Market Report 2011

December 2011

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TELECOMBusiness Review

Business Review Events in 2012

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• Swiss Investors• Greek Investors• British Investors• German Investors• American Investors• Dutch Investors• Moldavian Investors• Austrian Investors• French Investors• Chinese Investors

• Financing Romanian Economy• Banks & Social Media• Digital Marketing• Employment

• Tax, Law&Lobby• Focus on Agriculture• Focus on Tourism & Hospitality• Focus on Renewable Energy• Focus on Power• Focus on Banking• Focus on Real Estate• Focus on Telecom

• Annual Investment Awards• Foreign Investors Forum• Healthiest Companies

Gala EvEnts

• Civil Code Amendments• Litigation• Competition Law• Access to finance: PPP, EU Funds, State Aid Scheme• Restructuring and Insolvency• Intellectual Property• Transfer Pricing• Tax Audits• Credit Risk Management

Business Review Events in 2012

business-review.ro/events

• Swiss Investors• Greek Investors• British Investors• German Investors• American Investors• Dutch Investors• Moldavian Investors• Austrian Investors• French Investors• Chinese Investors

• Financing Romanian Economy• Banks & Social Media• Digital Marketing• Employment

• Tax, Law&Lobby• Focus on Agriculture• Focus on Tourism & Hospitality• Focus on Renewable Energy• Focus on Power• Focus on Banking• Focus on Real Estate• Focus on Telecom

• Annual Investment Awards• Foreign Investors Forum• Healthiest Companies

Gala EvEnts

• Civil Code Amendments• Litigation• Competition Law• Access to finance: PPP, EU Funds, State Aid Scheme• Restructuring and Insolvency• Intellectual Property• Transfer Pricing• Tax Audits• Credit Risk Management

Contents 2 Mobile telephony developments: residential

2 1. Market share

8 2. Trending 2011. Strategies and outcomes

10 3. Development paths for technologies. New services and their impact

11 Fixed telecom services

11 4. Cable TV, DTH, IPTV

13 5. Competitive models

14 Business-to-business landscape

14 6. New types of business in demand: cloud computing and managed services

14 7. Future of VoIP telephony services

15 8. Sales channels and marketing support in the industry

15 9. Major regulatory challenges

Editor: Nicu Pana • nicu.pana@telsign.ro Sales: Oana Molodoi • sales@business-review.ro Design: Alexandru Oriean • alexandru.oriean@bps.com.ro

In partnership with:GUIDES

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1. Market share

Since 2008, at the climax of the happy-go-lucky credit-fed bonanza, the whole market reached EUR 5 billion only to drop back to a lowly EUR 3.9 billion in 2010. The most favorable outlook for year-end 2011 gives the market low single-digit growth, maybe around the 1 percent volatile threshold, sending all guesses into the realm of statistical margin of error.

However, the Romanian telecom market has recorded five consecutive quarters of negative growth, with total subscriber losses of more than 1.75 million since the end of March 2010. The industry could consider a move towards postpaid subscriptions, VAS and mobile broadband that should bring long-term benefits to operators seeking to improve their ARPUs. Lower consumption, increases in taxation and regulatory intervention did their fair share of damage across the board; how-ever it was the somewhat unexpected breakout of market share pre-paid wars between the mobile operators that eventually sent the market into a tailspin. Cheaper pre-paid mobility and

Mobile telephony developments residential

heavily discounted fixed broadband took air out of the two most important engines of growth.

Instead of trying to migrate pre-pay to steadier two-year plans, operators chose to go for the other price-sensitive segment in an attempt to disrupt the market pattern.

A similar move saw Romtelecom, UPC and RCS&RDS fighting to gain market share at each other’s expense at almost any price. A more accurate picture here would be that of Romtele-com and RCS&RDS massively attacking the still high ARPU clients of UPC with a vengeance. With the benefit of hind-sight, one could have easily mapped out a different course of how to tackle the downturn: first review the bloated cost structure in 2009 and only then get back to a lean and mean principle before slashing and burning prices. Sometime in Q3 2010 the industry came to a common understanding that the era of fat margins that could sustain a short-time price war were well past us all, and returned to a thrifty strategy of stabilizing the client base and preserv-ing revenues. As a result, double-digit dives became single-digit dips.

The Romanian telecom industry is set to become one of the driving forces of economic bounce-back if it survives the compound pressures of price wars, the EU regulatory climate and associated conservative attitude towards investment.

