telecommunication published last 2 - BLOMINVEST Bank...Telecommunication Services in the MENA Region IMPORTANT DISCLAIMER This research is based on current public information that

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Telecommunication Services in the MENA Region

IMPORTANT DISCLAIMER This research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such.

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January 2010

For your Queries Economic Research Department Marwan Mikhael Head of Research [email protected] Tel: +961 1 737 247 Ext: 1421 Fax: +961 1 737 414 Alexandre Mouradian Deputy Head of Research [email protected] Tel: +961 1 737 247 Ext: 1414 Fax: +961 1 737 414 Cynthia Zeilah Analyst [email protected] Tel: +961 1 737 247 Ext: 1413 Fax: +961 1 737 414 Rebecca Nakhoul Analyst [email protected] Tel: +961 1 737 247 Ext: 1418 Fax: +961 1 737 414 Joanna El Awar Analyst [email protected] Tel: +961 1 737 247 Ext: 1410 Fax: +961 1 737 414 Jean-Claude Cherfane Analyst [email protected] Tel: +961 1 737 247 Ext: 1416 Fax: +961 1 737 414 Research Department [email protected] Tel: +961 1 737 247 +961 1 747 812 Fax: +961 1 737 414

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Table of Contents For your Queries ..................................................................................................................................... 3

Table of Contents ................................................................................................................................... 4

Executive Summary ................................................................................................................................ 6

1 Global overview ................................................................................................................................ 8

1.1 Regardless of economic conditions, people need to stay connected .................................................. 8

1.2 The shift from wired to wireless .......................................................................................................10

1.3 Increasing convergence – triple and quad‐play services ....................................................................12

1.4 Changing market landscape ..............................................................................................................13

1.5 Global telecommunications market ..................................................................................................15

1.5.1 Mature markets call for innovation‐driven growth… .................................................................................. 16 1.5.2 …while developing countries with low penetration present huge potential ............................................... 16

2 Overview of the MENA Region ........................................................................................................ 18

2.1 Snapshot of telecom in the MENA region .........................................................................................18

2.2 Market overview ..............................................................................................................................19

2.3 Mobile telephony – the major focus in the region ............................................................................19

2.4 Mobile penetration varies within the region ....................................................................................20

2.4.1 Mobile markets reaching saturation in some GCC countries… ................................................................... 21 2.4.2 … while penetration rates are still low in non‐GCC countries ..................................................................... 22

2.5 Fixed‐line ‐ no match for mobile services in the region .....................................................................23

2.6 Internet in the MENA region ............................................................................................................24

2.7 Competitive landscape in the region ................................................................................................25

2.8 Telecom sector – economy’s lifeline .................................................................................................27

3 Regional Trends ............................................................................................................................... 28

3.1 Regional economies affected by the downturn … .............................................................................28

3.2 … MENA telecom sector stands strong .............................................................................................29

3.3 Specific demographics shape the telecom sector ..............................................................................31

3.4 Liberalization led to historic changes ................................................................................................32

3.5 Expansion strategies have resulted in vast geographical presence ....................................................34

3.6 Telecom investment – new opportunities, changed attitudes ...........................................................35

3.7 Technological changes are following global trends ...........................................................................37

3.7.1 Convergence of fixed, mobile and other services ........................................................................................ 37 3.7.2 Increasing roll‐out of high‐speed internet … ............................................................................................... 38 3.7.3 … is driving growth in the mobile content segment .................................................................................... 39

3.8 Smartphones set to drive growth in the mobile handset market ......................................................40

3.9 Business segment – a lot of growth opportunities ............................................................................41

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January 2010

4 Opportunities and challenges .......................................................................................................... 43

4.1 Opportunities ...................................................................................................................................43

4.1.1 Government support for the telecom industry ........................................................................................... 43 4.1.2 Migration – opportunity to retain customers? ........................................................................................... 44 4.1.3 Introduction of WiMAX ............................................................................................................................... 44 4.1.4 Network sharing ......................................................................................................................................... 45 4.1.5 Increasing outsourcing activity in the MENA region ................................................................................... 45

4.2 Challenges ........................................................................................................................................46

4.2.1 Declining ARPUs .......................................................................................................................................... 46 4.2.2 VoIP services ............................................................................................................................................... 46

5 Future Outlook ................................................................................................................................ 47

6 Appendix ......................................................................................................................................... 48

6.1 Company profiles .............................................................................................................................48

6.1.1 Etisalat ........................................................................................................................................................ 48 6.1.2 Qatar Telecom ............................................................................................................................................ 49 6.1.3 Orascom Telecom Holding .......................................................................................................................... 50 6.1.4 Saudi Telecom Company ............................................................................................................................. 51 6.1.5 Zain ............................................................................................................................................................. 52 6.1.6 Mobinil ........................................................................................................................................................ 53 6.1.7 Batelco ........................................................................................................................................................ 54 6.1.8 National Mobile Telecommunications Company ........................................................................................ 55 6.1.9 Telecom Egypt ............................................................................................................................................. 56 6.1.10 du ............................................................................................................................................................... 57

6.2 Table of acronyms ............................................................................................................................58

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Executive Summary The first half of the year 2009 saw the world economy slip deeper into the recession triggered by the financial and economic crisis. While a lot of economies were barely managing to stay afloat towards the later part of the year, some countries in the developing world sensed better times ahead with a partial revival in capital markets. Before the recent debt crisis in Dubai rocked the world, the Middle East region had gone through its share of pains due to the global crisis. Economists talked at length about declining corporate earnings and eroding market capitalizations. The corporate scandal in Saudi Arabia, regarded by many as one of the biggest in the region ever, only added to the negativity and sapped investor confidence. Nonetheless, the region welcomed 2010 with some sense of optimism as some of the most awaited and iconic infrastructure projects became operational. Despite the recent setbacks, Dubai reiterated its presence on the global commercial landscape with the inauguration of its state‐of‐the‐art metro system and the world’s tallest tower – the Burj Khalifa. On the other hand, despite the tough times, the worldwide telecommunications sector remained relatively untouched and resilient to the shockwaves. Over the last decade, the global telecom industry has grappled with a number of challenges, including regulatory changes, technological advancements and consolidation, in addition to the saturation of markets and declining revenues in most developed countries. Much like basic utilities, telecom is now considered a facilitator of socio‐economic advancement and a potent tool for economic development. And hence it is not surprising that most analysts and experts believe that the sector is a key driver for broad‐based economic growth and the same is even more relevant in the current environment. The global telecom industry continues to grow at double‐digit rates, despite the prevailing economic weakness. Overall telecom revenues are expected to grow at a compounded rate of about 13‐14% over the next few years to reach USD 3.7 trillion by 2015. Within the industry, a common trend across most markets has been the consumer preference for wireless and the declining importance of fixed‐line services for basic voice calling. While the developed markets are relatively saturated following aggressive marketing by telecom companies during the last decade, the developing markets in the emerging countries present ample room for future growth. In developed markets, telecom companies are exploring new ways to drive revenue growth, most of which are currently focused on boosting usage of data and value‐added services. In the case of fixed‐line services, the uptake of broadband access will drive future growth. Interestingly, a major part of the expected growth in both wireless and fixed‐line segments is likely to be driven by high‐speed internet and data access. Wireless broadband revenues are expected to grow at a compounded rate of over 62% through 2015, while fixed‐lines are likely to register a moderate, but positive, growth of 6%. Over the last decade, the number of worldwide internet users recorded a gigantic leap from about 350 mn to 1.6 bn in 2008. About one‐third of this total user base is estimated to have broadband access. Furthermore, the number of mobile phone users is set to cross 5 bn globally by the end of 2010, up from 730 mn at the start of the decade. Of this, about 300 mn users are subscribed to next‐generation 3G and 3.5G networks, allowing high‐speed internet access similar to conventional broadband technology. As a result of the boom in internet usage, industry analysts predict a strong phase of growth for data‐driven innovations like Internet Protocol Television (IPTV) and video on demand, in tandem with the growth in mobile broadband’s subscriber base. Furthermore, the popularity of converged mobile devices is expected to surge as well, as vendors launch new high‐end smartphones to compete against the likes of Apple’s iPhone and BlackBerry. The telecom sector in the MENA region has witnessed tremendous growth over the past three years. In fact, some of the markets, especially in the GCC countries, reached near saturation due to the rapid increase in subscribers and mobile penetration rates. The sector registered a phenomenal CAGR of 44% between 2003 and 2007, with the number of mobile subscribers increasing from 24 mn to 103 mn. While mobile penetration rates in countries like the UAE, Qatar and Bahrain stood well above the 100% mark, the region’s subscriber base is expected to grow by 34% from 144 mn in 2008 to 193 mn by 2012. Mobile data revenues are expected to more‐than‐double between 2007 and 2012 to USD 6.7 bn from USD 3.1 bn, accounting for 16% of the total revenue forecast. The MENA region currently has about 40+ licensed operators vying for a total market of about 269 mn people that represent about 5‐6% of the world population. Consequently, the market landscape is relatively crowded and the competition will only get stiffer over the coming years, despite the IMF forecasting the region’s population to grow at 2% annually to 313 mn by 2014. The telecom sector largely weathered the impact of the global crisis because of the rapid growth in an underpenetrated market. Even though telecom spending in the region fell by about 5% to USD 44 bn last year, overall technology spending appears to be on the rebound. The Middle East is one of the world’s fastest‐growing regions in terms of IT expenditure. While the UAE projected an IT spending of nearly USD 5 bn for 2010, significant growth is predicted in Saudi Arabia and Qatar as well.

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January 2010

The telecom industry is at the cusp of another critical phase of its evolution. However, companies will need to carefully relook and evaluate their plans in order to participate in this growth. High subscriber growth levels will become increasingly difficult to sustain by relying solely on organic expansion. For operators in the region, cross‐border expansion and operational consolidation will be the potential directions to drive top‐line and bottom‐line momentum. Many operators already seem to have realized this, as reflected in the geographic expansion undertaken in recent years. Kuwait’s Zain extended its operations to 24 countries, including 7 in the MENA region, and the remaining across Africa and Madagascar. South Africa’s MTN operates across 21 countries from Guinea Bissau in Western Africa to Afghanistan. Etisalat’s coverage extends from the Ivory Coast in Africa to the Middle East and Pakistan, while Egypt’s Orascom operates in Italy and Greece, parts of Africa, Pakistan and North Korea. Moreover, most large operators have further plans of expansion and inorganic growth over the coming years. MTN bought out Syria’s Investcom during 2006 for USD 5.5 bn. More recently, in 2009, Saudi Arabian operator STC bought a 25% stake in Turkey’s Oger Telecom for USD 2.7 bn. STC announced an investment of USD 100 mn to develop the required infrastructure in Bahrain, after winning the country’s third mobile phone license. Oman may resume talks to sell a stake in Omantel this year as the global market recovers and liquidity improves. While inorganic growth will help drive strategic expansion, telecom companies will be required to preserve revenues and margins in existing markets through innovative services and technology enhancements. Over the last few years, many new business models have evolved based on the ability of modern telecom to enhance the customer’s experience and productivity. Video, multimedia, real‐time news, social networking, and TV are some of the new trends that are catching up fast, particularly with the availability of advanced handsets and commercial 3G networks. Another area of growing research and investments is the convergence between telecom and other industries such as media, travel, banking and financial services among others. Companies are increasingly provisioning services through the m‐Commerce channel, in addition to the traditional brick‐and‐mortar and web‐based touch‐points. While on one hand, such services are helping companies drive more business and improve customer experience, on the other, they benefit telecom operators through increased usage. This trend is here to stay as operators look to sustain and grow mobile revenues. There is an emerging consensus that the worst of the crisis is over and economies globally are on a recovery path. In the case of the region’s telecom industry, recent figures indicate a tremendous increase in the usage of mobile phones over the last few years. Neighboring Africa presents another strong opportunity, having recorded a 38% growth during 2007, surpassing the Middle East. Within the MENA region, strong demographic factors in countries like Saudi Arabia, which is the 23rd largest economy in the world, and Egypt, which is the 16th largest by population, will continue to drive further growth. The high GDP of the broader MENA region and the young, rapidly growing population make the market attractive for both regional and foreign operators. The six GCC countries alone represent a bloc with USD 1 trillion in GDP and 45% of the world’s proven oil reserves. As a result, regional telecom companies are expected to perform well on the back of an economic revival and the fundamental strength of the region. Despite near‐term perturbations, the longer‐term outlook for the sector remains bright, regardless of the already high penetration in some GCC countries. According to industry stalwarts, innovation, customer care, and value for money will be critical to sustaining and improving growth. The introduction of innovative products, reengineering of processes and competitive pricing will help reduce customer churn, which is a key concern in a price‐sensitive and competitive market. Liberalization of markets, entry of new players, evolution of new business models, and evolving technological trends can either represent challenges or opportunities, depending on how companies adapt and choose to respond.

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1 Global overview

1.1 Regardless of economic conditions, people need to stay connected As the world entered the second half of 2009, it became clear that what started as the subprime mortgage crisis in the United States followed by the credit crunch was one of the most severe global recessions since the 1930s. The financial turmoil, along with the macroeconomic slowdown, adversely impacted most industries not only across the developed world, but also in developing countries that were initially considered relatively immune. The telecommunications (or telecom) industry has not escaped the shock either. Nevertheless, compared to other industries, the industry has fared much better despite the weak economic environment and dented consumer confidence. Telecom has become an indispensable aspect of modern lifestyle in many ways, akin to other essential commodities and consumer goods. This aspect makes telecom rather unique despite being a services industry that is still relatively young and growing dynamically. Unlike many other industries, the effect of seasonal shifts in demand is negligible in the case of the telecom industry. Due to this non‐cyclical nature, the sector’s annual average growth at 7.5% was higher than the overall economic growth in OECD countries over the last two decades, which averaged 2.6% over the period. Even in the emerging and developing world, telecom is catching up fast and, in some cases, even exceeding the pace of development witnessed in the more mature countries. This is evidenced by consumers in certain developing countries having access to more advanced telecom equipment and services than that available in many developed nations. The impressive performance of the telecom industry was temporarily affected by the burst of the dotcom bubble in the earlier part of the decade. However, telecom companies (henceforth referred to as telcos), which survived the tide emerged stronger in terms of knowhow and funding. The global average net debt/EBITDA ratio for telcos fell below the average for all industries in 2000 and has remained lower since then, making the low debt level one of the key strengths of the sector. Various analysts and estimates pegged global telecom spending at 2.5% of total global GDP in 1990, 4.8% in 2006, and forecast it to reach 5.9% by 2013. As a result, the sector is widely regarded as one of the more important contributors to GDP growth. Reflecting this view, governments in countries like China, US, Germany and Australia undertook measures aimed at boosting the sector during the economic slowdown. Such initiatives will help the industry maintain growth momentum, putting it at an advantage compared to many other sectors. An analysis of the revenues generated by the top global telcos presents a mixed picture. While for some players, the latest results (1H09 or 3Q09) reflected YoY increase, others saw reduced revenues. However, capital markets clearly showed a preference for the sector. The S&P Telecom index has outperformed the general index consistently since the beginning of 2006. Although the telecom index saw a sharp decline as the crisis deepened and reached a trough towards the end of 2008 to come close to the overall market index, it bounced back strongly in early 2009 and has sustained the momentum since then. Most telcos do not seem to be faced with financing issues as well. Across most industries, tight liquidity conditions accentuated the impact of the economic slowdown. However, during the first half of 2009, Fitch reported that European high‐grade telecom issuers like Deutsche Telekom, Telefonica and Telecom Italia continue to maintain good liquidity levels with access to the otherwise limited capital, albeit at higher prices. That is in spite of most rating agencies’ releases since August stating that headline revenues and EBITDA of those companies have come under pressure. Consequently, regardless of the increased cost,

Telecom Revenue Growth vs. GDP growth in OECD countries

300

600

900

1200

1991 1993 1995 1997 1999 2001 2003 2005

USD

bn

15

20

25

30

35

USD

tril

Telecom Revenue, USD bnGDP constant prices , USD tri l

Source: OECD, Blominvest

Superior performance of the Telecom index

30

60

90

120

150

180

Jan‐06 Jul ‐06 Jan‐07 Jul ‐07 Jan‐08 Jul ‐08 Jan‐09

Index performance

S&P 500 S&P 500 Telecom Services

Source: OECD, Blominvest

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January 2010

many telecom companies used their good ratings to secure the early refinancing flexibility in order to avoid possible future hurdles. For instance, in June, British Telecom raised EUR 600 mn despite reporting a comfortable liquidity position, terming the market conditions attractive. A majority of European telcos in Fitch’s portfolio recorded an increase in liquidity during the six months ended April 2009. The strong investor confidence for the industry was reflected in the demand for debt issuances by telcos since the beginning of the year, many of which were oversubscribed and saw prices moving up, allowing the companies to raise more than initial expectations. Deutsche Telekom, Telefonica, Telecom Italia, KPN, Portugal Telecom and Vodafone refinanced a total of EUR 13.5 bn in near‐term maturities during the first quarter of 2009. Apart from tapping the capital markets, telcos undertook various cost optimization initiatives to streamline operations and prop up liquidity levels. Capital expenditure (capex) was probably the worst hit as a result of these cutbacks. According to a study by Ovum, an Information & Communications Technology (ICT) consultancy, North American fixed and mobile operators reduced capex by 16% and 27%, respectively, during 1Q09. Cost cutting measures were undertaken by almost all players, including the ones that had registered strong revenue growth, although telcos in developing economies are on the whole expected to maintain higher levels of capex compared to their revenues. While these initiatives are likely to help the industry in the short‐ to medium‐term, the overall long‐term impact raises questions about the sustainability of future growth. The study reported that equipment vendors saw revenues decline by 15% on average, components revenues were down 20%, and contract manufacturers took a massive 28% hit. As a result, telecom suppliers were posed with possibly bigger challenges than operators ‐ some of them faced possible bankruptcy. This does not augur well for operators too, who are likely to face supply issues in the future due to such developments. However, some analysts expect capex to bounce back starting 2010. Estimates suggest that capex levels could reach almost USD 380 bn in 2013, up from USD 300 bn in 2008, implying a CAGR of almost 5% over the next few years. The most pronounced effect of the economic slowdown on the telecom sector is the shift in consumer spending patterns. Given that the roots of the crisis lay in the housing market, the immediate impact was a reduction in fixed‐line connections following the decline in construction activity. Given the job losses and the ensuing apprehensions, consumers are becoming more conscious about their overall telecom spending and price differences across service providers. As a result, providers are under pressure to reduce tariffs, offer discounts, and rely on volume gains to sustain revenues. In certain cases, customers postponed purchase of new devices to limit their telecom‐related expenditure. The other options included shifting to cheaper operators, bundling services, and substituting part of their mobile usage with the usually cheaper fixed‐line calls. On the other hand, some households indicated the possibility of giving up fixed‐lines altogether and relying solely on mobile connections that provide both connectivity and mobility. Finally, there is some impact on demand from the business segment as well with companies undertaking cost‐cutting measures and headcount reductions. The ultimate outcome however remains to be seen as some of those measures may actually benefit the telecom industry. As a particular instance, cutting back on business travel expenses creates increased demand for telecom services. Teleconferencing is rapidly gaining in popularity compared to previous years as seen in increased penetration into the small‐enterprise market segment. The relatively more complicated

Capital expenditure as % of revenue 2009E 2007 Trend

Developed markets

Telefonica 14 13

Vodafone 13 11

France Telecom 13 13 = Deutsche Telekom 13 11

TeliaSonera 13 17

KPN 16 12

Swisscom 16 18

BT 15 16

Belgacom 10 10 = Portugal Telecom 12 11

OTE 16 17

Elisa 11 13

Telecom Austria 15 17

Average 13.6 13.8

Developing markets

MTN 18 21

Zain 17 35

MTS 19 16

Turkcell 13 12

Turk Telekom 15 43

Mobily 15 22

TP SA 14 16

VimpelCom 20 17

Qtel 29 20

Telecom Egypt 16 9

Orascom 18 33

Comstar 15 38

Magyar 15 16

Mobinil 22 34

Partner 9 9 = Wataniya 17 27

Tellcom 9 8

Average 16.5 22.1 Source: Bloomberg, Merrill Lynch, Booz & Co., Blominvest

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video conferencing service is picking up at larger companies. Many companies are encouraging telecommuting as an option to reduce operational costs and fixed overheads. Despite being faced with some tough challenges in the near future, the industry has many new opportunities to capitalize on. Changing consumption patterns among subscribers, triggered sooner than expected by the current crisis, translate into an attractive opportunity for innovative players who can respond to the demand with new services and suitably position their offerings. Companies that manage to continue with strategic growth‐linked investments are likely to emerge stronger with respect to the competition. In fact, a reasonable and well planned capex strategy is likely to be the key in the current situation. A case in point is that of operators such as Orange, Vodafone or T‐Mobile (Deutsche Telekom) that continued investments in 3G through the 2001 dotcom crisis despite the tight financial conditions. This may be a good time for vertical integration as well. Telcos can consider buying out retail space and turning them into operator‐branded outlets. Nevertheless, cash resources will also be critical in the near‐term for possible mergers and acquisitions (M&A) at attractive valuations as smaller and localized market players exit difficult markets.

