The great duopoly of UAE telecoms

With a fast growing population and economic growth of more than 7% a year, it is not surprising that the UAE’s two telecom operators, Etialat and du, are enjoying solid growth.

But with penetration rates either nearing saturation – or already beyond saturation – depending on the source of data, the UAE’s mobile sector is likely to experience significant change in the coming years.

The UAE telecoms sector’s path towards liberalisation is driven partly by the UAE’s membership of the World Trade Organisation (WTO), which it joined in 1996, according to Irfan Ellam, equity research analyst at Al Mal Capital Research.

But while the WTO aims for the global telecom sector to be completely liberalised, free from monopoly or government protection by 2010, Ellam points out that the UAE negotiated concessions and, under current WTO rules, its deadline for complete telecoms market liberalisation has been extended until 2015.

The subject forms an important part of a report from UAE-based Al Mal Capital, which describes the UAE’s telecommunications market as “a duopoly characterised by high GDP per capita of US$43,859 for 2007, an extremely high reported rate of mobile penetration at 166.4%, rapidly growing internet user penetration at 44.7% and steady fixed-line penetration at 30%.”

It adds that record high oil prices have led to an economic boom in the GCC, resulting in rapidly growing expatriate populations, especially in the UAE, which has an estimated 80% expatriate population, according to Al Mal Capital’s research.

The organisation forecasts the UAE’s population to grow at a five-year CAGR of 4.8% to 6.3 million in 2012, up from 4.6 million in 2007.

And this in turn will feed into the UAE’s mobile market, which Al Mal Research predicts will grow from 7.7 million subscribers in 2007 to 9.2 million in 2008 and to 11.9 million by 2012.

“Given the already very high penetration rates in the UAE, we expect penetration rates to grow modestly from 166 per cent in 2007 to 188 per cent by 2012,” says Ellam, author of the report.

“Penetration jumped over 38% in 2007, from 127% in 2006, to 166% in 2007; that is impressive growth for any market, let alone one that already has penetration over 100%. At face value, these rates imply that there are nearly two SIM cards per person in the UAE.”

However, Ellam adds that these penetration levels are likely to be inflated owing to ambiguities in the definition of ‘active subscriber’.

According to Ellam, until recently both Etisalat and du defined mobile customers as any customer who generated revenues in the financial year, regardless of how active the customer was.

However, the UAE’s TRA has since defined an ‘active subscriber’ as any mobile customer who has either made a call, sent an SMS or MMS, or received a call within the last 90 days.

As of first quarter 2008 results, du has restated its mobile subscriber base, with 1.76 million mobile customers being restated as 1.43 million active subscribers. Al Mal Capital says it expects Etisalat to do the same on the release of second quarter of 2008 results.

A significant number of users, such as business visitors using a local SIM and tourists who buy a mobile phone for use during their holiday, as well as residents having multiple handsets can inflate official subscriber numbers, all serve to inflate official subscriber figures.

“Many users are opting for one phone for business and one for personal use, as well as the use of devices such as Blackberries,” Ellam says.

Furthermore, the rise in mobile broadband could also be encouraging people to have more than one SIM.While the same SIM card can be used for voice and data, some users will opt to have two SIM cards for convenience, especially if the SIM used for mobile broadband is used in a modem or directly inserted into the computer, according to Al Mal Capital.

Milan Sallaba, partner, Oliver Wyman, agrees that SIM cards are likely to outnumber the UAE’s population. “There is no reason to doubt that many more SIM cards have been distributed than the current population, and no one will dispute that there are fewer unique users than active SIM cards,” he says.

“A large number of users have more than one SIM card, for example one for personal calls, and one for business calls, possibly one from each operator, or for instance they might have one for a dedicated data service device, such as a Blackberry, and a different one for their phone calls.”

He adds that there may be many instances where SIM cards are still considered “active” long after the person originally using it has left the country.

“The current penetration rate is high for the reasons mentioned above, and whether the ‘real’ penetration rate is lower than official figures largely depends on your definition of ‘real’… It is here where the telco operators at times apply definitions which effectively stretch the meaning of ‘active’ to prop up their subscriber figures.”

Despite this, overall growth in the UAE’s mobile sector remains fundamentally healthy. Al Mal Capital expects total mobile revenues to grow from AED 13.70 billion ($3.72 billion) in 2007 to AED 18 billion ($4.9 billion) in 2008, and to AED 21.08 billion ($5.7 billion) by 2012.

