mark the biggest shake-up in the country’s communications sector since Viva ended the Zain-Wataniya mobile duopoly in 2008. Kuwait is the last of the six Gulf Cooperation Council (GCC) members to create a telecoms watchdog separate from the government, which remains the monopoly owner of the fixed-line phone infrastructure as well as the strategically vital international gateway. The glacial pace of reform has led to a fragmented telecom industry, Kuwait’s second-largest after oil. The three mobile operators are exactly that, unable to offer fixed-line services, be they

GCC TELECOMS REPORT

broadband, television, or phone lines, which would help them offset the marked decline in traditional voice and text revenues following the adoption of Internet-based applications like Skype and Whatsapp. Presently, the three mobile operators–Zain, Qatarowned Ooredoo Kuwait (formerly Wataniya) and Saudi Telecom-run Viva Kuwait–compete only on mobile services and Viva’s launch led to a fierce price war that ravaged the earnings of the other two both in absolute terms and also their average revenue per user (ARPU), a key industry metric. “Competition between the three mobile operators is a bloodbath,” says a senior industry source speaking on condition of anonymity. Fixed internet services are provided by numerous small players, which rent capacity on the state’s limited fibre networks and creaking copper-wire infrastructure. That could be about to change now. CITRA has begun operations and board chairman and chief executive Salem Al Othaina was quoted in The Kuwait Times in early February as saying his rookie organisation aimed to privatise landlines, long distance cables and telephone exchange centres. “Mobile operators are keen to get into the fixed market because it would provide new revenues and allow them to offer an array of new services to both consumers and businesses,” says Matthew Reed, practice leader of Ovum's Middle East and Africa regional research. “Fixed services are potentially quite high revenue and high margin, especially if they include broadband and television, and could prove stickier with customers–that will depend on the regulator’s rules on bundling. Bundled services should provide more customer stickiness than pure mobile, which has been volatile with people jumping from one offer to another.” Aside from the stated privatisation objectives, the regulator’s remit so far remains unclear–it does not have a website and senior members did not respond to requests for comment. Uncertainty surrounds the stance the watchdog will take in terms of whether its first duty is to protect consumers or the companies themselves. Which 41

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earnings of Saudi Telecom “Viva aggressively came into a and Etisalat neatly show the impact of losing their monopoliesbeen and the a adoption market that haddomestic previously of alternative forms of communications. True, the following figures include all comfortable duopoly–the two other the duo’s foreign operations, but these units actually operators had non-domestic been charging for contribute little to their respective bottom lines the numbers useful and to show just incoming calls and from fixedarelines divorced revenue and profit growth have become. For instance, in 2005 STC–the abroad, for example, and promptly year rival Mobily began operations–made a profit of $3.3 billion on revenues of had to stop doing that.”

