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Strategic Scenarios for Algeria Telecom's Development

This lecture discusses the design of three strategic scenarios for the development of Algeria Telecom, considering new services and technologies, the decline of voice telephony, and the growing usage of Internet-based services

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Strategic Scenarios for Algeria Telecom's Development

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  1. Amman, Jordan, 4 – 7 December 2006 Strategic Management – Part II Forecasting Lecture 12 Algeria case study Ms Nawal AMEZIANE(ENSET, Oran) Post-graduation student, ENSET, Oran, Algeria nahawell@yahoo.fr ITU/BDT/ HRD Strategic Management

  2. Objectives of the Algeria case study • To design three strategic scenarios for the development of the incumbent operator in Algeria, considering the services offered by Algérie Télécom (fixed network) and its subsidiary Djaweb (Internet) in an integrated way. • To analyse the impact of new services and the convergence of new technologies on the revenue of Algérie Télécom in a competitive environment. • To investigate the decline of the revenue of voice telephony and the growing usage of Internet based services. • To compare these scenarios by using a business model providing the indicators characterising the financial performances. ITU/BDT/ HRD Strategic Management

  3. Scope of the case study • This case study does not represent the point of view of Algeria Telecom. • It is a pedagogical work carried out to be graduated by the University of Oran. • The initial data characterising the base year (2005) are available on the web site of Algérie Télécom or have been provided by Algérie Télécom. • All input data characterising the evolution of these parameters in the future have been assumed by the author without any information from Algerie Telecom. ITU/BDT/ HRD Strategic Management

  4. Telecommunications operators in Algeriaend 2005 • Two fixed operators: • Algérie Télécom, incumbent operator: 3,6 millions subscribers, • Lacom, new entrant, has got the second licence for fixed public network. • Three mobiles operators: • Mobilis(subsidiary of Algerie Telecom ) : 4,5 millions subscribers • Djezy(subsidiary of Orascom) : 6,5 millions subscribers • Nedjma(subsidiary of Watania) : 1,5 millions subscribers ITU/BDT/ HRD Strategic Management

  5. Scenario n°1, « conservative » • The objective is to migrate progressively from PSTN to NGN and all-IP-networks, and to take advantage of the traditional services with existing network as long as possible. • The objective of main lines is 6000000 in 2008. • The ADSL demand is moderate because tariffs remain quite high. Tariffs reduction are limited. Some subscribers connected with copper lines can’t have ADSL because they are too far from the exchange. Subscribers connected with CDMA of first generation can’t have ADSL. • Demand for Internet based services is moderate since the range of offered services is limited. • The impact of competition is supposed to be moderate. ITU/BDT/ HRD Strategic Management

  6. Scenario n°2, « defensive » • Market share is lower for traditional services and Internet based services since competition is more aggressive than expected in scenario 1. • Demand for fixed lines is lower since substitution fixed to mobile is higher. • Demand for Internet based services is moderate since the range of offered services is limited. • Regulatory framework is modified to facilitate the entry of competitors using new technologies (VoIP). ITU/BDT/ HRD Strategic Management

  7. Scenario n°3, « offensive »  • Ambitious action plans are set up to anticipate the impact of competition. • Higher demand for fixed lines is expected for using broadband services. • Many attractive Internet based services are developed by partners and offered by Algerie Telecom to satisfy various categories of customers, residential as well as business customers. • Attractive packages of bundled services are offered with double play or triple play at an affordable price in areas where there is a strong potential demand for broadband services. • Intensive campaign to sale ADSL where the copper subscriber lines are suitable for ADSL. • WiFi and WiMax are implemented where ADSL is not suitable. ITU/BDT/ HRD Strategic Management

  8. Fixed lines forecasting: method • Step 1: to forecast total demand (main lines ML+ waiting list WL) for the future years for the whole country • Step 2: to take into account mobile substitution • Step 3: to make assumptions about market share • Step 4: to estimate the satisfaction rate to carry out the lines in service • Step 5: to breakdown between categories: business, residential ITU/BDT/ HRD Strategic Management

