'Investment continues' says ST chief

MIROSLAV Majoroš believes that one day people will talk to the holographic image of their friends projected onto their palms. However, even then, landlines will be still around just as ancient Rome’s earliest and most strategic road, the Via Appia, still exists though surrounded by modern highways, says the president of Slovakia’s largest telecommunications company, Slovak Telekom (ST). He is confident that the current economic downturn should not deter firms from their drive to innovate: on the contrary innovations gain even more importance in this environment.

Miroslav Majoroš Miroslav Majoroš (Source: Courtesy of Slovak Telekom)

MIROSLAV Majoroš believes that one day people will talk to the holographic image of their friends projected onto their palms. However, even then, landlines will be still around just as ancient Rome’s earliest and most strategic road, the Via Appia, still exists though surrounded by modern highways, says the president of Slovakia’s largest telecommunications company, Slovak Telekom (ST). He is confident that the current economic downturn should not deter firms from their drive to innovate: on the contrary innovations gain even more importance in this environment.

The Slovak Spectator spoke to Majoroš about challenges that the telecoms sector faces today, the metamorphosis of the former landline provider Slovenské Telekomunikácie into a multimedia company, the desire of the European Commission to reach 100 percent broadband coverage for European Union citizens by 2010, market regulation tendencies and also about the way that Slovak academia responds to the needs of business.

The Slovak Spectator (TSS): What are the greatest challenges that the telecommunications sector faces today? What has been the impact of the global economic downturn on the telecommunications sector?
Miroslav Majoroš (MM): Customers currently do not care how they get their data, whether through fixed or mobile lines, they simply want to use the connection and have access for the lowest possible price. The crisis is tightly linked to prices. Corporate clients are now mainly starting to re-evaluate the structure of services for both its content and also its price. We have started more intense communication with many of our customers over this issue which, indeed, has been accompanying the telecommunications business over the past couple years, and I do not think this is going to change. I do not think that the crisis will get people to the nutritional level where they stop thinking due to the lack of calories: I think that firms will always be interested in innovations and the ones innovating will do it very effectively, thus gaining a larger competitive advantage over firms which focus only on cutting expenses. Cost reductions are certainly a very important issue and expenses always need to be cut; whether there is a crisis or a conjuncture, firms must always optimise their inputs. But innovations in times of crisis become even more significant.

TSS: Ernst & Young in its Business Risk Report for 2009 said that the year might bring an increasing tendency for regulation of the telecoms market. Do you expect an increasing tendency of regulation on the part of the European Union?
MM: We unambiguously feel the European Union’s tendencies for regulating the market which on one hand brings benefits for the customers because it supports competition but, on the other hand, if the regulation is applied in a bureaucratic manner, it might have a negative impact on the whole sector.

Currently, it is very hard to justify investments into technologies in a regulated environment because the shareholders require a return on investments, which is more difficult to achieve in a regulated environment. Besides, we are not alone in the universe and if we in Europe have the desire to regulate modern technologies in the same manner we have regulated technologies which have been around historically but the United States or Asia, for example, do not regulate them or the regulation takes place on a different scale, then we are building barriers for ourselves.

TSS: What are the most significant changes that your company has been through over the past five years? While in 2001, 90 percent of your income came from voice services, today it is only about 50 percent. You have several times said that Slovak Telekom is now a modern communications firm.
MM: Apart from the privatisation, which took place more than five years ago, we had to define the reason why we are in the Slovak market. A firm which does not know the reason for its existence, in fact no longer has a reason to exist. The firm Slovenské Telekomunikácie when I came here did not have a clear answer to this question but since then the firm has figured it out. We have to provide the services that our customers need since customers are the ones who make our existence possible with their resources. We unambiguously decided that we had to go into new technologies, a move which was surrounded by intense debate over the structure of expenses, profitability and returns. It indeed is a huge change for a firm which had a pretty stable structure of customers and of revenues and which then opted for technologies and products with a much lower return.