$8.68 billion, giving profit-revenue ratio of 38.3 per cent. In 2015, the company’s Matthew Reed, practice leader, regional research,profit Ovum Middle and Africa annual wasEast $2.49 billion on revenues of $13.88 billion, providing a profit-revenue ratio of 17.9 per cent. Etisalat, meanwhile, made a profit of $2.32 billion path it takes will be key to in the2008–the fortunes of its full three mobile operators, first year of challenger as shown by the varying actions of regulators in other Gulf countries. du’s operations–on revenues of $7.99 In the UAE, the regulator’s role seems to be equate to protect billion, which to operator nearly income one in by limiting competition among Etisalat and Du, which being are both ultimately three dirhams earned pure profit. owned by the government, Last and inhibiting that year, its internet-based revenues wereservices $14.1 billion otherwise would have destroyed an even larger slicebillion, of the so telcos’ and profit was $2.25 thatlucraratio tive international phone callhad businesses. Investors plunged to 18.2 perseem cent.to recognise these privileges, with Etisalat and du’s stockdespite values giving among Therefore, the them billions of the highest price-to-earningsdollars ratios inspent Gulf telecoms. Bahrain’s regulator, on foreign acquisitions in contrast, has been much and moremega pro-consumer, creating arguably the investments in their domesregion’s most competitive market at the foreign expense of shareholder value. tic and networks, Etisalat’s “Launching Kuwait’s regulator is aprofits step inhave the right direction–the key annual actually fallen even will be the speed at which it will implement reforms andthan practices to help though revenue more tripled and the sector,” says the industry “Will it regulate to thatsource. revenue growth is to acompetition large extent make it less of a bloodbath? an Will it look toofgenerate fees or othergrowth. income agent UAE population from the operators and thereby increase costs? It will probably For STC, the their deterioration in earnings take a few years for the regulator to become fully operational.” quality is less stark but is nonetheless The operators’ financial disconcerting. figures lay bare just how Kuwait’s mobile sector went from being amongThis the most valuable to Etisalat, an interrevenue drop,worldwide at least for necine catfight that has leftcomes deep scars as Viva grabbed 15 per despite the best efforts of cent the market share in its first yeartelecom of operations, shattering the longstanding regulator to restrict Voice over 55-45 split between Zain andIPOoredoo, eventually challenging for (VoIP) before services, which of course market leadership. “Viva aggressively cameand intoothers. a market that hadVoIP premeans Skype Officially, viously been a comfortable isn’t duopoly–the other been bannedtwo but onlyoperators du andhad Etisalat charging for incoming calls from lines and example, and havefixed licences to abroad, providefor such services promptly had to stop doing that,” saysduo Ovum’s and this hasReed. yet to do so in a meanIn 2012, Zain’s monthly ARPU was $42, but this fell to $30 incalls–be the first ingful sense. Internet-to-phone nine months of 2015, Ooredoo’s $26.40 to $18.80 over it to adropped mobile from or landline–are seemingly the same period. The pair’s net profit declined even more precipitously– throttled while internet-to-internet calls Zain’s Q3 net profit was $76 million vs $100 million in quality Q4 2012, while often disconnect and the is poor. Ooredoo’s dropped 73 per Industry cent to just $13.6 million. “When revenue sources say that so long as growth is difficult, to overtake other operators their regulators remain you parthave of to thebring governARPU down, which is what Viva hasand done,” says the source. ment state owns stakes in telecom Viva more than doubled itsoperators–almost quarterly profit from 2013’s million allQ1 the Gulf$17.4 telcos are to $36.2 million in Q3 2015,at butleast its startling rise has faltered. Its latest part government-owned–then quarterly profit was its lowest since Q1 2014 will despite revenues rising, protectionism remain high,still even if GCC TELECOMS REPORT

