Gulf telcos risk falling into handset subsidy trap
Telcos responding to harsh competition, stagnant growth; Smart phone shipments to Middle East seen up 52 pct in 2011; But European experience suggests profits may suffer; VoIP calls on smart phones threaten international revenue
October 26, 2011 5:22 by Reuters
Telecommunications firms in the Gulf are reacting to cutthroat competition by offering subsidised handsets, hoping to persuade customers to upgrade to smartphones and thereby boost lucrative data usage. But the tactic may backfire by eating into operators’ profitability.
The handset deals, which come with SIM cards and data plans, are the industry’s latest attempt to offset stagnating subscriber growth and falling margins on voice traffic.
It may enable operators to raise top-line revenues as they recoup some of the handset cost over the life of the subscriber’s contract, but the strategy can also wreck margins and hike subscriber acquisition costs.
“Subsidies are the plague of the telecoms industry,” said Pedro Oliveira, partner at consultants Oliver Wyman in Dubai. “In Europe, it hurt profitability to such an extent that operators have retreated from it.
“The subsidies start small but get bigger and bigger, with the operators eventually giving the handsets away for free. Costs rocket when operators subsidise handsets.”
Yet Gulf telecommunications firms are undeterred, tying up with numerous manufacturers including Apple , BlackBerry maker Research in Motion (RIM), Nokia and Motorola Mobility to sell handsets direct to the consumer.
The profits of the biggest Gulf operators, which were formerly national monopolies, are falling year-on-year, while some smaller operators have turned to selling handsets through their own outlets as a way to win market share. All are desperate to raise ARPU (average revenue per user) in heavily saturated markets.
Matthew Willsher, chief marketing officer at the United Aarab Emirates’ Etisalat , the largest Gulf operator by market value, said offering handsets cheaply was a way to overcome the rising costs of devices as models evolved.
“Our customers are very demanding and…really want the latest device as early as possible,” he said. “So I’m prepared to accept the financial and strategic risk of working very strongly with the device vendors to bring that to market.”
Etisalat now sells more than 20 handsets. Subscribers to its cheapest package, which costs 99 dirhams ($26.95) per month, can get a third off the price of the BlackBerry Bold 9900, RIM’s top-end handset.
This discount increases to nearly 90 percent for subscribers signing up to Etisalat’s 449 dirhams per month contract. The company also offers free or heavily discounted Samsung, Nokia and Motorola handsets.
Saudi Arabian affiliate Etihad Etisalat (Mobily), number one for data revenue in the kingdom, is pursuing a similar strategy.
“Embedded SIM card handsets will become a key factor in the data arena,” said Khaled al-Kaf, Mobily’s chief executive.
“It will require a huge number of handsets to be ordered and so requires a huge scale. It will be Etisalat- or Mobily-branded handsets that will be sold. We are looking into that very seriously.”
Yet millions of consumers in the Gulf, where governments generally do not levy income tax, are not short of disposable income, and a significant portion would buy the latest top-end handsets with or without a subsidy.
KICKING THE HABIT
Canalys, a British-based firm which analyses the telecommunications industry, forecasts smart phone shipments to the Middle East will jump 52 percent to 21.1 million devices in 2011, representing 23 percent of total mobile phone shipments to the region.
“Handset subsidies are the crack cocaine of telecoms operators — they’ve tried to give them up, but no country has succeeded without regulatory intervention,” said Robin Bienenstock, London-based analyst at Wall Street research firm Bernstein.
Such intervention has been tried in some other parts of the world; South Korea’s telecommunications regulator said in June that it had launched an investigation into whether mobile carriers had provided excessive subsidies for handset purchases, and warned of possible disciplinary measures. But with handset subsidies still in a relatively early stage in the Gulf, governments here are not so far moving in that direction.
Instead of selling handsets, operators should innovate with data tariffs, reducing prices to boost use, Bienenstock argued.
The increase in high-end handsets also facilitates cheap Voice over IP (VoIP) calls, such as free internet-to-internet calls and internet-to-phone calls. That is potentially a big blow to operators in a region where expatriates make up a sizeable segment of the population, and international calls are believed to be operators’ biggest source of revenue as people call home.
With 11 out 15 telecommunications licences in the Gulf held by government-controlled companies, there are big obstacles to VoIP; in the UAE, for example, VoIP is not illegal but the regulator says only licenced operators can offer it, and they have not done so.
However, high-end handsets can offer a way around this because VoIP tools such as Skype can be downloaded on them and come already installed on some smart phones.
“If voice revenues are being cannabilised and VoIP is still essentially illegal, it can only get worse for Gulf telecoms operators,” said Oliver Johnson, chief executive of British-based telecommunications research firm Point Topic. (By Matt Smith; Editing by Amran Abocar and Andrew Torchia)