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Mobile telephony developments residentialThe Romanian mobile market grew

by 0.12 percent during 2010, yielding a year-end user base of nearly 29.8 million and a penetration rate of 139 percent. Insiders now believe that the market will record negative growth over the course of 2011, contracting by 1.8 percent to reach 29.2 million subscriptions. This is based on the assumption of a return to growth from the 5.2 percent contraction in H1 2011. Pundits forecast the Romanian mobile market subscriber base to reach 29.6 million in 2015, resulting in a penetra-tion rate of 139 percent.

Mobile subscriber growth has been supported well above 100 percent pen-etration because the Romanian market has a significant proportion of inactive SIMs, although this group has reduced in size as a result of operator actions in Q4 2010 and Q1 2011. Previously, at the end of 2008, Romania’s telecoms regulator estimated that as many as 24 percent of Romanian prepaid SIMs were inactive. In addition to a high inci-dence of subscriber inactivity, many Romanians own multiple SIM cards as they look to exploit different tariffs and promotions from the mobile operators. This phenomenon artificially skews the data to show much greater owner-ship than is in fact the case and hints at possible further subscriber discount-ing in the future. France Telecom has begun discounting inactive lines across

its operations in recent quarters, and this likely explains the considerable contraction in Orange’s customer num-bers. Commentators expect Romania’s mobile operators to focus on attract-ing higher-value customers instead of signing up new prepaid users; this will significantly influence the size of net additions in the future.

Although the market has undergone a period of subscriber losses, for the most part market shares have remained stable as a consequence of all the operators reporting subscriber losses. The only notable exception is the performance of DigiMobil, which has seen its market share rise on the back of the growing popularity of multi-play services. As of the end of June 2011, Orange and Vodafone remain the largest operators in Romania, holding 35.8 percent and 31.6 percent of the market respectively. Orange’s lead over Vodafone had been slipping, with a particularly weak performance in net additions in the first nine months of 2010. However, with the large discount-ing of inactive prepaid SIMs in Q1 2011 by Vodafone, and smaller losses in Q2 2011, Orange has increased its market share from 35.2 to 35.8 percent from Q4 2010 to Q2 2011. This figure neverthe-less remains below the 36.1 percent market share it held in Q1 2010.

The third largest operator, Cos-mote, has boosted its market share

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significantly over the past two years, reaching 23.4 percent in Q2 2011, just a shade below the peak of 23.8 percent in Q2 2010. Earlier gains occurred in large part as a result of Cosmote’s success in the prepaid segment. However, in recent quarters it has reported large losses in the prepaid segment, while postpaid subscriptions have remained relatively stable. Looking ahead, the ability to cross-sell mobile and fixed services in multi-play packages will prove an advantage for Cosmote, and industry players expect this to help it increase its market share. For instance, in August 2011, Cosmote Romania and Romtelecom launched a new joint discount offer aimed at their common customers, giving them a EUR 1.24 monthly discount on each contract for the first 10 months of a 24-month deal. Further such offers should fuel Cos-mote’s subscriber acquisitions.

DigiMobil remains the smallest operator in the market by some way, but is not an insignificant player, reaching a 9.2 percent market share in Q2 2011, up from 8.2 percent in Q2 2010. DigiMobil does not provide regular subscriber fig-ures, but its low starting point suggests the operator is still in a period of con-tinued growth. Commentators believe that the operator’s subscriber uptake is, in part, fuelled by RCS&RDS’s multi-play offerings, many of which include mobile services. That said, net additions are likely to slow down as the overall growth rate declines. DigiMobil’s main challenge will be to offer services to subscribers outside the firm’s existing subscriber base, thereby allowing it to become a greater challenger to the larger operators in the market.

With competition reduced follow-ing the acquisition of Telemobil by Cosmote, expansion of DigiMobil as a competitor would be welcome for the Romanian market’s continued development.

In the 12 months to the end of June 2011, all four major operators reported losses, with only Orange and Vodafone achieving net subscriber additions in Q4 2010 and Q3 2010 respectively. Over the four quarters to Q2 2011, Vodafone lost the most subscribers, with net losses of 889,000. Its losses were hiked by the large disposal of inactive sub-scribers in Q1 2011. However, Cosmote and Orange have also experienced sig-nificant losses of 492,000 and 359,000 respectively.

Prepaid vs postpaidOut of Vodafone’s 607,000 subscriber losses in Q1 2011, 285,000 were prepaid subscribers, and the other 322,000 post-paid. Orange reported a loss of 190,000 subscriptions, but, as the operator does not provide a breakdown of prepaid and postpaid subscriptions, it is not possible to determine which type of subscrip-tion reduced to what extent. Cosmote lost 208,000 subscribers, the second largest total, but the impact of this loss is mitigated somewhat by the fact that only 15,000 postpaid subscribers were lost. The improvement in postpaid as a percentage of total subscriptions should have a positive impact on Cos-mote’s blended monthly ARPU. Finally, RCS&RDS lost an estimated 127,000 sub-scriptions in Q1 2011, derived from the performance of the market as a whole.

