WEAVING THE FABRIC

Azerbaijan 2012 | TELECOMS & IT | REVIEW: ICT

A call has been issued for private investment in the ICT sector, and high returns are attracting the attention of both domestic and foreign investors, as penetration rates and technological uptake continue climbing.

Azerbaijan has reinforced its position as a leader in the ICT sphere in the CIS region, with the sector totaling 10% of GDP in 2011, up two fold since 2005—no mean feat as the oil and gas sector has expanded rapidly over the same period. The sector has quintupled in size over the last few years, and has been identified as a strategic sector by the Azerbaijani government. It is hoped that increased investment will create an employment engine and a vehicle for the economy at large to continue its path of diversification.

Investment in the sector doubled to $509 million in 2011. The figure represents 3.2% of total investments made in Azerbaijan, both domestic and foreign, and fuelled a 12% growth rate over a 12-month period. Although a seemingly low portion of the overall investment chest, those who took the plunge have reported high earnings and tempting rates of return on investment. Moving up the investment agenda, ICT has firmly nestled in behind the country's prime oil and gas sector in terms of growth potential. Consolidated investment from the last decade totalled $3 billion, 25% of which was FDI.

The penetration of the fixed and mobile telecommunications sectors continued to increase in 2011, yet it is the mobile market that is spearheading growth. The number of mobile subscribers increased by 11%, reaching 10.1 million, by end-2011. Fixed-line penetration, however, grew by only 2.2%, with only 18.6 people per 100 registered subscribers at the end of 2011. Internet usage uptake also did not buck the trend, as the penetration rate hit 65 users per 100 people, driven by the country's young, tech-savvy population. The number of computers per 100 people remained at a low 15, however, as overall usage was instead boosted by increasing sales of smartphones and competitive data packages. The country's burgeoning IT sector, both in software and hardware, also posted a 50% increase in revenue in 2011, reaching $152.75 million.

Overall profits in the ICT sector increased by 11.8% in 2011 as compared to 2010, driven mainly by private business, which accounts for 80% of the sector and 76% of its profits. Determined to increase private participation in the sector, the government has committed to increasing liberalization in the sector, and continues working toward the privatization of the country's two fixed-line operators: Aztelekom and the Baku Telephone Network Production Association (BTRIB), which carried out a significant expansion of its network in 2011. Both companies are expected to be reorganized as joint-stock companies, and Aztelekom has been tentatively valued at around $1 billion.

FIXED TELEPHONY

Azerbaijan completed the digitization of its fixed-telephone network in 2011 and today the country has around 1.6 million subscribers. Overall market penetration rates are slowly growing; in 2011 fixed telephony penetration increased by 2.2%, and by the end of 2011, 18.6 people per 100 were network subscribers. According to the Ministry of Communications and Information Technologies (MCIT), penetration in Baku is at 35%, 10.7% in the regions, and 7% in rural areas. Despite increasing penetration rates and capacities in the public telephone network, the lack of competition and investment in the fixed-line market stands as the main barrier to speeding up the sluggish pace of growth in the sector, especially in rural regions, where 50% of the population resides. Both Aztelekom and BTRIB have positively expanded their networks over the last year. Aztelekom is the largest national operator, controlling local, national, and international calls. It is hoped their privatization will give a much-needed boost to the sector, whilst also potentially enlivening the local capital markets should an IPO be launched in 2012.

MOBILE TELEPHONY

Today, Azercell is the largest mobile service provider, and has a market share of over 55% with some 4.2 million subscribers. The mobile operator currently has more than 2,370 base stations, with over 650 deployed in 2011. Bakcell remains the second largest operator in the region, with over 2 million customers and a 35% market share. Finally, Azerfon, operating under the brands Nar Mobile and Azerfon-Vodafone, is rapidly becoming a very important player within the sector. Its revenues increased by 20% in 2011, and its market share rose to 19.5%, pushing total penetration to over 100%, a result of multi-SIM usage, which is expected to decrease with the introduction of mobile number portability (MNP). “The new MNP will contribute to the dynamics of the market: fairness and competition will be forced. Our studies show that customers in Azerbaijan are quite loyal to their numbers and are reluctant to move to other operators even if that operator offers lower prices and better services," Jurgen Peetz, CEO of Nar Mobile, told TBY.

Azerfon, which was granted a license to operate 3G in the country one year before its competitors, has now been joined in the sector by Azercell and Bakcell, the latter of which “had over half a million customers within three days," Richard Shearer, CEO of Bakcell, told TBY. According to the MCIT, there were 2 million 3G users by December 2011, and licensing 3G frequencies to Azerfon's two competitors has brought a significant drop in data tariff prices, and a growth in mobile broadband traffic. Prices are expected to drop further in 2012 as all three operators begin to show interest in 4G, with predictions that certain services could be launched as early as 2012. In preparation for the rollout of 4G, and to cope with the increasing number of smart phones in the market, the three operators have been heavily investing in their networks. Azerfon alone invested more than $80 million in 2011 to modernize its network, which resulted in a 20% growth in revenues for the operator of the Nar Mobile and Azerfon-Vodafone brands.

In 2011, over 148,480 mobile handsets were delivered to Azerbaijan, according to the State Statistical Committee (Azstat). The number of imported mobile handsets grew by 32.9% in 2011, and by 16.5% in value, and such factors will likely drive the growth of the sector in the future. “We believe that 2012 will be the year when data technology takes off. The increasing availability of smartphones, as well as the availability of terminals, is driving market behavior in Azerbaijan; prices are decreasing and mobile internet users are increasing," Shearer informed TBY.

INTERNET

Speed and capacity are expected to get a boost, and tariffs are predicted to fall further thanks to the implementation of transnational projects. One project is the Trans-Eurasian Information Superhighway (TASIM), a major regional initiative aimed at the creation of a transnational fiber-optic backbone targeting countries from Western Europe to China. Delta Telecom and Alcatel-Lucent, both data and telephony providers, are also participants in the Europe-Persia Express Gateway (EPEG). The EPEG fiber-optic system will be put into operation in May 2012, with an expected capacity of up to 3.2 Tbps, granted through 10,000 kilometers of terrestrial fiber-optic cable that will link the Middle East to Europe.

Such efforts are also likely to boost Azerbaijan's broadband pickup rate, which has remained stunted at only 30% of all internet users, with the majority still using the dial-up method and mobile internet solutions to get online. With things looking up, though, Jayhun Mollazade, CEO of AzQtel-Sazz, predicts that “five years from now there will be 4 million-5 million broadband users in Azerbaijan."

IT & E-GOVERNMENT

Alongside the prioritization of broadband internet, the MCIT is also concentrating on the development of e-government solutions. According to the UN's E-Government Survey, Azerbaijan ranked 82nd out of 192 countries in terms of e-participation. The government's portal currently connects 15 state agencies, which provide 60 types of electronic service, including an e-signature system. IT firms Caspel and ULTRA, both very active in the education field, are also committed to the further development of e-services, and the development of the sector offers numerous opportunities for domestic firms and foreign investors to boost overall productivity in the country's IT sector. Recognizing the importance of the sector, the government plans to establish a regional innovation zone (RIZ) in order to boost the production and export of IT products in Azerbaijan. The value of IT goods produced in 2011 reached $152.75 million, mainly in the areas of radio electronics, optical media, computer assembly, and software.