Industry Study ( Saudi Arabia Telecommunication Industry)

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BMI Research
Page 1 of 20
Saudi Arabia Telecommunications Report
Oct 1 2017
Saudi Arabia
Telecommunications
Quarterly
BMI Industry View – Saudi Arabia – Q4 2017
Sep 8 2017
Saudi Arabia
Telecoms
BMI View: Saudi Arabian telecommunications consumers exhibit strong demand for high speed data services in both the wireless and wireline segments. In our view, operators will
continue to invest in new technologies and continue to offer innovative services. Despite this, the mobile market has reached saturation point, with penetration rates having exceeded
153% by Q117. Based on the decline of over 2.83mn subscribers in 2016, we believe that the market hosts a number of inactive accounts which are being discounted. However, we
remain optimistic that operators’ investments in enhancing infrastructure capabilities will generate new growth opportunities. Additionally, e-Enterprise solutions are becoming a
main pillar for the leading operators, with new datacentres and business solutions popping up regularly. Still, overall competition is keeping ARPU down and infrastructure
development in a country as vast as Saudi Arabia is expensive. With heavy investment in their fibre backbones, operators are therefore looking to improve the efficiency of their
infrastructure and are aiming to outsource towers.
Latest Updates & Industry Developments
• CITC instructed mobile operators to end the fair usage policy. The purpose of the policy was to control data usage in unlimited packages by reducing the internet speed
after reaching a specific data usage per day. Mobile operators were given 48 hours to comply with the new regulation and 30 days to adjust clients’ packages. We believe
the new regulation will put an extra pressure on operator networks. However, new spectrums offered recently and adjusting customer packages will offset any negative
impact.
• There are reports that the regulator is implementing prepaid SIM ownership rules in 2017. Early indications suggest that foreigners and foreign workers will be allowed
to own up to two SIM cards whereas Saudi nationals will be allowed up to 10 prepaid SIM cards.
• Latest market data suggest that mobile subscriptions declined to 49.4mn in Q117 after 2.83mn subscribers were lost during 2016. The loss suggests that a
significant number of inactive prepaid accounts have been shed by operators and this trend could continue in the future as the penetration rate hovers around the
153% mark. We expect only modest organic growth prospects in terms of subscriber numbers out to 2021 as our estimates suggest the mobile market will slow down
to reach 48.3mn by end of our current forecast period.
• 3G/4G uptake in the country has remained healthy, with an estimated 39.7mn 3G/4G-enabled subscribers in the country by 2017, over 83.8% of the market. Our
forecast estimates that over 96.4% of the market will be using 3G/4G services by the end of 2021.
• We estimate that the wireline voice market will grow to 3.92mn subscribers at the end of 2017. However, we expect demand for high-speed data services to
drive growth in the wireline broadband segment. Total fixed and mobile broadband subscribers approximated 16.5mn at the end of 2017, growing to over 18.6mn
by 2021.
Mobile Market Saturation Evident
Net Additions (‘000) & Penetration Rate (%), 2015-2017
Source: BMI, operators, regulator
SWOT – Saudi Arabia – Q4 2017
Sep 8 2017
Saudi Arabia
Telecoms
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08/10/2017
BMI Research
Page 2 of 20
SAUDI ARABIA TELECOMS SWOT
Strengths
• The sector has attracted investment from major telecoms players including: Etisalat of the UAE and Kuwait’s Zain in the wireless segment; and Bahrain’s Batelco in the wireline segment.
• A healthy level of competition exists, with three GSM/3G operators and one iDEN network operator.
• All three of Saudi Arabia’s 3G operators offer 4G LTE services.
Weaknesses
• The mobile sector is saturated, with the rate of new customer growth slowing significantly.
• The level of government involvement in the sector remains high. It controls 70% of STC and has major stakes in Zain and Mobily through the semi-state entity the General Organization of Social
Insurance.
• Local loop unbundling is yet to be introduced, allowing STC to remain dominant in the wireline market.
Opportunities
• Continuing investments in high-speed networks and falling cost of smartphones will fuel demand for data and video services.
• Opportunities to migrate prepaid users to more lucrative postpaid tariffs.
• Saudi government policy to reduce the country’s reliance on foreign workers is likely to place upward pressure on prices but slow growth.
