A slightly different path

COMPARED to other European countries, development of telecom businesses in Slovakia took a different route because liberalisation here came later than elsewhere. Nevertheless, the market found its own path. The Slovak Spectator spoke with Peter Máčaj, the chief executive officer of Slovanet, one of the bigger alternative telecom operators in Slovakia, about the telecoms market, its consolidation, and the challenges it currently faces.

Peter Máčaj, CEO of SlovanetPeter Máčaj, CEO of Slovanet (Source: Courtesy of Slovanet)

COMPARED to other European countries, development of telecom businesses in Slovakia took a different route because liberalisation here came later than elsewhere. Nevertheless, the market found its own path. The Slovak Spectator spoke with Peter Máčaj, the chief executive officer of Slovanet, one of the bigger alternative telecom operators in Slovakia, about the telecoms market, its consolidation, and the challenges it currently faces.

The Slovak Spectator (TSS): What are the greatest challenges the telecommunications sector faces today? Do impacts from the global economic downturn continue to affect the sector and particularly alternative telecommunications operators?

Peter Máčaj (PM): The biggest challenges facing the telecommunications sector, at least in Slovakia, are incessantly decreasing prices and growing requirements on the services provided. These two things are a bit in contradiction because when you want to enhance the quality of telecommunications services or their parameters it is difficult to do so without investments. In general, prices for telecoms services have been decreasing for the last seven or eight years in Slovakia. In terms of the residential segment, this is because purchasing power here is not as strong as in other EU countries and when telecommunications operators want to sell a bigger amount of services they decrease their prices. In the segment of business clients, prices are decreasing too, as the formerly monopolised market has become de-monopolised over the last 12 years and prices have decreased due to competition. I see the biggest challenge in finding enough funds for investments to make services better at the same price level Slovakia is currently at, which is one of the lowest in Europe.

With regards to the crisis, I see two levels of impacts on corporate and residential clients. While business clients came a year ago with higher pressure for a reduction in the scope of services and also prices, the demand for services in the residential segment has not decreased. But what has been visible in the residential area is that price has become the number one criterion. This means that when a household changes its operator, 60 to 80 percent do so because of price. Payment discipline also worsened in both segments.

Nevertheless, the telecoms sector has been hit relatively little by the crisis from the viewpoint of demand because these are essential services and, for example, a job seeker needs a telephone and access to the internet to find a job. The crisis rather affected additional higher value added services. Here the decline was quite strong.

TSS: In recent years the Slovak telecoms market has consolidated significantly. What are the reasons behind this?

PM: Most economic sectors in Slovakia have been undergoing consolidation, in general. Beginning eight to 10 years after the fall of the communist regime in 1989 a number of new companies emerged. Local or foreign investors and private equity groups started to buy them and then sold them to strategic investors. This is a common process that took place in each society transforming from a post-communist state into a democratic country with a market-driven economy. This is one of the influences I see behind the consolidation process. The reason why consolidation in the telecoms business has been a bit stronger is that doing business in this sector is financially very demanding.

At first it arrives as a marvellous business but later you need more and more funds for investments, which come from banks or investors. And only big players get the funds.

Moreover, in the telecom business there is one special way through which the state spurs consolidation since telecom companies are using limited resources such as frequencies, ownership rights to lay cables, assigning of telephone numbers and so on, and their allocation is decided at the state and political level. This means that the telecom business is not completely independent from the state. Consolidation is almost complete in the business client segment. There are about five significant players far ahead of the others and here I do not expect any big changes in the foreseeable future. In the residential segment there are also about four or five significant players – but this group is not identical with those in the business segment – along with about 150 to 200 local providers. Here the opportunity for further consolidation is much larger, maybe even for the next 10 years.

TSS: Slovanet has been an active player in the consolidation process. What reasons have driven this process within Slovanet?

PM: During the last few years we have acquired about six local operators in various towns. We are continuing this process as far as our investment possibilities allow. Recently we acquired M-Elektronik, a local provider of cable TV service with almost 10,000 clients. But I have to say that due to the crisis we have not been able to follow our development plan since 2008 because of worse access to funds for acquisitions. The situation has now improved, but conditions are far from those that were present here three years ago.

The driving force behind acquisitions by Slovanet has been to obtain infrastructure. We can rent infrastructure from the former dominant telecom operator, Slovak Telekom, but the terms it offers are so disadvantageous to us that we decided to create our own infrastructure to provide services to households. Because building a brand new network would require enormous investments with too-long terms of return, buying existing networks along with their clients – even though these lines are not in perfect technical condition – proved to us to be a sensible way. After the acquisitions, we are able to enhance these lines and continue selling services provided on them to households. Through our acquisitions we have achieved the needed critical mass of clients, which in our case means 40,000-50,000 clients, so that the residential segment generates a profit for us, meaning we are able to cover infrastructure investments, costs of operation, and so forth from our revenues.

Our ambition is to continue with this approach and acquire other local providers. Since penetration of the internet is still low in Slovakia, we see space for growth in this residential segment.

TSS: What are alternative operators’ conditions and position in Slovakia?

