Since the liberalisation of the telecommunications sector in 2000, Algeria has become one of the highest teledensity markets on the African continent. With a mobile penetration rate nearing 100% and a fixed-line segment at 8% and growing, the sector is on a steady rise with numerous growth opportunities. While the fixed-line segment is controlled by a single public operator, the mobile market is dominated by three large operators, making for high levels of activity, with intensifying levels of tariff competition and falling average revenues per user (ARPU) rates. Indeed, as the market approaches saturation, Algeria’s network providers are looking to the development of value-added services, like data, and the introduction of third-generation (3G) technology to grow margins and boost revenues.

BY THE NUMBERS: According to the World Bank, Algeria’s GDP in 2011 was $188.68bn, of which about $7.5bn, or 4%, was from the information and communications technology (ICT) sector. The mobile market accounts for most of the growth, with a turnover of AD222bn (€2.13bn) in 2010, according to the Post and Telecommunications Regulatory Authority (Autorité de Ré gulation de la Poste et des Télécommunications, ARPT).

Both the fixed-line and mobile telephony sectors continue displaying gains, albeit at different paces. According to KPMG’s 2011 “Guide to Investing in Algeria”, landline subscriptions reached 2.9m in 2010, a 16% increase on the 2.5m subscribers of 2009. While mobile subscriptions showed a smaller growth rate in 2009-10, at 7%, the segment as a whole is quickly surpassing the landline sector in terms of market penetration and size. Mobile penetration grew from 1.5% in 2002 to 94.4% with 33.74m subscribers by 2011.

The success of the mobile telephony industry gave the sector its largest revenue share yet, growing 17% from €3.75bn in 2010 to €4.4bn in 2011. Indeed, as the total mobile penetration rate approaches 100% and demand for both fixed and mobile services continues to rise, the telecommunications sector is poised to experience significant expansion in the coming years.

FIXED LINE: The burgeoning demand for mobile services is paralleled by slower growth in the fixed-line segment. The landline penetration rate fell from 9% in 2006-07 to 7.2% in 2009, eventually climbing back up slightly to 8.05% in 2010. Indeed, fixed-line networks have witnessed a global downturn in traffic, dropping from 11.5bn minutes in 2005 to an estimated 3.7bn minutes in 2010, a 67% decline over the five years.

The fall in Algeria’s fixed-line market may also be due to the collapse of competition in the sector. As demand for fixed-line telephony rose in the early 2000s, monopoly operator Algérie Télécom (AT) was unable to meet consumer needs, prompting entry of a second fixed-line provider, Lacom, in 2005. Owned by an Egyptian consortium of Orascom Telecom Holding and Egypt Telecom, Lacom purchased the second fixed-line licence in Algeria for $65m, which granted it the right to compete in the market for 15 years. However, the large infusions of capital associated with the licence discouraged the entrance of other operators into the market, pitting Lacom alone against AT. In less than two years Lacom had racked up nearly $45m in losses, leaving it unable to satisfy some licence commitments and compete with AT’s low prices. Lacom was ultimately dissolved in November 2008 amid discussion of a possible sale to Dubai-based VTEL Holdings.

AT nevertheless plans to continue improving its infrastructure for both its fixed-line services and subsidiary mobile network, Mobilis. In its stated five-year plan, AT will invest €4.8bn between 2010 and 2014 to expand network coverage and upgrade services. The firm has joined ranks with the Canadian firm Irstel to establish Algeria Connect, a voice over internet protocol (VoIP) service that provides virtual phone numbers and allows subscribers to receive calls using an Algerian number at any location worldwide at the price of a local call.

Though projections for landline growth are smaller than those for mobile telephony, potential for expansion in fixed-line services exists. According to the International Telecommunications Union (ITU), the number of subscribers increased from 2.9m in 2010 to 3.1m in 2011. The total volume of Algeria’s fixed-line subscribers makes it the fourth-largest landline market in the Arab world after Egypt, Saudi Arabia and Syria. Additionally, the rise of mobile services has increased the traffic exchanged between fixed-line subscribers and mobile subscribers by an estimated 18.2% in 2010, indicating that both networks could serve to complement one another, says Fatma-Zohra Dardouri, president of the ARPT. Furthermore, growth in broadband internet subscriptions will likely expand demand for fixed-line services, as broadband remains the primary form of internet connection in the country. Indeed the fixed-line and mobile markets can both benefit from the competition, collaboration and innovation over the provision of internet services. As such, improved internet accessibility and increasingly more affordable mobile internet services can carry the entire telecoms sector forward.

