Rising demand for mobile data in Oman driving telecoms investment infrastructure

With two well established full-network operators complemented by a range of dynamic “reseller” players, Oman’s telecommunications market is lively and competitive. Growing market maturity has led to operators looking to boost take up of mobile internet and value-added services (VAS) in order to drive revenues, while targeting niches with innovative offers. Capital investments in recent years have prepared networks for rising data volumes and an increasingly demanding customer base looking for higher speeds. The sultanate’s demand for mobile data is now growing as fast as anywhere in the region but, even so, there is still substantial scope for growth.

Mobile Market

Oman has five mobile operators catering to its population of around 4m. The market leader is Omantel, part of Oman Telecommunications Company, in which the government has a 70% stake. It is closely followed by the Omani Qatari Telecommunications Company, once known as Nawras, and later rebranded to Ooredoo (which means “I want” in Arabic) in October 2014. Ooredoo Oman is owned by Qatar-based Ooredoo, previously known as QT el. The Omani subsidiary was renamed “to reflect the global strength of the group”, which reportedly has over 100m customers worldwide.

These firms operate their own networks, which are also used by three mobile virtual network operators (MVNOs). They are Friendi, launched in 2009 and part of Virgin Mobile Middle East and Africa; Renna, part of Oman’s Majan Telecommunications LLC and also launched in 2009; and TeO, short for Integrated Telecommunications Oman, formerly named Samatel.

The virtual operators on the market have lower capital expenditure pressures than the conventional GSM companies in the sultanate, but are required to depend on the latter for spectrum. This means that these operators tend to have lower profit margins.

Greg Young, CEO of Ooredoo, told OBG that it is difficult to determine the proportion of virtual operators’ lines that are active and the extent to which they are applying the policy of cancelling subscriptions that are inactive for six months or more. Research suggests that network usage by subscribers to reseller operators is currently below average, indicating that there is a possibility that SIMs are being used as second or even third SIMs in order to take advantage of specific services.

Subscriptions Still Rising

Oman had 6.4m mobile subscribers as of the second quarter Q2 of 2015, the last period for which figures were available, according to the sultanate’s Telecoms Regulatory Authority (TRA). This figure, which represents penetration of 154.05%, points to widespread ownership of multiple SIMs. As is the case elsewhere in the world, some Omani subscribers possess two or more SIMs, using them to switch between networks and therefore take advantage of lower network tariffs and special offers. Subscriber numbers have grown notably from 5.9m in Q2 2014, when penetration stood at 149%. The market is thus fairly saturated, with overall subscriber growth likely to be driven in the main by population growth and existing subscribers taking out contracts on additional networks.

Pre-paid subscriptions dominate the market, with a total of 5.8m, compared to 556,959 post-paid (contract) subscribers, up from 5.4m and 510,268, respectively, in Q2 2014, according to the TRA. Of the number of pre-paid subscriptions, 5m were with the main mobile operators, and 824,063 with virtual operators, with the latter category growing swiftly, at 10.8% quarter-on-quarter in Q2 2015 alone.

Omantel had a 45% market share as of the second quarter of 2015, down slightly from 48.2% a year earlier, while Ooredoo’s share stood at 42% in Q2 2015, up from 40.8% at the same time in 2014, according to the TRA. The MVNOs have gained market share, meanwhile, with a 13% portion in the second quarter of 2015, up from 11% the previous year.

Despite the competitive nature of the market (some considerably more populous countries have fewer operators), the TRA reports that average revenue per user (ARPU) rose in the year prior to Q2 2015, reaching OR7.68 ($19.88) a month, up from OR7.42 ($19.21). However, the upward trend in ARPU is not shared by all operators – Ooredoo saw its ARPU fall in the second quarter of 2015, as voice revenues slid.

