Too long with too little investment in communications infrastructure left the former Soviet satellite states with dilapidated telecomms networks, very low penetration and very slow expansion rates. However, since the countries of Central and Eastern Europe regained their sovereignty, shaking off the influence of the former Union of Soviet Socialist Republic (USSR), things have started to look up. Western investors have been invited to put their money into fresh build; new licences have been awarded. It took a while before the effects were felt, but at the start of last year, growth of mobile telephony had finally started to accelerate following the arrival of numerous new digital cellular networks and increased competition. That trend continued throughout 1997 with many markets witnessing over 100 per cent growth in subscriber bases, predicting at least the same again during 1998.
Growth of mobile telephony in central and eastern Europe
One of the most exciting markets is now Russia itself, which, despite political fragmentation and a lack of technical and financial infrastructure, is home to over 90 cellular networks, most backed with some degree of foreign capital. Russia may not have the highest cellular penetration in the region, nor the largest number of subscribers, but the demand for services and the level of investment have served to create a vibrant industry. Due to the fact that the country's fixed line alternative is so overstretched, operators in Moscow and St Petersburg have been reporting that they are unable to meet the demand for mobile telephony. Indeed, the penetration rate in Moscow doubled to an estimated 2.2 per cent (over 200,000 subscribers) in the year 1997. It is estimated that the total Russian cellular market exceeded 400,000 subscribers by the end of 1997.
This growth has not come without difficulties. There have been complaints from Russian operators that their progress is hampered by lack of frequency, traditionally owned by the military, and by unwritten rules concerning licensing procedures which tend to favour companies with links to the Russian administration. Another of the main problems with the Russian communications market has been the lack of a nationwide network - most systems have been city-based, or at best regional. There has been a real need to interconnect these in order to make something approaching nationwide roaming a reality. The Association of Russian GSM Operators has been formed to work towards this goal, as has Association 800, a consortium of Rostelecom, Moscow Cellular Communications and Delta Telecom, to deploy a nationwide network to interlink the cellular networks.
Analogue/digital split, end 1997
Making the most of Moscow
While they may delay, these obstacles do not deter. There are over 150 million people living in Russia; fewer than one in five have access to a land line, and entrepreneurs are keen to exploit the demand for telephony. The most successful inventor so far has been Vimpelcom, which is licensed to provide cellular services in Moscow and the surrounding region. Vimpelcom is Russia's largest mobile operator, with both D-AMPS 800 and GSM 1800 systems. Its licences and frequency give it access to a potential market of 1.2 million subscribers in Moscow alone. Vimpelcom also has AMPS licences for the regions of Karelia, Kaluga, Novgorod, Ryazin, Samara, Tver, Ulyanovsk, Vladimir and Volodga, and so has access to a population of over 28 million.
By the end of 1997 Vimpelcom had attracted around 115,000 subscribers (105,000 D-AMPS and 10,000 GSM-1800), a growth of over 95 per cent since the end of 1996. Vimpelcom claimed a 56 per cent share of the Moscow cellular market at the end of 1996 (with 56,600 subscribers), claiming that rival NMT systems took 26 per cent market share and GSM-900 systems, 18 per cent.
Having been floated on the New York Stock Exchange, Vimpelcom has a market capitalisation of over US$900 million, and is also profitable, despite the fact that it is still rapidly rolling out new network. For the six months ended June 1997, Vimpelcom recorded a net income of $32.6 million on a turnover of $138 million.
Outside of Russia, another interesting market from the point of view of future potential is the Ukraine, again woefully underdeveloped, but now home to four cellular network operators. The number of subscribers in the country increased dramatically in the latter half of 1997. Competition is now the name of the game in the country.
The largest markets in Central and Eastern Europe are Poland (852,000 subscribers), Hungary (702,000) and the Czech Republic (518,000). Between January and December 1997, Poland surged from third to first place in the subscriber rankings with all three cellular networks, including, unusually, the analogue NMT system operated by Centertel, recording large increases in customers.
