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Kuwait Telecom Industry (Update)

Overview of the Gulf Telecom Industry
The Gulf telecom industry has been one of the most dynamic industries, and witnessed rapid growth, especially in its
wireless (mobile telephony) segment, due to the liberalization of the sector. However, the intense competition from
local and regional players, and the limited size and saturated markets (with penetration rates ranging from 100% -
200%) have started to put pressure on the Gulf telecom operators. While the growth in mobile subscription in the
Gulf remains high, it has been showing a declining trend since 2008; a clear indication of the markets approaching
saturation.
GCC Penetration Rates for 2009 (per 100 inhabitants)
Mobile Fixed Line Internet Broadband
Bahrain 177.1 30.1 53.0 13.0
Kuwait 129.9 18.5 36.9 3.4*
Oman 139.5 10.5 51.5 44.0
Qatar 175.4 20.2 40.0 29.8*
Saudi Arabia 174.4 16.2 38.0 10.8
United Arab Emirates 232.1 33.9 75.0 14.1
Source: ITU, Respective TRA's and *Industry Sources
As Gulf acquisition targets become scarcer, the well capitalized telecom operators have resorted to diversification
abroad through acquisitions and new license bids. Players such as Qtel, Etisalat, Batelco and Saudi Telecom are active
in rapidly expanding outside the Gulf markets, and have operations throughout the world. Zain, the Kuwaiti telecom
player, was the third largest telecom player in the world, before it sold off its African operations to Indias Bharti Airtel
in March 2010.
Nevertheless, the Gulf telecom industry still remains lucrative. With comparatively high ARPUs and favorable
demographics, the mobile penetration in the Gulf countries are expected to increase (although at a more measured
level), which will continue to support the Gulf operators profitability. However, going forward, the telecom operators
cash flow will be driven by broadband services (both mobile and fixed-line) and other value added-services. The
broadband penetration rates in the Gulf is very low (ranging from 10% - 40% in 2009) and the operators are rapidly
introducing new services to capture this growing market. High standard of living in the Gulf, a large youth population
with keenness in new gadgets such as smart phones and internet-enabled devices, as well as the relatively limited
social and leisure networks are expected to significantly boost the growth in the broadband segment in the next 4 5
years.
Update on the Kuwait Telecom Industry
1

The Kuwait telecom industry is relatively mature and advanced, with high penetration rates and per spending capita.
Nevertheless, the countrys penetration rates are lowest among the Gulf countries, indicating opportunities for
further growth potential. The overall telecom market structure, which is dominated by the Government, and the
absence of a Telecom Regulatory Authority (TRA), could continue to be a hindrance for the industry to reach its full

1
In March 2010, CSR published a detailed industry research on the Kuwait Telecom Industry. This report provides an overview of the market structure
and the evolution of the industry.
February 2011
Industry Research


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potential. The Ministry of Communication (MoC) controls the fixed line and the international gateway for overseas
calls. With such a market structure, the three telecom operators in Kuwait i.e., Zain, Wataniya and Viva, are at an
inherent disadvantage, compared to the other Gulf telecom peers, as they are unable to benefit from an integrated
business model as well as impairing their revenue earnings.
In the last 2 3 years, the MoC announced plans which would reduce its influence on the industry and improve the
overall quality of the telecom market in Kuwait. These include establishing the TRA, introducing Mobile Number
Portability (MNP), and the establishment of a shareholding firm to offer competitive international call tariffs. Also, in
November 2010, the MoC announced its plans to privatize the fixed line operations as well as develop the countrys
fiber optic infrastructure. While these plans would provide an impetus to the growth of the telecom industry in
Kuwait, the government and the concerned authorities have made limited progress in implementing these plans.
Further, with the recent political developments in Kuwait, there is a high likelihood that these plans and laws would be
further delayed.
Fixed-line Segment
Currently, the MoC is the sole provider of the fixed-line services in Kuwait. According to the data from ITU, the fixed-
line segment has remained stagnant in the last five years in comparison to the mobile segment. This could be
attributed to the rapid technological advancement in mobile phones which has outstripped the traditional fixed lines.
In 2011, the fixed-line segment is expected to shrink to some extent. The ministry announced disconnecting the
subscriptions of users who have outstanding payments.
However at the end of 2010, the MoC announced its plans to privatize the fixed line segment in Kuwait in the next two
years. CSR believes that this segment has limited growth potentials, and liberalizing the fixed-line segment in this
technological era remains unattractive both to telecom operators as well as customers. While telecom operators may
be able to charge customers for making calls from fixed line (which is free of charge currently), they still would have to
make relatively high capital investments. In addition, it is unlikely for customers to shift back to fixed line, given the
multi-purpose use of mobile phones. The privatization of the fixed-line sector in the future, would improve the
penetration rate, however, to a very small extent.


