Fixed-line Challenge

Economic News

22 Jul 2010
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The annual results published by the Ukrainian fixed-line operator this week have confirmed the widely anticipated view that the company is losing its traditional market share in the face of unstoppable mobile operators. Yet an overall increase in the state-owned Ukrtelecom’s revenues reveals that the national operator has made a successful foray into new business lines such as data services.

The prospects of this most talked about company, which is slated for privatisation, are therefore not necessarily gloomy. Analysts still believe that if Ukrtelecom continues to invest in the modernisation of its largely obsolete infrastructure and manages to launch its widely anticipated 3G mobile services, it may well give mobile operators a run for their money.

According the official Ukrtelecom media statement released on March 7, total annual revenues in 2005 increased by 7.6%, reaching UAH7.7bn ($1.5bn). The official report cites investment into digital dial exchanges, network expansion and new internet services as the main revenue growth drivers.

New services seem to the beacon of hope for a beleaguered fixed-line operator that is trying to fend off competition. Revenues from newly launched services rose by 25.4% - representing a modest 2.8% share of total revenues.

Meanwhile, the state-owned incumbent - which has 9.8m subscribers and an estimated 72% of the fixed-line market - is coming increasingly under attack from aggressive mobile operators that doubled their subscriber base last year – taking a tangible slice of the cake from the fixed-line operator.

As evidence, despite moderate top-line growth, Ukrtelecom’s bottom-line figures seem to be under pressure from increased competition, with overall profits slumping by 31.6% - from $151m in 2004 to $104m in 2005.

Analysts point out that the incumbent is losing the battle for long-distance phone calls. This field of operations is being increasingly claimed by mobile phone operators, which have recently acquired licences to provide this service.

As a monopoly, Ukrtelecom has been slow to respond to this challenge, mainly because it lacks flexibility in rebalancing its tariffs and needs the approval from the National Communications Regulation Commission (NCRC) to set more competitive rates.

Although the NCRC approved lower rates for long-distance calls last year, the implementation of its decision has apparently been delayed by other agencies.

As well as losing out to less regulated and flexible mobile operators, fixed-line is taking another revenue hit from lower volumes of international and wholesale traffic, as these are leased to mobile operators. The two leading mobile operators, UMC and Kyivstar, have recently invested into their own fibre-optic backbones and no longer require Ukrtelecom’s services.

Faced with these challenges, the management of Ukrtelecom and the state authorities that oversee the company seem to believe that the company’s future lies in bundling its services -- offering both data and, more crucially, mobile services.

In December last year, the NCRC made a controversial decision to award Ukrtelecom a 3G licence without a tender – and has since invited manufacturers for UMTS equipment to launch a trial network.

The idea, analysts say, is to make the company more attractive before it is offered for sale through privatisation, with 3G offering Ukrtelecom the edge it currently lacks. If the company manages to extend 3G services to its 9.8m subscribers, the mobile services market would become fiercely competitive.

Unfortunately, 3G is a technology that has yet to be proven even in the West and is more expensive to implement than second-generation technology. Moreover, the dominant GSM operators are challenging the NCRC’s decision to award the licence without a tender and have warned they may not sign an interconnection agreement with Ukrtelecom’s new company.

As Kyivstar’s president, Ihor Lytovchenko, told local media this week "What is the use of developing your competitor on your own network?" According to Lytovchenko, Kyivstar cannot be forced to grant access to its network, because “it would be regarded as rude interference”.

While the battle hots up over the controversial 3G launch plan, the biggest question for Ukrtelecom is when it is going to be privatised.

Deputy chairman of the State Property Fund (SPF), Oleksandr Bondar. told the local Ukrainian News Agency this week that the company would be privatised before the end of 2006 and that he expected it to fetch between $2bn and $3bn.

Bondar repeated the earlier claim made by President Viktor Yushchenko that the value of Ukrtelecom is declining with each day that passes, and that it is necessary to sell sooner rather than later.

“Ukrtelecom's indicators are getting worse year-by-year," Bondar told the Ukrainian News Agency. "In 2001, when the law of peculiarities of Ukrtelecom privatisation was adopted, its price was 2-3 times higher than now."

Yet to proceed with the privatisation process, parliament has to cancel the law blocking the privatisation until after the election or adopt a new privatisation programme. Moreover, the cabinet needs to decide whether it wants to sell the total of 93% it holds in Ukrtelecom, or just a controlling stake.

None of these strategic decisions, analysts say, are likely to be reached until after the March 26 parliamentary elections and the formation of a new government. The ultimate fate of the fixed-line operator is therefore in the hands of politicians. Like so many time before, the future of Ukrtelecom is left to dangle in the air, as it desperately tries to keep pace with unstoppable mobile operators.

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