Twelve months ago for this publication I looked at new opportunities and capacity drivers in the Middle East. No one could have predicted the rollercoaster year that followed. Two events have had a dramatic impact on the Middle East telecommunications market over the last 12 months: first and foremost is of course the credit crunch which has had a global impact; secondly, overshadowed by the credit crunch but with a very significant regional impact, is the dramatic fluctuation in global oil prices – with the price of oil almost tripling and then dramatically stalling – and the impact that this has inevitably had on regional investment, both in terms of infrastructure and telecommunications.
The big players
Despite the economic downturn, STC of Saudi Arabia, Zain of Kuwait, Qtel of Qatar and Etisalat of the UAE remain among the largest businesses in the Middle East, and their increasingly geographically diverse businesses means that these companies look well placed to weather the storm. They remain active: STC has won the third mobile licences in Iran and in Bahrain; Qtel has expanded with investments in Indosat in Indonesia and in the Philippines; and Etisalat has made investments in Nigeria and Pakistan. In recent years, local operators have taken advantage of their high credit ratings and financed most of their expansion through debt financing. The credit crunch has removed this liquidity and for the time being, further expansion will be limited to those operators with cash reserves which are sufficient to cover both the cost of any new venture or acquisition and its existing debt obligations.
It is likely that until liquidity returns to debt markets, operators will concentrate on maximising the value of existing businesses to generate cash reserves for strategic ventures or to snap up undervalued assets.
Investment in the region
The Middle East has seen significant changes in telecoms over the last few years with competition – or at least managed competition – progressively being introduced.
> In terms of investment, it is the only region in the world offering the combination of high net worth consumers, high levels of international traffic and seemingly impossible network penetration rates.
The dynamic of investment has changed quite significantly over the last 12 months. During the first six months, the region was riding high on incredibly high oil prices and its apparent impunity to the credit crunch. However, the second six months was quite different following the sudden retreat of oil prices and widening effect of the credit crunch. Investment decisions were subject to significantly more scrutiny and investments only made when the business case for doing so was very strong. Likewise, liberalisation steps and market opportunities have slowed or been put on hold until market conditions improve.
> Two examples of this changing in the regional market are:
Oman. The Omani government suspended the sale of 25% of Omantel in autumn 2008 due to disappointment in the offers it received. It is likely only to restart the process once market conditions improve.
Bahrain. The third mobile licence process in Bahrain attracted only one bidder in the final round, with STC being awarded the licence for US$230 million – a fairly conservative licence fee by regional standards.
STC’s investment in Bahrain is sensible. Bahrain is joined to Saudi Arabia via a causeway: many Saudis travel to Bahrain for holidays and many Bahrainis commute to Saudi for work. So a combined mobile product for both countries is likely to be very attractive to consumers.
Further liberalisation and competition in the Middle East?
There still some way to go in Middle Eastern telecommunications markets to reach the level of liberalisation in European markets.
Managed competition, as is present in most regional markets, may be fine for now but not for too long. Consumer experience when they visit other regions leads to a growing awareness that it is possible to reach a high-quality, low-cost telecommunications service. Managed competition and consumer experience will inevitably act as catalysts for an irreversible shift in consumer mentality altering their view of their telecommunications provider from a utility provider, akin to their water and gas supplier, to a retail provider responsible for satisfying their consumer needs.
Mobile penetration rates are already significantly above 100% in many markets, yet new entrants continue to manage to secure new subscribers. Jordan and Oman’s national regulatory authorities have issued regulations facilitating MVNOs. Although there is clearly demand for new mobile operations, given the saturation of the market, new mobile investments are likely to slow until market conditions improve.
Future developments in fixed communications are difficult to predict. In contrast to mobile, fixed penetration levels are significantly lower. The practical difficulties of the build-out of a fixed network are significant and the returns often less remarkable than those achieved in mobile. However, the opportunity to obtain market share with the right product may now mean that investment in fixed operations are more attractive than was previously the case. Developments in Wimax and other fixed wireless technology also means that practical issues surrounding access to ducts, cabinets and “public land” can be overcome.
Capacity drivers
There remain two clear drivers for increased capacity into the region:
Increased competition and advanced services
As competition in regional telecommunications markets and markets penetration increases in less developed countries, there will inevitably be an increase in demand for capacity into the region. In addition, increasing requirements for data capacity will be required in order to meet demand through increased use of internet services and the development of new and innovative technologies.
Network resilience
In February 2008, four key subsea cables into the Middle East suffered breaks resulting in a loss of a significant proportion of the region’s data capacity. In December 2008, another two cables suffered breaks. In both cases the cable operators did everything they could to restore service quickly, but businesses in a number of the regional financial and economic centres suffered disruption. And as Middle East financial centres push to be global players, there is likely to be pressure to ensure that additional resilience is put in place. Clearly, the Middle East is a growing market where there is likely to be significant change. The credit crunch will inevitably affect investment decisions – into the region and by regional operators. However, opportunities in fixed markets and for additional international capacity into the region continue to offer good prospects for telecoms businesses.
