Even in a recession, the telecoms sector remains strong – though the market in some regions are stronger than others. True, the phenomenal growth rates of the past have flattened out in much of Europe and in America, but other regions – including the Middle East and Asia – are continuing to shine.
“It is business as usual for Europe’s mobile operators,” says Emeka Obiodu, senior analyst at telecoms consultants Ovum. “Whereas the markets expected them to take a hit from reduced consumer spending in their operational market, Europe’s mobile operators have continued to grow their revenues, with the economic downturn having little impact. Apart from isolated cases, the operators are more susceptible to their usual competitive dynamics than to any credit crunch.”
Analysis by Ovum concludes that revenue is continuing to grow in France, Germany and Italy. But despite the strength of the European market, telecoms companies that have got used to exponential growth want more of the same – both in the mobiles sector and for data transfer using fixed line and mobile broadband. These pressures have been key in pushing the major players into entering emerging markets and increasingly into global consolidation.
Gavin Patterson, principal analyst at Informa Telecoms & Media, says that consolidation is happening across the telecoms industry, not just among operators, but also with handset and infrastructure suppliers. “On the operators side, it is mostly about revenue generation,” he says. “In the past, it was led by a desire of big large pan regional operators to get into new markets. The markets where they had been operating were maturing and not increasing in size. They were looking for new markets to move into, with large populations, where they could start all over again. But the big operators are not following an M&A strategy as before and now they are trying to improve loyalty in their mature markets, because they are now seeing growth in data revenues”
Today, much of the pressure for global consolidation is driven by Middle East operators, says Patterson, including STC (Saudi Telecom), Zain, QTel and Orascom, on the back of their success in growing their regional and local markets. “The bullish M&A is now only coming from the cash-rich Middle East operators,” Patterson says. “They are keen to expand into mature markets to show they are on a par with Vodafone, T-Mobile, Telefonica and Orange.”
Consolidation is arriving in some surprisingly diverse ways and across a variety of territories. Last March, Deutsche Telekom took control of the main Greek telecoms provider, OTE, giving it access to the increasingly important Balkans region. Deutsche Telekom (which owns the T-Mobile brand) had earlier bought the Orange mobile business in the Netherlands. By acquiring SunCom, Deutsche Telekom also strengthened its position in the United States, while it was already very strong in the Central and Eastern European markets. Since then there has been persistent speculation of further consolidation among European operators, involving some of the largest companies.
Consolidation is also affecting emerging markets. Japan’s NTT DoCoMo recently bought a large equity stake in Tata Teleservices, giving it access to the Indian market, which is growing by ten million subscribers a month. The largest provider in India, Bharti Airtel, predicts that when the current exponential growth flattens out in a couple of years there will be further, and more substantial, consolidation among telecoms operators in the country.
This view was echoed by Fitch Ratings’ Credit Outlook for the telecoms sector for 2009, which suggests that “supply bubbles [are] being created in markets like India and Pakistan where the underlying fundamentals may not be as attractive as many are expecting….. leading to losses for new entrants and a period of market turmoil and consolidation”. Fitch also believes that despite the resilience of revenues in the European and United States markets, the economic downturn – and indebtedness of some operators – is likely to push some telecoms companies into cost rationalisations. That is likely to include further consolidation.
The trend towards the creation of a few global giants is clearest with Vodafone, which has built-up a large presence in many of the world’s most valuable markets – India, the rest of Asia, Africa, most of Europe, Russia and Australia. Despite considerable pressure, Vodafone has also retained its large stake in what is now the largest operator in the US – Verizon Wireless. Vodafone’s (now reluctant) partner in the US operation is Verizon Communications, which is itself building a major presence in developing markets – including Saudi Arabia, where it recently became one of the providers of fixed line services.
The Middle East region represents one of the world’s fastest growth markets in terms of mobile subscriptions. Unusually, penetration levels in the region can far exceed an average of one mobile per adult. “Saudi has almost reached 100% penetration levels for mobiles, the UAE is now over 200% and Bahrain is nearly at that level,” says Matthew Reed, Informa’s senior analyst, Middle East and Africa. “The 3G subscription figures are very high.”
There are also attractive opportunities in parts of North Africa and elsewhere in the Middle East, says Reed. “Penetration levels are already high in Tunisia, Egypt and Libya and there is the possibility of liberalisation in Algeria,” he explains. “And Morocco will offer a third mobile licence. Growth in Iran has been a big story for the last couple of years. Iraq will also show growth, where Zain is dominant, having taken over a rival and now has about two thirds of the market.”
Issa Goussous, a research analyst at the Arab Advisors Group, also believes that the sector has yet to peak in the region. “The Arab cellular markets continue to grow at a high pace, while the fixed line markets are either growing slowly or stagnating,” he says. Of all the Arab nations, the two showing the fastest growth, he reports, are Saudi Arabia and Egypt, driven in particular by the impact of fierce local competition.
Simon Simonian, telecoms analyst at Dubai-based investment bank Shuaa Capital, is another who takes a positive view of the prospects in the Middle East and particularly in Saudi. “It is still a growth sector,” he says. “We are still expecting double digit growth next year and after that single digit.” But, he adds, “It is difficult to predict the top of the market with mobile.” He believes penetration levels could go up to 140% in Saudi, leaving plenty of room for further and fast growth.