Market leader Orange does not provide a breakdown of subscribers, so

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this section is based on data provided by Vodafone and Cosmote, although Romania’s regulator gives a breakdown of the market’s total subscriber mix. Vodafone’s postpaid subscriber mix improved from 37.6 percent of total subscriptions in Q2 2010 to 38 percent in Q2 2011 as a result of the discount-ing of prepaid subscribers. Cosmote’s subscriber mix also improved in the 12 months ended June 2011 as a result of the discounting of prepaid SIMs. Both operators had been reporting steady improvements in their subscriber mixes but at fairly muted rates up until 2010, and with some quarter-to-quarter vari-ation. At the end of 2009, 38.1 percent of Vodafone’s subscriber base was postpaid, up from 37.9 percent at the end of 2008. This was almost double the proportion of postpaid subscribers in Cosmote’s customer base at the end of 2009, which stood at 19 percent; this was unchanged from the end of 2008.

However, by the end of Q4 2010, Vodafone’s postpaid subscriber based edged lower to 37.9 percent, down from around 38 percent at the beginning of the year, but slightly improving on the 37.6 percent of Q310, possibly linked to the loss of 35,000 prepaid subscribers during the fourth quarter of 2010. The surge in Vodafone’s prepaid subscriber base is indicative of a marketing drive aimed at securing new subscribers to boost its market share.

It is also thought that there is a considerable number of inactive prepaid SIMs on Vodafone’s network. For its part, Cosmote reported a postpaid sub-scriber base of 20.1 percent at the end of Q3 2010 (the latest data available). This was an improvement on the 19 percent

reported at the beginning of the year. In addition to attracting higher-value customers with its 3G offerings, the improvement to Cosmote’s subscriber mix is probably, in part, due to the disposal of inactive SIMs on its network, most of them prepaid subscribers.

Orange does not make public a breakdown of its subscriber mix, but based on its ARPU rates, it is likely to have a higher proportion of postpaid customers than Vodafone. Orange’s ARPU has largely remained higher than Vodafone’s and Cosmote’s ARPUs. RCS&RDS’s mobile services straddle the line between prepaid and postpaid. The service is offered in conjunction with a fixed-line subscription, but is free and comes with a free handset and free minutes.

ARPU trendsComparing ARPU data for the coun-try’s operators reveals a long-term

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downward trend for players in the market; however, inactive prepaid SIM discounting had a positive effect for Vodafone in Q2 2011. Orange continues to report the highest blended ARPU at EUR 6.83 in Q2 2011, only fraction-ally ahead of Vodafone after declining from EUR 6.9 in Q1 2011. Meanwhile, Vodafone’s ARPU increased by 11.5 percent quarter-on-quarter as a result of subscriber discounting, rising to EUR 6.8 in Q2 2011. However, in the 12 months to the end of June 2011, Voda-fone’s ARPU decreased by 1.5 percent. Cosmote reported ARPUs of EUR 5.0.

Operator ARPUs are likely to con-tinue declining over the longer term as price competition, changing usage patterns and mobile termination rates (MTRs) outstrip the positive impact of data usage on blended ARPU rates. The recent rate cut and a reduction in EU roaming charges will negatively impact ARPU for all of the country’s mobile operators. Continued competition for prepaid, postpaid and data subscribers is also set to exert more pressure on prices, which will further erode ARPU. Two factors that will help mitigate falling ARPU rates are increased data usage from customers and migration of low-value prepaid customers to higher-value postpaid contracts.

Non-voice SMS/MMS/video trafficAlthough SMS is the main driver of non-voice revenue in Romania, voice services continue to account for a rela-tively large proportion of local service revenues for Orange. This suggests that there is considerable scope for growth in non-voice service revenues from greater SMS usage, a service that is well

established throughout Europe. How-ever, with SMS seemingly less popular in Romania than other countries in the region, Orange and the other operators may be forced to more heavily promote alternative VAS to drive data usage.In the first half of 2010, ANCOM reported 4.007 billion SMS sent in Romania, up from 3.514 billion in H1 2009 and 1.789 billion in H1 2008. Despite the growth in SMS use, opera-tors are not seeing a corresponding effect with their non-voice ARPUs. This is most likely owing to bundled free SMS and price cuts. MMS, meanwhile, have failed to take off in Romania, with just 5.7 million sent in H1 2010, down from 6.0 million in H1 2009 and 6.9 million in H1 2008. 3G video traffic also appears to be falling, having dropped to 400,000 minutes in H110 (compared with 600,000 minutes in H109 and 1.1 million minutes in H108).

