High mobile uptake, leading smartphone penetration, and rapid expansion of wireless broadband and fibre-optic infrastructure have driven the UAE to the forefront of regional telecoms development. Although mobile tariffs are comparatively high and international volatility has affected operator profits, a recent series of consumer-friendly reforms should help control consumer charges while supporting growth. The Telecommunications Regulatory Authority (TRA) has rolled out several consumer-friendly changes aimed at boosting competition, with a long-awaited infrastructure-sharing deal between the two mobile operators making significant progress in 2016. The resulting reduction in capital expenditure will enable both operators – Etisalat and du – to focus their attention on deployment of next-generation internet services, helping Abu Dhabi and the wider UAE maintain a competitive advantage.
Telecoms Authority
The TRA was established as the industry watchdog under Decree No. 3 of 2003, also known as the Telecom Law. The authority manages the telecoms industries at the national level. Its responsibilities include ensuring adequate nationwide service delivery, compliance with licence terms, encouraging ICT uptake, resolving disputes between licensed operators, the creation and implementation of a policy framework for the industry, promotion of new technologies to transform the UAE into a regional ICT centre, and supporting human capital and research and development. While the federal Ministry of Finance (MoF) determines royalty rates paid by the nation’s two telecoms operators and manages royalty collection, the TRA oversees spectrum allocation and infrastructure-sharing arrangements. The authority also plays a role in reviewing mobile tariffs to ensure competitive prices and is required to assess all requests from UAE licensees to adjust retail prices. Additionally, in 2013 the TRA moved to further increase competition by rolling out mobile number portability, allowing users to switch providers without changing phone numbers.
Operators
The UAE’s telecoms market is primarily controlled by two firms: Etisalat – the country’s former state incumbent and leading telecoms operator, with its headquarters in Abu Dhabi; and its competitor, the Dubai-based Emirates Integrated Telecommunications Company, which was commercially branded as du in 2006. Other TRA licensees include Intaj’s broadcast satellite transmission, public access mobile radio Nedaa, satellite mobile communication Thuraya, and satellite services firms Inmarsat, Alyah Advanced Satellite Communication Services and Al Yah Satellite Communications Company (Yahsat).
Established in 1976, Etisalat is the largest telecoms operator in the UAE and one of the largest corporations in the GCC, with operations in 15 countries across the Middle East, Asia and Africa. The company reported 162m subscribers globally in the third quarter of 2016, compared to 170m for the same period in 2015, after it sold its 92.3% stake in Sudanese operator Canar in June 2016. Etisalat had 12.2m active subscribers in the UAE in October 2016. The federal government holds a 60% stake in Etisalat, and 40% of the firm is publicly traded on the Abu Dhabi Securities Exchange (ADX). du is also partially privatised, with 20% of the company listed on the Dubai Financial Market and the rest split between the Emirates Investment Authority (39.5%), Mubadala Investment Company (21%) and Emirates International Communications (19.5%), which is a subsidiary of Dubai Holding.
Etisalat offers the widest 3G and 4G coverage in the UAE and has established an extensive fibre-to-the-home network (FTTH), covering 86.4% of the country’s population and offering network speeds of up to 500 Mbps, making the UAE one of the most fibre-connected nations on earth. In May 2016 local media reported that Etisalat, in cooperation with China’s Huawei, had been testing FTTH services using new 10-Gbps passive optical network technology. In August that year data and IT research firm Telegeography reported that du had deployed a 20-Gbps-capable FTTH broadband service, also in partnership with Huawei. Early adoption of FTTH and next-generation broadband services has been a critical factor in Etisalat’s success: the UAE is home to a digitally literate population, mobile penetration is well over 200% and the country has one of the world’s highest smartphone penetration rates at around 70%.
Telecoms Uptake
The UAE’s telecoms sector has recorded strong growth in recent years. TRA data shows that the number of fixed lines rose from 1.83m in 2011 to 2.09m in 2013, 2.26m in 2015 and 2.29m as of end-2016, for a penetration rate of 26.4%. This is in sharp contrast to many markets where fixed-line services have been in consistent decline since the advent of mobile phones, with a growing prevalence of bundled service packages including broadband and landlines credited for this reserved trend. Active mobile subscriptions have grown far more rapidly in the UAE as well, however, jumping from 11.73m in 2011 to 13.78m in 2012, 16.06m in 2013, 17.94m in 2015 and 19.91m in December 2016, according to the TRA. This puts the UAE’s mobile penetration rate at 229.8%. Pre-paid subscriptions accounted for 16.76m, or 84.2%, of the total.