Many more markets can expect equally rapid expansion during 1998, as the region witnessed several new networks during 1997. In Slovakia, the GSM networks operated by Globtel (formerly Slovtel) and Eurotel Bratislava had been the only player in the country. In Estonia, Ritabell, backed by Levicom and MIC, invested EsK200 million in its network, in order to launch its Q-GSM service in April, and claimed to have garnered 1,400 subscribers within ten days of launch in the cities of Narva, Parnu, Tallin and Tartu. In Latvia, Baltkom GSM started offering commercial services in March 1997, one year after gaining its licence. It became the second operator in competition with the Latvian Mobile Telephone Company, initially offering services in the suburbs of the capital city Riga, with plans to extend its network along the main highways.
Romania gained two new networks during 1997. Mobifon, majority owned by Telesystem International Wireless and AirTouch, opened its Connex GSM network for business in April 1997. The group, which plans to plough $370 million into its infrastructure by the year 2000, then secured a $190 million loan from the European Bank of Reconstruction and Development (EBRD), the Export Corporation of Canada and the Nordic Investment Bank, to help it to achieve its goal. Mobifon, which expected 50,000 subscribers by the end of 1997, actually managed to attract over double that (110,000). When its service initially went live in Bucharest and eight other Romanian cities, the group had already spent $150 million on its networks. Mobilrom, Mobifon's French telecomm backed digital rival, launched services two months later, attracting just over 32,000 subscribers by the end of the year.
Still more new networks are expected to be launched during 1998. Indeed, already by the end of February Centertel had launched its new DCS-1800 network covering ten Polish cities. It reported that it had gained 1,000 subscribers in the first ten days. Meanwhile, Beltelecom the national PTO of Belarus, is set to build and operate a new GSM system in the country in a 51/49 partnership with a strategic partner, and the Bulgarian Post and Communications Committee is planning to award a new GSM licence - Bulgaria's second. The winner of the tender will compete with Mobilkom, which already operates an analogue network, and Mobiltel, which runs an 18,000 subscriber GSM network. It is understood that the Bulgarian Telecommunications Company (BTC), which has a 39 per cent equity holding in Mobikom, will automatically have a stake in the new licensee.
To the west, and despite the fact that Mobtel (a 51/49 joint venture between BK Trade and the Serbian PTT) was granted an exclusive 20 year licence to operate mobile networks in 1994, when 49 per cent of the Serbian PTT was recently sold to OTE and STET. The new investors were granted permission to build and operate networks in competition with BK Trade. A new GSM network, to compete with Mobetel's existing NMT-900 and GSM systems, is expected to be rolled out before the end of 1998, with initial coverage of the capital city Belgrade and Serbia's main north-south highway. In the meantime, BK Trade continues to enjoy a three year tax holiday, adding new network capacity. Mobtel expects to be able to hike its subscriber base to around 200,000 by the end of the year.
Long and winding road
Despite all the network development and growth in subscriber bases, there is still a long way to go before cellular networks come close to matching the quality, coverage and penetration achieved in Western Europe. So far only one country, the tiny state of Estonia, can boast a mobile phone penetration of over ten per cent. Only two more have achieved five per cent penetration (the Czech Republic and Hungary), while six cannot even claim a penetration rate of one per cent.
Even now it is clear that Eastern European governments always have telcos' best interests at heart. For example, the Ukraine should stand to benefit from last year's launch of four new mobile telephone networks (Ukrainian Mobile Communications, Golden Telecom, Kiev Star and JV UCCU all started offering commercial digital services in 1997). If the pattern set by other markets were to apply, such competition should raise awareness of mobile telephony in general, and encourage lower prices and increasingly innovative and well-targeted tariffs, designed to reel in the customers. But even with this potential growth so tantalisingly close, the Ukrainian Government has given its approval to draft legislation which would impose a $0.19 per minute tax on cellular calls, effectively raising the cost by 50 per cent. Ukrainian Mobile Communications has gone on record as saying that this would cause it to lose as much as 40 per cent of its subscriber base.
Of course, one option would be for the cellular network operators to attempt to shoulder all, or at least part of the financial burden themselves - a tactic by employed by Deutsche Telekom in similar circumstances in the run-up to the deregulation of the German telecomms market. But this seems unlikely, even unfeasible, in many markets where the investors are still embroiled in the costly task of building out their infrastructure. It all goes to show that despite their hunger for communication services, governments' fiscal policies are still quite capable of throwing a large spanner in the works.