Share Square: Saudi Arabia

The Kingdom of Saudi Arabia (KSA) is the largest country in the Middle East and 12th largest in the world by land area. The economy is largely oil based, with oil providing 45% of GDP and 90% of export earnings; KSA holds 16% of the world’s proven petroleum reserves.  Recent reductions in the oil price are therefore limiting economic growth and hence potentially constraining growth for mobile operators.  Efforts to diversify the economy in areas such as downstream petrochemicals and mining are in progress^[1] and may help to offset this to some extent. The population of KSA has grown annually at an average of 2.4% over the past five years to the current estimate of 30.9m people of whom 57% are under 30 years old. KSA has the joint lowest population density in the Middle East region with 14 people per km2 compared to the regional average of 136 people per km2.

Three Mobile Network Operators (MNOs) serve KSA – STC, Mobily and Zain.  STC the original incumbent has the highest market share by subscriber numbers with 45%, while Mobily and Zain have 38% and 17% respectively. The three MNOs supply 59.2mn mobile connections within KSA giving a market penetration of 181% as of Q4 2015, up from 53.9mn at the end of 2014. In addition two virtual operators commenced operations on the STC and Mobily networks late in 2014.

The mobile user population in KSA is polarised between Saudi nationals who tend to be high value users, and guest workers / expatriates who are more interested in low cost 2G voice and text services. As 2G legacy handsets are gradually being replaced with 3G and 4G capable handsets there will be a progressive reduction in the 2G user base. This will drive a longer term transition of former 2G users to 3G and is likely to increase use of VoIP services, particularly to limit the cost of international calls. The need for 2G services is however expected to persist for some time to come.

The mobile market in KSA, like many in the Middle East, is highly competitive. It has a sizable proportion of users that are amongst the World’s largest consumers of data and usage continues to grow. The user base is also fluid, with changes as expatriates come and go as well as pilgrims visiting the holy cities. To achieve further growth the MNOs are competing to expand the proportion of their user base that consume high volumes of data. This in turn is driving a process of technology and capacity upgrades.

KSA was one of the first countries in the world to rollout 4G. All three MNOs launched their 4G services in 2011 with Mobily reaching the market first. Although Mobily initially established a narrow lead in 4G subscriptions, STC now holds the dominant share. 4G coverage across KSA reaches 90% of the population as of Q4 2015, a relatively high figure even amongst the technologically developed nations of the Middle East.

The availability of these technologies has enabled KSA to maintain one of the highest data traffic volumes per user in the world. Cultural factors have contributed to these high data traffic volumes. In particular a rise in popularity of video games and a lack of cinemas have stimulated a thriving online video streaming culture. KSA has the highest per capita use of YouTube in the world and about half of this use is from mobile devices. This aligns with the fact that over 90% of KSA broadband connections are mobile.

The number of 4G/LTE subscribers is expected to continue to increase placing additional demand on the KSA networks. Subscriber forecasts suggest that, by 2020, the number of 4G subscriptions will reach 26.5mn from the current level of 10.6mn; with subscribers to 2G services falling to 7.1mn from 14.4mn in the same time period.

Although STC remains the dominant operator, Zain has been the leader in terms of recent growth from 2014 into 2015. STC grew its 4G population coverage from 77% in 2013 to a target of 95% by the end of 2014. STC 3G coverage was already at 96% in 2013^[2]. Mobily had 78% 4G coverage and 97% 3G coverage in 2014^[3].Zain’s recent growth has been driven by a US$1.2bn project^[4] to upgrade the technology of many of its sites to a minimum of 3G and also to rollout many hundreds of new and upgraded sites to improve coverage. While Zain’s 2G% population coverage was already over 90% the upgrade project will take 3G coverage from 86% to over 90% initially and 4G coverage from 55% in 2014 to over 90% by the end of the project. This has been undertaken in parallel with a brand refresh with new retail outlets and a push to encourage higher revenue users – Zain “opened, or refreshed, 91 Zain branded points of sale in 2015, bringing services closer to an ever increasing number of consumers”^[5].

In early 2012 the telecoms regulator of KSA, CITC (Communications and Information Technology Commission), instructed each MNO to host a Mobile Virtual Network Operator (MVNO) to boost competition. So far, Virgin Mobile (on STC from September 2014) and Lebara (on Mobily from December 2014) have entered the market through this route. The third MVNO, to be hosted on Zain’s network, is due to be announced in early 2016. The MVNOs target niche gaps in the market, with Virgin aiming at younger Saudis and expatriates seeking low cost international calls while  Lebara is targeting the low income mass market, both Saudis and expatriates^[6],^[7].  The MVNOs are at an early stage, but their overall market share is expected to remain relatively low and niche based.

