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Rise of digital economy poses hard choices for Gulf’s telecom providers

Massive investments to upgrade tech backbone does not fetch matching returns

Published: Updated:

No one can downplay the economic importance of the telecommunication sector which has been the backbone for the inception of the internet, which in turn triggered the digital revolution.

Thus, the telecommunication sector is woven into the social fabric of society and is one of the main drivers of economic growth.

But as in all scenarios, numbers never lie. According to GSMA Intelligence, the mobile industry contributed $115 billion to the GDP of Arab States in 2014 and is expected to contribute around $164 billion by 2020.

Hamad Obaid Al Mansoori, Director General at the General Authority for Regulating the Telecommunications Sector in the UAE said during an interview with Al-Arabiya News Channel, that the digital economy affects all sectors, namely Trade, Tourism and Education, and that its benefits are not limited to the telecom sector.

However, the factors supporting the telecom sector has changed dramatically worldwide in the last few years, given the rapid and constant development of the digital economy, which led users to substitute traditional voice and SMS services with the over-the-top (OTT) messaging and calling applications, the likes of WhatsApp, Skype and Viber, which are free of charge most of the time.

Transformation

The pain of the transformation was largely felt by Arab operators which saw their revenues dwindle given that the traditional services were considered very profitable for them, especially in the Gulf, where many expatriates reside.

Said al-Harthym an official in the Ministry of Transport and Communications for the Sultanate of Oman, believes that operators should keep up with the changes and embrace them rather than trying to stop them.

But the fact is, substituting traditional voice and SMS services with the OTT messaging and calling applications is going to be always a double-edged sword.

On the one hand, it has led to higher adoption of mobile broadband by customers which in turn led to an increase in revenues generated by data services.

Scale of investments

On the other hand, however, it has burdened the operators, as the scale of investments directed at upgrading networks, in order to meet the demand for OTTs, was huge, without the matching returns.

Gulf and European operators while not willing to accept the new reality quietly, have demanded that companies creating those applications should contribute to the telecom infrastructure investments but for the past five years these requests have been rebuffed.

Jawad Abbasi, head of MENA in GSMA, believes that Arab operators are at a crossroads. He says that “we must ensure the continuity of investments” injected by the operators but also ensure that these companies get an acceptable return on their investments, given that there are new technologies every five to seven years which requires companies to invest millions, and in some cases, billions of dollars.

Forecasts indicate that revenues from data services will contribute 50 percent of the total revenue in the next few years as a result of more users switching to data services and the innovative features of new apps that encourage existing users to consume more data.

But despite the high consumption of data by Gulf users, who on average consume 10 GB monthly, compared to European and American users who consume between 1 and 4 GB only per month, operators in the Gulf provide data services for very low prices in order to maintain their market share, Abbasi says. Therefore, according to him, data consumption growth does not necessarily mean higher revenues.

The question that remains to be answered is that with all the new factors that are coming into play, what will Arab operators choose? Rapid adoption of the digitized era, higher revenues or market share?