1.2 The shift from wired to wireless Mobile telephony has grown significantly since the early 1990s, outpacing the long‐established fixed‐line segment. In 2008, the number of mobile subscribers worldwide was already over three times higher than the number of fixed‐line connections, with average mobile penetration (number of subscribers per 100 people) of almost 60%, according to International Telecommunications Union. Across a sample selection of developed countries studied by the British telecom regulator Ofcom,

outgoing mobile call volume as a percentage of the total volume rose from 28% in 2002 to 46% in 2007 and continues to grow steadily. Across emerging countries, the adoption of mobile telephony is even faster given that fixed‐line networks are underdeveloped and subscribers are directly latching on to the more modern platform.

Housing starts in the US

0.0

0.5

1.0

1.5

2.0

2.5

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09

Mn of units

Source: NAHB, Blominvest

Fixed lines and mobile subscribers (bn), mid‐2008

Fixed l ines 1.3

Mobile subscribers

3.5

Fixed‐line and mobile subscriptions, 1998‐2008

0

1

2

3

4

5

'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

Bn

0

1

2

3

4

Fi xed‐l ine subscripti ons , bnMobil e subscriptions , bnRatio of mobil e to f ixed‐ li ne subscriptions

Source: BuddeComm, Blominvest Source: BuddeComm, Blominvest

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January 2010

While mobile penetration has grown rapidly, the corresponding revenue growth has failed to keep up. Average revenue per user (ARPU) for mobile services measured across a group of developed countries registered a flat to negative growth rate over 2002‐2007. The trend is likely to continue as estimates suggest mobile ARPU to fall from around USD 21 per month in 2007 to USD 17 in 2013. The pattern reflects increasing competition among service providers and, in some cases, regulatory changes. For instance, in 2007, the European Union regulated the tariff structures on roaming usage, which has traditionally been a margin‐booster for service providers and Mobile Network Operators (MNOs). With core voice revenues under multiple pricing pressures, operators are turning to data and other value‐added services (VAS) as means to boost the overall revenue per user. Revenues from such non‐voice services stood at approximately USD 140 bn in 2007 and are expected to increase substantially to USD 320 bn by 2013. Operators hope to offset the declines in the core voice segment through an increased focus on data‐based content and new services. A major portion of data revenues comes from text messaging (SMS) with total worldwide revenue from the segment estimated at USD 65‐75 bn in 2008. In Africa and the Middle East, peer‐to‐peer SMS contributed to about 60% of total mobile data revenue during the same period. Moreover, revenues from data‐based content and new features like video, instant messaging, games, social networking etc. are likely to grow significantly as more people start accessing such services through mobile devices. On the other hand, in the case of fixed‐line operators, broadband connections are driving revenues, while volumes and revenues for core voice services have declined. The average fixed‐line voice ARPU in many developed countries declined at a cumulative rate of almost 3% over 2002‐2007. Fixed‐line operators have not only lost voice market share to mobile service providers, but are also likely to face intense revenue pressure in the broadband segment with the advent of high‐speed mobile internet technologies like EDGE/GPRS/HSPA and reduced mobile hardware prices. Mobile internet access is now either as expensive as or only marginally more expensive than fixed‐line broadband access in many markets. In certain European countries, mobile broadband is actually cheaper than fixed‐line broadband. Mobile operators enjoy the operational economies of scale that the popular mobile technology platform (High‐

Mobile monthly ARPU, 2002‐2007 CAGR

2% 2%

‐7%

‐3%

0%

4%

‐5%

‐8%

‐6%

‐4%

‐2%

0%

2%

4%

6%

UK FRA GER ITA USA CAN JPN

Source: Ofcom, Blominvest

Global mobile voice and data ARPU

0

5

10

15

20

'07 '08 '09 '10 '11 '12 '13

USD

per m

onth

Voice Data Source: Informa, Blominvest

Fixed and mobile broadband substitution

0

50

100

150

200

2006 2007 2008 2009 2010 2011 2012 2013

Custom

er sites, m

n

Fi xed‐only Fixed and mobi le Mobi le‐only

Source: Informa, Blominvest

Fixed and mobile voice volumes and revenues, change 2006‐2007

‐20%

‐10%

0%

10%

20%

30%

40%

UK FRA GER ITA USA CAN JAP POL SPA NED SWE IRLMobile call volumesMobile voice retail service revenuesFixed line call volumesFixed line voice retail service revenues

Mobile revenue as % of total telecom revenue

0%

10%

20%

30%

40%

'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07

Source: Ofcom, Blominvest Source: Informa, Blominvest

12


speed packet access or HSPA) provides, unlike the DSL technology used in fixed broadband. As a result, fixed operators are likely to see mobile players taking up a larger chunk of the broadband market over the coming years. According to The Insight Research Corporation, worldwide wireless broadband revenues are expected to reach over USD 524 bn in 2013, growing at a CAGR of 74% since 2008, compared to wireline broadband reaching USD 290 bn at a CAGR of 7%. The overall industry seems to be headed in the direction of Fixed‐Mobile Integration (FMI). In many countries, a number of operators offer both fixed‐line and mobile services, either due to regulatory/licensing norms, or due to long‐established fixed‐line operators expanding into the mobile segment. Offering the two kinds of services under the same umbrella will not only help drive synergies, but will also help cater to the demand for more complex services as the industry moves towards a converged technological landscape. Technological advances like femtocells (indoor base stations that port wired data to a wireless network) will play a vital role in this evolution over the coming years. From a structural perspective, this will ignite consolidation opportunities for players offering a single platform. Examples of such cases are Telecom Italia, Belgacom and Swisscom that have reintegrated or re‐acquired their mobile units during the last three years.

1.3 Increasing convergence – triple and quad‐play services Fixed‐mobile integration by telcos at an operational level is just one aspect of the overall idea of telecom convergence. The fundamental concept of convergence involves tight integration between internet and Public Switched Telephone Network (PSTN) technologies, with high‐speed internet connectivity as the link between devices and services. This concept of convergence is often termed as triple‐play (bundling of voice, data, and video), or quad‐play (triple‐play combined with wireless). For the end customer, this translates into getting telephone, TV and internet services as a combined package from a single provider. From a usage standpoint, convergence will lead to better integration of content and allow for personalization across multiple devices like the television, computer, handheld, fixed‐line phone and other modern devices like a portable multimedia player, GPS etc. For operators, convergence presents a strong opportunity to boost revenues and lock in customers for the long term by shutting out competition from other operators. As a corollary, subscribers will benefit from price reductions and discounts that operators will be able to offer owing to better economies of scale with such service bundling.

Average monthly voice revenue per fixed line, 2002‐2007 CAGR

‐3%

0%

‐4%

‐1%

‐3%

‐2%

‐4%‐5%

‐4%

‐3%

‐2%

‐1%

0%

UK FRA GER ITA USA JPN CAN

Source: Ofcom, Blominvest

Convergence within the telecommunications industry ‐ strategic positioning matrix

Ease of convergence

Willingn

ess towards

converge

nce

Pure mobi le ‐ market leader HybridPure mobi le ‐ tier 2‐3 BroadbandOther players Pure fixed


13

January 2010

The idea of fixed‐line and wireless integration is based on the assumption that neither will be sufficient to exclusively serve the entire range of telecom needs in the foreseeable future. Analysts expect mobile services to become the preferred choice for voice usage, whereas fixed‐line will continue to deliver high‐performance data services and provide the backhaul for combined, wireless‐indoor and wired‐outside networks using technologies like femtocells. The current challenge and the focus of telecom research is to design systems that can seamlessly switch across multiple kinds of networks depending on the user’s location and preferences, enabling the most optimum experience in terms of quality and cost. The dual‐mode telephone handset, which allows network switching, is an example of such device convergence. The recent models of mobile phones, particularly those referred to as smartphones, provide an array of features that include the traditional calling, text messaging, multimedia, and internet‐based functionalities like browsing, emailing and instant messaging among many others. In fact, in certain emerging countries, where access to laptops and computers is limited and fixed‐line broadband infrastructure is not well‐developed, mobile phones are fast becoming the preferred hardware medium for accessing the internet and related services.

1.4 Changing market landscape Convergence is the central theme around most changes sweeping the telecom market. Cable companies and pay‐TV operators are already competing with telcos since the emergence of Internet Protocol Television (IPTV) and Voice over Internet Protocol (VoIP). Even companies like Sony, with its PS3 game console, have been trying to penetrate the networked home media space. Another area of interest in the telecom world is that of mobile content provisioning, termed more precisely as Mobile Media and Entertainment (MME). The segment has been mainly driven by the increasing popularity of mobile internet access. Device manufacturers and internet media companies are the new competitors that are threatening content revenues for traditional carriers. Mobile Network Operator (MNO) dominate the portal segment of the MME market, comprising users who prefer to access the internet and related services through the MNO’s interface. In the off‐portal segment, various content providers are trying to attract a bigger proportion of customer traffic by collaborating with online companies to increase brand recognition. Examples include Apple selling music on iPhones via a WiFi iTunes shop and social network service Thumbplay marketing its services on AOL. Device manufacturers like Apple and Nokia are expanding their presence in the mobile data space by rolling out handsets that make mobile internet browsing increasingly convenient. New‐age handsets like the iPhone and Blackberry Storm have already brought about significant changes not only in terms of access, but also in the area of content through tighter integration with proprietary and third party portals. For instance, iPhone enabled a Skype application allowing VoIP calls directly from the handset. The operator makes up for the lost voice revenue by increased data usage, albeit partially. Consequently, operators like Deutsche Telekom, T‐Mobile Germany, AT&T and Canada's Rogers Telecom have threatened to ban the application, claiming it to be a competing service and a breach of contract. One of the most critical challenges for mobile content provisioning is the complex nature of revenue‐sharing arrangements between the involved parties ‐ content originators, publishers, aggregators/distributors, platform providers, carriers etc. MNOs benefit the most from mobile data, especially in the developing markets. For instance, in India, they hold around 60% of the segment’s revenue, leaving the rest to content aggregators and content creators. However, if the mobile data market is to

Subscriptions by type in Western Europe

0

50

100

150

200

250

300

'06 '07 '08 '09 '10 '11 '12 '13

Subscriptio

ns, m

n

0%

5%

10%

15%

20%

Hou

seho

ld penetratio

n

Single play Double playTriple play Triple‐play penetration


MME revenue by service category in USA

0

1

2

3

4

5

6

7

'07 '08 '09 '10 '11 '12

USD

bn

Paid information Personalization GamesBroadcast TV Unicast TV and VoD MusicOther

Source: Analysys Mason, Blominvest

14


develop on a larger scale, they will likely need to give up usage‐based fee in favor of standardized time‐bound subscriptions, allowing content creators to benefit from a bigger share of the market. Another important development on the operational side is the emergence of Mobile Virtual Network Operators (MVNOs), defined as providers of mobile services without a self‐owned network infrastructure. The idea of MVNOs is suitably justified in markets where the operating MNOs are unable to optimally utilize existing infrastructure and capacity. An MVNO can buy/lease the unused capacity and resell it to end‐users through strong marketing and branding, playing on the arbitrage between wholesale and retail pricing. With success dependent on effective marketing, MVNOs typically focus on niche market segments. One of the best‐known (and regarded as the first) MVNOs is Virgin Mobile UK, which entered the market to specifically target the youth segment with flamboyant advertising and lucrative offers. Other examples include Lycamobile – a European MVNO targeting ethnic minorities, and Blyk – a no‐cost operator generating revenues from advertisements broadcasted to subscribers. However, performance of MVNOs has been mixed so far. Nevertheless, declining prices are forcing MNOs to look at alternatives to traditional retail, including wholesale selling of their capacity, and to focus on the core activities of customer service and marketing. Mobile Virtual Network Enablers (MVNEs) constitute the next generation of market players, providing services like billing, network element provisioning, administration, operations, and support of base station subsystems among others. Apart from the aforementioned changes to the structure, the industry is characterized by strong internal dynamics like M&As as well. During the initial months of the financial crisis, restructuring activity declined due to cash constraints preventing players from spending on deals. However, there are signs of a rebound in activity owing to attractive valuations. Vodafone Group was one of the few players that decided to take advantage of the attractive valuations. During the first half of 2009, it not only increased its stake in Vodacom ‐ South Africa’s largest mobile company ‐ from 50% to 65%, but also completed its merger with Hutchinson 3G Australia to form a 50/50 joint venture, Vodafone Hutchinson Australia Pty Ltd. In the United States, Vodafone’s joint venture with Verizon Communications ‐ Verizon Wireless ‐ completed its purchase of Alltel for USD 5.9 bn, expanding its coverage to virtually the entire country and its customer base to more than 83.7 mn. Brazilian telco and ISP Global Village Telecom (GVT) attracted bids from France’s Vivendi and Spain’s Telefonica, with the former eventually gaining control of the company through 37.9% of GVT’s voting shares valued at 56 reais each. On the other hand, Telefonica entered into a swap deal with China Unicom wherein both companies bought USD 1 bn of each other’s shares, increasing its stake in Unicom to 8.06%. Finally, in the beginning of November 2009, T‐Mobile and Orange signed an agreement to merge their British units into a joint venture with a combined market share of 37%. The companies are forecasting savings of more than EUR 4 bn following the move.

Worldwide MVNO subscribers

55

85

107

126

0

20

40

60

80

100

120

140

2005 2006 2008 2011

Subscribers, mn

Source: BuddeComm, Blominvest

15

January 2010

1.5 Global telecommunications market Market penetration is one of the most commonly used indicators to assess the maturity of a telecom market. Typically, a penetration of less than 100% implies that the market still has untapped potential. A comparison suggests that the division between developing and developed markets on the basis of market penetration is strongly correlated to the level of economic development. Numbers indicate that for most developing telecom markets, the GDP per capita stands below USD 10,000. On the other hand, telecom markets with mobile penetration of more than 100% have almost twice the GDP per capita. A region‐wise analysis of the telecom markets confirms the trend as well ‐ the highest penetration is observed in Europe, followed by the Americas and Oceania. Results are highly skewed within the last group since Australia and New Zealand, which together account for almost three quarters of the region’s population, have very high penetration compared to other Oceania countries. However, exceptions and irregularities to this general correlation do exist. In Africa, despite low GDP per capita, countries like Seychelles, Gabon and South Africa have almost 90% mobile penetration ‐ higher than countries like the United States, Japan or Canada with penetrations of 88%, 86% and 65% as of 2008, respectively. The disparity can be partially explained by the fact that developed countries have more fixed‐line subscriptions on account of better infrastructure, which leads to relatively lower wireless usage. In emerging markets across Asia and Africa, fixed‐line infrastructure is underdeveloped and, consequently, both mobile adoption and growth are faster. For instance, Europe has over twelve times as many fixed connections per capita as in Africa, but only five times as many mobile connections.

GDP vs. Region‐wise Telecom penetration, 2008

0

40

80

120

160

200

Africa Americas Asia Europe Oceania

Per 10

0 inhabitants

0

5

10

15

20

25

30

35

USD

'000

Mobile subscribers Fixed‐l ine subscribersBroadband subscribers Internet usersTotal telephone subscribers GDP per capita

Source: ITU, IMF, Blominvest Penetration of telecom services region‐wise, 2008

0

30

60

90

120

150

Africa Americas Asia Europe Oceania

Per 10

0 inhabitants

Mobile Fixed‐l ine Broadband

Source: ITU, Blominvest

16


1.5.1 Mature markets call for innovation‐driven growth… In the case of markets with penetration higher than 100%, there is limited room for operators to increase their customer base using conventional means. On the other hand, despite high penetration, markets like the Gulf region have only one MVNO. As a result, there is a strong opportunity for virtual operators to tap into specific market niches regardless of the high penetration. Social services provide an avenue for operators to not only achieve higher penetration, but also to increase revenues. Given the huge percentage of population that has mobile internet access, governments are encouraging the development of services like e‐health, e‐learning and e‐governance to increase reach and efficiency. E‐health allows access to health services at an affordable cost, while e‐learning makes education available to people living in areas with limited infrastructure development. Of these services, e‐learning (including non‐governmental services) is the most developed so far and is estimated to grow from a worldwide market value of USD 25 bn in 2008 to USD 46 bn in 2010, according to Global Insights on Digital Media by BuddeComm. One word that has become the catch phrase and a key business metrics for the telecommunications industry is customer churn, also known as customer attrition, customer turnover, or customer defection. It is used to describe loss of customers who choose services of a competing operator. In developed markets, managing customer churn has emerged as a key focus area for operators due to the limited opportunities for new customer acquisition. For instance, the larger carriers in the US are trying hard to achieve monthly churn rates of not more than 1%. In particular, pre‐paid subscribers have traditionally been inclined to change operators and customer churn within the segment has been generally on the rise since 2Q05. Customer retention is becoming especially important due to the impact of the global economic downturn. Some of the major global telcos (e.g. T‐Mobile, Verizon and Sprint Nextel) reported higher customer churn at the end of 2008 and in the beginning of 2009. Telcos need to employ specific churn management strategies, such as loyalty programs, targeted messaging and special offers for premium customers. In a market environment that has little barriers to prevent customers to move from one operator to another, MNOs can attract new customers through innovative service offerings.

1.5.2 …while developing countries with low penetration present huge potential

Africa is one of the least developed telecom markets in the world with average mobile penetration of about 39%. About one‐quarter of the countries in the African continent have mobile penetration of less than 20%, while fixed‐line penetration stands at a little more than 3%. Even in Asia, densely populated countries like India and Bangladesh have mobile penetration rates of just about 30%. As a result, local and regional players have managed to capture market share with little margin pressure in an underpenetrated environment. However, the situation is gradually changing with big international players like Vodafone showing ample interest in these relatively underpenetrated markets. Some of the entrants into these markets registered exceptional growth rates, exceeding 100% annually in some cases. For most of 2008, the Central Asia/Asia‐Pacific region ranked second in terms of M&As involving targets from the region and in 1Q09 acquisitions of companies in the region reached USD 6.51 bn – 75% of total M&A worldwide. Going into 2Q09, the buying spree moderated somewhat, with deals worth USD 2.48 bn reported in the region, according to Thomson Reuters.

Global customer churn

1.64%1.89%

3.87% 3.77%

2.78%2.46%

1%

2%

3%

4%

5%

2Q05 1Q06 4Q06 3Q07 2Q08

Churn rate

Postpaid Prepaid Blended


Low penetration implies growth potential, 2008

0%

30%

60%

90%

120%

Bhutan

Turkmenistan

Uzbekistan

Yemen

Tajikistan

India

Bangladesh

Kyrgyzstan

Sri Lanka

Egypt

Mobile penetration Annual growth

Source: ITU, BuddeComm, Blominvest

17

January 2010

In general, fixed networks hold negligible significance with penetration as low as 10%, despite which fixed‐line telephony does not represent a major growth area due to the high costs involved. Furthermore, such an investment may never bring expected returns as telecom users increasingly skip fixed telephony in favor of wireless services. However, mobile operators may face infrastructure issues similar to those faced by fixed‐line operators. Nevertheless, the market dynamics in these countries still imply attractive opportunities in the longer run. For instance, 90% of all telephone subscribers in Africa are mobile users and subscriptions are growing at 25‐30% every year, according to BuddeComm. Asia’s annual subscription growth of 25‐35% presents further potential. As a result of poor fixed‐line infrastructure and PC penetration, mobile networks are gaining prominence in enabling internet access and related services as well. In Africa, mobile operators have already launched 3G services in a number of countries. In India, the number of users accessing internet through mobile devices stood at about 38 mn in 2007 compared to 9 mn using PCs, according to the Telecom Regulatory Authority of India. These markets also have their own specific needs depending on consumer preferences and trends. For example, in Africa, it is common for a group of people to share one mobile phone. Nokia tapped into this opportunity by introducing a device for less than USD 30, which allows a carrier to track and split the bill for multiple subscribers using a common mobile phone. In India, Bharti Airtel and other operators have implemented ways for consumers to pay only for services they require and not forcing them to pay for extras. Therefore, telcos will need to identify and structure services that cater to specific needs of consumers in emerging markets in order to effectively tap into the available growth opportunities.