Broadband internetIn 2011 so far the industry has wit-nessed avid competition for the only engine of growth: broadband internet in its two flavors: mobile and fixed. Fixed telecommunications providers, still owning the best service crowning for the segment, focused on luring in clients with attractive bundled offers alongside digital/analog TV and fixed telephony. Meanwhile mobile operators focused on gaining rapid market pen-etration for the service such as Voda-fone’s Internet for Everyone initiative and Cosmote’s aggressive price promo-tion for mobile internet traffic. How-ever, mobile operators have also tried to bridge the gap between their current 7.2 Mbs standard and the whopping

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100 Mbps (120 Mps in UPCs latest elite products) speeds on fixed telecom networks. Orange leads the way with HSDPA speeds of up to 21.6 Mbps and even 43.2Mbps in Bucharest.

Speed is still the main consumption driver of the internet in Romania. The pressure percolates up in the entire industry from the nimble privately-held RCS&RDS which has earned a reputation for quickly building up critical mass from scratch with a focus on fast-forward operations and almost overnight deployment of networks and services. Even though RCS&RDS cannot compete with Orange, Vodafone and Cosmote on mobile voice due to its inferior coverage, limited advertis-ing and seemingly underwhelming customer care, it has somehow found a way to become a challenger on the broadband internet front.

Bundling mobile internet into five-play service for less than EUR 20 while getting free access to a growing nation-wide network of Wi-Fi hotspots will definitely send the mobile upstart into the cross-hairs of the well-established players.

Mobile, fixed voice & internet market shareMobile voice and fixed voice services have been contracting tough for rather different reasons. Mobile voice is going through a long overdue cleanup of its often over-reported client base at all three operators for which there is data. Inactive clients are being con-tracted, which in turn brings number of absolute subs down. However, market penetration levels remain well above saturation at roughly 135 percent.

Various voice/minute/internet traf-fic bundles are shredding some of the market value while failing to offset the shift in higher volumes.

At the other end, the landline mar-ket has been on an inexorable down-ward trend due to the all-pervasive social-economic trend of fixed-for-mobile substitution.

By 2015 the number of active traditional landlines will likely fall by another 25 percent from today.

The often-made argument that PSTN is obsolete does not hold water. The technology is mature, provides top quality service and business-wise is pure profit given the historic amor-tization of cost. It would actually be a dream for any businessperson unless consumers chose to adopt mobility instead. Fixed telecom services still count households, around 7.5 million, as their potential market, whereas mobile operators have around 21 mil-lion potential customers with even some duplication allowed.

The only reason why fixed broad-band internet is still outgrowing mobile internet adoption is its vast superior-ity in terms of speed and consistency. Should mobile internet meet and exceed FTTx-grade internet technolo-gies, the same logic may come into play.

2. Trending 2011. Strategies and outcomes

The telecom residential market has been geared towards securing the bot-tom line. Companies have seen aggres-sive cost-cutting, lay-offs and optimiza-tion programs.

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Romtelecom continues its feeble attempt to reduce the head count of a company that still gives a lot of weight to trade unions. Mobile phone operators cluster together collocating their equip-ment to save resources, which invites the tantalizing still yet far-fetched idea of single network operator that rents infrastructure to MVNOs.

But then again, this was supposed to have happened with the incumbent’s national network after market liberali-zation. We now see multiplying signs it is possible to have parallel infra-structure. RDS, UPC and Romtelecom between them have made redundancies across large chunks of the country.

The number of independent cable TV and internet providers has fallen sharply, swept away by regular waves of market consolidation. RCS&RDS and Romtele-com embarked on a quest to gobble up these local and regional players which eventually led to fewer direct costs.

Broadband offensiveThe most dramatic trend of 2011 has been the mobile broadband offensive, the only segment of the market prom-ising growth in volumes. Vodafone included mobile internet access for all subscriptions and from that point of view penetration of mobile internet access has soared; however, if we only count USB dongles and data SIMs for tablets, penetration has grown at a steady pace, kept in check by the adop-tion rate of the new emerging tablet computer market and the dissemina-tion of laptops, a fraction of all comput-ers available.

The available information combines fixed- and mobile-broadband sub-scriber data from the regulator, which offers the most comprehensive sum-mary of market trends. Mobile broad-band only includes those subscriptions for dedicated mobile broadband ser-vices such as USB dongles, and does not include smartphone subscriptions.