  9. Forecast of total demand Population P 2006 Total demand, ML+WL 2006 Density, D=(ML+WL)/P in 2006 extrapolation Density, D=(ML+WL)/P in 2007,...2006 Population P in 2007,...2006 Total demand, ML+WL in 2007,...2006 = D * P ITU/BDT/ HRD Strategic Management

  10. Estimation of the density for the potential demand (ML+WL)for the whole country 35% 30% 25% Scenario 1 20% Scenario 2 15% Scenario 3 10% 5% 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 ITU/BDT/ HRD Strategic Management

  11. Fixed - mobile substitution • Assumptions are made about the number of people who do not need fixed lines any more because they have mobiles. ITU/BDT/ HRD Strategic Management

  12. Impact of emerging competition • A second national operator has got a fixed licence and has started its operations in 2006. • This new fixed operator targets high income users with attractive offers. • Unbundling is not available, but it is envisaged by the regulator. ITU/BDT/ HRD Strategic Management

  13. Estimate main lines in service ML from ML+WLObjective of satisfaction rate • The estimation of satisfaction rate depends on the extension of the capacity of the network in such a manner that the service can be delivered in every area where there is a potential demand. ITU/BDT/ HRD Strategic Management

  14. Results 10 000 000 9 000 000 8 000 000 scénario 1 7 000 000 scénario 2 6 000 000 5 000 000 scénario 3 4 000 000 3 000 000 2 000 000 1 000 000 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 ITU/BDT/ HRD Strategic Management

  15. Business and residential lines Assumptions are on the evolution of the percentage of business lines / total main lines. • More residential lines if the waiting list is still high • More business lines if many Internet based applications are developed for business ITU/BDT/ HRD Strategic Management

  16. Tariffs (1) • Reduction of connection to facilitate the new demands. (important in a competitive environment, small impact on revenue) • Dilemma for monthly rental fee: • a low rental fee for social purpose is a risk to keep more low-income users than competitors, without cross-subsidisation. These low-income users are unprofitable with fixed lines contrary to prepaid mobiles. • a higher rental fee is a risk to have a higher churn. ITU/BDT/ HRD Strategic Management

  17. Tariffs (2) Tariff rebalancing and convergence with mobile tariffs. General decrease, except local traffic that was underpriced ITU/BDT/ HRD Strategic Management

  18. Traffic volumes at the base year ITU/BDT/ HRD Strategic Management

  19. Average traffic per line at the base year ITU/BDT/ HRD Strategic Management

  20. Traffic between operators at the base year Fixed network of Algérie Télécom OUTGOING TRAFFIC INCOMING TRAFFIC Going to: Coming from : 1 500 intra-willaya AT Fixed subscribers 700 AT Fixed subscribers extra-willaya 700 1100 Mobilis Mobilis 1 500 2000 Djezy Djezy 150 480 Nedjma Nedjma 450 dial-up Internet 267 164 International International 50 special services 4 817 6 444 total ITU/BDT/ HRD Strategic Management

  21. Evolution of traffic volumes 25 000 Special services 20 000 International dial-up Internet 15 000 Lacom Nedjma Djezy 10 000 Mobilis interurban fixed 5 000 local fixed 0 2006 2007 2008 2009 2010 2011 ITU/BDT/ HRD Strategic Management

  22. Forecasting for ADSL, WiFi et WiMax • ADSL forecasts are made separately for business and residential lines, since penetration rates and tariffs are different • WiFi and WiMax forecasts relied on the penetration rate of the population. Top-down and bottom-up methods are set up, then the two results are reconciled to decrease the deviance by an iterative process. Forecasting for ADSL, WiFi, WiMax is made with the Bass formula: N(t) = N(t-1) + p * (m - N(t-1) ) + q * (N(t-1) /m) * (m - N(t-1) )) N(t): cumulated subscribers at year t m: potential market p: innovation parameter q: imitation parameter ITU/BDT/ HRD Strategic Management

  23. Principles for ADSL forecasts • Scenario 1,  conservative strategy, average penetration rate. • Scenario 2,  defensive strategy, the penetration rate is lower because the impact of competition is higher than expected. Tariffs are the same to expect the highest possible revenue from this segment of service at short term. • Scenario 3, offensive strategy, the penetration rate is higher than because the new technologies are considered as a lever to defend the future of the fixed lines. Long term criteria prevails contrary to the previous scenario. The ADSL tariffs are decreased to be more competitive and to better penetrate small business and low income households. A better coverage is expected by enhancing the quality of fixed lines with optical cables between exchanges and cabinets. ITU/BDT/ HRD Strategic Management

