EuroTel CEO Barta: Poor tender quality hurts everyone

MOBILE operator EuroTel Bratislava recorded a 33 per cent growth in turnover to Sk8 billion last year, while competitor Globtel rose to Sk10.2 billion. For the first time since the introduction of GSM services in 1997, both operators recorded a profit as client numbers exploded past the two million mark.
With an almost 44 per cent share of active GSM clients at the end of 2001, EuroTel is now preparing for a tender for a UMTS license, which allows operators to offer new services with high-speed data transfer, such as audio and video. The Slovak Spectator spoke with EuroTel director Jozef Barta on March 8 about the new tender, market liberalisation, and the long road since 1997.

photo: EuroTel

MOBILE operator EuroTel Bratislava recorded a 33 per cent growth in turnover to Sk8 billion last year, while competitor Globtel rose to Sk10.2 billion. For the first time since the introduction of GSM services in 1997, both operators recorded a profit as client numbers exploded past the two million mark.

With an almost 44 per cent share of active GSM clients at the end of 2001, EuroTel is now preparing for a tender for a UMTS license, which allows operators to offer new services with high-speed data transfer, such as audio and video. The Slovak Spectator spoke with EuroTel director Jozef Barta on March 8 about the new tender, market liberalisation, and the long road since 1997.

The Slovak Spectator (TSS): Back in 1997, when you launched, the Mečiar government made a last minute switch in the rules saying that GSM firms had to have 60 per cent Slovak ownership. That allowed Globtel to hit the market six weeks before EuroTel, which had to suddenly rearrange its shareholder structure. Looking back, would you say the switch in rules occurred transparently? It seemed to put you behind the eight ball, and led to a gap in GSM customer numbers you have never caught up with.

Jozef Barta (JB): I wasn't in my position then, or even in the industry, but it was a clearly non-transparent act, and one that was clearly meant to help the private Slovak shareholders in Globtel. Until now the public has not been told who the beneficiaries of that act were.

However, I wouldn't like to blame the customer gap only on that decision. Globtel gained a small advantage in being able to tell the public they were the first to launch GSM, but I believe the big gap in customer numbers was created much later, and was in the hands of EuroTel management at the time.

TSS: Five years ago, The Slovak Spectator wrote a story portraying EuroTel as the incumbent and Globtel the challenger, you where the firm for businessmen, whereas Globtel was everyman's firm. Were these images true, then or now?

JB: That image was true. Every customer survey we did proved that was the image. It was also justified, because in the 1997-1998 period we had far fewer breakdowns than Globtel did and the know-how in our company was far greater. But besides the quality aspect there was also a price aspect, as EuroTel was charging a hefty premium for what it was offering. Now we know that was a mistake, and that the premium was unjustifiably high. The difference in quality and services wasn't 80 per cent.

TSS: Slovak Telecom, as a major shareholder in EuroTel, inevitably had something to do with the quality of EuroTel management under the 1994-1998 Mečiar government, as the head of ST was a political nomination for Mečiar's HZDS party. The US managers in EuroTel back then used to complain about their Slovak colleagues. What situation did you walk into when you took over the leadership of the company in 1999?

JB: It wasn't a very happy situation. The company was not in very good shape, although in retrospect I would blame all three shareholders. There were many executives nominated by the US shareholder to marketing positions. Quite simply, they failed. I think it was a combination of maybe not having the best people on the team, and then shareholder frictions. The whole corporate governance of EuroTel was wrong - the board of directors had five members nominated by the shareholders according to the shareholder agreement. These five people met every week as a board and voted on management decisions according to the wishes of the shareholder they represented. It was very inflexible, and if you combine the friction over the shareholder structure, it made for a team that was not very productive.

TSS: What really happened in 1999 during the tender for the GSM 1800 mobile frequency that led to the resignation of Telecom Minister Gabriel Palacka amid allegations that the two GSM incumbents had 'encouraged' him to decide not to open the market to a third operator?

JB: From my point of view it was very simple. What the Slovak government was offering to a potential third operator was simply not an attractive package. It had nothing to do with Palacka, it was just the situation here. They were offering almost exclusively 1800 MHz frequencies, almost no 900 MHz frequencies, and there's a big difference between the two in terms of the cost of covering an area. With 1800 your costs are much higher, and it's not suitable to build out coverage in a country if you just have an 1800 frequency.

People often forget that you're not buying a license but a spectrum. The spectrum they were offering wasn't very attractive. On top of that Slovakia is a difficult country to cover because there are a lot of mountains. It also has very low GDP, and two operators in fierce competition and an intense price war. Everybody accuses Palacka, but ignores the fact the government received no applications for the license. It's not like he cancelled the tender and there were five applicants knocking on his door - there was nobody.

TSS: But wasn't that because of the way he wrote the tender, making the conditions so unfriendly that no one applied, thus protecting the market for EuroTel and Globtel?

JB: The trouble was he had no opportunity to improve the attractiveness of the package. It wasn't about price - for any serious operator wanting to come to the country and build out a network, $10 million is peanuts. But that was the only thing Palacka could have changed. He couldn't add more spectrum, because it wasn't available. The 900 spectrum was sitting with the Army, and the Army refused to release it.

TSS: But it was then that the incumbents gained a reputation for aggression in defending their turf.