The data show that there had been 2.82 million fixed and 480,000 active mobile broadband subscribers in Roma-nia at the end of 2009, yielding a total of 3.3 million. This represents a sharp upturn from 2.82 million subscribers (2.53 million fixed, 290,000 mobile) in 2008, with mobile broadband proving to have been the real driver of growth.

By year-end 2010, there were 3 mil-lion fixed-line broadband and 930,000 dedicated mobile broadband sub-scriptions. This means that dedicated mobile broadband subscriptions have increased 94 percent year on year, far outpacing growth of fixed-broadband subscriptions and continuing to drive the sector.

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By the end of 2015, it is likely there will be around 12.7 million internet users in the country, equivalent to an internet user penetration rate of more than 60 percent. Growth should remain strong in the broadband market, although the rate of increase will slow over time as mobile broadband services become entrenched and operators find progress in addressing the rural areas of the country slow. By the end of 2015, a broadband subscriber base of around 6.67 million is envisaged; this would be equivalent to a penetration rate of 31.4 percent.

3G data servicesFollowing the poor macroeconomic conditions that stymied growth in data services in 2010, services have recov-ered somewhat in 2011. Mobile data ser-vices are now playing an increasingly important role in operators’ strategies in Romania and in the wider region.

Although growth in 3G services has slowed, and even had quarters of negative growth in 2010 and Q2 2011, the general trend remains positive. Although limited data on the number and type of mobile data users is pro-vided by operators and the country’s telecoms regulator, this segment seems to be exhibiting strong growth driven by operators offering low-cost services and attractive packages.

Enticing subscribers to spend more on their networks will remain an uphill battle, but net additions of 3G subscrip-tions will be driving growth across the market for some time. Many will be upgrades from existing 2G platforms, but there will be some new subscribers in the form of mobile broadband USB

modems, offering a brand new connec-tion type.

Orange is the only operator to give any clear indication of its 3G subscriber breakdown, although DigiMobil’s sub-scriber base is fully 3G. Nonetheless, not all of DigiMobil’s subscribers are necessarily using 3G services, or may not be regular users.

Orange reported strong growth in its 3G customers throughout 2009, peaking at 2.7 million at the end of the year.

However, the first half of 2010 saw subscription numbers falling; drop-ping to 2.6 million in Q1 2010 and 2.35 million the following quarter. Q3 2010 then saw a major reversal of the situa-tion, as Orange saw mobile broadband customer numbers rise to 3.02 mil-lion. Mobile broadband subscriptions continued to grow in Q4 2010, rising to 3.15 million, then falling slightly to 3.14 million in Q1 2011 and again in Q2 2011 to 3.1million.

As usual, the company gave no explanation as to why the dip in the first half of the year had suddenly reversed in Q3 2010.

Encouraging take-up of a new service like mobile broadband or 3G services can be difficult, as some sub-scribers will not see the use or wish to spend more on their mobiles. Low-price promotions help to bring customers around to testing any new service; some will continue to use it, but oth-ers will not. The H1 2010 decrease in 3G subscriptions reported by Orange probably resulted from subscribers not continuing their usage after a pro-motion had ended, rather than mass switch-offs.

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3. Development paths for technologies. New ser-vices and their impact

GSM technology followed a fast-forward path to 3G (WCDMA) via 2.5G tech-nology (EDGE). The industry is set to continue its upgrade course. 4G (LTE) is not yet on the radar. ANCOM intends to open a tender for selling four LTE licenses in the second half of 2012.

The licenses will be issued for the use of the 800-900 MHz and 2.6 GHz frequency bands. The winners of the tender will be chosen following a com-petitive selection process.

The number of LTE subscriptions is forecast to reach 500,000 by 2015 in Romania, according to a study on the Romanian mobile internet market by Nokia Siemens Networks.Temporary licenses have been approved for Alcatel-Lucent (one license for Bucharest and one for Timisoara) and Orange Romania (one license for Bucharest).

Even though these experimental licenses are given for a limited time, usually six months, the network opera-tor can ask for the license for a shorter time.

So, Alcatel-Lucent requested a one-month (February-March) experimental license for Bucharest and a six-month license for Timisoara starting from January 2011.

Orange Romania received its LTE license in September 2010, but the operator filed for an extension, which was approved until March 2011. The firm tested LTE technology on its own network in Bucharest last year and is expected to commercially debut LTE this year.

Orange and Alcatel-Lucent also teamed up last year to demonstrate LTE technology in Chisinau, Moldova. As part of the test, the companies also implemented HD voice services through the HSDPA network.