• New investment in ‘smart-cities’ will bolster telecommunications connectivity in the country and lead to a faster uptake of advanced technologies in the kingdom.
• Implementation of a unified licensing regime will allow operators to offer any public telecoms service over infrastructures of their choice while opening up the wireline market to full competition.
Threats
• Increased competition in mobile market from the introduction of Virgin and Lebara MVNO services could lead to price wars, pushing down ARPU levels.
• CITC mobile termination rate cut of 40% will put downward pressure on revenues of the two large operators: STC and Mobily.
• Strict SIM identification and ownership policies could hamper subscriptions growth in the future, especially among temporary visitors.
Industry Forecast – Saudi Arabia – Q4 2017
Sep 8 2017
Saudi Arabia
Telecoms
BMI View: We have not made forecast revisions in this quarterly update as the Saudi Arabian mobile market continued to post heavy losses in 2016 due to inactive SIM discounting
and the regulatory registration mandate. However, the wireless market is poised for steady growth over the medium term, out to the end of our forecast period in 2021. The fixed
market will witness gradual declines owing to the mobile substitution effects. We believe that the entry of MVNOs coupled with multiple promotions, new VAS and Saudi
Telecommunication Company’s aggressive investments will contribute to innovative technologies and modest growth in a saturated market environment where the mobile
penetration rate hovers around 157%. However, rising industry risks from the Saudisation policy and the imminent VAT on telecommunications will exacerbate prevailing industry
competitive pressures and dampen growth in the coming quarters.
Latest Updates
• Latest data from the market and our estimates suggest that there were approximately 47.24mn subscribers in the mobile market at the end of Q117, a y-o-y decline of
7.2% and a q-o-q contraction of 1.5%. We attribute recent losses to inactive SIM discounting in the market and the CITC’s disconnecting of unregistered mobile
subscribers.
• We now envisage a total of 47.36mn mobile subscribers by the end of 2017, rising to 48.3mn by the end of our forecast period in 2021.
• We anticipate strong growth in the 3G/4G sector throughout our forecast period, owing largely to aggressive investments by STC and other carriers as competition
heats up and data subscription figures surge. We expect the market to grow to 39.7mn 3G/4G subscribers by the end of 2017, increasing to 46.6mn by December
2021.
• There were 3.76mn fixed-line connections in Saudi Arabia at the end of Q117, according to market data published by the CITC.
• Our broadband forecast, based on regulatory data, envisages a total broadband subscriber base of 16.5mn connections at the end of 2017, rising to 18.6mn in
2021. This would give the country a broadband penetration rate slightly under 53%.
Structural Trends
Mobile
Growth in Saudi Arabia’s mobile market remained relatively flat, with 47.9mn subscriptions at the end of December 2016, according to market data published by the
Communications and Information Technology Commission (CITC). The mobile market lost over 4.9mn subscribers in 2016, a move we believe is due to the high number of
inactive SIMs being reported on the operators’ balance sheets and the CITC disconnecting unregistered mobile subscribers who failed to submit their fingerprints in line
with security measures since July 2016. The move was introduced by the regulator in September 2015. The market had remained largely stable
throughout 2014. We forecast the mobile market to grow to 48.3mn subscriptions in 2021 with a falling penetration rate of 148.34%. We expect demand to be sustained by
dedicated mobile broadband connections and multiple SIM ownership. Despite the likelihood of further inactive SIM deactivations, we expect that the mobile market will
recover and return to growth towards the latter years of our forecast.
Saudisation – the government policy to reduce the country’s reliance on foreign workers – will continue to weigh on subscriptions growth and poses an unpredictable
downside risk to our forecast. A reduced migrant worker base will result in subscription losses and revenue declines will stem from reduced international calls and
remittance volumes. These factors will exacerbate prevailing industry competitive pressures. From the consumer perspective, we believe the introduction of a value-added
tax in conjunction with other GCC countries in 2018 will negatively impact household incomes while weighing on consumer demand for telecoms services. In terms of the
impact on the demand side, we believe Zain is in the weakest position to face these challenges, given its greater reliance on migrant workers and other lower-value
customers for subscriptions and revenue growth and its less developed enterprise services portfolio. Furthermore, the transient nature of most of the customers that sign
up during the Hajj means their lines soon become inactive after they return to their home countries. However, the regulator is clamping down on the continued use of SIMs
left behind by visitors.
