|Broadband for SMEs in Central and Eastern Europe
|Pyramid Research Group, Europe
Broadband adoption by SMEs in CEE will grow, but do not expect a revolutionary breakthrough; broadband penetration of businesses will remain under 20% though 2007. However, although the number of enterprise users may pale in comparison with other regions, broadband services will to generate total business revenues of over $1.5 billion in eight major CEE markets by 2007. Attractive revenue opportunities will continue to exist not only for fixed telcos, but also for business applications, software and security solutions developers.
Data and Internet connectivity services available to small- and medium sized enterprises (SME) in Central and Eastern Europe (CEE) have gone through a remarkable transformation in the past decade. The market space that used to be an unchallenged domain of analogue X.25 networks and narrowband dial-up Internet access now features a wide variety of the broadband technologies ranging from xDSL (Digital Subscriber Line) to high-speed satellite channels. We believe, however, that despite technological advancements and increasing affordability, broadband services will remain beyond the reach of most SMEs in the near term. Subscriber growth in CEE will be less impressive than in other parts of the world and will be mainly supported by DSL and FWA technologies Cons 1. Overall weakness of the private sector comprised mostly of SMEs After more than a decade of transition to a market economy the private sector in many CEE countries remains underdeveloped, with state-owned enterprises continuing to account for a significant share of economic activity. Thus, in Romania the private sector accounts for 67% of GDP and in some CIS countries this share is well below 50%, while in more advanced Czech Republic and Hungary over 80% of GDP is produced by privately held entities. Lack of affordable external financing precludes technological innovation for SMEs with PC and fixed line penetration levels remaining low. At the end of last year, only every second business in CEE used a personal computer, compared to almost four PCs per enterprise in Western Europe (see Exhibit 3). *Note: PSTN in Public Switched Telephone Network. Western Europe (WE) includes Austria, Belgium, France, Germany, Italy, Netherlands, Portugal, Spain, Switzerland and the UK. Central and Eastern Europe (CEE) includes Bulgaria, the Czech Republic, Hungary, Poland, Romania, Russia, Slovakia and Ukraine. 2. Demand for broadband connectivity is not sufficiently supported by existing applications and most SME needs can be satisfied with existing narrowband access Business owners’ question of “why do I need to care about broadband” is still to be answered by the service and content providers. Most popular basic information search and email platforms are adequately supported by affordable dial-up Internet access, which in some cases is provided free of charge or as part of the voice/data/Internet service bundle. 3. Lack of aggressive and compelling marketing efforts to push broadband on the part of operators Incumbent operators, who account for the lion share of all Internet subscribers and revenues in most CEE countries, have little incentive to cannibalize their established leased line revenues by aggressively pushing alternative broadband offerings. Quite often, the quality of the latter also leaves much to be desired. In March 2003, more than a year after introducing its Neostrada ADSL service in Poland, the incumbent TP SA has received over 1,000 QoS (Quality of Service) complaints from 19,000 Neostrada users, many of which are SME customers. 4. Incumbents’ grip on the local loop practically means broadband monopoly while many CLECs (Competitive Local Exchange Carriers) remain financially distressed and scattered Slow implementation of the fixed market liberalization measures has resulted in a situation where incumbents still effectively control “last mile”. At the same time, emerging alternative operators cannot afford to build extensive networks from scratch. Local loop unbundling, the cornerstone of the true market competition, has so far attracted close attention of the national telecom regulators only in Estonia and Hungary. Even in these markets, cases of successful co-location are rare and have so far had little impact over competitive broadband service rollouts. Wholesale agreements have been more successful, but these also take long time to negotiate – Czech alternative operators reached satisfying pricing levels more than 6 months after incumbent Cesky Telecom’s initial wholesale DSL offer. 5. Prohibitively high pricing prevents more agile broadband adoption Leased lines, which were the only medium of the broadband Internet access before the advent of alternative technologies, have never spread en masse because of their high pricing. Today Russian enterprises pay over $900 per month for a 128kbps IP leased line with unlimited traffic, leaving the service beyond the affordability level for most SMEs. Other broadband technologies also remain expensive relative to the income levels and in comparison with Western European countries. In addition to monthly access fee, many operators levy Internet traffic surcharges, acknowledging the fact that bandwidth is and will remain a scarce commodity in CEE, at least in the near term. Moscow’s largest DSL operator MTU-Inform charges $40-160 for each gigabyte of downloaded data with monthly subscription plans priced at $60-450. 