Subscriber numbers grow as Dubai's mobile operators invest in technology

Over the past decade and a half Dubai has become one of the Middle East’s leading telecoms markets. The emirate has two highly competitive mobile network operators (MNOs), advanced ICT infrastructure, high smartphone penetration rates and strong support from the government, which has put ICT at the centre of many of its development plans.

The telecoms sector has seen steady expansion in recent years, driven by government spending and demand for the newest mobile handsets and other devices among early adopters, who make up a large percentage of Dubai’s population. “Since 2014 the market in Dubai has boomed,” Maysoon Fahmi Jamal, CEO of software vendor and identity solutions provider GET Group Holdings, told OBG. “There is security here and that has created competition in all sorts of industries, from food and business to ICT.”

On The Line

That said, the industry faces challenges as well. The UAE’s mobile penetration rate was at 209.9% as of the end of 2015, according to data published by the Telecommunications Regulatory Authority (TRA), the federal-level sector regulator. Given this level of saturation, the market’s two MNOs – Emirates Integrated Telecommunications Company (du) and Emirates Telecommunications Corporation (Etisalat) – face declining subscriber growth in the coming years. Consequently, future competition in the domestic telecoms market is widely expected to take place primarily on the basis of quality of services and innovation, which have become key areas of focus for both operators in recent years.

Furthermore, in August 2015 du and Etisalat announced that they had agreed to implement a fixed-line infrastructure-sharing deal that has been in development for more than half a decade. Under the agreement, Etisalat will allow du to provide services on its fibre, and vice-versa. As of March 2016, the projected savings from the partnership was 60% of du’s capital expenditure on infrastructure. The deal has the potential to result in shifts to the operators’ customer base, benefitting subscribers but presenting technical challenges for the MNOs.

Recent Growth

The telecoms sector has performed well recently. In the second quarter of 2015, for example, the UAE’s telecoms market brought in Dh1.89bn ($514.5m), up 24% from the same period the previous year, according to German market research firm GfK. Much of this growth took place as a result of sales made during the April iteration of the 2015 Gulf Information Technology Exhibition, one of the largest technology conferences in the Middle East. In 2014 the number of active mobile subscriptions in the country increased by 4.6% over the course of the year, according to the most recent data from the TRA, while revenues from mobile services jumped 14.9% in the same period.

Backed by this growth at home, the two MNOs have made moves into a handful of international markets, in addition to attracting new business from corporate clients. “Dubai is an advanced market in terms of conventional services,” Matthew Reed, the Middle East and Africa regional research practice leader at Ovum, a London-based ICT research firm, told OBG. “Market saturation is a real issue, so the mobile operators are working to expand into new segments. The business sector is a key area of focus here.”

Given this emphasis on corporate services and the government’s ICT-focused development plans, the emirate’s telecoms sector is expected to benefit from continued demand. This is also anticipated to have downstream effects. Abdulqader Obaid Ali, CEO of Smartworld, told OBG, “Big companies in the UAE have strong ICT infrastructure and processes, thanks to targeted investments. Nonetheless, there is a need for enhanced maintenance and awareness, which offers opportunities for ICT services business.”

History

Etisalat, the UAE’s legacy operator, was founded in 1976 and nationalised in 1983, at which point the federal government took a 60% ownership stake, and the remaining 40% was held by local investors. Through the 1980s and 1990s the company had a monopoly on telecoms in the country, serving as both the sole operator and the market regulator. In addition to operating the fixed-line infrastructure, in 1994 Etisalat launched the first global system for a mobile communications network in the Middle East, followed a year later by the introduction of dial-up internet services – another regional first. By 2000 the UAE was home to more than 1m mobile telecoms subscribers, a small number of who subscribed to an early, low-bit-rate version of mobile data. Over the next half decade Etisalat grew rapidly, from 2m subscribers in 2002 to 3m in 2003 and 6.7m in 2007.

In 2003 the UAE’s government introduced Law No. 3, which laid out a new legislative framework for the telecoms sector and formed a new federal regulatory body, the TRA. The entity has a mandate to oversee, develop and promote all aspects of the nation’s telecoms industry. One of its first orders of business was to liberalise the mobile segment, which grew exponentially through the early and mid-2000s. In 2005 the TRA licensed du to offer telecoms services in the UAE, introducing competition to the market for the first time. Since then there has been talk of the TRA issuing additional operator licences, though at time of print the regulator had not done so.