18


2 Overview of the MENA Region

2.1 Snapshot of telecom in the MENA region Telecom (including fixed‐line, mobile and broadband) is one of the fastest growing non‐oil sectors in the MENA region and is expected to reach USD 70 bn in annual revenues by 2015, according to Madar Research. The estimated investments needed to keep pace with this growth and with the changing technological landscape totals USD 375 bn over the next decade. In fact, GCC states are expected to channel a quarter of their infrastructure spending towards the telecom industry’s expansion. Throughout the MENA region, the sector is expected to remain on the growth path on the back of strong economic fundamentals, a young population, and government reforms and liberalization.

Source: Company reports, Blominvest

UAE

Egypt

JordanKuwait

Saudi Arabia

Qatar

Bahrain

Lebanon

Oman

Mobile operators: Zain, Wataniya, VIVA

Fixed‐line operations:Provided by Ministry of Communication

Mobile operators: Etisalat, du

Fixed‐line operators: Etisalat, du

Mobile operators: Qtel, Vodafone

Fixed‐line operators: QtelVodafone (yet to be launched)

Mobile operators: Batelco, Zain BahrainSTC Bahrain (yet to be launched)

Fixed‐line operators: Batelcoand 8 other companies

Mobile operators: MTC Touch, Alfa (managing two government’s mobile networks)

Fixed‐line operator: Ogero Telecom

Mobile operators: ZainJordan, Jordan Telecom, Umniah, Xpress

Fixed‐line operator: Jordan Telecom

Mobile operators: Mobinil, Vodafone Egypt, Etisalat Misr

Fixed‐line operator: Telecom Egypt

Mobile operators: STC, Mobily, Zain

Fixed‐line operators: STCEtihad Atheeb, PCCW, Optical Communications (yet to be launched)

Mobile operators: Omantel, Nawras

Fixed‐line operators: OmantelNawras (yet to be launched)

MVNOs: Friendi Mobile, RennaInjaz Telecom, KalamTelecommunications, MazoonMobile (yet to be launched)

UAE

Egypt

JordanKuwait

Saudi Arabia

Qatar

Bahrain

Lebanon

Oman




















Egypt

JordanKuwait

Saudi Arabia

Qatar

Bahrain

Lebanon

Oman

Egypt

JordanKuwait

Saudi Arabia

Qatar

Bahrain

Lebanon

Oman

Egypt

JordanKuwait

Saudi Arabia

Qatar

Bahrain

Lebanon

Oman

Egypt

JordanKuwait

Saudi Arabia

Qatar

BahrainEgypt

JordanKuwait

Saudi Arabia

Qatar

BahrainEgypt

JordanKuwait

Saudi Arabia

Qatar

Egypt

JordanKuwait

Saudi Arabia

Egypt

JordanKuwait

EgyptEgypt

JordanKuwait

Saudi Arabia

Qatar

Bahrain

Lebanon

Oman




















UAE

19

January 2010

2.2 Market overview While the Middle East and North Africa region is generally regarded to be in an economically developing stage, the region’s telecom sector is relatively advanced compared to many other industries. The use of mobile telephony is especially high with average penetration, excluding Egypt, at 93% ‐ almost as high as the developed world and much above the developing countries in general. Egypt is an exception due to its population being over 1.5 times that of the remaining countries combined with relatively low penetration of just above 50%. As a result, average mobile penetration of the entire region under study goes down to 66% when Egypt is included. Fixed‐line penetration and internet usage somewhat lag behind the developed world, but are still higher than in many other developing countries. The UAE is the most advanced country in the region, as reflected in the ICT Use Indicator compiled by Madar Research and the ICT Development Index released by the ITU. The UAE is the only MENA country that is included in the high‐index level country group by Madar Research (above the benchmark of 2.0) and at the 32nd position out of 154 (Sweden being the most advanced with a score of 7.50) on ITU’s list. The growth of telecom in the MENA region, particularly during the last couple of years, can primarily be attributed to the recent liberalization in most countries. The opening up of the market has been driven by the governments’ objectives of economic diversification and infrastructure development, especially in the oil‐rich GCC countries. This has led to increased competition in many sectors including mobile telephony, and telecom in general. Furthermore, some of the local telcos embarked a strategy of geographical expansion in order to become industry players of global reckoning.

2.3 Mobile telephony – the major focus in the region Countries in the MENA region are characterized by underdeveloped fixed‐line infrastructure, similar to other developing countries. With the advent of mobile telecom, almost all developing countries largely skipped fixed‐line telephony to move straight to mobile services. Although fixed‐line subscriptions increased at a CAGR of just about 8% over 2003‐08, the pace is slow. The growth of fixed‐line services will likely never reach the levels recorded by many developed countries, where the technology has existed for decades. The share of mobile in total telephone subscriptions is considerably higher for most MENA countries compared to Europe, which is the most advanced telecom market. Furthermore, liberalization in the fixed‐line segment has been slower than in the mobile segment, with the former being mostly controlled by incumbent players or by the governments in some cases.

Telecom indicators ‐ MENA vs. rest of the world, 2007

0%

30%

60%

90%

120%

Mobi le Fixed‐l ine Internet

Penetration

Developed countries Region under study excl . EgyptRegion under s tudy WorldDeveloping countries


MENA countries and ICT indexes, 2007 Country ICT Development

Index (ITU) ICT Use index

(Madar Research) UAE 5.29 2.19 Bahrain 4.69 1.78 Qatar 4.44 1.7 Saudi Arabia 3.62 1.66 Kuwait 3.57 1.49 Lebanon 3.43 0.73 Jordan 3.06 1.25 Oman 3 1.23 Egypt 2.54 0.7

Source: ITU, Madar Research, Blominvest

Mobile subscriptions as % of total subscriptions, 2008

65%

70%

75%

80%

85%

90%

95%

BAH EGY JOR KUW LEB OMA QAT KSA UAE World Europe


20


As a result, mobile telephony presents the most attractive growth opportunity for telcos looking to increase their presence in this market. For companies with capabilities across all the segments, mobile services are the fastest growing, contributing the larger part of total revenues.

2.4 Mobile penetration varies within the region

Wide disparities in penetration within the MENA region make it difficult to consider it as a homogenous market. In countries like the UAE and Bahrain, mobile penetration is among the highest in the world. On the other hand, Egypt and Lebanon are still in the nascent stages of their development. As a result, a meaningful analysis of the industry in the MENA region follows the categorization of these countries into two groups – a) the GCC states, and b) Egypt, Jordan and Lebanon.

Product‐wise revenue growth, 2007

‐25%

50%

125%

200%

Etisalat Qtel Batelco JordanTelecom*

STC Omantel**

YoY grow

th

Mobile services Fixed‐line services Others

*FY 2006 Source: Bloomberg, Blominvest ** Fixed‐line and “Other services” revenue

Product segmentation of selected telcos, 2007

0%

20%

40%

60%

80%

100%

Etisalat Qtel Batelco JordanTelecom*

STC Omantel**

Mobile services Fixed‐line services Others

* FY 2006 Source: Bloomberg, Blominvest ** Fixed‐line and “Other services” revenue

Mobile market in MENA, 2008

0%

50%

100%

150%

200%

250%

BAH KUW OMA QAT KSA UAE EGY JOR LEB

Penetration rate

0

10

20

30

40

50

Subscribers, mn

Mobile penetration Number of mobile subscribers

Source: ITU, IMF, Blominvest

Penetration estimation issues

Estimating telecom penetration in the MENA region is not a completely accurate task. Often, population figures are updated infrequently, and the data is typically available from several years back. On the other hand, population estimates are not always in line with reality, as was witnessed by Bahrain and Qatar which had to make drastic revisions to their population numbers in 2007. As a result, some analysts assume that real figures are also likely to be higher than the official estimates. At the same time, fluid populations with large numbers of expatriate workers (especially in the GCC) increase the differences between SIM card holders and official citizens. Thus, there are often discrepancies between penetration estimates from different sources. For the sake of comparison, the following table presents mobile penetration rates in 2007 estimated by the International Telecommunications Union:

BAH KUW OMA QAT KSA UAE EGY JOR LEB 148% 97% 96% 150% 115% 177% 40% 81% 31%

It should also be noted that penetration rates of 100% or above do not mean that every individual is a mobile subscriber. Instead, it reflects multi‐SIM ownership and mobile sharing within the population.

Source: International Telecommunications Union, Blominvest

21

January 2010

2.4.1 Mobile markets reaching saturation in some GCC countries… Mobile penetration rates in the GCC countries are the highest in the MENA region with some well above the 100% mark, implying possible saturation and limited room for future growth. However, the robust growth in recent years seems to contradict this view. Although year‐on‐year subscriber growth during 2008 was lower than the overall six‐year CAGR for most countries, the sector still registered healthy growth. Interestingly, the increase in mobile subscribers during 2008 was higher than the six‐year CAGR in the UAE where penetration was already the highest. Kuwait has the lowest mobile penetration of 99.6% within the GCC, according to ITU, which makes it the only country below the 100% benchmark. In terms of mobile ARPU, the GCC region (except for Bahrain and Kuwait) registered negative growth over the last few years in line with the rest of the world. Multiple reasons contributed to the trend, including increased competition and liberalization resulting in reduced price control. The high penetration rates and lower ARPU also reflect the phenomenon of multiple‐SIM ownership. Such customers switch between operators to optimize

their spending on different kinds of calls, thereby not only making fewer calls from each network, but also reducing total tariffs for operators. Furthermore, the proportion of pre‐paid connections in the total number of subscribers has been on the rise in recent years. As a result, revenues suffered since pre‐paid cards are often preferred by the lower end of the market. For instance, post‐paid ARPU was almost five times that of pre‐paid in Bahrain during 2008. Interestingly, Bahrain is one of the two countries that have seen an increase in overall ARPU, including even pre‐paid, over the last few years.

Mobile subscriber growth in GCC

0%

10%

20%

30%

40%

50%

BAH KUW OMA QAT KSA UAE

CAGR (03‐08) YoY (07‐08)

Source: ITU, Various Sources, Regulatory Authorities, Blominvest

ARPU trends in the GCC

20

40

60

80

100

2002 2003 2004 2005 2006 2007

USD

BAH KUW OMA QAT KSA UAE

Source: Global Investment House, Blominvest

Share of pre‐paid subscribers in the total subscriber base

20%

40%

60%

80%

100%

120%

2002 2003 2004 2005 2006 2007BAH KUW OMA QAT KSA UAE

Source: Global Investment House, Blominvest

Mobile ARPU patterns in Bahrain

0

10

20

30

40

Pre‐paid subscribers Post‐paid subscribers

BD per mon

th

0%

5%

10%

15%

20%

25%

Growth YoY

2007 2008 Growth YoY, 2008

3G penetration

0%

1%

2%

3%

BAH KUW OMA KSA UAE

2006 2007

Source: TRA, Blominvest Source: Booz & Co, Blominvest

22


Mobile data services and broadband internet will be potential growth areas for operators over the upcoming years. So far, these segments do not form a significant part of the revenue mix as growth was restricted by the low penetration of 3G, necessary for such services. Even in the UAE, the penetration rate for 3G is just over 3%, compared to more than 30%, 10% and 5% in Japan, Italy and the UK, respectively. Another choke‐point for data and content‐based services is the lack of Arabic content in addition to policies restricting certain kinds of content. Nevertheless, with the gradual opening up of the market and operators enhancing network infrastructure, revenues from content services and internet usage are likely to increase.

2.4.2 … while penetration rates are still low in non‐GCC countries Among the three non‐GCC countries under study, Jordan has the most developed market with mobile penetration comparable to certain GCC countries, which is remarkable given its much lower GDP per capita. However, mobile subscription growth has weakened in recent years. Egypt is trying to catch up with a CAGR of almost 50% over the last five years. In terms of absolute numbers, Egypt has the highest number of mobile subscribers in the MENA region due to the country’s population. Lebanon’s telecom market is in the early stage of development with the lowest penetration among the countries under study. Nevertheless, the country’s GDP per capita is the highest within the non‐GCC group, making it an attractive market with strong future growth possibilities. The main hurdle has been the government’s control of the market, both in the fixed‐line and mobile segments. Currently, the government‐owned OGERO provides fixed‐line services, while mobile services are provided by MTC, part of the Zain Group, and Alfa ‐ a subsidiary of Orascom. The two mobile operators receive a fixed fee per active subscriber from the state. Reportedly, customers generally have to deal with high prices and issues related to service quality and governance. The priority for the sector right now is its privatization, which was planned a few years back but has not happened due to political reasons.

Despite the difference in penetration rates, the revenue patterns in the non‐GCC group are similar to those in the GCC countries. Declining ARPU, partly as a result of higher pre‐paid subscriptions, is a challenge for the players in these countries as well. Strong competition, especially in Egypt and Jordan, contributes to the revenue trend. Of the three countries, only Egypt has an active 3G network with the other two likely to join the league soon. Meanwhile, on January 4, 2010, Jordan Telecom Group (Orange) announced that 3G services will be operational within three months in Jordan. In August 2009, the group had bagged the JD 50 mn license to introduce 3G services in the country.

Mobile subscriber growth in non‐GCC

0%

10%

20%

30%

40%

50%

EGY JOR LEB

CAGR (03‐08) YoY (07‐08)

Egypt ‐ Mobinil ARPU

0

20

40

60

80

100

120

2002 2003 2004 2005 2006 2007 2008

EGP

Source: ITU, Regulatory Authorities, Blominvest Source: Company reports, Blominvest

23

January 2010

2.5 Fixed‐line ‐ no match for mobile services in the region

The fixed‐line sector in the MENA region remains relatively less developed unlike mobile telecom, where certain countries enjoy some of the highest penetration rates worldwide. Fixed‐line penetration rates stand below 20% except for Bahrain, Qatar and the UAE. Taking into account the possible bias due to larger average household sizes in the region, these numbers still imply the lower popularity of fixed telephony than developed countries with an average penetration of 44%. The situation is unlikely to change dramatically in the foreseeable future. The growth of fixed‐line subscriber base is slowing down although it has not turned negative in general. The actual number of fixed‐line subscribers fell during 2007 in Jordan, making it the least‐penetrated in the region under study. The country registered a negative 5‐year CAGR over 2003‐08. In Oman, another country with low penetration level, there were practically no fixed line additions during 2008. Other countries are witnessing minor growth with CAGRs of less than 8% over 2003‐08 in most cases. Forecasts indicate either a decline in the numbers, as in Saudi Arabia, or considerably lower growth, as in Egypt.

While liberalization may help arrest the decline to some extent, there seems to be little room for any significant expansion of fixed‐line services in the MENA region. The widely available and competitively priced wireless services have found favor with the majority of the region’s population as the primary means of communication. In line with the global trend, there appears little or no chance of a switchover to fixed‐line telephony at the end‐consumer level.

Fixed‐line market in MENA, 2008

0%

5%

10%

15%

20%

25%

30%

35%

BAH EGY JOR KUW LEB OMA QAT KSA UAE

Penetration rate

0

2

4

6

8

10

12

14

Lines, mn

Fixed‐l ine penetration Number of l ines


Fixed‐line forecasts ‐ Egypt and Saudi Arabia

02468101214

2007 2008 2009E 2010E 2011E 2012E

No of fixed

lines (m

n)

Egypt KSA Source: ITU, Blominvest

Fixed‐line growth in MENA

‐20%

‐10%

0%

10%

20%


YoY 07‐08 CAGR 03‐08


24


2.6 Internet in the MENA region

The UAE is the leader in the development of the internet segment within the MENA region. Other countries are however starting to catch up. This is particularly true of the wealthier GCC nations except for Oman, which has the lowest internet penetration and usage rates in the region. In most cases, annual growth rates for 2007 stood higher than the CAGR registered for 2002‐07, implying rapid uptake in recent times. Broadband growth rates are particularly impressive in Oman, Qatar and Saudi Arabia given their low penetration levels. Bahrain is probably the only country where almost the entire internet subscriber base uses broadband for access since 2006. Although ADSL had been the leading technology, it gradually gave way to wireless and mobile broadband in recent years. A similar trend is likely to follow in other countries as well. Today, broadband subscription forms a small portion of total internet usage. For instance, less than 15% of all internet subscriptions in Kuwait are on broadband access. On the other hand, despite being the last country to introduce broadband in 2007, penetration rates in Lebanon are higher than some other countries due to rapid uptake and development of the segment.

Internet market in MENA, 2007

0%

5%

10%

15%

20%

25%

30%


Subscribers, % of

popu

latio

n

0%

10%

20%

30%

40%

50%

60%

70%

Users, %

of p

opulation

Internet subscribers Broadband subscribers Internet users (right scale)


Internet growth in MENA

‐50%

0%

50%

100%

150%

200%

250%

BAH KUW* OMA QAT KSA UAE EGY JOR LEBInternet, CAGR 03‐08 Internet, YoY 07‐08Broadband, CAGR 03‐08 Broadband, YoY 07‐08

* YoY growth Source: ITU, internetworldstats.com, Blominvest not available

Broadband subscribers as % of total internet subscribers, 2008

0%

20%

40%

60%

80%

100%


Internet subscribers by access type in Bahrain

0%

20%

40%

60%

80%

100%

2004 2005 2006 2007 2008

% of subscribers

ADSL Wireless Mobi le broadband Dia l ‐up Source: ITU, Blominvest Source: TRA, Blominvest

25

January 2010

The increase in popularity of the internet has been adversely impacted by the low availability of Arabic content and certain issues regarding access to websites like Facebook and Orkut, which are immensely popular in the Western world. Most countries under study do not allow VoIP services as a regulatory restriction. Egypt, on the other hand, implemented free internet access in Cairo during 2002 and the only fee involved is the cost of the phone call. According to IMF estimates for 2008, Egypt is the most populous Arab country with a population of more than 75 mn. Its sheer market size, combined with such efforts to promote internet usage, make it the largest internet market in the Arab world.

2.7 Competitive landscape in the region

The competitive landscape of the telecom sector in the MENA region is quite different from that in most other parts of the world. In recent years, the region’s governments have taken a number of steps to liberalize the market. Following the issuance of new licenses, each country now has at least two mobile operators ‐ Qatar was the last after the second mobile license was awarded to Vodafone Qatar in December 2007, ending the monopoly of Qtel.

Despite the opening up of the market, the cost of acquiring licenses remains high. Further, telecom companies in the region have fared well and are expensive propositions for foreign players planning to enter the market. As a result, local players have thrived through expansion within the region. Even in the

case of Vodafone, investments in both Qatar and Egypt are into entities largely owned by the respective governments. Incumbents are mostly government‐owned, with Egypt being the only country where the major local mobile player is not owned by the government. The government ownership implies the obligation of the participating players to pay royalty fees, which are typically a specified percentage of income or profit.

