Drafting change: The advent of 3G technology and new regulations will reshape the market

Significant changes are set to come to Algeria’s telecoms sector following the drafting of a new information and communications technology (ICT) law that would at least partly liberalise the market and lead to increased competition. The draft law has been submitted to parliament, though has yet to be confirmed. Further changes seem likely to come with the long-delayed launch of 3G mobile broadband services that is scheduled to take place at the end of 2013. Although the fixed-line segment is liberalised, the state-backed Algérie Telecom (AT) operates alone, following the closure of a previous provider. The mobile segment is competitive, with three operators, although negotiations continue over the ownership of one of the largest providers.

SPEND: According to the UNCTAD “Information Economy Report – 2012”, Algeria’s spending on ICT in 2012 stood at $4.59bn. By comparison, the figure for neighbouring Morocco – which has a population of similar size and a significantly smaller GDP – stood at $13.25bn. Most ICT spending in the country is on telecommunications; the sector regulator, the Post and Telecommunications Regulatory Authority (Autorité de Régulation de la Poste et des Télé communications, ARPT), pegged telecoms expenditure in 2011 – the last year for which data was available at the time of press – at AD412bn (€3.79bn), or 3% of GDP. This was down from 3.5% the previous year. Of the total spend, AD66bn (€607.2m), or 16%, went toward fixed-line services, primarily infrastructure expansion, while AD246bn (€2.26bn), or 60%, was spent on mobile telecommunications. The remainder went to other services such as very small aperture terminals (VSAT) and voice over IP (VoIP).

FIXED-LINE SEGMENT: The number of fixed-line subscriptions in 2011 stood at 3.06m, 83% of which are wired connections with the remainder connected via wireless local loops (WLLs). Impressively, the number of subscriptions in 2011 represented an increase over figures for 2010 and 2009 – a rarity, particularly in emerging markets – although it was more or less unchanged from 2008, with the number of fixed-line subscribers having fallen early in the period before recovering in 2011.

Despite this recovery in absolute terms, fixed penetration rates are down over the medium term; per-capita penetration stood at 7.92% in 2011, down from 8.97% in 2008, and the 2011 household penetration rate of 37.31% was down from 42.7% in 2008. The average number of minutes of usage per subscriber has also been falling, from 113 in 2010 to 95 in 2011, a drop of 16%; the figure stood at 116 in 2008. Average revenue per user (ARPU) also dropped in 2011, to AD1783 (€16.40) a month, from AD1849 the previous year (€17.01) and from a peak of AD3426 (€31.52) in 2005.

The main player in the fixed segment is the state-owned AT, which currently operates an effective monopoly. The firm employs around 26,000 people and had a 2011 turnover of $855m. Another company, Algerian Telecommunications Consortium ( Consortium Algérien de Télécommunication, CAT), a 50:50 joint venture between Orascom Telecom and Telecom Egypt that marketed itself as Lacom, was granted a 15-year licence to provide fixed-line services in 2005 and launched operations in 2007, using WLL technology and recruiting several thousand subscribers. However the firm ceased operations the following year due to financial difficulties.

There has occasionally been discussion in the local press of privatising or partly privatising AT. However, in June 2013 AT CEO Azouaou Mehmel said that opening the firm’s capital to private investment is not on the agenda, adding that the firm currently has no need for additional funds.

CALL CENTRES: Algeria’s Maghreb neighbours Morocco and Tunisia are both emerging as important regional centres for outsourced call centre operations, due to factors such as French being widely spoken, their locations in the same time zone as much of Europe and comparatively low wage costs. Algeria shares many of these advantages.

In 2011 there were 75 call centre operations in the country, according to the ARPT, up from only 10 in 2007; nevertheless, the segment is less developed than those of its neighbours. “There has been a lot of investment in the call centre segment, but it hasn’t taken off due to poor infrastructure; call quality is still low and calls are also expensive, which undermines the profitability of the sector,” Mohamed Fadi Gouasmia, the general manager of local ICT firm AnwarNet, told OBG. According to Gouasmia, some call centre firms that had established operations in Algeria subsequently moved them to Morocco because of such issues.

MOBILE USERS: The total number of mobile phone subscriptions stood at 37.5m in 2012, according to the ARPT, representing an increase of 5.4% on 2011 figures. The body put the mobile phone penetration rate in 2012 at 99.28%, up from 96.52% the previous year. This compares to just 1.43% a decade earlier, according to International Telecommunications Union (ITU) figures, illustrating how quickly the country has been to take up mobile communications – similar to many middle-income economies elsewhere in Africa and the Middle East. According to the World Economic Forum, around 81.5% of the population has mobile network coverage.