Recent Changes

Over the past decade the TRA has continued to work to liberalise the market. In December 2013, for example, the regulator oversaw the introduction of mobile number portability (MNP), which enabled Etisalat subscribers to port their phone number to a new du contract and vice-versa. As in many other markets in the region that have enacted MNP in recent years, the results of the legislation were modest, with just over 9000 users per month switching operators over the course of 2014, for example. Regardless, MNP did prompt the operators to compete more directly on price, to the benefit of subscribers on both networks.

From 2012 to 2014 the TRA oversaw the “My Number, My Identity” campaign, under which all mobile subscribers were required to register their SIM cards with their national ID card. SIMs that were still unregistered by mid-January 2014 were cancelled. The campaign resulted in a drop in overall subscribers of about 1.16%. “The SIM registration programme resulted in some rejigging of the data for 2014,” said Reed. “On the upside, the result has been better information that more directly reflects reality.”

Sharing Deal Completed

In August 2015 the TRA oversaw the conclusion of five years of talks with du and Etisalat, which agreed to begin implementing fixed-line infrastructure sharing. Under the agreement, the two operators will open their respective fibre networks to calling, broadband internet and, by the end of 2016, internet protocol television (IPTV) services for the other’s subscribers. Given that Etisalat has substantially more fibre in place throughout the UAE than du, the latter is expected to benefit considerably from the deal.

“For the first year of implementation the operators have agreed to only share their networks for calling and broadband usage, which means they will not be able to offer triple-play,” Reed told OBG. “This will limit the impact of the initiative, at least at first. Beyond that, assuming they can sort out the technical issues, this could be a big deal.” Most market observers expect to see a drop in the price of broadband in the UAE, for example, which has the potential to cause an uptick in fixed-line internet subscribers.

Mobile Market

On a per capita basis, the UAE is one of the highest-volume telecoms markets in the world. As of the end of 2015 the country had 17.9m active mobile subscribers, up from 16.8m at the end of 2014 and 16.1m at the end of 2013, according to data from the TRA. The 2015 figure was equal to a mobile penetration rate of 209.9%, compared to 199.3% at the end of the previous year. Around 15.6% of the country’s mobile subscriptions are post-paid contracts, while the remaining 84.3% are pre-paid, though the former have been growing as compared to the latter in recent years – post-paid subscriptions made up just 12% of the market in 2011, for example.

As of the end of the third quarter of 2014, the latest available figures, Etisalat had 54% of the UAE’s total mobile subscriptions, while du held the remaining 46%, according to market research firm Global Investment House. While Etisalat provides services throughout the UAE, du has focused largely on Dubai since its establishment in the emirate a decade ago.

Both du and Etisalat have worked to bring new technology to the domestic market in recent years, in an effort to ensure that mobile revenues continue to grow for the foreseeable future. Most recently both have begun to install 4G long-term evolution-advanced (LTE-A) infrastructure, which has the potential to provide mobile data speeds that are two to three times faster than standard LTE (see analysis).

Fixed-Line Shift

The recently enacted fixed-line infrastructure-sharing agreement could result in expansion in the fixed-line market. As of the end of 2015 the UAE had 2.2m fixed-line subscribers, for a penetration rate of 25.8%, according to the TRA. While precise market share data is unavailable, in August 2015 Osman Sultan, du’s CEO, estimated the firm’s share of fixed-line revenues at around 15% of the total, with Etisalat controlling the remainder. Perhaps unsurprisingly, given the rise of mobile handsets over the past decade, fixed-line calling has declined significantly recently, from 3.8bn annual voice minutes in 2011 to 2.9bn in 2014.

Meanwhile, broadband internet is on the rise. At the end of 2015 the UAE had 1.2m broadband subscribers, up 12.5% from 2014, for a penetration rate of 14.3%, up from 12.9% the previous year. Residential subscribers accounted for around 88% of the 2014 total, according to the TRA, with business broadband subscribers making up the difference.

One reason for the relatively low broadband penetration may be the high price of fixed-line internet. According to a recent report published by the International Telecommunications Union (ITU), the UN’s ICT arm, the UAE has the most expensive broadband internet in the Gulf region. Assuming the fixed-line infrastructure-sharing agreement is fully implemented, broadband costs could drop significantly as du and Etisalat compete more directly on price.

Trending Up

Total revenues generated by the UAE’s telecoms sector rose to Dh32.8bn ($8.9bn), in 2014 up 12% from Dh29.2bn ($8.1bn) the previous year, according to TRA data. Mobile services accounted for the majority of this. Mobile revenues increased by 15% in 2014, to Dh25.5bn ($6.9bn), up from Dh22.2bn ($6bn) in 2013. The rise has been attributed in large part to a nearly 17% increase in prepaid subscriptions over the year.