JB: I still don't understand how we could have influenced it. Now, yes, with the third operator discussion we have about national roaming, we try to protect our interests. But at that time the discussion wasn't about national roaming. No one asked anything from us. The government was trying to put together an attractive spectrum package for a new operator, and it just wasn't there. We eventually came in and said 'fine, if you don't know what to do with this spectrum, give it to us and we'll pay for it'. The government then doubled the price to $20 million, and we told them that if they wanted $10 million from each of us, we wanted exclusivity in return. In getting exclusivity on the 1800 frequency until the end of July 2002 we were protecting our interests, but that was at the very final stage of the process.

TSS: We are now on the verge of another tender for a third mobile operator and a UMTS third generation mobile license. The Telecom Office has had to put back the date for submission of license requests twice, saying that Globtel and EuroTel are being obstructive and that they have promised to attack any contract with a third operator. Are you being over aggressive?

JB: First of all, we never said anything about legal attacks from our part, never threatened anyone with any legal action. But we think the Telecom Office made a huge number of mistakes from day one - when they issued the invitation to participate, the way it was published, the way it was structured. Newspapers have quoted independent lawyers saying mistakes were made. What we said was that if the Telecom Office tries to push through a process that was started on the wrong foot, the risk is that somebody will come and challenge our license. That's what we're afraid of - we don't care about other people's licenses. But if my shareholders approve Sk1.5 billion ($31 million) for a spectrum which is being vaguely promised for two years from now, and we are required to pay this long before...

TSS: Before elections?

JB: Yes, before elections. My fear is that any independent lawyer who wants to make a name for himself will come and say 'this licensing process is invalid from day one'. He could attack it as a breach of the Constitution, as a breach of the Telecom Law, of the Law on Competition. I don't want to call it a catalogue of horror, but so many mistakes were made.

TSS: Telecom Office head Milan Luknár often seems to have a depressed look on his face. Does he have a tough job as director of the Telecom Office?

JB: Definitely. He has a very difficult job because he doesn't have his own budget. He's controlled by the Telecom Ministry budget, and that very much limits his independence.

TSS: Does that effectively mean that ST is regulating the market?

JB: No, the ministry is. And because they are paying the money, they can have a lot of influence on the decisions being made by a supposedly independent office. The government should have created a special chapter in the state budget, and Luknár should have his own budget. Instead, he's been walking around complaining he didn't have enough money to hire a consulting firm for this UMTS license tender. They told him he couldn't - how independent can he be when he can't even decide whether or not to hire a consulting firm?

TSS: Did the lack of a consultant affect the quality of the tender so far?

JB: Yes. And the poor quality of the tender hurts everybody.

TSS: Telecom market liberalisation on January 1, 2003, apart from bringing a stronger Telecom Office with more powers, is also expected to change the market completely, allowing among other things a boom in home internet use. Deputy Telecom Minister Dušan Faktor, however, says no big change will occur because new operators will charge European rates for connections. Will liberalisation in fact mean a big change, either for your company or for the consumer?

JB: Our company won't see too much of an effect because the mobile market is liberated already. If you look at the Czech market, which is maybe 1.5 or 2 years ahead of us in liberalisation, you don't see too many alternative players in the marketplace. And the Czech market is probably three or four times the size of the Slovak market in terms of revenues, customers. So I don't believe the market will change that dramatically, and we may see one or two alternative fixed line operators surviving, not more.

In terms of Internet, I don't believe the monthly connection fee is the barrier. I think the main barrier to Internet penetration in Slovakia is PC penetration. If you look at the price of even the lowest-end computer, it's out of the reach of the younger population here.

TSS: Are you betting on introducing high-speed data technology - that people will use their phones to get on line rather than computers?

JB: High-speed data is still for the higher end of the customer base, but what we are betting on is the mobile Internet in general - WAP and GPRS. I believe there are lot of people in Slovakia who will have their first experience with the Internet through mobile phones because they cost a fraction of what a PC does. It's obviously limited in speed and colours, but it's something that people will learn how to use and have access to information.

TSS: The level of mobile penetration in Slovakia is incredible - predicted to be 55-60 per cent by the end of the year. Globtel claims that by 2003 it will have more customers than ST. What is it with Slovaks and their mobiles?

JB: Slovakia isn't any different from any other country around us. Penetration levels are around 60-70 percent in Hungary and the Czech Republic. It shows also that competition between EuroTel and Globtel is so fierce that we've managed to lower the barrier to Slovaks, who are much poorer than the Germans and Austrians, and achieved a growth rate here which is similar to that in much wealthier countries in western Europe.

TSS: After five years since the introduction of GSM services you finally made a profit in 2001 - Sk307 million after taxes, compared to a Sk567 million loss in 2000. Are you surprised it took so long?

JB: It came sooner than we planned. In the year 2000 we refinanced the company, and projected that profits would come in 2002. We beat that through cost-cutting, and much higher customer numbers than we expected. Huge customer growth usually means losses for a mobile operator because you have to subsidise the growth. But we managed to contain those costs, so we're pretty happy.

TSS: The recent sale of a 49 per cent stake in gas utility SPP brought only $2.7 billion, and analysts said that the reason it wasn't higher was that the world had lost interest in utility equity. Is the same thing happening with the Slovak telecom market - that the government is offering next generation licenses after the boom has long faded?

JB: If you look at western Europe people are returning their UMTS licenses. They don't even want their money back from the government, they're just happy not to be forced to build out the network. The telecom market is healthy, and growth rates around the world are very solid. But the bubble has burst. The expectations were too high, and people have learned a tough lesson.

TSS: Has the Slovak government learned the same lesson?

JB: We're actually lucky that Slovakia is behind, because I think the Telecom Office has seen what happened in other countries. It's kind of a luxury, really, to learn the lesson without paying for it yourselves.

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