Playing games with 3G

Details: Category: Trends & Forecasts; 04 February 2008; 12911 views

Orange and Vodafone are winners in the contest for the last two 3G licenses in Romania. At least that is how it now appears, in a story which has lessons for regulators and operators in emerging markets worldwide...

Developing Telecoms has reported regularly on developments in Romania, one of the largest Central European telecoms markets and one of the most recent to issue new 3G licenses. Now Developing Telecoms contributing editor Dr. Nicolae Oac? brings things right up to date and in the process exposes some strange goings on in a story which contains lessons for regulators and operators around the world.

The story starts in 2006 when, on October 13 of that year, the winners of the beauty contest for the last two 3G licenses in Romania: RCS&RDS and Telemobil were announced. The announcement was a double surprise. First this was because winner RCS&RDS were a complete outsider. The company is a cable operator without any mobile network operator experience and without the support of an important international or local player.

The other big surprise was that Cosmote Romania, an established mobile operator, with a 2G network covering over 97% of Romania's population, and which had invested €450 million in Romania up to 2007 and belonged to OTE Group, was not awarded a license.

But that was not all. Against all expectation ANRCTI, the national regulatory body, refused to award the 3G license winners an additional 2G license or to regulate national roaming with 2G networks. The result of this was to make one favourite, Deutsche Telekom, withdraw from the contest. So the real result of the contest is that the big winners of the contest for last two 3G licenses have been ... the 2G operators, Vodafone Romania and Orange Romania.

The story unfolds as RCS&RDS delay

In January 2007, RCS&RDS and Telemobil paid their first license installment and obtained their 3G licenses, with an allocation of one million new numbers. RCS&RDS had announced in November 2006 that commercial launch of its 3G services would take place in February 2007. But this turned out to be a field trial only, with service limited to two small areas, Bucharest and Otopeni, a village close to Bucharest.

In May 2007, RCS&RDS announced it was postponing the launch of its 3G services until the autumn, and in October 2007 the company postponed the launch yet again, to mid 2008.

But then, only one week after the May announcement, local newspapers announced that RCS&RDS would provide 3G services under the Digi Mobil brand. The service was to be offered free but on a limited basis: in Oradea and only to the company's existing voice, CaTv and Internet customers. This was the second limited mobility service launched in Oradea, first having been provided by Atlas Telecom since 2003, based on DECT technology.

So finally, in November 2007, Digi Mobil went live in eight major cities (Bucharest, Oradea, Timisoara, and others), but service was limited to RCS&RDS's existing fixed network customers. Only in December 2007 was the service launched commercially. By the time RCS&RDS finally launched its commercial service more than one year had passed from the contest.

So, as a result of the delays the winners of last two 3G licenses have been... Vodafone Romania and Orange Romania, a problem to think about for the authorities!

3G network costs

To have any chance of competing with Vodafone and Orange, which both cover about 97% of the population, RCS&RDS will need to offer over 90% coverage. Orange and Vodafone have each invested up to one billion Euros in their 2G networks. To compete effectively, a new entrant will need to invest a similar amount, with much of this taking place in the first two to three years. To date RCS&RDS has announced that its 3G network will cover only 55% of Romania's population, by mid 2008. RCS&RDS is in danger as a result of under investment of repeating the CosmoRom experience.

A chance for Telemobil - switching to European technology?

Telemobil launched Zapp Mobile in December 2001 and has about half million customers - about 3% in a 22 million market. This is the third launch for Telemobile, after the first in 1993 and a re-launch in 1998 as SunTel, using LEMS (Low Emissions) technology which is now incorporated into CDMA. Continuing with CDMA technology means remaining a niche player, with attendant problems of profitability. So switching to WCDMA - the main European 3G technology - offers Telemobile a great new market opportunity.

New market entrants' opportunities - the theory

New entrant theory, which encouraged the astonishing 3G auctions in UK and Germany in early 2000's, has not been validated by market experience. Today there are few new entrants. 3, backed by Hutchison Whampoa in the UK and Italy is one, and P4, 70% owned by the Icelandic private investment fund Novator and Netia, got a 3G license in Poland in May 2005 and launched 3G services in March 2007, after postponements.

That 3 has remained in business is taken by some analysts as a success. But 3 continues to experience problems in UK and has not achieved a respectable market share.

RCS&RDS and to a lesser extent Telemobil are newcomers in a 22 million SIM, approaching 100% penetration market. The key difference between 3 in the UK and Italy and P4 in Poland is that they both have national roaming permission. RCS&RDS and Telemobil do not!