Source: ITU and Company Reports

18.7 18.6 18.6 18.5 18.5
76.1
79.5
81.6
118.0
129.9
0.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
2005 2006 2007 2008 2009
Trend in Fixed-Line and Mobile Penetration Rates (%)
Fixed Line Mobile


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Mobile Segment
The mobile segment has grown at a 2004-2009 CAGR of 14.1%, which is the lowest among the Gulf countries.
Kuwaits ARPU is one of the highest in the region which could be weighing down on the growth of the industry. At the
end of 2009, the mobile penetration reached 129.9% with subscribers amounting to 3.88 mn. According to Zain, the
mobile penetration rate was 141% at the end of 9M 2010.
The low penetration rates in Kuwait as compared to other Gulf countries, indicates further growth potential.
Although, the growth rate in mobile subscribers will be gradual as the market penetration has crossed 100%,
reflecting saturation. In Kuwait, similar to other Gulf countries, the high penetration rates are due to the ownership of
multiple SIM.
With regards to the telecom operators in Kuwait, Zain has been losing its market at a relatively faster rate (as
compared to Wataniya), since the entry of Viva in December 2008. As of September 2010, Zain had approximately
1.87 mn subscribers (market share of 44%), which in fact decreased from 1.89 mn as of June 2010. On the other hand,
Wataniya has been able to maintain its market share within the range of 38% - 40%, and until September 2010 has
been able to acquire new subscribers which reached 1.72 mn. Viva has been posing stuff competition to Zain and
Wataniya, and has garnered considerable market share since its launch, by continuously introducing new offers and
services. Competition between the three telecom operators are set to get tougher in the near future, once the
Mobile Number Portability (MNP) is rolled it out in Kuwait. The operators may have to renew their strategies
related to meet customer satisfaction and retain customers.
Source: Company Reports, CSR Analysis
Internet and Broadband Segment
With limited growth potential in the fixed-line segment, and rapid growth of mobile segment almost coming to an
end, the internet and especially the broadband segment will be the next phase for growth for all players in the
industry. Kuwait has one of the most developed infrastructures in the region, and yet the penetration rates for
internet as well as broadband are lowest among the Gulf countries. The high tariffs for broadband access could be the
reason for low penetration. According to the World Bank, the fixed broadband monthly subscription was reported at
USD 46.27 in 2008, again the highest compared to the other Gulf countries. However, with plans for issuing licenses
for new internet service providers (ISPs), and growing competition among the telecom operators, the broadband
internet services are likely to become more affordable in Kuwait. It is to be noted that currently in Kuwait, there are 4


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ISPs. In November 2010, the MoC suspended the issuance of licenses for the new ISPs until the established of the
TRA in Kuwait.
Major Events in 2010 and 2011
2

Related to Industry
Update on MNP:
The momentum of the MNP in Kuwait slowly seems to be picking up. In January 2011, it was revealed that the ministry
has obtained the necessary permission from the Fatwa and Legislation Department to go ahead with the project.
Currently, the ministry is awaiting responses from the State Audit Bureau and the Ministry of Finance, after which they
would sign the contract with the company chosen to implement the new system. The ministry will collect a regular small
fee from each of the local telecommunication companies in exchange for running the MNP operation, and once
implemented, customers would be charged KWD 5 for switching their mobile service from one operator to another,
which retaining the same mobile number.
MoCs Five year Plan:
In April 2010, the MoC announced that they are in the process of finalizing a new telecommunications law, which is in
the final phases and is waiting for passing at the parliament. One of the laws includes the establishment of a
shareholding firm to offer competitive international call tariffs. 50% of the shares of this company will be held by the
public, 24% by the government and 26% by a strategic investor. The five year plan also includes the privatization of
the MoC within four years.
Related to telecom operators:
Viva considers going public
In May 2010, the company announced its intension to get listed on the Kuwait Stock Exchange. While Viva is already a
well known brand in the market, this move is expected to further benefit the companys image. This will also improve
the financial flexibility of Viva, providing the company an advantage given the challenging operating environment.
Zain now a regional player
3

