AN APT SUCCESS

UAE, Dubai 2012 | TELECOMS & IT | REVIEW: ICT

Dubai, in its quest to become the premier hub for business and commerce in the region, has long recognized the significance of ICT, with investment in infrastructure now on the up.

Given the national and transnational nature of telecommunications companies, the development of ICT and telecommunications in Dubai has been inextricably linked to the development of the sector in the UAE as a whole. The International Telecommunications Union (ITU)—the UN body that aims to guide the development of the industry globally—has, in its 2011 ICT Development Index, ranked the UAE the most advanced of all Arab states, and the 29th most developed in the world in terms of ICT. The ITU has also noted that the UAE “is now ranked fourth in the world after Japan, South Korea, and Hong Kong in terms of fiber-optic penetration," with the country's telecommunications market expanding in value from $8.2 billion in 2005 to $13.6 billion in 2011, attaining 20% annual growth.

TELECOMS PLAYERS

The modern telecommunications era in the UAE effectively began in 1976, when local partners and UK technology firm International Aeradio established Emirates Telecommunications Corporation (Etisalat), which later came under majority UAE government ownership and control. Etisalat, among the first networks in the world to deploy mobile phone technology, enjoyed a market monopoly over nearly all aspects of the telecommunications market until 2005, when the UAE government inaugurated the Emirates Company for Integrated Telecommunications. The new company launched the “du" brand the following year, and in 2007 launched its mobile service, which by 2009 had secured 32% of the UAE mobile market. While financial turmoil in the UAE that year slowed du's ascent somewhat, it quickly recovered pace and by the end of the first quarter of 2012 had captured some 46.7% of the mobile telecommunications market of 11.7 million subscribers. Du added some 320,600 customers in 1Q2012, more than any quarter in the preceding two years, with the average revenue per user (ARPU) in the mobile sector at $32.4. Given that mobile penetration in the UAE was a sliver under 200% at the end of 2011—the highest mobile penetration rate in the Middle East and among the highest in the world—du's gains have largely been chipped away from Etisalat's customer base, rather than by attracting new customers to the market. In the first quarter of 2011, for example, du added 272,000 mobile subscribers, while concurrently Etisalat lost 334,000.

Competition between the two carriers has been limited to the mobile market, however. Although both companies do offer fixed-line and broadband services, as of the second quarter of 2012, they did not offer them in the same areas of the UAE. Announcements of a timeline for when competition may begin in these other areas of the telecommunications market have been in and out of the media for several years, with the latest deadline being the end of 2011. At the end of December 2011 the UAE's Telecommunications Regulatory Authority (TRA)—formed in 2004 to monitor, regulate, and guide the development of the industry—announced that plans had been postponed once again, explaining that neither operator was technically ready for the network sharing that would be necessary to allow for competition in the fixed-line and broadband markets.

While perhaps frustrating for consumers, the situation in the UAE is in line with global trends for telecommunications markets that have been newly opened to competition. Given the cost of infrastructure development and the generally slow consumer adoption rates of fixed-lines, new players in the market tend to focus efforts on the relatively cheaper and faster-growing mobile sector. Indeed, when one looks at the UAE, there is an average of two mobile subscriptions per resident, while fixed-line sector penetration was still at just 31% by the end of 2011.

When it entered the market, du had initially targeted low-revenue mobile users, but has evolved its strategy as its success has grown, with the company increasingly targeting Etisalat's post-paid subscribers, who tend to be higher-spending clients. The company has stated that in its projections, given its current trajectory, it will surpass Etisalat's market share in the UAE by end 2012. Telecommunications experts in the UAE have also stated in published reports that du's total revenues are likely to increase 54% between 2010 and 2015, while Etisalat's gains will be a more modest 18% over the same period. While being hounded by du in its home market—which resulted in a 3% loss in operating profits in the UAE—Etisalat's overseas operations also took a beating in 2011, with tough trading conditions eroding the value of its operations in India, hacking nearly 23.4% off of its 2011 net profits.