CALL CENTRES: One promising avenue for the fixed-line segment is the proliferation of local call centres, demonstrated by the rapid rise in the number of these facilities, from 10 centres in 2007 to 80 by 2012. Algeria’s call centre industry is still small compared to neighbouring countries like Morocco and Tunisia, which respectively enjoyed a €340m and a €158m turnover in 2009 (the last year for which data is available), compared to Algeria’s €12m profits.

In 2007 AT and Vorax Technologies, an Algerian firm specialising in communications solutions, announced plans to build 48 new call centres in Algiers, Oran and Constantine. The venture was to create over 4000 new jobs, specifically targeting new graduates, and stimulating hopes that the industry could help alleviate some of the country’s 20% youth unemployment rate.

The country’s large populace, low labour costs, strategic geographic position and command of several international languages, such as French, make it attractive for call centres serving Western firms, especially those with Belgian and French customers. “It is a market that is expanding strongly, particularly in the provision of job opportunities,” Dardouri told OBG.

MOBILE SERVICES: Following sector liberalisation in 2000 and the entry of foreign investors, mobile telephony has incurred remarkable growth. Subscription numbers jumped from 86,000 in 2000 to about 36m by June 2012. Even with the expectation that mobile penetration will reach at least 99% by year-end 2012, there is room for expansion, especially given that neighbouring countries Morocco and Tunisia enjoyed mobile penetration rates of 100.1% and 106%, respectively, in 2011. For example, improving network coverage in rural areas during peak telephone hours is an especially promising avenue for growth. “The market has been developing extremely well in Algeria, despite tough competition, and with respect to 2G, it seems to me that the current consumer needs are almost fully met,” Joseph Ged, chief executive officer of Nedjma, told OBG.

However, given sector expansion and the presence of multiple network providers, average revenues per user (ARPU) rates in the industry have fluctuated in recent years. In the fourth quarter 2008 ARPU stood at €6.58 and dipped to €5.91 in 2009 before eventually climbing to €8.69 in the second quarter of 2011. While this rise is at odds with regional trends for ARPU measures, which have decreased elsewhere, the rates are roughly comparable. In Morocco, Maroc Telecom’s ARPU fell from €8.90 in 2008 to €7.07 by the first quarter of 2012, and in Egypt the industry’s ARPU dropped from €9.57 in 2007 to €4.47 by the end of 2010.

As ARPU rates fluctuate, growth in the mobile segment is expected to increasingly shift towards data services, in line with general consumer trends away from voice services. The expected launch of 3G technology further encourages this shift (see analysis). Indeed, significant demand exists in Algeria for smartphones and efficient internet provision, and although the state has yet to award a 3G licence, the widely used GPRS and EDGE technologies support a number of the new data and multimedia platforms. Although many of these services are still seen as a luxury by most of the population, growing consumer purchasing power and the continued maturation of the mobile market should ensure expansion of this market.

OPERATIONAL COMPETITION: The leading mobile market operators are: Mobilis (AT’s subsidiary), with 29.2% of market share in subscriptions in 2011; private operator Djezzy (Orascom Télécoms Algérie, OTA), with 46.8%; and second private provider, Nedjma (Wataniya Télécoms Algérie), with 24% of the market.

Subscription numbers and revenues continue to grow. Djezzy counted over 16m subscribers at the end of 2011, up from 15.1m in 2010, with Mobilis close behind at 11m subscribers, up from 9.45m in 2010, and Nedjma with about 9m subscriptions, compared with 8.25m in 2010. Competition between the operators is characterised by price fluctuations, including reductions in pricing structures and an increase in promotional offers, as each network strives to outbid the others. In 2010 mobile prices fell from 4.4% to 3.4% of average income per capita, while the access fee for prepaid mobile offers has been significantly reduced since the liberalisation of mobile service provision, from AD17,750 (€170.40) to AD400 (€3.84) for Djezzy; AD5800 (€55.68) to AD500 (€4.80) for Mobilis; and AD2900 (€27.84) to AD500 (€4.80) for Nedjma as of 2010. Similarly, in 2010 the price per minute of prepaid packages declined with the introduction of 24 different mobile tariff offers among the operators, lowering the cost of both prepaid and post-paid mobile plans.