  24. Parameters for business ADSL forecastswith the BASS formula The penetration rates of the three scenarios are the following : ADSL business subscribers scenario 1 scenario 2 scenario3 1 739 366 1 241 253 2 079 502 Business fixed lines in 2011 Penetration rate in 2011 60,0% 50,0% 70,0% p 0,035 0,035 0,035 q 0,38 0,38 0,38 m 1 043 620 620 626 1 455 651 ITU/BDT/ HRD Strategic Management

  25. Results of business ADSL forecasts 900 000 800 000 700 000 Scenario 1 600 000 Scenario 2 500 000 Scenario 3 400 000 300 000 200 000 100 000 0 2005 2006 2007 2008 2009 2010 2011 ITU/BDT/ HRD Strategic Management

  26. Evolution of bandwidth of business ADSL 120,0% ADSL - 20 Mega 100,0% ADSL - 8 Mega 80,0% ADSL - 2 Mega 60,0% ADSL - 1 Mega 40,0% ADSL - 512K 20,0% ADSL - 256K 0,0% 2005 2006 2007 2008 2009 2010 2011 ITU/BDT/ HRD Strategic Management

  27. Parameters for residential ADSL forecastswith the BASS formula scenario 1 scenario 2 scenario3 Residential fixed lines in 2011 1 739 366 1 241 253 2 079 502 Penetration rate in 2011 70,0% 60,0% 90,0% p 0,035 0,035 0,035 q 0,38 0,38 0,38 m 1 217 556 744 752 1 871 551 ITU/BDT/ HRD Strategic Management

  28. Results of residential ADSL forecasts 3 000 000 2 500 000 Scenario 1 2 000 000 Scenario 2 1 500 000 Scenario 3 1 000 000 500 000 0 2005 2006 2007 2008 2009 2010 2011 ITU/BDT/ HRD Strategic Management

  29. Evolution of bandwidthof residential ADSL 120,0% ADSL - 20 Mega 100,0% ADSL - 8 Mega 80,0% ADSL - 2 Mega 60,0% ADSL - 1 Mega 40,0% ADSL - 512K 20,0% ADSL - 256K 0,0% ADSL - 128K 2005 2006 2007 2008 2009 2010 2011 ITU/BDT/ HRD Strategic Management

  30. Evolution of ADSL tariffs • The evolution of ADSL tariffs is based on three principles: • A significant decrease of all ADSL tariffs is allowed by a decrease of equipment costs by manufacturers and the amortization of past investments. • The gap between tariffs of low bandwidth and high bandwidth is decreased to make high bandwidth ADSL more affordable for small customers and to increase the penetration of advanced multimedia services, which require high bandwidth. • The gap between business tariffs and residential tariffs is decreased to have cost based tariffs. ITU/BDT/ HRD Strategic Management

  31. Revenue from business ADSL 45 000 ADSL - 20 Mega 40 000 35 000 ADSL - 8 Mega 30 000 ADSL - 2 Mega 25 000 ADSL - 1 Mega 20 000 ADSL - 512K 15 000 10 000 ADSL - 256K 5 000 0 2005 2006 2007 2008 2009 2010 2011 ITU/BDT/ HRD Strategic Management

  32. Revenue from residential ADSL 40 000 35 000 ADSL - 20 Mega ADSL - 8 Mega 30 000 ADSL - 2 Mega 25 000 ADSL - 1 Mega 20 000 ADSL - 512K 15 000 ADSL - 256K 10 000 ADSL - 128K 5 000 0 2005 2006 2007 2008 2009 2010 2011 ITU/BDT/ HRD Strategic Management