The market is regulated by the CITC a well-established regulatory organisation who provide reliable and consistent regulation.  The current spectrum allocation for LTE in KSA includes 1.8GHz plus a totally non-harmonised arrangement in the 2.3GHz (STC) and 2.5GHz (Mobily) bands. A number of reports suggest that in order to match the increasing subscribers demand and realise associated benefits such as increases in GDP and employment, KSA should release harmonised spectrum in the 800MHz and 2.6GHz bands in line with international standards. The military currently occupies a large portion of the spectrum in KSA, including portions of both the 800MHz and 2.6GHz bands.

Tower sharing potential

There are currently an estimated 29,000 mobile telecommunication towers in operation in KSA. At present all the towers are owned and operated by the MNOs and tower sharing has been very limited.  There is no towerco active operationally in the market at present.

Although a towerco is yet to penetrate the market, evidence exists of small scale tower sharing between the three operators, suggesting some appetite for site co-location. Negotiations for the sharing of Mobily and Zain sites on a large scale have also been reported in the past though the operators failed to reach an agreement.

At the time of writing, Mobily and Zain have issued separate requests for formal proposals from third party investors / operators to buy their tower portfolios.  The MNOs intention is to lease these back from the resulting towercos.  Mobily are seeking to sell their full portfolio of around 9,000 towers and Zain to sell their growing total of about 5,800 towers.  Given that the regulatory body CITC has been promoting competition, such as through the introduction of new MVNOs into the market, it is expected that CITC will welcome the increased competition that one or more towercos would bring.

The benefits of a towerco approach, such as consolidation and economies of scale, are likely to be greatest to all parties if a single company is able to acquire both sets of towers.  Whether this is possible will depend on the progress of the bidding process.  A factor that may constrain towerco expansion across KSA is the ownership model of STC.  STC is majority owned by the KSA Government and therefore is likely to have different strategic drivers to the privately owned Mobily and Zain. It also has the largest base of towers in KSA and could alter the dynamics of the market considerably.  The outcome of the Mobily and Zain processes are not yet known at the time of writing.

The KSA mobile market is highly competitive, growing and has some of the highest rates of data use worldwide. Accordingly the networks are highly developed and 4G penetration is or soon will be over 90% on all three networks. The market also serves less data intensive users. For these, 3G coverage is over 90% on all networks, over 95% on STC and Mobily, and the 100% 2G coverage is also likely to be required for some time to come.

Given the very competitive nature of the market and the technology investments needed to keep up with demand, measures to increase efficiency and improve balance sheets will be of great value.  As a result the prospect of tower sharing, not hitherto present in this market on any scale, is now highly likely with bidding in progress for the tower assets of both Mobily and Zain.  Whether this results in a single operator or two remains to be seen, though the efficiency gains are likely to be greatest with only one.

The opportunities for the towerco(s) in KSA differ from those in African regions where tower deals have been more frequently observed.  In KSA the mobile market is more mature and the emphasis is increasingly on technology updates rather than coverage rollouts.  Towerco opportunities therefore lie in consolidation and efficiency of operation.  Nevertheless, the sustained high levels of data use also make this a lower risk investment, though again this is dependent on the bidding process

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References

·  GSMA

·  CITC

·  World Bank

·  World Factbook (CIA)

·  Analysys Mason / GSMA - http://www.gsma.com/spectrum/wp-content/uploads/2012/05/GSMA_report_on_KSA_DD2_6GHz_2012-04-30.pdf

·  Callen et al, Economic Diversification in the GCC: Past, Present, and Future, IMF Staff Discussion Note, December 2014 - https://www.imf.org/external/pubs/ft/sdn/2014/sdn1412.pdf

·  STC Annual Report 2013

·  Mobily Annual Report 2014

·  Zain Annual Report 2014

·  https://www.sa.zain.com/autoforms/portal/site/zainsa/news/news187?AF_language=en

·  http://www.oxfordbusinessgroup.com/news/mvnos-signal-change-saudi-telecoms

·  http://www.aljaziracapital.com.sa/report_file/ess/SPE-143.pdf

[1] Callen et al, Economic Diversification in the GCC: Past, Present, and Future, IMF Staff Discussion Note, December 2014

[2] STC Annual Report 2013

[3] Mobily Annual Report 2014

[4] Zain Annual Report 2014

[5] https://www.sa.zain.com/autoforms/portal/site/zainsa/news/news187?AF_language=en

[6] http://www.oxfordbusinessgroup.com/news/mvnos-signal-change-saudi-telecoms

[7] http://www.aljaziracapital.com.sa/report_file/ess/SPE-143.pdf

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