With Tele2 waiting in the wings and regulators watching closely, is Lietuvos Telekomas ready for competition?
In December, Lietuvos Telekomas general manager Tapio Paarma said confidently that he would have no trouble sleeping on New Year’s Eve.
“No nightmares,” pronounced the gruff Finish native who has overseen the rapid and total restructuring of Lithuania’s state-owned telephone company since it was privatised in 1998.
It’s not the pop of champagne corks that might have kept Paarma awake, but the fact that the next morning, his company’s monopoly on telephone service was set to expire. On January 1, 2003, Telekomas’s four-and-a-half year exclusive right to offer voice calls over the country’s telephone wires, or “fixed-lines,” officially came to a close. Competitors are now allowed to rent capacity from Telekomas and repackage and sell local, long-distance, and international telephone service to the public.
There aren’t huge profits to be made from residential service, where Telekomas is already facing stiff competition from aggressive mobile phone operators. In the first nine months of 2002, Telekomas saw a 13.6-percent decrease in the number of its “main-line” customers as mobile phone use skyrocketed. But at least two competitors are gearing up to enter the market— Sweden’s Tele2, which in just two years has become a strong number three in the Lithuanian mobile market, and the much-smaller Interprova, a domestic start-up long-distance company that is already battling Telekomas in court. Observers expect that international calls over Telekomas’s fixed-line network, which in 2001 handled 60 to 70 percent of all international telephone traffic, are sure to attract other competitors.
Meanwhile, the Communications Regulatory Authority is working overtime to prepare to monitor Lietuvos Telekomas’s relations with its competitors, who will also be its wholesale customers. It will not be easy to referee the coming battle, which in other European countries has spawned numerous lawsuits between incumbent and challengers. An official letter mailed to Telekomas last October put the company on notice that after the first of January, it will be expected to meet “sets of obligations” concerning its prices, how well it provides network access to its competitors, and its accounting practices, says Feliksas Dobrovolskis, who heads the Telecommunications Regulation Division of the Communications Regulatory Authority.
Over the past two years, the CRA and Telekomas have sparred over price increases, competitive practices, and the extent of the regulator’s authority. With the opening of the market, a new level of scrutiny will take effect. Much depends on the number and calibre of the challengers who join the fray. But one thing is for certain: Telekomas ‘s legal department, and the government regulators who must work out the technical protocols of connections and prices, will be kept very, very busy.
Despite the new competition, Paarma has good reasons to be confident. Under his leadership, Lietuvos Telekomas has invested US$480 million to transform itself from a inefficient state-owned telco into a streamlined operation well-positioned to handle the large volumes of data traffic that modern businesses demand.
Despite all the talk about a wireless future, the fact is that the reliability and cost effectiveness of fixed-line networks for data remain unchallenged. “I don’t see any other technology that Paarma should lose sleep over,” says Julian Watson, telecoms research manager at the World Markets Research Centre based in London. Thanks to upgrades made over the past four and a half years, Watson expects Telekomas will remain the leading data communications provider “for some years to come,” a potentially lucrative position as more foreign companies invest after NATO and E.U. membership.
And Telekomas has the widest network in the country. More than 3,000 kilometres of new optical cable have been added to improve speed and capacity for data. In June 1998, only 19.4 percent of the telephone network had been digital, but now it is 81.5 percent digital, allowing a whole range of new voice and data services targeted to businesses. Where 10 different technologies had been patched together before privatisation — the result of a cash-strapped state owned company trying to upgrade piecemeal — there is now an up-to-date network which is adding further broadband capabilities. And everything from ISDN lines to videoconferencing services is currently available through subsidiary UAB Lietuvos Telekomas Verslo Sprendinimai (Lithuanian Telecom Business Solutions). In Lietuvos Telekomas 2001 annual report, Internet and other data communication revenue were the bright spots on a balance sheet on which revenues from standard fixed-line services were falling sharply.
Diversification has been a major part of Paarma’s preparations for the new competitive landscape. And he has not hesitated to deploy a subsidiary to fend off competition, as in the area of voice-over IP, which uses the Internet to carry international long-distance call. Consider Voicecom, the Telekomas subsidiary created in 2001 as a clear defensive thrust against smaller players using the Internet to make cheap international calls. While court proceedings continue with Interprova, a start-up whose lines were disconnected by Telekomas because it was using data lines to connect voice calls, Paarma has aggressively cornered that very same market by establishing UAB Voicecom, a joint-venture with U.S.-based Nexcom Telecommunications, Ltd. Paarma says proudly that after little more than a year in operation, Volicecom now dominates the market for such calls, controlling 80-percent of the business.
Clearly, Telekomas is no longer the same “old-fashioned Soviet locomotive” Paarma says he found when he took over as general manager on July 7, 1998. In less than five years, change after relentless change was put through, as if Paarma were staring at his watch. With a finite amount of time before the market was liberalised, speed was clearly important to the majority owners of the privatised company — Amber Teleholdings, an investment partnership of Scandinavian telcos Telia and Sonera, which also control the fixed-line networks in Latvia and Estonia.