On a per-user basis, revenues have been declining in recent years. In 2014, for example, average revenue per user on a monthly basis was Dh126 ($34.30), up only slightly on Dh124 ($33.75) in 2013, and down from Dh136 ($37) in 2012 and Dh148 ($40.30) in 2011. Mobile data is widely regarded as a key growth area for both operators in the coming years. According to Ovum, mobile data revenue in the Middle East as a whole is expected to reach $16.3bn by 2019, up from $9.9bn at the end of 2014, for example. Broadband internet revenues in the UAE reached Dh4.6bn ($1.3bn) in 2014, up from Dh4.3bn ($1.2bn) in 2013 and Dh3.8bn ($1bn) in 2012. Revenue from fixed-line telephony subscribers was at Dh2.8bn ($760m) for the year, up from Dh2.6bn ($707m).

Homegrown Operator

Dubai’s local MNO, du, was launched in 2006 and is owned in large part by a number of government entities, namely the UAE federal government-owned Emirates Investment Authority (EIA), which holds 39.5%, and Abu Dhabi’s Mubadala Development Company, with 20.08%. Another 19.5% is held by Emirates Communications and Technology, and the remaining shares are listed publicly on the Dubai Financial Market.

Growth

In 2014 du reported net profits of Dh2.1bn ($571.6m), which represented expansion of 6% on the previous year on revenue growth of 13% in the same period. The company attributed the expansion primarily to an uptick of 18% in the mobile data segment, which was worth Dh2.8bn ($760m) in 2014. “Data continue to drive the momentum in our business as customers’ demand for connectivity remained strong,” Sultan told local media in February 2015. According to the operator, in 2015 data represented 32.3% of mobile revenues, up from 29.8% in 2014. Still, profits fell for the full year by 8% due to royalties paid to the government, and the company has been working to get growth back on track.

In an effort to diversify its revenue base, du has moved into various new market segments in recent years. For example, in 2013 the company completed work on an $80m data centre, developed in conjunction with Equinix, a US-based technology firm. Also in 2013 du bought a 10% stake in Khazna Data Centres, an Abu Dhabi government-owned firm that operates two data centres in the UAE, including one in Dubai.

In mid-October 2014 du announced that it had partnered with Cisco, a US-based network technology manufacturer, to set up a new data centre in the UAE, with the objective of expanding voice and video services for mobile subscribers.

The new facility will also support du’s involvement in the Dubai Smart City (DSC) initiative, a seven-year plan, developed by Dubai’s government, to embed various technologies into all kinds of urban systems. The firm has taken on a leading roll in the programme.

Among other things, the operator is involved in setting up an emirate-wide, interlinked wireless internet network. “du’s plan is to cover all areas of Dubai with Wi-Fi signals,” Reed told OBG. “The networks will be tiered, so they will be free to use at slower speeds, but then people will be able to pay for faster access,” he added

Legacy In Action

Etisalat has been operating in the UAE for nearly 40 years. The federal government – in the shape of the EIA – has a 60% controlling share, while the remaining 40% of the firm is listed on the Abu Dhabi Securities Market.

Over the decades Etisalat has made a variety of acquisitions around the world. As of early 2015 the firm oversaw operations of various types in a total of 19 nations, including Egypt, Nigeria, Indonesia, Afghanistan, Sri Lanka and India, among others. Etisalat posted net profits of Dh8.9bn ($2.4bn) in 2014, on revenues of Dh48.8bn ($13.3bn) for the year. Much of this expansion came as a result of Etisalat’s €4.1bn acquisition of a 53% controlling stake in Maroc Telecom in May 2014. Etisalat bought the shares from Vivendi, a French media company.

In the year and a half since the deal was confirmed in 2014, Etisalat has been consolidating its sub-Saharan and west African subsidiaries – in Benin, Central African Republic, Gabon, Côte d’Ivoire, Niger and Togo – under the Maroc Telecom brand. As a direct result of the deal, in 2014 Etisalat’s group-wide subscriber base grew by more than 27%, to reach approximately 182m people around the world.

