REVIEW

Down to the Wireless

nvestment in the ICT sector has paid off for Azerbaijan as the government earmarks it as an engine of growth. Expanding penetration rates and bulging profits are also opening the eyes of investors.

Growth in Azerbaijan’s ICT market has quintupled over the last seven years and the sector is continuing to develop rapidly, currently at a rate three times faster than that of the country’s overall economic development. In the past decade over $1.5 billion has been invested into the telecommunications sector, with approximately 21% of that investment coming from abroad. In 2010, Azerbaijan saw 32.1% growth in ICT, the largest single year-on-year sector expansion in the country’s economy, and it currently represents 3.5% of GDP. The development is in part being fueled by Azerbaijan’s tech-savvy population. There are 7 million mobile phone users out of a total population of 9 million, as well as rapid expansion in internet access and use across the country.

The government is allocating profits from the country’s oil and gas revenues to support the growth of the ICT sector, and a number of key programs have been initiated to develop the market. In 2004 the government abolished the Ministry of Communications and established the Ministry of Communications and Information Technologies (MCIT), tasked with developing a vision and an action plan to build a modern ICT sector. The MCIT has been entrusted to oversee the modernization of the telecommunications network between 2011 and 2013 using the latest technology. The vision is for the sector’s revenues to exceed energy revenues by 2022, making the ICT sector a powerful economic engine.

Recent privatization measures have seen the market open up, with new fixed and mobile network operators entering the sector. State shares were privatized in five telecommunications companies and the private sector share of the telecommunications sphere has risen from 62.7% to 80%. Only fixed-line operators Aztelekom and Bakutelecom remain to be privatized. Aztelekom is the international operator of Azerbaijan and has considerable telecommunication networks, providing universal services. The privatization of Aztelekom and the opening up of its infrastructure to other players looks likely to encourage other participants in the market to offer a broader range of services. It is envisioned that Aztelekom will be restructured as an open joint-stock company in 2011, with the company’s shares being placed on the market in 2012. MCIT predicts that Aztelekom will probably sell for somewhere in the $1 billion range.

FIXED TELEPHONY

Fixed telephony market penetration rates are relatively low in Azerbaijan in comparison to mobile telephony, and the fixed-line sector is currently still largely in government hands. By the end of 2010 just 16.4 people per 100 were landline network subscribers, based on an estimated 1.48 million telephone main lines in the country. Most of the users—81%—are concentrated in urban areas, even though around 50% of the population live in rural areas. The fixed-line telecoms infrastructure is poor, mainly owing to a lack of competition and investment, although the eventual privatization of Aztelekom should improve telecoms services in the medium term. Aztelekom is the single largest national operator for the fixed-line telephone network, controlling long-distance and international calls, including the leasing of intercity and international channels. It offers various telecoms services, including local, intercity, and international telephony; data transmission; telegraph; telex; television and radio broadcasting; cable transmissions; leasing of frequencies; internet access; and a telephone pay-card system. Faced with an antiquated telephone system inherited from the Soviet era, Aztelekom has invested in modernization, including digitization, and has expanded its next-generation network coverage to several regions, including Ganja, Sumgait, and Absheron. The MCIT encourages investment into regional telecoms services as part of its “100 telephones per 100 families” project. One element of the government’s program envisages providing people with universal telecoms services, including VoIP and internet access. Although the number of main lines has been growing, it has been far outpaced by the uptake of mobile telecoms services.

MOBILE TELEPHONY

Demand for mobile telephone services has grown strongly, owing to the poor quality of the state fixed-line network, and the needs of the oil industry and related sectors. In 1996 the first GSM service was launched. A second operator appeared in 1998 and a third was licensed to start operations in 2007. Consequently, the number of mobile telephone subscribers has grown rapidly, from zero in 1993 to 87 per 100 inhabitants in 2009 according to the State Statistical Committee (SSC). Current figures indicate that the mobile telephony sector has reached almost 100% penetration. However, there are considerable elements of dual SIM ownership, which skew penetration figures.

Although the use of mobile telephony services remains expensive for the average Azerbaijani consumer, costs are coming down as a result of greater competition, with companies launching incentive schemes to attract new customers and to retain existing ones. According to SSC data, a mobile tariff for 100 minutes usage per month cost AZN18 in 2005, and fell to AZN9 in 2008. The SSC estimates that the cost of a mobile telephone tariff, based on income per head, equaled 2.7% of average monthly income in 2009, down from 16.1% in 2005. Mobile phone users in Azerbaijan prefer pre-paid as a means of payment, and more than 95% of customers currently use this method.

