The Middle Eastern economies of  the United Arab Emirates (UAE), Bahrain, Jordan, Oman, Yemen, Kuwait and Qatar, also known as the oil economies, have banked solely on their abundant petroleum reserves for years. These regions, fraught with strife and political instability, have found it difficult to develop other potential industries in a major way.

The Middle East’s telecom industry has remained mostly under the state’s dominance till recently, with telecom ministries of the Middle Eastern countries controlling and offering most of the telecommunication services. However, the situation has changed over the past few years in the wake of the growing realisation about the need for competition. A number of Middle Eastern countries are making efforts to open up and diversify their telecom markets in order to tap the new growth opportunities.

A recent noticeable trend is the growing interest among operators to expand their presence both regionally and globally through mergers and acquisitions (M&As). The region’s two key operators, the Saudi Telecom Company (STC) and Etisalat, diversified their operations in 2010, and have expanded operations in international markets.

With telecom markets opening up in the Middle East, major European operators such as France Telecom and Vodafone that have a strong presence in African and Asian markets, and others like Telefonica are actively seeking acquisitions in that region.

From 2009 onwards, the region has also witnessed the emergence of mobile virtual network operators (MVNOs). The Middle East’s first MVNO, Friendi Mobile, launched services in Oman in April 2009. Subsequently, a second MVNO, Renna, introduced its services riding on the network of incumbent operator Omantel. Friendi expanded its services to Jordan in June 2010, and recently forged a partnership with Zain in Saudi Arabia.

According to industry experts, there is a clear opportunity for MVNOs to offer customised services to the region’s sizeable expatriate community, for instance, call centre services in different languages and value-added services.

Over the past eight years, the region’s capacity to provide telecommunication services has also improved manifold with the creation of new infrastructure and fully digitised systems. The Gulf Cooperation Council (GCC), a group of six Gulf states comprising Kuwait, Bahrain, Qatar, Oman, Yemen and Saudi Arabia, has established and installed an interregional fibre optic network known as the Fibre Optic Gulf, which links these states with each other. This interregional network is now connected to the FLAG cable system, which is a global fibre optic link owned and operated by FLAG Limited (which is owned by Reliance Telecom, India).

Key features 

Telecom penetration in the Middle East has surpassed 100 per cent in many countries. In fact, the Middle East is known to have the highest telecom penetration rate in the world, with countries like the UAE having a penetration rate of 200 per cent, which implies 2 SIM cards per person. A study indicates that the average mobile penetration in the Middle Eastern region is likely to increase to 130 per cent by 2015.

The region has diverse markets with small to large population sizes and several categories of per capita GDP. Qatar, for instance, has twice the per capita income as compared to most countries in the Middle East while Bahrain has the smallest market size by population.

The Middle East markets also differ in terms of the levels of competition. A market like Bahrain has many players and is extremely competitive, while the UAE has only two key operators.

Although slow to take place, the region has witnessed its share of M&As. Some incumbent operators have expanded operations to offshore destinations after posting huge profits at home. Major players involved in M&As include Etisalat, du, STC International, the Qatar Telecom (Qtel) Group and Zain.

Key service providers in the region are now majorly focusing is now on African markets, where the GSM network infrastructure is still at a nascent stage.

While mobile voice services still remain a lucrative business for the region’s telecom operators, data services are also picking up fast. For instance, data services grew from 7 per cent of the total revenues in 2007 to 10 per cent in 2009. Operators in the Middle East are expected to drive new revenue streams through fixed or mobile broadband, which will lead to the next level of growth in the telecom industry, by widening access as well as enabling more content and services.

Country analysis 

tele.net takes a look at the telecom sector of some Middle Eastern countries...

Saudi Arabia 

The Saudi Arabian telecom market is more competitive than most other countries in the Middle East. STC, a Saudi Arabian incumbent, is the largest telecom company in the Middle East in terms of revenue and market capitalisation. It enjoys over 50 per cent share of the Saudi market. It is followed by the second and third largest Middle Eastern regional players, UAE-based Etisalat (Mobily) and Kuwait-based Zain respectively. Zain Telecom began operations in the country in August 2008 and secured a market share of 10 per cent in less than a year.

What makes this market so attractive is the combination of its population size and affluence. While its total population is relatively low, its GDP per capita is much higher. In addition, the Saudi Arabian telecom market has been slower to develop than some others in the region such as the UAE or Qatar, leaving room for growth.

