Private sector participation, adoption of new tech drive ICT sector: AlJazira Capital

Jassim AlJubran, Head of Sell-Side Research at AlJazira Capital

The private sector's increased participation, elevated awareness of digitization in small and medium-sized enterprises (SMEs), and continuous improvement in the adoption of new technologies by consumers and businesses will be key growth drivers of the Saudi information and communications technology (ICT) sector, Jassim AlJubran, Head of Sell-Side Research at AlJazira Capital, told Argaam.

On the sidelines of the ICT Indicators Forum 2024, AlJubran said the local ICT sector's revenue leapt at a compound annual growth rate (CAGR) of 6.5% from SAR 71 billion to SAR 100 billion during the period from 2018 to 2023. In addition, the number of subscribers to telecom services exceeded 63 million.

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The sector witnessed tremendous growth over the past years, making it the largest and fastest-growing digital economy in the Middle East and North Africa (MENA) region.

Saudi Arabia is deemed attractive for foreign investments in the ICT sector. Foreign investments will help the Kingdom reach a competitive level compared to developed countries.

New companies in the sector will support meeting the growing demand and enormous potential, while boosting market competition, as the technical scene in Saudi Arabia can shift from a service provider to an innovation driver, AlJubran said. He indicated that healthy competition is necessary to accelerate innovation.

Here are details of the interview:

Q: How do you view the recent progress in the local ICT sector? Can it reach advanced global positions under the Saudi Vision 2023?

A: Indeed, the ICT sector's size reached more than SAR 166 trillion by the end of 2023, making it the largest and fastest-growing digital economy in the MENA region. The sector's current contribution to the Saudi gross domestic product (GDP) reached more than 4.0%. This makes the outlook for the sector's contribution promising, due to its underlying strengths and growth drivers.

Over the past few years, Saudi Arabia's capital investments in digital infrastructure exceeded SAR 100 billion, which contributed to improving service quality by increasing internet speeds by more than 13 folds to 215 megabits per second for mobile phones, double the global average.

This helped the Kingdom maintain its strong position among the top 10 countries in terms of internet speed. Today, the Saudi ICT sector is facing strong global competition. Hence, the Kingdom jumped 10 ranks on the International Telecommunication Union's (ITU) ICT Development Index (IDI), thanks to the recent regulations introduced by the Communications, Space & Technology Commission (CST).

Q: What do you think of the sector's financial performance in recent years? Did all departments keep pace with growth?

A: The sector has seen significant transformations recently. Further, the framework of Vision 2030 and the impact of the sector's new regulations started to be manifested, especially the acceleration of technology development during COVID-19.

Looking back at the sector's performance three years ago, we will find that it reached maturity and stability after the penetration rate in the traditional communication services reached high levels. This is in addition to the emergence of competition in the individual (consumer) sector among operators, along with the impact of the pandemic on demand for some services and products related to domestic and religious tourism. Accordingly, we had expected a slight growth in revenues and squeezed margins.

However, the sector's revenues grew at a CAGR of 6.5% from 2018 to 2023, jumping from SAR 71 billion to reach a historical level of SAR 100 billion.

We believe that the sector's recent regulations, in conjunction with Vision 2030 and empowerment of the private sector, contributed to the continued growth in the consumer or the business-to-business (B2B) sectors. However, the business sector contributed the most to this growth in the last two years, with some companies recording a growth rate of over 20% due to digital transformation in the business sector.

In addition, the individual sector continued to record healthy growth levels, but partially affected the ICT's profit margins due to increased competition. However, the consumer sector still boasts several positive indicators, as the number of subscribers exceeded more than 63 million compared to 47 million four years ago, while penetration rates reached over 198% recently.

We should also highlight the robust internet speed, thanks to the massive capital spending in the sector and the rising demand for data amid changing consumption patterns.

Q: Is there any competition among ICT companies in light of this development?

A: There is competition and overlap between these two sectors, especially in areas where telecom companies move towards B2B businesses and Fintech solutions. Regardless of healthy competition, these two sectors are two sides of the same coin. Technological services cannot go without the infrastructure provided by telecom companies.

The telecommunications sector would have also reached maturity and stability to a large extent if it had not aligned with innovations and continued growth and competition. There is competition in several aspects, where integration between the two sectors would match.

Q: What are the future growth opportunities in the Saudi ICT sector?

A: The ICT services in Saudi Arabia are already growing as significant investments have been allocated over the past few years for the wired and wireless communications infrastructure and technologies to create future growth.

With the government focusing and supporting the development of a competitive digital economy, increased participation from the private sector, awareness of digitization in SMEs, and continuous improvement in adopting new technologies by consumers and companies, stand as key drivers for growth in the Kingdom's ICT sector.

Partnership with global technology giants to acquire technical knowledge and develop a globally qualified local workforce with expertise in the ICT industry is crucial for building a solid base for the sector in the Kingdom.

