Saudi Mobile Market Still Offers Growth

­At nearly 200% mobile penetration, the Saudi mobile market should be close to maturity, but surprisingly it is still growing, despite possible slowing in H212. The main growth engine is demand for mobile broadband services, which has offset the expected decline in voice services, mainly for the leading companies, STC and Mobily.

The increase in mobile revenue is also due to a continued increase in the number of post-paid subscribers due to increasing data use, and increase in business sector revenue due to strong private investment. The main catalyst is domestic subscriber growth in mobile broadband driven by LTE network expansion and the widespread adoption of smartphones and tablets.

Saudi operators still have pricing power because the market still looks like a profitable duopoly despite the entry of Zain in 2008. Zain has struggled to establish itself partly as a result of limited flexibility caused by its heavy debt burden. Fitch estimates that Zain only has a market share of 14%, and its revenue share is lower at 9%-10%. Its planned financial restructuring will grant the company more financial flexibility; Fitch expects this to be carried out in Q212. The restructuring will support the company's coverage in the market, and also improve its reputation after years of weaker performance. Zain is also to begin providing mobile phone number portability, mimicking the leaders.

However, Zain will have to introduce various offers to gain subscribers and thereby boost its revenue. The main differentiator may be price per minute, but Fitch does not expect the leading operators to enter into price war in the short term while there is still growth in mobile broadband. Innovation that will provide customers with more sophisticated services will be the main area of competition. The top-ranked operators are striving to maintain their core advantage by investing heavily in new technologies. KSA is the first country in MENA where LTE services have already been launched, with all companies involved to some extent, mainly in big cities.

Regulation risk may be rising, however, as CITC, the regulator, is considering awarding three MVNO licenses in the medium term. The regulator is considering the experience of other countries in introducing MVNOs into their markets, where they have bolstered competition to provide better-quality services at more favourable prices. This will mean more choice for customers, and better service coverage.

Data revenue rose by 25%-30% during Q112 compared with Q111 and data revenue as a percentage of total mobile revenue is rapidly approaching 25% after a robust 2011 and Q112. Smartphone penetration is still low in KSA (estimated at 25%) compared with the UAE (estimated at 47%), but it is catching up fast due to favourable demographics. A strongly growing and young population represent strong pillars for future growth