Kingdom come

Much has changed in telecoms in Saudi Arabia in the last couple of years. Greater openness and increased demand for services bode well for the future.

The economy of the Kingdom of Saudi Arabia has some way to go to catch up with others in the Middle East for competitiveness. It is hard to imagine that it will ever become a vibrant hub for international commerce after the fashion of the United Arab Emirates or Bahrain. But its journey in the past few years towards more openness, and away from a dependence on oil revenue, has been significant.

In no field has this change been more marked than in telecoms. Where incumbent Saudi Telecom – STC – was once the sole provider of all fixed and mobile services, it now faces two other players in the mobile sector. And while it remains pretty much in control of fixed-line infrastructure, it does now face competition here too.

UAE operator Etisalat was first to break the deadlock in 2005 when its Mobily brand opened for unwired business in the Kingdom. Kuwaiti powerhouse Zain was subsequently granted the country’s third mobile phone services licence, trading as Zain Saudi Arabia. Next to open was the country’s data services market which now comprises three operators: STC, ITC, and Mobily-owned Bayanat.

Now it is the turn of KSA’s fixed-line sector. Three consortia, led respectively by Bahrain’s Batelco, Hong Kong’s PCCW and US-based Verizon Communications, have won approval to build and operate new fibre-optic networks. Batelco, for example, in conjunction with alternative Saudi operator Atheeb Telecom, has committed to invest £1 billion in its first five years of operation on new build.

“Following the award of fixed-line concessions in early 2008, the winning consortia are now beginning to implement their network investments, and clearly intend to compete vigorously in the consumer broadband and business markets,” observes John Gibson, president of business development for AT&T’s Middle East and Africa business, one of STC’s foremost international partners.

But it will be a while yet before STC feels any serious heat, believes Said Irfan, research manager for analyst company IDC’s Middle East, Turkey and Africa office: “The new fixed service licensees have not yet started operations, although Atheeb Batelco has signalled that it will soon,” he says. “The market is not yet very competitive, as STC still holds a significant share of the wholesale and retail fixed services market, with some competition from Mobily’s Bayanat subsidiary and ITC through their shared fibre network. The retail broadband service market, on the other hand, is more competitive, with a plethora of ISPs providing services over the other operators’ networks.”

Telecoms revolution

Saudi Arabia’s telecoms revolution is remarkable, despite the slow emergence of wired competition, says Paul Joseph, Middle East regional manager with Sprint International Markets. “It’s got three mobile operators, competition in fixed-line voice and data,” he says. “There’s tremendous demand for IP services. A few years ago the bandwidth it required was measured in hundreds of Mb, and now it’s hundreds of Gb.”

Despite liberalisation, the process of unfreezing telecoms services from years of state control, and rolling out services to a mostly poorly connected population of nearly 25 million, is still in its early stages. “You’ve got lower overall penetration of services than most other countries in the region,” says Declan Lonergan, vice president of research with Yankee Group. “But you’ve got faster and better infrastructure than most. Those consumers in Saudi Arabia that have wired broadband enjoy fast speeds, leading perhaps to less of a perception than in other countries that mobile broadband is a good alternative to fixed.”

The next phase of development of the country’s communications looks likely to centre around extending availability of broadband services into the vast swathes of the country where such connectivity in unknown.

“There’s tremendous activity from both the incumbent and from alternative operators on the broadband side,” says Mohsen Malaki, manager with Dubai-based analyst company Delta Partners. “Mobily is expanding into wired broadband as its next growth area. It’s looking at both Wimax and fibre-optic networks.” At present, he says, Mobily is offering mobile and wired services as separate lines: “But it will probably be looking to converge them together in some sort of FMC bundle down the line – despite the regulatory difficulty it might face here.”

The market for corporate services is also starting to heat up, says Malaki, particularly in the area of managed solutions: “You’ve got outsiders like AT&T, BT, Verizon and others offering corporate data services as part of service agreements with their multinational customers,” he says. “And there’s demand from big Saudi companies, particularly banks, that have offices around the world.”

Protectionist instincts

The protectionist instincts of Saudi Arabia’s government are still at work, despite the relaxing of monopolistic strangleholds. No foreign organisation is allowed control over a Saudi enterprise, so partnership with local interests remains the only way in for outsiders.