The cost of rapid change
The transformation of Telekomas has not been easy. The problem was not the improvements, but rather the pace of change. As more than half Lietuvos Telekomas’s workforce was slashed, news of the massive layoffs — many of them of older employees — sent shockwaves through the country. Where 10,000 employees once laboured, now less than 5,000 collect salaries. And every citizen was directly affected by the changes when they opened their phone bill. Local telephone calls which for decades had been provided free to the public even after Lithuania won its independence from the Soviet Union, suddenly were being charged on a per-minute and per-call basis. Increases in the monthly service fee had pensioners and “socially disadvantaged” groups up in arms.
In the past two decades, most of Europe’s state-owned telephone companies have been privatised , but they have done so with the luxury of time to usher in the sweeping changes. Not so in Lithuania. What was accomplished over a span of 15 to 20 years in Europe, was done here in less than five.
“It was the most rapid change in Europe,” Paarma pronounces, with a glint of Scandinavian pride in his gravely voice – the satisfaction of a hard job completed as planned. But the speed of those changes has earned the company a special position of anger in the minds of many Lithuanians.
One wall in Paarma’s office in Lietuvos Telekomas’s Vilnius headquarters, is covered with dozens of framed caricatures which have appeared in Lithuanian magazines and newspapers lampooning Paarma as a profit-hungry businessman taking money from the disadvantaged while he cozies up to politicians. Paarma believes the tide is turning in the media, and Telekomas now tracks its press coverage carefully, even at it has new unveiled new discount programs for its disadvantaged customers and lowered fees on international calls. It’s not so much the still-rare positive stories that Paarma takes heart from, but rather a slow-down in the negative press.
“Let’s say the frequency has decreased,” he says. “I don’t even remember when the last [caricature] was published; it was some several months ago.”
The painful changes are all in the past, says Paarma who seems genuinely eager to improve his relations with the public. “Do you know any family where the husband and wife are in bed, boxing with each other at the same time as they are making love?” he asks. “No. We took hits first, bad news first. And now it’s time for love.”
So far, at least, there are few signs his conciliatory message is being heard. The steady tariff hikes of the past few years may be over, and in fact, prices are already coming down for international calls to Scandinavia and Russia, but criticising Lietuvos Telekomas has become a national pastime. And not only in casual conversation, but in the government halls.
Guoda Steponavièienë, vice president of the Lithuanian Free Market Institute is the think-tank’s point person for telecommunications. She follows any legislation and regulation of telecommunications in parliament and has been alarmed by what she has been seeing. “Lietuvos Telekomas has become a very emotional issue in this country,” says Steponaviciene. “Politicians seem interested only in kicking Lietuvos Telekomas, because that is what people want to hear.”
With more than 30 years experience in the telecom field, Paarma is circumspect when asked about the political climate, and about his recent battles with regulators. Prior to his appointment as General Manager at Lietuvos Telekomas, he had served as deputy CEO at Lattelekom, where the Latvian government has fought so bitterly with the telephone company, both sides have sought international arbitration. Paarma is optimistic that the regulatory climate in Lithuania will improve, especially with E.U. membership in 2004.
“It will settle down,” he says. “All operators including us, we are protecting our rights and our views. Regulatory, I hope, is trying to push for competition for all. If they are doing that, fair enough. If they are in line with European Union regulations, fair enough.”
But Paarma does raise the question of the expertise of regulators, and the wisdom of creating new regulations that will soon need to be replaced. “Their problem has been a huge amount of work and not enough experience,” he says. “Of course lawmakers — meaning the government, — they are passing laws, but what is the quality of those laws? The new telecommunication law is coming into effect the first of January but already we know that they are going to have to change it for the European Union. So everybody is making mistakes, there are contradictions. These are normal debates, sometimes struggles, that happen in other countries as well. Everybody is doing their job.”
In the end, the World Market Research Institute’s Julian Watson says that the biggest concern for Telekomas will not be regulation, and not even competition, but whether the data boom which Paarma is betting on, will come to pass soon enough to offset the falling revenues from residential telephone services. Says Watson: “There are bigger risks to Telekomas than competition: lower than expected demand for data services, and enforced reductions in capital expenditure due to lower revenues in its core telephony business.”
If Paarma is nervous about the future, he doesn’t show it. Having observed the situation in Estonia, where competition has already come to fixed-line telephony, he feels he has prepared well. International calling, where Estonian Telecom took its biggest hit, only makes up 7.7 percent of revenues at Lietuvos Telekomas in 2001. That is much less than the 26 percent of revenues in 1998.
And Paarma takes heart from the competitive landscape two years after Estonia was liberalised. “From my side, I welcome competitors,” says the famously tough negotiator between drags on his cigarette. “But I believe there are much more dreams than realities in some of those plans. What happened in Estonia? Fifty licenses were issued, ten started, and three are alive today.”
“Let’s put it this way,” he says, exhaling a cloud of blue smoke. “I hope our competitors have done proper business plans.”
Lithuanian Business Review