While growth in mobile subscriptions has slowed in recent years as the market has approached saturation, usage appears to be growing at a faster rate: the monthly average number of minutes per user stood at 199 in 2011, up 21.3% on 2010, and ARPU in the segment grew from AD566.3 (€5.20) in 2010 to AD611.4 (€5.62) in 2011. While the vast majority of subscriptions remain prepaid contracts, the post-paid contract segment is expanding at a significantly faster rate: the compound annual growth rate (CAGR) in the segment stood at 17.1% between 2009 and 2012, compared to a CAGR of 3.9% in the prepaid market, raising the post-paid segment’s market share over the period from 5% to 7%.

MOBILE OPERATORS: Algeria hosts three mobile operators, all of whom have significant backers, namely Mobilis, a subsidiary of AT; Ooredoo Algeria, formerly known as Wataniya Telecom Algeria, which is 80%-owned by Kuwaiti-Qatari operator Wataniya (which in turn is 92.1% owned by Qatar’s Ooredoo, formerly Qtel); and Orascom Telecom Algeria (OTA), which is branded as Djezzy and owned by Global Telecom Algeria, formerly Orascom Telecom (OT).

OT began as part of Egypt’s Orascom group of companies and remains headquartered in Cairo; however, the group’s major shareholder is Russian telecoms operator Vimpelcom, which acquired a 51.9% stake in OT in 2011. In May 2013 Baskindale, a subsidiary of a company called Altimo Holdings and Investments that has a 47.85% stake in Vimpelcom, made a tender offer to acquire the outstanding shares in OT not already owned by Vimpelcom, though OT’s management advised shareholders not to accept the offer price, and the firm’s initial offer in late May failed to secure enough votes from shareholders.

Thanks to prudent regulations and competition rules, the three mobile providers operate in a reasonably dynamic market, particularly by regional standards. Indeed, Arab Advisers’ Group 2013 Cellular Competition Intensity Index put Algeria roughly in the middle of the pack of Arab nations in terms of the intensity of competition in the mobile market, with a score of 57.99% (compared to Saudi Arabia in first place with 76.58% and Lebanon in last place with 40.71%). No company has more than half of subscriptions. According to ARPT figures, at the end of 2012 Djezzy was the largest of the three firms in terms of mobile subscriber market share, with 17.8m subscribers (up 7.5% on 2011), or 47.6% of total mobile subscriptions, followed by Mobilis at 10.6m (up 1% year-on-year, y-o-y), with a market share of 28.3%, and Ooredoo, formerly known as Nedjma, on 9.1m (up 6.5%), giving it a market share of 24.1%. Djezzy’s high number of subscriptions is due to a large proportion of total prepaid customers with 17.13m subscribers, giving it a prepaid market share of 49%, while post-paid subscribers are fairly evenly split among the operators, with Ooredoo at 992,206, Mobilis at 903,301 and Djezzy at 717,960.

Revenues at Djezzy in 2012 stood at AD143bn (€1.32bn), up 6% on 2011, with EBITDA also up 6% to AD85.2bn (€783.8m). Mobilis’s turnover for the year was AD59bn (€542.8m), up 11.6%, with net profits more than doubling to AD12bn (€110.4m).

Revenue at Wataniya grew from AD223.7m (€2.05m) in 2011 to 266.9m (€2.46m) in 2012; profits rose from AD10.3m (€94,760) to AD19.6m (€180,320) over the same period. For the first six months of 2013, the firm announced revenues of $523.6m and profits of $93.9m, up more than threefold y-o-y. Mobilis reported a net profit of AD14.2bn (€130.64m) for the same period.

POTENTIAL CHANGES: Vimpelcom and the Algerian state have been in negotiations over the latter’s potential acquisition of large stakes in Djezzy. According to the Algerian authorities, the government has the right of first refusal under the 2009 Complementary Finance Law for stakes in foreign firms when their ownership structure changes, as it did when Vimpelcom acquired a majority stake in OTA.

Vimpelcom has said it is willing – and indeed intends – to sell the stake to the government, though a conclusion has yet to be reached. According to local press reports in late May 2013, the authorities were seeking a new valuation of the operator to determine an appropriate price, which has yet to be decided. There have been complications to the ownership discussions – including allegations between the two sides of regulatory breaches and subsequent penalties, both of which have been challenged – but the negotiations have continued.

INTRODUCING 3G: The country is working on reaching the same level of high-speed mobile network development as some of its regional peers in launching mobile broadband services; for example, 3G was launched in neighbouring Morocco in 2007, and in June 2013 the country’s telecoms regulatory body announced that it would carry out a tender for 4G licences towards the end of the year.

However, the market in Algeria is more than ready. At least some of the infrastructure for 3G networks is already in place, with operators waiting for the distribution of licenses planned before the end of 2013. Mobilis, for example, has been testing 3G systems since 2004 and now has a network covering 20 provinces. “We started delivering 3G-enabled SIM cards to operators three years ago,” said Abdelhamid Benyoucef, the CEO of HB Technologies. “From a technological standpoint everything is ready. It’s almost just a matter of a flick of a switch.”

