Like other sectors of the economy, development of Saudi Arabia’s ICT industry is being deeply influenced by the government’s Vision 2030 strategy that emphasises the need for diversification and modernisation. However, in the context of this roadmap, ICT is not being addressed as a standalone sector, but rather as a fillip to help all other sectors transform through the adoption of digital technologies, cloud computing and e-commerce, among other applications.
In 2018 the sector regulator, the Communications and Information Technology Commission (CITC), said it had carried out a study to estimate the value of spending on ICT services. It concluded that spending totalled $36.2bn in 2017, up by 4.6% on the previous year. Of that total telecommunications accounted for almost two-thirds (65%), with the remaining 35% distributed between IT, hardware and software services. The CITC states that the sector contributes around 6% to the Kingdom’s total GDP and 10% to non-oil GDP. Private sector estimates suggest that ICT spend rose by a further 8% to nearly $40bn in 2018.
Mobile & Internet
Saudi Arabia has a very high mobile phone penetration rate. There were 43m mobile phone subscriptions in mid-2018, according to the CITC, representing a penetration rate of 132%. As with other countries in the Gulf, many people in Saudi Arabia have more than one phone or hold multiple SIM cards. The balance of mobile phone contracts is still heavily skewed towards pre-paid, which equalled 71.5% of all subscriptions in mid-2018.
There was also 3.34m fixed-line connections in the country at the time, of which 1.74m were residential, representing a household penetration rate of 31.6%, and 1.6m were business lines.
While most broadband connections are now mobile, Saudi Arabia still has a relatively high proportion of fixed-line hook-ups. Many of these are digital subscriber lines connected through telephone cables, but recently there has been an increased trend towards fibre-to-the-home/fibre-to-the-premises connections that offer greater speed and capacity. Overall, about 80% of the population has internet access, according to a November 2018 report distributed by media firm Business Wire. The Kingdom is committed to providing internet to the entire country, specifically in remote areas. Since 2007 the government has been working via the Universal Service Fund to connect thousands of localities to telephony and internet services not originally provided by commercial operators.
The recent performance of the mobile sector has been mixed. The total number of subscribers peaked at 53m in 2014 and 2015 but then trended down in subsequent years to a low of 40.2m at the end of 2017 before picking back up to 43m in the second quarter of 2018. The slump in 2016 and 2017 has been attributed to various factors, including the general slowdown in the economy, a reduction in the expatriate population and the introduction of obligatory fingerprint registration for SIM card ownership.
Contract composition has also been changing. Prepaid customers still account for the bulk of mobile phone contracts, but the post-paid segment has started to grow. In the first quarter of 2018 post-paid customers stood at 11.2m, or 27% of the total, according to a July 2018 sector report by Aljazira Capital. This translated to growth of 10.9% year-on-year.
Regulations governing mobile telephony operators have undergone changes in recent years. A new law was implemented in January 2016 requiring anyone buying a SIM card to be fingerprinted for registration. The biometric data is shared with the National Information Centre and used for security purposes, and a maximum of two SIM cards are allowed for each ID holder. The initial impact of the measure was a drop in subscriber numbers and a shift away from pre-paid contracts; those with postpaid accounts had already provided detailed personal information when securing a mobile phone contract.
Another big change came in late 2016 when the government announced plans to award unified licences to Zain Saudi Arabia and Mobily, two of the top-three mobile operators, allowing them to offer not just mobile telephony but also fixed-line and internet services. Previously, only state-owned Saudi Telecom Company (STC) – the largest mobile provider – had been allowed to operate with a unified licence. One factor in the decision to grant unified licences was the desire to give operating companies a better business case for investing heavily in new services, such as 5G. However, a subsequent application by fixed-line operator GO Telecom to offer unified services was turned down. A further change to the mobile environment was the decision in September 2017 to lift the ban on voice-over-internet-protocol (VoIP) services, such as those provided by Skype, Viber and Whatsapp.