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whichvarious indicates its margins have attempts fallen as the Gulf authorities’ therestrict rival pair access fight back aggressively. to tomore certain apps only “Kuwait (was) a very tough market for us pushes consumers to find alternatives. in “Alternative the last few quarters,” Zain’s execstrategies to chief monetize utive Scott told analysts’ mobile dataGegenheimer are critical, as areanstrategies callaccelerate to accompany its Q3 results. In a from oneto revenue development city marketmarket with operators using essentially adjacent partnerships and new the same models,” technologies, connectivity has business says Deloitte. So why become the commoditised so all there is haven’t Gulf telcos tried to really launch to compete on is price, marketingWell, and they custheir own OTT-type services? tomer service–Gegenheimer estimatestelethat wouldn’t be the first. UK-based as the giant incumbent, Zain used to enjoy a 40 coms Vodafone was one of many perattempt cent price rivals, which to to premium create itsover ownitsInternet serhas now fallen to less than 20 perincent. vices. Vodafone 360 started Europe is apermitting boon for consumers, many to of in That 2009, its subscribers whom switch between dependimport contacts fromoperators social networks ing on who has bestapp offers for aItparticuand access anthe online store. lasted lar service, trend shown by Kuwait’s mobile about two ayears. penetration, which per cent The reasons forwas this56failure are when mulViva launched and nowtowards stands at 218 per tifold, the tendency monopoly cent–or subscriptions pertoperson, the as noted2.18 above in regards Facebook third globally. operators et al highest being one, but The operators areseem also to have themselves a stalemate in used tofought running networksto and are mostly subscriber termsgovernment at least–Zaindepartments has a 37 per part-privatised cent share, 33 per cent and Ooredoo for 30 with little Viva track record or instinct per cent, making Kuwaiton theSilicon most balanced innovation, so taking Valley’s Gulf mobile market. In earnings terms, finest thinkers wouldn’t really be athere fair is greater disparity, with Zain’s revenue share contest. 40“In per cent, per centwere and Ooredoo’s the Viva’s past, 36 people worried 24 per cent. majorofnew mobile technoloabout the No effect apps eating the gies are expected some years,services,” so the trio revenue from for traditional are likely to again wage warchief shouldfinancial the regAjay Bahri, Ooredoo ulator launch a fixed line licence auction, a officer told an analysts’ call this month. sale that could also Kuwait’s “We believe that at reinvigorate Ooredoo we have ailing fixed sector, more of changed ourbroadband mindset not to think about whichas later. that a threat but as an opportunity where we provide (large) bandwidth allow our customers to use more data and also introduce interactive services and (additional) services like IPTV and others, which is also resulting in growing data usage.” Deloitte calls for operators to offer so-called value-added services (VAS) including mobile health, money and banking, machine to machine communications plus high-quality web-based calling services to rival the likes of Skype and connectivity bundling with highvalue products such � as laptops, cameras Formeris VIVAthat Kuwaittraditional chairman, and cars. “Our view Adel Mohammed al-Rumi, telecoms servicesspeaking are at dying in ofall the launch the the company in Kuwait on market around the world, in City particular 3, 2008 voice and SMS,” December said Ooredoo’s Bahri. “We have to be nimble and agile so that

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Kuwaitis attend iPhone launch in front of Ooredoo Kuwait's headquarters in Kuwait City in 2015

The lack of private and public investment in fibre networks has led Kuwait to fall far behind its GCC neighbours, with Kuwaiti consumers and businesses tending to rely on mobile broadband. According to a 2014 World Bank report, only 32 per cent of Kuwaiti households had broadband penetration. This compares with 67 per cent in Qatar, 69 per cent in the United Arab Emirates and 52 per cent in Saudi Arabia. In Kuwait, there are four major internet service providers–Qualitynet, Zajil, FASTtelco and Gulfnet. These lease fibre and copper network capacity from the government, which sets internet price and slashed tariffs by 40 per cent in 2012 to try to boost fixed broadband penetration. Operators decried this reduction, arguing the bigger problem was the lack of state investment, with only about a fifth of homes thought to be fibre-enabled. “The sector should be opened up to more players, whether that’s to the existing mobile operators or others,” says Ovum’s Reed. “The regulator could issue new fixed line licences, for example.” Presently, only a quarter of Kuwait’s fixed broadband subscribers were on fibre, according to The MENA division of the Fibre to the Home Council. This compares with 95 per cent in Qatar and 85 per cent in the UAE. Kuwait’s regulator could opt to build a state-owned broadband network on which wholesale capacity is sold to licence holders. This would be more efficient because it would prevent duplication of infrastructure, reduce capital expenditure and minimise the inconvenience of digging up roads, although some companies might see a competitive advantage in owning their own network. “The network could remain wholly government owned or it might sell some or all