  33. Cumulated number of WiFi subscribers Cumulated number of WiMax subscribers ITU/BDT/ HRD Strategic Management

  34. Evolution of PSTN revenue(traditional voice telephony) An optimistic assumption is made about future revenue because a stimulation effect of the mobiles development leading to a growing revenue of communications from fixed lines to the mobiles Special services 140 000 International 120 000 dial-up Internet Lacom 100 000 Nedjma 80 000 Djezy 60 000 Mobilis fixed interurban 40 000 fixed local 20 000 Monthly rental fees 0 Connection fees 2004 2005 2006 2007 2008 2009 2010 2011 ITU/BDT/ HRD Strategic Management

  35. Interconnection revenue Interconnection revenue for the fixed incumbent operator is related to the call termination of communication coming from other operators (fixed and mobiles) and terminating to the Algerie Telecom subscribers. 16 000 14 000 12 000 Lacom 10 000 Nedjma 8 000 Djezy 6 000 Mobilis 4 000 2 000 0 2005 2006 2007 2008 2009 2010 2011 ITU/BDT/ HRD Strategic Management

  36. Evolution of total revenue International accounting rates 600 000 500 000 interconnection 400 000 data transmission 300 000 WiFi WiMax 200 000 ADSL 100 000 PSTN 0 2005 2006 2007 2008 2009 2010 2011 ITU/BDT/ HRD Strategic Management

  37. Evolution of CAPEX (million DA) CAPEX of scenario 3 is higher because of larger investments required to offer advanced services to a higher number of customers, especially with ADSL, WiFi et WiMAX. ITU/BDT/ HRD Strategic Management

  38. Evolution of CAPEX for scenario 2 160 000 International network 140 000 Long distance domestic network Local core network 120 000 Local access network 100 000 IT (Information technology) Suppporting facilities 80 000 Data communication 60 000 ADSL WiFi 40 000 WiMax Backbone IP 20 000 0 2005 2006 2007 2008 2009 2010 2011 ITU/BDT/ HRD Strategic Management

  39. Evolution of CAPEX for scenario 3 International network 250 000 Long distance domestic network Local core network 200 000 Local access network IT (Information technology) 150 000 Suppporting facilities Data communication 100 000 ADSL WiFi 50 000 WiMax Backbone IP 0 2005 2006 2007 2008 2009 2010 2011 ITU/BDT/ HRD Strategic Management

  40. Evolution of labor costsper category of staff level (million DA) ITU/BDT/ HRD Strategic Management

  41. Evolution of OPEX OPEX 120 000 100 000 Labour costs 80 000 Bad debt 60 000 Interconnection 40 000 other OPEX 20 000 0 2004 2005 2006 2007 2008 2009 2010 2011 ITU/BDT/ HRD Strategic Management

  42. Income statement Scenario 1 ITU/BDT/ HRD Strategic Management

  43. Income statement Scenario 2 ITU/BDT/ HRD Strategic Management

  44. Income statement Scenario 3 ITU/BDT/ HRD Strategic Management

  45. Cash Flow (scenario 1) ITU/BDT/ HRD Strategic Management

  46. Indicators for financial performances ITU/BDT/ HRD Strategic Management

  47. Profitability criteria for investment. First method: indicators are carried out with the free cash flows of the studied period without taking into account the terminal value. Second method: indicators are carried out with the free cash flows including the studied period and a terminal value equal to the discounted fixed assets of the last year. ITU/BDT/ HRD Strategic Management

  48. Continued Third method: indicators are carried out with the free cash flows including the studied period and a terminal value calculated with the Shapiro formula on a theoretical perpetual value. ITU/BDT/ HRD Strategic Management

  49. Recommendations for University • It would be interesting to pursue this study : • to adapt the business model to the local context • to take into account the fixed-mobile convergence • to improve the tariffs structures of new services • To improve the CAPEX modeling for new technologies • to collect more accurate initial data • Future activities could be done in cooperation with ITU. ITU/BDT/ HRD Strategic Management

  50. Recommendations for Algérie Télécom • To undertake market surveys to better know the customer expectations. • To improve the reporting system for all data requested by the business models. • To keep the loyalty of the current fixed lines subscribers with a low monthly rental fee (150 DA/ month), but to avoid extending fixed lines where there are not enough customers who can afford new broadband services. • To promote broadband services through ADSL in urban areas or WiMax in other areas. • To connect enterprises with fiber optic (MAN et VPN). • To decrease bad debt. ITU/BDT/ HRD Strategic Management

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