As of June 2010, the total telecom subscribers in the region stood at 46 million. In terms of broadband technologies, the Middle East has witnessed an extensive uptake of Wi-Max services, with over 20 major cities being covered by these services by early 2010. Mobile broadband and Wi-Max broadband subscribers have exceeded the number of ADSL subscribers.

Going forward, the surge in broadband is expected to drive the growth in this market. Broadband users have grown tenfold since 2005, and are expected to nearly double from 3.2 million users in 2010 to 5.9 million users in 2014.

Another key trend has been the increasing number of tower sharing deals in the region. For instance, Mobily aims to conclude a tower sharing deal with STC by end-2011. This trend is expected to gain traction as it helps operators reduce network maintenance costs.

Yemen 

Yemen is one of the poorest and least developed countries in the Arab world, owing to its low oil reserves. Around 35 per cent of the population lives below the poverty line and the telecom sector reflects this situation. Yemen has three GSM operators – MTN Yemen and Sabafon (which have similar market shares), and Y-Tel, which entered the market in 2007 but failed to gain a significant market share.

CDMA mobile operator Yemen Telecom, which is 55 per cent owned by the state-owned Public Telecommunication Corporation (PTC), is also a significant player in the market, with a similar market share as MTN and Sabafon.

According to Dubai-based research and consultancy firm Delta Partners, the market share of the four mobile operators in 2009 stood at 37 per cent (MTN), 31 per cent (Yemen Mobile), 29 per cent (Sabafon) and 5 per cent (Y-Tel).

Apart from the mobile telephony segment, the market has seen little liberalisation, competition or private investment. All fixed line and internet services are provided by PTC and its subsidiaries.

For the country, a combination of low per capita income, political instability, and GSM duopoly between MTN Yemen and Sabafon appears to have hindered growth. Telecom penetration increased from 20 per cent in 2006 to 30 per cent at the end of 2009, which is one of the lowest in the Middle Eastern region.

Further, given the slow progress of the mobile sector, Yemen’s Ministry of Telecommunications has indicated no plans of offering 3G licences in the near term.

As it stands, there exists significant growth potential in Yemen’s telecom market. However, for it to be fully tapped, factors like the country’s economic and political stability will come into play.

Kuwait 

Kuwait is one of the wealthier members of the GCC, having the third highest (behind Qatar and the UAE) GDP per capita income. Like the other smaller GCC members, it has a very high expatriate population, forming at least two-thirds of the total. This makes its population very fluid, thereby leading to distorted telecom penetration statistics.

Kuwait is the only country in the Gulf region that does not have an independent regulator. The Ministry of Communications functions as both the regulatory and the operating entity for fixed line services. However, the setting up of a telecommunications regulatory authority, expected to be operational by 2012, is under way. This will enable mobile operators to diversify their business models, increase competition in telecom infrastructure, provide better service quality in the country and reduce call tariffs.

Kuwait was the first country in the Gulf region to open up its markets to cellular competition, which has been increasing ever since. Until 2008, the wireless sector was dominated by Zain and the National Mobile Telecommunications Company (Wataniya), the two leading mobile operators in the country. The entry of Viva in December 2008, backed by STC (of Saudi Arabia) has broken the duopoly and added new momentum to Kuwait’s telecom industry.

At end-June 2009, mobile penetration in Kuwait had peaked at 125 per cent, with the total number of subscribers reaching 3.56 million. As of December 2010, Zain is reported to have close to 2 million subscribers, followed by Wataniya with 1.76 million and Viva with 800,000 subscribers.

Qatar 

Qatar is a small and wealthy country having a per capita income that is almost double than that of Kuwait or the UAE. This is well reflected in the high penetration rates of mobile and fixed line services, and broadband and internet services. Qatar was the last country in the region to introduce competition in its telecom market. After being granted the licence, the UK-based operator Vodafone Qatar launched its mobile services in July 2009, ending the monopoly of all sectors of the market previously enjoyed by the incumbent Qtel. The operator entered the market at a time when mobile penetration in the country had already crossed 150 per cent.

Qtel had 2.4 million mobile, fixed and broadband customers (December 2010), while Vodafone Qatar had 756,767 users (as of March 2011). Despite the high mobile penetration, the proportion of 3G outreach is relatively lower in Qatar.