The largest mobile services provider, Azercell, has a market share of around 58%, with around 4.1 million subscribers. Azercell has installed 1,800 base stations in Azerbaijan and covered almost all mountainous areas. The second-largest company is Bakcell, which has nearly 2 million subscribers and a market share of around 35%. Bakcell made considerable improvements to its network in 2008-09 and now covers 90% of the country’s territory and roughly 98% of the population.

Azerfon (which operates under the Nar Mobile and Azerfon-Vodafone brands) is also a leading player in the market, with around 1.6 million subscribers. In December 2009 Azerfon was the first telecoms company operating in Azerbaijan to be granted a license to provide 3G services from the government. Azerfon launched 3G services in early 2010, and has rolled out the network to several regions in Azerbaijan. Caspian American Telecommunications (CATEL; a US-Azerbaijani joint venture) has a much smaller subscriber base. The company, however, was the first CDMA wireless operator in Azerbaijan.

The introduction of new technology including 3G services, first launched at the start of 2010, will allow high-speed internet access, and should further contribute to higher demand for new handsets and more comprehensive service contracts with providers. Bakcell has now also applied to the government for a license to operate a 3G network and is hoping to launch this phase in 2011. Smart phones are already very popular in Azerbaijan, although consumers are generally not yet as familiar with using their mobile phones as internet access devices. Azerfon plans to significantly increase the number of 3G sites in 2011 and is investing more than $65 million to modernize the network in Azerbaijan. The development of 3G services will result in significant potential for content development, and according to Jurgen Peetz, the CEO of Azerfon, the company intends to give students and young professionals along with external investors the opportunity to develop applications.

INTERNET

The number of internet users has grown over the last several years to 1.5 million or 18.2% of the population. Significant steps have been made to make the internet more accessible for consumers, and tariffs in Azerbaijan have decreased by about 10 times over the last three years. The volume of internet services has increased 3.7 times, with broadband services up 6.6 times in the last five years. Current consumer penetration is at 50%, with 25% of those being broadband internet users. Education is seen as being essential to increasing consumer penetration and the state-backed Program on Information of the Education System (2008–2012) plans to provide internet connectivity to all schools in Azerbaijan with a “1 pupil–1 computer” project being implemented. Currently, more than 200 secondary schools have been connected to the internet through ADSL.

One of the main targets of the policy pursued in the ICT sector has been to expand the infrastructure and install up-to-date telecommunications infrastructure applying new technologies. The recently established AzDataKom network has a transmission rate of 10 GB per
second, and has considerably increased the potential of the local telecommunications network. In order to expand the existing fiber-optic network and provide a stable infrastructure, 317.4 kilometers of long fiber-optic cable lines were installed in 2008. It is expected that a rising number of homes and buildings will be connected with fiber-optic cables, which will allow HDTV, IPTV, and high-speed internet access for a large swathe of the population.

The development of a high-capacity network and internet services goes hand in hand with the development of e-government systems, and progress is gradually being made. The government had declared its intention to bring in e-government systems in order to enhance transparency and to make communication with the authorities an easier process. One of the first steps in this direction is the development of an e-signature system, which is currently being developed using a Microsoft platform and will be completed in 2011.

E-commerce has come a long way in Azerbaijan in the past two years; however, there is still incredible room for growth. Two payment gateways are now actively functioning and close to 100 merchants are currently connected. The progress of the e-commerce market has been slowed by low internet penetration, lack of local support for e-commerce projects, and little to no regulatory framework. Further demand from the general public is also needed to grow e-commerce in the country, and therefore a growth of knowledge of and trust in online purchasing and payment methods needs to take place. Gradual steps forward can be seen, as with national electricity company Bakıelektrikşebeke, which has seen its online bill collection percentage increase steadily since it connected to both payment gateways. Bakcell is another service provider that has benefited from being connected to a payment gateway. It allows its customers to pay their mobile bill and buy pre-paid credit online. Customers have responded positively, making thousands of online transactions per month.

FUTURE PLANS

Plans to further liberalize the ICT sector are underway along with economic and structural reforms to encourage continued growth. The establishment of an Independent Regulatory Authority is, according to the MCIT, a key priority. The launch of Azerbaijan’s first telecommunications satellite is scheduled for 2012 and it is hoped that this will create opportunities for the country for the manufacture and application of satellite technologies, in turn contributing to the development of telecommunications. Considerable focus is being placed on the development of wireless networks and there is huge room for growth in this area.