East Europe telco seeks digital content niche

Croatian fixed line incumbent and mobile operator Hrvatski Telekom entered into the world of e-books and e-readers in July 2011. The operator launched its own e Book store which is available on Apple devices (iPad and iPhone), Android handsets, PCs and also its own branded e Reader with 3G connectivity.
In many ways this is a similar move to that made by Amazon with its Kindle e Reader and e Book store. There are many reasons to think that for a telco in Eastern Europe launching such a service makes sense and it can take advantage of a number of core assets that operators have in the region as well as the lack of competition in emerging product segments.
Revenues from core services falling and likely to fall further
Mobile operators and fixed line incumbents are already seeing their revenues fall across the Eastern European region as a result of factors such as the poor macroeconomic environment and saturated markets but also unfavorable regulatory conditions and strong price competition from new entrants. These factors are likely to continue in the future as operators suffer from further falls in mobile termination rates and lose revenues from roaming.
The imperative then for operators is to find new revenue streams to exploit and Hrvatski Telekom’s move into e Books and e Readers is one such development, although others have been made, such as the acquisition of Croatian company Combis in order to gain a greater foothold in the ICT market.
Absence of international OTT players creates local opportunities
Hrvatski Telekom’s e-book store, called Planet 9, is an online distributor of digital content and is an over the top play in the sense that it is available not just to the operator’s customers but also customers of fellow Croatian mobile operators, Vipnet and Tele 2. A key point in Planet 9’s favor is that it does not face much competition from an international over the top player such as Amazon.
There is no local Kindle store and the Kindle e Reader device is also not on sale in Croatia, although it can be purchased from overseas. If someone in Croatia were to buy a Kindle from the UK they would only have access to the UK Kindle store which has no content in the Croatian language. Therefore Hrvatski Telekom can take advantage of its local position to sell local content in the Croatian language. Because Croatia is a small market it will be well down the list of Amazon’s priorities and therefore any Kindle launch specifically for the Croatian market is unlikely.
The same arguments regarding the absence of international OTT players also apply to other services such as OTT video. Given the small size of the Croatian market an early launch from Netflix, for example, is highly unlikely. There might also be an opportunity for a local player such as Hrvatski Telekom to provide an OTT service with more locally relevant content such as Croatian films or films with Croatian subtitles. Eastern Europe is also a region that is full of small countries in terms of population and is also full of a diverse range of languages so these kinds of opportunities are not exclusive to Croatia.
Aside from their strong local presence another advantage that telcos can bring to bear is their chains of shops. This is important as it is through its T-Centre shops that Hrvatski Telekom can sell its e Readers. The shops are also an important way of distributing handsets and tablets from which the Planet 9 e Book store can be accessed. The argument is that telcos in the region need to find services that can take advantage of this core strength of a retail distribution network.
Hrvatski Telekom also has an advantage in the sense of its network ownership which it uses to offer free data traffic to customers who buy its e Reader. The Amazon Kindle also offers free data but since it does not own any network it has to pay for the privilege giving it a disadvantage on the cost side with a telecom operator e Reader and e Book store. The same would apply to any other non telco player trying to launch their own e Reader in Croatia. They could sell WiFi only e Readers but these would lack the functionality of the 3G enabled e Reader Hrvatski Telekom is selling.
Billing: a trade-off
Hrvatski Telekom is seeking to sell e Books not just to its own customers but also to the customers of Vipnet and Tele 2. Doing this can increase the size of the addressable market for e Books which is important as otherwise the e Book store might be too niche a proposition. Selling to Vipnet and Tele 2 customers means that users are not charged through their mobile bill but must pay with a credit card. Vipnet has also launched its own e Book store but has only enabled it for existing Vipnet customers who are then charged through their mobile phone bill. So the operators do face a trade off between taking advantage of the convenience for subscribers of having payment via the mobile bill, but in doing so reducing the size of the addressable market by only making the service available to existing customers.
Scale: national dominance versus international weakness
Scale is another potential advantage that Hrvatski Telekom can bring to the table. This can be seen not just in the size of its retail distribution network but also in the fact that it has a large number of existing customers to whom it can market its e Book store and e Reader. However, whilst Hrvatski Telekom is an extremely important operator in Croatia it does not have international scale. This is significant because it has an impact when Hrvatski Telekom is acquiring e Readers, meaning that it is unable to get significant discounts. Although Hrvatski Telekom is part of the Deutsche Telekom Group no other subsidiaries have launched an e Reader and so therefore Hrvatski Telekom cannot get discounts on purchasing the devices with other operators. Hrvatski Telekom’s e Reader costs 898 kuna (US$157), for example, which is more expensive than the Kindle, but is currently being discounted by 50%.
Is the demand there?
Ultimately, however, the success of the e Book service will be determined by whether the demand is there from consumers. It is all very well to say that there is no competition from international over the top players but if consumers have no interest in the product then this is irrelevant. There should be a niche in Croatia for e reading in terms of there being sufficient readers. For example, at the end of 2011 research showed that more than 50% of those questioned had read at least one book in the last year, with an average figure of 3.
There are, however, question marks in the sense of how much money there is to be made generally in selling digital content in Eastern Europe. Levels of piracy are high and willingness to pay tends to be low so the Planet 9 e Book store needs to have attractive price points to generate sufficient interest. Hrvatski Telekom believes that the threat of piracy can be averted if the consumer is provided with an easy to use service with a reasonable price.
The costs of the device will also place a constraint on uptake in the market. This is despite the fact that the operator states that the margin from Planet 9 comes from the content and not selling the device. But Hrvatski Telekom does state that its current e Reader will not be the last it issues and prices are likely to fall in the longer run.
The move into e Readers and e Books is a logical one for Hrvatski Telekom and demonstrates the right kind of strategic thinking. The launch of online services such as the e Book store gives the telecom operators an entry into a nascent market where its early mover advantage will prove helpful. The international over the top players are also unlikely to prove much of a competitive threat. Obviously these arguments extend well beyond e Book stores and there are a number of further areas in online content operators could examine such as video.
Creating an ecosystem, however, with both content and device, as Hrvatski Telekom is trying with its own e Reader, is likely to prove more difficult as the operators lack the scale of the multinational players such as Amazon and Apple when financing the cost of a device. A retail distribution outlet to sell its own e Reader is a positive factor, however.
The e Book store is also not entirely reliant on the Hrvatski Telekom e reader, however, and the operator can still seek to sell e Books to owners of Android or iOS devices. Looking to the future operators must be patient because these online content services are niche for the time being and will not become significant revenue generators overnight. The addressable market will however increase over time as smart device penetration also grows. Nevertheless Hrvatski Telekom considers itself satisfied with its progress so far in the world of e Books and at the end of last year, after only 5 months of activity, was selling the same amount of content as a midsized bookstore in Croatia.
Stephen Wilson is a senior analyst working across Informa Telecoms and Media’s Europe and Broadband & Internet Intelligence Centres. For more information, visit http://www.informatandm.com/