Competition is driving operators to innovate to differentiate their product offerings and stay ahead of the pack with attractive pricing packages. “The dynamics of the sector are changing rapidly toward heavy market segmentation, and operators must realign to service the wide spectrum of users,” Talal Said Marhoon Al Mamari, CEO of Omantel, told OBG.

In Q2 2015 alone, the TRA received and approved three tariff plans for revision, two new tariff plans and 53 promotional tariff offers. “Telecoms operators should not underestimate the customer’s requirements and sophistication,” Said Abdullah Mandhari, CEO of Oman Broadband Company, told OBG. “They will need to switch to a customer-centric approach and get creative with the services offered.”

Traffic

A total of 7.9bn minutes of outgoing calls from mobiles were made in the 12 months leading up to end-June 2015, according to the TRA. Of all outgoing mobile calls in Q2 2015, 78.7% were on-network, 19.8% off-network and 1.5% to fixed lines. Some 254m SMS messages were sent, down from 374m in Q2 2014, and 678,000 MMS (multimedia messaging service) messages were sent, less than half the 1.4m sent in the same quarter of the previous year.

A total of 223m minutes of outgoing mobile calls were made to international numbers in the second quarter alone, a substantial amount. This indicates the importance of international traffic to Omani operators. Around 45% of the sultanate’s population is expatriate, as reported by the National Centre for Statistics and Information (NCSI), and ties with international business are growing. Overall, including fixed-line connections, 231m minutes of outgoing calls to international numbers were registered, up from 220.5m in the same quarter of the previous year. International incoming calls, meanwhile, clocked up 71.2m minutes, down from 84.3m in Q2 2014.

Mobile Data

As in other overseas markets, Oman’s telecoms companies are looking to boost revenue streams in the long term by developing the mobile data segment, including the expansion of VAS. The population of Oman has grown more than 8% per year over the past four years, according to the World Bank, and the NCSI forecasts further growth of 2.4m by 2040. This upwards trend, coupled with a burgeoning tourism sector, potential increases in the short-term expatriate workforce as major projects roll out and the potential of winning subscribers from other networks all provide opportunities for voice subscriber growth, the main focus of which will be data.

As of Q2 2015, Oman had a total of 3.1m active mobile data subscribers, according to the TRA, representing a penetration rate of 74.21%. Active data subscriptions grew significantly over the previous 12 months, from 2.7m (66.98% penetration). Of data subscribers, 2.1m were defined as “dedicated” and 975,500 as “standard”. Data subscription numbers can exaggerate the number of truly active subscribers – some subscribers have the means to use data, but choose not to, or use it very rarely. The scope for improving growth is thus substantial.

According to Young, the sultanate has the fastest growing smartphone market of all the GCC member states. Currently, 68% of Ooredoo’s subscribers have a smart device, meaning that there is scope for the company to grow its data customers by nearly 50% even without subscription growth, and before factoring in increasing data volumes among existing data customers. It is clear, therefore, that there is a lot of room for the data market to expand.

Growing Benefits

Data consumption in Egypt will be driven by both accessibility and demand, as it is in other regional countries. Cheaper smartphone handsets will make mobile internet available to a wider range of the population, as currently some of the less affluent are priced out. Moreover, the growing availability of online content and apps in Arabic that are tailored for the local market is likely to draw more subscribers to mobile internet usage. For some years such content was somewhat limited, giving little incentive for those not fluent in other languages to get online. Now, however, information, services and products are all available online and are quickly proliferating across the Arab world.

The increase in mobile data penetration does not only affect telecoms companies and consumers; it can also impact the broader economy. Research by professional services firm Deloitte and the GSM Association, an international grouping of mobile operators and related companies, suggests that a 10% increase in mobile penetration could boost productivity by 4.2%. Sectors such as media, transport and retail are obvious beneficiaries, as mobile access brings them closer to their clients, but the technology can also impact a range of other industries positively.

