Saudi Arabia's Mobily will start leasing its mobile phone network to a new operator to launch a rival service in the first quarter, an executive said, kicking off the biggest shake-up in the kingdom's telecommunications market in six years.

The Saudi telecom regulator, in a move to increase competition, has required the three mobile operators - second-biggest Mobily, leader Saudi Telecom Co (STC) and Zain Saudi - to provide wholesale capacity to new operators that have no networks of their own.

The winning bidders, announced last June, have yet to receive their licences. The Communications and Information Technology Commission (CITC), which has offered no more details, declined to comment.

But Karl Michael Henneking, Mobily's chief corporate strategy and marketing officer, told Reuters that service would start soon from its partner, London's Lebara Group.

"We expect Lebara to launch services in the first quarter of 2014. The CITC is supposed to issue the licences at the end of January," he said.

Lebara will help Mobily "gain market share in a segment we're not so strong in", Henneking added, declining to say which social or ethnic group Lebara would target. He hinted that it would include expatriate residents, who account for around a fifth of Saudi's estimated 27 million people.

Newcomers such as Lebara, known as mobile virtual network operators (MVNOs), usually pay the host firm a percentage of their revenues plus fees.

Mobily also sees a business opportunity from having developed an Internet-based platform to run Lebara's billing, operations and technology. It is now in talks to sell this system to other potential virtual newcomers to the Middle East, Henneking said. Such a system allows them to focus on marketing and customer service.

MVNOs are widespread in Europe, but Gulf regulators have been reluctant to allow them, because most of the region's 15 mobile operators are ultimately government-controlled and a major source of state revenue.

LEADING THE WAY

Oman is the only Gulf state to launch MVNOs, with former monopoly Omantel hosting two on its network. Should MVNOs succeed in Saudi, which is by far the largest Gulf market, and help boost the revenues of its existing mobile companies, then neighbouring nations may follow suit.

"In more developed markets, the entry of MVNOs sparked a price war, but if we take Oman as an example from this region, ARPU (average revenue per user) stabilised within two years of MVNOs' entry," said Karim Yaici, a telecoms lead analyst at Analysys Mason. "We can expect a similar scenario in Saudi."

Analysts expect Saudi mobile companies to retain control of their core networks and spectrum and to limit MVNOs to targeting pre-agreed market segments.

This would inhibit price competition and reduce the risk that the MVNOs will cannibalise revenue from their hosts.

STC has teamed up with Virgin Mobile Middle East & Africa, and Zain Saudi with Gulf retailer Axiom.

Saudi Arabia's mobile penetration is around 185 percent, or 1.85 mobile subscriptions per person, which suggests the MVNOs will face a battle to carve out a profitable market share.

"Not all MVNOs will be successful," Henneking said.

He said some Lebara customers would use its services as their sole mobile account but that a larger share would sign up to Lebara as a second, back-up service.

In addition to the revenue and fees they pay to host telecoms companies, the MVNOs will also pay a licence fee of 5 million riyals ($1.3 million) and 15 percent of their revenues to the regulator.

That is a small amount by comparison with the $6.1 billion that Zain Saudi paid for the kingdom's third mobile licence in the last sector reform. Zain, which launched service in 2008, has yet to report a profit.

"Zain Saudi's licence cost really put the company in a deep hole it has struggled to dig itself out of. You could argue it overpaid," Asim Bukhtiar, Riyad Capital head of research, said.

"Perhaps the regulator saw that it needed to offer licences at a particular price to be able to attract bidders for the MVNO licences and make the market more competitive." - Reuters