Kuwait-based telco Zain Group reported a 33 percent profit drop in the second half of 2015 — which it attributed to currency losses at the time — but chief executive Scott Gegenheimer is stoic.
In an interview with Arabian Business, the US national, who has worked for Cisco and Motorola among other heavyweights, argues that Zain Group is facing the same challenges as the rest of the telecoms industry: tougher competition, fast-changing technologies and surging demand for web-based services.
To put the company’s latest results in context, Abu Dhabi-based telco Etisalat also recorded a steep, 40 percent drop in its second-quarter net profit, which it, too, blamed on foreign exchange losses. Over in Qatar, Ooredoo’s net income also fell by 39 percent.
Despite the challenges, Gegenheimer insists the telecoms industry overall is set for continued growth — particularly in the Gulf region where mobile penetration rates are as high as 200 percent. “It is a very large market and there is room for growth,” he states. Zain Group remains one of the Gulf’s biggest telcos by subscribers — in the first half of this year it said it had 46.3 million active customers and 108 million under licence — and is the market leader in six of its eight operations in Kuwait, Bahrain, Saudi Arabia, Iraq, Morocco, Lebanon, Jordan, Sudan and South Sudan.
The company announced in July that it made a net profit of KD39.2 million ($128.8 million) in the three months to 30 June. Like other telcos, data services saw the most rapid growth, with revenues from data growing by 10 percent year-on-year in the first half of 2015 to constitute 20 percent of the group’s total $940 million revenues.
Gegenheimer says this proportion is likely to increase as more and more people use mobile phones to get online. However, he warns that the industry lacks a coherent strategy to profit from this. In a nutshell, telcos are giving away far too much data for free.
“Telcos worldwide need to monetise data properly,” he says. “We tend to get very competitive on pricing and sometimes our data packages are not as profitable as people think because the pricing is very, very cheap and we continue to give away more and more data.
“What you see a lot in this region are heavy promotions where you give away a lot of data for free for a couple of months. You launch a promotion, your competition launches a promotion, promotions start to get out of control and all of a sudden your pricing plummets.
“The key is making sure you have fair usage policies and know how to up-sell your customer. For example, if you’ve given a one megabyte (1MB) package and someone’s using 3MB and you’re not blocking them, throttling them or upselling to them, that’s something you’ve got to deal with. At the same time, you have to be very transparent with your customer.”
Saudi Arabia is Zain Group’s largest market with $913 million of revenues for the first half of 2015 and 11.3 million customers but it is also loss-making. One of the reasons for this is that the kingdom has some of the cheapest data in the world and this is unsustainable, says Gegenheimer.
“Data usage in Saudi Arabia is huge. It has the highest usage of [video sharing website] YouTube per capita in the world and some people are using a terabyte of data a month. That’s a lot of data. If they’re paying their fair amount that’s fine, but at the moment they’re not.”
Zain Group sought to raise data prices in Saudi Arabia earlier this year by pulling out of promotions and reassessing mobile packages. Gegenheimer is vague on the exact increase (“Around 10 percent in Q1 2015 and a second uplift in Q2”) but says Saudi data is still 50 percent cheaper than other parts of the region and “significantly less” than other parts of the world. For example, in Europe and the US the price of 1 or 2 gigabytes (GB) is the same as you pay in Saudi Arabia for 500GB.
Another reason why Zain KSA is still waiting to turn a profit in Saudi Arabia (its two competitors are Saudi Telecom Company and Etisalat’s Mobily, also loss-making) is that is that it paid an extremely high price for a licence. “The licence was very expensive — $6.1 billion — and it’s taking us longer than expected to build a sustainable business model and break even,” Gegenheimer says.
“However, the losses are shrinking and we are continuing to grow our revenue. Some of the biggest opportunities are in Saudi Arabia — it is the biggest market in the GCC and although penetration rates for voice are still high there are pockets of growth, including data.
“Our hope is that, as we start to capture the data market, we can convert the Saudis from using just the data on their handsets to using voice, too.”
Zain Group may also be soon working with a mobile virtual network operator (MVNO) in the kingdom — an emerging type of business that resells wireless services under the ‘parent’ telecom operator’s network. “We have not yet got an MVNO in Saudi but the regulator is pushing to have one for the market there so we will probably end up having one,” Gegenheimer says.
“MVNOs are tricky though — if you look around the world probably only 80 percent or 90 percent of them are making money. So I am focusing on my core business there and trying to drive the company’s results first.”
Zain Group has yet to announce specific guidelines on turnaround to shareholders, but Gegenheimer says the company aims to be profitable in Saudi Arabia by the end of 2017.
The group’s second highest revenues, at $604 million, come from Iraq where it has 43 percent of the market. “It’s our biggest market, but it’s also probably our biggest challenge,” he says.
Ongoing political instability and violence have rocked the group’s Iraq business and revenue dropped by around 20 percent this year because at least 30 percent of the country is under the control of militant group ISIL. But Gegenheimer is adamant the company will continue to operate there.
