With famously high ARPU levels, Kuwait has been a cash cow for established mobile operators Zain and Wataniya. But with STC joining the market late this year, the sector is about to be shaken up.
With Saudi Telecommunications Company (STC) becoming the third mobile operator in Kuwait, the duopoly of Zain (formerly known at MTC) and Wataniya Telecom now has to compete on a higher level. Tariff reductions are expected, putting more pressure on revenues.
While Kuwait has one of the highest GDP's per capita in the world, and telecom operators enjoy high ARPU levels, there is growing concern among the industry about market saturation.
Mobile penetration is often quoted as above 100%, and there has been some question over whether the country's mobile sector can continue to grow.
But Javier Álvarez, partner at Delta Partners, the Dubai-based telecoms consultancy firm, believes this figure is inaccurate.
"Here we're talking about the number of subscriptions, which is not the same as the number of customers in the market," Álvarez explains. "We believe that there is a double SIM effect of around 30%, which would effectively lower your penetration rate down to around 70-75%. Therefore, I believe there is still room for growth."
What is certain is that Kuwaiti telcos enjoy remarkably high ARPU levels. Zain's ARPU stood at around US$70 for 2007, while Wataniya's measured slightly lower at US$56 - which still compares favourably compared to other regional markets.
This means that despite the relative size of the market, the customer base in Kuwait accounts for a large proportion of group revenues - demonstrating the importance for both companies of a strong performance in Kuwait.
In 2007, Zain's revenues in Kuwait increased by 16% to US$1.226 billion, while EBITDA increased 27% to US$684 million from the year-earlier period.
This constituted about 20-25% of the group's total figures; the operator even saw group revenues break Kuwait records to top out at US$5.91 billion, while EBITDA improved 25% from last year to reach US$2.56 billion.
For Wataniya - which has less of an international presence - revenue from Kuwait accounted for almost 50% of group revenues, despite the fact that its customer base in the country represented just 13% of its total across the MEA region.
Revenues for 2007 totaled US$772.7 million (compared to US$1.5 billion across the board), while EBITDA stood at US$393 million.
STC's entry into the Kuwaiti market later this year may signal the end of the good times for Zain and Wataniya, which have benefited from a lack of competition. "Zain and Wataniya are enjoying a typical duopolistic environment," Álvarez says.
"They are not facing the aggressive price cuts that maybe the Jordanian market is currently facing. In the past few years, you've rarely seen decreases in terms of the price levels - and that's one of the reasons Zain has such a high ARPU."
STC paid a premium on the third mobile licence, forking out US$900 million for a 26% stake, valuing the licence at around US$3.5 billion. The Saudi operator's bid outmatched the second highest bidder - from Kuwait Finance House - by about 25%.
This means that, if anything, STC will be looking to recoup its investment, rather than embark on a hard-hitting drive to encourage mass-market take-up of its services.
With Zain planning its entrance to the Saudi market, both it and STC also have a strong incentive not to destabilise each other's domestic market with aggressive promotional activities.
"I do not believe STC is entering the market in an aggressive way; it's not like Umniah entering Jordan or Mobily in Saudi Arabia. I think there are powerful reasons for this," Álvarez says.
"Firstly, it paid a high price for the licence and STC needs to create a proper return on this investment. Secondly, STC will have Zain in its own backyard very soon and this creates the conditions for a more or less implicit agreement of peaceful cohabitation.
Thirdly, the STC mindset of being an incumbent in the Saudi market is not of a very aggressive nature. It is used to playing the premium operator angle, rather than the local, no-frills angle," he adds.
Preparing for competition
Regardless of whether or not STC will come into Kuwait with all guns blazing, Zain and Wataniya have already planned for the newcomer. As the retention of existing customer bases becomes paramount, quality and breadth of their service offerings takes centre stage. Wataniya, for example, recently launched a collect call service, ensuring pre-paid customers can continue to make calls when they run out of credit.
In fact, like the rest of the region, the majority of mobile users remain on pre-paid contracts. The general belief in many developed markets is to push these subscribers onto post-paid contracts. In Kuwait, Scott Gegenheimer, general manager and CEO of Wataniya Telecom, believes this could detrimentally affect an operators' relationship with that customer.
"I don't necessarily want to convert people from pre to post-paid. I never like to do that, because all of a sudden you have bad debt and other issues and the customers aren't comfortable," Gegenheimer says.
"Every service you should be offering on pre-paid, you should be offering on post-paid and vice versa. The only thing you don't want to do is have the pre-paid customer run out of credit."
The real key to sustaining earnings, according to Álvarez, is to tailor products and services to the customer bases. This comes when the operators become more intimate with their subscribers.
"The evolution they need to follow is to increase the stickiness of their portfolio of products and services, regardless of the means of payment whether for postpaid or prepaid. This needs to be part of the equation but this cannot be the only way," Álvarez says.
"Unless operators get much more prepared and increase their degree of customer intimacy and knowledge they have of their bases through analytical marketing techniques - and I'm aware that some are taking steps in this direction - it's going to be very difficult for them to create more stickiness," he adds.
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