Challenger steps into the ring as an equal

In recent weeks we have seen the clearest signs yet that du is nipping at Etisalat's heels.

Until recently du showed little sign of disturbing Etisalat's grip on the market but that seems to be changing.

In the two years since the launch of du, the UAE's second telecommunications company, there were few occasions when the newcomer seemed likely to seriously trouble the veteran. But in recent weeks, we have seen the clearest signs yet that competition between the two is real and that du is nipping at Etisalat's heels with an intensity that few would have predicted just a year ago. As the country's sole telecommunications company for 30 years, Etisalat has developed strengths that are difficult to duplicate, not least of which is a customer base much larger than the population of the UAE.

As such, it is difficult to judge du on market share alone, although its most recent stake of more than 30 per cent is no small achievement for a two-year-old company. But in the race for new customers both companies are on relatively equal footing. Both are spending heavily on advertising, have lots of special deals aimed at their chosen markets, and a presence in retailers throughout the country.

And it is in this race, where the companies share an equal starting line, that du took a commanding lead during the first quarter of this year. Whether it is expatriates arriving in the country or local residents buying their first or second line, hundreds of thousands of new mobile subscribers are added by Etisalat and du every quarter. In the first three months last year, Etisalat added about 250,000 and du 180,000, with the share of new subscribers, known as the "marginal market", split roughly 60:40.

Fast forward to April this year and it is du that is reporting 250,000 new customers, compared with Etisalat's 50,000, meaning 80 per cent of the marginal market has chosen du. If that type of split continues, du could have a 50 per cent share of the market by this time next year and all of a sudden, Etisalat is no longer the UAE's number one mobile operator. The speed at which the market has changed is incredible.

The choice by du to position itself as a low-cost, value-for-money operator may have seemed a little out of place in the halcyon days of early 2007, when money seemed to be erupting from the UAE sands and marketing was filled with the language of the rich promising luxury, lifestyle and products for discerning customers. But du patiently built its brand and today appears to be reaping an oversized reward.

"Never doubt the appeal of being better value for money," its chief executive, Osman Sultan, frequently says when asked about the popularity of the network. If it were true last year, it will certainly remain true in the economic caution of this year. Aside from pricing, du benefits from one of the best free-marketing campaigns any company can have: its status as a new entrant breaking a long-running monopoly.

It is fair to say that all monopolies generate a degree of frustration and public resentment, and in the UAE this is no different. It does not require genius to capitalise on this as a new competitor against Etisalat. But what is required is a decent alternative that offers a service that is roughly as good with a low cost of switching. For at least a year after its launch, du struggled with the first half of this proposition, suffering from a mobile network that was of a clearly lower standard than that of the competition.

This was understandable. It takes time to roll out a fully functional national mobile network and the UAE is spoilt by Etisalat's system, which is one of the best in the region and up there with most operators around the world. The company has had more than a decade to cover the country thoroughly and has never been short of the cash needed to invest in top-quality equipment. But du has been putting billions of dirhams into its own network each year and the results are beginning to show. The new status of du, as a legitimate contender rather than a pesky underdog, means the nature of competition between the two companies will change in the coming year. Both will focus increasingly on retaining their best customers and enticing the most lucrative customers from the other side to try out their service.

For Etisalat, services such as the Apple iPhone and the RIM BlackBerry are one way to make customers less inclined to switch. It will also look to use its near-monopoly in the national broadband internet and landline telephone markets to keep customers, with a bigger focus on bundled packages of services sold on longer-term contracts. At du, a major challenge will be to convert more of its customers into billed, or "post-paid", subscribers. Post-paid users generally spend more and are less likely to switch operators than those using prepaid scratch cards.

The company's new "Elite" service, promoted by celebrities such as the Emirati animator Mohammed Saeed Harib and Shahrukh Khan, one of the biggest names in Indian entertainment, is part of this push. Expect both companies to continue to boost their advertising spending. As the two networks become more comparable in terms of service quality, the brands and public perceptions of each will become more important. According to data published this week in the Gulf Marketing Review, Etisalat raised its advertising spending by 91 per cent in the first quarter of this year. Not to be outdone, du boosted its own by 600 per cent.

Competition, it seems, benefits both customers and advertising agencies alike. [e-mail]