Saudi Arabia is feeling the heat of competition

Posted by Matthew Reed Tuesday, September 29th, 2009

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Saudi Arabia remains the biggest prize in the Gulf region for telecoms operators and vendors.

Although the more-populous Iran has overtaken Saudi Arabia in terms of mobile subscription numbers, Saudi Arabia has the largest economy in the region and a substantial population, of 24.6 million.

But the arrival of new operators – particularly third mobile operator Zain Saudi Arabia, which made its debut in August 2008, but also Etihad Atheeb, which launched in June as the first of the country’s three new fixed licensees – has led to a sharp intensification of competition.

An important aspect of that competition is pricing. Saudi Arabia is often caricatured as a country awash with money. But despite the size of the economy, not all Saudis are wealthy. Income per head in Saudi Arabia is markedly lower than in some of the smaller Gulf emirates, with a GNI per capita of US$15,500 in Saudi Arabia in 2007, compared with US$38,420 in Kuwait in 2006 and US$24,270 in the UAE in 2004, according to World Bank figures.

As a result, Saudi consumers have an eye for a bargain, and Zain has set out to exploit that with a series of aggressive price promotions, starting with its You Pay, We Pay launch offer. When Zain Group CEO Saad Al Barrak also took on the role of Zain Saudi Arabia CEO in March after the resignation of launch CEO Marwan Al Ahmadi, he said that the operator would not engage in price wars. But pricing has remained a central feature of Zain Saudi Arabia’s strategy: In April, the operator introduced an offer including discounts of 35% on many calls.

That aggressive pricing explains why Zain has added more net subscriptions than either Mobily or STC’s Al Jawwal network in every quarter since it launched, though Zain’s lead was most pronounced in its first couple of quarters. More recently, Mobily and Al Jawwal have performed better in terms of net additions.

The effect of the increased competition is evident in the Saudi operators’ ARPU figures: STC’s monthly blended ARPU fell from SAR140 (US$37.33) in 2Q08 to SAR110 in 2Q09, and Mobily’s was also down slightly year-on-year, to SAR68 in 2Q09.

The decline in ARPU has added to the pressure on Saudi operators to develop new revenue streams from data and other value-added services. And with broadband penetration in Saudi Arabia at just 5% in 2Q09, according to research by Informa Telecoms & Media, there is a substantial market for new broadband connections, as demonstrated by the fact that Mobily has been described by the GSMA as having the world’s busiest mobile broadband network, with 600,000 HSPA subscriptions at end-June.

Mobily has also made a big commitment to WiMAX, having awarded a US$100 million contract to Samsung earlier this year to expand the WiMAX network of subsidiary Bayanat Al Oula. Mobily bought Bayanat, which holds a data license, because it was unable to acquire a fixed license in Saudi Arabia. The acquisition has provided Mobily with an alternative route into the fixed market and an opportunity to offer bundled fixed and mobile services as a means of differentiating itself from some of its competitors.

But Mobily is not alone in pushing WiMAX. Etihad Atheeb, which in 2008 awarded contracts worth US$333 million to Motorola, ZTE and Wipro to build its WiMAX network, launched services in June under the Go brand. The potential for growth in Saudi Arabia’s broadband market does provide some scope for WiMAX providers. But as STC expands its DSL coverage, and with all three mobile operators now offering mobile broadband – Zain introduced mobile broadband services in June, the last operator to do so – it is difficult to envisage WiMAX becoming more than a niche technology in Saudi Arabia, running in third place in terms of subscription count, behind DSL and HSPA. Informa forecasts that there will be just 333,500 WiMAX subscriptions in Saudi Arabia at end-2013.

Mobily has also been innovative in terms of devices, becoming the first and only Saudi operator to offer the iPhone. STC recently introduced the HTC Magic, which uses Google’s Android platform, but the device does not quite have the cachet of the iPhone. All three Saudi mobile operators offer the BlackBerry, with Zain filling that gap in its portfolio earlier this month.

Saudi Arabia’s new operators have set the agenda, and that has sometimes left incumbent STC looking flat-footed. But STC is the only Saudi operator with a complete portfolio of fixed and mobile services, and a recent move by STC to bundle its DSL and mobile broadband offerings suggests that it is beginning to take advantage of that unique position.

In a liberalized market, STC is inevitably relinquishing market share. But STC’s scale and range of offerings – and its internal reorganization to meet challenges from its competitors – means that it will remain the dominant player.