Broadband penetration at the household level is high at about 60 per cent and growing. In addition to offering ADSL services, Qtel plans to develop a fibre-to-the-home (FTTH) national broadband network, with the first phase of its trials being successfully completed in January 2011.

Qatar’s telecommunications authority ictQatar has recently published a consultation document that details the findings from an extensive analysis of the telecommunications market in Qatar and makes policy recommendations for the sector’s continued development. ictQatar has undertaken this strategic sector review to encourage competition and increase customer benefits. It plans to provide high speed affordable internet access to all the government bodies and 95 per cent of the households by 2015.

Qtel has been expanding its presence globally and has operations in over 17 countries. Through its purchase of Wataniya of Kuwait, Qtel has also expanded operations into Tunisia, Algeria, Saudi Arabia and the Maldives, and has obtained a licence for Palestine. In addition, it has separately acquired licences in Iraq and Oman. The operator has also expanded further into Asia with interests in Singapore, Cambodia and Laos. In February 2009, it completed the purchase of a 65 per cent share in Indonesia-based Indosat.

Bahrain 

Bahrain is the smallest market in the Middle East in terms of population, but it is also one of the most competitive markets in the region. This is primarily due to the fact that it liberalised the telecom market way back in 2002-03. It has a well-established regulator, the Telecom Regulatory Authority (TRA) of Bahrain.

The Bahrain Telecommunications Company (Batelco) is Bahrain’s principal telecommunications company. It shares the fixed line market with 14 other operators providing international calling services using international direct dial, carrier pre-selection or prepaid calling cards. Batelco completed the rollout of a next-generation network (NGN) in January 2009.

Wi-Max rollout in 2008-09 has intensified competition in Bahrain’s broadband sector, with two operators, Batelco and Zain Bahrain, rolling out these services. By mid-2009, Wi-Max had a 3 per cent share of the broadband access market.

In the mobile market, Batelco and Zain Bahrain were joined by a third operator – Viva Bahrain (owned by STC) – which launched services in March 2010. As in other GCC markets, mobile penetration is quite high and the significant expatriate population provides room for further growth.

Like other incumbent operators in the GCC countries, Batelco has ventured into offshore operations, with subsidiaries in Kuwait, Jordan, Yemen and Saudi Arabia. It also has a 49 per cent stake in India’s S Tel.

According to a recent quality of service survey commissioned by the TRA of Bahrain, the overall mobile service in Bahrain is comparable to that in Switzerland and better than that of France and Germany.

UAE 

The UAE is the least liberalised market in the Middle East, with only two operators across all sectors and no foreign investment. Incumbent Etisalat enjoys over 60 per cent of the market share. The federal government of the UAE has a majority (60 per cent) stake in Etisalat. The second operator, du, which launched its services in 2007, has gained ground despite interconnection difficulties and no number portability. As of December 2010, du had over 30 per cent of the mobile market share.

Competition in the fixed line and broadband markets is likely to increase in the near future with Etisalat and du agreeing to share their networks. They completed the technical and operational details of the network sharing arrangements in July 2010 and the commercial launch of services is expected in 2012, after testing  the network and system interfaces.

The fluid expatriate population (over 80 per cent of the total) may have played a role in the UAE’s high mobile penetration rate of over 200 per cent. All countries in the GCC have extremely high penetration levels but those in the UAE are the highest of all. Much of this is on account of the multi-SIM ownerships acquired to take advantage of the various offers by different operators.

Etisalat is rolling out a national FTTH network, which is expected to be completed by 2012. By end-2009, it had covered 85 per cent of the households in Abu Dhabi. Government policies over many years have provided great encouragement to increase the levels of ICT development. Many of the region’s major digital media companies are based in the UAE.

In 2011, du and Etisalat plan to roll out their 4G services. The trials are already under way and the operators hope to implement services by end-2011. In another development, the TRA of UAE has recently launched the next generation networks industry forum in order to accelerate the transition of the telecommunications sector in the UAE to NGN. 

Net, net, these are interesting times for telecom companies in the Middle East. Emerging from the economic slowdown, the operators expect to expand and carve out new revenue streams in a cost-effective manner. The next few years are also likely to witness aggressive M&A activity, which will be crucial for future profitability of operators in the region.