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Sat 26 Sep 2015 09:54 AM

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"What is the next biggest thing?" du CEO Osman Sultan on the future of the telecoms sector

The Lebanese executive has led du ever since the UAE’s second telco was launched in 2007. But if anything, the CEO says the challenges and opportunities that exist today are greater than they ever were

"What is the next biggest thing?" du CEO Osman Sultan on the future of the telecoms sector

If you want a lesson in the fast-changing world of telecommunications, there’s no better teacher than Osman Sultan. In 1998, when Sultan took on his first leadership role, as founding CEO of Egypt’s Mobinil, he sat his team down and started drawing on a whiteboard.

“I drew this picture, which was a mobile phone in the hands of everyone,” he says, smiling. “That was daring — that was taking a bet that mobility would become a big thing.”

Eight years later, the Lebanese found himself in Dubai, getting ready to launch what would become the UAE’s second telecoms player, du. Once again, he got his senior team members round a table.

“Everything had changed,” Sultan recalls. “That story of a single mobile phone in everyone’s hand? Everyone now has a phone in each hand and probably one in their pocket as well.

“And that forced me to think. What is the next biggest thing? It wasn’t mobility. It was about doing much more with this thing [the mobile] that you carry everywhere with you.”

That ability to think one step ahead of the game has served Sultan well over the years. Building up a mobile company from scratch in Egypt, a country with only a 1 percent penetration rate and a rocky economy, wasn’t easy. Neither was taking on the might of the UAE’s Etisalat in a market where the penetration rate was well over 100 percent.

But after an hour spent in Sultan’s company, two things are immediately clear. Firstly, that he is up for a challenge. And secondly, that he sees his industry as being about far more than just fibre, calls and minutes. As the world in general, and the UAE in particular, heads towards a ‘smarter’ future, Sultan sees the role of du as being not only a fundamental anchor to the local economy, but also as the lynchpin of a collaboration between a whole host of operators and players. 

“For years, we in the telecoms industry have lived in what I call the reign of unshared certainties,” he says. “In telecoms we used to offer everything to the customer — the infrastructure, the access, the distribution, billing and so on — all in one company.

“We are now living in a world where all of us will have to come together and we have to invent new ecosystems. But things are still not very clear. We are still arguing, still fighting over revenue-sharing models. So we are going from the unshared certainties to the shared uncertainties.

“And that shift is extremely exciting – it’s going to define new models of society and new models of civilisation.”

This is big-picture stuff. And Sultan is clearly putting his money where his mouth is; du has partnered with a group of different operators to bid on the Dubai smart city project, and has recently created a new position — that of chief innovation officer — whose task will largely be to focus on this area of the firm’s future.

More prosaically, however, Sultan also has his hands full with the here and now. Since launching in 2007, du has been the Middle East and North Africa’s fastest-growing telco. Only two years after its launch, du recorded its first quarterly profit. By comparison, the second mobile operator in nearby Qatar, Vodafone Qatar, is still waiting to record its first quarterly profit some six years after starting operations.

In just a few short years, it has attained near parity with Etisalat in terms of mobile subscribers, although — as Sultan admits — in terms of value share, it still has some catching up to do. The trick has been to manage the breakneck growth the company recorded in its first few years of operation, and steer its transition into a more mature outfit.

It’s in that context that Sultan puts du’s second-quarter results, which were released last month. The firm reported an 8 percent fall in net profits compared to the same period a year earlier to AED502m ($137m), a result that was in line with analysts’ estimates.

Revenue edged up to AED3.09bn, from AED3.02bn. The CEO is quick to point out that a major factor in the drop in net profits was the royalty payments that both du and Etisalat pay to the UAE government.

Last year, du paid out 10 percent of its regulated revenue back to the government, and 25 percent of regulated profits. This year, those figures went up to 12.5 percent of revenues and 30 percent of profits, and next year they will rise to 15 percent of revenues and 30 percent of profits.

“Compared to last year, this royalty percentage has jumped by 18.8 percent, as opposed to the 3.1 percent rise in net profit before royalty,” Sultan says. “That has not been enough to offset the huge increase we had in royalties.”

While the share of data in overall mobile revenue rose to 31 percent, from 29.4 percent in the same period a year earlier, du also reported a decline in average revenue per user (ARPU), from AED96.8 to AED92.6. Sultan puts some of that fall down to the highly saturated market in the UAE, where each user carries an average of two mobile phones, and he also points towards the so-called over-the-top (OTT) players — like WhatsApp, Facebook, Skype and so on — as having had an impact on the business. But unlike most telco bosses in this part of the world, Sultan says that the more traditional players will need to use their brains, rather than rely on protective regulatory environments, if they are to succeed.

“Let’s take SMS revenues — they have been directly affected by people using WhatsApp, WeChat. Fair enough,” he says. “All this is creating a very exciting ecosystem, and far be it from me to say no, we need to resist or fight these players. It’s up to us to be clever enough to figure out how to offer value for our customers to benefit from this.”

“We have to be clever in putting out the right tariffs for the bundles that we do,” he continues. “Most of the bundles we did at one time were selling voice, and you got data. Now we need to sell the data, and you get the voice as part of the bundle. Just this shift allows you to fine tune the accuracy of what we charge.

“But at the same time, the sector is working against us — tariffs are getting more complicated. I’m a strong believer in the fact that you need to promote full transparency to the people — this is what you pay, and this is what you get — in a non-ambiguous manner.”

