The Saudi Telecommunication Industry is rated as the largest across the entire Middle East region. The estimated subscriber base in the year 2008 was estimated at about 42 million. The Middle East region is known for high population density as well as high population growth. This is the single most important factor which has caused a high expansion in the local economy. The authorities have also continuously supported the industry in a development, expanding and the recent privatizations. The role of the government has enhanced penetration of the services to very high levels. This paper analyzes the Saudi Telecommunication industry with more focus on the Saudi Arabia Telecommunication Company STC which is the largest player in the Middle East market and whose actions, inactions and performance directly determines the direction of the entire industry in the region (Country Profile: Saudi Arabia, par5-7).
The Saudi telecommunication market in the Middle East has been continually transformation within the last 10 years. Commitments made in the year 2005 as Saudi Arabia joined the World Trade Organization led to the privatization of the long dominant monopoly which was publicly owned. The market was also significantly liberalized. The market is dominated by mobile line subscriptions as opposed to the fixed line. The mobile lines take up over 90% of the entire market by the year 2008. Unlike the fixed lines, the mobile lines sector embraces diversity as well as extreme flexibility thus proving convenient for the population thus the high level of acceptance. This has offered adequate incentive for investment. The fixed lines have had very slow growth in the region. This is as a result of under investments. The situation is occasioned by the fact that the line is much less dynamic and confers minimal diversity to the people (Telecom Privatization and Learning’s in the Kingdom of Saudi Arabia, par8).
Over the past eight years, both the mobile line and fixed lines have registered increased penetration though the fixed line segment falls short of the expectations set out by the development plans (Saudi Arabia Telecommunication Industry, par3).
The sector is regulated by the Communication and Information Technology Commission (CITC) a body formed in the year 2001. The commission issues licenses to private operators, and is also mandated to regulate multimedia service providers, telephone as well as internet. The body works in parallel with the Ministry of Communications and Information (MCIT) to support growth as well as enforce regulations against abuse of powers due to market dominance. The MCIT develops the program policies and programs aimed at developing the sector (Saudi Arabian General Investment Authority, par8).
The two main licenses issued are the individual licenses and class licenses. Individual licenses are issued to those who wish to offer a single service such as mobile data service, fixed voice telephone, mobile telephony and any other related service. Class licenses are categorized into Type A and Type B. Type A licenses are issued to hose offering voice resale services nationally and internationally, VSAT (Very Small Aperture Terminal) as well as satellite and pay telephones. Type B applies to those offering value added network services as well as internet services providers.
The Saudi Telecommunication Company was founded in 1998 as the sole provider of fixed line provider, paging services, internet as well as wireless telephones in the region. The company remained a monopoly up to the year 2003 when the process of privatization began. It was changed to a joint stock company. With a paid up capital of SR 12 billion a value which was raised to SR 15 billion after which an initial public Offering was undertaken leading to a 30% offloading of the capital. 90 million shares were sold to the public at SR 170 per share. To date, Locals hold a 20% stake of the company while the other 10% is owned by the Pension Fund and the General Organization for social insurance. This privatization move set the way for the successive streak of innovations and expansion in the private sector for the entire telecommunication sector.
The sectors liberalization has been stepwise. Introduction of the GSM operations saw the CITC license new operators in the VSAT services as well as mobile and fixed services. This led to the entrance of Mobily and Zain. The introduced competition enhanced tariff reduction as well as a rise in the number of subscriptions in the region. The fixed line saw a company named Etihad Atheeb Telecom Company (Atheeb) enter to offer services such as Broad band and international Gateway. The company acquired 3.5 GHz frequency spectrum at SR 522.9 million and an additional SR 5 billion in the form of license fee relating to the fixed lines (M&A volumes in GCC to reach $25b in 2010, par8).