Additionally, I believe there are several upsides contributing to future growth. This includes the increased use of 5G networks, robust business sector, soaring demand for data and Fintech, optical fibers, and growth opportunities related to emerging technologies such as artificial intelligence (AI), cloud computing, the Internet of Things (IoT), and augmented reality (AR).

Q: Given the rise in offerings by technology companies, is there a need for other companies to join to boost competition?

A: There is great attention to this sector after the listing of a number of companies in the sector, with others awaiting regulatory approvals. Overall, the sector captured significant growth in the past three years, reflecting its fundamental potential. The Saudi IT services market is large and relatively huge compared to other GCC countries, while IT spending in the Kingdom as a percentage of GDP is lower compared to global markets. Therefore, there is an opportunity for growth. Software, cloud computing, cybersecurity and specialized IT services will be among the key drivers of ICT spending growth.

The technology market is highly fragmented in Saudi Arabia, with the main player in the ICT market having a low double-digit market share at 13%, while the second largest player having nearly half this share. Market fragmentation can be an indicator of relative barriers to entry, but more new players in the market can spark innovation greatly to the benefit of the customer, technology, and economy.

Capital expenditure (capex), which I believe reflects the ICT landscape in the Kingdom, remains low. In the last 12 months, capex in the Saudi ICT was low single digits on average compared to other economies. However, SMEs are poised to drive competition towards innovation and better customer services, research, development, and innovation – once you spark the race to innovation.

The addition of new companies would support meeting the growing demand and enormous potential, in addition to creating a competitive market. It in turn can lead to the comprehensive development of the sector.

Saudi Arabia's tech scene could move from being a service provider to being an engine of innovation. However, healthy competition is necessary to accelerate innovation.

Q: What is your take on the recent push by telecoms to establish independent tower companies and sell and lease back towers?

A: I believe that recent updated regulations by the government, particularly those from the CST, aimed at fostering infrastructure sharing, including towers, incentivized telecoms to venture into creating standalone tower companies.

Presently, the Saudi telecom market appears to be gravitating towards the formation of distinct tower entities, mirroring trends observed in numerous international markets. It would not be surprising if, in the future, all tower assets were consolidated into a single entity.

Consequently, stc and Zain KSA initiated moves to monetize these assets, and it is plausible that Mobily might adopt a similar approach in the future—selling and leasing back towers, then merging them with the new entity. This could alleviate Mobily's debts and bolster its capital expenditure, particularly following Zain KSA's success in selling its towers to the alliance for around SAR 3 billion.

Moreover, establishing tower management entities undoubtedly opens doors for expansion beyond Saudi Arabia; as evidenced by stc’s subsidiary, TAWAL, already making inroads into Pakistan. There is a wealth of global experiences and numerous telecom operators worldwide.

Certainly, integration would allow for sharper focus and more efficient operations, culminating in significant cost reductions (synergy), as towers can be easily shared by multiple operators at a single operating cost.

Furthermore, given the high value of these assets today, telecom operators can unlock their value by partially selling tower assets instead of leaving them frozen, thereby gaining better access to capital.

This move will enable them to diversify into other services such as data centers, cloud services, further expansion into enterprise services, and digitization in general. It sets the stage for future growth while retaining the flexibility to utilize these towers, especially in burgeoning sectors.

It is possible that TAWAL will be listed on Tadawul in the future, unlocking its full potential as one of the largest tower management companies globally, boasting revenues that could surpass SAR 4.8 billion and a portfolio of over 30,000 towers.

Q: How does foreign capital contribute to increasing competitiveness? How does it affect existing companies?

A: Foreign investments from global players will bring advanced technology and expertise in their field of specialization, rather than attract investments. Thus, foreign investments will help the Kingdom reach a competitive level compared to developed countries.

Saudi Arabia has recently attracted more than $9 billion investments in future technologies, including from the American giants Microsoft and Oracle, that are building cloud regions in the Kingdom. Microsoft will also invest $2.1 billion in hyperscale cloud services, while Oracle has allocated $1.5 billion to build a new cloud region in Riyadh. In addition, Huawei also announced an investment of $400 million to establish a cloud region for its services in the Kingdom. Also, stc owns the Saudi Cloud Computing Co., in a joint venture with Alibaba.

There is no doubt that technological developments are currently being led by economies outside Saudi Arabia. Therefore, I believe that there is another way to access more advanced technology through strategic foreign investments (to accelerate progress, and attract the skill and talent required for innovation and benefit from it).

We see China being denied access to American technology, or American technological skills, because of sanctions, while Saudi Arabia was able to attract these strategic partnerships. Such partnerships should be welcomed in order to enhance our rate of innovation and import a skills base.

The Saudi technological landscape may soon be globally innovative, and strategic investments could open new geographic channels for Saudi companies to provide their services or products.