The UAE has remained a key market for Etisalat, however. In 2014 the company invested around Dh2.5bn ($680.5m) in domestic infrastructure, specifically 4G LTE networks and 3G and 4G base stations. As of early 2015 the firm reportedly had 19,000 base stations up and running in the UAE, which supplied 2G and 3G coverage to 99.5% of the country’s populated locales and 4G coverage to 90% of these areas. In March 2015 Etisalat announced that it planned to spend Dh3.5bn-4bn ($953m-1.1bn) on network technology in the UAE – particularly 4G LTE-A – before the end of the year.

Additionally, in early 2015 the company announced that it would be collaborating with Swedish telecoms giant Ericsson to lay the groundwork for the installation of so-called 5G networks in the UAE. This technology is not expected to be widely in use until at least 2019, but the partnership has been a successful one so far; in March 2016, Ericsson named Etisalat its “IT Partner of the Year”.

Shifting Strategies

With Etisalat and du now sharing fixed-line infrastructure, customers can choose to get their fixed phone and broadband services from either firm. The competition has meant both are shifting strategies. While international connections have been core to Etisalat’s strategy, du is focused locally. “We are a mono-country operator and believe that it remains a better opportunity for us to invest in the UAE,” du’s Sultan told OBG. “We will not be going through the standard telecoms company model of expanding to other countries, unless it will support our position in our home market.”

For investors, another big change came in June 2015 when Etisalat announced that foreigners would be allowed to purchase the company’s shares on Abu Dhabi’s capital markets for the first time, after the UAE’s federal government reversed a long-term ban on foreigners holding the stock. Under the new ruling foreigners and foreign institutions will be allowed to hold up to 20% of Etisalat stock, though the EIA – the single largest shareholder in both Etisalat and du – has said that it does not plan to reduce its holdings anytime soon. Regardless, as the second-largest telecoms operator and fifth-largest stock in the Gulf region, Etisalat will likely attract attention from foreign investors in the coming years.

Demand Drivers

A handful of government-led development initiatives are expected to result in considerable expansion in the telecoms and ICT industries in the coming years. Under the DSC, government entities of all sorts are in the process of incorporating telecoms technology into their services in a variety of ways. For example, in July 2015 Dubai’s Roads and Transport Authority installed 3G wireless technology in all 408 of the emirate’s traffic signals, thereby connecting them to a central control centre, from which authorities will be better able to monitor and control traffic flows.

Prior to the beginning of the autumn 2015 Gulf Information Technology Exhibition in Dubai, the government announced that it would showcase a number of new “smart” services. The Ministry of Human Resources and Emiratisation was planning an exhibition on a new smartphone app and a tech-enabled inspection programme, which has allowed authorities to track and regulate labour practices more efficiently than before. The Dubai Police, meanwhile, announced that they would showcase 15 new tech-related projects at the event.

The Dubai Innovation Strategy (DIS), which was launched in the Year of Innovation in 2015 and aims to boost entrepreneurship across a range of industries, is also expected to have a positive knock-on effect for telecoms and ICT firms. Indeed, in May 2015 du appointed a new, senior executive manager to drive the focus on innovation at the company.

Dubai’s tech-savvy population is also considered to be a key demand driver. With a smartphone penetration rate of 77% in mid-2014 – according to data from Nielsen, a media research organisation based in the US – the UAE is home to more smartphone users on a per capita basis than almost any other country in the world. While many users opt for top-end handsets – including Samsung’s Galaxy Note 4 and Apple’s iPhone 6 and 6+, for example – in recent years hardware manufacturers have seen rising demand in the UAE for lower-cost handsets as well (see analysis).

Outlook

Given these promising prospects, most local players expect to see continued telecoms market expansion for at least the medium term. The emirate’s DSC and DIS initiatives are aligned broadly with the overarching, seven-year Dubai Plan 2021, under which the government aims to cement its position as a regional centre for ICT innovation and investment. The telecoms sector has an important role to play in this transformation. “The advent of the smart city will provide us with numerous opportunities to innovate and collaborate on [which will] drive business,” Sultan told regional media in May 2015.

While the finalisation of the infrastructure-sharing agreement between du and Etisalat bodes well for the future, the implementation of the deal is still under way. This presents a variety of technical and bureaucratic challenges.

Furthermore, given the UAE’s high mobile penetration rate, both operators and various other industry players are working to generate revenue from new business segments. “Content creation, enterprise services, e-commerce and cloud computing all represent potential growth areas in Dubai at the moment,” Sudhir Kumar, a partner and head of corporate communications at regional professional services firm Morison Menon, told OBG. “The market is trending up. There has been some volatility in recent years, but the long-term trend is clearly positive.”

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The Report: Dubai 2016

ICT chapter from The Report: Dubai 2016