The experience and revenue strength of the Saudi and Middle East market have clearly given the leading operators in the region the appetite and financial strength to expand into other areas. However, the leading operators in other markets have similar ideas. And that is leading to short-term competition and longer-term consolidation. It looks as if mergers and acquisitions in the telecoms sector have some way to travel yet.
Case studies
Saudi Arabia
Intense competition between telecoms companies has sparked a radical improvement in the quality and choice of services in Saudi Arabia and a reduction in costs to business and domestic consumers. The main operator in Saudi remains Saudi Telecom, or STC, which is now 70% state-owned – the government intends to dispose of the balance of its stake in the near future.
There are three companies who compete aggressively in Saudi’s mobile market. STC launched its Al-Jawwal mobile service in 1995. A second contract was awarded to Mobily (owned by Ettisalat of the UAE) in 2004 for a price tag of $2.4bn, with Mobily gaining almost 30% of the market within 18 months. Zain – a global player, which has been very successful in Africa – paid $6.1bn for the third Saudi mobile licence in March 2007. This was the highest price per service user of any contract in the world, indicating Zain’s confidence about the prospect of further growth in the Saudi market.
Zain’s entry into Saudi has sparked fierce competition, led by Zain’s ‘One Network’ offering – a single tariff that includes free roaming across other countries in the region, which was already highly popular in Africa. This has also proved popular in Saudi with businessmen who travel to other countries in the Middle East and to pilgrims attending the Hajj and Umra. Mobily and Al-Jawwal have responded with similar offers.
Fixed line telecoms have traditionally had a lower level of penetration in Saudi than in other countries in the region and compared to other countries with similar levels of GDP per capita, partially reflecting the challenges of the country’s geography. Opening up the fixed line market to competition has begun to address the lack of physical infrastructure and the historically poor quality of the network. Batelco, PCCW and Verizon won the contracts for the fixed line services, which they took over running during 2008. Verizon has committed to spending $3bn on optical wire cables to connect the major Saudi cities.
“Fixed line infrastructure was an issue up to 2006,” says Simon Simonian, telecoms analyst at Dubai-based investment bank Shuaa Capital. “Since 2007, Saudi Arabia Telecom has been aggressively upgrading its infrastructure. You can see this commitment reflected in increased subscriptions.” According to analysis from Egyptian investment bank EFG-Hermes, further growth in the fixed line market in Saudi can be expected. While Saudi has a higher fixed line penetration than that of the wider Middle East region, it is below that of neighbouring GCC countries, “which implies there is still some room for growth,” reports EFG-Hermes.
Both EFG-Hermes and Informa predict growth in fixed line subscriptions will largely be driven by demand for data transfer and data seervices. But much of that demand for data transfer could be met by mobile broadband. The Saudi government is keen to use WiMAX – the 4G wireless technology – to increase internet access and offer it as a platform for data transfer. The ‘Transform Saudi Cities’ initiative is intended to greatly increase the use of WiMAX for broadband access and is initially available in central Riyadh and on university campuses. Despite a slow start in broadband take-up, EFG-Hermes expects this will rise rapidly – growing to one million subscribers by the end of 2008 and doubling again by the end of 2009. At present, broadband take-up in Saudi is far below that of other countries of similar wealth.
Saudi Arabia’s has used competition to transform its telecoms network from a poor quality monopolistic service within a few years into what the Economist has described as having “one of the most open telecoms systems in the Middle East”. In the process, it has also enabled STC, the former monopoly operator, to build a successful global business.
Hong Kong
Hong Kong has one of the world’s most competitive and dynamic telecoms markets. This has led the territory to have the second highest penetration figures for mobiles and broadband in Asia after Japan.
Mobile phone licences were initially awarded back in 1994. There are now over 11 million subscribers – a 161% penetration rate – of whom nearly 3 million are 3G subscribers. Despite this high take-up, fixed line subscriptions also remain high, at over 100%. There is also a 77% penetration rate for household broadband. There are seven and a half thousand public wi-fi access points.
There are five mobile operators in Hong Kong – CSL, Hutchison, Smartone, China Mobile and PCCW. Ten companies provide fixed line services – PCCW, Hutchison, Wharf T&T, New World, Hong Kong Cable, Hong Kong Broadband, Towngas, CM TEL, TraxComm and HKC. Another six companies offer satellite-based fixed line services. In addition, there are nearly 200 internet service providers offering broadband connections. Some of the Hong Kong-based telephone operators have used their early experience of the liberal Hong Kong market to expand globally: Hutchison owns the 3 network which operates in Europe and elsewhere, while PCCW operates in many markets, including Saudi Arabia.
According to Informa, the model adopted by Hong Kong of encouraging a large number of operators created one of the world’s most competitive markets, but produced a market environment in which many of the operators could not survive independently in the long-run – creating a string of recent consolidations, with some second-tier players taken over by larger operators But the successful telecoms industry in Hong Kong has been central to the territory’s commercial boom in recent years.