LEGAL LIMBO: Despite being the market leader, since 2010 Djezzy has been involved in a legal dispute with the Algerian government over alleged violations of foreign exchange regulations. At the end of May 2012, Orascom Telecom announced that the Algerian Court of Appeal had rejected its request to overturn a previous judgment that imposed a fine of AD99bn (€950.4m) on its subsidiary OTA. The dispute was further complicated by the acquisition of Orascom Telecom by Russian telecoms group Vimpelcom in early 2011 for $6.6bn, which allegedly violated the Algerian government’s right of first refusal in the event of Djezzy’s sale. Implemented in 2010, the Complementary Finance Law states that in the event that a foreign partner seeks to sell a stake in an Algerian company, the government has the right of first refusal against foreign transactions and can offer to buy the shares.

Although Vimpelcom has since affirmed its commitment to selling a majority stake (51%) in Djezzy to the state, disagreements remain over the price of the sale. Vimpelcom’s initial sales offer came in high at $7.8bn – $1.2bn more than what Vimpelcom paid to acquire the operator. According to independent audit firm Shearman & Sterling, the highest current estimates of Djezzy’s value was $6.5bn, a sum the state has agreed to pay. For now, negotiations over the sale continue, albeit hampered by the proposed price and the legal dispute concerning foreign exchange fines.

The Djezzy affair has shaken confidence in the telecommunications sector for a number of reasons. First, talk of the government’s acquisition of the most profitable private operator in terms of revenue turnover hints at a re-establishment of a state majority in mobile networks, raising fears among some industry players of a market regression, Moreover, the government’s legal negotiations with Vimpelcom prompt questions regarding the clarity of regulations in the telecoms sector. Finally, the prolonged dispute has delayed the launch of 3G technologies, costing the industry a key new source of revenue and efficiency gains (see analysis). A NEW SHAKE-UP? Investor unease may increase all the more with Qatar Telecom’s (Qtel) recent bid to acquire Nedjma. In March 2007 Qtel purchased 51% of Kuwaiti network operator Wataniya, which functions under the Nedjma brand in Algeria. Already owning 80% of Nedjma’s shares, on September 4, 2012 Qtel offered to purchase 47.5% of Wataniya’s remaining shares, a move that would have increased its ownership of Nedjma from 52.5% to 100%. Qtel’s ambition to acquire all of Nedjma prompted the Algerian government in early September to reassert its right to preemption over Nedjma and purchase at least 49% of the brand’s shares if Qtel bought all of Wataniya.

Observers feared that state action against Qtel would further hurt investor confidence by raising the possibility of another Djezzy scenario, or even the re-establishment of a public monopoly in the mobile industry. On October 4, 2012 Qtel’s offer to purchase 100% of Wataniya expired, and three days later it received acceptance from shareholders to purchase 39.61% of Wataniya’s shares, increasing its ownership of the telecoms company to 92.1% for a sum of $1.8bn. At the time of writing, Algerian authorities had yet to announce any plans to claim Nedjma from its new Qatari owner.

MORE SERVICES: Mobile providers are vying to enhance their service offerings through investments in increased network capacity and the provision of value-added services. In May 2012 Mobilis announced its intention to invest AD142bn (€1.36bn) over the next five years in the modernisation of its infrastructure, upgrading its services to an all-IP network and increasing its number of base stations from 5200 to 9000. To facilitate the expansion, the company also plans to open a new customer care and support centre in Sidi Abdallah.

