THE ARRIVAL OF ALTERNATIVE TELECOM OPERATORS HAS BROADENED THE MARKET

Changing the market

THE DAYS when there was only one provider of telecommunications services in Slovakia have been over for some time. The liberalisation of the country’s telecoms market opened the doors for new operators, significantly changing the domestic market and bringing various benefits to end users, both residential and corporate.

Stanislav MolčanStanislav Molčan (Source: Courtesy of GTS Slovakia)

THE DAYS when there was only one provider of telecommunications services in Slovakia have been over for some time. The liberalisation of the country’s telecoms market opened the doors for new operators, significantly changing the domestic market and bringing various benefits to end users, both residential and corporate.

The Slovak Spectator spoke with Stanislav Molčan, the Chairman of the Board of Directors of GTS Slovakia, the largest of the new entrants into the Slovak market, about the current challenges of the telecoms market, consolidation occurring in the industry as well as how he sees the impact of government regulations. Molčan said that GTS Slovakia does not mind being called an alternative operator even though its position right behind Slovak Telekom in the fixed-line market means that it is indeed a big player in the industry.


The Slovak Spectator (TSS): What are the greatest challenges facing the telecommunications sector today? What has been the impact of the global economic downturn on the sector and especially on alternative telecommunications operators?
Stanislav Molčan (SM):
The economic downturn has affected the whole telecommunications market in a significant way. We do not know the final numbers for this year yet but those released so far by Slovakia’s Statistics Office indicate that the whole value of the telecoms market, the total revenues of all the mobile and fixed-line operators, will be lower in 2010 than in 2009. Mobile operators account for most of this change because of regulation of inter-connection prices and roaming calls, as well as the high competition due to the arrival of the third operator. But it is questionable whether it will be possible to assess these two markets [mobile and fixed-lines] separately as Slovak Telekom and T-Mobile merged [into Slovak Telekom] earlier this year and will show their numbers together. On the fixed-line market revenues have decreased also.

For alternative operators the impacts of the crisis have been milder but it has slowed down growth. The revenues of GTS Slovakia have not stagnated, but while we reached double-digit percentage growth in turnover as well as EBITDA (earnings before interest, taxes, depreciation, and amortisation) during previous years, last year and this year these percentage increases are only single-digit. Telecom companies face large pressure from clients to reduce prices and of course the trend to boost capacities continues on. Clients are requiring more and more services, broadband, applications of either a multimedia or other character, they require quality and especially higher and higher capacity of lines. GTS Slovakia, which is focused exclusively on corporate clientele, must now sign up many more new clients and sell more services to fill in gaps caused by decreasing prices for services so that we can keep the upward trend.


TSS: The Slovak telecoms market has been consolidating significantly. Why?
SM:
The consolidation is closely related to the way in which the Slovak telecoms market has developed over the last decade. Because liberalisation and the opening of the Slovak telecoms market arrived only after 2000, after the big bubble burst in this market, no really big telecoms players arrived in Slovakia from abroad. Everybody was very cautious after this bubble. To start a telco business in a green field area required huge investments into infrastructure and at that time there were rather activities of a local character and the networks were built gradually by local companies. Now, it is unimaginable to start a green-field telco business because this requires much higher costs than in the past. And building the infrastructure is inevitable because a solely virtual operator, either mobile or fixed, without its own infrastructure cannot compete with existing operators.

Ten years ago GTS was a company which had at its disposal an international network in other countries but locally we were actually without an infrastructure. At the end of 2005 and the beginning of 2006 GTS acquired three mid-sized telecom companies, Telenor Networks, Nextra, and Quadia DCT and Aliatel, a small sister company of Czech Aliatel. In this way we acquired the optic-fibre network of Quadia and the wireless network of Telenor Networks. Earlier this year we acquired Dial Telecom, which had acquired eTel sometime ago. Now we have 200 kilometres of optic-fibre routes in Bratislava, tens of thousands of kilometres of optic fibres, and FWA wireless technologies across Slovakia.

While the first wave of acquisitions took place primarily with the goal of acquiring infrastructure, in the second wave we pursued financial synergies and acquisition of client bases.

After the last wave of consolidation, a trio of alternative operators, GTS, Slovanet and Swan, make up the main competition to the dominant telecom operator, Slovak Telekom. So yes it is true that the Slovak telecoms market is consolidating and GTS has significantly contributed to this process.