By the year 2006 inflow of foreign equity had risen to 49% and later 51% in the year 2007 and a peak of 60% recorded in the year 2008. This was in the joint stock fixed line company. Foreign ownership had risen to 51% by 2006 and 70% by 2008. In addition export of telephone services had been largely allowed though under certain conditions stipulated by the CITC. The end of year 2008 saw the culmination of the transition process towards the stipulations of the WTO.
For local companies operating in the mobile line market, the foreign ownership is a maximum of 70% as at the year 2007. VSAT licensees were limited to only five but the situation changed in the year 2006 when it was declared that the VSAT licenses would be unlimited both for local as well as international players.
As mentioned above, the Saudi Arabian market is the largest and fastest growing in the Middle East, in the year 2008 it was established that the market recoded 37% growth in the purchased total market value of telecom services. The total valuation was stated as SR59 billion. STC led the market as I controlled 80.8% of the market while Mobily controlled 18.4% and Zain 0.8%. The average consumption per subscriber was estimated as SR2390. Ironically, SR2390 is the per capita consumption which is significantly higher than consumption per subscriber. The implication is that subscriptions surpass the population numbers by over 15 million. This means that a large proportion of the population have access to more than one line. This is an indication of a fairly strong market demand.
For the period of one year ending in June 2009, the total turnover for the combination of STC, Mobily and Zain was a whooping SR72 billion. This was 22% higher than the previous year. These achievements were supported by the aggressive innovations and hence launch of new services to supplement the core services which increased avenues for which the companies could attract new revenues.
On the supply side 4.1 million lines were supplied by STC both fixed and mobile. The percentage of STC’s fixed lines held by households was 73% and the remainder was held by business entities. In the mobile telephony, the total capacity of the three players was 36 million lines in year 2008. This represented a growth of 26.7%. STC accounted for over 55% of the entire supply in the market, mobily supplied 38.9% and Zain about 5.6%.
The last twenty year has seen STC constantly increase its operations in the fixed line segment as a result of technological progress as well as population growth. Over his period, a 19.4% Compounded Aggregate Annual Growth Rate (CAGR) has been achieved which when compared to the population is about six times higher. Nevertheless, the last 8 years have seen a significant slowdown in the pace of growth occasioned mainly by the entry of mobile lines offering flexibility and dynamism and the inadequate investments by the company in the segment. Within this eight years period the CAGR recorded stood at 4.1% which as can be seen is significantly lower than the CAGR for the entire 20 year period.
According to the development plan for the year 2000-2005 the fixed line segment was expected to grow to approximately 5.78 million lines. The actual results fell short of these expectations as only 3.84 million lines were recorded by the close of year 2005. For the period between 2006 and 2008, only 260000 lines only reducing the shortfall rather than achieving new targets. Looking at the penetration rates the target was 33.6% however only 16.6% density was achieved by the end of year 2005. Despite the entrance of Atheeb, experts warn that it is unlikely that the target of achieving a density of 27% by 2010 will be achieved. They estimations show that only 16.8% penetration is likely to be achieved (Mergers and Acquisitions News, par6).
The entry of GSM technology occurred in the year 1994. Phenomenal growth from a subscription of a paltry 16000 offered by STC alone to 36 million in 2008 offered by the three providers has been witnessed. A 57% growth of CAGR for the market was registered for the ten year period between 1990 and 2000. Despite this growth, the last eight years have seen the CAGR falling to the current 50%. This is interpreted by experts to imply that the service is gradually approaching the maturity stage of product lifecycle. As competition set on, and demand rose, the market for mobile lines saw continued transformation. As Zain was being launched in the year 2007, the existing players, mobily and STC could be seen to engage more competitive strategies. STC committed over SR22.5 to expand regionally in a bid to try and catch up with big regional players such as Zain. Mobily on the other hand was into price cutting and the development of incentives to customers such as the ‘free roaming’ across 56 countries in a bid to counter the powers possessed by Zain with the ‘Zain One network’ advantage.
