|Issue:||Europe II 2002|
|Topic:||Carrier Market Development in the Baltic Region|
|Title:||Director, Carrier Business|
The liberalisation of the fixed telecommunications market in the Baltic region has attracted the attention of European, Scandinavian and Russian telecom operators. Utility companies and railways also want to market their excess telecommunications capacity. There are good reasons to consolidate telecommunications operators in the Baltic States but this is likely to occur only for international services. Regulation is different in each of the countries and unification seems unlikely although economies of scale would result and international competition met more efficiently.
The liberalisation of the fixed telecommunications market in the Baltic region, starting January 2003, has attracted the attention of European, Scandinavian and Russian telecom operators to the region during the past few years. This is not a surprise, considering that population of Latvia, Lithuania and Estonia taken together significantly exceeds the population of countries such as Norway, Finland or Denmark. Of the Scandinavian countries, only Sweden has a greater population than the Baltic States (see fig. #1). As a result, given the continuation of the GDP’s growth trend in the Baltic countries and local telecommunications penetration figures that point to the existence of a substantial un-tapped market, quite a few telecom players have shown interest in the Baltic market. Many question the viability of this market given the relatively low official GDP statistics compared to Western Europe. However, if one includes the contribution of the informal sector – the so-called grey economy of self employed, but not criminal, businesses – the Latvian population is thought to be at roughly the same level as countries such as Portugal or Greece. This, I believe, is true of all three of the Baltic republics. Fixed phone penetration there is rather good, averaging close to 34%, and mobile penetration is thought to approach 50%. It seems that the number of mobile customers in Estonia and Latvia already exceeds the number of fixed line customers, but reliable data is not easy to obtain. Similarly, although there are many, a precise count of pre-paid mobile users is not available. Internet usage is growing rapidly. Politically, there has been strong government support of the e-society concept, and there has been visible progress in the government’s use of the Internet. Recently, for example I was able to find some information I needed about tax regulations by using the Internet to access the Latvian government’s institutional website. A few years ago this would have been an impossible dream. Carrier and Wholesale Business Development in the Region Carrier and wholesale business is the telecommunications business area that generates revenue by buying and selling such carrier services as traffic termination and voice delivery to destination, and capacity for voice and data transit as well as interconnection and IP transit to other licensed telecommunications operators. The roots of the carrier and wholesale business in the region stretch back to 1992, when the first agreements were signed for investment to modernise the region’s telecommunications infrastructure. Obviously, the initial focus was on international call provisioning, basic international infrastructure, and the start of international settlements to obtain payment for international calls originated in other countries. These payments are used to help pay for our telecommunications development programs. In fact, the profile of our international carrier business and our dealings with international operators was established and in operation well before changes could be seen in local and national telecommunications. Next, came a period of intensive expansion (the DDP and IRU based connections, purchased between 1994 and 1996 and still in operation) of the international infrastructure. This was paid for in part by the growth of demand for international voice services and in part by the unbalanced retail tariffs that the telecom monopoly devised to subsidise development. The growth of mobile operators created demand for proper network interconnection and appropriate commercial arrangements. Accordingly, Latvia’s first interconnect agreements between fixed and local mobile operators were concluded in 1996. Nevertheless, there is still a good way to go towards real, comprehensive, local interconnect agreements. By 1999, the Internet market had grown sufficiently to make the need for international Internet transit evident. Latvia’s international wholesale Internet capacity has doubled every 10 months during the last two years. This summer, for the first time, the transmission capacity used for international data traffic exceeded the capacity needed for international voice transmission (see fig#2). Now, due to the expected market liberalisation and obligations to interconnect with other licensed operators, the focus of carrier operations in Latvia and Lithuania has shifted towards national interconnection. This has required extensive work on the commercial aspects of interconnection and, as well, on agreements, procedures, network configuration and billing. Estonia went through this exercise earlier when its market was opened in 2001. From a regulatory perspective, it is clear that the national regulatory authorities (NRAs) will increase pressure in the domestic interconnect and wholesale areas. The NRAs can be expected to emphasize cost-based pricing and the non-discriminatory attitudes and wholesale accounting separation policies called for by European Commission recommendations. This is understandable, as each of these three countries faced significant political trials to join the European Union (EU). However, the EU’s rules are likely to be interpreted in slightly different ways in each country, depending upon the strength and competence of the national NRA. International carrier business in the region is not expected to be directly regulated; there will be only non-binding ITU recommendations on interoperability, not commercial restrictions, to observe. There are many signs, indicating