Telcos turning to tech to propel growth

August 15, 2024, 7:19 AM

Gone are the days when telcos could rely on merely a phone network to turn a profit

Companies pivot from pure telecoms
e& bought into Careem and Starzplay
Analysts say tech is way forward

Fear of market irrelevance has spurred former Gulf telecom operators such as e& to bet on providing more sophisticated, tech-based services to consumers and businesses.

This strategy differs from earlier efforts to create a vast geographic footprint for their operations, which, in many cases, led Gulf telcos to nurse billion-dollar losses.

E&, which is listed on the Abu Dhabi Stock Exchange, eventually quit Nigeria and India, while its $2.6 billion stake in Pakistan Telecommunication Co is now worth only $40 million based on the latter’s current share price.

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E&, which is more commonly known as Etisalat, did not respond to requests for comment.

Gulf telecom operators have long feared becoming a so-called “dumb pipe” in which the companies solely provide data as a commoditised product and have sought instead to offer more sophisticated services, says Nishit Lakhotia, head of research at Bahrain’s Sico Bank.

These, he says, include a greater focus on data centres for corporate clients, consumer fintech and other digital and media services.

“How materially profitable will these become for them will only become clear in the medium term,” Lakhotia says.

“Gulf telcos are wise to invest in data centres, which will be a core business that underpins the AI revolution. They’re also monetising their tower infrastructure to some extent, although many telcos are retaining partial ownership of their towers.”

Etisalat spent $400 million on a majority stake in ride-hailer Careem’s so-called super-app and also bought into other tech companies such as streaming service Starzplay Arabia and lending platform Beehive.

Neetika Gupta, head of research at Muscat’s Ubhar Capital, says Etisalat clearly defines its different businesses by separating its financial results into telecoms and tech. Etisalat by e& and e& International are in its telecoms division, while E& enterprise provides tech-based services to corporate customers and e& life is consumer-focused.

“The core telecoms business in the UAE is well placed, generates a lot of cash and the company is expanding more and more into tech,” Gupta says.

Etisalat told analysts earlier this year that it wants its tech-related divisions to generate 40 percent of its revenue by 2030. Currently, this figure is around 7 percent, Gupta says.

“Without making other investments, tech will likely provide a maximum of 20-25 percent of revenue in 2030,” Gupta says.

“Etisalat aspires to grow its tech business substantially – not just in the UAE, but across the Gulf and especially Saudi.

“The growth potential in pure telecoms services is limited, but IT remains underpenetrated in the region – Etisalat can offer cybersecurity, data centres, cloud services, IoT (internet of things), business processing, accounting and more.

“It’s a much bigger market for Etisalat to tap. I don’t know how successful the company will be, but it’s making a good move.”

Gulf countries often take pride in being the first to launch new technologies and offer superior services. Qatar, the UAE and Kuwait are ranked first, second and third worldwide for mobile internet speeds, while Saudi Arabia and Bahrain are eighth and 10th respectively, according to the Speedtest Global Index.

Yet being an early mover on new technology can be vastly more expensive than coming to market later and, aside from the prestige in claiming such milestones, it does not benefit customers to a meaningful extent.

Etisalat, Saudi Telecom Co and Qatar’s Ooredoo are ultimately government controlled and therefore their responsibilities go beyond simply turning a profit by providing telecoms services. They must also create and operate the infrastructure that enables national economies to diversify and expand.

Sch government ambitions may not necessarily be aligned with minority shareholders’ best interests.

“Telecom operators are expected to launch the latest technology, investing billions of dollars to build out next-generation networks,” Lakhotia says.