MENA mobile players: presence in the countries under study, 1Q09

0%

20%

40%

60%

80%

100%

Batelco Zain Wataniya Qtel Omantel Vodafone* Etisa lat STC du OTH** JTEL

Share of total subscribers

* Vodafone Egypt + Vodafone Qatar ** OTH is present in Egypt through a 35% stake in Mobinil Source: Blycroft, Company reports, Blominvest Note: In Lebanon mobile operators manage government‐owned networks ‐ data as of end‐2008

Major telcos in MENA ‐ ownership structure, 2009

0%

20%

40%

60%

80%

100%

Etisalat Qtel Batelco JTEL STCOmantel du Zain OTH

Effective government ownership Public Corporate


Royalty rates of incumbents Bahrain 0 Egypt 0 Jordan around 10% of net profit Kuwait 0 Oman 10% of gross revenue Qatar 12.5% of net profit + 1% of revenue KSA 15% of gross revenue UAE 50% of consolidated net profit Lebanon NA Source: Company reports, Regulatory Authorities, Blominvest

Total subscribers 2.12 8.43 1.36 3.42 1.76 19.94 23.52 19.55 2.75 21.78 1.71 mn

BAH

JOR

LBN

KWT

JOR

BAH

KSA

UAE KWT

OMN

QAT

JOR

OMN

EGY

QAT LBN

EGY

UAE

KSA

EGY

KSA

26


The five biggest players in the region are Etisalat, Qtel, Zain, STC and Orascom Telecom Holding. Saudi Arabia’s STC was the last to expand abroad after it recently acquired a mobile license in Bahrain. Etisalat, Qtel, Zain and Orascom have impressive presence in geographies other than the MENA region as well, with stakes in companies across 18, 20, 24 and 15 countries, respectively. The primary focus has been on the African and South‐Asian markets. With the launch of Zain Saudi Arabia, the kingdom is now home to three of the top five regional players. Telcos in the MENA region fared relatively well in recent years, despite the economic crisis and contraction seen in most sectors. All of them posted positive results during 9M09. Although STC, Orascom Telecom, Omantel and Jordan Telecom registered lower net profits compared to 9M08, the shortfall was less than 13%. Orascom and Omantel were the only ones to report declines in revenues, with numbers falling by 4% and 3%, respectively. Etisalat recorded the highest surge in net operating profit of 32%, followed by Zain. Another major telco Qtel reported a revenue growth of 22%, dispelling any serious adverse impact of the economic crisis. du, which started operations relatively recently in the UAE, continued its outstanding performance with revenue growth of almost 40%, swinging to a net profit of USD 42.1 mn from a loss of USD 38.6 mn in 9M08.

MENA telcos ‐ 9M09 results

0

2

4

6

8

10

12

STC du

OTH

Batelco

Omantel

Etisalat

Qtel

Zain

JTEL

USD

bn

‐20%

0%

20%

40%

60%

Revenue, 9M09 Net operating profi t, 9M09Revenue, % YoY change Net operating profi t, % YoY change


27

January 2010

2.8 Telecom sector – economy’s lifeline Amid the economic turmoil, governments are looking beyond their respective conventional sectors – oil and gas in the GCC countries ‐ to identify opportunities in other sectors that could help trigger and sustain an economic revival. World over, economic policymakers believe that the telecom sector is one of the pillars of modern economic frameworks in the information age. Investments into the development and progress of the telecom sector have a multiplier effect on a nation’s entire economy. According to Booz & Co., the contribution of a freely competitive and market‐driven telecom sector to the country’s overall economy can be as high as 3.38% of the GDP, compared with 2.33% in monopolistic markets. Related research conducted by the World Bank in 2002 indicated that a 10% decline in telecom costs in a particular market could help boost trade by as much as 8%. In this respect, a more liberalized telecom sector will benefit the economies in the MENA region. Interestingly, FDI into the region’s telecom sector stands at a mere 0.07% of the overall GDP, and the sector contributes only about 2.1% to the region’s GDP compared to 3.5% for the world as a whole. Moreover, broadband penetration in the region is just 0.8% in contrast to the 4.2% worldwide. On the other hand, the telecom market in Jordan is fully open to competition. Looking back to its reform phases, mobile penetration grew from 1.8% in 1998 (when the mobile market was still a monopoly) to 23.9% in 2002, when there were two players operating in the market. Mobile penetration shot up to 75.6% in 2006 following the entry of the fourth player. In comparison, Jordan’s GDP at constant prices grew by nearly 8% during 2008. In Lebanon, 34% of the population uses mobile phones, compared to only 16.9% in 1999. On the other hand, Lebanon’s GDP grew at 2.6% during 1998 and by 8.5% during 2008. In general, the telecom sector, particularly in the MENA region, has shown strong resilience during the prevailing economic turmoil. The region can ride the telecom wave through a targeted approach involving regulatory changes, cash injection, and broader government support. And Telecom can offer businesses and people in general real solutions that meet their business and individual needs, and help in the process to enhance economic growth and performance.

Annual GDP growth and penetration rates in the MENA region (%) Year Bahrain Egypt Jordan Kuwait Lebanon Oman Qatar KSA UAE PR GDP PR GDP PR GDP PR GDP PR GDP PR GDP PR GDP PR GDP PR GDP 1998 14.8 4.8 0.1 7.5 1.8 3.0 12.7 3.7 13.8 2.6 4.2 2.7 11.6 9.0 3.2 2.8 17.0 0.1

1999 21.0 4.3 0.7 6.1 2.5 3.4 14.3 ‐1.8 16.9 ‐0.8 5.1 ‐0.6 14.3 5.5 4.1 ‐0.7 27.2 3.1

2000 31.7 5.2 1.9 5.4 8.0 4.3 21.4 4.7 19.7 1.7 6.7 4.6 19.6 10.9 6.6 4.9 44.1 12.4

2001 45.1 4.6 3.9 3.5 17.4 5.3 37.5 0.2 20.0 4.5 13.2 5.6 27.5 6.3 11.8 0.5 55.9 1.7

2002 57.2 5.2 6.2 3.2 23.9 5.8 50.3 3.0 19.9 3.3 18.6 2.1 39.0 3.2 22.8 0.1 67.6 2.6

2003 63.7 7.2 7.8 3.2 25.3 4.2 56.1 17.3 20.1 4.1 23.5 0.4 51.5 6.3 32.2 7.7 78.9 11.9

2004 91.3 5.6 10.1 4.1 30.1 8.6 76.4 10.2 22.0 7.5 31.4 3.4 61.5 17.7 39.8 5.3 93.7 9.7

2005 105.4 7.9 17.7 4.5 56.4 8.1 84.3 10.6 24.3 2.5 50.9 4.9 81.0 9.2 60.0 5.6 110.9 8.2

2006 122.1 6.7 22.9 6.8 75.6 8.0 91.1 5.1 26.8 0.6 68.1 6.0 91.9 15.0 81.6 3.2 130.4 9.4

2007 146.9 8.1 37.6 7.1 80.3 8.9 97.3 2.5 30.3 7.5 91.7 7.7 111.2 15.3 115.1 3.3 177.2 6.3

2008 185.8 6.1 50.6 7.2 86.6 7.9 99.6 6.3 34.0 8.5 115.6 7.8 131.4 16.4 142.9 4.4 208.7 7.4

Note: PR= Penetration rate Source: IMF, ITU, Blominvest

28


3 Regional Trends

3.1 Regional economies affected by the downturn … In its early days, the financial crisis appeared to be limited to the developed world with little or no impact to most emerging markets, including the MENA region. However, that was not the case and almost all the economies around the world are coming to terms with the economic weakness over the recent few quarters. For 2009, the IMF estimated that the world GDP would contract by 1.1%, while the World Bank put its estimate at a more pessimistic 3%.

The MENA region (under study) can be broadly divided into two groups ‐ oil‐rich (the six GCC states) and oil‐poor (Egypt, Jordan and Lebanon). Despite being a net petroleum exporter, Egypt has been classified as an oil‐poor country, given that the contribution of oil to its economy is significantly lower than in the GCC countries to warrant a meaningful comparison. Nevertheless, strong economic ties ‐ capital flows, labor migration, and external trade ‐ between the countries imply that oil prices are important to all the countries in the region. The nosedive in oil prices and tighter liquidity were the two main fallouts of the global crisis that affected the GCC countries. Lower oil prices meant a sudden deterioration in export receipts, as well as public revenues, which had a widespread impact as reflected by the cutbacks in public expenditure on infrastructure development and economic diversification. With the real estate debacle in Dubai, the overall GDP growth for 2009 and 2010 is likely to remain lower than the 2007‐2008 levels, with countries like Kuwait, Saudi Arabia and the UAE expected to witness a recession. Qatar is the only exception with its 2009 GDP growth expected to outpace the last couple of years on the back of strong momentum in the natural gas sector. In Egypt, Jordan and Lebanon, lower remittances and investments from the GCC were partly offset by the lower costs of imported hydrocarbons. Furthermore, tighter regulation in these countries helped their financial sectors to remain relatively shielded from the global turmoil. However, exports from these countries, a major portion of which goes to the European Union and the US, are expected to decline significantly. As a result, economic growth in Egypt, Jordan and Lebanon during 2009 is expected to slow down to 4.7%, 3% and 7%, respectively. Despite the general weakness, apart from Kuwait, Saudi Arabia and the UAE, the countries under study should outperform the 2009 benchmark growth rate of 1.7% for the wider group of developing and emerging economies. Many analysts predicted the start of a slow recovery during the second half of 2009, some signs of which were seen in the few rallies in mid‐2009 across capital markets in the US and the MENA region. The question emerging now is related to the exact timing of the recovery in different markets, which, in turn, depends on the extent to which a country was able to mitigate the impact of the crisis. The extraordinary measures during the crisis were not limited to the US alone, as countries in the MENA region introduced stimulus packages as well. However, in the region, the focus of fiscal expansion was on economic diversification and development projects, in addition to preemptive measures for the financial sector. The difference when compared to the US and other Western countries was mainly on account of the Middle Eastern crisis being driven by secondary pressures like lower oil prices and liquidity squeeze, and not by structural factors.

Real GDP growth (YoY change)

‐5%

0%

5%

10%

15%

20%


2007 2008 2009 2010

Oil price, 2002‐2009

0

30

60

90

120

150

Jan‐02 Jan‐03 Jan‐04 Jan‐05 Jan‐06 Jan‐07 Jan‐08 Jan‐09

Weekly all countries Spot price

Source: IMF, Blominvest Source: EIA, Blominvest

29

January 2010

Over the last several years, GCC countries were able to achieve significant fiscal expansion on the back of accumulating budget surpluses. The oil windfall was directed mainly towards a) investing in the region or abroad through Sovereign Wealth Funds, b) piling up foreign reserves, particularly in the case of Saudi Arabia, and c) reducing public debt, for GCC countries which came down to an average of 12% of the GDP in 2007 from 69.9% over 1998‐2002. The situation was however different for Egypt, Jordan and Lebanon. On the brighter side, yields for bonds in the overall MENA region, especially sovereign bonds, are down from their end‐2008 highs, making it possible for the countries to turn to investor funds. Sovereign debt issuance gained popularity in the region, with Lebanon, Dubai, Abu Dhabi, Bahrain and Qatar issuing bonds during 2009.

3.2 … MENA telecom sector stands strong The telecom sector’s non‐cyclical nature is true for the industry in the MENA region as well. Even as real estate crashed, oil and gas projects got shelved, and many other industries faced tough times, most telecommunications companies managed to post an increase in revenues during 9M09 on a yearly basis. Year‐on‐year profitability was strong as well, with most companies posting robust profits during the period, including du, which was in the red a year ago. This was despite profits being impacted by the steadily rising competition in the region and the pressure on prices and margins. For instance, Zain’s entry into Saudi Arabia during the second half of 2008 directly impacted the performance of other companies. Further, many telcos operating in emerging countries were exposed to foreign currency losses due to a strengthening dollar.

HSBC/DIFX Middle Eastern Conventional Bonds

4

8

12

16

May‐08 Aug‐08 Nov‐08 Feb‐09 May‐09

Yield (%

)

Sovereign Corporates Financia l Services

Budget balance as % of GDP

‐20%

0%

20%

40%

60%

2005 2006 2007E 2008E 2009E 2010E 2011E

Bahra in Egypt Jorda nKuwai t Qa ta r Sa udi Arabi aUAE

Source: World Bank, EIU, Blominvest Source: HSBC/DIFX, Blominvest

MENA telecom companies, revenues

0

2

4

6

8

10

12

STC du

OTH

Batelco

Omantel

Etisalat

Qtel

Zain Jtel

USD

bn

9M08 9M09


MENA telecom companies, net operating profit

‐0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5STC du

OTH

Batelco

Omantel

Etisalat

Qtel

Zain Jtel

USD

bn

9M08 9M09


Mobile customers base, 1Q09 vs 1Q08

0%10%20%30%40%50%60%70%

Etisalat du

Omantel

Batelco

Zain

Zain Bahrain

Wataniya

Qtel

Vodafone

Egypt

Mob

inil


30


The positive outlook is shared by investors as reflected in their support for the equity issues by telcos. The most prominent was the Vodafone Qatar’s IPO in April 2009, which raised USD 1 bn and was one of the largest IPOs during the year globally. The SAR 300 mn (USD 80 mn) IPO of Etihad Atheeb Telecommunications in Saudi Arabia earlier in 2009 was oversubscribed as well, while Qtel’s debut bond sale in June of USD 1.5 bn was more than eight times oversubscribed, according to the company’s statement. The capital market performance of the telecom sector has been relatively good as well. A clear outperformer was STC with its stock zooming to record highs in mid‐2009. In general, all telecom stocks outperformed general indices in the GCC and in Jordan. Only in Egypt, Orascom Telecom fared weaker in comparison to the EGX 30 general index. In fact, the resilience of the telecom sector vis‐à‐vis other industries was strong enough for some analysts to opine that local governments should increase their support to the sector in order to inject life back into the economies. Steps like regulatory revisions, reducing the financial burden of telcos in license fees and royalties, investing in infrastructure, and enhancing the overall awareness about ICT may create multiplier effects for other industries as well. However, the crisis is not over yet as a sustained recovery may still be a few months away. The telecom sector could play a role in accelerating activity in capital markets and the economies at a broader level. A specific characteristic of the Middle East, especially GCC countries, is the high percentage of expatriates in their populations. The depressed economic and business environment resulted in an outflow of foreign workforce, contributing to the shrinkage in the populations of these countries. As a result, telcos may see customer bases thinning down, impacting top‐lines. Furthermore, convergence is still in its early stages of evolution in the MENA region, but multiple SIM ownership makes it easier for subscribers to reduce spending. Going forward, while companies may face revenue pressures on multiple fronts, they will be able to sustain long‐term growth through well‐planned strategic decisions related to technological and market development. However, absolute customer numbers did not really suffer significantly. Most telcos in the region reported an increase in the number of mobile customers during the third quarter of 2009, compared to the same period last year. du registered a 50% increase in its customer base. However, net customer additions (defined as the number of new customers adjusted for the churn) during 1Q09 compared to 1Q08 presents a mixed picture. While Egypt and Qatar fared better during 2009, net new subscriptions in the UAE and Kuwait were lower. However, in the UAE, a majority of new customers went with du, whose increase in net customer additions was more than offset by the decline registered by other players. Telcos in the MENA region continue to have access to funds, which may translate into possible opportunities at a time when other industries are struggling to fund growth. Carefully planned consolidation activity, along with sustained capital spending on infrastructure will be critical areas for telcos to focus on over the next few months.

Performance of major telcos in MENA vs. HSBC optimized regional index

0

20

40

60

80

100

120

140

Jan‐08

Apr‐08

Jul ‐08

Oct‐08

Jan‐09

Apr‐09

Jul ‐09

Oct‐09

Performance

Eti sa lat Zain STC HSBC GCC + Egypt + Jordan

Source: Bloomberg, Blominvest

% of expatriates in total population, 2007

0%

20%

40%

60%

80%

100%

Bahra in Oman Qatar Kuwai t UAE SaudiArabia


31

January 2010

3.3 Specific demographics shape the telecom sector Most of the countries under study have small populations, except for Egypt, which is the most populated country in the Arab world, and Saudi Arabia in the GCC region. As a result, the apparent potential for the sector’s expansion and sustained growth seems limited compared to other heavily populated developing countries. However, the differentiating factor is the GDP per capita, which is relatively high compared to most developing countries. In fact, it stands close to the European average of USD 33,000 ‐ multiple times higher than the average of USD 5600 for emerging and developing economies, according to IMF’s 2009 estimates. Furthermore, Qatar is in the league of nations with the highest per capita GDP during 2009. The substantial spending power makes the strong opportunity quite real and has been one of the main drivers behind the telecom sector’s performance in the region.

The MENA region’s population is characterized by a low average age. People under 24 years of age constitute a substantial portion of the entire population, which is as high as 50‐55% in some countries. This has two direct implications for the telecom sector. First, the younger population tends to be more tuned in to technological advancements and is likely to be more prolific in telecom usage. Their internet usage rates are higher than people in other age groups as well. As a result, they represent a ready base of early adapters for new products and services. This is especially true for services that can help boost ARPU like multimedia content and mobile broadband among others. Secondly, a large young population translates into a strong population growth rate in the future. The population in the region is forecast to increase by more than 2% annually over the upcoming years. When compared to the more developed countries with growth rates in the range of 0.2‐0.3%, this represents an immense potential for sustained expansion in the telecom customer base. Population density in most counties under study is significantly higher than in the more developed telecom markets like Europe and the US. In the case of Egypt, although the overall population density is low, a majority of the population lives around the Nile delta, making it one of the most densely populated regions in the world. Consequently, as a result of such geographical concentration, a larger number of people can be reached with relatively lesser infrastructure investments. Therefore, capex for infrastructure roll‐out during the initial stages does not need to be very high, making it easier for new market entrants. However, costs are higher in the more mature markets for players looking to extend coverage beyond their existing base.

Country Population (mn)

GDP per capita, USD ‘000

(current prices) Bahrain 0.8 24.4

Egypt 76.7 2.5

Jordan 6.0 3.8

Kuwait 3.5 32.5

Lebanon 3.9 8.5

Oman 2.8 18.7

Qatar 1.2 76.0

KSA 25.5 14.9

UAE 4.9 46.6 2009 estimates Source: IMF, Blominvest

Population aged 0‐24, 2010 forecasts

0

20

40

60


% in

total population

Source: UN, Blominvest

Population growth rates

0

1

2

3

4


%

2005‐2010 2010‐2015 2015‐2020

10.7%


Population density, 20051048

0

100

200

300

400

500

BAH EGY JOR KUW LEB OMA QAT KSA UAE EUR US

Population

per sq. km


32


The high level of migration is another critical aspect of the demographics in the MENA region ‐ inward in the case of GCC countries and outward from Egypt, Jordan and Lebanon. Over the last few years, Qatar, Saudi Arabia and the UAE have been particularly attractive for foreign workers. According to 2008 UN estimates, the number of migrants is likely to continue increasing during the coming years across the other GCC countries as well. For telecom companies in destination countries, this directly translates into an expanded customer base. On the contrary, such migrant populations tend to be dynamic and follow the economic cycle. In recent times, as economic growth slowed down, a large chunk of migrants either returned home or moved to countries with relatively better prospects. Many sectors like construction witnessed a considerable outflow of workers as investments slowed and jobs were cut. At the same time, telecom companies in countries like Egypt and, to some extent, Lebanon are likely to witness an increase in customer base as their migrant citizens return due to job losses. However, reduced disposable incomes in an economically weak environment may limit the ability of telecom companies to drive revenues despite an increase in the absolute number of consumers.

