Insight Global markets collapsed in the recession of the past year, but the ring of mobile phones could still be heard across the Gulf.
Mobile phone industry rings up gains
While other industries have faltered during the downturn, the phone industry has continued to post revenue gains. The importance of having a mobile phone and a low level of competition has made providers a favourite of investors as share prices climb. Even as global financial and property markets collapsed in the recession of the past year, the tapping and talking on mobile phones could still be heard across the Gulf.
As the technology-rich handset continues to be a status symbol for consumers and businesses alike, it has made the regional telecommunications sector a safe haven for investors looking to ride out the worst economic downturn in decades. While property projects were delayed and banks wrote down billions of dirhams in bad loans, GCC phone companies have experienced steadily rising revenues and cash flows.
"Telecoms are in the same category as daily goods like milk or food," says Gert Rieder, the chief executive of Batelco Bahrain, the largest Bahraini telecoms operator. "The recession has forced people to cut down on unnecessary spending, but you cannot live without your mobile. It's your contact to the rest of the world." The top 10 telecoms firms in the GCC, including the UAE carriers Etisalat and du, increased revenues as a group by 14.3 per cent to US$32.6 billion (Dh119.74bn) in the first nine months of this year compared with the same period last year, data from JP Morgan Chase showed.
Still, not all Gulf operators have experienced similar growth. Earnings before interest, taxes, depreciation and amortisation at the Saudi operations of Zain and the Qatar unit of Vodafone decreased during the first nine months of this year as they spent a considerable amount of capital building networks. Net profit at Zain as a whole dropped more than 52 per cent after it took a $130 million hit on its foreign exchange reserves.
The recession has caused consumers to be less likely to purchase expensive new handsets. Reduced regional roaming rates and an overall decrease in voice minutes, the main revenue driver, have all made an impact on bottom lines. "Telecoms are resilient but they're not immune against economic recession," says Christian Kern, the head of MENA equity research for JP Morgan. Still, the overall picture is one of shedding light in a generally dark place. Industry success in the region was thrust into focus during a panel discussion at the Telecoms World Middle East conference in Dubai on Tuesday, with executives enthusing about recent results and future prospects.
"Over the past 18 months, despite challenging economic conditions, the fundamentals of the sector have been very strong and attractive," says Farid Faraidooni, the executive vice president for corporate affairs for du. "If we believe that the worst is behind us, it proves that the sector is resilient to the worst economic crisis that the world has seen." Mr Faraidooni has plenty of reasons to be pleased. Du, for example, says its revenue rose more than 39 per cent in the first nine months of the year, outpacing the rest of the region. By comparison, its rival UAE operator Etisalat says its revenue advanced by only 6.2 per cent in the period.
Du has also outperformed the regional telecoms sector on the stock market, posting a 44.1 per cent gain on the Dubai Financial Market since the beginning of this year. Shares of Qtel rose 37 per cent on the Qatar Exchange while Etisalat gained more than 29 per cent over the same period. Only Saudi Telecom, the largest telecoms company in the GCC, showed a shares decrease this year, falling 7.7 per cent after profits dropped in the first quarter. Its stock has rebounded nicely since slipping to a low for the year on March 11, jumping 47.7 per cent.
While GCC mobile penetration rates are close to saturation point, it is more than just the popularity of flashy new devices that has propelled the telecoms sector. Mobile data, growth in emerging subsidiary markets and increased broadband usage are all helping to boost growth. "The mobile has transformed how we've used bandwidth capacity for broadband data and voice," says Mr Faraidooni. Driven by multimedia-rich smartphone devices, mobile data now accounts for about 20 per cent of wireless revenues in UAE operators, Mohamed al Ghanim, the director general of the Telecommunications Regulatory Authority, said during a keynote speech at the telecoms conference.
Moderate levels of competition have also aided the sector, ensuring that enough of the profit pie is divided up to keep sales sustainable. Unlike in Europe and the US, where consumers have access to a variety of services, no more than three telecoms companies operate in any GCC country except Oman, which has launched two virtual network operators this past year alongside two incumbent carriers. The move into acquiring existing foreign operators and purchasing new spectrum licences in emerging markets is becoming another area of exploration for GCC operators, Mr Rieder says. Batelco Bahrain would like to double its current subscriber base to 10 million users and is actively looking for investment opportunities in Northern Africa and India, he says.
Though such investments in general have not yielded significant returns as yet, Etisalat, for example, still expects to get half of its revenue growth from outside the UAE within five years, from about 15 per cent at present. Besides, sometimes you have to spend money to make money. Perhaps the secret behind the telecoms success story is its ability to generate new business models through innovative technology. For each step into a high-speed broadband network it creates several offshoot revenue sources, such as mobile entertainment. That kind of evolutionary process not only takes time, it also requires a significant capital investment laden with risk.
"For example, take the 3G spectrum auction in Europe in 2000, where more than ?100 billion (Dh546.92bn) was spent on licences," Mr Kern says. "The investment community took quite a hit on that spend and the returns on that money would be questionable today". Although it is difficult to predict what is next for the sector, one interesting possibility for future growth is the opportunity to work with content providers so an operator can maximise its investment in "dumb pipes", an industry term for its broadband network. Already the US phone provider Sprint has opened its network and given internal codes to web developers to access its high-speed infrastructure and let others dictate how it should be best used.
"We have to look forward beyond ARPUs [average revenue per user] and beyond debt," says Ahmed el Oteify, the chief executive of Varkon Group, an Egyptian telecoms consultant. "We have to look at how to build open networks. A telecoms operator should be an open platform for others to come to them." @Email:email@example.com