|Issue:||Europe I 2002|
|Topic:||Czech Telecom on the Move-Partially Privatised and Preparing for the Market|
|Author:||Dr Pemysl Klima|
|Title:||President & CEO|
Czech Telecom – partially privatised, publicly traded – is the Czech Republic’s main service provider (3.85 million fixed lines) and controls its largest mobile operator, with 3.24 million subscribers. Since the entrance of foreign investors, the company has been extensively re-organised and its infrastructure, now fully digital, upgraded to comply with legislation and to prepare for the challenges of the market. Voice revenues are decreasing as mobile, data and value-added service revenues are going up. They are installing Next Generation IP/ATM platforms.
Czech Telecom is a national operator with a history of providing Telecommunication services for many decades. In January 1989 SPT TELECOM, s.p., was given responsibility for the provisioning of telecommunication services in the Czech Republic and was separated from the postal services. In January of 1993, it was converted into a joint-stock company. In September 1995 TelSource (a joint venture of KPN Royal Dutch Telecom and Swisscom) entered as a strategic partner into the company with a 27 per cent share. In December 1998, KPN acquired an additional 6.5 per cent direct interest in SPT TELECOM, a.s. On January 1st, 2000, the new brand name of Czech Telecom, a.s, was adopted to reflect the transformation of its corporate identity, in advance of the liberalization of the Czech telecommunications market into a modern, customer-focused, stable company. Shareholder structure and privatisation The current shareholder structure of Czech Telecom, a.s., is as follows: The National Property Fund of the Czech Republic (51.1 per cent share), TelSource – a joint venture of KPN and Swisscom (27per cent), KPN Royal Dutch Telecom (6.5 per cent), investment funds and smaller shareholders (15.4 per cent ). A Government Resolution from November 2001 determined that the government, to complete the privatisation of the company, would sell at least 51.1 per cent of shares in the company through a tender. At the end of April 2002 the government decided not to accept any of the offers received. Organization Since the entrance of TelSource as the strategic investor, the company has undergone several transformation steps. The present state of evolution is represented by a new business management structure based on the ‘Business Model’ (see diagram). This model defines the business and support units and the financial goals and responsibilities of each business unit (BU) and support group. The BU holds full responsibility for revenues, customer contact, product development and its business processes. The ‘trading’ links between units, and with daughter companies, are defined in the rules for transfer charging and revenue sharing. The Business Model, together with a combination of line, project and management methods, enables us to react flexibly to our customers’ expectations and meet the needs of the liberalized market and the development of new technologies. Czech Telecommunication Market Description During the past few years, telecom services in the Czech Republic have reached a level comparable with other European countries, and the market has been liberalized, in compliance with the legislation currently in force. Digital technologies are used throughout the network. New networks for mobile communication are being developed quickly and cover the whole territory. The Czech Republic has one of the highest mobile penetrations. The total market has nearly 10.8 million access devices (fixed and mobile terminals). The fixed line penetration is 38 per cent and mobile penetration 69 per cent (EOY 2001). Fixed telephone services will continue to be provided in the future, but the proportion of the network utilized by data transmission and especially Internet access services is growing rapidly. PSTN revenues are declining (6.3 billion CZK; 18 per cent drop in Q1 compared to Q1 2001). Data, ISDN and Internet revenues are rising (1.6 billion CZK; 23 per cent increase in Q1 compared to Q1 2001). Fixed-line Regulation The new Telecommunications Act opened the market as of January 2001 (including – long distance and international calls). About 20 fixed-line licences have been issued since then. An independent regulator for both pricing and industry issues was established. A Universal Service Obligation (USO) was introduced and the measures defined, but the cost recovery decision is still outstanding. Carrier selection is to be introduced by June 30th, 2002, with number portability and carrier pre-selection to be introduced by the end of 2002. Czech Telecom is ready to meet these deadlines. To achieve these targets, the network digitalization will have to be completed and the intelligent network implemented, as a prerequisite to carrier selection. The total investment will be over 1.5 billion CZK. Based on the decision of the Regulator, complete renumbering will be done overnight on September 21st, 2002, within a time frame of 3 hours. Interconnection agreements and the expansion of the carrier selection service details are being negotiated now with five alternative operators. Interconnection prices must reflect the cost of service provisioning. Cost calculation methods have been discussed with the Regulator. The Czech mobile market is growing fast, with