3.4 Liberalization led to historic changes Liberalization timeline (year in which the second mobile license was awarded) & current status

Egypt Jordan Bahrain Lebanon Oman KSA UAE Qatar

1998 2000 2003 2004 2004 2004 2006 2008

3 mobile 4 mobile 3 mobile 2 mobile 8 mobile 3 mobile 2 mobile 2 mobile

1 fixed‐line Competitive fixed‐line

Competitive fixed‐line

1 fixed‐line 2 fixed‐line 4 fixed‐line 2 fixed‐line 2 fixed‐line

Competitive internet market




1 ISP Competitive internet market

2 ISPs 1 ISP

Note: Competitive means that open entry is permitted Source: Booz Allen Hamilton, Telecom Regulators, Blominvest The liberalization of the telecom sector started a little more than a decade ago and was triggered in most countries by the requirements resulting from the World Trade Organization (WTO) accession. With the second mobile license in Qatar being awarded to Vodafone Qatar in 2008, each of the nine countries under study now has at least two licensed operators. This is a remarkable change compared to the monopolistic market environment that prevailed till the mid‐90s. The fixed‐line market however lags behind as some of the countries still lack market‐driven competition in this segment. The internet market is probably the most liberalized with most of the countries allowing open entry. However, internet service providers (ISPs) sometimes have to comply with content restrictions depending on the government’s stance on certain issues. In overall terms, Bahrain and Jordan have the most liberalized telecom sectors in the MENA region with four licensed mobile operators and open entry allowed in the fixed‐line and internet segments. Egypt’s mobile and internet markets are also relatively liberalized, although fixed‐line is monopolized by Egypt Telecom. The tender offer for the second license has been planned, but is being postponed since 2008 due to uncertain economic conditions. Oman, which was relatively late to liberalize, has been an innovator in the MVNO space, being the first country to have mobile resellers. At the other end of the spectrum is Lebanon, where government‐owned telecom networks are managed by private telecom companies on a contractual basis. Meanwhile, in Kuwait, fixed‐line voice services are provided entirely by the Ministry of Communications, which is also the owner of the international gateway. Liberalization of telecom in the MENA region helped attract investments from foreign companies. France Telecom was the first in the list after it became a stakeholder in Egyptian Mobinil at the time of the company’s inception in 1998. More recently, France Telecom also picked up a majority stake in Jordan Telecom in 2006. Following the sector’s strong performance, there are

Net migration in MENA countries

‐150

‐100

‐50

0

50

100

150

BAH KUW OMA QAT KSA UAE EGY JOR LEB

'000

2000‐2005 2005‐2010 2010‐2015


33

January 2010

signs of increased interest from international players. For instance, while France Telecom has been increasing its stake in Mobinil, Vodafone obtained a second mobile license in Qatar. Countries in the MENA region are gradually establishing regulations to support the co‐existence of several telecommunications providers and facilitate customer choice. The most common regulation is related to internet resale, enabling ISPs to buy internet capacity from network owners and resell it to customers under their own brand. Fixed‐line voice resale regulation exists in three countries, while mobile resellers (or MVNOs) are currently active only in Oman. Furthermore, there is some progress in the area of Local Loop Unbundling (LLU), which opens up the physical connection between the customer’s house and the telephone exchange’s central office, currently managed by an incumbent, to multiple players. Carrier selection is either already available or being planned in most of these countries, as is Mobile Number Portability (MNP) that allows a customer to retain the same number when switching from one operator to another.

Another indicator of the extent of liberalization in a telecom market is the availability of VoIP, which enables transmitting voice over an internet connection and, as a result, provides a cheaper alternative to traditional telephony, especially for long‐distance and international calls. In the GCC countries, VoIP is strictly regulated and is either forbidden or restricted to domestic connections (the UAE) and provided by existing telcos. Popular international VoIP services such as Skype are blocked in some of these countries. Nevertheless, Bahrain has seen considerable progress, as a number of VoIP providers are now licensed to offer services including international calls. In Jordan and Egypt, there are a number of VoIP providers, with the service available in Egypt already since 2000. The ISPs in the Middle East are also required to cooperate with national authorities regarding the availability of certain websites amid security concerns. Often, content related to criminal skills, illegal drugs, gambling or offensive to religion is prohibited. Also, social networking sites (including certain online dating services, parts of Facebook, Orkut, YouTube and others) are sometimes blocked as well. The GCC countries and Egypt follow a similar philosophy of internet censorship, while Lebanon and Jordan, on the other hand, allow relatively free access. Blocking some of these websites may have an impact on the telecom industry, as social networking is a rapidly growing source of revenues for companies worldwide in the area of mobile content.

Service‐based ompetition enablers in MENA, 2007 Country LLU Carrier

selection MVNOs Fixed‐

voice resale

Internet resale

MNP

Bahrain P √ P √ √ P

Egypt √ P × √ √ √

Jordan P √ √* √ √ √

Kuwait × × × × √ ×

Lebanon √ × × × √ ×

Oman P P √ P P √**

Qatar × × × × × P

KSA √ P × × √ √ UAE √ √ × × × P

√ ‐ implemented; × ‐ not implemented; P – planned Source: Booz Allen Hamilton, Various news agencies, Telecom Regulators, Blominvest * License issued, however regulation is being redrafted ** As a decentralized solution

34


3.5 Expansion strategies have resulted in vast geographical presence

The recent years have been characterized by a significant increase in the geographical presence of telcos in the MENA region. Telecom companies were quick to latch on to the opportunities as new licenses were auctioned in neighboring countries. Consequently, in most countries under study, the market is shared between the incumbent and at least one other major local player. The only exceptions were UAE, reserved for two Emirati operators – Etisalat and du‐ and Qatar where the second license was awarded to Vodafone. Saudi Arabia and Kuwait have as many as three local players operating in the respective markets. The resultant increase in competition across the region, coupled with factors like market saturation, led regional operators to seek growth elsewhere. Another reason for this move was the relatively limited investment opportunities in the nearest region, even though the situation changed a lot compared to several years ago. New license issuances and privatization offers are still limited and have thus failed to meet the demand of expansion‐hungry local companies. In order to offset the possibility of declining margins in their home countries and to continue expanding, telcos are turning to emerging markets to capitalize on the low penetration. So far, the maximum focus has been on Africa and South‐East Asia, where the potential for growth is higher than in the MENA region. In fact, some telcos followed such an aggressive expansion strategy that within several years they set up operations in more than twenty countries. The four most active operators in the region, often referred to as the “big four”,


Geographical presence of MENA players, 2009

0

5

10

15

20

25

Zain

Qtel

Etisalat

OTH

Batelco

Omantel

STC

JTEL du

Num

ber of countries


Penetration rates in countries where most MENA telecom players operate, 2008

0%

50%

100%

150%

UK

Netherlands

Gabon US

Tunisia

Indonesia

Sri Lanka

Egypt

Pakistan Iraq

Nigeria

Tanzania

India

Sudan

Burkina DRC

Niger

Source: Company reports, ITU, Blominvest

1 2 3 4‐5

Number of MENA telecom companies in a country:

35

January 2010

are Zain, Qtel, Etisalat and Orascom Telecom. During the last two years, STC and Omantel joined the big league taking their first steps towards overseas expansion. The mobile penetration rate in most countries of Africa is estimated at less than 50%, while continent‐wide mobile penetration stands at about 39%. Zain, Orascom, Wataniya (a Qtel subsidiary) and Etisalat are now significant players in the continent with a combined market share of over 20%. Etisalat was mentioned as the world’s fastest growing mobile operator in a July 2008 report by Informa Telecom and Media. In November 2009, the company’s website showed a global customer base of 94 mn. Despite enormous opportunities in the African continent, the business environment remains challenging. Telcos entering the market need to be prepared for issues related to legal technicalities, integration, and lack of transparency from the target company in many cases. For instance, Orascom Telecom only recently managed to reach a settlement with the Republic of Chad after the Ministry of Telecommunications invalidated the previously agreed transfer of TchadMobile’s 51% shares. On the other hand, given the evolving nature of the industry and the challenging business environment in the region, MENA telcos are possibly more experienced in operating in a difficult market ecosystem compared to companies from the developed world. However, the situation is changing now and calls for MENA telcos to undertake future expansion only after careful evaluation. As emerging markets continue to develop, opportunities for potential entry in new territories need to be studied thoroughly. In some countries, there is an oversupply of operators ‐ India has at least 11 operators, and so does Indonesia, while Cambodia and Bangladesh have eight and six operators, respectively. As a result, fierce competition resulted in negative growth for some of the smaller operators, which was unusual for emerging markets. According to an Oliver Wyman report, ARPU rates in emerging African and South Asian markets will decline by 50% by 2013 from the current already low levels. Africa is a unique market with low personal income that limits overall telecom spending, including voice usage. The data segment including SMS is constrained by the low level of literacy. Moreover, market fragmentation due to small populations, language barriers, and political issues makes it difficult for companies to realize any meaningful economies of scale. While there may be possibilities of addressing the likely revenue decline through steps like network sharing or focus on higher income segments, the prevailing economic weakness aggravates the concerns in the short‐ to medium‐term. Another setback has been the recent devaluation of most emerging currencies compared to the US dollar. As a result, overseas profits were subdued for most telcos, particularly for companies like Zain, Qtel or STC, which generate a significant part of their total revenues from international operations. Some operators seem to be in a course correction mode over the last few months. Vodafone announced a planned slowdown of its expansion, while increasing focus on extracting value from existing assets.

3.6 Telecom investment – new opportunities, changed attitudes The telecom sector in the MENA region witnessed a wave of investment activity in recent years. Regional players embarked on a shopping spree, looking for opportunities not only in the region but also in other parts of the world, especially the emerging markets in Africa and Asia. The expansion strategies adopted by most MENA telcos included both greenfield expansion and acquisition of existing operators. However, new license awards in the countries under study were limited, as a result of which prices moved up and industry analysts expressed caution on the valuation of some of these deals. Zain, which paid over USD 6 bn for a third mobile license in Saudi Arabia and invested over USD 1.5 bn towards network rollout by Feb 2009, will face a pressure on profitability due to high amortization expenses. STC’s USD 900 mn acquisition of a 26% stake in VIVA, Kuwait’s third mobile operator, was seen by most industry insiders as a very expensive deal.

Mobile operator share in the African market, 1Q09

0%

5%

10%

15%

20%

25%

Vodafone

MTN

Zain

Orange

Orascom

Maroc

Telecom

Portugal

Telecom

Milicom

Wataniya

Etisalat

Others

Source: Blycroft, Blominvest

36


The year 2005 was the best year for deals in the MENA region with an average value of more than USD 1.5 bn. Total deal value was the highest in 2005 as well, up by almost 180% compared to the previous year. The market eased to some extent in 2006, only to grow again in 2007. It was not until the second half of 2008, when the impact of the global financial crisis was the most profound in the region that the regional M&A market was down to substantially low levels. The acquisitions were made possible partly due to the low debt levels of some companies. Except for Zain and Qtel, MENA telcos in general have a lower net debt‐to‐EBITDA ratio compared to the European average. Another supporting factor was the government backing given that most companies in the sector are government‐owned in some part, often through SWF stakes. However, some analysts are questioning the sustainability of acquisition decisions made on account of relatively comfortable cash positions. For some operators, the extensive expansion strategy did not result in organic growth.

Consulting firm Booz Allen Hamilton classified telecom operators in the MENA region into four groups in 2007 ‐ local players, dormant giants, opportunistic players, and international integrators. The categorization is based on the level of regional focus and the potential ability to create value in territories outside the region. In our view, companies like du and Jordan Telecom can be considered local players, given their complete focus on local markets. STC and Omantel can be classified as dormant giants, given their limited current international presence and impending expansion plans backed by strong financials. Of the larger players, we believe that

Selected new license awards in MENA Year Country Winner Price (USD mn) 2004 Saudi Arabia (second license) Etisalat 3,200

2004 Oman (second mobile license) Qtel‐led consortium 104

2006 Egypt (third mobile license) Etisalat 2,900

2007 Saudi Arabia (third license) Zain‐led consortium 6,100

2007 Kuwait (third license) STC‐led consortium 908

2007 Qatar (second mobile license) Vodafone‐led consortium 2,124

2009 Bahrain (third license) STC 230 Source: Various news agencies, Blominvest

M&A activity by MENA telcos

0

2

4

6

8

10

12

'98

'99

'00

'01

'02

'03

'04

'05

'06

'07

'08

1H08

1H09

USD

bn

0

3

6

9

12

15

18

Num

ber of deals

Dea l va lue Number of deals

Source: Thomson One, Blominvest

Acquisitions by MENA operators in recent years Date Acquirer Target Deal value, USD mn % acquired 14‐Mar‐09 Zain Al Ajial Wana Corporate 333 31

7‐Jun‐08 Qtel Indosat 1,800 40.8

21‐Jan‐08 STC Oger Telecom 2,850 35

26‐Jun‐07 STC Binariang GSM 3,050 25

2‐Mar‐07 Qtel Wataniya 3,801 51

6‐Feb‐06 Zain Mobitel 1,332 61

4‐Jul‐05 Oger Telecom Turk Telekomunikasyon 6,550 55

19‐Jun‐05 Etisalat PTCL 2,599 26

29‐Mar‐05 Zain Celtel 3,400 100 Source: Thomson One, Blominvest

Source: Booz Allen Hamilton, Blominvest

Opportunistic players

•Zain•Qtel•Orascom Telecom

Dormant giants

•STC•Omantel

Cross border value creation potential

Level of regionalization

International integrators

•Etisalat

Local players

•du•Jordan Telecom

Opportunistic players

•Zain•Qtel•Orascom Telecom

Dormant giants

•STC•Omantel

Cross border value creation potential

Level of regionalization

International integrators

•Etisalat

Local players

•du•Jordan Telecom

37

January 2010

Etisalat can be regarded as an integrator that is well‐placed to take advantage of synergies between its home and overseas markets in terms of network traffic, roaming revenues and capex synergies. On the other hand, similar synergies are relatively difficult to come by in the case of companies like Orascom Telecom. Zain introduced the “One Network” roaming offer across the markets it covers. Qtel pursued a strategy of inorganic growth through its acquisitions of Wataniya and Indosat.

The investment landscape in the MENA telecom market will see some reshaping, especially in the face of the economic downturn. Increased funding constraints will drive inherent changes that were bound to happen following the aggressive and often inorganic growth achieved at high costs. While the major players are likely to continue to remain active (e.g. Zain earmarked USD 5 bn for acquisitions until 2011), the average deal size is likely to decline. Regional telcos may prefer greenfield licenses to capitalize on lower prices beyond the GCC in countries like Lebanon, Libya and Syria. The financial crisis is likely to result in operational consolidation and a move towards extracting more synergies and organic growth. Any investment will need to be carefully planned as new potential deals emerge out of funding constraints faced by smaller, usually local players. In fact, the crisis is likely to lead to certain M&A opportunities that may otherwise not have come up. Even merger deals ‐ so far scarce in the region ‐ may happen. South Africa’s MTN and India’s Bharti were close to a merger agreement that would have created the third biggest telco in the world with more than 200 mn customers across India, Africa and the Middle East. However, talks were abandoned despite the backing from Lebanon’s Mikati family, the second‐biggest shareholder in MTN. Etisalat, Zain and Qtel have plans to become truly global players over the next decade and a mega‐merger may just be the enabler for such a vision.

3.7 Technological changes are following global trends

3.7.1 Convergence of fixed, mobile and other services The technological and operational landscape in the region is evolving in line with the global trend of fixed‐line giving way to wireless. From the perspective of subscriber base, growth in the fixed‐line segment was dwarfed by the rapid development in the mobile segment. In fact, in some countries like Jordan, Kuwait and Lebanon, the number of fixed‐line subscribers stagnated or even decreased. At the same time, the uptake is still growing despite cellular penetration surpassing 100% in most MENA countries.

Upcoming greenfield licenses and privatizations

Country Description Timeline Algeria Privatization of up to 50% of Algerie Telecom Expected in the next two to three years

Lebanon Privatization of the mobile network operators Currently on hold because of economic conditions

Egypt Second fixed‐line license Twice delayed, no new timeline

Oman Privatization of 25% of Omantel On hold

Oman Third mobile license Twice delayed, no new timeline

Morocco Third mobile license Was expected in 1Q09, no new timeline

Bahrain Privatization of Batelco No timeline

Libya New integrated license No timeline

Syria Third mobile license By 1Q10

Source: CA Cheuvreux, Blominvest

Mobile and fixed‐line subscriber growth

‐20%

0%

20%

40%

60%

BAH EGY JOR KWT LBN OMN QAT KSA UAE

Mobile growthYoY, 2008 Mobile CAGR 03‐08Fixed‐l ine growth YoY, 2008 Fixed‐l ine CAGR 03‐08

Segment‐wise revenues, 2008 growth

‐10%

0%

10%

20%

30%

40%

STC

Qtel

Omantel

Batelco JTEL

Etisalat

Growth YoY

Mobi le revenues Fixed‐l ine revenues

Source: ITU, Blominvest Source: Bloomberg, company reports, Blominvest

38


Similar conclusions can be drawn from an analysis of revenues logged‐in by integrated telecom operators in the region. For most of them, the mobile segment contributed to maximum growth during 2008. In the case of STC and Jordan Telecom, revenues from fixed‐line declined during 2008 compared to that in 2007. However, the dynamics of the market in the MENA region are quite different to meaningfully tap deeper into the fixed‐line segment. While the more developed markets are characterized by fixed‐to‐mobile substitution, consumers in the MENA region are leapfrogging and latching directly onto mobile services instead of adopting fixed‐line initially. The late evolution of the market translates into availability of latest in mobile content and technology, thereby implying the absence of any significant advantages of fixed‐line over mobile services. Internet access, which was conventionally regarded as the key competitive advantage of fixed‐line, is being gradually made available on mobile devices with little difference in speed and quality. The CEO of Mobily, the second largest operator in Saudi Arabia, recently expressed his firm belief that mobile internet in the region will overtake its fixed‐line counterpart over the coming years. Fixed‐line operators in the more developed markets are tackling the issue by getting on to the fixed‐mobile convergence bandwagon. Many are increasingly adopting technological enablers like PBX extensions (linked to VoIP usage), femtocells, and dual‐mode handsets. However, these are not yet popular in the MENA mainly due to regulatory barriers and the focus on core services. Nevertheless, given that the telecom sector in the region is quickly catching up with developed markets, it is a question of when, and not if, fixed‐line operators will make a shift and move in tandem with market needs. Yet another step ahead of fixed‐mobile convergence is the concept of triple‐ and quad‐play that allows bundling of services across fixed‐line voice, mobile voice, internet and Internet Protocol TV (IPTV). However, convergence is still in its infancy in the MENA region, as both operators and regulators are opposed to the idea, an example of which is the tightly regulated VoIP segment. However, going by the global trend, convergence is the way the telecom industry will evolve. This includes bundled services, which will account for 80% of telecom revenues in the future, according to a report by Yankee Group. Middle Eastern operators should make use of this fact based on experience of players in more developed markets. For instance, BT acquire a huge number of customers for its triple‐play services thanks to the VoIP offering, and France Telecom is considering bundling services for the entire family. Instead of viewing it as a threat, regional operators should adapt convergence and use it to gain competitive edge ahead of competition.

3.7.2 Increasing roll‐out of high‐speed internet … The MENA region is relatively underpenetrated in terms of high‐speed internet or broadband access. Compared to almost 16% in Europe, the average penetration for the countries under study stands at around 5.5% with Qatar, UAE and Bahrain contributing the maximum. Only about 39% of all internet subscribers use broadband services compared to 78% in Europe. Even in the UAE, which is the most developed ICT market in the region, less than 50% of the households had access to broadband according to a June 2009 report by Arab Advisors Group. Household penetration was even lower in other countries ‐ 22% in Qatar, 14% in Oman and under 7% in Egypt. This is rather unique considering that the region boasts of some of the highest average mobile telephony penetration rates in the world. Not surprisingly, broadband is an increasingly important point of focus for regional stakeholders, including operators, customers and regulators. The governments realize the crucial role that a fast and efficient broadband network plays in the globalized world. Moreover, they are looking to bridge the gap between the low quantum of population in concentrated urban centers and large populations scattered across the rural areas. For instance, increasing the internet penetration rate by 10% in Iraq is likely to raise the GDP per capita by 1.5%, according to the management of Asiacell, the country’s second largest operator. Such numbers, although arguable, are difficult to ignore. For operators, broadband represents a new revenue stream with strong growth potential. However, the high levels of infrastructure investment led operators to pursue revenues through acquisitions and to buy basic service licenses than to bet on new technologies. They find themselves caught in the dilemma of whether to focus on costly physical fiber infrastructure, or on

Broadband in MENA, 2008

0%

3%

6%

9%

12%

15%

18%

BAH EGY JOR KWT LBN OMN QAT KSA UAE

Penetration

0%

10%

20%

30%

40%

50%

60%

70%

Growth

Broadband penetration Growth YoY


39

January 2010

mobile broadband. Furthermore, in the case of mobile broadband, opinions are divided over the sustainability of Worldwide Interoperability for Microwave Access (WiMAX) versus the alternative High Speed Packet Access (HSPA), and the soon‐to‐be‐launched Long Term Evolution (LTE). Demand is constrained by high prices of services and good computer equipment that tends to be costlier compared to many other markets. The situation seems to be changing off late. Operators are rolling out network upgrades ‐ du completed its upgrade to an IP‐based core network at more than USD 27 mn, which enables it to offer faster broadband to residential customers. Qtel doubled broadband speeds for free, while Etisalat announced plans to install a new Fiber To The Home (FTTH) technology, which will make Abu Dhabi the first city in the world to have super‐fast internet speeds of up to 100 mbps. Mobile broadband has been gathering momentum with the deployments of either WiMAX or HSPA, which are the two competing standards. The latter turned out to be more popular with the region’s operators given its ease to be supported largely by the same infrastructure with an upgrade. Nevertheless, there are indications about WiMAX becoming a technological alternative as well. Seven licenses have been granted in the Gulf, mostly to incumbent operators, and another five in Jordan. The lower entry barriers in this market segment will help accelerate adoption and roll‐out of WiMAX vis‐à‐vis other competing standards. According to Ernst and Young estimates, it costs between USD 50 mn and USD 100 mn to set up a WiMAX network for a small town or area, in addition to the license cost of about USD 15 mn. In Saudi Arabia, two WiMAX roll‐outs were announced recently ‐ one by Mobily in collaboration with Samsung, and another by GO and Motorola. In Bahrain, Mena Telecom launched a new USB WiMAX device that can be used with laptops and computers. The potential for WiMAX is especially huge in countries like Jordan as no 3G licenses have been awarded yet. Regardless of the standard, mobile broadband will play an increasingly important role in providing reliable and efficient high‐speed internet access to homes and offices, including places that are not covered by fixed‐broadband infrastructure.

