New long-distance competitors face TPSA's foot dragging
The three license winners for domestic long-distance calls are preparing to offer service from July 1, but crucial interconnection negotiations with Telekomunikacja Polska (TPSA) are yet to begin and look set to be very difficult.
Moreover, TPSA is likely to profit from technical hitches that may further delay the reality of a competitive market until the beginning of next year, analysts said last week. "It's a cushion, helping TPSA to be completely prepared for the competition," said Piotr Wozniak, an analyst at CDM Pekao Securities. He added that delays are nothing new, given that the liberalization of domestic long-distance calls was originally envisaged for the beginning of 1999.
The three license winners Netia 1, National Grid Koleje Telekomunikacja (NGKT) and Niezalezny Operator Miedzystrefowy (NOM) are the first independent operators in the domestic long-distance market, which has so far been monopolized by TPSA. Each paid o23 million for a license.
Netia 1 is a consortium made up of local fixed-line operator Netia Holdings, BRE Bank, Powszechna Kasa Oszczednosci Bank Panstwowy (PKO BP), Warsaw-based electric utility Stoen and Swedish telecom firm Telia. NGKT comprises U.K.-transmissions system operator National Grid Group, Polish State Railways (PKP) and smaller telecom operators, while NOM brings together Polish Power Grid (PSE), oil giant Polski Koncern Naftowy (PKN) and several domestic electric utilities.
First on the list of snags are interconnection costs the consortia must pay to both TPSA and local operators to use their infrastructure. Subscribers will choose which long-distance company will transmit their call to another city. That company must pay the company at the destination area usually TPSA to run the call through their switchboard, said Bob Creamer, a regional telecom analyst at Raiffeisen Capital & Investment Polska.
Each long distance company has three months to negotiate interconnection agreements with TPSA, but the Communications Ministry is likely to end up resolving them, Creamer said. "It's assumed that TPSA won't want to negotiate or will do so on very difficult terms," meaning the Communications Ministry will be forced to step in to arbitrate, he said. "All of this is a nightmare for the Ministry," Creamer said.
Despite having won the licenses in January, the three consortia have yet to actually receive them, meaning that even getting to the negotiating table is at present impossible. "Without the license we can't make a deal with TPSA, get the connection agreements and provide the service," said Jolanta Ciesielska, Netia's spokeswoman. Wozniak said it is possible however that the agreements will come through before the end of June.
While losing its lucrative monopoly on long-distance calls, which it has traditionally used to subsidize the deficit run by its local service, TPSA is trying use its leverage in negotiations to transfer part of the burden of unprofitable local operations to its new rivals. "This is an obstruction to competitiveness on the market," Wozniak said.
Netia 1, given its sister company, Netia Holdings' local operations, is less dependent on TPSA's local infrastructure than its competitors. While TPSA has about 10 million subscribers and massive infrastructure. Netia, as the next largest fixed-line operator, has about 270,000 nationwide, and some infrastructure already in place. NGKP's and NOM's networks, by contrast, reach city suburbs only and both consortia must invest in infrastructure, Wozniak said.
Unfortunately, Netia 1's dependence on TPSA intercity infrastructure is also heavier than that of its competitors. NGKT and NOM have national telecom networks run via PKP's railways and PSE's energy transmission facilities, respectively. Netia 1, while now developing a state-of-the-art fibre-optic network, presently relies on TPSA infrastructure. Netia 1 is also building switchboard centers in Warsaw, Poznan and Katowice, to direct calls around Poland once its service debuts.
When Poland's new system takes effect, long-distance callers will select a provider by dialing a four-digit prefix after the zero and before the local code. Netia 1 bought the privilege of first choice among 1033, 1044, 1055 and 1066, said Jaroslaw Nowrotek, an adviser to former Communications Minister Maciej Srebro. NGKT and NOM will fight it out for the next two and TPSA will automatically receive the last one, he said.
But TPSA has not yet installed the technology to send calls to independent operators, which means an automatic default to TPSA. "These switches should work properly from the beginning of July, but they won't," Wozniak said. "TPSA is not ready to switch the calls, so you'll have no option," he said. He said that while the switches for some towns are likely to be finished by July, it is unlikely the rest will function until 2001.
"The most important thing is to take impulses (call units) from the market, and TPSA will try to maintain this movement for as long as possible," Wozniak said. Roughly 15% or zl. 1.6 billion ($410 million) of TPSA's revenue from ordinary phone services came from domestic long-distance calls in 1999, Creamer said. "The sources of (these) are the subscribers, so it's very important to have a strong base ... who'll do these (inter-city) calls."
But the new billing system, modeled on the German telecom liberalization, will undoubtedly benefit independent operators at TPSA's expense, Creamer said. Customers will receive one bill listing all calls, including those charged to independent operators. The subscriber will pay TPSA, which will reimburse independent operators for calls routed to them. "This is very good for them," Creamer said. "They don't have to develop their own billing systems and TPSA carries the credit risk."
When all the wrinkles are ironed out, things may not look too rosy for the new operators. A price war is in the cards, Creamer said. "Prices will collapse, and it may well not be a profitable business." He added that independent operators experienced this in the German long-distance reforms one reason Elektrim pulled out of the bidding. In fact, prices seem likely to decrease by 20%, Creamer said. "The only thing they might do is succeed in destroying TPSA's margins."
Creamer also said Netia could end up subsidizing its investment and its increased capacity via other activities in the future, such as internet projects. But in some respects, NGKT and NOM have an edge over Netia 1 "if it's about who can put the capacity in place and make some money," Creamer said, adding that it's much cheaper to run lines alongside a railway than to build a network from scratch.
