Zbigniew Makowski:

"This is not about being a technology-led company, it's about being lean and mean."

Since the mid-1990s, Poland's telecom market has slowly opened to competition. A big boost came this year when three independent operators - Netia 1, Niezależny Operator Międzystrefowy's (NOM) and Energis Polska - started offering domestic long-distance (DLD) calls, slightly denting Telekomunikacja Polska's (TPSA) monopoly. Yet despite the continued liberalization of the saturated fixed-line calling market, independent operators are pushing other services to stay ahead of their competitors. The local arm of British telecom and e-business solutions provider Energis is battling in both the fixed-line voice service market and the Internet access and data transmission sector. George Zbigniew Makowski, the 47-year-old president and chief executive officer of Energis Polska, recently talked to the Business Journal's Roseanne Gerin about the ongoing liberalization of the telecom market and his firm's prospects for voice and data services. The following is an edited version of their conversation.

Q: Will we see any dramatic changes when the DLD market is opened to all operators in January and when the international long-distance calling market opens in 2003?

A: In terms of intercity (calling) the biggest problem is that it takes time to build interconnectivity with TPSA's network. Historically speaking, with local operators and companies like Energis Polska, it takes 12 months to negotiate an interconnection agreement and physically build points of interconnection with the incumbent operator. In our particular case, we started the process over a year ago. The most difficult part is agreeing to the commercial and technical terms and conditions because once that is (done), the process is actually quite fast. We managed to build 12 points of interconnect within four months, so it was a record. That doesn't take into account how long it took to negotiate those points of interconnect. At the beginning of next year, there will be lots of new operators. And people will come in and start a variety of wide new long-distance services - some of them based on traditional voice service, some of them based on traditional Internet protocol. The problem is how long it will take them to negotiate interconnect agreements. The second part of the puzzle is how much money they will be able to make on the interconnect itself. Because the tariffs today are still quite high in comparison to tariffs in Western Europe, companies like Energis are very careful in terms of the types of customers we target for a number of reasons. First, we are required to do the customer billing, which means we have a huge cost associated with servicing them. Second, we are required to provide all the customer services and the backup infrastructure. It means we can come in with some unique offers, but what we've decided to do is focus exclusively on business customers and develop our offers around them.

Q: If we look at some of the liberalized telecom markets in Western Europe, the former monopolist still grabs most of the market share. It seems the situation would be the same with TPSA in the next few years. Do you agree?

A: Today TPSA still retains about 95% of the voice market, despite the fact that you've got all these local loop operators. As the market opens up what you find is that new entrants into the market progressively reduce prices and services. So two things happen: first the consumer benefits from a variety of products and services. These prices in themselves become lower and lower so that the margin offered on these prices becomes smaller and smaller. What then happens is that it becomes a battle for market share as operators try to cover their operating costs through increased volume.

Q: Energis Polska was the last of the three independent operators to offer DLD service. Are you at a disadvantage?

A: Energis in the U.K. already offers long-distance services and has a lot of experience in voice-based long-distance services. What Energis Polska wanted to ensure was that the agreement negotiated with TPSA was the right type of agreement in terms of commercial terms and conditions, and technical terms and conditions. Both Netia and NOM have already had the ability to capitalize on the fact that they had staff and built their structures here. Their time to market was much faster than ours. We particularly wanted to make sure that we negotiated an agreement that would make sense to our shareholders so we spent a lot of time in the interconnect negotiations. But we also wanted to make sure that commercially the agreement made sense to us. Yes, it took time. It's worth saying that despite the fact that we are the last to enter the market, our offer is completely different from that of our competitors. What we try to do is be very focused in terms of what it is we are seeking to offer and to differentiate our products and services from TPSA.

Q: Mobile subscribers are increasing rapidly. Are they the ultimate threat to fixed-line operators?