3.7.3 … is driving growth in the mobile content segment Mobile content is another area that we believe will witness strong growth over the coming years, despite lagging in the past compared to other developed markets. As of December 2008, data services including content accounted for less than 6% of total mobile revenues, which was significantly lower than the rest of the world. Africa was the only region where the ratio was even lower. Data ARPU of merely USD 2.16 on a monthly basis is rather low as well. Moreover, the figure includes revenues from SMS services, which contribute around 60% of data revenues in the wider MENA region. Overall, the higher‐end mobile data/content segment is a tiny contributor to the overall mobile business. In fact, the management of du recently downplayed the current level of earnings from data services, terming them as a “negligible error”. However, in light of some of the recent developments, higher‐end services like mobile content and MMS can help boost declining mobile ARPUs in the MENA region, similar to the more developed markets. The region witnessed the fastest growth in data revenues globally, which spiked 91.7% YoY in 1Q08, while the yearly figure for 2008 was up by 46% compared to 2007, and compared to the global increase of 24%. The demand is clearly there, especially after the introduction of content‐friendly handsets like Blackberry and iPhone, for which data usage is almost double the normal data usage. According to an online survey conducted by du several months ago, 27% of internet users in Saudi Arabia had used mobile access to get online. Recently, the GSM Association, the mobile operator trade body, termed Saudi Arabia’s Mobily as the "the busiest mobile data network on the planet". Even the amount of internet content in Arabic, which was otherwise slowing down mobile broadband uptake, is increasing. Google recently launched its Translator Toolkit for creating Arabic versions of English websites. The Abu Dhabi government undertook an initiative to create more Arabic content by launching a dedicated organization in 2008. The outlook of service providers to higher‐end mobile content is changing as well. Not long ago, mobile content was available only through WAP portals in the region, as established by an earlier generation of European operators. The content was highly aggregated and expensive, discouraging potential users. However, in October 2008, du and Rotana, the largest Arabic content provider, announced an agreement introducing flat‐rate data charges and low content prices integrated into subscription

Mobile data revenues, December 2008

02468101214

Africa

Americas

Asia

Pacific

Eastern

Europe

Western

Europe

Middle

East

US/Canada

World

USD

0%

5%

10%

15%

20%

25%

Monthly data ARPU % of tota l mobi le revenue

Source: Informa Telecoms and Media, Blominvest

40


packages. Rotana signed a similar deal with Zain, whose Bahrain customers will be the first to avail of the service. Nokia has an active interest in the region as well, launching its online music store last year, while Sony set up its first specialized digital media office in Dubai. The most popular value‐added services in the MENA region are games, music, news, religious content, sports and women‐specific content, delivered in multiple formats including text, graphics, video, ringtones and SMS/MMS. A specific characteristic of the region is the importance of religious content, including services like prayer alerts and prayer readings. Mobile banking has emerged recently. Zain and Western Union are reportedly working together to launch mobile money transfer services through the operator’s new Zap platform. du has teamed up with a credit card company named Dubai First to launch the first mobile payment trial in the region.

3.8 Smartphones set to drive growth in the mobile handset market

Mobile phones represent around 90% of all telephone lines in Africa. The continent’s mobile market is growing consistently at an average 50‐60% every year. With the overall market penetration at about 30%, there is still enormous potential to be tapped over the upcoming years. Meanwhile, in the MENA region, due to poor fixed‐line infrastructure, mobile networks are beginning to play an increasingly important role in internet service provisioning as well, following the launch of 3G services. Newly introduced converged licensing regimes have not only increased the competitive pressure in many key markets, but have also allowed mobile operators to branch out into new service segments. New handsets are being launched every other day, targeting different customer brackets. While Google launched a USD 500 phone manufactured by China’s HTC, African operator MTN sent a team to China to develop a handset for USD 10. Nokia has the largest share of the mobile handset market in most parts of the developing world, but Chinese handset makers such as ZTE have been eating into its share, particularly in Africa. MTN is also looking for cheap and high‐end smartphones that can be retailed for about USD 40. Market analyst firm Gartner reported that worldwide sales of mobile phones reached 308.9 mn units in 3Q09, a 0.1% increase from 3Q08. Smartphone sales surpassed 41 mn units, a 12.8% increase over the same period last year, and are likely to represent the fastest‐growing segment of the mobile‐devices market during 2010. Smartphone sales are expected to remain robust globally on the back of reduced prices. The global smartphone market is estimated to grow 23.7% YoY during 2009. Smartphones are set to more than double their share of the total handset market by 2014. As a result, the share of smartphones in total handset sales is likely to increase from the current 16% to 37% by 2014. At the same time, the smartphone sales in the Middle East and North Africa market are forecast to reach almost 8 mn units in 2010, and grow with a 39% CAGR until 2014. Thus, the segment could become the key driver for the entire mobile handset market, as conventional mobile handset volumes are likely to remain flat over 2009‐2010 and to grow subsequently.

Middle East handset market value

4

5

6

7

8

9

10

2008 2009 2010 2011

USD

bn

Source: Informa Telecoms & Media, Blominvest

Global mobile handset sales

0

500

1000

1500

2007 2008 2009 2010 2011 2012 2013

Mn units

Africa and Middle East EuropeAs ia Paci fic Latin AmericaNorth America

Source: Informa Telecoms & Media, Blominvest

41

January 2010

3.9 Business segment – a lot of growth opportunities Telecom companies in the Middle East are increasingly viewing business customers as an important target segment. The corporate segment most often uses post‐paid tariff plans and higher revenue roaming services, as opposed to retail pre‐paid customers that are low on average revenue given their use of basic services. Integrated operators hold the advantage of being able to offer solutions catering to the corporate segment’s needs compared to purely mobile operators. Fixed‐line telephony continues to be an important part of corporate communication infrastructure. As a result, service offerings for this segment are relatively better in countries with integrated telecommunication licenses, such as the UAE, Qatar and Bahrain. Meanwhile, options are limited for the corporate segment in countries like Egypt where fixed‐line and wireless licenses are separate. Typically, government‐owned telecom sector also implies limited choice to consumers. Integrated operators are better positioned to offer Virtual Private Network (VPN) services that enable companies to send voice, data and video over a single, reliable internet connection, creating a secure network across multiple company sites and its mobile employees. Some regional telcos extend this service beyond domestic borders by offering an international VPN service. Companies can opt for a dedicated leased line from almost all fixed‐line and integrated operators in the region. Integrated telcos offer services like web and email hosting, though not as often as VPN. The most developed enterprise solutions, like managed ICT services, ICT consulting and outsourcing, are however less prominent and are currently offered by Orange Jordan and operators in the UAE. Practically all operators offer BlackBerry services and other mobile email solutions. Bulk SMS allowing sending a text message to a huge number of mobile subscribers is another common product. Closed user groups are popular as well, enabling special tariff schemes and control of usage within the group. With limited availability of data related to the enterprise segment in the MENA region, most observations are based on reports from some of the regulatory authorities. For instance, the most popular basic mobile service in Lebanon is roaming. However, over half the companies that responded to the survey claimed to be using no corporate‐specific services at all. It is notable that the Lebanese corporate segment may not be representative of the general regional trend as its internet usage is still relatively low. Therefore, it is possible that more tech‐savvy enterprises in other countries use more advanced telecom services in general. Nevertheless, wireless broadband use among companies is much higher in Lebanon than in Qatar. The possible reason behind the popularity of wireless broadband in Lebanon may be the relatively poor fixed‐line services, which may see some improvement after privatization. Egypt fares better than Qatar in business ICT usage with 55% of enterprises using broadband, compared to 38% in Qatar. Assuming Qatar to be broadly representative of the GCC countries, Egypt and the UAE could likely be the regional leaders in corporate usage. However, even the broadband usage in Egypt still lags behind the EU‐15 average of 82%. Also, the online presence of companies in the region stands low as indicated by 26% in Qatar, compared to 66% in Europe.

% of businesses using selected mobile services in Lebanon

0%

20%

40%

60%

Roaming WAP GPRS VPN/CUG None

Source: TRA Lebanon, Blominvest

% of businesses by internet connection in Qatar and Lebanon

0%

10%

20%

30%

40%

50%

ADSL

Dial‐up

Leased

line

Wireless

broadband

Other

% of businesses

Qatar Lebanon

% of businesses conducting activities online

0%

30%

60%

90%

Using

e‐

mails

Business

Search

Product

Prom

o

Sales

Orders

Custom

erService

Financial

Svcs

Placing

Orders

Contacting

Public

Lebanon Egypt

Source: ICT Qatar, MCIT Egypt, Blominvest Source: ICT Qatar, TRA Lebanon, Blominvest

42


The future of the business segment lies in managed services. Following the severe economic crisis, services that enable companies to outsource their ICT functions, thereby reducing their costs and allowing them to focus on core activities, will become increasingly popular. So far, Orange Jordan is the major provider of such services in the region. According to its estimates, companies can save up to 15‐20% on telecom costs through such outsourced solutions.

43

January 2010

4 Opportunities and challenges

4.1 Opportunities

4.1.1 Government support for the telecom industry

The development of the telecom industry is one of the key elements of the growth strategy adopted by governments in the MENA region. Consequently, the sector benefits from significant state support, especially since most of the regional operators are owned by the governments. During the prevailing economic slowdown, particular attention is being paid to telecom in the hope that the wider ICT industry will help boost the economy and accelerate the recovery process. Most governments in the region recognize the importance of the sector as reflected in the 2008‐2009 Global Information Technology Report by the World Economic Forum. The UAE scored 6.05 compared to the mean of 4.67 in the Executive Opinion Survey for the government’s treatment of the ICT sector, placing it among the global leaders in terms of prioritization of the industry. The country was ranked fifth out of the 134 studied countries. There is ample room for ICT initiatives in the region, including those led by the governments. The level of digitization of the public sector is still low compared to developed countries, and ideas like e‐governance still have a long way to go. Accordingly, large sums of money are being allocated for various ICT projects by the governments. In Saudi Arabia alone, ICT spending is projected to reach USD 733 mn between 2009 and 2011, while communication‐related hardware spending for mixed‐use civil projects in the entire GCC region is forecast at USD 2.95 bn during this period. Among the notable projects launched recently is the Government Network in Qatar, built and hosted by Qtel as a secure platform for communication and data sharing between government entities. Bahrain continues to expand its e‐government services network as well. In 2008 itself, debit and credit card transactions involving government entities through its special portal stood at almost USD 2.5 mn. The country is now planning to introduce utility bills payments through mobile phones. Special attention is being given to broadband as a medium that can play a role in the broader development of the society. In this direction, the Arab Regulators Network (AREGNET) recently assigned Egypt’s National Telecommunications Regulatory Authority to lead a task force to study broadband internet and to explore ways of spreading it deeper in the Arab world. Also the Minister of Telecommunications in Lebanon recently proposed a plan for 2010 to upgrade and modernize broadband in Lebanon, which would raise the capacity from the current 2 mb to 120 mb. The cost of the upgrade is estimated at USD 166 mn.

World Economic Forum indicators for ICT industry

Government prioritization of ICT (max. score 6.34)

Importance of ICT to government vision (max 6.40)

Bahrain 5.42 5.03

Egypt 5.18 4.45

Jordan 5.52 5.04

Kuwait 4.28 3.61

Oman 5.02 4.97

Qatar 5.55 5.66

KSA 5.17 4.81

UAE 6.05 5.86

Average 5.27 4.93 Source: World Economic Forum, Blominvest

44


4.1.2 Migration – opportunity to retain customers? The Middle East region witnesses significant migration activity, especially into the GCC countries. As a result, expatriates account for anywhere between 20% and 80% of the total population in these countries. Remittances from GCC to non‐GCC countries under study (Egypt, Jordan and Lebanon) contribute over 50% to total remittance receipts. Most of the major regional telecom companies are present in more than one country, following aggressive expansion in recent years. In fact, the leaders operate in 20 or more countries with a focus on Africa and South/South‐East Asia – countries from which significant migration happens to the Middle East. Within the Middle East region itself, most telcos have expanded, or are considering expanding, operations beyond their home countries. This implies an opportunity for telcos to target migrants with offers that leverage synergies arising out of their international presence. Cheaper roaming tariffs were among the initial initiatives undertaken by the larger telcos. Zain was the first to introduce a special roaming offer under its One Network scheme that offered national rates across 16 markets where it operated. As a result, competitors felt the pressure, and Qtel slashed roaming rates by as much as 50% in three countries where it operated. However, such offers are typically aimed at travelers and not long‐term migrants as a result of which there still exists an untapped opportunity to retain customers when they move to another country. Such initiatives can be seen elsewhere in the world. For instance, Surinam’s incumbent Telesur launched an MVNO in the Netherlands to target Surinamese expats. Middle Eastern telcos have been watching this space with caution for a while. Zain is possibly the only company to maintain a global brand across the countries where it operates. Other operators still use different brand names, which results in subscribers seeking a new service provider upon migration instead of continuing with a brand that they were already using. Telcos could consider designing special offers for migrating customers to stay with the same operator. In the highly penetrated Middle Eastern markets, such initiatives may well be a potential competitive advantage for telcos that can execute this effectively.

4.1.3 Introduction of WiMAX WiMAX, the wireless digital communications system, is gaining ground in the Middle East region as a means of enabling wireless broadband in areas where fixed‐line infrastructure is inadequate. The technology does not rely on cables, but on wireless signals from base stations, and can be a convenient solution for areas with low population density. The platform can be used to provide both fixed and mobile internet access and is used by existing and new operators for last‐mile connectivity. The main drivers behind the success of WiMAX in the region include demand for high‐speed wireless broadband owing to the lack of adequate fixed‐line infrastructure, wider spectrum choices and superior quality of service. Moreover, barriers to entry are considerably lower than for other telephony and data services. According to estimates by Ernst and Young, it costs USD 50‐100 mn to set up a small WiMAX network with licenses costing around USD 15 mn. As a result, there were 19 commercial WiMAX networks in service as of April 2009, according to Analysys Mason, a telecom consultancy. Both fixed‐line operators and MNOs are choosing WiMAX to offer broadband services. According to industry experts, WiMAX could become the most prominent broadband solution towards the end of 2009 with most operators claiming it to become their main channel for providing data services to customers. The markets are often underserved when it comes to broadband, and are thus likely to willingly adopt this technology. Further, data services provide a means to sustain and increase ARPU rates, which have been under significant pressure in the recent years. However, it is important for operators to gauge the true potential and possibilities that exist with WiMAX deployments in an era of fast technological advancements. Already, there is stiff competition between WiMAX and HSPA (3G telephony), which

Remittances from GCC as % of total, 2006

0%

25%

50%

75%

Jordan Lebanon* Egypt

* Data for 2008 Source: IMF, Blominvest

Regional expansion leaders Company Number of countries Zain 5

Qtel 3

Etisalat 3

Orascom 2

Batelco 2 Source: Company reports, Blominvest

45

January 2010

even though does not offer the same capacity as the former, but is easier to deploy on existing infrastructure. Nevertheless, sentiments about WiMAX in the MENA region remain positive and operators could stand to benefit significantly from the technology in coming years.

4.1.4 Network sharing Sharing of infrastructure across multiple operators was not popular in the MENA region until very recently. With network coverage being regarded as a competitive differentiator, players were not open to deals that could lead to the loss of a competitive advantage. However, with markets reaching saturation, competition remains high as reflected in low ARPUs. The differentiation on account of geographical network coverage is becoming almost insignificant. Moreover, operators are increasingly looking at ways to cut their costs during economically tough times. There are a number of ways in which operators can share infrastructure, from basic unbundling or site and tower sharing to the more complicated ones such as sharing of antennas, base station equipment and maintenance, or radio spectrum. According to Booz Allen Hamilton, capital expenditure can be reduced by as much as 40% with effective infrastructure sharing. In a recent white paper, telecom advisory firm Delta Partners said that nearly USD 8 bn could be saved over the next five years in the MENA region just by tower sharing, as operators invest anywhere from 10% to 20% of their revenues to roll out new sites or upgrade existing ones. The firm also indicated that cost reductions would far outweigh the impact due to market loss, which is the primary argument against network sharing. Simple forms of infrastructure sharing like national roaming and some unbundling were implemented in the region a couple of years ago in Jordan, Oman, Saudi Arabia, the UAE and Egypt. Qtel and Vodafone Qatar signed a tower‐sharing agreement in 2008. According to industry analysts, such deals are being considered by more telcos as a primary means of reducing costs in a difficult economic scenario. The rental of network by MVNOs from incumbent telcos is another case in point. Well‐drafted deals can benefit all the involved parties. While virtual operators can focus on niche market segments and mitigate the risk of heavy upfront capital expenditure, incumbents can target mass markets and increase penetration, albeit indirectly. MVNOs typically focus on niche segments like immigrants or price‐sensitive groups as opposed to the mass markets served by incumbent operators. This was indeed the case when Omantel allowed Majan Telecommunications to offer services using its infrastructure. Omantel’s CEO said that the cooperation had created a win‐win situation for all the involved players. As the Middle Eastern telecom markets become increasingly liberalized, further opportunities will emerge in the MVNO space, which can benefit both existing and new players.

4.1.5 Increasing outsourcing activity in the MENA region The MENA region is gaining importance on the global outsourcing map. This is a result of multiple factors that include low labor costs, strong business opportunities and private and government focus on building capacities and attracting investments. Supporting the observation, AT Kearney, in its last Global Location Services Index, ranked Egypt as 6th globally and Jordan as 9th, while the UAE debuted at the 29th position. Egypt was also rated as the world’s seventh most desirable outsourcing center in a study by strategic advisory firm Tholons. The country is already home to international outsourcing giants such as Wipro Technologies, Mahindra‐Satyam, Hewlett‐Packard, IBM and Cisco Systems. International outsourcing companies are increasing their presence in Jordan as well, benefitting from its IT capabilities and low costs. Meanwhile, the UAE aims at gaining prominence in the IT industry with the development of the Dubai Internet City. With the region’s companies realizing the advantages of outsourcing, intra‐regional outsourcing is gaining ground. Analysts estimate that 35% of the Middle East outsourcing business is won by Arab companies. Countries like Egypt are the major destinations with salaries that are much lower than those in other countries within the region. Such movement of business processes to remote locations presents a huge opportunity for the telecom industry. The increased telecom spending to establish connectivity and regular contact between the remote locations and the headquarters will help operators drive more revenues.