POPULAR APPEAL: Many customers are ready for the launch; smartphones are popular amongst the middle and upper classes, in particular Samsung handsets, and some mobile operators offer 3G-ready internet USB sticks that currently run on GPRS/EDGE networks. “Algerians are fans of new technologies and adopt smartphones and tablets very quickly, which presages the development of a new market with strong potential. The Algerian smartphone market is 10 times greater than two years ago,” said Zhao Liang, general manager of Huawei.

The government first called for bidders for 3G licences in October 2011, but the launch of the service has been delayed numerous times. While 3G services were due to be started in Algeria in the first quarter of 2013, in May 2013 Moussa Benhamadi, the minister of post and ICT, said the roll-out had been delayed due to the ongoing ownership negotiations for Djezzy. The authorities reportedly wished to complete the transaction before distributing 3G licences, as companies undergoing a change in the structure of their ownership are not permitted to bid in licensing rounds and they wanted to avoid disadvantaging Djezzy by allowing other firms to launch 3G services before it was capable of doing so.

In spite of the delays, in late July Benhamadi said that he had signed a decree for the launch of 3G and 3G+ services, saying the ARPT would launch a tender for three licences in August and that the service would enter into operation in December.

The ARPT officially announced on October 15 that 3G licences had been awarded to three operators, Algeria Telecom, Ooredoo and Djezzy. Final licences specifying the exact coverage obligations will be granted by the ARPT once operators pay the appropriate fees and meet the conditions laid out in the tender document. Vimpelcom, the controlling shareholder of Djezzy, has reported that the licence will cost $40m and cover a period of 15 years.

DEVELOPMENTS: The launch of the service is expected to have a major impact on the ICT sector, although it will take time to roll it out across the country. “The Algerian telecoms market has reached its limit in terms of services and requires the introduction of new technologies to develop data and digital content,” said Karim Cherfaoui, the CEO of Divona.

Some preparations for the eventual launch of 4G/long-term evolution (LTE) are also under way; in July a centre to train postgraduate students in the development of LTE services and applications built by the government in partnership with Huawei was launched at the Sidi Abdellah technology park in Algiers. AT also plans to offer what it describes as a limited fixed form of LTE to professionals, with plans for an initial 150,000 or so subscribers.

OTHER SERVICES: The VOIP market was opened to competition in 2004. The ARPT lists three providers: Anwar Net, Icosnet and Smart Link Communication. Total spending on VOIP services stood at AD1.28bn (€11.8m) in 2011, a significant increase from AD40m (€3.68m) in 2010, as per ARPT figures. Regulation can be tricky, according to operators. “Very few other countries now regulate VOIP but here it’s treated in an unusual way,” said Ali Kahlane, president of local ITC firm Satlinker and president of the Internet Services Provider Association of Algeria. “In theory it’s permitted; however you need authorisation to use anything other than a headset as a receiver, such as a VOIP phone. It’s not really clear if it’s the service or the device that’s restricted.”

The ARPT put spending on VSAT services at AD3.34bn (€30.7m) in 2011. According to Kahlane, Algeria was one of the pioneers of VSAT technology, with his firm among the first to launch the technology commercially in 1999. However, the state subsequently obliged VSAT operators to bid for licences, and there are currently three licence holders: AT, Divona Algérie and OTA. There are roughly 3500 VSAT units installed, although licences are expensive, which has limited growth. There are also three global mobile communications by satellite providers: AT, Thuraya and France Télécom. Spending on the service in 2011 was AD370m (€3.4m).

NEW REGULATION: Efforts to pass a new ICT law are currently under way, something players say is long overdue. “There is a need for legislation that efficiently regulates new ICT technologies; the lack of such legislation is a major constraint on the emergence of ICT services, notably e-commerce,” said Abdelkrim Tegguiche, CEO of Algerian IT firm and internet service provider Webcom. An official draft of the legislation has not been published, but according to Gouasmia it includes changes that will boost competition, such as allowing for the creation of mobile virtual network operators (MVNOs), local loop unbundling and liberalising radio spectrum. The law has yet to be passed. “The law was adopted by the government and sent to parliament, where it was discussed in April, following consultation with industry; however it now seems to be stuck in committee due to disagreements between the ARPT and the ministry,” Gouasmia told OBG. “MPs we have spoken to say that the law is not on the agenda for the time being. Whether or not it is passed will define the medium-term future for the sector.”

OUTLOOK: The key determinants of the segment’s future will be the launch of 3G services in the near term and the ultimate passage of the new ICT regulation law. Together these developments will likely lead to dramatic changes in the sector, including further increasing competition through the launch of virtual operators, potentially re-invigorating competition in fixed-line services and (in the case of the launch of 3G) giving a boost to mobile sector revenues. The prospects for a more liberal market are promising as the country’s telecoms sector is set to undergo significant and wide-reaching changes.

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The Report: Algeria 2013

Telecoms & IT chapter from The Report: Algeria 2013

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