A: At the beginning of next year, the mobile networks will probably have more subscribers than the fixed-line networks. It is interesting … it's not a substitution effect, but it's an effect of what's happening on the market (with) TPSA's (tariff) rebalancing process that reduced long-distance prices over the last 14 months or so. Two things have happened: prices of long-distance services have been decreasing and quite dramatically; second, the cost of the monthly fee has been going up.

Q: How important is data transmission service for Energis Polska vs. DLD service?

A: In our business plan we promote ourselves as being an e-business and telecoms company, so the emphasis of our business model is on data transmission and the Internet. We are trying to provide a full portfolio of services to business clients. Today voice services always drag other services after them, so once you start to develop a relationship with a client, you may start talking on voice, but you also find very quickly the conversation will shift to how we can put together quite a complex data network through the country. And how we can connect our data network through international companies with their parent companies across the world. One of the great things that Energis has is that it has built its own connectivity between Poland and its worldwide data network, so we are one of the very few suppliers that can provide complex solutions built around the world. Having built the data interconnect in Poland, we are the only operator that is called a tier-one Internet operator, meaning that there are a limited number of telecommunications operators that physically connect and manage the worldwide Internet backbone service.

Q: Companies such as Formus Polska, which offer broadband connections for Internet access and data transmission, have seen their client base decrease and limited demand for their service. Yet Energis is betting that there will be demand for such service here. Why?

A: The (local multipoint distribution service) LMDS broadband (a wireless technology for high-speed Internet access and data transmission) operators are targeting the high level residential and the SME marketplace. Our policy is to work closely with these operators, so we are building interconnects with them. We are providing (clients) with Internet connectivity. Our customers … are the large business users that require high levels of quality services, be they Internet or voice, and which have the budget to pay for them. It's a question of understanding which sector we're targeting here.

Q: In June, Energis announced that it had completed contracts with Regus (international operator of business centers) and Ericsson (the local affiliate of the Swedish mobile phone maker), for national and international leased lines for data transmission, imaging and voice service. Have you closed any major corporate contract since then?

A: We're closing contracts on a weekly basis, and what it shows is that there is a big need for Internet and data infrastructure (services). It's fair to say I'm happy with the progress we've made. We have been extremely successful within the banking sector where we are providing a large amount of connectivity and Internet access to banks. We also now find the retail sector is looking at the services we offer, and we have signed our first contracts with hypermarkets. I can't give you names. Some of the agreements we have will range from $150,000 a year to more than $1 million. We have a broad span of contacts.

Q: When you look at fixed-line firms like Netia and Telefonia Lokalna starving for investment, to what extent can they be blamed for their own financial predicaments?

A: In many cases it's a problem with the markets. Twelve to 18 months ago, it was very easy to raise capital. With … venture capital companies, bankers and the stock markets, raising capital wasn't an issue. The problem was over the last six to eight months when the Internet bubble burst, there was a very negative sentiment to investments in Internet-related ventures and telecoms and it has been extremely difficult to raise cash. The problem at most companies is that they built up huge amounts of debt that have been necessary to put the backbone infrastructure in place and they can't service these debt payments.

Q: Is it possible to sort through the mess and find crucial lessons from this?

A: Yes … This is not about being a technology-led company, it's about being lean and mean, bringing services to the market in a very quick period of time, and making sure that the shareholders or backers have the cash to be able to fund the growth of the business. Two key things come to mind - making sure one has enough funding to meet the obligations of the business plan and the timing and launching of services.

Q: Is there still room for Poland's fixed-line telecom market to grow?

A: You're looking at a market with just short of 39 million people and the fact that there are some 10 million fixed lines. The conclusion that you come to is that there is still enormous opportunity for growth. The question is can people afford to pay for the telecom services and can the new operators (see through) the building out of these telecom services? The first thing is that the license fees you have to pay to continue operating these services, whether its local loop, long distance or UMTS, is a very fine balancing act between the way the government can actually get the money into the treasury's coffers and whether the operators can afford to pay for the license fees. The other thing is the infrastructure is very expensive to build. If you take those two elements into the equation, it's not an easy market to do (business) in.

Roseanne Gerin