PM: It is not worth crying over spilled milk. The operation of the telecom regulator has been poor for 15 years and this has not improved even though we constantly point it out. Liberalising the market for fixed-line voice telephone service in Slovakia, enabling interconnection between voice networks of the dominant operator and other operators, was probably the last to be accomplished within the EU. This gave the dominant operator time to get prepared, which is what it did, and it managed to keep its clients. In countries which liberalised this market earlier, about 30-40 percent of clients switched to other operators while in Slovakia I estimate this to have been 15-20 percent.

The second fundamental thing is how the broadband internet market is regulated. This is the market of local metallic lines. Here Slovakia has taken a completely atypical direction in the so-called local loop unbundling, which should have been the second step of liberalisation. In fact, this step has not yet happened in Slovakia. The referential offer, i.e. the terms under which the dominant operator leases local loops to other providers, does not enable us to provide and sell services on them in a way that is effective enough for us. Actually, because no local loop unbundling happened in Slovakia liberalisation of the market for access to the internet happened in the way that 150 players emerged who built their own networks, either Wi-Fi, optic, optic-metallic, coaxial and so on. This is why the market is so atomised and needs consolidation. As a consequence Slovak Telekom holds the dominant position in fixed-line voice service as well as in broadband internet. In the latter I estimate it at 92 percent in the residential segment. On the other hand, the market has found its own way. Alternative networks have been built and already a significant number of clients are using them. And I expect that this share will grow. Of course, this also has some disadvantages because in many places multiple cable lines have been laid and the quality might have been higher if we had had only one infrastructure in each location.

Even though there are plenty of small, partial problems, I do not expect the telecommunication regulator to do something today to benefit alternative operators. Formally, it has set conditions for operation of the dominant, as well as alternative operators, but these are not improving the conditions for operation of alternative operators. They are unacceptable for us; they prevent us from using regulated prices for provision of profitable services and for development of our operation.

In Slovakia I see a conflict of interest as the state is the owner of a 49-percent stake in Slovak Telekom and simultaneously is the founder of the regulator. This means that the state on one hand receives dividends [from Slovak Telekom] and on the other hand it should regulate the company’s profits or revenues. The only solution I see is for the state to sell its remaining stake in Slovak Telekom.

TSS: Does the position of an alternative operator offer any advantages over the dominant operator?

PM: The word ‘alternative’ has been used less often over the last one or two years. Basically we are a telecommunications operator like any other and we can provide any service in the same scope as the dominant providers in Slovakia, Deutsche Telekom and France Telecom, except for mobile services – but even this is possible to solve via virtual mobile operators. The main strategy of a so-called alternative provider is to offer services in a faster, more effective and more flexible way, with better care for its clients.

An alternative or a smaller operator is more flexible and can choose from more technologies as it is not as bound to those into which it has invested. We use this advantage heavily – we use technologies based on wireless, optic, and metallic networks. Basically we can offer the client the most effective service for a reasonable price. The most important advantage is the quality of services. Alternative providers are usually smaller companies and thus they are able to prepare effective and build-to-suit solutions for clients. In terms of business clients, bigger companies usually have more fixed settings and are not able to provide a build-to-suit solution for each client. In the residential segment, an alternative provider has more flexibility in creation of prices and it can change a product faster. Quality is another important criterion. If we do not have a higher quality of services, a client would have no reason to switch providers.

TSS: Slovanet launched a telecommunications development and research project in 2010. Can you tell us more about it?

PM: This is a three-year project focusing on primary, not applied, research and we do it in cooperation with the Ministry of Education. It is focused on research of algorithms for identification of spam and similar unwanted electronic mail and it is called Spamia. Its aim is to make headway in research and development in this field at the Slovak level as well as at the global level and to move these algorithms forward. We launched a special workplace in Banská Bystrica where our research team is based. As we also provide e-mail services, we can provide a huge number of e-mails for testing of these algorithms so that there is not only a purely academic look at this issue. I am glad that we have launched this project as there are only a few real interconnections between business and academia in Slovakia.

Apart from anti-spam technologies we are also active in developing solutions to protect children from unwanted content on the internet. We want to be innovative.

In general, development is inevitable for an operator of our size because we cannot afford to buy all the software we need. Actually, the only significant software we have bought is economic accounting software. The rest has been developed by our people either as brand-new programmes or applications derived from free software or codes.

TSS: One of your surveys of client behaviour indicated that Slovaks want to pay the lowest monthly fees and tend to subscribe for longer periods. What do you think this says about Slovaks as consumers?

PM: I am sure that other telecom operators have come to the same findings. This phenomenon, started by mobile operators, is very strong in Slovakia and I think that it is stronger than, for example, in the Czech Republic or Austria.

TSS: Development is very fast in telecommunications. Where might it be within five years?

PM: If I knew this I would make a lot of money on it. Alas, I am not such a visionary. But we can look at some countries, for example the USA and Canada or Western Europe where the development is two to three years ahead of Slovakia to get a hint at what direction we might be going. But what I am completely sure of is that there will be increasing demand for broadband internet access. Moreover, TVs will also be used for services currently received via a PC, for example sharing photos, videos, online games, social networks, etc. Access to a fixed broadband internet line will become a necessity for every household. Mobile internet will be a secondary option.

The segment of business clients is conservative and the migration to IP telephony is almost complete here. I see more focus on security and here a lot of work could be done.

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