Fixed-Line

Unlike many parts of the world, Oman’s fixed-line telecoms segment is growing, partly thanks to innovations by operators. As of Q2 2015, Oman had 402,699 fixed-line telephone subscribers, according to the NTA, up from 362,003 a year before. Household penetration stood at 100.1% and individual penetration, that is, the number of subscriptions divided by the number of individual residents, was at 9.6%, up from 9.2% in the previous year.

Post-paid subscriptions predominate, with 305,245 all told, but the strongest growth has been in pre-paid fixed-line, which expanded by a substantial 20.1% in the first quarter of 2015 alone to reach 42,960.

Other fixed-line subscriptions in Q2 2015 constituted Integrated Services for Digital Network equivalent channels, using traditional telephone lines at 45,930 subscriptions (showing no growth over the year), wireless in local loop connections at 1763 (down 1.18%) and public telephones at 6801 (also showing no growth). Of all fixed-line connections, 67% were residential (a segment that grew by 7% in the quarter) and 33% business (up 1.3%). Fixed line ARPU fell, thanks perhaps to rising competition from pre-pay services, and the rise in subscriptions not being offset by rising overall call volumes. Fixed connections generated OR5.68 ($14.70), down from OR6.98 ($18.07) a year before.

Of all outgoing fixed-line traffic, 65.9% went to mobile networks, 24.5% to on-network fixed-line, and 9.6% to off-network fixed-line numbers in Q2 2015.

Omantel

For the financial year 2014, Omantel announced revenue of OR481.2m ($1.245bn), up 4% from OR462.9m ($1.198bn) in 2013. The company said that growth was led by domestic retail revenues, which rose 4.3% to OR392.6m ($1bn), with fixed and mobile broadband and corporate data services rising particularly strongly. Revenue from national and international calls and SMS fell, however, thanks partly to increasing usage of over-the-top services (including the virtual operators). Operating expenses rose 2.8% from 2013 to OR350.8m ($908.2m), with net profit reaching OR122.4m ($316.9m), up 2.6% from OR119.3m ($308.9m) in 2013. Call revenues decreased despite subscriber numbers growing by around 3.3m. Al Mamari told OBG that the company saw record growth of fixed broadband services, “despite unfavourable market conditions and more competition from the virtual network players”.

Ooredoo

The company’s total subscriber base grew 11.4% during the first half of 2015, despite dropping 2.8% of its fixed-line subscribers, a loss the company based on a transition to new technology for home broadband that it says will help improve service. In the mobile segment, post-paid customers grew 6.0% to 202,026, while pre-paid subscribers rose 12.2% to 2.5m, up from 2.2m a year before.

Ooredoo’s revenues grew by 12.6% in the first half of 2015 to OR121.9m ($315.6m), up from OR108.3m ($280.4m) in the first half of 2014, according to Young. This led earnings before interest, tax, depreciation and amortisation (EBITDA) to grow to OR68.4m, ($177.1m) up from OR57.5m ($148.9m) in the first half of 2014. Net profit grew to OR22.2m ($57.5m) from OR18.7m ($48.4m) in the same period of 2014, driven by higher EBITDA, but was somewhat eroded by the higher cost of depreciation due to investments made in modernising the network.

Capital Investment

Ooredoo’s ongoing modernisation programme, which began in 2012, entails increasing 3G+ capacity, offering double speeds and wider coverage, as well as launching 4G services with a new network footprint to ensure the operator can keep pace with growing demand and data traffic.

Under the initiative, in May 2014 Ooredoo undertook the “turbocharging” of several of Oman’s largest cities through the launch of a third 3.5G data carrier on the 900-MHz frequency, therefore significantly increasing internet speeds for video streaming and downloads and increasing coverage inside buildings.

Partly funded by finance and refinancing deals totalling OR90m ($223.1m) from banks, including HSBC Oman, Qatar National Bank Oman and DBS Bank, the programme also involves a capital investment-to-revenue ratio of over 30%, according to Young, more than twice global industry norms. At the end of June 2015, the company had invested OR97m ($251.1m) in the scheme, now nearing its conclusion.