However, it also expects monthly ARPUs to decline from AED 163 ($44.3) in 2008 to AED 157 ($42.7) in 2009 and further to AED 148 ($40.2) by 2012, owing to increased competition.

This is also a scenario that Sallaba foresees. “As the regulatory environment matures, increased competition and lower margins may be a real possibility facing the current players,” he says.

“As such, key challenges relate to ensure continued profitable growth in a very penetrated market. Specifically, identifying and securing growth opportunities abroad will be a key focus, and Etisalat has already successfully embarked down this road with its numerous international investments, and for du, a more immediate opportunity arguably relates to the operator more fully capitalising on its mobile market share, and to ensure revenue stimulation for SIM cards sold.”

The players

“Etisalat and du, remain poles apart. Etisalat commands around 80% of the UAE mobile market and is aggressively expanding international operations in 15 overseas countries with 36 million proportionate subscribers,” Ellam said.

Meanwhile du, which started mobile operations at the start of 2007, is still at an early stage of growth as it builds out its UAE network and operations. The company is currently aggressively targeting a 30% market share by 2010.

But once du completes its mobile network roll-out, Al Mal Capital expects genuine increased competition within the UAE between the two players, although it will be based less on direct price competition and more on special offers and promotions.

Sallaba agrees that until now, du has been attempting to compete more by special offers than just price.

“In the case of the UAE, du tries to make its offer attractive with features such as name-numbering, pay-per-second billing, 3G services, free SIM and activation fees, and international call incentives,” he says.

“At the same time, Etisalat has started loyalty through a specific program and is currently aiming at making roaming to its internationally owned operations particularly advantageous.”

But despite increased competition on its home turf, Etisalat is likely rely more heavily on growth and profitability driven by its rapidly expanding overseas operations, according to Ellam.

However, he adds that in the near-term Al Mal Capital does not foresee any material impact to the two operators’ respective market segment shares owing to competition.

“Until du offers mobile network coverage comparable to Etisalat’s, the incumbent’s commanding market share should not be at risk,” he adds.

In the fixed-line segment, the market is effectively delineated geographically, with du serving New Dubai and Etisalat the rest of the country, according to Al Mal Captal.

While carrier selection and pre-selection are available, the researcher says this is failing to have a material impact on market share. “Additionally we believe neither operator will be easily able to gain access to the others’ telephone exchanges to allow it to install its own equipment,” the report states.

In terms call charges based on average price per minute, the mobile call costs in the UAE are comparatively less than those in other GCC countries.

However, prices in the other GCC countries are falling more rapidly from their higher base than those in the UAE, primarily in response to competition, and are slowly catching up with the UAE, according to Sallaba.

In two or three years the GCC market, with regards to average price per minute, will be more homogenous than it is today.

“In global comparisons, the UAE spend is similar to other GCC countries, the USA or Western Europe, but higher than many developing countries, in line with what one would expect,” he says.

 With high penetration rates, Etisalat and du are likely to be fighting over new expatriates entering the country – who often have high roaming usage –  and new users from the youth sector, which remains comparatively under-penetrated, according to Sallaba.

“In addition, competitors in highly penetrated markets typically try to capture more additional clients, or ‘churners’ from competitors than they lose. As such, more effort is typically placed on retention, as opposed to acquisition, and on making the existing customer base more profitable,” Sallaba says.

While du has been criticised by some analysts who have accused the company of chasing large numbers of low ARPU users in a bid to gain for active users, Sallaba thinks the company has been successful to date.

“At launch, du stated they were aiming for a 30% market share three years after launch. Eighteen months after launch they have captured around 25% share already,” Sallaba says.

“du managed to attract subscribers through a variety of clever and successful marketing campaigns, such as the ‘retain your number booking campaign’ pre launch, which attracted hue interest and pent-up demand prior to the actual launch.”

 du is likely to make more out of its integrated infrastructure covering fixed and mobile telephony, internet and TV services, in an attempt to maximise revenues and customer loyalty, although this is easier said than done, according to Sallaba.

However, he adds that du has recently started to specifically cross and up sell to its existing customer base to stimulate demand and usage, which could help it fulfil its aims.