When we look at new technologies, be they data, image, sound or multimedia, first there is much sharper competition and a larger investment required with lower returns. All of this pushed us to restructure the company: we reduced the number of employees and managers. Today this firm is about three times smaller than five years ago in terms of its number of employees. As for sales turnover, it is slightly lower, because logically the products offered in the past are now less attractive for customers, but we are still doing pretty well. But we opted for innovation: while in the past we had 9 percent of our employees with a university education, today it is more than 44 percent. The firm has completely metamorphosed: it has changed its structure and in fact also its direction.

TSS: Do you think that telecommunications firms in other post-communist countries had to go through a similar development?
MM: Certainly, the development was very similar. In some places these changes might have taken place faster. Compared to the Czech Republic, Poland or Hungary where the landline coverage reached 40-50 percent, this number in Slovakia stood at 30 percent. It meant that in Slovakia the public accepted mobile technologies much faster while the replacement of classical landline phones by mobile phones was much quicker than in other countries. In 2003 in Slovakia we were already talking about the replacement of landlines by mobile phones in the area of voice services. It wasn’t a problem at all in Germany since there the households kept their landlines while family members had their mobiles as well. The products lived and co-existed side by side. In Slovakia, it was more demanding. First, a lot of households did not have landlines and for others keeping both landlines and mobile services was too financially demanding. In Slovakia, people simply had to make their choices. Of course, this type of substitution also happened in other countries but in Slovakia it happened much sooner and it placed us in the situation where we were neither ready structurally nor in terms of investments to face this situation. Our company was able to undergo its restructuring only when it had already felt the drop in the number of our customers. The company was forced to carry out these changes much faster than it would have done under standard market conditions.

TSS: You have said that undertaking digital television was the most complicated product for ST ever.
MM: The most important step was to make the decision itself: it required investments and also solutions to problems we had not dealt with before, for example the issue of copyright. We had to make sure that a customer who is using our services is really paying for them. Then we had to achieve a network of sufficient quality to be able to handle the burden of programmes which it had not carried before. If you lose the connection during a phone call, it is relatively unpleasant, but you can call again. But if you lose the broadcast, for example, during the finals of the World Championship, you really encounter mass dissatisfaction. When you have such a product, you simply cannot afford broadcasting a notification “sorry for the inconvenience”. Of course it was demanding and at the beginning we had customers who were dissatisfied. It was also a sort of cleansing process for the firm. It was not only about particular employees and how effective they were but also about the internal interconnections of the firm because this product calls for interlinking at the level of information, marketing and technology.

TSS: Is the Slovak population technologically advanced enough for taking in such a new product?
MM: I will share with you some statistical data which show us to be unique at the European level: 92 percent of our broadband DSL connections are being sold as self-install packages. It really means that our customers can install the packages themselves. The Magio digital television packages are also sold as self-install packages and 50 percent of our customers take these packages and do their own installation at home. The perception that Slovaks are conservative and less-advanced technically is simply false.

Currently, we have 40,000 Magio customers; our goal is for 100,000 customers. There are two challenging factors: first is the infrastructure, because the product requires high and stable transmission speed, while the second is the product itself: the customer must find it interesting. Our priority certainly is improving the infrastructure. We are currently at the level of 220,000 to 230,000 households which can be connected to the optic cable infrastructure. There are limitations to providing this product through the traditional, metallic infrastructure and thus we want to invest into replacing this technology. Our strategy is to try to increase the speed of the traditional cables in smaller communities while continuing to build the optic network in the larger ones. As for our investments, we are not cutting those. On the contrary, we believe that this is the right time to continue the project. We have invested €66 million into our networks and plan to continue.

TSS: How do you see the future of the fixed line?
MM: Fixed lines will be around for the next 10,000 years. Rome’s Via Appia is the oldest preserved road, built by Consul Claudius Appius in the 4th century BC. The road is still there, part of it as a tourist attraction, but it also continues as an asphalt road up to Brindisi. There is a highway next to it but that road is still used as well. I find this analogy best suited for the future of landlines. The question, of course, is whether the landline will be made of optic fibres or metal and what will be transmitted through them: be it voice or holographic images, but the line will be there. Simply said, there is no other alternative for the transmission of a huge volume of data because wireless connections are simply not enough and will not be enough for a very long time.