Like other companies in the Kingdom, mobile phone operators must meet Saudiisation targets – the requirement to employ a minimum number of Saudi citizens in different roles, which carries consequences if not met. In October 2018, for example, the CITC said it had suspended Mobily from selling its services to new pre-paid and post-paid customers because of its failure to meet Saudiisation requirements for senior management. The Saudi Stock Exchange (Tadawul) said trading of Mobily shares had also been suspended. However, both the CITC and Tadawul suspensions lasted for only one day since the CITC lifted the ban after Mobily submitted evidence showing its commitment to Saudiisation. Prior to the suspension, five of the company’s 12-strong senior management team – including the CEO – were expatriates, according to the company’s website.
In a separate development at the end of 2018 STC, Mobily and Zain said they had reached an agreement with the government on a new way to calculate royalty fees. Previously, royalty fees had been set at 15% of net revenue from mobile services, 10% from fixed-line and 8% from data services. Backdated to January 1, 2018, the operators proposed this be replaced by a single 10% royalty on net income from all telecoms services. STC said the change would have a positive effect on its financial results for the fourth quarter of 2018, while Zain said it would represent a savings of SR220m ($58.7m) for the first nine months of 2018. However, Mobily said the royalty fee changes implied taking on an additional annual cost of SR450m600m ($120m-160m) for a few years beginning in 2019, and that it would pay an additional annual licence fee equal to 1% of its net telecoms revenue. Still, the three companies noted that the agreement resolved disputes over previous royalty payments. As part of the deal, all three agreed to upgrade their fixed and mobile network infrastructure – including for 5G preparation – over the next few years in support of Vision 2030.
Indeed, STC, Mobily and Zain are the main telecoms players in Saudi Arabia. Detailed market share information for these three is not readily available, but in its mid-2018 analysis Aljazira Capital estimated that STC controls 52-54% of the market in terms of the number of subscribers. With data released by Zain at the end of the first quarter of 2018 stating a subscriber base of 8.4m, this implied a market share of 18%. That in turn suggested that Mobily’s market share for the same period stood at 28-30%. Looking at market share by revenue, STC was estimated to lead with 60% of segment revenue in 2017, followed by around 25% for Mobily and 16% for Zain. The three players saw an increase of 4.1% in average revenue per user (ARPU) during 2017, reversing a declining trend since 2012. The increase is likely a reflection of the fact that all players were allowed to increase their data charges that year.
STC is the largest telecoms operator in the Middle East by value, with market capitalisation on the Tadawul of SR32.3bn ($8.6bn). Although it is a majority stateowned company, it is listed on the stock exchange with some private shareholders. Before 2005 it operated as a monopoly, being the only licensed telecoms operator in the Kingdom. In the years since then, STC has had to adapt to a surge in demand, very rapid technological change and increasing competition from new players.
Profits quadrupled to reach a record level in the four years to 2006, but income trended downward as competition entered the market: in 2013 profits were 43% below the 2006 peak. While this period was nevertheless marked by heavy capital spending, including on the acquisition of international operating licences in Indonesia, India and South Africa, profitability in the domestic market remained low. In 2015-17 the company implemented a turnaround plan that brought a measure of stability and achieved a steady improvement in profit. The trend continued after the appointment of a new CEO, Nasser Al Nasser, in early 2018.
Al Nasser has indicated that STC will support Vision 2030 and promote investment in areas likely to increase data consumption. In January 2018 he announced an expansion strategy called DARE that aims to make the company one of the world’s top-15 telecoms players in the next five years. The name is an acronym for digitisation, accelerating asset performance, reinventing customer experience, and expanding the scale and scope of the business. He acknowledges that the plan is ambitious, given that revenue is under pressure due to competition and a reduction in the number of expatriates living in the country. Al Nasser believes market growth will be flat over the next three years, thus the focus will be on improving margins through increased efficiency while investing in new areas. The transition to 5G will play a critical role in this. The company is planning to build 12 new data centres across Saudi Arabia before 2022, which will support digital services in cloud computing, cybersecurity, data analysis and smart cities. “This will make [STC] the largest provider of infrastructure in the Middle East for cloud computing services,” he told local media in October 2018. In 2018 the company reported a 6.5% increase in net profit to SR10.79bn ($2.9bn), with a 2.6% improvement in revenue for a top line equal to SR52.07bn ($13.9bn).