We believe operators will continue to focus on the 3G and 4G markets, ensuring that existing subscribers spend more. This is both a cause and effect of the slowing mobile
market as a whole. We expect slightly more than 89.99% connections on 3G and 4G platforms by the end of our forecast period in 2021. An upside risk to that scenario is the
expanding number of 3G- and 4G-enabled devices available in the market as well as the faster speeds on offer from network operators. The continuation of 3G and 4G
subscriber growth will be supported by ongoing investments in next-generation mobile networks and fierce price competition in the data market among the three mobile
network operators (MNO). STC’s aggressive investment in 4G and 4.5G technology is evident of the fact that such investments will bolster 3G/4G uptake in the country.
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BMI Research
Page 3 of 20
Although we expect mobile average revenue per user (ARPU) in Saudi Arabia to trend downwards during our forecast period as a result of intense competition in a
saturated market, the increasing focus on high-value services such as mobile data poses an upside risk to our forecast. While competition dynamics have already forced
down the price of data to some of the lowest in the world, consumer appetite is large and operators are pursuing strategies to gain a stake in the content being consumed
as well as connectivity in order to boost revenue and ARPU. Meanwhile, a seasonal increase in subscriptions and usage during Muslim festivals such as the Hajj is also
expected to boost ARPU stability in the market.
One of the biggest downside risks to mobile ARPUs in the Saudi Arabian market is the introduction of mobile virtual network operator (MVNO) services. Virgin Mobile
launched in September 2014 and Lebara in December 2014. MVNOs usually target specific market segments such as foreign workers with cheap local and international
calling options. Although MVNOs will use these offers to put some pressure on ARPUs, we expect them to respond by expanding their range of premium services. Such
services include LTE and the video, gaming and enterprise-focused services the technology enables.
We forecast the combined impact of these market dynamics to be a relatively stable ARPU throughout the five years to 2021, following the sharp decline in 2014 due to
competition between the three MNOs.
Set against this downside pressure, upside pressure is likely to be exerted by the recent Saudisation policy. According to local mobile handset retailers, sales have nearly
halved as a result of the policy. Although this is likely to have a negative impact on total mobile subscriptions, there could be an upside risk to our forecast of downwards
trending ARPUs. In fact, we could see average prices rising as a result. However, we have not yet factored this into our forecasts and will monitor the situation for the next
few quarters to gauge the impact.
Industry Trends – Mobile
(2015-2021)
e/f = BMI estimate/forecast. Source: BMI, operators, CITC
Wireline Voice & Broadband
There were 3.76mn fixed-line connections in Saudi Arabia at the end of Q117, according to market data published by CITC. This reflected y-o-y growth of 4.2%.
There are upside and downside risks to our outlook. On the upside, both STC and Mobily are investing in expanding their next-generation fixed network infrastructure and
bundling fibre optic broadband connections with fixed voice and pay-TV services. However, we caution that the arrival of LTE networks, which have the capacity for high
bandwidth data transmission, is a key downside risk to our growth expectations. By end-2021 we forecast a fixed-line subscriber base of around 3112mn from 3.135mn in
2020 as bundling and promotions may continue to slow the decline of fixed-line services. The fixed-line penetration rate will hover under the 9% mark as the ongoing fixedto-mobile substitution effect will weigh on the market.
Wireline broadband operators STC and Mobily have signed a number of agreements in recent quarters to roll out fibre-based fixed network infrastructure in new real estate
developments. We expect the bundling of premium broadband and IPTV services with fixed telephony services to drive growth in wireline broadband subscriptions. The
expansion of fibre optic networks will change the dynamic slightly, with consumers likely to upgrade to faster speeds and use broadband services for a growing range of
content and online products.
Meanwhile, Zain has also signed an agreement with Dawiyat Telecom, a wholly-owned subsidiary of Saudi Electricity Company (SEC), to leverage the latter’s 51,000 km
fibre optic network. The agreement is subject to regulatory approval. However, we expect Zain to immediately leverage SEC’s fibre network to improve its backhaul capacity,
injecting competition against STC and Mobily into the broadband market.