of it to private companies such as the mobile operators,” says Reed. “Licensees would buy wholesale capacity and then offer different packages and pricing to differentiate themselves. That’s the theory, in practice it might not be so straightforward and so we’re probably a few years from seeing such a plan come to fruition.” The other big dilemma for the fledgling regulator is what to do with the international gateway, the exchange through which all international call and data traffic enters and exits the country. Historically, government-owned telecom monopolies would control this but as monopolies were broken up worldwide, gateway access–or outright ownership–was also sold off to private companies. Companies owning or controlling an international gateway can cut deals with international counterparts to reduce call tariffs, but Kuwait’s government has seen little reason to push for better prices, meaning tariffs have remained steady while prices worldwide have fallen. “Operators having been looking to the enterprise sector as a major area for revenue growth over the past few years as the consumer market matured,” says Reed. “They’re keen to offer services to international or regional business, for which having control over the international gateway would be important.” The high expense of international calls in Kuwait has pushed customers into the hands of over-the-top (OTT) players such as Skype, further adding to the mobile operators’ woes. OTT calls are often of much lower quality but so great is the price difference that people are willing to accept such problems. “In other countries where there’s less of a gap between OTT and conventional call tariffs, many people prefer to pay that little bit extra for a higher quality connection,” says the industry source. Operators also do not benefit from the high tariffs either because most of the profit goes to the government as the gateway owner. “There’s a huge opportunity should the regulator allow for operators to reduce prices for consumers and make more money on international calls,” says the source. Internet Service Providers also buy data capacity at the international gateway. ISPs are the only companies permitted to do so, yet mobile operators are the biggest buyers of data capacity and so buy capacity that was obviously earmarked for them from the ISPs. The operators complain sales chain–government to ISP to mobile operator–is expensive and inefficient. “The mobile market is over-penetrated, with growth only likely to come from data unless the government sells off the fixed-line network or the international gateway,” says the industry source. “For the market to evolve, it will need to converge and consolidate.”

GCC TELECOMS REPORT

INSIGHTS

FROM A RO OA A R WHIM

ARR TO A

PER

THE INTERNET PLAYERS THAT WERE INITIALLY DISMISSED BY OPERATORS IN THE REGION HAVE BECOME THEIR WORST NIGHTMARE AS GCC TELCOS STRUGGLE TO COMPETE

ive years ago, Gulf telecoms operators were “An insatiable appetite for more data is forcing teletalking tough. At industry conferences, their communication companies to invest heavily in next CEOs vowed to take the fight to the so-called generation networks. At the same time competition has over-the-top (OTT) players such as Facebook and gone global, creating enormous price pressure in most YouTube, whom they claimed were the prime beneficiamarkets,” Deloitte wrote in a Autumn 2014 report on ries of consumers’ surging demand for data while the Gulf telecoms. “On the other hand, with declining revetelecoms operators themselves were the ones paying nues from traditional income sources such as wire line for the networks that carried this traffic. The problems and wireless voice, the pressure is on to look for new for the telcos was that the data boom, which continues products and services, but many are struggling.” to strengthen to this day, wasn’t bringing a commensuFor Gulf operators, the data revolution began just a few rate return on their investments and so they wanted the years after the six GCC countries ended their respective OTTs to help pay for their expensive mobile and fixed telecom monopolies and it has arguably had a more pronetwork improvements. nounced impact in this region than others because of Similar complaints and promises had been made by the large expatriate populations. Roughly a decade ago, their European counterparts but, five years on, this tough foreign residents in the Gulf really could only call home talk has come to nothing–the OTTs refused to budge, via landlines or mobiles or send SMS texts, the latter of justifiably confident that consumers would punish any which would cost about $2 from the UAE, so internaoperator who sought to deny them access to their favou- tional connectivity was a huge money spinner, as were rite online entertainments. That would be especially true other now-obsolete charges such as the 150 dirhams in such a young, tech-savvy region as the Gulf–46 per annual fee for Etisalat pay-as-you-go subscriptions. Data cent of Saudi Arabia’s population is under 25–and the has all but ended conventional text messaging–revenue kingdom is the largest per-capita user of YouTube globfrom which was almost entirely profit–replaced by ally–while for Kuwait and Oman the figure is 41 and 50 web-based instant messaging apps such was Whatsapp, per cent respectively, according to the CIA Factbook. while this programme and others including Skype and Facebook, YouTube, Google Twitter and Amazon are Viber also offer phone calls that are free to other webnear-global monopolies in their particular fields and so based accounts and at a much reduced price to landtelecoms operators, in whose DNA it is to compete lines and mobiles abroad. rather than collaborate, were always likely to lose These are bald statistics, but a quick look at despite their initial belligerence. the earnings of Saudi Telecom and Etisalat neatly The fear remains of becoming a so-called show the impact of losing their domestic monop“dumb pipe”, essentially a commoditised data proolies and the adoption of alternative forms of vision for which the only real differentiating communications. True, the following figures factor would be price, but telecom operinclude all the duo’s foreign operations, but ators seem at least a little more willing these non-domestic units actually conto acknowledge that there wouldn’t tribute little to their respective bottom be such a thirst for data if it wasn’t lines and the numbers are useful to � Facebook chairman for the likes of Facebook. show just how divorced revenue and and co-founder, Mark Zuckerberg