Etihad Etisalat is a local private mobile operator trading under the Mobily brand name, with the UAE’s Etisalat holding 27.45% of the equity in the provider. Mobily began offering services in 2005 after being granted the Kingdom’s second mobile phone operating licence to end the monopoly previously held by STC.
Mobily achieved a net profit of SR80m ($21.3m) in the fourth quarter of 2018, the first period in the black since the second quarter of 2016. Overall, the company’s net loss decreased by 82.7% in 2018 to record a full-year loss of SR123m ($32.8m) compared to SR709m ($189m) in 2017. This performance was helped by a 4.5% rise in revenue to SR11.86bn ($3.2bn) in 2018. However, the company’s capital expenditure nearly doubled in 2018, reflecting the continuation of its network modernisation programme and the acquisition of new spectrum early that year. Previously, the company reported a 9.7% decrease in revenue in 2017 to SR11.35bn ($3bn). The fall that year was attributed to the lifting of the ban on VoIP applications, falling interconnection revenue and the adverse impact of the fingerprint registration law. Financial and debt servicing costs were also high in 2017.
Zain Saudi Arabia was the third mobile phone company to obtain an operating licence in the country, starting from 2008. With headquarters in Kuwait, Zain Group is present in eight countries across the MENA region and has over 6000 employees.
In Saudi Arabia its relatively small market share of around 18% has restricted Zain. Its subscriber base dropped from 8.2m at the close of 2017 to 8.1m at end-2018, and the second half of the year was characterised by consolidation and debt restructuring. The July 2018 report by Aljazira Capital stated the company had announced that it would reduce its capital from SR5.8bn ($1.5bn) to SR3.6bn ($959.8m) in order to write off accumulated losses of SR2.2bn ($586.5m). Zain then planned to issue shares on the Tadawul worth SR6bn ($1.6bn) to secure capital of SR9.6bn ($2.6bn). Financial results for 2018 show a jump in net profit from SR11.5m ($3.1m) in 2017 to SR332.4m ($88.6m), with revenue rising by SR225m ($60m) to SR7.53bn ($2bn).
There are also three mobile virtual network operators (MVNOs) in the country: Virgin Mobile KSA, Lebara KSA and Axiom Telecom. Smaller companies buy access to existing networks at a wholesale price instead of building their own communications infrastructure. Virgin Mobile said its subscriber base had reached over 2.8m by the end of 2017 and was expected to hit 3.5m by the close of 2018. The company is experiencing strong revenue growth and positive performance in earnings before interest, taxes, depreciation and amortisation, and net profit. Virgin Mobile launched its MVNO service in September 2014 and has been targeting young customers in the Kingdom. In April 2018 the company won an award for Best Digital Customer Experience in the country at the Middle East G-Summit.
The sector is looking to develop new technologies as part of an overarching drive to digitalise a range of economic and government activities. Such digitalisation and the investments necessary to enable it is a vital part of opening up new revenue streams and creating a knowledge-focused economy.
A 2018 white paper by the International Data Corporation highlights the growing use of cloud services in Saudi Arabia, predicting that spend on public cloud services will rise by 365% from SR427.7m ($114m) in 2017 to SR1.57bn ($418.6m) in 2022. The analysis also estimates that the adoption of cloud services will create approximately 55,000 new jobs between the close of 2017 and end-2022. “Vision 2030 is encouraging the private sector to develop efficient, cost-saving cloud technologies,” Khalid Al Shangiti, CEO of local IT infrastructure solutions provider Ebttikar, told OBG. “Cloud technologies may be optional now, but by 2022 private companies and small and medium-sized enterprises will need to develop cloud systems in order to compete.”