After Zains sale of its African operations to Indias Bharti Airtel in March 2010, the companys financial flexibility
significantly strengthened. However, the companys portfolio is now limited only to the Middle East, tapering down
the companys image from being a global player to a regional player. In September 2010, the UAE based Emirates
Telecommunications (Etisalat) proposed to acquire a 46% stake in Zain. This also includes selling the companys stake
in Zain Saudi. The deal is subject to completion of a due diligence process, which is now expected to be completed by
the end of February. The deal has already faced some obstacles including a lawsuit attempting to block the stake sale
as well as an unexpected bid by Turkeys Cukukrova Holding. If the deal is completed successfully, Etlisalat will be able
to add Zains market leading operations of Kuwait and the high growth markets of Iraq and Sudan to its portfolio.
However, with regards to Zain, concerns related to its future strategy as well as brand name are likely to arise.


2
The Major events in 2010 and 2011 for the telecom industry have been compiled from various Arabic and English daily newspapers, company press
releases and Zawya.
3
In December 2010, CSR published a report on Zain and Etisalat deal, which can be view under the Special Report section Zain Deal


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Wataniya relatively exposed to geopolitical risks of Tunisia and Algeria
In January 2011, Wataniya completed its acquisition of an additional 25% stake in Tunisiana, increasing its ownership
to 75%. For Wataniya, Kuwait, Tunisia and Algeria are its key markets in terms of revenues and subscribers. In the
medium term, Tunisia and Algeria are expected to boost revenues for the company as the competition in the Kuwait
has intensified and the industry is relatively mature. However, given the significant exposure of the companys
operation to Tunisia and Algeria, Wataniya is exposed to geopolitical risks in the region. Political tensions are brewing
in both Tunisia and Algeria. If the situation worsens in these two countries, similar to that of Egypt, the financial
performance of Wataniya will mostly likely be impacted.
Outlook
The outlook for the telecom industry in Kuwait is stable. While the Kuwait market is relatively mature and limited in
size, low penetration rates as compared to other Gulf countries reflects room for further growth potential. Competition,
among the three mobile operators in Kuwait, is most likely going to result in new and improved service for the
customers. The introduction of the MNP in Kuwait (which now is likely to be executed in 2011) will further intensify the
competition in the industry, pressuring the cash flows of the operators. The broadband segment is now becoming the
major area of focus and could be the next driver of revenues for the telecom players in Kuwait, as there is growing
uptake and use of smart phones and internet enabled devices.
Going forward, the telecom industry stands to benefit from the privatization plans of the fixed-line and international
gateway (if accomplished), and the heightened economic activity with the countrys focus on economic diversification
through the USD 100 bn national development plan, although there is no specific allocation to the telecom sector. The
growth in the industry will also be supported, albeit modestly, by the favorable economic and demographic structure in
Kuwait and the region. According to IMF, the country population is estimated to rise from 3.67 in 2011 (in 2009, the
population was 3.53 mn). Also, the economy is projected to grow steadily over the medium term as the global recovery
boosts the demand for oil along with the successful implementation of the development plan. The real GDP growth is
projected to rise to 2.3% in 2010 and to 4.4% in 2011. On the flip side, the ongoing political tensions in Kuwait could
delay the progress of some of the plans and telecom laws, hampering the growth momentum of the telecom industry in
Kuwait.


Analysts Contacts

Victoria Monteiro
Credit Analyst
v.monteiro@capstandards.com
+965 22258822 ext.514

Capital Standards (CSR)
Al Nassar Tower, 11th Floor,
Fahad Al-Salem St., Kuwait City
P.O.Box 26620, Safat, 13127 Kuwait
Office: +965 2225 8822
Email: services@capstandards.com
Website: www.capstandards.com




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