� Representatives from the UAE's Telecoms Regulatory Authority at the 2015 ICT Development Forum in Dubai

Saudi Arabia consumes the most content on Youtube per capita in the world

46 %

of its population is under 25

profit growth have become. For instance, in 2005–the year rival Mobily began operations–STC made a profit of $3.3 billion on revenues of $8.68 billion, giving a profit-revenue ratio of 38.3 per cent. In 2015, the company’s annual profit was $2.49 billion on revenues of $13.88 billion, providing a profit-revenue ratio of 17.9 per cent. Etisalat, meanwhile, made a profit of $2.32 billion in 2008–the first full year of challenger Du’s operations–on revenues of $7.99 billion, which equate to nearly one in three dirhams earned being pure profit. Last year, its revenues were $14.1 billion and profit was $2.25 billion, so that ratio had plunged to 18.2 per cent. Therefore, despite the billions of dollars spent on foreign acquisitions and mega investments in their domestic and foreign networks, Etisalat’s annual profits have actually fallen even though revenue more than tripled and that revenue growth is to a large extent an agent of UAE population growth. For STC, the deterioration in earnings quality is less stark but is nonetheless disconcerting. This revenue drop, at least for Etisalat, comes despite the best efforts of the telecom regulator to restrict Voice over IP (VoIP) services, such as Skype, Viber and others. Officially, VoIP isn’t banned but only Du and Etisalat have licences to provide such services and this duo has yet to do so in a meaningful sense. Internet-to-phone calls– be they to a mobile or landline–are seemingly throttled while internet-to-internet calls often disconnect and the quality is poor. Industry sources say that so long as regulators remain part of the government and states own stakes in telecom operators–almost all the Gulf telcos are at least part government-owned–then protectionism will remain high, even if the various Gulf authorities’ attempts to restrict access to certain apps only pushes consumers to find alternatives. “Alternative strategies to monetise mobile data are critical, as are strategies to accelerate revenue development from adjacent GCC TELECOMS REPORT

INSIGHTS

market partnerships and new business models,” says Deloitte. So why haven’t the Gulf telcos tried to launch their own OTT-type services? Well, they wouldn’t be the first. UK-based telecoms giant Vodafone was one of many to attempt to create its own Internet services. Vodafone 360 started in Europe in 2009, permitting its subscribers to import contacts from social networks and access an online app store. It lasted about two years. The reasons for this failure are multifold—the tendency towards monopoly as noted above in regards to Facebook et al being one—but operators are also used to running networks and are mostly part-privatised government departments with little track record or instinct for innovation, so taking on Silicon Valley’s finest thinkers wouldn’t really be a fair contest. “In the past, people were worried about the effect of apps eating the revenue from traditional services,” Ajay Bahri, Ooredoo chief financial officer told an analysts’ call in March. “We believe that at Ooredoo we have changed our mindset not to think about that as a threat but as an opportunity where we provide (large) bandwidth allow our customers to use more data and also introduce interactive services and (additional) services like IPTV and others, which is also resulting in growing data usage.” Deloitte calls for operators to offer value-added services including mobile health and money, machine to machine communications, high-quality web-based calling services to rival the likes of Skype and connectivity bundling with high-value products such as laptops, cameras and cars. “Our view is that traditional telecoms services are dying in all the markets around the world, in particular voice and SMS,” said Ooredoo’s Bahri. “We have to be nimble and agile so that we adapt to the new technologies and also take those new apps as an opportunity to increase our revenue by increasing data usage by our customers.”