While digital adoption is expanding within the public and business spheres, individual use of new technologies is gathering pace as well. A September 2018 report by US-based hardware company Linksys noted that the number of devices in regional homes is growing. About 85.4% of respondents from the Middle East said they owned at least one smart TV, with over a quarter (27.9%) owning multiple smart TVs. One-quarter of respondents said they used their smart TVs to access subscription-based services, such as TV series, movies and live-streamed sporting events. In addition, the use of voice assistants such as Amazon Echo, Amazon Alexa and Google Home are on the rise. Other popular devices included remote connections to home security cameras and smart lighting systems – used by just under 40% of respondents. About half of the people surveyed said they owned a smart doorbell, while around a quarter said they used smart thermostats.
International companies have been working with the government to aid the development of digital systems in a number of areas. In late 2018 Cisco Saudi Arabia announced that it had signed various memoranda of understanding with different state departments to carry out a country digitalisation acceleration programme, smart city initiatives and a virtual education project. “Digitalisation will play an important role as the Kingdom focuses on diversifying its economy and achieving its ambitious Vision 2030 agenda, launched in April 2016,” Salman Faqeeh, managing director of Cisco Saudi Arabia, told local media. “The memorandum outlines a multi-pronged approach though which Cisco will help accelerate Saudi Arabia’s digital agenda and position the country for long-term prosperity in the digital age.” The company is looking to focus its efforts on four priority areas: health care, education, smart cities and cybersecurity.
At the end of 2018 Cisco was collaborating with the Saudi Electricity Company to develop smart grid and smart metering systems, which could save up to 60% on energy costs. In the education sector the tech firm was working on virtual connections between teachers and remote students, and a total of 14 virtual classrooms had been set up in seven cities in the Kingdom. Cisco was also working with STC on the rollout of 5G.
Another strategic partner is Stockholm-based tech multinational Ericsson. Michele Vitale, a senior programme manager at the company, told OBG that 60-70% of the firm’s business in Saudi Arabia is concerned with the rollout of wireless networks, 20% relates to digital services and the remaining 10% or so is providing operators with service management. He noted that the company’s performance tends to follow cycles, with ups and downs connected to how communication technology is adopted around the world.
As the rollout of 4G and 4.5G networks slows, the new big business driver is the adoption of 5G. The process began in Saudi Arabia in 2019 and is expected to gather pace from 2020 onward. Ericsson-made equipment is being used by mobile operators such as STC for the establishment of 5G in the country, and the Swedish firm’s annual revenue is likely to grow by 20% or even 30% in the peak roll-out years of the early 2020s. Vitale then expects the pattern of earlier tech waves to repeat, with revenue growth falling off before the next phase of disruptive innovation.
A high priority is being placed on ICT for government services, in particular on the development of e-government systems for citizens and businesses. The authorities have established an official e-government programme known as Yesser, which reports to the National Committee for Digital Transformation. Yesser has four main goals: to raise public sector productivity and efficiency; to provide better services to the country’s individuals and businesses; to increase return on investment; and to provide accurate and timely information. “The government is making a concerted effort to increase local private sector participation through public-private partnerships,” Yasser Alobaidan, CEO of digital services firm Jawraa, told OBG. “Improving centralised e-government services and enterprise resource planning systems will also enable more efficient allocation of resources and improve the ease of doing business for the private sector.”
Majid Al Draehim, research and innovation manager at Yesser, told OBG that there is high demand from Saudi citizens to make more government services available online. The e-government initiative has reached a high level of maturity, with around 4000 separate government services at different stages of the migration process at the end of 2018. Many of the services have “connected” status, meaning it is possible to carry out all steps of the process online, while others are described as “interactive”, which means that part of the process is online yet physical presence at a government department or agency is still required at some stage. Al Draehim mentioned the university enrolment process as a good example of an efficient e-government service. Students applying for a place at university need only to provide their national ID number. The system immediately links to the Ministry of the Interior (MoI) to verify ID details, as well as to the national academic database and the Ministry of Education to retrieve high school grades and qualifications. The entire process can be carried out in a matter of seconds.
