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A Study Of The UAE Telecommunications Sector By Al Ramz Securities

Al Ramz Securities, one of the UAE’s leading brokerage houses and fully licensed by the Emirates Securities and Commodities Authority (SCA) to conduct financial advisory and analyses, has released its comprehensive report on the UAE’s telecommunications sector. The report follows that of the banking sector in a series of industry assessments intended for the local stock market. The results are as follows: Market Overview The UAE telecommunications sector is among the strongest and advanced in the Arab world. Operators are well-supported by the government’s initiatives and established policies. The sector’s expansion is being fueled by the sustained growth of its customer base (the UAE posted a five-year population CAGR of 15 per cent), rising consumer purchasing power, and advanced infrastructure. Industry is evolving due to changing technology and consumer patterns. Voice services (landline and mobile), the traditional income generators of the sector, have been on a downtrend in the last six years. Other services including internet and data services, on the other hand, have persistently increased their share of the business. The telecoms sector has evolved from a growth play to semi-defensiveplay, in response to heightened competition, financial risk and consumer sophistication. Earnings are still steady but not as dynamic as they used to be; dividend yields remain attractive, nevertheless. Sector Performance and Outlook ‘Mobile’ services accounted for 56 per cent of industry revenue in 2010, with ‘Other’ services such as internet and data taking in 35 per cent and ‘Fixed Line’ coming in last at 9 per cent. The average revenue shares of the Mobile, Others and Fixed Line segments from 2005 to 2010 were at 58.68%, 26.42% and 14.90%, respectively. Service price reductions resulting from stiff competition between local carriers Etisalat and Du have favored consumers. The operators, however, have sustained declines in their overall average revenue per user (ARPU) due to lower charges per service (voice call, SMS, etc.) and discounts. This has been particularly true for mobile ARPU, which appears to have remained flat in the last three years. For Fixed Line ARPU, the decline could be partially explained by the popularity of mobile phones over traditional landlines. Fixed Line Since 2008, the number of Fixed Line subscriptions has been growing at slower rates. Total subscribers in 2010 increased by less than 5 per cent, in contrast to the double-digit growth common during the earlier part of the decade. Most of the increase came from new Du subscribers, with the company’s market share of the sub-sector improving from 24 per cent in 2009 to 31 per cent in 2010. Overall Fixed Line ARPU is dropping ahead of the infrastructure sharing between Etisalat and Du scheduled by the end of the year. Consumers prefer the convenience of mobile phones and internet telephony (VoIP), and increasing competition between the operators has been putting pressure on margins because of discount service rate offerings. The slide is expected to continue in line with regional and global trends. Mobile National mobile penetration rates – at more than 146 per cent as of June 2011 – are one of the highest not only in the region but in the world. The figure is artificially skewed, though, as it includes inactive users. The propensity of consumers to use multiple SIM cards for business, personal and other lifestyle purpose is a main contributor to the unusually high rate. Another factor is the high traffic of temporary residents such as tourists and businessmen. However, the high level of teledensity is also indicative of a saturating market. Overall mobile ARPUs could stagnate or even drop due to the oversold market and intensifying rivalry between Etisalat and Du, which will be further heightened by number portability (The scheduled September launch has been delayed once again and the Telecommunications Regulatory Authority announced it has indefinitely extended the time given to both telecom operators to launch the cellular number exchange service). While subscriptions are forecast to rise further due to population growth and better technologies for mobile Internet, the same cannot be said for ARPUs. As with Fixed Line ARPUs, Mobile ARPUs could be disrupted in favor of internet and/or data revenues (they could stagnate at the very least and could possibly drop at worst). Internet and Data Services The UAE had around 1.37 million internet subscribers as of end-2010, representing an internet user penetration rate of 41.59 per cent. Etisalat and Du thus face various growth opportunities punctuated by the impending implementation of infrastructure sharing. Du has the additional prospect of operating on a national presence. The overall growth in internet subscription has followed the growing number of broadband subscribers. By end-2010, broadband subscribers made up 57 per cent of the total, boosted by network improvements from operators and a surge in smart and media device usage. Smart devices, which have become increasingly less expensive, have driven up the popularity of internet and data services. Last year, data subscribers more than doubled to 38,271 with the inclusion of virtual leased line services. The government and the private sector are also leading the demand for data services that enable their organizations for electronic transactions. On the retail side, the UAE’s young, expat-dominated and affluent population has been demanding more high-tech data and multi-media devices. These devices in turn drive higher yield on internet and data traffic for operators. More growth is expected in light of growing device sophistication and more efficient connectivity, especially when both Du and Etisalat launch their LTE infrastructures. Potential Growth Areas Long-term Evolution (LTE) Networks Taking a cue from the success of mobile broadband, local players are now moving towards superfast broadband connections. The Global Mobile Suppliers Association foresees a 200 per cent rise in online mobile demand for voice, data and video services. HSPA Evolution, which has become mainstream in the Middle East with the region’s operators pioneering its introduction, currently provides the capacity and performance to support a good user experience of mobile broadband. Some countries in the region offer the highest data throughput speeds and lowest latency that can be experienced anywhere in the world today. The Long-term Evolution (LTE) network is the next step to deliver an even better mobile broadband experience to the mass market. It offers new spectrum in potentially larger and contiguous blocks, in 2.6 GHz for capacity in the cities, and sub-1 GHz for the most economic area coverage and improved building penetration. Many governments are already allowing the shift of existing spectrum to support LTE deployments. The 1800 MHz will very likely be a prime band for LTE deployments, especially in Europe, the Middle East, and Asia Pacific. The first LTE1800 systems have already been commercially launched, with several others in the deployment or planning stages. Du and Etisalat have been conducting LTE trials and just this week, Etisalat has launched its 4G network. LTE will allow them to re-use many existing resources and follow a single global standard for communications interoperability. These will drive down costs and deployment times, raise economies of scale, and simplify roaming. For mobile users, a shift from 3G to 4G LTE will facilitate an enhanced mobile broadband experience as LTE technology is optimized for data. Depending on network configuration and device availability, average throughput speeds can exceed 3G by up to 10 times. Marked improvements in uplink data speeds and latency can also be achieved.

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