In the gritty streets of Deira, the old commercial heart of Dubai, lurks a threat to some of the region’s biggest telecommunications firms.
It is here on the northern bank of Dubai creek, among the grocery stores and barbers, the discount tailors and food stalls, where low-wage workers come after a day’s toil to phone their family and friends overseas.
Instead of using their pre-paid mobile phones, they cram into the sweaty booths of dilapidated backstreet Internet shops to call home at prices a fraction of those charged by telecom operators Etisalat , the United Arab Emirates’ most valuable listed company, and rival du .
These shops dodge government inspectors to offer unlicensed Voice over Internet Protocol (VoIP) services -- free Internet-to-Internet calls and cheap Internet-to-phone calls. The UAE’s regulator says only licensed companies can provide VoIP.
“It’s less than a tenth of the cost of Etisalat, that’s why I come here,” said Mansour, 21. The Afghan works in a Deira clothes shop and calls his family in Kabul three times a week from a 14-booth VoIP shop run by managers Mamun and Shajib, both 22.
The Bangladeshi pair have been offering VoIP services for more than a year and spoke on condition that their full names and company details were not disclosed.
“For internet we can only charge 3 dirhams (82 U.S. cents) an hour and that’s not enough to pay two salaries, shop rent, licenses and broadband costs,” said Shajib. “We would have shut if it wasn’t for VoIP, but this is very popular and more and more people are telling their friends.
“Most people’s salaries are not even 1,400 dirhams per month and they can’t spend much on the telephone, so that’s why they come here. If Etisalat or du offered the same rates as us, we would close down tomorrow.”
Internet-to-phone calls via Skype, the global leader for consumer VoIP, are intermittently blocked in the UAE, but the Deira shops use other programs such as Calls Telecom and Call World for Internet-to-phone calls, and these seem to work without hindrance.
Rates start at 0.1 dirham per minute to phone a landline in India, with Pakistan, Bangladesh and Sri Lanka the other top destinations, Shajib said. Prices to these countries are about 0.25 dirham per minute on average.
To call India, Etisalat and du charge 1.89 dirhams per minute for off-peak calls between 9 p.m. and 7 a.m., and 2.40 dirhams at other times.
The regulator sets their tariffs, so the two operators cannot directly compete on price and instead tout various call packages. Etisalat offers subscribers a 60 percent discount on late-night calls to the subcontinent, but its fees are still much higher than the rates offered by Shajib and rival shops.
Etisalat operates across 18 countries but three-quarters of its revenue comes from the UAE, while du is a single-country carrier, and international calls are among their biggest income streams. So VoIP is potentially disastrous for them.
“It’s a losing battle - when you try to ban or restrict something on the Internet, the harder you squeeze, the more it gets between your fingers,” said Oliver Johnson, chief executive of British-based telecoms research firm Point Topic.
“As speeds increase, people will value VoIP more and more and they won’t see why they should make a normal international call instead. Margins on international calls are yesterday’s revenues.”
Four-fifths of UAE residents are expatriates, which spurs demand for international calls. Wealthier Western and Arab residents have better access to the Internet, at home and at work, and were the first to use VoIP services in the UAE; its spread to the lower-income majority could be a game changer for Etisalat and du.
“If VoIP was legal and widely available, it would be a disaster for Gulf operators,” said Pedro Oliveira, partner at consultants Oliver Wyman.
Many smart phones come ready-installed with Skype, which can be used for Internet-to-Internet calls. Operators are pushing these high-end handsets as they try to offset falling profit margins on voice calls by selling data packages, so they are aiding the rise of a technology that could hurt their own businesses. Etisalat’s profits have fallen in six of the past seven quarters.
“There are really three big competitors (in the UAE) and one of those is VoIP...you can see it on the street corner,” said Matthew Willsher, Etisalat’s chief marketing officer.
So far, the UAE telecommunications regulator seems determined to resist the rise of Internet-based phone calls as it tries to protect revenues in the government-controlled sector. Only Etisalat and du are licensed to provide VoIP services, and they have yet to do so. The two companies are majority-owned by government-linked institutions and the sector is an important source of state revenue.
“So long as regulators remain part of the government and the government continues to own controlling stakes, then protectionism will remain high,” said Oliver Wyman’s Oliveira.
In October, Etisalat unveiled plans for ePlus, an online platform it says will include social and instant messaging, plus VoIP calling. But it has not revealed likely prices for VoIP calls and the UAE regulator, which must approve these tariffs, has dampened expectations for any major savings for consumers.
“Do not expect prices to fall drastically just because voice over IP services are launched,” Majed Almesmar, deputy director-general of the Telecommunications Regulatory Authority, told reporters at an exhibition in Dubai. “We are waiting for them (the operators) to come with certain packages or proposals. We need to look at those proposals.”
As Mansour in Deira explained, low-cost calls are the main motivation for people using VoIP, so rolling out VoIP services that do not offer steep discounts to conventional services would be unlikely to satisfy consumers.
Du has also said it will launch VoIP services, but it is unclear when this will happen; other UAE innovations such as number portability were delayed for over three years and a deal to allow open competition on fixed line services are running late.
Ultimately, fighting VoIP could harm the UAE’s economic competitiveness, some analysts argue.
“Protectionism could harm economic development if it places other industries at a disadvantage to those based elsewhere – eventually, governments could decide these negatives outweigh the positives and loosen VoIP restrictions,” said Oliveira.