three GSM operators (3×900/1800 MHz, 1xNMT450) and two UMTS licenses issued. Company Results Despite the pressure on the Czech Telecom’s revenue during the first year of its operation in the liberalized market, the company successfully eliminated the impact of this pressure on its EBITDA results, as shown in the chart. Results are comparable with other European operators in their early years in a liberalized market. Our rating remains at the maximum level possible in the Czech Republic: A- from Standard & Poor’s, and Baa1 from Moody’s. Our financial results make us one of the leading companies in the Czech Republic, with low levels of debt in comparison with other European operators. The period of intensive network construction ended several years ago, and investments are now directed towards the further development of network functionality, quality, and reliability through the introduction of state-of-the-art technology. A large portion of the investments were made to meet the regulatory requirements of the Telecommunications Act, primarily enabling carrier selection and number portability services and a necessary prerequisite – completing the network digitalization by the end of June this year. Eurotel Praha also acquired a licence to roll out and operate a UMTS (Universal Mobile Telecommunication System) network, under favourable payment terms. To maintain EBITDA margin in the face of declining revenues, we have focused on cost reduction. The number of employees decreased to 15,194 at the end of 2001, a reduction of 42 per cent during the last five years. The number of main telephone lines (MTLs) per employee is growing each year, reaching 253 at the end of 2001. The number of main telephone lines was 3.842 million at the end of 2001, and has remained nearly stable for the past few years. The number of euroISDN channels was 261,000, representing a 114 per cent increase during 2001. The number of Internet users (both paid and free-of-charge access) reached 475,000, having grown 157 per cent during 2001. The number of Eurotel customers was 3.238 million, the highest number of new customers among the Czech mobile operators, an increase of 49 per cent during 2001. With its leading position in the Czech Telecommunications market and its blue chip status on the Prague stock exchange, Czech Telecom intends to be at the forefront of Czech companies aiming to improve management and administration standards as outlined in the Code of Proper Governance issued by the Czech Securities Commission, which is based on OECD guidelines and the Unified Code of the London Stock Exchange. Czech Telecom thus assumes international principles of best practice in proper administration beyond the requirements of the Czech law. Market Challenges In addition to the company re-organisation described earlier in the Business Model, we are using several other techniques and procedures, described below, to meet the challenges of the market: o To take full advantage of market opportunities requires not only an organic growth, but acquisitions and partnerships as well. We now own a 51 per cent share in Eurotel, 100 per cent in the Internet advertising agency M.I.A.,100 per cent in the LAN/WAN services company, OMNICOM, and 86 per cent of the Centrade-B2B solutions company. o We are introducing effective strategy management methods, one of them being the Balanced Scorecard – a strategic management tool based on Key Performance Indicators. Another strategic planning process being implemented is Scenario Planning. To be able to react to the market requirements as quickly as possible, we have defined the basic segments, are evaluating specific customer needs within them and devising flexible and suitable solutions We are introducing the ISO 9001:2000 Quality System and getting the necessary certifications. We are completing a brand architecture project to define our product brands. o We are motivating the employees by means of implementing new human resource programmes (new systems of benefits and remunerations, e-learning courses, etc.). o We are implementing new CRM processes and systems. o We are continuing to introduce quality of service guarantees – service level agreements (SLA). o We continually search for and assess new business areas, and elaborate segment strategies. We also proactively investigate possibilities of solutions and services based on new partnerships. We are continuing the implementation of our corporate culture project. Conclusion Czech Telecom intends to continue its strategy of compensating the expected revenue decrease from traditional voice services with mobile and data services revenues, as well as from high value-added services, in conjunction with measures to increase the telecommunication traffic. As we know that value-added services and integrated solutions on top of the up-to-date network services are another key to increased profitability, we will continue to develop the technology platform for multimedia services of Next Generation Networks (NGNs) based on IP/ATM technologies. We are also introducing broadband and integrated solutions for corporate clients, including the state administration, customized products for SME segment, and IT as well as entertainment solutions. We know that our customers are not willing to buy technologies, they are looking for value. By providing value to customers we generate value to our shareholders.