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LAST WORD

TAMING THE MOBILE DATA BEAST MOBILE DATA HAS BEEN AN INCREDIBLE SUCCESS, SAYS HERMANN RIEDL, PARTNER AND MANAGING DIRECTOR, BOSTON CONSULTING GROUP MIDDLE EAST. BUT IN THE QUEST FOR MARKET SHARE, GULF OPERATORS HAVE BACKED THEMSELVES INTO A CORNER. NOW THEY NEED A NEW PRICING PARADIGM TO SAVE THEMSELVES

ost GCC mobile operators have nurtured a beast: an unprecedented mobile data explosion. While the trend towards ever higher mobile data usage is universal, GCC usage has grown even faster to be among the world's highest consumption rates per user. Average monthly data consumption per user is above 10GB for some GCC operators–whereas the corresponding value is between 1GB and 4GB in the US and Europe. So why is this a problem? Should mobile operators not be happy if their services are in high demand? Unfortunately, some–but not all–GCC operators have, in a race for market share, forgotten to adequately monetise this demand. Mobile data has been pushed into the market with attractive low-cost 50GB+ "large buckets" or even unlimited tariffs. As a result, the data traffic growth is leading to a higher cost per user not revenues– per-user revenues are flat. The beast, though, is becoming expensive to feed. New technologies such as 4G have dramatically lowered the cost per gigabyte and eased the pain somewhat. Nevertheless, 4G or at some point 5G technology, will not change the picture of increasing costs versus flat revenues–it only delays the inevitable. Especially as voice revenue streams are diminishing due to lower prices, VoIP competition or simply fewer calls by the millennial generation that prefers WhatsApp messaging over calls, making users pay adequately for data consumption has become a matter of survival for GCC telcos. Therefore, a new pricing paradigm is required to bring revenues and cost drivers into alignment again, i.e. flattening voice and messaging while unflattening data. Leading the market back to the simple equation where more data consumption means paying more will save the industry. While most marketing managers agree, it is easier said than done in highly competitive market GCC TELECOMS REPORT

environments. Market leaders will have to make bold moves, and other market participants will have to resist being tempted to push flat rates and make quick gains in market share, but rather follow and bring their tariff structures in good order as well. In addition, the relevant GCC telecoms regulators need to play along. They are at times tempted to block the phasing out of unlimited tariffs, or even introduce fair use policies. After all, low data prices make a regulator look good–and due to high consumption, the effective per-megabyte prices in some GCC countries are among the world's lowest. However, if low prices are leading to a profitability squeeze, and operators run out of capacity to invest in the required upgrades or new technologies, their countries are not served well. While low prices are in the consumer interest, congested networks and outdated technologies are not. Thus regulators must take a more comprehensive long-term view of the industry and then take the right decisions, allowing a fair return on investments into modern data networks. Mobile data in the GCC has been an incredible success story so far. While in many places the high-speed fibre rollout has been lagging, mobile operators have created a market for mobile broadband that is, by some measures, outpacing many Western countries. However, in doing so, they have been feeding the beast of mobile data explosion, without a corresponding up-tick in revenues per user. There is still time to correct these mistakes of the past, and bring revenue growth in line with cost growth again. The countries where market players move early enough to tame the beast will eventually benefit from a healthier ICT sector, where operators maintain the ability to invest into an advanced infrastructure, and consumers and businesses benefit from a better network experience, wider high-speed data coverage and more innovative services. 48

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