Capital intensive develpment pathsEven though LTE technology is exclu-sively used for data transfers at the moment, the first LTE handsets fully compatible with the VoLTE (voice over LTE) standard have been showcased, at the 2011 Mobile World Congress in Barcelona. Though limited interest has been seen from Vodafone and Cosmote, these two players are likely to step up their efforts to catch up with the early movers.

In the landline sector, all signs point to FTTB/H/C technology as the solution of choice for operators. Initial higher deployment costs per subscriber (anywhere between EUR 30-80) are off-set with considerable projected mainte-nance and higher reliability scores.

Only Romtelecom and RCS&RDS are currently pursuing this, leaving UPC struggling to bridge the technology gap.

Since the advent of SMS, no addi-tional service on top of mobile voice has succeeded to achieve the “killer” status. MMS, 3G video-conferencing and location-based services have not yet passed the niche limit.

The most promising technology seems to be Near Field Communication.

As the mobile phone is now the gateway to any individual’s digital life, transforming the handset into a mobile wallet could potentially open the door to closer integration between banks

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and mobile operators. As value-added SMS have been an established payment channel for some years and are grow-ing at a steady pace, it is not far-fetched to envision an NFC market ecosystem from handsets to SIM applications and on to a whole new advertising niche taking shape around the segment.

Orange is best-suited to take advantage of the new developments considering France Telecom’s backing of Cityzi, the largest deployment to

date. Other promising services could be content-oriented ones. Romtelecom launched dolcetv.ro, an online platform to deliver online media content to its customers. This is perhaps the biggest bet for the next three years in terms of internet services. The raging success of Netflix in the US as well as the telling signs that young users would subscribe to such a service suggest online media distribution as a major topic to follow through.

Fixed telecom servicesFixed telecom services are reeling under the pressure of mobile services, which has led to the erosion of the number of landlines. As a strategy, operators are bundling fixed services as part of larger packages. The battle for market dominance sees RCS&RDS and Romtelecom up against each other, the former taking over Boom and AKTA, and the latter eyeing a takeover of UPC.

4. Cable TV, DTH, IPTV

In the landline market, the introduc-tion of bundled services is likely to somewhat help to maintain interest in fixed-voice services.

The broadband market is expected to generate the most aggressive growth rate. This boost to competition should be a positive move for the market, allowing more players to drive down costs that will encourage greater take-up rates.

ANCOM reports that the land-line segment declined to 4.5 million subscriptions by year-end 2010, a

year-on-year decrease of 4.9 percent. This represents a large acceleration in decline in the sector when compared with the 0.4 percent decline in 2009.

Shrinkage in the fixed-line segment is attributable to the replacement of traditional PSTN and ISDN connections with mobile phones and by dedicated broadband connections. This is sup-ported by data from ANCOM showing that incumbent Romtelecom has con-tinued to lose market share to alterna-tive operators.

Romtelecom has been reporting a shrinking fixed-line customer base for nearly three years.

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Lose some win someThe decline has been unrelenting, see-ing the operator post declines from Q2 2008 to Q2 2011. At the end of June 2011, the company’s subscriber base had fallen to below 2.6 million, a 3.9 percent year-on-year decrease. This represents a marked deceleration in the rate of decline of fixed-line subscriptions from the 7.6 percent year-on-year fall to Q2 2010. The slowing decline in H2 2010 and H1 2011 in part reflects the lessen-ing impact of fixed-to-mobile substitu-tion as the early substitutes diminish and the positive impact of convergence services on fixed-line subscription retention increases. It also appears to reflect an improvement in economic conditions, as well as the aggressive price discounts Romtelecom offered to retain and/or attract subscribers, which led to a 7.1 percent year-on-year decline in fixed-line revenues.

The growing clout of Romania’s alternative fixed-line operators has contributed to the ongoing decline of

Romtelecom’s market share, although alternative operators have recently appeared to lose momentum. Romtele-com accounted for 58 percent of the market’s landlines at the end of 2009, down from 62.3 percent at the end of 2008. By December 2010, its share of the market had only fallen to 57.9 per-cent, representing a stabilization.

The Romanian incumbent has been working hard to reduce fixed-line customer churn by launching price pro-motions and bundling fixed lines with alternative services such as broadband and DTH TV, as well as with attractive hardware, software and IT support. During 2010, Romtelecom contin-ued looking for ways of bolstering its bundled service offerings following the launch of an IPTV service in December 2009. The operator’s IPTV service is intended to complement its existing DTH offering, and the two services reported a total of over 1.2 million users as of June 2011, up by 30.8 percent year on year. The IPTV service itself had attracted more than 35,000 subscribers by the end of June 2011.

