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Jan 09 2012

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Middle East Telcos To Focus On Data, Content To Arrest Dipping Margins

--Data services to contribute over 15% of telcos revenues in 2012

--Cos look for acquisitions that complement portfolios

--Infrastructure sharing as capex gets squeezed

By Shereen El Gazzar

DUBAI (Zawya Dow Jones)-- Mobile telecommunications operators in the Persian Gulf region will focus on boosting their revenues from data services and content in 2012, as they seek to offset falling profit margins on their voice services by exploiting the boom in sales of tablets and smartphones, analysts say.

Data services, including broadband connections and smartphone data plans, contributed 10-15% of the telcos' overall revenues in the first half of 2011 and the share is expected to rise further in 2012, according to Reda Haidar, a consultant at Informa Telecoms & Media.

And as the companies shift from offering mere connectivity to becoming "smart-pipe" operators, there's likely to be more mergers and acquisitions in the industry, with operators seeking to snap up companies that provide new technology or content relevant to Arab audiences in the region.

For example, Saudi Telecom Co., the kingdom's biggest operator, in December took its total stake in Intigral to 71% as part of its strategy to focus on providing content services. Intigral provides locally relevant digital content and applications, including a social networking app and one targeted exclusively at women. And STC is looking for further acquisition opportunities.

"We are looking at what is available [to acquire] to complement our portfolio at the right price. It could be in infrastructure or application and content," said Ghassan Hasbani, chief executive officer of STC 's international operations.

Kuwait's Mobile Telecommunications Co., or Zain , may look for niche acquisitions such as an Internet Service Provider, according to Simon Simonian, the senior vice-president for telecom, media & technology research, at Shuaa Capital. And Emirates Telecommunications Corp., or Etisalat, is developing a new online and mobile content service called eLife OnWeb, which will sell content from third-party providers.

However, Haider at Informa believes the investment in content and new technologies won't be sufficient to reverse the decline in margins. At Etisalat, the region's biggest telecoms provider by market value, the net profit margin shrank to 21% in the first nine months of 2011, from 24% in the same period a year earlier. STC 's profit margin fell to 13.2% from 18.7% over the same period, according to Zawya.com.

Because consolidation within the region is unlikely, as regional governments tend to view their telcos as "national champions" and would likely resist any outside attempts at mergers, the way forward for regional telcos would be look at expansion outside the Middle East region, Haider said.

For instance, Etisalat and Qatar Telecom, or Qtel, could increase their stakes in assets in Africa and Asia, Haider said. Alternately, telcos could enter greenfield areas like Iraq or Syria when political conditions improve by bidding for new licenses, like STC and Qtel plan.

On the infrastructure front, while regional telcos will improve the quality of their 3G network and start the roll-out of 4G Long-Term Evolution, or LTE, networks, they will also look at tower sharing to achieve cost savings as the tight liquidity climate squeezes capital expenditure.

A challenge telcos may face is competition from the mobile virtual network operators--companies which sell mobile services while leasing capacity from regular mobile network operators. Saudi Arabia, for instance, is expected to introduce three MVNO licenses in the Kingdom in 2012, said Marc Hammoud, director equity research at Deutsche Bank.

However, not everybody considers the MVNO phenomenon, which is gaining worldwide popularity, a bad thing. "MVNOs that target a specific segment create opportunities for both existing operators as well as new entrants to the market," said Bahjat El-Darwiche, a partner at Booz & Co. in Beirut. This is a good tool for existing operators to penetrate new segments and for regulators to create more competition instead of offering new infrastructure or facility-based license, he said.

-By Shereen El Gazzar, Dow Jones Newswires, +9714 446 1684 Shereen.elgazzar@dowjones.com

Copyright (c) 2012 Dow Jones & Co.

(END) Dow Jones Newswires

09-01-12 0353GMT