Among Yesser’s priorities for 2019 is the inauguration of a new national e-government portal, which will provide a single sign-on for all citizens wanting to access government services. Another is to rationalise and integrate software licences across different government departments and agencies, and to align information architecture and capabilities. Work is also being carried out on projects focused on open data, e-participation and the application of new technologies such as blockchain. According to Al Draehim, a much more streamlined way of doing business is emerging, delivering more speed and efficiency, and capturing significant cost savings. A particularly popular e-government app is Absher, which was created by the MoI for a large variety of transactions. The app is useful for making payments to government departments; setting up appointments; managing identity cards, passports and driving licences; paying traffic fines; and completing residence and visa requirements. According to the MoI, there were more than 11m Absher users in early 2019.
One example of a new e-government initiative is the introduction of biometrics for international travel. In May 2018 the General Directorate of Passports (Jawazat) said it had begun using eye-scan technology and was piloting facial recognition to identify travellers entering the country, as well as to track those who might have overstayed their visas. Using the system to facilitate easy travel is one way to increase foreign investment in the country, according to Sulaiman bin Abdul Aziz Al Yahya, the director of Jawazat. “We cannot attract investors while our services are poor or procedures are complicated,” he told local media. Jawazat takes fingerprints from all people entering the country. It was estimated that almost all 12.2m legal expatriates living in Saudi Arabia had registered their fingerprints by May 2018. The adoption of biometric systems coincides with the move to introduce tourist visas and allow visitors on threemonth visas to extend them to six months. According to Gloria Guevara Manzo, president and CEO of the World Travel and Tourism Council, the implementation of biometric technology at border checks was the single-biggest opportunity for the tourism sector in 2018.
Cybersecurity is another important issue in Saudi Arabia, as hacks have occurred on both public and private networks. In October 2018 the National Cybersecurity Authority said it had issued new internet safety guidelines, establishing minimum technical standards to be observed by government agencies. The standards were described as mandatory for all public and private sector agencies that own, operate or host national infrastructure deemed to be sensitive. Furthermore, in September 2018 STC signed an agreement with Anomali Company, a US-based IT firm, to build an information-sharing platform to track cyberthreats. The platform will be used to protect STC and its subsidiaries, deploying the latest cybersecurity technologies and analysing data in an attempt to anticipate, provide early warnings for and neutralise external attacks.
The development of smart cities is another area that requires special attention to security. According to Trend Micro, a Japan-based cybersecurity and defence company, the absence of well-defined security standards and regulations could turn projected smart city benefits into major problems. Speaking at the Smart Transformation Summit in Riyadh in April 2018, Moataz bin Ali, vice-president of the Middle East and North Africa at Trend Micro, said that smart city systems rely heavily on the internet of things, and this increases the attack surface available to hackers. “These attacks not only compromise big data, but also disrupt government services and hold systems ransom,” he said. It is therefore vital to develop secure data processing and infrastructure. A 2017 Trend Micro report noted there had been an estimated 8.8m ransomware threats in Saudi Arabia out of a global total of around 1.6bn. The education sector was the most affected, followed by government and telecoms.
While the race to establish 5G networks will lead to even greater competition among the Kingdom’s mobile providers, it will be a primary medium through which Saudi Arabia can advance its technological goals. Digitalising government services, upgrading infrastructure and creating an environment with an emphasis on secure technology should support global firms and local players in achieving the long-term goal of a diversified, knowledge-based economy, while providing more jobs and new revenue streams over the medium term.
Saudi Arabia has considerable influence over the growth of the regional ICT market due to a number of factors, including the fact that the Kingdom has the largest stock market and TV stations in the region, and its citizens post the greatest number of tweets of any country in the Arab world, as well as being highly active on other social media platforms. A favourable regulatory environment also plays a role. “The future of tech companies in EMEA resides in emerging markets like Saudi Arabia. While Western markets can be hostile to tech companies, they are welcomed in Saudi Arabia,” Sam Blatteis, a former Google executive who is now CEO of The MENA Catalysts, a regional public policy advisory and research firm, told local press in April 2018.