6. Broadband availability is still limited to large megapolises in countries like Russia and Ukraine 7. Low level of e-readiness Note: 10 is the highest score, 1 is the lowest score. E-readiness rankings take into account a range of factors, from infrastructure quality to government initiatives and the degree to which the Internet is creating real commercial efficiencies. Source: Economist Intelligence Unit, Pyramid Research According to the EIU overall ranking of 27 out of 60 countries worldwide, the regional champion Czech Republic lags far behind Western Europe and the US, while Kazakhstan and Azerbaijan ranked 59 and 60 respectively. Overall, e-commerce has a long way to go to become a major broadband adoption driver. Like in other emerging markets, e-commerce development in CEE has not kept pace with Internet use: recent market research in Poland demonstrated that although some 80% of SMEs had Internet access in September 2002, less than 8% made purchases online, mainly office supplies, computers and software. Pros 1. Strong economic growth makes outlook for SMEs more sound Major CEE economies have generated higher growth rates than most EU countries in the last 4-5 years (see Exhibit 5). An additional boost is expected after the EU accession of the eight candidate states – Hungary, the Czech Republic, Slovenia, Slovakia, Poland, Lithuania, Latvia and Estonia – in May 2004. Note: CEE rate is based on average growth in Poland, Russia, Hungary and the Czech Republic; WE rate is based on average growth in France, Germany, Italy and the UK. Source: Economist Intelligence Unit, Pyramid Research 2. Fixed market liberalization will spur competition in fixed telecom markets Full liberalization of the fixed telecoms markets has started in many CEE countries (Poland, Romania, Czech Republic, Bulgaria, Slovakia) in January 2003. Although it is premature to expect a profound impact of the liberalization initiatives on the competitive landscape in the first year, we anticipate more heated competition among broadband service providers. As demonstrated in Estonia, proactive regulation is the key to a successful uptake of broadband services. For example, national regulators can create a favorable environment for DSL development by mandating incumbents to design wholesale offers that would make it viable for alternative carriers to launch services, which also happened in Hungary in mid-2002 and in the Czech Republic in February 2002. 3. Advancement of DSL In the past 2-3 years DSL technology became the fastest growing medium of the broadband Internet access. DSL popularity can be attributed to its ubiquitous reach and competitive pricing (see Exhibit 6). New DSL flavors such as SDSL and VDSL that cater to niche market segments also help to boost penetration. While there is little doubt that incumbents will continue to dominate the residential DSL access, CLECs stand to benefit from a growth in SME demand. Hungary provides a good case study of this phenomenon. There, alternative operators Vivendi and GTS already control up to 30% of all business DSL connections. Their operations offer, possibly, a blueprint for CLEC deployment of DSL in CEE. 4. Push from cable operators and competition between DSL and cable modems Intensifying competition between DSL and cable providers has already resulted in broadband access price decline in major urban centers in Hungary. Although Hungarian cable connections are greatly outnumbered by DSL lines, the incremental cost of getting cable modem vs. ADSL is much lower. Outside Hungary, Internet-on-cable holds strong promise in the Czech Republic and certain regions of Russia. 5. Growth of corporate network services such as IP VPNs Affordable and flexible networking services such as IP Secs are gaining momentum in the CEE corporate market space. Although these VPNs can be built on any infrastructure and accessed via dial-up, broadband connectivity is required to optimize performance and reap full operational benefits. 6. Growth of local content Growing availability of the local online content including business portals is an important driver of the demand for broadband services in SME market space. Some telcos, such as Russia’s largest CLEC, Golden Telecom, have acquired content development capabilities to extend their service portfolios beyond providing the Internet access pipeline. 7. FWA deployments Deployment of FWA (Fixed Wireless Access) networks initially started in large cities, but now it extends broadband services availability to hard-to-reach and rural areas in countries like Poland and Russia. In addition, FWA is more flexible and less expensive than traditional terrestrial dedicated channels. Nextra and Tele2 in the Czech Republic, Tele 2 and CDP in Poland, Art Communications in Russia are among the most active regional FWA operators. 8. Evolution of the Internet use by businesses The primary impetus of the Internet usage by SMEs in CEE is gradually shifting from basic information search to online banking and sophisticated supply platforms. State-led initiatives, such as online government procurement and taxation, remain very important for boosting the Internet spread and reach among businesses. Significant progress in adopting EU standards on e-signatures and other transactional security measures has already resulted in e-commerce and online banking growth in Hungary and the Czech Republic.