The pace of telecom development in Central and Eastern Europe has been such that the leading tele-economies of the old East Bloc are today on a par with the average in Western Europe. Even those that lag behind, usually due to an unhappy combination of economic and political factors, are closing the gap
The countries of Central and Eastern Europe (CEE) have experienced successive waves of telecom development since the dramatic political changes of the late 1980s and early 1990s. Progress has divided into two tiers, but it is dramatic overall.
From a standing start in the early 1990s, the pace of telecom development has been such that the leading tele-economies of the old East Bloc are today on a par with the average in Western Europe as measured by most accepted indicators. Even those that lag behind, usually due to an unhappy combination of economic and political factors, are closing the gap.
Some of this can be put down to some happy accidents of timing. For example, the overhaul of old-style command economies in the region and the renewed emphasis on telecom development that occurred in the 1990s coincided with some major changes then sweeping the industry in Europe and beyond.
Foremost among these was the widespread (if reluctant) acceptance of the need for telecom liberalization in the rest of Europe; most CEE countries were quick to adopt deregulation along the lines adopted across the European Union (EU) in 1987 and 1992. These redefined rules and practices in key areas such as public procurement, competition and independent regulation.
At the same time, new technologies (most notably GSM and STM) were emerging with significant economies of scale. In many cases, these were embraced in order to enable operators to leap several generations of technology in a single bound.
Thirdly, the opening of CEE telecom markets coincided with a glut of investment supply, led by carriers from Western Europe and North America. Their money kick-started development in the region in a way that would not have happened if the period of change had taken place in, say, 1999-2002, by when the global telecom economy had caught a cold of pneumonia-like proportions.
Not just luck
Yet it would be wrong to put the region's success down to good timing and good fortune alone. There was a great deal of courage and sheer force of will required to move from a moribund command economy to a market-based alternative; nowhere can this be more clearly seen than in the telecom sector, which was until then dominated by sclerotic state-run national monopolies. It's worth noting that in the run-up to the first wave of CEE countries joining the European Union in May 2004, the state of telecom was far less of a stumbling block to accession than sectors such as finance and agriculture.
The results are there for all to see. In 1990, telecom provision in the CEE was at least two decades behind the West and perhaps as much as 40 or 50 years behind. By 2000, that gap had shrunk to about five years and today, in most cases, it's about 12 months.
Walk into the office of a CEE telco and the language is all too familiar: fixed-mobile convergence, triple play; billing and customer care. You might be in Brussels or London.
Then there are the laggards, which many see as more exciting in potential than the now 'mature' markets of the CEE region.
There are differences of course, many of them almost a direct result of the compressed period of development outlined above. The task of ironing out these differences has arguably constituted the three greatest challenges for the sector in the last five years. The first concerns the sector's structure and ownership; the second surrounds the convergence of technology; the third is how to get slower-to-develop markets up to speed.
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The implosion of technology stocks in 2000-01 created unique pressures upon and rifts between the JV partners who had emerged to dominate the CEE telecom operating business in the 1990s. Initial optimism quickly gave way to morbid financial pessimism that at one stage might have cast the region's telcos into the void.
North American investors, many under pressure from competition in their domestic markets for the first time, post-1996 US deregulation, were looking to exit; their West European counterparts, themselves debt-laden, were in no position to take up the slack even where their commitment to the region remained strong. Local partners, drawn from the ranks of banks and utilities, were looking to offload holdings in businesses whose value they saw, somewhat inopportunely, to have plummeted.
In Central Europe, three principal West European investors eventually regained their equilibrium as investors in major PTOs. Telef"”nica of Spain (in the Czech Republic), Deutsche Telekom (in Hungary, Slovakia and Croatia) and France Telecom (in Poland) have consolidated their grips on incumbent telcos, often after protracted legal wrangling with local partners and governments. Such arguments over corporate governance continue to this day elsewhere in the region.
Aside from gaining majority stakes in the region's telcos, these major players have also managed to consolidate their fixed and mobile holdings in given national markets. In the 1990s, these were often kept at arm's length by licensing authorities in order to maximize the proceeds from license sales. Now, consolidation and rebranding is the key.
Last year, when France Telecom rolled Polish cellular business Centertel into its Orange unit and thus brought it closer to FT-controlled fixed-PTO TPSA, Sanjiv Ahuja, CEO of Orange SA, said, 'this is a key market at the center of Europe with a population of nearly 40 million, and it's an exciting time to be here following Poland's entry to the EU last year. Centertel is one of our best performing operations, and I am confident that we can help them build on their success to date, while also providing an opportunity to launch something new and exciting.'
In line with the strategy of FT/Orange and other combined fixed-mobile telcos elsewhere, the identity of that 'something new and exciting' is clear. Convergence.
Fixed fightback
Unlike markets in Western Europe, where mobile services were a late addition to long-established fixed-line services, in the CEE countries wireless shot off into an early lead while fixed-line provision was rare or non-existent. Ten years on, the balance is shifting back.
The lure of 'instant infrastructure' provided by mobile technology, first thanks to NMT and from 1992 onward by GSM, initially covered all the bases.
'The fixed side in Eastern Europe has striking similarities with what happened in Ireland when it joined the EU,' says Kari Pasonen, VP and head of the provision business division at Comptel, the mediation and provisioning company that works extensively in the region. 'Their telecom infrastructures were dilapidated, but they jumped over several generations of technology to have a new network capable of supporting new services.'
'Of course the first networks were all mobile,' adds Pasonen, 'as these were the fastest and easiest to build. Now the mobile penetration is high and the new services coming up are broadband, which require fixed networks.' As he concludes: 'so the fixed network is getting a face-lift.'
On the one hand, it is trendy to talk about substitution of fixed by mobile, and observers point to the CEE as a case where fixed was shunned in favor of mobile. Equally, it is clear that for a vast proportion of the region's population, their personal telephone is a mobile. But after a decade, broadband is shifting the market's dynamics. The pendulum may be swinging back in favor of fixed services.
Coupled with the consolidation in operating structures described earlier, it is quite possible that some of the carriers will leapfrog nascent triple-play operations in favor of quadruple-play offers that include mobile as well. Western carriers active in the region (apart from Central Europe, the Nordic telcos are omnipresent in the Baltic States) may even use these markets as test beds for such service packages. Pliable regulators and dominant market positions would help in this context.
Playing catch up
While the leading CEE countries have moved from 'state-of-the-ark' to state-of-the-art in little more than a decade, the internal gaps in performance between the countries of the region have widened. Experts say that the further east one travels, the greater the political and commercial risks surrounding a business venture.
One can blame an odd mix of ideological opposition to change, political indecision over strategic reforms and popular hostility to sea-changes such as wholesale privatization of foreign direct investment. One cannot discount the public fear of (and institutional potential for) corruption when it comes to reforming and restructuring an industry like telecom.
Pulling in the opposite direction are factors such as the prospect of entry into the EU. Having seen the Czech Republic, Hungary, Poland, Slovakia and Slovenia as well as Estonia, Latvia and Lithuania in the Baltics gain entry to the EU, others next in line for EU membership such as Bulgaria, Romania and Croatia are now redoubling their efforts to meet European norms. So too are those more remote from EU membership, including those Europe-facing states of the former Soviet Union.
Yet while it is tempting to explain away disparities in CEE performance benchmarks in terms of different levels of political and regulatory will and transparency, it is far more likely that telecom growth relies most of all on overall levels of economic development. When governments and the carriers that they still control are willing and able to fund additional investment, and ordinary consumers and businesses are able to afford to pay for those services, the circle will be squared.