The development is, of course, fascinating. There is always a new wireless technology coming along which is able to transmit a volume of data which approaches the capacity of the landline and then at that point the landline makes further progress. Two or three years ago it was said that the landline will be replaced by wireless technology. Today we have the optic fibre cables and currently there is no wireless technology that is able to transmit what the optic technology is capable of. Our generation will certainly not live to see the disappearance of the landline.

TSS: Last year Slovak Telekom had 16,000 new clients for landlines and reversed the declining tendency of previous years. It is a 1.4 percent increase according to the results published by Deutsche Telekom, the majority shareholder of Slovak Telekom. How do you interpret this development?
MM: Without question it is the optic fibre network and the internet. We now have products which do not require having voice service in its standard form. We have now over 36,000 clients who are using IP phones in their households and an additional 10,000 corporate clients. And we also have products focusing exclusively on transmitting data, for example, our Naked DSL or Magio without voice service or connection to the internet. This was exactly what opened a space for us to widen the number of our customers. The understanding of the landline is changing and today’s generation of 20-year-olds who are establishing their families are thinking differently about installation of a landline than my generation. Decades ago, there was one single product and you had to bribe someone to have that product installed. Today, customers who are setting up their own households are able to choose between different providers and to select a package, with internet and also voice. Of course, we still have customers who are using the classical voice services because we have tried to tune those in a way that they find interesting. But we cannot expect that these classical voice services will fuel the growth of the number of connections.

TSS: How do you view ST’s obligation to provide a universal service?
MM: Sometimes I have a feeling that there are people in Brussels who are sometimes managing the sector by looking into the rear view mirror because their front window is completely blank. We have phone booths, from which there has not been a single call made for years, but we have to maintain those booths and it costs us money. There is a system to compensate the operator for these expenses but it has not been activated yet. It costs us more than Sk100 million (€3.32 million) annually and we have not yet received a single crown. To cut a long story short, the universal service is a burden for us and it makes no contribution to the regular customer. In addition, 92 percent of these booths need to be functional and we have to check them. We also have a duty to publish paper phone books.

TSS: The European Commission has the aspiration to have 100 percent broadband coverage for all citizens of the European Union. Do you consider this goal realistic?
MM: Certainly it would be realistic if €100 billion is invested into the project. Technologically it is possible; but one has to realise that this in fact means coverage everywhere, in every spot, the Gerlach Peak and even the Dobšiná ice cave. One should not really work in a political way with the numbers. I would be delighted if 100 percent coverage becomes a reality but I cannot exactly see how they want to do it. Of course, if European funds are reasonably used we could do quite a lot to achieve coverage even where it cannot be commercially justified for everyone. Currently, we are covering about 30 percent of households with broadband and I think this year we might even achieve 40 percent. We have a quite considerable advantage in the spread of optic fibre coverage: by the end of this year some 300,000 households will have a chance to use these services. The problem, however, is that there is still a large group of people, about 40 percent, who are not interested in having these services because they do not see any great contribution in having the internet even if they got it for free. And this is where we need to change things. But it is not a problem of operators but a political problem. This is of course also linked to the further use of the internet by society and by e-government. Progress in this area will be rather slow until people understand that they can use the internet to manage their affairs more effectively than standing in long lines at offices and bureaus.

TSS: The Slovak education sector has been criticised for not responding effectively to the needs of the labour market and business. What is the situation in your sector?
MM: We are active in meeting representatives of the schools and seeking solutions. In Slovakia, the academic sector is disconnected from reality to a large degree and when our universities produce graduates who do not match the needs of a given sector it is a huge waste of resources. We have to completely train graduates who start working with us in terms of technology and they have rather scant knowledge of project management, which is a key activity since most people who join us, in fact, become part of a specific project. Then there is also a certain lack of language proficiency. It is indeed sad to see a 23 year-old with poor English. You hear quite often that we are going to invest more into research and science, but you do not really hear the details: will we invest in basic research or research on a nuclear or atomic level?

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