The accelerating decline of Romtele-com’s fixed-line customer base may have been due to the growing use of number portability in Romania. It is also likely that the sharp economic contraction that Romania experienced in 2009 had an impact on the number of fixed-line connections. As consum-ers cut spending on telecom services, landlines were often the first service to go owing to the expediency of mobile communications.

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not require a fixed-line connection for their broadband service. However, the improved product portfolio of Romtele-com, alongside an improved macroeco-nomic climate, has reduced fixed-line losses for the former national operator.

Offering fixed telephony as part of broadband and pay-TV packages is a strategy used successfully by opera-tors worldwide, and Romania’s telecom companies are no different. Romtele-com’s rollout of IPTV will certainly help its own services remain popular among subscribers, though take-up rates reported so far have been far from stellar. It is likely that the growth of converged services will reduce the rate of fixed-line decline rather than lead to growth in the number of subscribers.

The fixed voice market seems set to reach 19 percent penetration by the end of 2015, with mobile services cannibalizing the market and VoIP-based offerings also drawing customers away from traditional landlines. This combination will more than counterbal-ance subscriber growth from converged services.

5. Competitive models

Romtelecom and RCS&RDS are engaged in an epic battle for market dominance. The incumbent made up in just three years for the lost couple of decades by adding TV and internet to its product portfolio. With the acquisitions of Boom and Akta (the DTH division), Romtele-com is now the second biggest player in the market with the clear objective to become the market leader in the future.RCS&RDS has fought back by put-ting even more pressure on the

EBITDA-hungry Romtelecom with heavily discounted offers for services over FTTx networks. The latest move to launch a nation-wide network of Wi-Fi hotspots with free access for RCS&RDS customers counteracts Romtelecom’s strategy to offer a free Wi-Fi router with its ADSL internet service.

RCS&RDS is also the first player to pursue the exclusive content competi-tive strategy. Even though RCS&RDS has lost its exclusivity for the Liga 1 games, it is keeping its focus on developing this line with other exclu-sivities such as Formula 1 and MotoGP. The pay-per-view movie channels and the general TV station have not been equally successful.

By far the most daring move by RCS&RDS so far has been the ongo-ing discussion to take over UPC. The troubled American-owned cable opera-tor has been a rather easy target for both RCS&RDS and Romtelecom via its nimble cable outfit, NextGen. More than 500,000 customers have left UPC for other providers since 2008. More recently, the rate of client churn at UPC has slowed down as the company became more flexible with aggressive retention offers as well as infrastructure upgrades such as Fiber Power 120 Mbs.

The Competition Council has not ruled out the merger on principle but if and when the takeover deal is in place, the regulators will need to take a closer look into the dynamic shift of the market.

If the merger does not happen, UPC will most likely shore-up its position by realigning its client base prices, trading off high ARPU for putting an end to attacks from its competitors.

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Market Report 2011

B2B landscapeCloud computing and managed services could prove to be two important business lines to pursue for telecom operators, along with the already en vogue mobile voice and data, in order to keep healthy margins. The race for customers is prompting companies to keep investing in both conventional distribution and out-of-the-box sales strategies. Additionally, they must face the music from Europe.

6. New types of business in demand: cloud computing and managed services

The business-to-business market has turned into a pillar of relative stabil-ity for the telecom industry in 2011 as it has been less volatile compared to depressed consumer market demand.

Mobile companies have focused on building up loyalty with their biggest account while fishing for the occasional migration of a super client.

In the mobile industry the begin-ning of the year was marked by Cosmote’s assault on large corporate accounts in the banking and FMCG sectors whereas Vodafone and Orange responded by further customizing their communications solutions for companies.

Vodafone secured Pentrom in a multi-million euro contract and decided to push their services to SMEs with their “SRL” throughout the year campaign.

However, 2011 cleared showed the industry needs a new approach for the upcoming couple of years if it is to preserve the margins it currently holds.

The opportunity arising is to package compelling new services with mobile voice and data.

One strategic direction will defi-nitely be cloud computing and man-aged services. Moving not only storage but also applications to the cloud could not only slash the costs of equipment and maintenance, but could also improve mobility, at the core of the industry.

However, in 2011 it was Romtele-com’s business division that actu-ally took early decisive action in this direction with My Office, be online and IT Manager. 2012 seems likely to see a boost in demand and offers for B2B clients including managed services and cloud computing-based solutions.

The increased presence of Google in Romania will most likely trigger a 10-12 percent growth in this year compared to 2011.

