Romanian Telecom Market Overview

Aprilie 2009

IONUŢ PASCU - Project Manager ROLAND BERGER STRATEGY CONSULTANTS S.R.L.

The Romanian telecom market¹ saw a healthy increase in 2008, in spite of the increasingly difficult market conditions, reaching a value of EUR 4.22 bn (USD 6.17 bn) from EUR 3.91 bn (USD 5.36 bn) in 2007, based on an upsurge in consumption which is expected to continue in the following years. [¹ Including fixed telephony services, mobile telephony services, Internet, data transmission and leased lines; excluding internal telecom services on owninfrastructure of Teletrans and Telecomunicatii CFR]

Mobile telephony has grown at market pace, accounting for around 66% of the total market, whilst Internet and data transmission services have also shown a significant development.

The Romanian telecom market has steadily increased over the last six years with mobile telephony playing the leading role

In a telecommunications market reaching maturity, traditional voice services are starting to experience sustained pressure on revenues due to stronger competition, continued price erosion as well as the emergence of alternative services (VoIP). In this context, non-voice offers as well as value-added services are becoming increasingly important so as to alleviate the decrease in voice ARPU.

 

Fixed telephony market

The deregulation of the voice market in 2003, which did not bring about significant changes in the initial period after its enforcement, started to generate the first visible effects in 2005. As such, even if Romtelecom is still the dominant player in the market, it has to cope with fully-fledged competitive offers (including both post-paid and pre-paid services) from a number of alternative operators.

Although Romtelecom controls most of the local access market, accounting for roughly 69% of the total number of fixed lines, its portfolio was shrunk by more than 1 mn since 2005 to reach 2.97 mn lines by September 2008. As far as its backbone capacity is concerned, the incumbent operator has gradually extended its fiber optical network, which spreads over 32,000 km.

Romtelecom follows in the footsteps of other major European incumbent telcos (such as Deutsche Telekom, Telecom Italia), which have initiated the deployment of next generation networks (NGNs) allowing for integrated telecom service offers (covering voice, data and VPN, Internet as well as video services). In this respect, Romtelecom pledged to invest EUR 500 mn in a next generation network, provided the evolution of the regulatory framework will allow a reasonable return on investment.

Initial steps have already been taken both in terms of the voice and data network capabilities, with approximately EUR 300 mn poured into the infrastructure during the last three years. Thus, in order to fully capitalize on its nationwide fiber optic network, Romtelecom launched its ADSL (Asynchronous Digital Subscriber Line) service for residential customers in May 2005, allowing for higher transfer rates as compared to ISDN (Integrated Services Digital Network) technology using the traditional copper wire network. With regard to the telephony infrastructure, in 2007 Romtelecom managed to achieve country-wide digitalization of its network. In addition, as of July 2005, Romtelecom has started using a centralized billing system named Geneva, which allows the incumbent operator to provide much more flexible subscription options for its customers.

The transformation and development program that Romtelecom has been undergoing starting 2003 is to alleviate the challenges posed by the competitors active in a converging telecom market, i.e. mobile operators, fixed alternative operators and ISPs. Aside from the offensive in the data and Internet market segment, the company launched its DTH-based (Direct to Home) TV services in December 2006. The service, marketed under the brand “Dolce”, rounds off Romtelecom’s portfolio of fixed voice, Internet and data services, and thanks to an aggressive pricing policy coupled with intensive promotion it has already managed to build up a customer portfolio that surpassed the 600,000 threshold in January 2009. Building on the NGN, Romtelecom will be able to provide IPTV services, complementing the DTH offer. The next envisaged step in the transformation program will be the adding of mobile services to the current portfolio (in conjunction with the sister-company, Cosmote), enabling the company to provide quadruple play services: fixed telephony, mobile telephony, Internet and TV. As of October 2008, the two companies initiated integrated offers to cover the needs of residential as well as business customers. The bundled package for residential customers offers unlimited free communication between a Romtelecom fixed line number and up to four Cosmote postpaid subscribers, while the package for business customers includes a fixed line subscription with Romtelecom and a minimum of two mobile subscriptions with Cosmote, offering unlimited minutes for all fixed-fixed, mobile-mobile and fixed-mobile communications for the numbers included in the bundle.

Romtelecom’s non-voice services are slowly starting to offset the decline in revenues from the core business (fixed telephony), combined with a relative containment of subscriber churn for fixed subscriber lines and retail traffic (both domestic and international calls). Thus, the company’s revenues in the first 9 months of 2008 amounted to EUR 656.4 mn, up 1.1% from the same period of 2007, while the company posted an operational loss of EUR 14.4 mn as compared to the EUR 33.1 mn profit registered during the same period of 2007. This negative operational result provides an indication that the growth in non-voice services comes with a certain investment cost. In an attempt to compensate for the lower retail traffic, the operator implemented its latest round of tariff rebalancing in August 2006, diminishing tariffs for local, long-distance and fixed to-mobile calls, while enforcing higher subscription fees. Building on this initiative, as of June 2007 the incumbent offers an option with higher subscription fee but unlimited free calls within its network and reduced tariffs for fixed-tomobile calls.

On a different note, due to unfavorable market conditions, the Greek telecom group OTE and the Romanian Ministry of Communications and Information Technology (Romtelecom’s shareholders) agreed in November 2006 upon postponing the Initial Public Offer for the Romanian incumbent’s shares for an indefinite period.

At group level, after listing another 10.7% share of the company via the stock exchange in 2007, the Greek government has finally found a strategic partner for OTE in June 2008, when Deutsche Telekom acquired a 25% stake in OTE for a total amount of EUR 3.2 bn.

After the boom given to the market by the advent of alternative players in 2004-2005, as of 2006 the Romanian fixed telephony market has entered a continuous downward trend, reaching an estimated value of cca. EUR 767 mn in 2008, down from EUR 784 mn in 2007, due to a reduction in traffic and to the price erosion characteristic of an increasingly competitive market.

After a significant drop in 2006, the fixed telephony subscriber portfolio has returned to 2005 levels

The decrease in consumption and the price erosion led to a drop in fixed voice revenues as of 2006

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