TSS: What benefits do you expect from the acquisition of Dial Telecom? Do they provide any services which GTS has not so far provided?
SM:
The main reason behind the acquisition was to get to their client base. It actually has not provided any services that we did not provide. Our service portfolio has been more extensive, also because of our international background. Another reason [for its acquisition] was its experienced staff and its know-how which we also would like to use.

Dial Telecom and eTel had built-up infrastructure, especially in Bratislava, and were focused on business in Bratislava and its environs. GTS is also able to provide services outside Bratislava which Dial Telecom and eTel had to outsource. The benefits and financial synergies from the latest acquisition are very interesting for us.

GTS operates a network of many kilometres of optic-fibres across Slovakia even though a majority of them are in Bratislava. GTS is the only operator in Slovakia leasing the metallic network of Slovak Telekom within the so-called unbundling of local lines. Using the latest technologies we can transfer tens of megabites of data on these metallic lines, which is a very attractive service for our clients.

Even though our negotiations with the dominant operator were tough and lasted some years and we had to also invest into technologies, our coverage by fixed infrastructure is now much larger and we are now actually able to provide services in any locality in Slovakia. However, because of the current set-up we are able to be competitive only in the corporate market. Of course, there are pressures, also from other operators, to make the terms softer so that other operators can use this infrastructure for residential clients and be competitive. The metallic infrastructure in Slovakia is still the most extensive and with the latest technologies attached to that infrastructure it is very interesting.


TSS: What is the position of Slovakia in providing services by data centres in Europe?
SM:
This is an interesting theme, especially for the near and mid-term future. GTS, which as a group operates in Central and Eastern Europe as a fixed-line operator, has the better portion of its business still in the voice business. Speaking openly, the voice business in fixed-line networks has a downward tendency and is not very attractive with regards to the future. This means that we have to look for something else. We are trying to compensate for this by data services. Here, however, the price erosion is relatively large, similar to that in the internet segment.

We have been looking for a long time for the direction to move and for the services and products which would be able to push the company into a growth mode. We see data centres as one of these solutions. Of course, we already provide these services but so far the focus has not been as strong as it could have been.

Before our shareholders made their decision about our next direction, a survey was made and the fact is that Slovakia, along with Romania, ended as the least attractive countries in Eastern and Central Europe. Poland, the Czech Republic and Hungary all have bigger prospects within the GTS group. This is because of the historical development 10 years ago when many companies opened up their headquarters in Prague, Warsaw or Budapest and services of data centres were required. In Slovakia, these companies have only smaller branches. Thus, when companies are centralising their operations, these go back into their headquarters.

In spite of this, the decision of our shareholders was that GTS, as a group, is going to invest into data centres in all of its countries, including Slovakia. Already GTS as a group is the biggest player in the region in terms of square metres of existing data centres. With regards to revenues, data services are making up about 5 percent of the total group’s revenues. The ambition of GTS as a group is to increase this significantly and to move into the position of one of the top players within Europe. And the group’s plans show this as feasible, in terms of revenues and the square metres of data centres.

GTS shareholders are from the US and they have already been active in the telco and IT businesses there. In the US, which is the leader in these technologies, the interest in data centres and outsourcing of services such as the operation of servers and so on is much bigger than in Europe. Experience from the past shows that trends move from the US to Europe and thus we expect that the interest and requirements of clients for these services will be much bigger in the future than it has been so far.

There was a kind of a block on the part of clients to outsource the sensitive data they keep on their own servers and they preferred to operate them on their own. But the fact is that now the requirements and criteria for data centres are much higher in terms of security and energy supplies, as well as infrastructure. It now often happens that when we do analyses for clients they realise that outsourcing the operation of a server is much cheaper for them.

This is, for example, also because of energy prices which are lower for us than for end-users. Today the operation of data centres is as much about energy prices because these centres are highly power-demanding.

From this point of view the acquisition of Dial Telecom, with its strong client base in this segment, is very important for the further development of GTS Slovakia. This means that we are not beginning from zero and we have a big group of clients already at the beginning.

The issue of the client base is very important in this business segment because the proper
size of a data centre is of high importance. If you underestimate its capacity you can end up with a problem because moving a data centre is very demanding. On the other hand, when you do not properly estimate further development and build a data centre that is too big your operating costs are very high. This is because of the high requirements put on modern data centres. You need large volumes of power and extensive capacities of optic-fibre infrastructure which must be properly backed-up so that the data centre can run in the event that power supplies from one resource or one optic route are interrupted.


