Diversity is clear in Eastern European broadband

By Steve Wilson

Having recently read Slavenka Drakulic’s marvellous and wholly wry little book Cafe Europa, I think it is worth noting the real differences that exist in the fixed broadband markets of all the countries in Eastern Europe. And that is the theme of Slavenka’s book: that culture matters and that generalisations are dangerous.

Many nations in Eastern Europe have seen the growth of micro ISPs or neighbourhood networks. However, there are big differences between the countries. For example, in Romania there are a plethora of fibre based neighbourhood networks running overhead cables. In the Czech Republic this DIY segment is filled by players using fixed wireless technology in the unlicensed spectrum. One could put this difference in technologies down, at least in part, to culture. Many Romanians are not long time city dwellers, with mass movement to the cities in the post World War Two industrialisation. This means that they might have a different attitude to urban aesthetics than the longer time city dwellers in the Czech Republic. The rapid influx of people into Romanian cities also resulted in haphazard urban development meaning that overhead cables reflect some part of the earlier culture. These cultural factors mean market dynamics can be very, very different.

The question of the ownership of incumbents also shows the different spheres of influence in Eastern Europe. Whilst the popular conception might be that German telecoms group Deutsche Telekom (DT) is dominant throughout the region, this is not correct. For example, whilst DT is a powerful player, with interests in the incumbents of countries such as Hungary, Croatia and Slovakia there are other players that are active. For example, Swedish group Telia Sonera is the dominant player in terms of ownership of the incumbents in the Baltic states of Latvia, Lithuania and Estonia. Just like in Scandinavia fibre is very prevalent and in Latvia there is even an open access network. Telekom Slovenia is another important player with interests in different countries from the ex-Yugoslavia and it is worth bearing in mind that the Slovenian incumbent still remains under majority state control.

Another noteworthy thing about Eastern Europe is that not all countries are yet members of the European Union, and this too has an effect on telecoms policy. Countries such as Serbia, Macedonia and Montenegro are yet to join the club and are still pressing down the road to liberalisation of the telecom market, albeit at different speeds. Whilst the incumbent in Serbia remains state owned and a second license for fixed telephony has only just been issued, in a country like Lithuania wholesale DSL, local loop unbundling and duct access have long been in place. It would be remiss not to point out the one constant so far: that unbundling has failed to grab a really significant market share in any Eastern European market.

The fundamental economic conditions are also vastly different between the countries in Eastern Europe and this too has an effect on the fixed broadband market. For example, according to Informa data, fixed broadband penetration at the end of September 09 stood at only 11% in Moldova but at 69% in Slovenia. Clearly such discrepancies have all sorts of consequences, for example upon the willingness of outsiders, whether they are telecom operators or financial groups, to invest in the fixed broadband market. The extent to which the different markets have been hit by the world financial crisis has also differed, with countries such as Latvia and Hungary being particularly hard hit.

The story for cable is also far from similar between the different Eastern European markets. There are markets such as Kosovo, Bosnia and Hungary (thanks to Digi) where the cable operators are still laying new infrastructure. And yet there are other countries, such as the Baltic states, where cable is regarded as an old and inferior technology, dating from the dark days of the fag end of the Soviet system. The consequence is that in countries such as Lithuania all new wired networks are based on FTTx. While the technologies may be different depending on the country it is true to say that there is new wired infrastructure being deployed almost everywhere. The fact that labour costs and costs of civil infrastructure work are low means that CAPEX is not so much of an issue. However, low CAPEX for wireline rollouts applies equally to the deployment of fibre optic and coaxial cables.

And what of market dynamics in the region? These too demonstrate sharp divergence. Romtelecom, majority owned by OTE, is rapidly growing its market share; a situation attributable to the company’s very slow start in broadband. Indeed its parent company OTE, the Greek incumbent, was also slow on the uptake in seeing broadband as a revenue generator. In Hungary, however, Magyar Telekom had been fractionally losing market in the 3 quarters up to the end of September. This was in part due to the ferocious competition from Digi, building out its cable and fibre networks and leaving its competitors trailing in its wake.

Whilst Slavenka’s book is keen to stress the differences between Eastern European countries there is also time for her to talk of shared experiences, particularly in the Balkan region as a whole. For the sake of simplicity and ease of understanding I have followed the same path and made a few conclusions that divide the Eastern European countries into more homogenous groups.

The Baltic countries fit naturally together thanks to the Scandinavian influence and also the different projects to roll out backhaul fibre to those in rural areas, for example RAIN in Lithuania and Estwin in Estonia. Balkan EU member states such as Bulgaria and Romania also go together. This is because of the widespread deployment of overhead cabling and also the lack of regulation with regard to illegal distribution of content. Speeds are fast and competition intense. Then there are the other Balkan states such as Serbia that are still trying to modernise their telecoms regulation and increase their level of economic development. We can also talk of a group of countries such as Hungary, Poland and the Czech Republic. These countries have traditionally been seen as more Westernized and have seen investment in the incumbents from DT and also Telefonica in the Czech Republic and France Telecom in Poland. They have followed a more Western European regulatory model with local loop unbundling in place, although not as yet a big success, present in all countries. Penetration in these markets is also similar with it being in the range of 40-50 % of households.

Whilst this formulation is far from perfect and there are countries such as Slovenia (with its far higher penetration than elsewhere in Eastern Europe) that seem to stand alone, it is more fruitful than a simple lumping of all the diversity into one box.