Wataniya Algeria has similar plans to upgrade its platform, and earlier in 2012 began adding next-generation messaging solution to Nedjma, which will provide a cost-effective method of preparing Nedjma’s network to support future service demands. These include the introduction of value-added text messaging and content delivery services for consumers and corporations, opening the door for new revenue streams. A strong emphasis on data services has already brought rewards for Djezzy, which reported a 7% growth in sales over the first three months of 2012 following increased efforts to attract higher-end subscribers. However, in light of the legal issues the company continues to face, no recent plans for upgrades or investments had been announced at the time of print.

DATA SERVICES: Growing demand for data and multimedia services will likely ensure continued growth and innovation in the domestic telecommunications industry. Though consumer purchasing power remains modest for widespread smartphone use, Algeria is reputed to have the best mobile infrastructure in the Arab world, according to MVF Global, a global lead generation firm, which means that introducing 3G technology should help boost smartphone usage. Demand for smartphones is anticipated to grow partly due to continued frustration over slow domestic internet services, said Karim Abdelmoula, co-author of the study, “The State of ADSL in Algeria”.

LAUNCHING 3G: Improvements are also expected with introduction of 3G technology. The Ministry of Post and Information and Communications Technology ( Ministère de la Poste et des Technologies de l’Information et de la Communication, MPTIC) launched a tender for 3G licences in September 2011, aiming to distribute them by the following month and introduce 3G services in March 2012. However, the September licence auction was postponed, leaving operators, investors and consumers with little concrete information regarding the eventual launch of the new technology. A number of deadlines for the introduction of 3G have since been announced and passed amidst continued delays.

While officials still expect implementation towards the end of 2012, the postponement of 3G licences has put mobile providers in a disadvantaged position to succeed in Algeria’s mobile internet market and compete with the broadband sector. Mobile internet has become an increasingly important source of revenue for operators as consumer demand grows for smartphones with fast and efficient internet access – functions that are not assured by fixed-line internet services. The delay has also hampered the ability of operators to develop more sophisticated services and improve network capacity, and problems would likely be ameliorated with a 3G network and the improvements in bandwidth, spectral efficiency and transfer rates it offers.

THE ROLE OF THE REGULATOR: Created in 2000 and launched the following year, the ARPT is charged with establishing a regulatory environment conducive to competition and distributing licences and authorisations to service providers. The ARPT has awarded the three GSM licences since 2001 to the main mobile operators, but no new licences have been distributed since 2007. By the end of 2010 it had issued over 80 internet service provider (ISP) and 10 VoIP authorisations. Another key responsibility of the ARPT is the arbitration of disputes between consumers and operators, as well as between operators. It receives disputes and evaluates cases in an attempt to negotiate amicable solutions, but when this fails, the ARPT concludes arbitration by issuing a decision, which may be challenged by a disputing party in the State Council.

An example of the ARPT’s regulatory efficiency was Decision No. 1 in January 2009 that sought to curb promotions offered by mobile operators. Promotions had become excessive and repeated, with a total of 99 promotions and 5154 promotional days offered in 2008 by the sector’s three mobile operators, effectively eroding competition and limiting the visibility of mobile brands with the public. The ARPT introduced an initiative that limited the type, number and duration of mobile promotions while encouraging operators to use alternative means, such as tariff reductions, to attract customers. Consequently, there was a decline in the number of promotions by 52% to 47 and a 79% reduction in promotional days, down to 1066, in 2010. Though new challenges will likely arise with the introduction of more products and services, the presence of a regulatory body is likely to ease Algeria’s transition into the next generation of telecoms technology.

OUTLOOK: Since liberalisation in 2000, Algeria’s telecommunications industry has expanded rapidly and continues to offer opportunities for growth. Though uncertainty over the fate of Djezzy and Nedjma has called into question short- to medium-term market potential, and falling ARPU and penetration rates reduce margins, a shift to data should help boost revenues, especially once a 3G framework is finalised. “Nothing except mobile broadband data services can bring the market higher growth levels through new generation high-speed data services, given that demand for these services is evident and expected to increase,” Ged said.

Though less dynamic than the mobile industry, potential remains for advancing landline services, particularly as demand for fast and efficient internet service grows. Opportunities in the establishment of global call centres, which can spur local business growth, have yet to be exploited. Given the trajectories for expansion and growth, it is clear that the telecommunications sector will continue progressing in the near future.