The first of three articles on the current state of the industry finds a new mood of realism about the potential returns from investing in the transformation of eastern Europe's archaic system. The road, it seems, will be longer than expected.
Four years ago, when the Iron Curtain was finally lowered, western telecommunications companies and east European governments were confident that investment would pour into the new democracies. The companies foresaw large returns on their investments. The governments believed that transforming their archaic telecommunications systems would help transform their economies.
It hasn't quite happened that way. 'What both the western and eastern sides have realised since then,' says Ross Parsons, east European telecoms analyst for communications consultants CIT Publications, 'is that the telecommunications infrastructure in the East is in a much worse state than they first anticipated.' Investments are going to have to be a lot larger and the returns will probably be a good deal smaller than originally anticipated. There is more realism and greater pragmatism around now, a realisation that the road will be a lot longer than anyone at first thought.
The size of the job to be done can be gauged from recent estimates by the European Bank for Reconstruction and Development. The bank reckons that to satisfy the current level of demand for network access in the region would require a further 17 million new lines and cost US$25 billion. To reach parity with OECD countries would require 90 million new lines and a US$135-billion investment. Western Europe has an average of 43 lines per 100 people. Eastern Europe ranges from Bulgaria's 25 per 100 to Poland's 9.5.
CIT Publications' report on the region, Communications Markets in Eastern Europe 1993, suggests east European governments face some hard choices.
'While the political pressures exist to go for fast basic network expansion, this sector is not always the most likely to attract the greatest level of interest from potential foreign investors. They are far more interested in the lucrative business services market where they can charge a premium price.' Western companies may not be plunging in headlong, but many are testing the water. Two of the most seriously involved, says Parsons, are Germany's DBP Telekom and the American company US West. DBP has been investing heavily in the former East Germany since reunification and has used that as a springboard to move further east. US West is a partner in the first cellular telephone systems in Hungary, the Czech republic and Slovakia.
The CIT report suggests that three elements are inextricably bound together in the future development of telecoms in eastern Europe - first, restructuring the existing organisations (both the regulators and the providers) in each country; second, privatising some or all of them; and third, introducing some form of competition into the sector. Parsons thinks Hungary is the country furthest down the road. Hungary is curious: it has one of the lowest line counts of any country in Europe (10.92 per 100 inhabitants) but very advanced policies on the development and liberalisation of the telecoms sector.
'They're going to privatise 30% of their state-owned telecommunications company,' says Parsons. 'Basically it's a trade-off for them. They get the cash and the know-how of a foreign telecommunications company coming in, and in return they give up a certain amount of control over their network. I think that pattern will repeat itself across eastern Europe. Most East European governments have talked of their plans at some point in the future to privatise their telecommunications companies and that will probably follow the same pattern, trading off control over the network for cash and know-how.' Hungary is also moving fast in the introduction of mobile telecoms. Cellphone networks are now a viable proposition in several countries where entrepreneurs (both local and western) are unwilling to join long waiting lists for fixed line telephones. If businessmen are prepared to pay premium rates for mobile phones, the telecoms companies are more than willing to supply them. Hungary has granted two cellular digital licences recently. One went to a consortium of US West and the Hungarian Telephone Company, the other to a consortium of companies from the Netherlands, Denmark, Sweden and Finland.
Mobile telecoms are spreading rapidly in Russia as well. The country has already granted 12 digital cellular licences, eight of which have gone to US West International. The licences will cover most of the major Russian cities.
'It's seen as a sort of instant cure to the lack of a telephone connection,' says Parsons. 'You're a western business, you go into Moscow and you can't get a telephone line because there's a waiting list of something like 25 years. There are ways round that - you can probably get it in early by paying extra - but the quickest way is to link up to a cellular mobile connection.' But mobiles are only an aid for the business sector, says Parsons. 'It's not by any means a cure for the big pent up demand of the population who just want a subscriber line and can't afford to pay premiums.' Will investment in eastern Europe repay the companies that are patient? CIT Publications thinks it could: 'The potential is huge if service revenues from a population estimated at 400 million in the region approach the levels derived from a western European population of only three quarters that figure.'
CIT Publications has been monitoring the major players.
- Alcatel (France): expects to generate 10% of its telecoms revenues from Eastern Europe by the year 2000. Main interests: joint ventures producing switching equipment.
- AT and T (US): supplying switching and transmission equipment to Poland, Ukraine, Russia and the Czech republic.
- Cable and Wireless (UK): joint ventures, particularly in Russia and Bulgaria.
- DBP Telekom (Germany): major expansion in the former East Germany.
- Ericsson (Sweden): built East Europe's first digital cellular GSM system in Budapest.
- GPT (UK): principal involvement is in Russia, in partnership with Moscow Telecommunications Network.
- IBM (US): communications systems for East European banks.
- Motorola (US): supplier of cellular telephones, particularly in former Soviet bloc countries.
- Nokia (Finland): concentrating on Baltic states, Poland and Russia.
- Northern Telecom (Canada): sea cable laying to provide international gateways, mainly in Russia.
- Siemens (Germany): one of the most active players. Joint ventures in every country in the region.
- Telecom Denmark (Denmark): cabling.
- US West (US): partner in first cellular systems in Hungary, the Czech republic and Slovakia.