Romanian Telecom Market Overview

Martie 2008

IONUŢ PASCU - Project Manager ROLAND BERGER STRATEGY CONSULTANTS

The Romanian telecom market¹ saw a robust increase in 2007, reaching a value of EUR 3.70 billion (USD 5.07 billion) from EUR 3.36 billion (USD 4.19 billion) in 2006, based on an upsurge in consumption which is expected to continue in the following years.

Mobile telephony has witnessed strong growth, accounting for around 68% of the total market up from 61% in 2005, 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 approaching 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 valueadded 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 75%, its total number of lines in service has shrunk by more than 1 million since 2005 to reach 3 million lines by end 2007. As far as its backbone capacity is concerned, the incumbent operator has gradually extended its fiber optical network, which spreads over more than 30,000 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 million 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 million 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 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. Moreover, 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 approaching the 400,000 threshold by the end of 2007. 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 December 2007, the two companies are giving both residential and business customers a foretaste of a full-blown portfolio through a combined package of Internet services provided by Romtelecom (ClickNet) and mobile telephony services provided by Cosmote, available at a 10% discount (from the tariffs charged if the two services are acquired individually).

Nevertheless, so far Romtelecom’s non-voice services could not offset the decline in revenues from the core business (fixed telephony), mainly due to the drop in the number of subscriber lines and retail traffic (both domestic and international calls). Thus, the company’s revenues in 2006 amounted to EUR 894 million, down 3.8% from 2005, while the EUR 649 million revenues in the first three quarters of 2007 translated into a decrease of 2.4% as compared to the same period in 2006. 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-to-mobile calls.

On a different note, due to unfavourable 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 an unsuccessful attempt to identify a strategic partner for OTE, the Greek government decided to sell another 10.7% stake in the company via the stock exchange in 2007. The sale was a success, as the offer was oversubscribed and generated proceeds of EUR 1.1 billion for the Greek government.

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