Features

Eastern Europe: times of dramatic change

On the occasion of the enlargement of the European Union on 1 May Angel Dobarziev, Analyst at Ovum, takes a look at the CEE telecommunications markets and examines their potentials ... and reckons that mobile is changing the whole comms business.

Those were the days ... ! The former incumbents still dominate the telecoms markets in Eastern Europe but the change in the competitive environment in the past two years has been as dramatic as it has been painful. Up until two or three years ago, they oversaw growing fixed line businesses with no competitors in sight. In the mobile markets they had one or two competitors, but the markets were at their early growth stages and there was room for all. Those that bought shares in Eastern European incumbents, such as France Telecom and Deutsche Telekom, could not believe their luck. Now, all that is changing.

What has happened, is that a mobile explosion has lead to fixed-mobile substitution.

The mobile markets in the region have shown huge growth in the past few years. To illustrate the point, one can look at mobile penetration in the region: in the Czech Republic it was 89%, while it reached 85% in Slovenia and 71% in Hungary in October 2003. Other countries are catching up fast, with Estonia seeing 63% penetration and Poland 45%; while Romania with 28% is still at the early stages of mobile growth. While this has led to an expansion of communications services in the region to the wider population, there has also been three unwelcome developments for incumbents.

Firstly, fixed line growth was stopped in its tracks. Instead of getting a fixed line, users without access chose to go 'straight to mobile'. What is more, existing users began to use their fixed lines less. As if this were not enough, some households begun to 'cut the cord', and go 'mobile only'.

Indeed, most incumbents in Eastern Europe recorded a decline of 2-3% in the number of fixed lines in the last year. The two exceptions were Lituevos Telecomas, the Lithuanian incumbent, which saw its number of fixed lines decline by 16% and TPSA, which grew its fixed lines by 3% (and was the only player to do so).

Liberalisation, and competition have now begun to bite. New competitors, eager for a slice of the fixed voice pie, abound in most markets. This is leading to gradual price declines while incumbents are seeing their market share of calls erode. This is increasing the pain inflicted by FMS and acts as another blow to the fixed line units.

Cost reductions are the order of the day. The 'restructuring' or 'transformation' programmes are the incumbents' response to the changed environment. TPSA 'restructured' 19,000 employees, or 30% of its workforce, in the year to September 2003. Cesky Telecom reduced its staff by 10% in the same period, and announced staff reductions of an additional 20% in November 2003. Most others are doing much the same.

Capex has also been squeezed in order to preserve cash flows and maximise the return on the existing investments. The average capex reduction among Eastern European incumbents in the first nine months of 2003 was 24%, compared to the same period in 2002, with some notable exceptions.

Lituevos Telekomas was so disheartened by the massive line decline, that it virtually cut all investment: its capex in the first nine months was just $11 million, 80% lower than the amount for the same period in 2002.

With the mobile market being the growth engine in the region, those with a strong mobile subsidiary, such as TPSA and to some extent Matav and Eesti Telecom, are managing to plug the gap left by the fixed line decline.

However, those operating in saturated markets (such as Cesky Telecom) or without a (viable) mobile operation (such as Lituevos Telekomas and Romtelecom) are finding things much more hard going.

Data services such as ADSL or advanced mobile data services are met with a muted demand. This is partly a function of the low disposable income of the population, whose appetite for voice services (following years of rationing) has not yet been fully sated. But operators, with their relatively high prices, are not helping things either.

But the bottom line is still good. The results of the Eastern European incumbents are showing the effects of these market developments, but also their actions to manage the challenges thrown at them. Their average revenues remained static, and some such as TPSA and Matav found marginal growth, with most others seeing a decline in their revenues. Their profitability and cash generation demonstrated their lightening reactions to costs. The average operating profit margin remained an enviable 18%, while the average operating cash flow was a healthy 38% of sales. These are exceptional results for times of dramatic change - but things will certainly not get any easier.