In the last three years both STC and Mobily have shifted competition into offering 3G services such as high speed internet, video streaming, conferencing and calling as well as multiplayer gaming. The CAGR of 124% has been recorded for the last 4 years up to 2007 for broadband services. In fact the years 2006 and 2007 saw a 10-fold rise in the CAGR (Saudi Arabian Telecom Industry, par7).
A relook at the density analysis shows that the rates have grown by over 100% within the last two decades. 8.5% was the ratio as at the year 1990 while by the end of year 2008, the rate had grown to about 16.5% for the fixed line. Despite this the performance in the fixed line segment is below the regions average. The main reasons are lack of adequate competition in the segment as well as the unwillingness of STC to invest heavily in the segment.
In the mobile line segment, the density stood at 144.8 lines for every 100 individuals. This can be compared to a figure of a paltry 6.8% recorded in the year 2000. Clearly this sector has achieved high growth in the backdrop of liberalization characterized by privatization as well as the introduction of competition. As a result, the total density as at 2008 stood at about 161.3 for every 100 people.
In the future, there are expectations that the fixed line segment will grow due to the prospects indicating that investment in segment is likely to increasing hence improving demand. There are expectations that three new operators will join the market especially in the provision of broadband services and will invest in alternative infrastructure effectively bypassing the STC’s facilities. Batelco, a company from Bahrain in conjunction with Atheeb are set to invest a billion dollars in new technology called WiMax, Pacific Century CyberWorks (PCCW) from Hong Kong will develop fixed-wireless networks. In addition, Verizon from the US wishes to establish a relationship with STC to offer fixed-wireless services.
As the Saudi Arabian Kingdom embraces the concept of e-government, demand for more complex IT services is on the rise. It should however be noted that most of the projects outlined above are in their initial stages meaning that there is still more time required to establish the performance of the industry in the future.
Consequently, the most visible strengths of the industry are several. First, the rate of growth of the fixed line was about 6.6% which is triple the growth rate f the population for the period between 1990 and 2008. The implication is that the growth of the sector is not limited by the rate at which population grows. Looking at the 4.1 million fixed lines and the fact that 73% are subscribed by household while businesses hold 27%, it is clear that there are growth avenues especially in the business sector which in normal circumstances is considered to have the greater potential. In addition, demographics indicate a rise in population but a decline in the size of the family. This means that the future is expected to record constantly increased demand telecommunication services. It is also expected that by the year 2020, the business community will be expected to swell to above 1.3 billion. The indication is that, demand for telecommunication technology and other related services are expected is expected to be on the rise. The estimated needs for the period up to 2020 in the fixed line sector is expected to be in the range of 5.9 million (Saudi Telecom Co. par5). Also, it is clear that a slight increase in population is bound to generate an even higher demand. This is due to the fact that about 45% of mobile line holders have more than one card. Even more important is the fact that an estimated 60% of mobile phone users are in the prepaid rather than the post paid category. The implication is that the high uptake of prepayment avails better financial stability strengthening cash flows as well as balance sheets for the providers (More M&A in Saudi telecom sector seen, par5).
There are several clear opportunities in several areas of the sector. First, the regulatory framework is highly improved mainly because the percentage of equity allowed for foreign investors is 70% for mobile phones and 60% for fixed lines. This means that foreigners are at greater advantage and can effectively invest in the country. There are also plans by the authorities to ensure that ISPs cut their prices to enhance the development of IT growth centers across the country.
The most visible weaknesses in the industry are several. First, despite the introduction of competition, the industry still relies heavily on the ADSL network provided by STC. Again, the registered number of active mobile lines is 36 million a figure which is 11 million higher than the entire population. In addition, there are ongoing price wars in the industry and it is clear that the effect on revenues and profitability of the firms can already be observed. On the other hand the sector relies heavily on expert labor which is in short supply in Saudi. Hiring expatriates from outside the country is a much more expensive undertaking for new entrants (Telecommunications Report Saudi Arabia, par5).
