Riyadh – Decypha: As Saudi Arabia begins to shift its focus towards its non-oil sectors, in an effort to stabilize its economy against the volatility of crude, industries such as telecommunications are quickly starting to rise in terms of growth contribution. While riddled with many challenges, the sector is still one of the most promising, when it comes to the kingdom’s 2030 vision.
Demand for data services and mobile broadband has been lately replacing traditional voice and text services, where the country’s spending on cloud services has reached $ 31.3 million in 2015. Despite the targeted effort to an advanced sector, will the government expand its budget to cater the rising demand for advanced communication services? Will the leading Saudi telecommunication companies be able to give a competitive edge of services to their consumers while also meeting government goals of sector growth?
The demand in the telecommunication sector is mostly made up of the young population in the country, increase in affluence levels, and a rise in the liberalization of the sector according to a report released by SICO Investment Bank. The increasing demand by young people created the urge to adopt recent technologies such as mobile communication, internet, and broadband. The high demand on phone usage from youngsters were due the social restrictions imposed by the country; however the expat population also boosts the demand in telecom sector that brought in international revenues for telecom companies according to SICO Investment Bank. Saudi telecom and IT sectors are major key players of the National Transformation Program (NTP) 2020 in the country which partakes in the 2030 development vision.
Saudi Telecommunication Market Performance
Saudi Arabia is said to be among the largest information communication and technology markets in the Middle East and is led by the prominent Saudi Telecom Company (STC), Mobily, and Zain. Approximately 53 million subscribe to mobile phone services according to a report by Shearman and Sterling.
Approximately SAR 180 billion is the estimated volume of Saudi’s telecom sector and capital investment over SAR 50 billion according to Arab News. The industry contributes around 6% of the kingdom’s GDP, with the Saudi government supporting it in 2016 alone with SAR 130 billion in investments. Additionally, the country is anticipating a SAR 138 billion growth in the sector, by the end of 2017, mainly due to the investments sustained by government and private companies.
The telecom market has been witnessing prosperous achievements based on Al Jazira Capital report. By end of 2015 ongoing to 2016, mobile subscribers achieved a 2.28% year on year (YoY). Post-paid subscribers base was steady at 7.6 million subscribers and was expected to achieve a growth of 15.7% YoY. On the other side, the pre-paid subscriber base was steady; however expected growth should have reached 0.29% YoY.
Post-paid subscribers outweigh pre-paid subscribers in the country; the pre-paid sector face challenges following the government’s regulation to finger print all SIM cards therefore transferring to post-paid subscription. Mobile data subscribers’ base recorded 25.8% YoY.
As the country is accommodating 53 million subscribers a Riyadh Capital Report is expecting a decline by 10% or 15% in pre-paid subscriptions. The fourth quarter of 2016 witnessed a stable performance following a period of uncertainty, where STC declined 9% quarter-on-quarter; however Zain and Mobily grew by 10% quarter-on-quarter. Despite the growth, Mobily plans to focus on sustaining its market share at higher customer acquisition costs and will prioritize operating cost savings in the upcoming period.
Government plans and growth strategy
One of the government-owned agencies, considered to be a key player in the market, is the Communications and Information Technology Commission (CITC). The agency is responsible for providing licenses to telecom companies that is required to be sanctioned by the Council of Ministries, managing tariffs, content filtering, and quality control. CITC was established under the telecom act and seeks to provide advanced and affordable communication services, managing frequencies efficiently, and transferring telecom technology among other objectives.
The agency plans to enhance the sector that will provide unique communication services to subscribers and encourage investors to take part in leading projects. CITC will increase investments in the sectors of hosting, cloud computing, supporting small and medium enterprises (SMEs) and boosting secured networks and information. The telecom sector will own a vibrant role in covering e-education, health services, bank services, and e-government.
The state-owned entity has also issued a regulation that obliges all mobile companies to link new and existing subscriptions into the subscriber’s finger print. This advancement seeks to decrease penetration rate which currently stands at 168% total and affect the total number of subscriptions.
