ECONOMY

Heady entry for new telecom firms but the survival of most of them is highly unlikely

In a country plagued by relatively high inflation, there is no other industry than telephony where the benefits of liberalization are clearly visible. The release of first-half results by incumbent telecoms operator OTE showed that competition has finally started gaining steam even in the fixed telephony market, widely regarded as the least exposed to serious competition until recently. This is good news for consumers and the small alternative operators but this will not be the case a few years from now when most companies offering fixed-line telephony services go out of business. The liberalization of the Greek fixed-line telephony market officially took place on January 1, 2001, three years later than in other EU countries because Greece was granted a concession to delay liberalization of voice services. This was viewed by many as advantageous to OTE as it delayed the adverse impact on its profitability entailed by the combination of fixed market share, revenue losses and high fixed costs witnessed elsewhere in the EU. As expected, OTE first felt the pinch of competition in international volume in the form of call back services and international calling cards. Nevertheless, OTE managed to maintain its monopoly status on local and domestic long-distance calls due to the lack of serious competition. This, however, seems to be a thing of the past as more companies have entered the fixed-line telephony market in the last 8 months. Indeed, in its first-half results announced last week, OTE showed weakness in its domestic fixed-line business with local and international call volume being down 8.2 percent and 5 percent, respectively, compared with a year earlier. This weakness was particularly reflected in second-quarter revenues which increased by just 4.5 percent compared to a year earlier. Analysts were quick to attribute this weakness mostly to the new competition and to the ongoing cannibalization by mobile telephony as lower mobile telephony tariffs convince clients to switch to mobile. The increased competition and the resulting loss in market share to OTE, albeit small in the first half, should come as no surprise, as more than 10 companies already offer fixed-line phone services in Greece, charging lower prices than OTE. According to market analysts, the new entrants charge, on average, 8 percent lower than OTE in local calls and 15 to 20 percent lower in domestic long-distance and international calls. Among the alternative operators, listed ISP provider FORTHnet and latecomer listed IT firm Infoquest, which also holds a GSM license, are considered the main competitors to OTE. Intraconnect, Teledome, Lannet Communications, Vivodi Telecom and Starcom are also active in the market. It will take a miracle, though, for all these companies- or even most of them – to be around in a couple of years. To be able to win market share, one has to invest heavily in building up one’s own network, be price competitive, that is, offer services at a discount to the price charged by incumbent OTE, and incur heavy marketing expenses. Given the unfavorable capital market conditions and the history of failures by alternate operators in other European countries and the USA, it will be very difficult for any firm without a far-reaching client base, especially among corporate users, and a strong capital base to stay around and break even in a reasonable period of time. Things would have been different if companies were able to finance their investments cheaply in the capital markets but this is not so with the debt laden telecommunications industry having fallen out of favor with mutual fund and pension fund managers. That means most of them will not be able to undercut the incumbent for a long period of time. Does it mean that all alternative operators will go down? Of course not. Some will survive. FORTHnet, Greece’s second largest ISP, and Evergy, a joint venture by Greece’s Public Power Corporation (DEH) and the Italian Wind, seem to be two of the winning candidates. FORTHnet has the first-mover advantage, has a strong brand name recognition, has the second largest backbone in Greece and can build on existing relationships with clients. Its does not have, however, the strong capital base of Evergy. The latter plans to launch services in the last quarter of 2002 and enjoys a number of advantages. First, it has access to PPC’s customer base which exceeds 6 million people. It can rely on Wind’s know-how and can offer nationwide voice and data telecom services, utilizing PPC’s transport and distribution power network to develop a fiber optics backbone network. In addition, it can rely on PPC for investment funds. All in all, competition in Greece’s domestic wireline market seems to be heating up and this is good news for users to pay lower prices. But everybody should be aware that chances are most new entrants will not be around in a few years’ time. This is, however, part of the market game.