That said, in terms of overall reach, revenues, and resources, Etisalat still dwarfs du, given that the former is a transnational player active in 18 countries and is the largest company in the UAE outside of the oil and gas industry, while the latter's operations are largely limited to the Emirates. As a straight comparison, Etisalat's total revenue in 2011 was $8.77 billion, with net profits, after royalties paid to the government, pegged at $1.58 billion; du's total revenue in 2011 was $2.42 billion, with net profits after royalties a shade under $300 million.

In its annual report for 2011, the TRA noted that the telecommunications sector contributed 4.9% to the UAE's GDP, and employed 10,800 people. The same report noted that internet service subscriptions increased 10.5% in 2011 to more than 1.3 million, while the number of internet subscriptions using fiber-optic lines was up 70.8%, signaling a massive migration away from more antiquated copper-wire networks. This is reflected in the fact that, as the TRA report pointed out, in 2008 there were no residential customers receiving internet service faster than 4 MB per second, while in 2011 almost half of all residential subscriptions matched this speed or were faster. Both Etisalat and du said they would continue to expand their high-speed fourth-generation (4G) and long-term evolution (LTE) networks throughout 2012, with the former launching the service in December 2011 and the latter launching it in June 2012.

And while rumors of the possible introduction of a third telecommunications player in the market have circulated almost since the creation of du, the TRA has denied that it intends to allow a new provider to enter the market before 2015. Market analysts have pointed out that this hesitance is likely due to the fact that, given the level of saturation in the mobile market, a third player could only make gains on the current duopoly players' losses.

ICT TECHNOLOGY

The UAE, and Dubai in particular, has invested heavily into transitioning into a knowledge-based economy, notably by investing in free trade zones with optimized facilities to attract multinational companies. The impetus for Dubai Internet City (DIC), for example, came in the late 1990s when it became clear that the Emirate's ability to count on its oil resources for revenue was shrinking, according to DIC Managing Director Malek Sultan al Malek. “The ICT sector provides a platform for other industries to develop. Unfortunately, at that time the region only had consumer products and we didn't have system developers or ICT infrastructure companies," he says. “We had to create specialized value propositions for these companies and industries to come to Dubai. This is why we decided on the first free zone out of the strategic plan to move toward a knowledge-based economy. What we've done for this specialized economic zone is to study the goals of the typical ICT company. For many, the goal was to expand into the Middle East, and we decided to provide an open door for these companies to put a foot in this region."

“For example, we deployed temporarily a state-of-the-art platform by Cisco, and we were the largest community using IP telephony at that time," says Malek. “The government has been keen to encourage the development of this and other sectors, and we offer incentives to technology companies such as free zone status, tax breaks, and so on. Multinational companies are coming here not only to serve Dubai, but to have a place to start in and to learn from, to then serve the whole region."

And come they have. Since opening in October 2000, and allowing for 100% foreign ownership, the DIC has attracted numerous global heavyweights to open their regional headquarters within its boundaries, including Microsoft, IBM, Oracle Corporation, Infor Global Solutions, Sun Microsystems, Cisco, HP, Nokia, Cognizant, and Siemens, among others. The DIC's more than 140,000-sqm area is now the base for more than 850 companies and their more than 10,000 employees. The proximity of so many companies involved in software development, business services, e-commerce, and consultancy in the same area has functioned like a magnet to draw in more.

This cluster effect has been compounded by the DIC being situated beside other free zone areas including Dubai Media City and Dubai Knowledge Village, adjacent to popular residential areas including Dubai Marina, Jumeirah Beach Residence, and Palm Jumeirah, and at the same time a stone's throw from half a dozen high-end hotels and conveniently accessible 25 kilometers south of downtown Dubai off of Sheikh Zayed Road, the main route to Abu Dhabi.

A TELLING SUCCESS

“Promoting competition in the telecommunications sector has also benefited the development of ICT infrastructure," stated the ITU in a recent report. “Such competition not only encourages development of the ICT industry, but also acts as a stimulus for overall economic development of the country."

A sign of the regional dominance Dubai has helped foster in the ICT industry is that the UAE is now the source of some 60% of mobile phone application development in the Middle East, according to Flagship Projects, a local applications development company. The firm reports that the most-used Arabic language apps in the region are in the genres of music, social news, and religion, with an estimated 40% of those who own a smartphone using between six and 10 apps per day.