Competition with Teeth

A range of local, regional and international operators are vying for the new mobile licence in Algeria. Despite being a 'third-to-market' proposition, the auction is the most attractive bidding opportunity since the country's first mobile sell-off in 2001, writes Lucy Norton

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By  Richard Agnew Published  November 2, 2003

Introduction|~||~||~|Algeria has become the first Maghreb nation to launch a second GSM licence auction.

Although the licence only offers the prospect of being third to market behind Orascom Telecom and former monopoly Algeria Telecom, the country's still negligible mobile penetration rate - set to be just 3% by the end of 2003 for a population of 31.8 million - and triple digit subscriber growth mean that a third operator has ample room to expand.

Indeed, the size of the Algerian market makes this licence auction the most attractive telecoms opportunity to come out of the region since Algeria sold its first licence to Orascom Telecom in August 2001.

The licence opportunity has attracted operators from across Europe, the Middle East and Africa, eager to take advantage of Algeria's mobile growth potential. Eight operators in total have pre-qualified to take part in the auction and some well-known names appear in the roll call.

France Telecom-owned mobile operator Orange and Spain's Telefonica Moviles are there for a second time after losing out to Orascom in 2001. Both operators have an established interest in North Africa. Orange holds a majority stake in Egyptian mobile market leader, MobiNil, while Telefonica is a joint shareholder in Moroccan new entrant, MediTel.

Two companies with experience South of the Sahara, Deutsche Telekom's management consulting arm, DeTeCon International, and second-placed South African mobile operator, MTN, have also pre-qualified for the auction. Finally, fresh from their wins in the CPA-run tender in Iraq, Kuwaiti mobile operators MTC-Vodafone and Wataniya Telecom are also throwing their hats into the ring.

These well-practised bidders have been joined, at the pre-qualification stage, by two relative newcomers; Moroccan incumbent Maroc Telecom and Turkish mobile market leader, Turkcell.

This is the first time Maroc Telecom has gone seeking a mobile license abroad, while Turkcell has only attempted to enter a MENA market once before. The operator was unsuccessful in its attempt to win the Northern region license for Iraq in October.

Given the attractiveness of the opportunity, the Algerian government can expect bids to at least match the US$454 million Tunisia was able to drum up for its first GSM licence - sold in March 2002.
||**||The players|~||~||~|
Indeed, there is a strong chance that the bids will exceed this. With a population more than three times the size of Tunisia, subscriber growth prospects for Algeria's third player outstrip those open to Tunisia's second mobile operator.

Competition for the licence will also be serious; the bigger financial hitters Orange and Telefonica each have a clear commitment to North Africa, while MTC-Vodafone and Wataniya Telecom are both intent on establishing themselves as pan-regional operators. However, bids are unlikely to rival the US$737 million benchmark set by Orascom Telecom in August 2001.

As the third operator to enter the market, the new licensee will be facing sharply reduced margins to those enjoyed by Orascom Telecom over its past 20 months of operation as the first new entrant. Tariffs are set to fall with the increased competition, pushing down average revenue per user (ARPU) levels, which for Orascom Telecom stood at an impressive US$30 at H1 2003 - higher than levels recorded by its operations in both Egypt and Tunisia.

The second new entrant will also have to work harder to attract the higher value 'early adopters' who have already taken their business to Orascom Telecom. This second licence is therefore worth less, in earnings terms, than the first. In licensing a second private mobile operator, the regulator, ARPT, hopes to bring genuine competition to Algeria, which has so far been lacking.

The launch of Orascom Telecom's Djezzy service in February 2002 did not spark the large tariff cuts and flurry of infrastructure rollout normally associated with liberalisation, much to the disgruntlement of the ARPT.

This is primarily due to the fact that Algeria Telecom has been slow to raise its game in the face of competition.

The incumbent has remained relatively indifferent to the debut of the new entrant. Its Mobilis GSM service has co-existed alongside Djezzy in something of an oligopoly ever since. Indeed, the incumbent's sluggishness has allowed the Djezzy service to overtake its own.

Orascom Telecom entered the Algerian market in February 2002, when mobile penetration still languished well below 1% and the incumbent's network only had sufficient capacity to support 100,000 users. As a result, the Djezzy GSM service was able to sign up an average of 35,000 subscribers a month throughout 2002. It was solely down to the efforts of the new entrant, therefore, that penetration levels began to seriously climb.

Subscriptions grew by a factor of four to finally exceed the 1% threshold at the end of 2002. Orascom Telecom currently controls around 85% of Algeria's estimated 800,000 mobile users.
||**||Potential for growth|~||~||~|
The entrance of a third private player promises to act as a remedy to both the ARPT's tariff concerns and Algeria Telecom's below par performance.

An aggressive new entrant will be looking to go after subscribers with tariff cuts, both as a means of wooing valuable 'early adopters' from the existing players but also as a way of penetrating the lower-income echelons of the 31 million strong market. The market leader Orascom can therefore expect to see its impressive ARPU levels seriously dented in 2004.

The threat of more intense competition will also motivate Algeria Telecom to raise its game. The incumbent will be aware that it is running the risk of dropping from second to third place in its home market.

It will therefore respond with network investment, as a means of increasing both capacity and service quality. Indeed, the incumbent has already begun to move in this direction. In February 2003, the operator awarded a contract to Ericsson, valued at US$162.5 million, for the installation of 500,000 new lines.

Algeria's second mobile licence auction therefore has the power to unlock the full growth potential of the Maghreb's largest market. It remains to be seen which of the eight interested operators will be given the key. The government says it will select a winner before the end of 2003.

Lucy Norton is a senior telecoms analyst for the Middle East at the World Markets Research Centre, which provides daily monitoring of any developments that impact on the investment climate in telecoms markets worldwide.
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