“To be honest, it’s a tough situation and we don’t know when it’s going to fix itself. The conflict has impacted our business and there’s no real light at the end of the tunnel. What’s more, the government continues to raise taxes — on 1 August it brought in a 20 percent sales tax across industries such as food and cars, which could hit us indirectly as there will only be so much disposable income going around.
“That said, it’s a very large market and we’ve spent lots of money on network infrastructure; we just got a 3G licence this year and are rolling out data services. Iraq is behind the rest of the region in terms of data services — we already have 4G in five of our other markets — so there is certainly room for growth. I don’t see us pulling out of the market.”
Conflict aside, things have been smoother for Zain Group in Iraq since March, when an Iraqi court threw out a $4.5 billion lawsuit against the company over its 2007 acquisition of Iraqi telecom operator Iraqna from Orascom Telecom. The judge also dismissed the applicant’s right to appeal.
Meanwhile, Zain Group’s Kuwaiti home turf is tough, though not for the same reasons as Iraq. “We are the largest operator in Kuwait by far [with revenues of $544 million] but the market is getting so saturated and customers pay a price premium for us — close to 20 percent of the market — which has impacted a little on our business.
“We haven’t really lost any customers with the competition coming in but what we’ve done is locked them into longer-term contracts (12, 18, 24 months) and given out handsets. Customers are happy because they get free phones and we’re happy because they’re not chewing off our network. It’s a challenging market because of high penetration rates — at least 150 percent — but there are still opportunities.”
One such opportunity is Kuwait’s international gateway, the national fixed line that is still owned by the government. Gegenheimer says Kuwait’s new telecoms regulator has indicated that the line could be privatised in future, and Zain Group and other operators are awaiting further guidance. “We are hoping to see this in the near future. We believe privatisation is in the best interest of our customers and the economy,” he says.
Gegenheimer is less optimistic about the prospect of expansion into new markets, saying the telecoms industry in many countries is saturated and competitive and Zain Group prefers to focus on existing operations to achieve future growth.
“The truth is there is not a lot of opportunity left in the world and the pricing tends to be really high so any new entry would have to make strategic and economic sense.
“We want to stay in the Middle East and North Africa region because our brand translates really well here. So [as] long as I stay in MENA I don’t have to build the brand — everyone already knows it, which makes things easier.”
Outside the GCC, Gegenheimer says he is targeting Morocco, in which Zain Group has only a 15.5 percent stake in the country’s third largest mobile operator, Inwi, plus Egypt, Tunisia and even Libya if a unity government is appointed.
“North Africa has good opportunities and we are not yet there. However, there is a lot of saturation and competition in those markets, so it would depend on pricing levels and who wanted to sell out.
“Essentially, we are not looking to exit any markets right now, nor are we eyeing many specific new markets for entry. We make decisions on a case-by-case basis: what are the market differentials, does it make financial sense?” he adds.
Gegenheimer says his ultimate aim as CEO is to drive Zain Group’s transition “from a mobile operator to an integrated services provider” — one that is well positioned to cash in on the burgeoning ‘smart cities’ movement. He describes this as an “enterprise space”, the use of digital technology and telecoms infrastructure to enable cities and buildings to function more efficiently.
Zain Group has already partnered with UAE-based smart city consultancy NeXgen to pilot smart metering intended to cut water and electricity consumption. “We believe there is a lot of spillage and wastage going on across the Gulf and we can help governments reduce this through smart technology,” he says.
The company intends to spend around 15 percent of its annual revenue on capital expenditure for the next three years to upgrade its services and networks.
Gegenheimer is coy about annual forecasts, explaining that the company will provide its next round of guidance to analysts at the end of October. However, he is clear about the biggest industry-wide battle he is fighting at present: the cannibalisation of voice and SMS services by over the top (OTT) and voice over internet protocol (VOIP) players such as Whatsapp, Skype and Viber.
Rising demand by internet users for such services could hurt telcos’ voice revenue by as much as 50 percent in future, claimed a report by Credit Suisse in May, forcing telcos to raise data rates to cope with the growth in traffic and added stress on networks.
“This is a worldwide issue all telcos are facing,” says Gegenheimer. “We have strong ties to the countries we’re operating in; we provide billions of dollars of network infrastructure and we hire tens of thousands of employees across the region.
“OTT players don’t even have a presence in those markets yet they’re using our network to provide services to our customers for free. How do we compete against that?”
The issue is a regulatory one, he concludes. “The telecoms industry is one of the most heavily regulated in the world and we think VOIP and OTT services should be regulated, too.
“But few countries — particularly in the Gulf — have the regulatory environment to support this and we are likely to see small steps rather than a ‘Big Bang’ approach.”
Nonetheless, Zain Group is working with the industry and relevant authorities to bring about requisite change.
“We need to be on a level playing field with the OTTs. People are migrating away from traditional services and it is having a massive impact on our industry.”
Source: Arabian Business