Dedicated mobile broadband is gaining ground in Saudi Arabia and we believe it will remain the dominant technology in the market. The CITC reported a sharp rise in
mobile data subscriptions in the first quarter of 2014 followed by less dramatic but still impressive growth over the following year. Our calculation of the size of the
broadband market includes all wireline subscriptions as well as dedicated mobile data subscriptions such as data-only SIMs for tablets and dongles but excludes
smartphone-based 3G/4G subscriptions. We believe strong price competition in the mobile market and the launch of offers like Zain’s 1TB data-sharing plan are key factors
in the sharp rise in data-only connections. The CITC estimates that there were 3.56mn fixed broadband subscribers in the country compared to 20.2mn dedicated mobile
broadband connections at the end of 2015. One possible explanation for the large disparity is that for subscriptions to data plans which allow data to be shared up to five
devices, each device is counted as a separate subscription. It is notable that the number of dedicated mobile broadband subscriptions fell to 12.71mn at the end of March
2017, suggesting a certain amount of volatility within the mobile broadband sector.
We forecast, based on regulatory data, a total broadband subscriber base of 16.5mn connections at the end of 2017, rising to 18.6mn in 2021. This would give the country a
broadband penetration rate of just under 53%.
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08/10/2017
BMI Research
Page 4 of 20
Industry Trends Wireline Sector
2015-2021
e/f = BMI estimate/forecast. Source: BMI, operators, CITC
TELECOMS SECTOR – HISTORICAL DATA & FORECASTS (SAUDI ARABIA 2014-2021)
Main telephone lines in service, ‘000
Main Telephone Lines/100 Inhabitants
Cellular Mobile Phone Subscribers, ‘000
Mobile Phone Subscribers/100 Inhabitants
2014
2015
2016
2017f
2018f
2019f
2020f
2021f
3,620.0
3,752.0
3,637.0
3,527.9
3,457.3
3,405.5
3,371.4
3,346.1
11.8
11.9
11.3
10.7
10.3
10.0
9.7
9.5
52,735.0
52,796.0
47,933.0
47,357.8
46,742.2
47,303.1
47,823.4
48,301.6
171.3
167.3
148.5
143.8
139.3
138.6
137.8
137.0
29,100.0
33,400.0
36,810.0
39,699.6
41,486.1
43,145.5
44,867.0
46,572.0
3G & 4G market, % of mobile market
55.2
63.3
76.8
83.8
88.8
91.2
93.8
96.4
Monthly Blended ARPU, SAR
59.9
52.4
52.4
53.1
53.8
53.1
52.6
52.0
22,992.0
23,757.0
15,998.0
16,525.9
17,054.8
17,583.5
18,102.2
18,609.0
74.7
75.3
49.6
50.2
50.8
51.5
52.2
52.8
3G & 4G phone subscribers, ‘000
Broadband internet subscribers, ‘000
Broadband internet subscribers/100 Inhabitants
e/f = BMI estimate/forecast. Source: BMI, operators, CITC
Industry Risk/Reward Index – Operators To Focus On Services For Revenue Growth
Jul 13 2017
MENA (Region)
Telecoms
BMI View: In the MENA region, operators will be focusing on services for revenue growth as they look to deepen relationships with customers and create new revenue streams. In the
top markets, the focus will be on IoT ecosystems while the mid-tier markets are likely to focus on other VAS. Our Risk/Reward Index is geared towards the prevailing traditional
business models, so saturation in mass-market offerings leading to stagnant subscription figures will weigh on overall scores.
Our Middle East and North Africa (MENA) Telecoms Risk/Reward Index covers 17 markets in the region, from the high-income economies of the United Arab Emirates and
Saudi Arabia to war-torn states such as Syria and Yemen. This disparity means that while all countries have good access to basic services, especially in the mobile segment,
availability and affordability of advanced services varies immensely from country to country.
The Gulf Cooperation Council (GCC) states continue to head the league table, with the UAE now taking the lead from Saudi Arabia, thanks to the latter’s 2.1-point drop in the
telecoms score. This drop is mainly due to a prolonged slip in subscriber numbers and ARPU figures. Despite saturation, GCC states remain the most attractive to industry
players. It is in …
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