In its “Statistical Yearbook of Abu Dhabi 2016”, Statistics Centre – Abu Dhabi (SCAD) reported that the IT and communications sector’s contribution to the emirate’s GDP at current prices fell from Dh19.34bn ($5.3bn) in 2011 to Dh18.74bn ($5.1bn) in 2012, although it rebounded in 2013 to Dh19.22bn ($5.2bn) and rose a further 11.7% to Dh21.46bn ($5.8bn) in 2014, the most recent year for which SCAD statistics are available.
Investment
Foreign investment has also been growing, particularly after moves to liberalise the sector, with a recent decision to open du shares to foreign investors making an impact. According to SCAD, total foreign investment in ICT in Abu Dhabi grew from Dh4.97bn ($1.4bn) in 2011 to Dh5.96bn ($1.6bn) in 2012 and Dh7.14bn ($1.9bn) in 2013. Investment soared in 2014, rising by 330% to reach Dh31.3bn ($8.5bn). Foreign direct investment in the sector has also been on the rise, increasing from just Dh17m ($4.6m) in 2011 to Dh154m ($41.9m) in 2012, before slipping to Dh145m ($39.5m) in 2013 and rising again to Dh151m ($41.1m) in 2014.
Although updated figures have not yet been published, foreign investment is projected to have grown in 2015, when Etisalat unveiled plans to open 20% of its stock to foreign ownership by the end of the year. Shares began trading in September 2015, offering an important boost to both its profits and the ADX, although investment remains somewhat constrained. Shortly after Etisalat shares began trading to international investors, index compiler MSCI announced it would add the firm to its Emerging Markets Index, paving the way for further such growth-supporting moves.
Digital Literacy
The UAE boasts one of the highest smartphone penetration rates globally. In August 2016 the TRA reported that 68.9% of handsets registered on the UAE’s networks were smartphones, a slightly more modest estimate than software and cloud-based services firm LogMeIn’s April 2016 estimate of 78%. Samsung was the most-used handset brand in the UAE during the first quarter of 2016, accounting for 33% of all registered handsets, followed by Nokia (28%), Apple (14%) and Blackberry (2%). According to the TRA, iPhone 6 is the most popular smartphone model, accounting for roughly 4.48% of total handsets in the UAE, followed by iPhone 5s (2.39%), Samsung J100/H/J1 (1.81%) and iPhone 6s (1.696%). Residents of the UAE are digitally engaged and avid users of social media, with the TRA reporting that smartphone and fixed-internet users made 24bn visits to social networking sites during the quarter, with Facebook accounting for 91% of the total, followed by Twitter, LinkedIn, MySpace and Yahoo-owned, Arabic-language email provider Maktoob.
Etisalat Recent Growth
According to Etisalat’s 2015 annual report, sales rose by 6.6% in 2015 to Dh51.72bn ($14.1bn), up from Dh48.51bn ($13.2bn) in 2014, and profits reached Dh8.3bn ($2.3bn) in 2015, a 4% annual contraction. Although it regained some traction in 2016, the company missed profit projections owing to low global oil prices weighing on the UAE economy. According to an Etisalat investment update from November 2016, the firm announced its global revenues rose by 2% year-on-year (y-o-y) during the first 11 months of 2016 to Dh39.4bn ($10.7bn). UAE revenue rose by 3% to Dh22.5bn ($6.1bn) in the same period, and net profits also saw a 7% spike, totalling Dh5.88bn ($1.6bn), due to higher finance income and lower royalty rates. The company also reported more than 19m mobile subscribers in the UAE by November 2016. Etisalat’s market share was 55.5% in the mobile segment and 83.9% in the fixed segment in November 2016. In October 2016 the company also reported that y-o-y profits would have risen by 16% if adjusted for the impact of the sale of its Sudanese subsidiary Canar.
4g Lte
Recognising consumer and market trends favouring mobile internet usage, Etisalat was an early adopter of 4G LTE services, moving in 2011 to roll out the country’s first, and now the region’s largest, 4G+ network, offering mobile broadband speeds of up to 300 Mbps and covering 93% of the population. In January 2015 the company announced it had spent Dh2.5bn ($680.7m) on 4G LTE networks and fibre-optic infrastructure in 2014, bringing its total spending in the five years up to 2015 to Dh21bn ($5.7bn). The company also added 2500 3G and 4G base stations to its network in 2014, bringing the total to 19,000, and planned to increase this number to 22,000 by the end of 2015. This would in turn bring 2G and 3G coverage to 99.5% of the population and 4G services to 90%.