There are also several threats in the industry. The most important is the explosion in growth of the mobile phones. This is posing serious risk to the growth of the fixed line segment and actually has the potential to stagnate the segment. More and more people choose the mobile lines due to the flexibility and if the rates are as low as those in the fixed sector then the segment is likely to even shrink rather than expand. Thirdly, the price wars are likely to pose serious threat to the operators in the long run as margins are poised to continually shrink a factor which could reduce return on investment in the sector putting off investors. Again, Saudi Arabia has a high unemployment rate especially among the youth who are the most important people in the uptake of the services in the mobile line segment. This poses a challenge to the growth rate of demand for the industry which is supposed to support future expansions.
In the year 2009 and 2010, STC has recorded significant growth in line with the industrial trend. Operating revenues rose from SR47.5 billion to SR 50 billion. Net income levels however dropped from SR11 billion to 10 billion following a rise in operational costs (Global Finance, par3). Consequently, the earnings per share on Net Incomes fell from SR5.52 to SR5.43 (STC. Consolidated Financial Statements for the Year Ended December 31, 2009, p2-4).
The company has engaged in several mergers, acquisitions as well as joint ventures over its entire lifetime. Over the past ten years, the company has witnessed at least one acquisition and about 3 stakes in bid to expand its operations. The most important factor which bestows immense powers on the company is the fact that it is publicly funded meaning that access to funds is much easier in comparison to other private players (Research and Markets, par5).
In the year 2000, the company acquired Flag Telecom Holdings Ltd owned by a company called Reliance Communications. Flag Telecom operated an underwater cable system (Mena telecom merger and acquisitions to reach $30bn in 2010, par9). The aim of this acquisition was to acquire infrastructure to facilitate international connectivity in telephone as well as internet services. In the year 2002 the government made a decision to divest from the company allowing foreign investors to acquire a size4able stake at the company’s equity (Saudi Telecom Company, par 2).
Again, in the year 2007, the company acquired a significant stake in AwalNet. The company was an existing internet provider in Saudi Arabia (More M&A in Saudi telecom sector seen, par7). This acquisition gave STC an avenue to diversify products a factor which not only helps in improving the future ability of the company to generate revenues but also reducing its vulnerability to business risks. Later in the same year the company acquired a minority interest in a Malaysian company called Binariang GSM Sdn Bhd (Telecom Investment Opportunities in the MENA Region Multiple, par5). This company was an investment holding company based in Malaysia with major investments in the telecommunication industry. The intention in making this decision was to tap into the regional market in a bid to expand into new markets and improve market presence hence gaining competitiveness against other giants such as Zain in the region who according to the management posed potential threat to the company in the context of regional dominance (MENA Mergers & Acquisitions Activity, par4-5).
In the year 2008 the company acquired a minority stake in Oger Telecom a company based in Dubai and offering telecommunication services. The action led to improved indirect expansion in to the Middle Eastern region in line with the company’s goals (John, par7).
It is the view this writer that investing in the telecommunications in Saudi Arabia may not be a good decision for an investor. This verdict is based on several considered observations. First, it is clear that the giants of the Middle Eastern region are already in the market. They not only have the requisite experience in telecommunications, but also better understand the needs of the region. This puts them at an advantageous position to not only develop better products for the country but also take advantage of the cross-border communications which offer substantial edge. In addition, the players already are recognized leaders in the development of new services and products. Secondly, it is clear that most of the products have reached the maturity stage in the product lifecycle. The implication of this is that the future growth is much less as compared to the past. This means that new entrants would face a stiffer scramble for the market share. The competitors already in the market are financially strong and could easily out price new entrants in a bid to protect their markets. In fact, the only viable investment would have to be in the introduction of more complex products with the ability to introduce new useful concepts rather than the traditional areas (Saudi Arabia Major Business Sectors, par9).
In conclusion, the recent years have seen tremendous growth in the telecommunication sector in Saudi Arabia. STC has maintained the lead by ensuring that they are pioneers in the introduction of new telecommunications technologies and products. It is clear that in the near future the company is likely to continue in the lead and despite the liberalization processes.
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