The worldwide telecommunications crisis has hampered the ability of Eastern European countries, including Romania, to privatise, liberalise or raise money for investment. Fixed telephony, which requires greater per line investment, but generates lower average revenues than mobile, has been especially hard-hit. For social reasons, Romania’s local telephone tariffs were kept low, limiting funds for modernization of Romania’s outdated telecom infrastructure. Today, competition from modern cost efficient, mobile operators and alternate long-distance backbones, calls into question fixed telephony’s future in Romania.
World Telecommunications Markets There is a worldwide crisis in the telecommunications sector resulting in US$2 trillion in market value lost in two years, US$1 trillion in debt; more than 500,000 employees laid-off; over 60 telecom companies have declared bankruptcy; and the lack of confidence in corporate governance. Some of the world’s most important operators have big problems and, accordingly have diminished their interest in Central European markets, paticularly for fixed telephony. Moreover, fixed telephony service is on a downswing of its life cycle, in both the USA and Europe the subscriber base and turnover is stagnating or decreasing. Since 1999, fixed line penetration in Hungary and Czech Republic has stalled at 38%. Is 38% the maximum penetration a country in Central Europe like Hungary can expect? If this is the case, what would the maximum penetration be in Romania, a country with one third of Hungary’s GDP? Given the world situation, raising funds for telecommunications through the international markets has become increasingly difficult and costly. The Romanian Market Romania, a country with 21.7 million inhabitants is the second largest market in the region after Poland, by population. In the past few years the country’s economy has improved slowly. Fixed telephony, using classical technology, is now a less attractive business than mobile telephony as it requires higher investments and has lower returns. Fixed telephones require a US$600 investment per line and generate US$200 yearly ARPU (Average Revenue Per User) compared with a US$200-400 investment per line and US$220 yearly ARPU for mobile telephony. Consequently, it is difficult to find rational investors for fixed telephony. Romanian Post Liberalisation Landscape Liberalization calls for the development of three independent markets for local, long distance and international services. The new entrants on domestic long distance market could be companies that already own backbone networks. These could be state owned companies such as CTCFR, a railroad company affiliate with 3.530 Km of optical fiber backbone network, Teletrans - a power company affiliate with 900 Km optical fiber network or Radiocomunicatii with its 2.500 Km of radio relay network. Private companies such as RCS, a cable company with its 2.500Km optical network or Astral Telecom, another Cable Company that has a 650Km optical network are also possible contenders for this market. The strongest competition will be in the international market where the investment is lowest - an exchange and an interconnection contract with an international carrier is all that is needed to provide international services. Mobile operators will provide international services to their mobile clients, while ISPs will provide VoIP. All of these companies might try to enter the domestic long distance market as well. Because of the high investment and low return little competition might be expected in the local market, especially for residential subscribers. Cable companies, which already reach over 45% of Romanian households, could enter this market if they could raise the funds, some US$200/user, to install equipment for bi-directional connections that would permit the bundling of such services as TV, data, Internet and voice. But at the moment, here in Europe there are no cable operators successfully providing fixed telephony, all are niche players with low market shares. Mobile operators, whose investment per user is low, could enter the fixed market by addressing just the most lucrative segment in order to increase the package of services they provide. Europe’s experience with liberalization shows that without exception, the incumbents keep their strong positions. Deutsche Telekom of Germany, for instance, has a 98% share of the local market and a 60% of long distance market after five years of competition. Spain’s Telefonica has 90% of the local market. In the UK, BT has over 82% of the local market after 20 years of competition. BT have lost only 18% in 20 years - less than 1% per year! Fixed Telephony Tariffs In Romania, as in other countries before liberalization, local calls are subsidized by long distance calls. Liberalization forces tariff re-balancing based on cost, so local call tariffs will tend to increase slowly, but long distance tariffs will decrease dramatically. During the last 13 years Romanian fixed telephony was considered to be a social service, and tariffs were kept low to favor the low-income population. As a result, revenues were insufficient to expand and modernize the country’s telecommunications infrastructure and Romania’s telephone system now ranks in the last position in Europe. RomTelecom’s low tariffs since 1990 provided neither quality services nor infrastructure development. In contrast, Hungary’s fixed line penetration doubled to 30% between 1994 and 1997, due to the use of a price-cap formula, permitting US$500m per year investment, while mobile telephony was in its infancy. A government ordinance issued in 1998 just before privatization, gave RomTelecom the right to adjust tariffs quarterly using the price cap formula successfully used in Hungary, Czech Republic, etc. RomTelecom adjusted tariffs quarterly in 1999, but for the last three years the full adjustment has not been possible and RomTelecom’s rates have decreased in real terms by 12% in 2000, 4% in 2001, and 6% as