Gov't carves up prime Warsaw telecom market
Elektrim subsidiary El-Net's worst nightmare came true last week when the Communications Ministry said it would issue a second license for local telephone service in Warsaw.
The decision upset El-Net's intention to exclusively compete against Telekomunikacja Polska (TPSA) in the lucrative Warsaw calling market, and made the local license that El-Net had agreed a year ago to pay e245 million for far less valuable. The move also significantly reduces the pool of potential clients El-Net could tap, analysts said.
Bidders for the first local license originally understood that the Communications Ministry would only bring in one new competitor, which makes the decision to award a second license particularly painful for El-Net, analysts said.
"According to analyses made by our specialists, including the lawyers, the ministry was supposed to choose one operator" only for Warsaw, said Michal Michalski, El-Net's press spokesman. He refused to comment further on the issue until the Communications Ministry actually issues the tender.
After a hotly contested tender more than a year ago, the Communications Ministry chose El-Net in a tender for the Warsaw local license, primarily because the company had offered such a high price. While Elektrim has had the actual license in hand since last summer, it has done virtually nothing to date to develop telephone service in the capital. Protests by competitor Netia had prevented the Communications Ministry from actually granting the license until six months ago.
For its part, the Communications Ministry justified its decision by saying that Warsaw, a city of roughly 1.8 million inhabitants, is large enough for several competitors. Other large cities in Poland also have several independent providers, such as Katowice, which has three local telephone companies including TPSA, analysts said.
Communications Ministry officials also pointed out that the governing body had never promised that it would only issue one license. "El-Net is absolutely right," said Jaroslaw Nowrotek, an adviser to Minister Maciej Srebrno. "The tender El-Net won was to select one operator. But the ministry has never guaranteed that there would be only one tender."
The ministry decided to call the new tender because Warsaw alone generates 40% of total traffic, Nowrotek added. "So the minister decided that the solution to have only one independent operator was a wrong one."
Srebro on Thursday said the ministry would call a second tender by the end of December. A winner will be chosen by the end of the first quarter next year. Besides Netia, other likely bidders include Poland Telekom Operators and Telefonia Lokalna, but most bets are on Netia.
"We are very happy" that a new tender will be called, said Meier Srebernik, president of Netia. "We're looking forward to entering that market."
The decision presents "significant upside" for Netia, said Jan Sudol, telecom analyst at Donaldson, Lufkin & Jenrette. "They're focused and well financed," and already have operations in most of the other large cities in the country.
That, he said, is in clear contrast with El-Net, whose parent company Elektrim is having serious financial difficulties and has made little movement on actually building new telephone lines in Warsaw.
"This is not good for Elektrim (El-Net's parent company)," Sudol said. "At best, they now only have an 18-month jump start," before the planned full liberalization of Polish telecoms in mid-2001.
"At worst, their lead time drops to six months," he said. "There is very little upside from this for Elektrim. All they can do is try to delay the tender."
Srebernik said that it was unlikely that the winner of the second license would pay anything near the E245 million El-Net offered for the first license. The fact that the second bidder will start to build its service a year later and have less time before the telecom market is deregulated will impact the license fee.
"There's no doubt that with the loss of time, the value of the license fee should not even be close" to what was paid in the first tender, Srebernik said. "The value of the license itself is still very high, it's just a question of how much of that do you eat" in the form of license fees.
In most of the rest of the country, the ministry since 1997 has applied a policy of "duopoly" in granting local licenses, Kasperek said. That means that in all urban areas save one (Katowice, where two alternative licenses have been granted), the ministry has sold only one license, bringing in one new player in each market to compete head-on with TPSA.
El-Net may have been counting on such a policy being maintained in Warsaw, but "there's nothing in the law, which limits the number of licenses the ministry can issue," Sudol said.
While there may have been an "understanding," there is nothing on the record to suggest that the ministry agreed not to grant another license, he added.
But that doesn't provide much comfort to El-Net, which is trying to draft a viable business plan for its service while at the same time eating the E245 million it has already agreed to hand over.
"That's why they paid such an enormous amount for the license to have exclusivity," said Rafal Gebicki, a telecom analyst with Raiffeisen Capital & Investment Polska. He said that he thought El-Net would try to block the second tender.
El-Net refused to comment on whether it would protest the decision. "We are waiting for the official position of the Communications Ministry," Michalski said.
Since winning the first tender in December 1998, El-Net has drawn much criticism for being slow to build out its network. Netia claims that if it wins the new tender, it will be up and running and offering local telephone service in the capital by the end of next year, Srebernik said.