Additionally, in the longer term Etisalat is also working to roll out 5G services across the UAE, in tandem with du. In October 2016 Etisalat announced it had successfully demonstrated 5G technology, offering peak download rates of up to 36 Gbps. The company is expecting to begin testing 5G in 2018, with commercial rollout scheduled for 2019.
Digital Development
Etisalat has avidly pursued new digitally driven revenue streams, completing work on its first network function virtualisation cloud network in July 2016. The company’s cloud infrastructure had been under development since 2013, when it adopted a network function virtualisation model and software-defined networking, technologies closely associated with smart cities, the internet of things (IoT) and 5G mobile broadband services. The new system is based on the open-source OpenStack cloud platform, which is used by NASA, the European Organisation for Nuclear Research and leading global web companies.
The company has established a corporate-wide programme to “cloudify” the rest of its network, which has been dubbed Sahaab, the Arabic word for cloud. The programme seeks to harmonise traditionally hardware-centric telecoms services with software-centric cloud services, further supporting development of a competitive, digital economy under the mandate of UAE Vision 2021 – the national-level strategic framework developed by over 300 officials from 90 federal and local entities. This comprehensive document aims to move the UAE’s economy from its oil-dependent beginnings to one that is knowledge-based. In October 2016 Etisalat announced it plans to boost and diversify revenues by offering digital transformation services for its UAE clients through a newly created Etisalat Digital business unit, reporting it expects the market for such services to be worth Dh50bn ($13.6bn) over the next five to seven years – in line with other analyst forecasts projecting strong growth in the software and managed services IT segments (see IT overview).
International Challenges
Etisalat’s international network coverage extends to over 200 countries, and it has launched operations in 17 markets across the Middle East, Africa and Asia. In continues to expand its presence and service offerings internationally, announcing in October 2016 that its Egyptian subsidiary, Etisalat Misr, had acquired a 15-year, 4G licence from Egypt’s National Telecommunications Regulatory Authority for $535.5m. It has struggled in other markets, however, finalising the sale of its 92.3% stake in its Sudanese unit, Canar Telecom, in August 2016. The Dh349.6m ($95.2m) deal with the Bank of Khartoum came after reports of sluggish economic growth and currency volatility in Sudan, which had affected revenues. Etisalat first acquired a stake in Canar in 2004, and doubled its holding in 2007 for a total investment of Dh584m ($159m).
Infrastructure Sharing
In early 2015 du announced that it had reached a long-awaited fixed-network, dual-infrastructure agreement for new developments in greenfield areas with Etisalat. They will share the costs of installing fixed telecoms infrastructure in new developments, meaning both companies will be able to reduce capital expenditure through long-awaited infrastructure sharing, rather than constructing two separate networks. This will also break the monopolies held by each in their respective markets, giving consumers a choice between network operators for fixed-line and broadband services. Previously, du had been restricted to new development areas and free zones in Dubai, while Etisalat had served the rest of the UAE market. The operators first began plans for infrastructure sharing in 2009, launching a trial bitstream service agreement in July 2011 followed by a commercial launch in 2014. In 2016 du reported that infrastructure sharing for fixed networks could reduce roll-out costs by up to 60%, in a move that could bode well for consumers squeezed by comparatively high telecoms tariffs. In 2016 the UAE licensees entered into a UAE-wide passive infrastructure-sharing agreement.
High Tariffs
Although service quality remains strong in the UAE, telecoms consumers have often argued that tariffs for broadband, mobile long distance and other services are too high. According to SCAD figures, tariffs for Abu Dhabi’s consumer fixed broadband and business fixed-broadband services did not change between 2012 and 2015, and monthly prices for the services were set at Dh149 ($40.57) and Dh775 ($211), respectively. Businesses in the UAE have long found telecoms and internet tariffs to be too high, and a 2011 TRA review found that a total of 46% of companies surveyed were dissatisfied with the cost of international calls made from mobile phones, compared to 37% who were satisfied with the fees. The World Trade Organisation attributes high tariffs in the UAE to limited competition under the market’s duopoly, although rising royalty rates have also pushed tariffs up.
In January 2015 local media reported that the UAE ranked 30th out of 37 countries worldwide for pre-paid and post-paid mobile broadband prices, according to an International Telecommunication Union survey for that year. The study was based on affordability and a comparison of package prices and GNI for each country. In the UAE monthly pre-paid data packages at the low end, 1 GB, were around Dh100 ($27.23) and Dh449-500 ($122-136) for 20-25 GB. Regionally, the disparity was clear, as in Saudi Arabia 1 GB averaged $20.96 and unlimited cost $93.39, while in Qatar 1.5 GB was only $6.81 and unlimited was $27.59. However, regulators are addressing this issue. A 2017 TRA survey revealed that satisfaction with tariffs for international calls via mobile phone had risen to 58%, while satisfaction with fixedline tariffs for international calls had grown to 62%.