The conventional mode of entering a new market, by making a direct investment, along with a local partner, in something tangible, like a service centre or network operations centre, may be making way for a less traditional approach. “It was Cisco that raised the flag here,” says David Molony, principal analyst at Ovum. “It has been heavily involved with the Saudi Arabia Six Cities plan, where it’s been a part of building a lot of greenfield networks in partnership with local operators.”

At a carrier level, AT&T is attempting something similar with Energy City Qatar, believes Molony: “It’s a joint venture where AT&T provides a lot of expertise and professional services to help local service providers, or sponsoring industry partners, to develop and integrate communications infrastructure,” he says. “AT&T is now going to extend this shared, almost virtual model to Mumbai, and one imagines it will be looking then at something similar in a big market like Saudi Arabia.”

A virtualised approach to market entry gets around the regulatory and licensing restrictions that can be a major inhibitor, says Molony: “It fits the trend that these global operators are going for in any case, for example with hosted applications managed on their own networks. By controlling things centrally and by not establishing a full-time presence on the ground, they can standardise, save cost and de-risk.”

ASP model

Gurkan Ozturk is vice president for global sales and marketing with Verscom Solutions which provides infrastructure solutions and outsourcing of network development for Middle East operators. His customers like working with an ASP model: “US companies in particular are not keen on spending money on the Middle East,” he says. “They see it as risky, culturally different and expensive to approach direct.”

To serve these and others with similar reservations about direct involvement it is Versom’s policy to look for markets where there has been deregulation, and then enter, he says. “We’ve got local partnerships in Saudi Arabia, as you can’t do direct business there,” he says. “It’s a hugely important market not just because of its population but also because it’s got so much money. It had an $800 billion budget surplus last year which has to be spent somewhere.”

The business culture of Saudi Arabia is at least changing and becoming more acceptant of relationships with outsiders – although outsiders with a homegrown regional footprint are probably at an advantage. “We are in regular contact with all the licensed operators in KSA and pleased to progress business with them on many fronts,”

says Andrew Grenville, executive vice president of international and wholesale with alternative UAE operator Du. “Operators in KSA welcome the fact that we have brought competition to the UAE, and we welcome their market choices in their country.”

In a market that had barely developed at all until a few years ago, outside experience seems as necessary as ever. “The whole country is short of IP skills, which creates an ideal opportunity to provide managed services for businesses looking to reduce their IT headcount,” says Malaki. “The next stage is for broadband penetration to increase among SMEs. With the extension of broadband into new smaller businesses will come the opportunity to sell them managed services.”

With so much progress in so short a time, there’s good reason for future optimism for further developments in the Kingdom’s telecoms market, believes AT&T’s Gibson: “Mobile led the way, and the Gulf’s largest mobile operators now compete in a market where mobile subscribers more than doubled in the two years following liberalisation,” he says. “That development is now being replicated on the fixed side. The huge population, fast growing economy and relatively low penetration rates mean this market has very exciting potential.”

The Saudi economy – present and future

Although by no means an open and fully competitive proposition, the Saudi economy is performing well on its own terms, and indicators for its future look positive. “It is expected that the population of KSA will continue to grow over the next five years, pointing to favourable telecoms market conditions,” says Abdulrahman Bahanshal, marketing communication manager with STC’s wholesale business unit.

This growth outpaces the global average, he says: “Recent growth of 2.5% is versus a world rate of 1.21%,” he says. “And 50% of the population here is under the age of 20.”

Bahanshal points out too that an average national household size of 6.21 persons is relatively large. He says there has been much investment in next-generation technologies to meet the next wave of consumer demand: “We’ve seen the emergence of NGN technologies like high speed DSL, FTTx, Wimax, as well as other new NGN services such as IPTV and video on demand,” he says.

He believes corporate potential is also cause for optimism: “The enterprise segment is still underserved and is expected to grow, with most enterprise customers being from the services sector,” he predicts. Wider macro-economic indicators likewise appear favourable: “Despite the current global economic slowdown, KSA’s economy continues to experience good GDP and economic growth, and it is anticipated that this will continue to benefit growth in both the retail and wholesale telecoms market,” says Bahanshal.

As a subset of the economy, the telecoms sector in KSA is performing well, despite wider world economic conditions, says Sukhdev Singh, research director with AMRB, an analyst company with offices across the Middle East and north Africa: “All companies in the Saudi telecoms sector have been reporting reasonably high profits,” he says. “Saudi operator Mobily made a particularly handsome profit of 50% in its last quarter, and STC’s results were good too.”