46


4.2 Challenges

4.2.1 Declining ARPUs Most operators in the region do not prefer to disclose actual ARPU figures, which are likely to be higher than many major telcos in developed countries. According to Abdulaziz Ibrahim Fakhroo, chairman of the GSM Arab World, Zain and Qtel enjoy ARPU of equal to or higher than USD 50, placing them among the top 20 telcos worldwide. However, even as the subscriber base continues to grow, the risk of declining ARPU rates is very real due to multiple factors. Increasing liberalization and competition led to high mobile penetration. However, at the same time, the use of mobile phones remains relatively concentrated with multiple SIM ownership. This implies that spending on a single card is relatively low as the subscriber can spread out usage depending on call tariffs. Moreover, stronger competition led to pricing pressure, despite regulatory authorities checking open price wars. Finally, the current crisis will likely result in lower tourism and, consequently, lower roaming usage, which is often the main driver for higher mobile voice revenues. Another issue due to the increased competition is the increase in customer churn, as seen in other markets worldwide. With more choice, subscribers tend to switch from an existing to a new operator to benefit from incentives and offers rolled out by newer players. The costs related to this churn are becoming increasingly relevant to the entire telecom industry and are among the reasons for industry insiders to substitute ARPU with Average Margin Per User (AMPU) as the primary indicator for performance after taking costs into account. To counter the ARPU decline, regional operators need to look at services that can help increase revenues. Operators are considering data services, including value‐added services and video services among others, as potential means of increasing consumer spending. Broadband is characterized by high average rates per user with residential WiMAX rates in the region being among the highest in the world (USD 52, as reported by WiMAXCounts). Bundling of services is yet another way through which operators are addressing concerns related to customer churn and retaining the share of the customer’s wallet.

4.2.2 VoIP services A significant portion of revenues in the MENA region comes from international calls as local call prices are often fixed by regulators. According to Etisalat’s chairman, local call services are actually offered below cost. The VoIP market is strictly regulated with a ban on such services across almost all GCC countries, except Bahrain. However, Jordan and Egypt have issued licenses for providers of such services. While VoIP presents a good opportunity to drive more traffic to internet service providers, it is definitely a threat to traditional international voice revenue. Even though status quo seems to prevail for now, telecom companies will need to prepare themselves at some stage to counter the arrival of VoIP providers. According to TeleGeography, leading VoIP provider Skype’s cross‐border traffic grew by 41% to 33 bn minutes during 2008. The company held an 8% share of the international long‐distance voice telephony market, exceeding any other telephone provider. Roughly 25% of these minutes were accounted for by the “Skype out” mode that allows paid calls from Skype to regular telephone lines. As a result, traditional telcos will need to shift their focus from voice to data and multimedia services in order to effectively counter the pricing pressure from the much cheaper VoIP services.

International long‐distance traffic, 2008

Telephone traffi c92%

Skype traffi c8%

Source: TeleGeography, Blominvest

47

January 2010

5 Future Outlook The MENA telecom industry can be regarded as a relatively better performer in a region that fared better compared to many other regions of the world. The region under study is expected to post stable growth despite the global economic downturn. The telecom sector, both globally and regionally, has not been impacted directly by the crisis and seems to be reaffirming its non‐cyclical nature. Telecom companies in the region posted positive profits during 1H09. For many telcos, the numbers were better than those posted for 1H08. Revenues for a number of the telcos in the region were up on an annual basis. Nonetheless, the sector has not been entirely immune to the adverse global economic environment. The slump in the stock market dragged share prices down even for telcos, with most declining between 25% and 50% since the beginning of 2008 when the crisis hit the region. Orascom Telecom Holding was the worst performer with an almost 70% decline, whereas Jordan Telecom was the least affected with a dip of 12%. It seems that the impact of the crisis on the labor market also impacted the sector, at least in some countries. In the UAE, the outflow of expatriate workforce triggered by the slowdown led to net mobile additions falling substantially during 1Q09. However, during 3Q09, net additions in the country were back to the same levels as in 3Q08, indicating the bottoming out of the market. There was a certain downward trend in Kuwait as well, while net mobile additions actually rose in Egypt and Qatar, implying the return of workers to these countries. Despite near‐term perturbations, we believe that the longer term outlook for the sector remains bright. Although penetration in the GCC countries remains high at more than 100% in some cases, there are no visible signs of slowdown. Subscriber growth in almost all the countries ranged between 20% and 35% YoY during 2008 and was largely in line with the 5‐year CAGR. Egypt, Jordan and Lebanon present remarkable growth potential owing to penetration rates that are comparable to the underdeveloped markets. One of the major growth drivers for the high subscriber numbers was the recent liberalization in most of the telecom markets in the region. Over the last couple of years, the region, which was dominated by mostly state‐owned monopolies, gave way to market‐driven competition. As a result, all the countries under study now have at least two players in the mobile segment. Another relatively new phenomenon in the region was the entry of MVNOs, the first of which was Friendi Mobile in Oman, followed by Renna, also in the same country. The MVNO model appears promising for the region due to multiple factors. On one hand, existing operators with established brands are seeing limited opportunities to acquire new customers in well‐penetrated markets. For these players, MVNOs present a good means of generating revenues from unused network capacity. On the other hand, the market includes several niche segments for virtual operators to tap into with focused marketing efforts, despite the high overall penetration. The European example of Lycamobile shows that an expatriate‐focused strategy can be quite successful. We see strong potential for MVNOs, as well as for operators that decide to share networks in the region. Regional telcos undertook a strategy of rapid geographical expansion, with some of them aiming to become major global operators over the next few years. Earlier, acquisitions of stakes and new licenses in existing and new markets were plentiful, as ample growth of capital and liquidity was available to companies. However, with tighter liquidity, companies will need to rethink and develop strategies that are built around sustainable growth and not just opportunistic expansion. The changes due to the global economic downturn are definitely having an impact on the landscape of the telecom industry in the MENA region. Liberalization of markets, new players, new business models, inter‐player relationships, various expansion tactics and evolving technological trends can be either challenges or opportunities depending on how companies choose to respond and adapt. It is crucial that in such dynamic times, operators focus on their core business objectives and take well‐planned steps to achieving them.

48


6 Appendix

6.1 Company profiles

6.1.1 Etisalat

Etisalat is the telecommunications service provider in the UAE since 1976, and has built a modern telecom infrastructure, establishing itself as an innovative and reliable service provider. It stands 140th among the Financial Times Top 500 Corporations in the world in terms of market capitalization and is the 6th largest company in the Middle East by capitalization and revenues, ranked by The Middle East magazine.

Peer Group Analysis(9M09) ETISALAT du

Debt/Equity (%) 8.08 115.47 EV/EBITDA 6.47 17.45 P/E 8.31 52.83 Return on Assets (%) 13.14 2.36 Return on Equity (%) 26.56 7.93 Dividend Yield (%) 4.74 ‐ EPS 1.27 0.05

Total assets (USD bn) 16.90 2.12

Market Cap* (USD bn) 21.04 3.17

* As of December 13, 2009 Source: Annual Report, Blominvest

Recent Developments • Taking ahead its technology‐pioneering initiative, Etisalat acquired a 16.6% stake in SoftAtHome, a software provider of home operating platforms that helps service providers deliver convergent applications for the digital home. This will help the company provide its customers a holistic digital home experience and bring a shift in the way technology is used in today’s world.

• Etisalat and GE Healthcare recently signed a memorandum of understanding to mark their strategic alliance to introduce the latest healthcare solutions in the UAE.

• The telco is set to enter the USD 10 bn remittance market with a new service. On January 04, 2010, Etisalat announced that it has partnered with Citibank to facilitate remittances for Indian nationals from UAE via mobiles, with further plans to expand it to Bangladesh, Pakistan and Egypt in the coming months.

Financial Analysis For the first nine months of 2009, Etisalat announced an increase of 6.6% in total revenues to AED 22.11 bn from AED 20.75 bn reported in the year ago period. The increase was a result of the higher customer base reported by the company. The company’s net income decreased 5.5% to AED 6.85 bn from AED 7.25 bn, as the year ago profit included an exceptional income after federal royalty profit of AED 892 mn from sale of shares in Mobily. Excluding the exceptional item, net income increased 9% compared to the year ago period. This result came after the company said that it had fully acquired Tigo Sri Lanka, the Sri Lankan unit of Nasdaq‐listed Millicom International Cellular SA, for USD 207 mn.

Management Outlook Etisalat’s international subscriber base stands at 94 mn and is forecast to reach 100 mn soon with operations covering nearly 2 billion people across 18 markets around the world. Moreover, the company is likely to begin commercial operations in India during the second half of 2010. The UAE’s largest telecommunications company is seeking to acquire assets in at least two countries in Africa and a mobile phone license in Syria. In 2008, it had bought stakes in six companies throughout the Middle East and Africa.

Stock Performance

5

10

15

20

Jan‐08May‐08 Sep‐08 Feb‐09 Jun‐09 Oct‐09

Stock Price

1300

2600

3900

5200

6500

Index

ETISALAT DFM Source: Bloomberg, Blominvest

Major Shareholders Holding (%)

Public 40

Government 60


Revenue breakdown

Others4%

Interconnect4%

Data services12%

Internet8%

Mobiles60%

Telephones12%

Source: Annual Report, Blominvest

Subscribers base

5.36.3

7.58.6

9.8

0

2

4

6

8

10

12

2004 2005 2006 2007 2008

(Mn)

Source: Annual Report, Blominvest Key Financials (AED’bn)

9M09 9M08

Total Revenues 22.11 20.75

EBITDA 6.99 7.38

Net Earnings 6.85 7.25

Capex 16.17 14.75 Free Cash Flow 12.86 12.01

Subscribers(mn) 9.8* 8.6** Enterprise Value 55.50* 112.58**

* 2008 **2007 Source: Annual Report, Blominvest

Company Overview

49

January 2010

6.1.2 Qatar Telecom

Stock Performance

70

140

210

280

Jan‐08May‐08Sep‐08 Jan‐09 Jun‐09 Oct‐09

Stock Price

3500

7000

10500

14000

Index

QTEL DSM

Source: Bloomberg, Blominvest Major Shareholders Holding (%)

Public 21

Government 78

Corporate 1


Revenue breakdown

Wireless services87.5%

Wireline services12.5%


Subscriber base

0.9

1.3

1.7

0.0

0.5

1.0

1.5

2.0

2006 2007 2008

Mob

ile sub

scribers in

Qatar

mn

Source: Annual Report, Blominvest Key Financials (QAR’bn) 9M09 9M08


EBITDA 2.79 2.11


Capex 3.78 5.33 Free Cash Flow 0 7.13

Mobile Subscribers (mn) 1.6* 1.3** Enterprise Value 53.76* 51.93**

*2008 **2007 Source: Annual Report, Blominvest

Headquartered in Doha, Qatar Telecom (Qtel) is present in 17 countries and provides fixed and mobile telecommunications services. The company is focused on expansion both in the MENA region and South East Asia. In total, it has a coverage base of more than 560 mn people, and now has 57.5 mn consolidated subscribers. Qtel’s strategy is to offer consumer mobile, consumer broadband, and corporate managed services across Middle East and North Africa, the Indian Subcontinent, and South East Asia.

Peer Group Analysis(9M09) Qtel Zain

Debt/Equity (%) 240.98 87.40 EV/EBITDA 11.50 6.38 P/E 6.69 16.21 Return on Assets (%) 3.75 4.12 Return on Equity (%) 21.14 10.75 Dividend Yield (%) ‐ ‐ EPS 21.35 0.067



* As of December 13, 2009 Source: Annual Report, Blominvest

Recent Developments • Recently, at the 4th annual CommsMEA Awards 2009 in Dubai, Qtel won two of the communications industry’s most prestigious awards ‐ “Middle East Mobile Operator of the Year” and “Overall Operator of the Year”, in recognition of its ongoing transformation into one of the most effective and customer‐focused telecommunications companies in the region.

• Qtel recently signed a major cable agreement with Tata Communications, which will increase bandwidth by connecting Qtel to hubs throughout the world via Tata’s Global Network. As per the agreement, Qtel will be the designated ‘landing party’ in Tata’s Global Network (TGN) Gulf Cable System, with other regional operators playing the same role for their respective nations.

• In November, the company launched a massive promotional campaign to celebrate the second anniversary of its Blackberry Service in Qatar. As part of the offer, the company is selling the new Blackberry Gemini in a special pack for QAR 999.

Financial Analysis With a footprint across 17 countries, Qatar Telecom announced an increase of 22.1% in 9M09 total revenues to QAR 17.48 bn from QAR 14.32 bn in 9M08. The company reported an increase of 27.7% in net earnings to QAR 2.35 bn from QAR 1.84 bn, as the number of mobile subscribers increased 33.1% to 1.68 mn. Earnings before interest, taxes, depreciation and amortization increased 32.2% to QAR 2.79 bn from QAR 2.11 bn. Due to the launch of several campaigns during 3Q09 for new services, product enhancements, international calling and roaming, the company’s cash balance stood at zero at the end of 9M09.

Management Outlook In a bid to become one of the top 20 telecom companies in the world by 2020, the company plans to invest up to USD 2 billion in its international operations. For this, Qtel successfully completed the tender offer for Indosat during 2009. In addition, Qtel and India’s wireless giant Tata Communications agreed to align their infrastructures and work together to provide connectivity solutions including Ethernet, MPLS (Multi Protocol Label Switching) and a wide variety of managed services to their global customers.

Company Overview

50


6.1.3 Orascom Telecom Holding

Stock Performance

0

20

40

60

80

100

Jan‐08 May‐08 Sep‐08 Feb‐09 Jun‐09 Nov‐09

Stock Price

3000

6000

9000

12000

Index

ORTE EGX30 Source: Bloomberg, Blominvest


Public 47.9

Corporate 52.1


Revenue breakdown

GSM89.7%

Internet & Fixed l ine

1.4%Telecom Services8.8%


Subscriber base

3

29

49

7078

0

30

60

90

2004 2005 2006 2007 2008

Mob

ile sub

scribers worldwide

mn

Source: Annual Report, Blominvest Key Financials (EGP’bn)

9M09 9M08

Total Revenues 21.14 21.89 EBITDA 3.51 3.45 Net Earnings 2.11 1.96 Capex 0 1.20 Free Cash Flow 0 3.56 Subscribers( mn) 78.00* 70.10** Enterprise Value 9.90* 21.54**


Orascom Telecom Holding S.A.E. (OTH) was established in 1998 as a leading mobile telecommunications company operating in 11 emerging markets with a population under license of 498 mn. The company’s average mobile penetration stood at approximately 46% as of December 31, 2008. OTH has grown to become a major player in the global telecom market and is considered among the largest and most diversified network operators in the Middle East, Africa, and South Asia regions. In January 2009, it announced the sale of its 100% stake in M‐link to TLC SERVIZI S.p.A., a wholly owned subsidiary of Wind Telecomunicazioni S.p.A.

Peer Group Analysis(9M09) OTH ETISALAT

Debt/Equity (%) 465.14 8.08 EV/EBITDA 7.81 6.47 P/E 8.91 8.31 Return on Assets (%) 5.05 13.14 Return on Equity (%) 39.73 26.56 Dividend Yield (%) ‐ 4.74 EPS 3.12 1.27



* as of December 13, 2009 Source: Annual Report, Blominvest

Recent Developments • OTH raised objections to the Egyptian regulator’s approval of the sale of Egyptian Company for Mobile Services (Mobinil) to France Telecom unit Orange Participations. Orascom Telecom and France Telecom own sizable stakes in Mobinil and have been in dispute regarding their ownership since 2007.

• Shareholders of OTH on December 28, 2009, backed a USD 800 mn rights issue to strengthen the firm's balance sheet as it works to resolve a dispute with Algerian tax authorities. Orascom said that it would use the proceeds to cover any cash shortfall after Algeria ruled that the firm owed USD 596.6 mn in back taxes and penalties. The cash call still needs Egyptian regulatory approval.

• On December 13, 2009, the Canadian government concluded that Globalive (WIND Mobile) is a Canadian company that meets the Canadian ownership and control requirements under the Telecommunications Act. This cleared Orascom’s hopes of launching its Canadian operations. OTH has a 65% indirect equity ownership in WIND Mobile, which purchased a spectrum for CDN 442 mn in August 2008.

Financial Analysis During 9M09, Orascom reported a decline of 3.4% in total revenues to EGP 21.14 bn from EGP 21.89 bn in 9M08 due to foreign exchange fluctuations. Meanwhile, the company’s net income increased 7.7% to EGP 2.11 bn from EGP 1.96 bn, helped by a higher subscriber base. Total subscribers increased 11.3% to 78.0 mn from 70.1 mn in the year ago period. Both cash balance and capital expenditure stood at zero compared to EGP 3.56 bn and EGP 1.20 bn, respectively posted in the year‐ago period. However, the company’s global operations have been improving over the years as local currencies stabilized against the US dollar, except for devaluations in Algeria, Pakistan and Tunisia.

Management Outlook Egyptian market heavyweight Orascom runs mobile phone operations from North Africa to North Korea. In order to respond to the fierce competition, the company is working towards a possible merger with AKTEL, the leading mobile operator in Bangladesh. Moreover, the company is also set to start its operations in Canada.

Company Overview

51

January 2010

6.1.4 Saudi Telecom Company

STC is the leading national provider of telecom services in the Kingdom of Saudi Arabia. Along with its subsidiaries, the company offers fixed and mobile telephony and Internet services across Saudi Arabia and several other countries.

Peer Group Analysis(9M09) STC Zain





Recent Developments • STC launched the biggest‐ever VIP center in order to introduce its special services to Al Tamayoz customers. The new center will provide affluent customers with premium services inside and outside the Kingdom, including travel, tourism and transportation services, meet and greet at airports, gift delivery, bookings, visas, and other related services.

• STC announced recently that its 25% stake in Malaysian company Maxis Bhd would be reduced to 17.5% following its sale of shares to the public. Maxis plans to channel the money into the booming Indian and Indonesian markets and to reduce its debt levels. However, STC has not yet revealed the exact financial impact of the IPO.

• STC as part of a group reorganization appointed former Booz & Co telecom consultant Ghassan Hasbani as CEO of its international operations on January 10, 2010.

• During 2009, Saudi Telecom signed a five‐year agreement with Software AG, a global leader in business infrastructure software, to enable the company to provide more efficient and enhanced customer support facilities to its subscribers.

Financial Analysis During 2009, STC reported an increase of 6.9% in total revenues to SAR 50.75 bn from SAR 47.47 bn in 2008. The increase was mainly due to the mobile subscriber base increasing to 19.0 mn from 17.3 mn. Net earnings declined 1.2% to SAR 10.82 bn from SAR 11.04 bn, following investments in overseas affiliates in Turkey, India, Kuwait and Indonesia. STC’s chief executive said that the cash outlays are tied to setting up new networks and upgrading existing ones. He added that the telecom giant is currently investing in all its affiliates to boost market share and overseas earnings. As a result, cash balance declined by 7.9% to SAR 7.42 bn from SAR 8.06 bn in 2008.

Management Outlook STC has undertaken a strategy focused on customer satisfaction and retaining its leadership position in the domestic market, while expanding internationally. The main pillars of its strategy are focus on customer satisfaction, deployment of 3G and expanded convergence offerings. The operator also plans to offer wholesale services as well as to win over corporate customers through improved and specially tailored enterprise solutions. STC, which has about 70 mn subscribers around the world, has expanded internationally in the past two years through a series of acquisitions and licenses in Malaysia, Indonesia, India, Turkey, South Africa Kuwait and Bahrain.

Company Overview Stock Performance

30

60

90

Jan‐08 May‐08 Sep‐08 Jan‐09 Jun‐09 Oct‐09

Stock Price

3000

6000

9000

12000

Index

STC SASE Index



Public 16.4

Government 83.6

Source: Bloomberg, Blominvest Revenue breakdown

GSM59.0%

PSTN31.1%

Data9.9%


Subscriber base

11.2

13.8

17.319.0

0

5

10

15

20

2005 2006 2007 2008

Mob

ile sub

scribers worldwide

mn

Source: Annual Report, Blominvest Key Financials (SAR’bn)

2009 2008

Total Revenues 50.75 47.47 EBITDA 11.80 12.29 Net Earnings 10.82 11.04 Capex 2.57 2.45 Free Cash Flow 7.42 8.06 Mobile Subscribers (mn) 19.00* 17.30**

Enterprise value Value 127.05* 173.48**


52


6.1.5 Zain

Zain (formerly MTC) is the pioneer in launching mobile telecommunications in

the Middle East region and is now also a major player in the African continent. It is a leading wireless services provider with commercial presence in 24 countries across the Middle East and Africa with over 15,000 employees. The company provides a comprehensive range of mobile voice and data services to 64.7 mn active individual and business customers.