Ooredoo currently has 98.77% population coverage in total, 28.15% 4G coverage and 89.83% 3G+ coverage, while its home broadband reach is 85.61% of the population. It operates 1371 3G sites, 1213 of which are “turbocharged” with a second 3G carrier at 2100 MHz and 1178 of which are turbocharged with a third carrier at 900 MHz. In all, it has 1778 physical base-station sites and 4868 km of backbone fibre optic cable. The ongoing expansion of the company’s fibre network should help contain the cost of leasing lines. Line leases and equipment sharing savings are expected to partly offset rising maintenance costs from the company’s expanding network.

Third Licence

In March 2015 TeO announced plans to relaunch its MVNO services whilst applying for a full-service licence. The full-service “class one” licence would allow TeO to compete with Omantel and Ooredoo Oman as network operators. TeO is looking to establish a direct fibre broadband network in response to perceived demand amongst households for faster connection of 10 Mbps to 100 Mbps.

The launch of a third full-service operator would likely increase competition on the Omani market, while the company’s plans to deliver a fibre broadband network suggest that it might target higher-end customers. While Omantel and Ooredoo both occupy strong market positions with brand recognition, existing networks and international connectivity, the continued strong demand for broadband and bundled services suggests that there could be some space in the market for a third full-licence operator.

Tax Issues

In November 2014 the Shura Council, which advises the government, proposed levying a 12% royalty on telecoms companies’ revenues. The proposal came at a time when the government is looking at ways to cover the sultanate’s budget deficit at a time of lower oil prices and broaden its revenue base to reduce reliance on oil earnings.

The proposed tax has already garnered opposition from the telecoms industry. Speaking to the press in September 2015, Young warned that the levy could cause operators to trim future investment, constituting “a direct hit to our profitability”. Reiterating the direct link between profitability and investment, he suggested it would be fairer to levy taxes across sectors, rather than just on telecoms, noting that Ooredoo and Omantel already pay 7% of their gross revenue and 12% of profits in tax. The proposed levy echoes moves in other countries such as Hungary, where telecoms companies, seen as particularly profitable and less vulnerable to the effects of economic downturn, have been targeted for extra taxes.

Network Quality

The TRA is active in monitoring the quality of connections that telecoms companies provide, publishing company performance figures in its guidelines to ensure market transparency. This is particularly significant at a time when operators are working to improve service quality to win over subscribers in what is a near-saturated market.

The key performance indicators (KPI) set for mobile operators include less than 0.8% of calls dropped and less than 1.1% of calls blocked due to network congestion. In the second quarter of 2015 Omantel reported 0.46% of calls dropped and 0.56% of calls blocked due to congestion, with the respective proportions for Ooredoo being 0.46% and 0.04%. In the same period a year earlier, Omantel reported 0.50% of calls dropped and 0.81% blocked, while Ooredoo, meanwhile, reached 0.64% and 0.01%.

In regards to fixed line, the TRA sets a KPI of less than 1% of calls unsuccessful, and fewer than three faulty lines for every 100 people, per quarter. In Q2 2015 Omantel achieved 0.39% and 2.22, respectively, and Ooredoo attained 0.07% and three.

Outlook

While Oman’s population and economic growth should sustain voice traffic volumes for some time to come, it is clear that the future of the market lies in increasing mobile data usage. Mobile data penetration is still moderate for a country defined by the World Bank as “high income”. Therefore, opportunities should arise to increase both subscriber numbers and the volumes used by existing subscribers. Moreover, the growth and variety of online content available in Arabic and other languages spoken in Oman, combined with falling prices of smartphones, mean that access is improving and demand is rising.

Sector players that have made necessary investments in infrastructure capacity should be well placed to continue to grow data volumes, while smaller MVNOs will be able to focus on the growing number of niches in what is becoming an increasingly diversified, competitive and segmented market.

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The Report: Oman 2016

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