that the carrier and wholesale areas will be exposed to heavy competition in Latvia and Lithuania. Scandinavian operators will fight for international voice and IP transit. The utility and infrastructure companies, such as power companies and railways, have already applied for operator’s licences so they can ente r the market and sell their excess telecommunications capacity. We have already seen this happen in Estonia, the first Baltic state to liberalise its telecommunications sector and encourage a competitive market environment. Carrier business revenues in the Baltic region are now estimated to total approximately 23 million US dollars per year. Precise financial data is not currently available because the shares of Lietuvos Telekomas and Eesti Telefon are traded in the stock markets and there are strict limits on the commercial information they release to the public. Carrier and Wholesale Business Consolidation Opportunities in the Region We have often observed that large multinational firms treat the Baltic countries as a single market. When these companies enter one country, they soon – almost as rule – follow with pan-Baltic market coverage. Indeed, individually, the Baltic countries are not big and it is difficult to obtain significant economies of scale in just one of these countries. Although it would seem there are good reasons for a consolidation of telecommunications operations in the Baltic States, the question is a bit more complex than it appears at first glance. If there is any consolidation it is likely to occur only in the international services area. National interconnect and wholesale regulation (often over regulation) is different in each of the countries. It seems unlikely, at least for now, that all three Baltic countries will agree to work together to unify their legislative and regulatory frameworks for domestic interconnect, licensing and wholesale operations. The individual NRAs simply do not communicate among themselves. On the other hand, a good case can be made for consolidating the Baltic region’s carriers: – Individually, the markets are too small to provide noticeable economies of scale; – The Baltic States are viewed as a single region by world; – An infrastructure for carrier services already exists in the Baltic States and an alternative infrastructure is being built; – The dominant operators have common shareholders (Telia-Sonera); – Corporate customers are already demanding pan-Baltic services; – It would be easier to meet existing international competition with a common, region-wide, strategy. It would seem logical for the dominant operators to join efforts; they have a common owner, can formulate strategic targets for pan-Baltic carrier operations and, generally, this would serve as a stabilising factor. This, however, is not as simple as it appears. First, the common owners – Telia and Sonera – are currently engaged in a complicated and time-consuming merger process. In parallel, they are working to re-define their strategic objectives and identify cost-saving measures. It will be difficult for them to plan the consolidation of their Baltic operations until their own re-organisation has been completed. Second, the Baltic States’ dominant fixed telecommunications operators, Eesti Telefon and Lietuvos Telekomas, are listed on the stock exchange. If their profit-generating international carrier and wholesale businesses were consolidated into a separate unit, their financial results in their over regulated domestic markets would suffer and their share prices would, no doubt, fall. Third, national pride, in part responsible for the failure of the Telia / Telenor merger some years ago, will argue against such a consolidation. Who will manage the consolidated company? In which country will the headquarters be located? Such prosaic questions, and the difficulty of devising a complex three-party shareholders agreement, can significantly delay consolidation. The dominant Baltic operators are already creating an infrastructure to provide the services their corporate customers in all three countries demand. The spirit of co-operation that existed in the days of the monopoly has gone. The best description of relations between the dominant operators today is “co-opetition” – a combination between cooperation (when in the interest of both parties) and uncompromising competition for corporate accounts. The main Baltic mobile operators (Omnitel, Latvian Mobile Telephone, and Eesti Mobiltelefon), not to mention Tele2 – present in all three countries, are certainly closer to co-ordination of their common operations than the Baltic’s fixed incumbents. Conclusion: Opportunities in the Baltic Carrier Market A swift look at the Baltic can give the impression that there are easy, quick, market opportunities. A closer look, though, brings to light previously unseen influences, factors and constraints and reveals a wholly different reality. The Baltic region is situated on the crossroads between Western Europe and Russia and between the Ukraine, Belarus and Scandinavia. There, the interests of Scandinavian, Russian and European operators are intersecting in complex somewhat unpredictable patterns with results that cannot yet be foreseen. Considering all of the above, I believe that few opportunities will be found inside each of the countries of the region. Those few that do exist are short-term opportunities, based on accounting rate arbitrage and collection rates, until cost-based pricing becomes the rule. Other opportunities, including the creation of a pan-European carrier operator, would call for extensive investments. We are not likely to see serious movement in that direction, however, considering how difficult it is at the moment to attract investments in European telecommunications infrastructure, the downturn in cross border merger and acquisitions activity (Fig#3), the competition that can be expected when the Baltic States are fully liberalised and the relatively small size of the Baltic market. It is more likely, since Russia was not as affected by the downturn of telecom industry as Europe and the USA, to expect attempts by Russian investors to enter the Baltic telecommunicatins market.