Peer Group Analysis(9M09) Zain STC





Recent Developments • Zain and India’s Bharti Airtel on February 16, 2010, agreed to a USD 10.7 bn deal for Zain’s African business. The deal will finally give Zain a chance to cash in its business after a previous attempt to sell the African holdings failed. Both parties have agreed to enter into exclusive talks until March 25 to pen out more details. The deal does not include Zain’s holdings in Sudan or Morocco.

• At the third Annual Telecom World Awards, Zain received three prestigious prizes including Best Operator, Best Brand and Best Technical Innovation for its ground‐breaking, borderless "One Network" service.

• Zain, the newest player in Saudi Arabia’s mobile telecommunication market, has built two high‐technology towers in Makkah to ensure better communications during the pilgrimage season and in unpleasant weather conditions. It also announced the expansion of its groundbreaking "One Network" platform for Egypt in a strategic partnership with Mobinil which will benefit over 27 mn Zain customers.

Financial Analysis During 9M09, Zain reported an increase of 23.6% in total revenues to KWD 1.78 bn from KWD 1.44 bn in 9M08, due to a higher subscriber base. The subscriber base increased 49.5% to 63.54 mn from 42.50 mn. The company’s net earnings decreased marginally to KWD 0.20 bn from KWD 0.24 bn, impacted by currency fluctuations of KWD 36 mn (USD 130 mn) as well as increased financing and depreciation costs due to network expansion. With the company undertaking capital intensive expansion for network expansions and widen service offerings, cash balance declined 68.3% to KWD 0.33 bn.

Management Outlook In order to sustain in the fiercely competitive market, the company is working towards a possible merger with other international companies. The company bought mobile company Cell One in Namibia for USD 59 mn. Amid rising competition in the mobile‐payment market in Africa, Zain is expanding into three more countries in a bid to become the largest service operator in the region. Zain's launch of mobile payment services in Malawi, Sierra Leone and Nigeria follow the successful rollout of services in Kenya, Uganda and Tanzania in February 2009, in which more than 10 mn people became subscribers. Meanwhile, Zain expects to generate USD 8.2 bn in revenues during 2009.

Company Overview

Stock Performance

600

1200

1800

2400

Jan‐08May‐08 Sep‐08 Feb‐09 Jun‐09 Nov‐09

Stock Price

4000

8000

12000

16000

Index

ZAIN KWSE Source: Bloomberg, Blominvest


Public 64.0

Government 24.6

Corporate 11.4


Revenue growth

1.342.25

4.47

5.91

7.44

012345678

2004 2005 2006 2007 2008

(USD

'bn)


Subscriber base

3.2

13.7

27.0

42.5

63.5

‐

10

20

30

40

50

60

70

2004 2005 2006 2007 2008

(Mn)

Source: Annual Report, Bloinvest

Key Financials (KWD’bn)

9M09 9M08

Total Revenues 1.78 1.44 EBITDA 0.24 0.29 Net Earnings 0.20 0.24 Capex 0.36 0.39 Free Cash Flow 0.33 1.04 Subscribers (mn) 63.5* 42.5** Enterprise Value 4.93* 9.10**


53

January 2010

6.1.6 Mobinil

Egyptian Company for Mobile Services (Mobinil) was established in November 1997 and began operations in May 1998. Mobinil controls ECMS through a 51% stake. ECMS’ network currently covers most of the urban areas in Egypt. As of March 2009, Mobinil had 3,899 sites and 35 switches. In a three‐player market, Mobinil is the market leader, serving over 21 mn subscribers with a market share of 47.5%, and competes with Vodafone Egypt (VE) and Etisalat Misr (EM). Mobinil has no comparable competitors in the market it operates.

Financial Analysis(9M09) Mobinil

Debt/Equity (%) 147.07 EV/EBITDA 4.77 P/E 10.72 Return on Assets (%) 13.68 Return on Equity (%) 58.55 Dividend Yield (%) 0.96 EPS 19.43

Total assets (USD bn) 2.47

Market Cap* (USD bn) 4.35


Recent Developments • Egyptian Company for Mobile Services said it might seek foreign loans instead of sharing equity. It said that a probable bond issue with a coupon rate of 11% is likely to bring in a total of EGP 1 bn, which will be used to pay for network expansion and acquisitions. Through the bond issue, it also plans to pay EGP 750 mn for the third generation (3G) license taken earlier.

• Egyptian regulator’s approval of the sale of Egyptian Company for Mobile Services (Mobinil) to France Telecom unit Orange Participations was recently contended by Orascom Telecom Holding. Orascom Telecom and France Telecom are the largest shareholders of Mobinil and have been disputing about their stakes in Mobinil. The company said that it will study legal procedures and announce a decision later.

Financial Analysis During 9M09, Egyptian Company for Mobile Services announced an 8.8% increase in total revenues to EGP 8.01 bn from EGP 7.36 bn in 9M08. Meanwhile, net earnings increased marginally to EGP 1.46 bn from EGP 1.42 bn. The total subscriber base of the company stood at 20.1 mn. Capital expenditure stood at the same level of EGP 0.09 bn as that in 9M08. The company’s cash flow increased 97.6% to EGP 0.83 bn and earnings before interest, tax, depreciation and amortization increased 4.5% to EGP 1.85 bn. Management Outlook In order to sustain its position in a competitive market, Mobinil launched aggressive online promotions to sustain subscriber growth and its leadership at the expense of lower ARPU.

Company Overview Stock Performance

85

170

255

Jan‐08May‐08 Sep‐08 Feb‐09 Jun‐09 Nov‐09

Stock Price

3000

6000

9000

12000

Index

EMOB EGX30 Source: Bloomberg, Blominvest


Corporate 71

Public 29


Revenue growth

4.55.4

6.4

8.2

10.0

‐

2

4

6

8

10

12

2004 2005 2006 2007 2008

EGP (bn)


Mobile subscriber base

Prepaid96.8%

Postpaid3.2%


Key Financials (EGP’bn)

9M09 9M08

Total Revenues 8.01 7.36 EBITDA 1.85 1.77 Net Earnings 1.46 1.42 Capex 0.09 0.09 Free Cash Flow 0.83 0.42 Subscribers (mn) 20.1* N/A Enterprise Value 19.59* 25.36**


54


6.1.7 Batelco

Established in 1981, Batelco is Bahrain’s leading provider of national and international telecommunications and networked IT services, including internet and broadband. Over the years, the company has invested USD 1.4 billion in Bahrain’s telecom infrastructure, providing world‐class services to both corporate and retail customers. Batelco’s customers in Bahrain now include 767,000 mobile users, 205,000 fixed‐line customers and 82,000 broadband users. The telco presently controls 56% of the country’s telecommunications and information services market.

Peer Group Analysis(9M09) Batelco du




* as of December 13, 2009 Source: Annual Report, Blominvest Recent Developments • Batelco said that it was looking forward to a very profitable 2010 and revealed its strategy for constant transformation and advancement. According to the company, the recently redesigned sleek logo showcases Batelco as a Bahraini icon.

• Batelco’s India operations started in December 2009. Apart from the mobile license, the company has an ISP license for many states including Orissa, Bihar, Jharkhand, Assam, North East, Jammu & Kashmir and Himachal Pradesh. The telco is also "exploring its participation" in the forthcoming auction for 3G mobile spectrum in India.

• Its chief executive announced that the company is eyeing an acquisition of up to USD 1.5 bn in the Middle East and North Africa region. The company, which has enough liquidity to buy the stake, is still at the negotiation stage and aims to acquire the stakes before the end of the year.

Financial Analysis Supported by moderate performance across the region, Batelco posted a marginal increase in total revenues to BHD 0.35 bn from BHD 0.32 bn in 2008. As the company is planning to invest in various start‐up operations to achieve future growth, its capital expenditure increased 50.0% to BHD 0.18 bn from BHD 0.12 bn. The company’s net earnings increased marginally to BHD 0.11 bn from BHD 0.10 bn. The total subscriber base of the company stood at 1.05 mn. Meanwhile, the surge of more than five times in its cash balance to BHD 0.76 bn will support its goal to diversify revenues away from its home market through foreign acquisitions.

Management Outlook In order to sustain revenues despite increasing competition in the domestic market, Batelco is upgrading the quality of its services. In line with this, Batelco signed a contract with Globitel, a leading global provider of converged telecom solutions under which the latter will provide Batelco with SpeechLog "Call Recording & Quality Monitoring" System as an effective call center solution to manage and monitor service quality.

Stock performance

0

0.3

0.6

0.9

1.2

Jan‐08 May‐08 Sep‐08 Jan‐09 Jun‐09 Oct‐09

Stock Price

0

1000

2000

3000

4000

Index

BATELCO BSE Source: Bloomberg, Blominvest


Corporate 23.8

Public 18.5

Government 57.7


Revenue breakdown

Fixed l ine12.2%

Internet12.6%

Data comm. circuits14.3%

Wholesale8.5%

Mobile51.2%

Other1.3%


Subscriber base

Broadband customers

7.8%

Mobile customers72.8%

Fixed l ine customers19.4%


Key Financials (BHD’bn)

2009 2008


EBITDA 0.11 0.11



Subscribers (mn) 1.1* N/A Enterprise Value 0.87* 1.14**


Company Overview

55

January 2010

6.1.8 National Mobile Telecommunications Company

Stock Performance

1000

2000

3000

Jan‐08May‐08Sep‐08 Feb‐09 Jun‐09 Nov‐09

Stock Price

4000

8000

12000

16000

Index

NMTC KWSE Source: Bloomberg, Blominvest


Public 24.0

Government 23.5

Corporate 52.5


Revenue growth

237

353428 408

482

‐

200

400

600

2004 2005 2006 2007 2008

KWD mn


Subscriber base

2.7

6.4

10.0 9.510.9

‐

3

6

9

12

2004 2005 2006 2007 2008

Total sub

scribers worldwide

mn

Source: Annual Report, Blominvest Key Financials (KWD’bn)

9M09 9M08


EBITDA 0.11 0.81



Subscribers (mn) 10.9* 9.5** Enterprise Value 1.03* 1.36**


National Mobile Telecommunications Company (NMTC) is the second mobile operator in Kuwait having commenced commercial operations in December 1999 under the Wataniya brand name. Wataniya operates across four MENA countries and the Maldives, with over 10.9 mn total customers. The company also owns a license to operate as the second mobile operator in Palestine, although operations are yet to be launched. By the end of 2008, Wataniya’s GSM operations covered a population of 49mn with an estimated penetration of over 89%. As of 2008, Wataniya had active operations in five countries.

Peer Group Analysis(9M09) Wataniya Zain

Debt/Equity (%) 34.01 87.40 EV/EBITDA 3.32 6.38 P/E 5.83 16.21 Return on Assets (%) 14.82 4.12 Return on Equity (%) 29.32 10.75 Dividend Yield (%) ‐ ‐ EPS 0.257 0.067




Recent Developments • Recently, Wataniya announced a contract with Nokia Siemens Network (NSN) to

modernize its HSDPA network and to provide customers with new environment‐friendly products and services. The company has decided to use NSN’s Flexi platform, which will help reduce energy consumption by at least 70%.

• Wataniya recently launched the first‐of‐its‐kind brand designed exclusively for the eager youth of Kuwait. The offer included an entertainment‐focused package for both prepaid and postpaid customers.

• In October 2009, Wataniya celebrated its 10th anniversary by honoring its media partners.

Financial Analysis Despite high competition, Wataniya managed to maintain total revenues during 9M09 at KWD 0.35 bn compared to KWD 0.36 bn in 9M08, helped by the company’s compelling new offers. As the company’s customer base increased 14.7% to 10.9 mn from 9.5 mn, net earnings increased 42.6% to KWD 0.97 bn from KWD 0.68 bn. Cash balance decreased 87.9% to KWD 0.11 bn from KWD 0.91 bn in the year‐ago period. Meanwhile, capital expenditure also reduced by 28% to KWD 0.18 bn. The results continued to be negatively affected by the elimination of fees for incoming calls from the fixed‐line and International network since early 2008.

Management Outlook The company believes that its strategy to focus on improving customer retention and brand awareness will help it strengthen its position in the market and broaden its reach accordingly. In addition, NMTC is also beginning to realize synergies within the Group (Qtel). Meanwhile, the company is continuously working towards improving the quality of its network and the end‐consumer experience.

Company Overview

56


6.1.9 Telecom Egypt

Stock Performance

9

15

21

27

Jan‐00 May‐08 Sep‐08 Feb‐09 Jun‐09 Nov‐09

Stock Price

3000

6000

9000

12000

Index

ETEL EGX30 Source: Bloomberg, Blominvest


Government 80.0

Public 20.0


Revenue breakdown

Others6.0%

Domestic Wholesale11.1%

Voice revenue31.6%

Access revenue21.0%

Intl Wholesale

30%


TE Data/ADSL market share59%

52%45%

31%27%

0%

20%

40%

60%

2004 2005 2006 2007 2008 Source: Annual Report, Blominvest Key Financials (EGP’bn)

9M09 9M08


EBITDA 2.97 2.57





Telecom Egypt (TE) is Egypt's sole fixed‐line telecommunication operator, offering retail services (access, voice, internet & data) through its 95.04%‐ owned subsidiary TE Data, and wholesale services (broadband capacity leasing to ISPs, and national & international interconnection services). TE is the largest provider of fixed‐line services in the MENA region with more than 11.6 mn subscribers as of March 2009. TE is a part of the country’s growing mobile market through its 45% stake in Vodafone Egypt (VFE), the second largest mobile operator in terms of subscribers. TE Data leads the market with 70% of Egypt's internet capacity and a market share of 60%. As the only fixed‐line operator in Egypt, TE has no direct competitors.

Financial Analysis (9M09) TE

Debt/Equity (%) 5.60 EV/EBITDA 11.28 P/E 8.45 Return on Assets (%) 10.65 Return on Equity (%) 12.85 Dividend Yield (%) ‐ EPS 2.01

Total assets (USD bn) 5.86 Market Cap* (USD bn) 5.29

* as of December 11, 2009 Source: Annual Report, Blominvest Recent Developments • TE recently launched its first Fiber‐To‐The‐Home implementation in Egypt, which will enable the company to provide new and integrated services that cater to current and future needs for residential and business customers.

• Recently, in January 2010, TE purchased the remaining 4.95% of shares in its broadband subsidiary TE Data from three local Egyptian banks, which took its total ownership in TE to 100%.

• Telecom Egypt, which already has a 44.95% stake in Vodafone Egypt (VE), announced that it had signed a wholesale telecommunications services deal with VE that could help the company generate EGP 4 bn spread over the next three years. The deal implies the usage of TE International gateway services to transit all the incoming and outgoing traffic from VE customers.

Financial Analysis Telecom Egypt reported an increase of 3.3% in 9M09 total revenues to EGP 7.74 bn from EGP 7.49 bn, helped by its latest marketing promotions to boost sales and maintain margins. Total subscriber base stood at 11.70 mn. With broadband internet being the strong growth area, net earnings increased 17.8% to EGP 2.58 bn from EGP 2.19 bn. Due to its efficient cash management strategies, cash balance increased 11.5% to EGP 2.13 bn. As the company continues to invest in its state‐of‐the‐art infrastructure and important projects, capital expenditure for the period increased 10.7% to EGP 7.37 bn.

Management Outlook The three pillars of Telecom Egypt’s strategy are optimizing its network, focusing on the rapidly growing broadband and data segments and leveraging its expertise overseas. The management is striving to optimize the network infrastructure through its wholesale offering. The company has signed several submarine cable contracts in order to benefit from reduced international bandwidth cost and capitalize on Egypt’s geographical position.

Company Overview

57

January 2010

6.1.10 du

Stock Performance

1

3

5

7

9

Jan‐00 May‐08 Sep‐08 Feb‐09 Jun‐09 Oct‐09

Stock Price

1300

2600

3900

5200

6500

Index

DU DFM Source: Bloomberg, Blominvest


Government 59.7

Corporate 20.0

Public 20.3


Revenue breakdown

Broadcas ting3.0%

Wholesa le9.4%

Fixed21.0%

Mobi le66.5%


Subscriber base

Mobi le89.4%

Fixed10.6%

Source: Annual Report, Blominvest Key Financials (AED’bn)

9M09 9M08


EBITDA 0.16 ‐0.74

Net Earnings 0.16 ‐0.74

Capex 0 0 Free Cash Flow 1.21 ‐0.34



Emirates Integrated Telecommunications Company (du) is a UAE‐based telecommunication services provider. The company operates under the brand name du, offering fixed, mobile, broadband broadcasting and associated telecommunications services to residential and corporate customers. It offers services across three business segments, namely mobile, home and business. Services include voice calling, Internet, content services and television for individuals and households, integrated fixed and mobile business solutions for businesses and government agencies, and international data networks and wholesale services for international operators and telecommunications carriers.

Peer Group Analysis(9M09) du ETISALAT





Recent Developments • du partnered with Motorola Inc. for the successful launch of Dubai Metro’s mobile WIMAX network. du offers its customers wireless internet access while travelling on the metro on Personal Digital Assistant (PDAs) and laptops through Wi‐Fi services.

• du has become the first UAE telecom provider to bring Facebook Mobile to its users giving them easy access to the hugely popular social networking platform. There are no charges for using the service and it is exclusively available to du subscribers.

Financial Analysis During 9M09, du reported an increase of 40.1% to AED 3.81 bn from AED 2.72 bn in total revenues, helped by strong performance across fixed and mobile segments with mobile providing the largest gains. The increased subscriber base stood at 8.8 mn. With strong revenue growth, the company swung to a profit of AED 0.16 bn from a loss of AED 0.74 reported in the year ago period. With improving performance from all its segments, du’s cash balance stood at AED 1.21 bn compared to a net outflow of AED 0.34 recorded earlier. There was no capital

expenditure during the period under review.

Management Outlook Looking forward to 2010, the company plans to take its 3G, EDGE network to the next level by using sophisticated HSPA+ technology from industry leading provider Huawei. The company has already spent USD 85 mn to finance the HSPA+ roll‐out. The enhanced network will give customers superfast download/upload speeds of 21 Mbps, up from the current 7.2 Mbps. du customers will see a dramatic difference in their mobile broadband capabilities after the new system is rolled out across the UAE.

Company Overview

58


6.2 Table of acronyms ADSL Asymmetric DSL LLU Local Loop Unbundling AMPU Average Margin Per User LTE Long Term Evolution AREGNET Arab Regulators Network MEA Middle East and Africa ARPU Average Revenue Per User MME Mobile Media and Entertainment BT British Telecom MMS Multimedia Messaging Service CAGR Compound Annual Growth Rate MNO Mobile Network Operator CEO Chief Executive Officer MNP Mobile Number Portability CUG Closed User Group MVNE Mobile Virtual Network Enabler DSL Digital Subscriber Line MVNO Mobile Virtual Network Operator EDGE Enhanced Data rates for GSM Evolution OECD Organization for Economic Cooperation and

Development EIA Energy Information Agency PBX Private Branch Exchange EIU Economist Intelligence Unit PSTN Public Switched Telephone NetworkFMI Fixed‐Mobile Integration SMS Short Message Service FTTH Fiber To The Home SWF Sovereign Wealth Fund GDP Gross Domestic Product TRA Telecom Regulatory Authority GPRS General Packet Radio Service UN United Nations GPS Global Positioning System VAS Value‐Added Services HSPA High Speed Packet Access VoIP Voice over Internet Protocol ICT Information and Communications

Technology VPN Virtual Private Network

IMF Asymmetric DSL WAP Wireless Application Protocol IPTV Internet Protocol TV WiMAX Worldwide Interoperability for Microwave AccessISP Internet Service Provider WTO World Trade Organization ITU International Telecommunications Union

Documents

telecommunication published last 2 - BLOMINVEST Bank...Telecommunication Services in the MENA Region IMPORTANT DISCLAIMER This research is based on current public information that