7. Future of VoIP telephony services

VoIP has been steadily eroding the market share of PSTN lines over the past three-four years. While the overall

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Market Report 2011

quality has definitely improved with increased investment in equipment and service support, VoIP has not yet touched the GSM segment of the mar-ket mainly due to the still perceived difference in quality and reliability in favor of GSM voice.

However, with the ever growing popularity of worldwide distributed platforms such as Skype and FaceTime, mobile operators will soon feel the pinch of calls being re-routed using these solutions.

For the moment the reaction on their part is rather passive-aggressive and comes down to basically cutting down access to these platforms via their 3G connections. But as Wi-Fi hot-spots multiply rapidly throughout the country, the pressure will mount.

There should be at least some partial acknowledgement of this global market force in the local market and consequently some degree of flexibility mainly in the form of optional VoIP services.

8. Sales channels and market-ing support in the industry

Increased completion in a bear market usually triggers a compensating trend to increase control in all areas, espe-cially in the sales and marketing chan-nels. Orange has been among the first to recognize this need and kept up the pace since 2010. The franchised Orange shop network now exceeds 200 stores and counting.

The country’s largest mobile telephony chain Germanos has fol-lowed the path of controlled diversifi-cation of its product portfolio to benefit

both Cosmote and Romtelecom in an attempt to squeeze more efficiency per square meter.

Romtelecom and RDS have been leading the customer hunt with their direct sales forces going door-to-door. The pro-active approach has gener-ally been credited for UPC’s acceler-ated customer base drain. UPC has responded by upgrading their customer retention policies and general con-sumer satisfaction focus in an apparent “arms race”.

The higher changeability of opportunity-oriented customers makes it increasingly important for telecom companies to continuously invest into the mainstream distribution network while taking shots at alternative ways to move the market.

Since the advertising market will likely continue its free fall, some of the money usually spent as advertising will be redirected into improving the first-hand experience in shops everywhere.

9. Major regulatory challenges

On August 4 2011 ANCOM released a set of measures for public consultation that call for a 30 percent decrease in termination rates for fixed and mobile networks.

The proposal recommends a two-stage reduction of all the operators’ tariffs. In the fixed segment, ANCOM has recommended the 50 operators with significant market power reduce termination rates from RON 0.0097 to RON 0.0082 as of January 1 2012, and then a further cut of RON 0.67 from July 1 2012. The total reduction is around 31 percent, according to the

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Market Report 2011

One other bone of contention will likely be the apparent go-ahead from the Competition Council for RCS&RDS to take over UPC if the transaction eventually comes through.

The newly formed conglomerate of Romtelecom, Cosmote and their affili-ates, though loosely connected, will possibly be the most affected.

Consolidation and market dominance issuesSize does matter and so does the peck-ing order, in business as well as in the animal kingdom.

Telecom is no exception. The land-line business has come under intense pressure to consolidate since 2008. Romtelecom and RDS are gobbling up the last medium-sized local cable companies in an attempt to not only improve cost efficiencies but also to jockey for pole-position in the immi-nent three-way market gridlock.

The largest operator will likely be able to get the best economies of scale from content fees to infrastructure related costs. Being number one in the market is not just winning bag-ging rights. Mobile operators in their turn will likely continue to collocate network capacities, maybe even jointly operating the same network to cut costs and improve margins.

In Romania Orange and Cosmote are the most likely to follow this strat-egy if further integration of mother companies elsewhere makes it pos-sible here as well. Conditions are ripe in the coming two years for a potential change of market leaders given the close contest unfolding at this point in time.

regulator. The regulator identified six mobile operators with significant mar-ket power – Cosmote, Orange, Romtele-com, Vodafone and RCS&RDS. The ANCOM proposals recommend sym-metrical peak rates for all operators of RON 0.0424 per minute from January 1 2012 and RON 0.0346 per minute from July 1 2012.

The proposed cuts are based on the long-running incremental cost meth-odology as espoused by the European Commission, although ANCOM states it will review the methodology and may reduce termination rates further at the end of 2012.

The telecom regulator aims to have MTRs based on the operators’ true operational costs. As RCS&RDS is purely a 3G operator and has the small-est network coverage, its operational costs are likely to be higher.

Romania’s four 3G mobile network operators are expected to come under increasing pressure from rival services offered by the country’s two largest wireline operators, Romtelecom and Radiocommunications National Society (SNR).

Incumbent Romtelecom has been deploying a CDMA450 network and commercially launched services in 20 cities in April 2009. The opera-tor intends to continue expanding its network to cover both rural and urban areas where wireline infrastructure is underdeveloped.

Meanwhile, SNR is launching WiMAX services, and Romania’s regulator is attempting to tender two new WiMAX licences and seems keen to generate additional competition in Romania’s wireless internet market.

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