Royalty Changes
Etisalat had been the sole telecoms operator in the UAE until du entered the market in 2005, and the two companies’ royalty regimes have reflected du’s growth prerogative. Until 2012 du’s royalty charges were set at 5% of revenues and 17.5% of profits, while Etisalat paid 15% of revenues and 30% of profits. In 2012 the UAE’s MoF launched a new five-year timetable for du’s royalty rates, running until 2016, gradually increasing the firm’s royalties to bring them on par with Etisalat. Rates rose to 7.5% of royalties and 20% of profits in 2013, 10% and 25%, respectively, in 2014, and 12.5% and 30%, respectively, in 2015. This weighed on du’s growth in 2015, with the company reporting a modest 0.8% increase in turnover to Dh12.34bn ($3.4bn), while profits fell by 8.1% due to 20.6% growth in royalty fees. Both operators paid 15% of their regulated revenues, excluding handset sales, as well as 30% of their regulated profit in royalties in 2016. In February 2017 the MoF confirmed that royalty rates would remain unchanged until 2021 for both operators.
Roaming Rates
In April 2016 the TRA announced new consumer-friendly reforms, implementing new price caps for intra-GCC roaming services for Etisalat and du, following the promulgation of TRA Directive No. 4 of 2015. This offers significant benefits to consumers who travel throughout the region, with the TRA stating international roaming prices for UAE customers would fall by an average of 42% beginning in April 2016, when the policy was officially implemented.
The new regulations were unveiled after the most recent meeting of the GCC Ministerial Committee for Post, Communications and Information Technology, which had already implemented the first phase of its roaming working group recommendations in 2012, setting a maximum cap on wholesale and retail mobile tariffs. The second phase of the recommendations, which were approved back in 2015, involves setting price caps for calls made to other GCC members, calls made within the visited GCC country, as well as voice, SMS and mobile data services.
Fair competition initiatives received perhaps their most recent significant boost in March 2016, when local media reported that the Federal National Council passed a draft bill proposing the creation of a new IT and telecoms policy council that will be responsible for regulating and maintaining fair competition in the ICT market. The proposed new body will have a remit to strengthen competition in the electronic communications sector, which in turn should foster consumers’ freedom of choice, and lead to rate reductions and quality improvement across the sector.
Satellite
A key player that is having a major impact on the sector is Yahsat, which is fully owned by Mubadala Investment Company. Set up in 2007 to meet growing demand for satellite communication services, Yahsat launched its Y1A satellite in April 2011 and it is currently responsible for television and other commercial services in more than 64 countries. A second satellite, Y1B, was launched in 2012 and offers affordable satellite broadband services to 28 countries through the MENA region. The company’s third satellite, Al Yah 3, is set to launch by the end of 2017 and will extend broadband service to an additional 19 countries and 600m users in sub-Saharan Africa, as well as Brazil. “While the manufacturing of Al Yah 3 is being done elsewhere, increasingly we want to bring a local component, specifically in areas like non-critical components,” Masood Mahmood, CEO of Yahsat, told OBG. “Our first batch of the first multidisciplinary Space Systems academic programme graduated on May 17, 2017 and trained in all elements of manufacturing, so they could be employed not just in space, but any high-tech industry. Our new lab, the Yahsat Space Lab, will be dedicated to these students.”
The firm’s YahClick service already provides coverage to 28 countries in Africa, central and south-west Asia and the Middle East via its Ka Band technology, which make high-speed internet access affordable for both rural and urban communities. It also offers a broad range of applications, from education and business transactions to e-government services.
In August 2016 Yahsat signed an MoU with Panasonic to explore alternative methods of deploying broadband connectivity over the next five years, with the additional possibility of a Yahsat satellite constellation serving general mobility needs. “Satellite operators are increasingly moving away from terrestrial fibre networks, which themselves are getting cheaper and cheaper, and more towards mobile broadband for the maritime and aviation segments,” Mahmood told OBG. “Most players are currently positioning themselves.”
Outlook
Although a macroeconomic slowdown and government plans to introduce a value-added tax in 2018 could weigh on telecoms and handset revenues in the near term, the sector remains well positioned to continue a steady growth path, bolstered by sophisticated infrastructure and leading levels of mobile and smartphone penetration. Etisalat’s growth strategy should see it maintain its position as a market leader in 2017, while consumers will benefit from TRA reforms aimed at improving competition and containing telecoms costs, thus paving the way for sustainable growth.