Saudi Arabia’s economic reforms also include ‘Unified Licenses’ which will be provided by the government to mobile companies that will allow them a full range of telecom services according to Gulf Times. This decision will replace the old habit of companies applying for separate licenses for each service provided such as mobile and fixed lines, but now companies are abiding by one license. Small companies may now compete STC, while Zain (Saudi Arabia) and Mobily will be able to expand into fixed services. The Unified License decision will provide with more options and better prices.
Other government plans include increasing investments of broadband and increasing the contribution of information technology industry to non-oil sectors GDP by 2.24% in 2020.
Saudi Arabia plans to extend licensing periods as well for companies up to 15 years in return for 5% from the annual net income of each company during this period. Saudi’s Zain states that this extension period will decrease its annual amortization charge by SAR 433 million as Mobily predicts a positive outcome of this decision recording annual amortization by SAR 260 million. Despite the positive impact, the real effect will show after the current licenses of each company expire according to Gulf Times.
Market Challenges
Despite government aspirations for increasing market growth, the Saudi telecom sector continues to face several challenges starting with fluctuating oil prices, higher subscriber penetration levels in voice and data services, finger print registration of SIM card according to Al Jazira Capital report. Other challenges include limited growth avenues and a shortage in government spending. In order to tackle these challenges, the country needs to focus on sector-related elements such as infrastructure, broadband, creative ideas in advanced technologies, and increasing investments in digital economy according to Arab News.
Telecommunication Market Trends
The telecom sector has been witnessing various market trends including a privatization program that liberalized the market since 1998. Other trends include companies such as Virgin Mobile Saudi Arabia reaching one million subscribers in 2015, Lebara Saudi Arabia partnered with Huawei to provide MVNE services to other telecom companies within the country.
The market trends in telecom sector continue to evolve to cater the rising demands for digital services including development of broadband infrastructure. The fixed broadband development includes increasing the use of new fiber connectivity in Riyadh, Jeddah, Mecca, Madina, and Dammam. Mobile companies such as STC, Zain, and Mobily are also expanding services to develop triple or quad-play offerings for their consumers through bundle services according to Shearman and Sterling report.
Due to evolving market trends, the telecom market will witness fierce competition in the upcoming period with the support of the government’s budget that will be targeted for infrastructure and high tech projects. The government is also promoting technology start-ups.
Top Market Player
The Saudi telecom sector is dominated by the Saudi Telecom Company (STC), Zain, and Etihad Etisalat (Mobily) who have launched the 4G service in 2011. STC and GO telecom are the two fixed telecommunication licenses outlets in the kingdom. Other companies in the market include Virgin Mobile and Lebara who entered the local industry as MVNOs in 2012; however they were admitted by Saudi’s CITC as wireless communication providers.
STC is one of the key players in the market and hold 49% to 52% of the market, Zain has a subscriber base of 12.4 million which amounts a market share of 23%, while Mobily hold a market share ranging from 25% to 28%. Mobily, according to Al Jazira Capital report, features a weak operating performance and a limited growth potential. The company achieved a loss of SAR 2.1 billion in the fourth quarter of 2016. Despite Mobily struggling for growth, Zain has achieved improvement in market in 2016 in its subscriber base that currently stands at 12.4 billion. STC holds the strongest revenue growth of 10.9% YoY in 2016.
The market’s profit margin remains steady at 59% in the first quarter of 2016, where STC will achieve an operating margin of 23% in the first quarter of 2016 compared to 19% of the previous year, while the net profit margin will be steady at 20% compared to 15% in the same period last year.
The Saudi telecom sector remain promising despite challenges, geographical trends, technology, demand, and legislation. Through newly anticipated government regulations and movement, competition is likely to increase within the industry, yet the market allows its operators to prosper compete in different segments such as telephone services, fixed lines, data services, and broadband. As mobiles represent about 75% of the overall telecom revenues, it is quickly becoming the most important segments in the market, attracting further focus as the state and private sector aims to strengthen this industry.
By Fatma Khaled