a result of inflation. Even so, RomTelecom was criticized for adjusting tariffs despite the fact that all its competitors -mobile operators, cable companies, ISPs, etc. have US$ based tariffs that has protected their revenues against erosion. Interconnection Tariffs - Wishes and Reality The new interconnection tariffs proposed by Romania’s recently established regulatory body, ANRC, expresses the desire- if not the reality for a higher efficiency Romania in general, and RomTelecom in particular. Although this is a step towards the future, at present Romanian fixed telephony means manual and analogue exchanges, old fashioned equipment, over-staffing, political interference and the like. Romainias neighbours have increased tariffs. The local peak hour interconnection tariff averages 0,8c/minute in the EU, 1.95c in the Czech Republic and 2.87c in Hungary. Obviously, these are far from the 1.15c/minute rate proposed by the ANRC. Those EU countries having the lowest interconnection tariffs average about 0,8c/minute for peak hour local calls. Candidates for immediate admission to the EU (Hungary, Czech Republic, etc.) have much higher tariffs (over 2c/minute for local calls). Romania’s low tariffs (1.15c/minute for local calls) seems to place it between the first two groups. Romania’s tariffs , though, should not be considered to fall between these two groups, as the ANRC’s proposed tariffs suggest. Romania’s GDP per capita and average wage are three times lower compared with countries such as Hungary and its inflation, although decreasing, is still higher (two digits) and it has experienced considerable delays in restructuring its economy. This is obvious as Romania’s delayed admission to the EU, after the Visegrd group’s admission is a consequence of these problems. These problems also amplify the impact upon the local population of the suggested rates. EU countries, and countries having much higher GDP than Central Europe, digitalized their networks some time ago. This brought higher efficiency, lower operational expenditures and lower asset depreciation, higher number of user per employee. Countries in Central Europe have not yet terminated digitalisation: Cesky Telecom was 95% digitalised by 2001 and Hungary’s Matav 85%. RomTelecom, though, still has manual exchangesand has digitalised less than 70% of its system. Manual exchanges are still in use as are analogue exchanges and other equipment with high operating costs. New entrants in liberalized markets are more efficient companies. They use modern technologies, need less investment and have fewer, more skilled personnel compared to incumbents. RomTelecom, for example, has 150 users per employee, but Hungary’s Matav has 300users/employee and Romanian GSM900 operates over 1,000 users/ employee. To double its productivity RomTelecom needs to invest enough in modern equipment to be able to operate with half of its current staff, but this is not possible due to the current situation. On The Horizon - A Crisis of Fixed Line Business in Central Europe Soon, fixed telephony could become an unprofitable business in Central Europe- a low GDP and average wage region – with accordingly low telecom service consumption. The prolonged world telecommunications crisis, strong and unequal competition with mobile telephony, low demand for fixed telephony, the obligation to keep rates low despite higher investment and costs, all point to a future crisis of fixed line business in Central Europe. Poland was the first country in the region where telecommunications companies faced problems. In 2002, TPSA, backed by France Telecom, avoided the payment of US$3.2 billion in loans. However, it’s main competitors Netia and Eletrim were suffering. Netia strongly backed by Telia, was able to avoid banckruptcy, but Eletrim became the first telecom banckrupty in Central Europe. In the Czech Republic, the plan to privatise Cesky Telecom by attracting a strategic partner failed, and was postponed to 2005. This plan also failed in many other countries in the region. Bulgaria, Greece, Turkey, Moldova and others have all failed in recent years to attract a strategic partner, via international auctions of their incumbents. The reasons for this failure include little interest in the region and in fixed telephony, and the differing points of view of the buyers and sellers. The state is selling an asset and wants at least book value, but the buyer values the company according to its potential free cash flow, which can be strongly influenced by regulations (tariff regulations, for example) According to Public Network Europe’s, October 2002 issue, Hungary’s Matav believes its fixed line business might be operating at a loss within two or three years, and that without fast corrective action (tariff increases, etc.) service quality will be affected. Taking into account the difference in economies between Romania and Hungary as well as the differences in RomTelecom and Matav, this might happen even earlier for Romania, if it has not already started. Baring in mind, fixed line penetration in Hungary is 38% - a phone for every household, - but only half that (19%) in Romania. Conclusion To assess the real impact of liberalization - mainly on the development of local infrastructure where there are big problems - one must evaluate fixed telephony in comparison with mobile telephony. Given the fact that fixed telephony has higher per line investment costs and lower per line income compared with mobile telephony, one should question if we still need fixed telephony. To be or not to be, this is the question for fixed telephony! References: 1. Roger Noll – Telecommunications reform in Romania, 2000 2. Nicolae Oaca - Mobile telephony: the main driver of Romanian telecommunications! IEEE Communications Magazine, August 2000. 3. Nicolae Oaca - What’s ZAPPening in Romania? Mobile Europe, March 2002 4. Nicolae Oaca: Romanian Telecommunications are preparing for liberalization. The 13rd ITS Regional Conference, Madrid, 8-10 September 2002.