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Mon 3 May 2004 04:00 AM

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Pot of Gold

Telecomms operators are ready to pay as much as $1 billion for the licence to run Saudi Arabia’s second mobile phone network.

|~||~||~|The prospect of being able to operate Saudi Arabia’s second mobile phone network has prompted a flurry of interest from international telecomms operators and local companies. No less than eleven consortia are set to bid for the licence, despite an upfront fee that is expected to be around $1 billion.

The prospective riches on offer have tempted some high profile names to enter the bidding process. From Saudi Arabia, Prince Alwaleed bin Talal is involved. Internationally, the world’s largest mobile phone company, Vodafone, has joined a bidding consortium. Etisalat is also making a foray outside its domestic market.

What is enticing these big names to enter the fray is a market of 22 million people, earning per capita incomes higher than the regional average.

“It’s the biggest market in the Middle East outside Iran and the penetration rate is still really low compared to other countries like Kuwait,” says Yaman Al Jundi, research analyst, Arab Advisors Group. “In Saudi Arabia, penetration is 32%, so there’s still a lot of room for growth.”

“It’s a big market and there’s great potential,” adds Mohsen Malaki, telecomms analyst, IDC.

Three more statistics illustrate why the bidders are prepared to pay so much — and comply with the Saudi regulatory body’s strict conditions — to enter the market.

Arab Advisors predicts that market penetration could reach 76% by 2007, more than double the current rate in a country where the population is still growing rapidly. Average revenue per user (RPU) in Saudi Arabia is one of the highest in the world at $63. Finally, Saudi Telecom Company, which operates the country’s existing sole mobile network, generated around $4.5 billion in revenues from its GSM service in 2003.

Before a licensee is appointed, however, hopefuls have to go through the bidding process. Stage one was the request for pre-qualification, where the bidding consortia had to formally register their interest in the license and pay a fee of SR150,000 ($40,000.)

Twelve entities submitted their requests and eleven made it to the pre-qualified list, which was released in early April. Those eleven now have around two more months to submit their bid, after which the authorities make their decision. The winner was expected to be announced in the summer, but the country’s telecomms regulator, The Communications and Information Technology Commission (CITC), is now talking about the fourth quarter.

The bidders have to comply with some fairly strict conditions. Each consortium must consist of a telecomms operator and five Saudi companies. The telecomms partner has to own at least 15% of the consortium’s equity, up to a ceiling of 49%, and sign a five year management contract with its Saudi partners.

It must be publicly listed on its national stock market and have achieved an average market capitalisation of at least US $1 billion over the previous three months. It also has to be operating a mobile network that provides services to at least 1.5 million subscribers and have two years experience operating a network that it built from scratch. 20% of the winning company has to be publicly floated in its first year of operation and another 20% within three years.

Two separate applications must be submitted: one for a GSM license and the other for a 3G license. The Communications and Information Technology Commission (CITC) will have the discretion to award the 3G licence to the winner of the GSM licence, but does not have to.

The licence will be valid for a period of twenty five years and STC is obliged to allow interconnection between its mobile phone network and that of the new provider. The new operator can also use STC’s mobile network to run its service until it has its own technical infrastructure fully up and running.

According to a document released by the CITC, the winning company will be required to submit a ‘financial proposal for payment of an upfront licence fee.’ Bids will be evaluated primarily on the basis of their commercial, operational and technical proposals, the CITC says. Those that are deemed to have met the necessary requirements will then be evaluated on the basis of how much they have bid.

In the end, cash is likely to play a large part in who wins the licence. Many in Saudi Arabia are already saying that Vodafone, currently the world’s largest operator of mobile phone networks, is the favourite to win. “Clearly, they have the most experience and the largest numbers of subscribers, so they are seen as the front runner, closely followed by MTC,” says Al Jundi at Arab Advisors Group.

“Some people are saying it’s a done deal. Other say ‘Not quite, look at the partnerships all of [the bidding consortia] have,’” adds Malaki at IDC. “It’s such a big deal that it’s going to be hotly contested by everybody.”

The inclusion of Vodafone’s name in the list of bidders certainly stands out. Vodafone’s only significant investment in the Middle East is its majority stake in Vodafone Egypt, but the decision to enter the fray in Saudi Arabia and its earlier involvement in the bidding for Oman’s second GSM license indicate a change in strategy. It is also seen as a perfect mobile partner for any new telecomms operator in the UAE.

All this raises a question mark over Vodafone’s agreement with Kuwait-based MTC, which co-brands its mobile services in Kuwait and Bahrain as MTC-Vodafone. Unfortunately, Vodafone did not respond to e-mail or phone requests for an interview to discuss its strategy in the Middle East.

Whoever, the new operator turns out to be, Al Jundi at Arab Advisors believes that it will both take customers from STC and pick up new ones. A parallel in the GCC could be Kuwait, where the introduction of a second operator in 1999 is considered to have been good for consumers and both operators.

Kuwait now has a mobile penetration rate well over the 50% mark, advanced services and competitive pricing. At the same time, both operators are very profitable. “The entry of the new operator would be really healthy,” says Al Jundi. “STC would have to introduce new services.”

He says that although STC has been lowering tariffs dramatically, pricing is people’s key concern. “Maybe the service itself isn’t that good, but I think the main concern is the price,” he says. “STC is going to have to fight to keep its customers, especially if they [the second operator] jump in with really competitive packages.”

Saudi Telecom Company is already responding to impending competition. GPRS, a technology that speeds up GSM networks to allow for internet access and picture messaging, was introduced in late 2003. TV voting by SMS and mobile ‘chat’ services are also in the offing.

“The focus of Al Jawal [STC’s mobile phone service] was previously to fill the backlog of services [and] increase coverage. The Kingdom’s population is geographically spread and there a lot of empty spaces,” explains Jameel Al-Molhem, general manager of marketing at Al Jawal.

“Heading into 2004, we have started a shift with the launch of our Abwab content service [news and entertainment]. We are planning to launch interactive SMS services through deals with magazines, newspapers, and TV stations. We are also ready to offer a mobile service in co-ordination with banks,” he adds.

Saudi Arabia’s 22 million people will be hoping that the arrival of competition leads to more such service innovation and lower prices. The country’s treasury also stands to benefit to the tune of a billion dollars.||**||

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