Saudi Arabia Telecommunications Report Q2 2008

With an estimated total of 25.753mn subscribers at the end of 2007, Saudi Arabia's mobile penetration rate appears to have finally surpassed 100%. Based on this estimate, which is derived from the limited data released by the Saudi operators, the sector grew by 31% during 2007, compared with the 37% growth seen in 2006. Although we expect subscriber growth to continue for the duration of our five year mobile forecast for Saudi Arabia, we envisage much slower rates of growth from 2008 onwards. A number of factors support our belief that growth will continue, not least demographic change, with Saudi Arabia's population expected to continue expanding over the next few years. We also believe that the subscriber figures published by the operators contain a number of inactive users which, if discounted, would reduce the real penetration rate. Finally, it is highly likely that there is already a multiple SIM ownership trend established in Saudi Arabia, with this trend also being seen elsewhere in the region.

The anticipated launch of services by Saudi Arabia's third GSM operator, Kuwait-based Zain, will also help to ensure sustained growth in the coming years. It was announced in January 2008 that Zain had awarded a US$935mn 2G and 3G turnkey network rollout contract to Nokia Siemens Networks. Zain plans to launch its Saudi operations in the first half of 2008, competing alongside existing operators Saudi Telecommunications Company (STC) and Mobily.

In addition to the launch of services by Zain, the next few months are expected to be characterised by the introduction of increased fixed-line competition and the launch of services by Verizon of the US, Bahrain's Batelco and Hong Kong's PCCW. These three companies, whose successful bid for fixed service licences was announced in April 2007, respectively plan to build networks based on cable and fixed-wireless infrastructures. We believe that the building of these new infrastructures, which will allow the new operators to bypass STC's fixed-line network, will lead to falling prices and more choice within the Saudi fixed-line and broadband internet sectors.

Just as STC continues to face increased domestic competition, it was announced in January 2008 that the Saudi incumbent was set to acquire a 35% stake in Oger Telecom, a Lebanese firm which has interests in various telecoms operators in South Africa (Cell C), Turkey (Trk Telecom) and Romania (Zapp), plus internet operations in Saudi Arabia, Lebanon and Jordan. STC made its first foray into the international telecoms market in 2007 with its purchase of a 25% stake in Malaysia's Maxis. The Saudi incumbent also holds Kuwait's third national mobile concession and hopes to launch its first services there later in 2008.

Finally, in our latest and newly revised set of Business Environment Rankings for the Middle East, Saudi Arabia continues to sit in first place ahead of Qatar, Bahrain, Kuwait and Israel. The country benefits from having the highest telecoms market and country structure scores in the region, reflecting the potentially fewer limits which the country is seen as presenting to returns on telecoms sector investments.