To be fair, du is not the only Middle Eastern operator that is navigating these issues. In fact, most of the Gulf’s major players have seen their recent quarterly performances pulled down for a variety of reasons. In Qatar, Ooredoo has been hit by foreign exchange losses and the performance of some of its units in unstable markets. Accounting problems at Etisalat’s Saudi unit have acted as a drag on its bottom line. Kuwaiti operator Zain’s presence in markets that have been hit by unrest, plus currency fluctuations, have seen its profits progressively worsen for three years now.

Against that background, the prospects for du — especially in a saturated market like the UAE — look tough but Sultan waves those concerns away. He cites three tracks, or drivers for the growth, starting with the general performance of the UAE economy, the projected increase in visitors and so on.

“This is a vibrant economy where the economic dynamic is like no other — so in that sense we are privileged,” he says. “The second track is that our customers will be using the same telecoms services, but using more, and that will come from data. Smartphones are becoming more and more popular.

“The third track — and probably the most exciting — is people using us to do new things more and more,” Sultan adds, returning to his favourite subject. “And that’s the entire digital universe — the entire smart theme that we are going towards. We believe that this is a journey that will be a game-changer.”

As well as those three tracks, the last year or so has seen new areas open up to competition within the UAE telecoms space. About a year ago, mobile number portability (MNP) was brought into the country, allowing consumers to switch operator without having to change their number. Sultan says that the impact from MNP has been negligible from du’s perspective, pointing out that only 1-2 percent of the market has decided to port over to a competing operator.

Of far greater importance is the opening up of fixed-line infrastructure sharing, which was announced last month, and will allow customers all over the country to choose between the two operators for their internet, landline and TV services (the latter will come into force in about nine-12 months’ time, Sultan says). Given that du only has about 10 percent of fixed-line coverage in the UAE, there is obviously plenty of opportunity here, although talks have dragged on for six years. Of the few regrets that the CEO says he has, one has been not driving this issue more aggressively.

“On 14 July this started with what we call a controlled launch — that will take, in our opinion, about three months,” Sultan says. “Customers are moving from one operator – but a limited number. But for the time being, we have reached the technical feasibility in what we call dual play — that’s voice and internet services.”

Given that most UAE fixed-line services have voice, internet and TV services all bundled together, I put it to the CEO that many will wait to make a switch until TV is added to the mix. He shrugs: “This is why I’m not giving a lot of prognostics…but again, this could be a game-changer in my opinion.”

What certainly won’t be a game-changer is a move to acquire an overseas telco or an overseas licence, a path that has been trodden by most of the Middle East’s big operators. It’s a strategy that Sultan knows well, from his days at Egypt’s Mobinil, but it seems that the opportunity for du has passed. 

“If you look at the lifecycle of du, where we were [in the past], there were still opportunities, but we didn’t have the resources to claim this ambition,” he says. “Today, we could do it but does it make sense, does it add value? It doesn’t any more.”

Overseas opportunities are few and far between these days. The two most notable expansions by Gulf telcos in recent years have been Ooredoo’s purchase of a licence in Myanmar, and Etisalat’s acquisition of a controlling stake in Maroc Telecom. But difficult experiences in other markets have seen a wholesale withdrawal from certain geographies, as when Zain retrenched from Africa.      

“We talked with operators and we looked at the value that could potentially be created by doing the pure expansion on geography, and there wasn’t any,” Sultan continues. “I couldn’t find a story to convince my shareholders to trade one dirham that they have in du in the UAE, for another market, especially one that was not growing, or God forbid, where revenues were going down.

“We are operating in the most interesting part of the region. And if you look at operators that have been really successful at moving into smart and moving into digital, many of them have been one-country operators. We’re talking about operators in Korea, we’re talking about PCCW in Hong Kong, we’re talking about [Japan’s] NTT and so on. All these operators did not start geographical expansion to become global.

“Our expansion is an expansion in scope — so moving from a pure telco to an ICT player, and into the enterprise space, and moving from a pure connectivity play to a connectivity plus smart play,” he adds. That is the expansion we need to have.”

When questioned as to whether the UAE market can take a third operator, especially given that Saudi Arabia, Bahrain and Kuwait all have three mobile licence holders, Sultan says that the current model — two licence holders paying what amounts to a pretty hefty tax to the government — has served the country well so far.

“It’s not for me to comment on the actual prospect of more competition — that’s the prerogative of the TRA [the UAE’s telecoms regulator],” he says. “The UAE has always been at the forefront – for example the first to have 4G and 5G is coming soon.

“Would a new operator pay the same level of royalty? Obviously yes. Would that operator make investments in infrastructure or not? It all depends, but obviously you have seen consolidation and difficulties in other countries where you had a plethora of MVNOs and so on.”

Sultan adds that du is investing between AED1.5-1.8bn ($410-490m) in infrastructure on a yearly basis, and reveals that he sees 5G becoming operational in the country in 2018 — two years earlier than expected. It will be yet another achievement for a company that has already become a crucial part of the local economy despite its relatively youthful age.

As the interview draws to a close, Sultan returns yet again to the subject of smarter technology.

“It’s all about making things easier, safer, more efficient, cooler, funnier, and ensuring people have more time for themselves,” he says. “So you have a better quality of live, which leads to happier people. There is a power in this simplicity.

“We know that it’s not our job to do all of this. We know that there are people when it comes to hosting, big data, the cloud or virtualisation, who have more competency. But we hope we will become the anchor player in of this.”

Given Sultan’s knack for predicting the future, it seems a safe bet that du will be playing a solid role in the UAE’s vision to ‘get smart’ in the near future.

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