So what chance do RCS&RDS and Telemobil have, coming into a market approaching saturation? Without national roaming or a 2G license, in a market dominated by GSM900 operators, the answer has to be poor. Without a strategic partner, an international approach and proper financing the answer must be very poor. A strategic partner with international exposure, such as Deutsche Telekom or Telefonica, could considerably increase the new entrant's chances by bringing industry expertise, access to international finances and the synergies of a global group.

Telemobil waits for financing from shareholders

In July 2007, Telemobil launched a US$125 million bond issue on the USA market which failed due to ‘market conditions'. To market conditions one should add the business plan. Put bluntly, it is not easy to convince investors to put money into a business based on CDMA technology in a country which is member of the EU. The amount targeted - US$125 million - meant sticking with CDMA. Even with trials designed to develop CDMA technology in Europe, in Portugal and the Czech Republic, CDMA remains a technological island in the EU - around 1 million users in a 630 million user market. The EU is the home of GSM and UMTS. It is not hard to see that potential investors would see this as a high risk business.

At the end of September 2007, Oger Telecom, owned by Rafiq Hariri the former prime minister of Lebanon, announced its interest in the Romanian telephony market. At the end of October Romanian newspapers announced that Saudi Oger would take a 45% stake. It was also announced that Telemobil will launch 3G services in second quarter 2008, initially covering 19, later expanding to 110 cities by the end of 2008. In 2008, Telemobil will invest US$60 million to launch its 3G services and to expand its CDMA network, according to Piermario diPietro, CEO of Telemobil. The question is, will Oger Telecom permit Telemobil to stay on its CDMA technological island or are negotiations in progress to switch to UMTS?

RCS&RDS valuation increased three times in 70 days!

During the summer of 2007, RCS&RDS announced its intention to float on the London Stock Exchange (LSE) and to increase its share capital by 15% via a GDR (Global Depositary Receipt) issue. The IPO was planned for late 2007.

While preparing for the IPO, RCS&RDS promoted its services aggressively to grab as many new customers as possible. Deals on offer included zero connection fees for new users and free fixed telephony. The results have not been bad: 1.1 million CaTV users, one million fixed telephony users, 500.000 Internet users and 510,000 DTH users. To these one should also add presence in other Central European countries such as Hungary and the Czech Republic.

So what is RCS&RDS worth? In July 2007 it was valued by the press at €750 million. By August this had increased to between US$1.5 to US$2 billion. By October newspapers were putting the price as high as US$2,575 billion (€1,816 billion). It is difficult to place an accurate value on RCS&RDS, while the only financial information is provided in IPO prospectus. The states that by December 31st 2006, company registered US$297 million revenues and US$109 million EBITDA.

RCS&RDS postpones again - 3G services and IPO

The mystery of this spectacular increase in company's valuation, was underlined by the announcement on October 9 that RCS&RDS was postponing the launch of its mobile services until mid-2008. Four weeks later RCS&RDS postponed its IPO due to ‘market conditions' but then on November 13 a company official once again announced that the IPO was on track and that it will be floated in the first half of 2008.

Telemobil failed to raise US$125 million due to ‘market conditions'. RCS&RDS is seeking four times more that this! Standard & Poor's has lowered Romania's rating from stable to negative! Let us remember that the highest loan for a Romanian mobile operator was US$300 million for MobiFon/Vodafone in 2002, when the market was far from the saturation point it has now achieved. One has to ask if these loans are obtained now, what will the cost be?

A 3G license for Cosmote!

The last two 3G licenses have not yet been used properly, making us think again about duopoly in Romanian mobile communications. Before Cosmote launched in December 2005, Romania had a duopoly with Vodafone and Orange sharing about 90% of the market. The owners of last two 3G licenses clearly have experienced problems with financing, network roll-out and commercial launch of services. Meanwhile, the Romanian authorities have not taken any public stance on the use of scarce national resources and the poor level of competition in 3G. By its inaction, ANRCTI, the Romanian regulatory body for telecommunications, quietly assists in the game playing with the last two 3G licenses, while waiting for the first check point built into the license clauses, due mid 2008. This would be its first opportunity to decide to cancel a license.

What can be done now to avoid further delay and game playing? As long as the last two 3G license owners delay and while Cosmote Romania has financing and proper conditions to build up a 3G business and to compete with Vodafone and Orange, ANRCTI should award Cosmote Romania a 3G license. A 3G license to Cosmote Romania will trigger more action, will stimulate the owners of last two 3G licenses to make faster decisions and will increase competition and investments in mobile networks. That is in Romania's interest!

PS: Cosmote Romania could wait for the EU recommendation permitting to use 3G technology in lower bands 900MHz or 1800 MHz, promised for next year, but it is a pity to loose time playing games with 3G.