TSS: GTS Slovakia is a member of the international group GTS Central European Holding (GTSCE). What are the advantages and disadvantages of being in the group?
SM:
The advantages are obvious: it is the international background and financial strength. The latter also means a large competitive advantage for us, for example when acquiring Dial Telecom. It also means that we do not have problems with [funding] investment projects. When we show and explain an investment project to our shareholders which is feasible, they are very open and we are able to very dynamically realise our plans. Furthermore, we can utilise the strength of the group when doing business with other large operators. Even when these are wholesale businesses when large operators buy services from us to be provided to their end clients in this region, this is very interesting for us. This is because we provide these services on our network and thus the profitability is still very high. Moreover, our employees are members of the international teams developing projects or services which we share with other sister companies. This is much more effective than if we do this on our own.

With regards to disadvantages, I would only mention all the reporting and administrative work we must do as well as the high number of time-consuming international meetings and video-calls which we attend. This slows us down a bit. But on the other hand I understand the need for this because the shareholders are on another continent and they want to know what is happening here. But when summing up, the advantages exceed any disadvantages.


TSS: GTS Slovakia, Dial Telecom and eTel Slovensko were the first telecom companies in Slovakia providing fixed-line services after the monopoly enjoyed by Slovenské Telekomunikácie was terminated. How has the market changed since then?
SM:
It was tough. The market in Slovakia opened as one of the last in this region and the former monopoly defended its positions until the very last moment. The terms for alternative operators doing business in the telecoms market were not the most advantageous at that time and even now I would say that they are not as we would like to have them.

On the other hand, when I now assess and compare Slovakia’s development with other countries, I can say that everything bad is good for something. At that time requirements for alternative operators to start providing full fixed-line services were demanding in Slovakia. We had to fulfil a number of formal and technical obligations, as well as invest huge amounts of money. Inter-connection fees were very high, too. But when I am looking back, this had one big advantage: not everybody was able to enter this market. Only those really determined and financially strong enough were able to do this business and provide services at a required level.

In the Czech Republic, for example, the conditions were softer and that resulted in the mushrooming of virtual operators who provided services without making any investments into infrastructure. They just hired dealers, bought services from another operator on a wholesale level and sold them to end clients under their own brand. Because their costs were very low, they were satisfied with a very low margin resulting in falling prices. This got reflected in low investments into new solutions and infrastructure, which in the end affected the quality of services provided. At the end of the day, all these virtual operators ended their business: they simply withdrew from the market or went bankrupt. Actually, they spoiled the market and left.

Something like this has not happened in Slovakia. So if I return back to the question, it cost us a lot of money, time and energy to build our business in Slovakia but the market is competitive and the quality and prices of services are maintaining a reasonable level. In the end it is the end user who profits most from this development.

In general I perceive the task of alternative operators in a very positive way. Without us and our pressure on the former monopoly to improve services and effectiveness and to reduce prices, both residential and corporate clients would pay much higher prices.

Now, since GTS Slovakia is the second biggest fixed-line operator in Slovakia after Slovak Telekom, we are discussing whether it is still suitable to call us an alternative operator. But we primarily understand the term to mean us as being an alternative to the former monopoly and thus we stick to the term. Compared with the traditional operator, we are still more flexible and dynamic.


TSS: How do you perceive regulation of the telecoms market either by Slovakia or the EU?
SM:
Regulation helped us at the beginning of our operations in the Slovak market. Without the regulation we would be not where we are now. I think that the telecoms market should be regulated but it should be not exaggerated. The regulation should be meaningful and it should not permit somebody to get a market share or a client base on the back of somebody else.


TSS: Development in the telecoms sector is very swift. What is its future direction?
SM:
We are pushed to enhance and prepare new products such as multimedia applications and content on the internet. In the voice segment, mobile service is dominating but the fixed-line voice service will be here for many more years. The trend is to move to VoIP (voice over internet protocol) which has much bigger opportunities that the old classical TDM, phone technology based on circuits.

What I see as a current challenge is security. Over the last year the number of so-called frauds, when a hacker hacks into a VoIP-based exchange of one of our clients and causes huge damage, has increased considerably. Clients often underrate the need for security and I see it now as our task to make clients more aware of this danger as well as to offer them security solutions. Another field in which I see space for further growth are the previously mentioned data centres.

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