Monday, July 6, 2009

Romania: A Tough Crowd

Oxford Business Group Latest Briefing

3 July 2009

The cooling of the Romanian economy and the near saturation of the market have resulted in lower earnings for the country's telecommunications sector. There are signs that competition is about to increase the pressure on sector players even further.

Romania's GDP fell 6.2% in the first quarter of 2009 compared to the same period in 2008, with household spending down by 12.3%, according to figures released by the National Institute of Statistics on June 9. As with other sectors in the economy, this slowdown has hit the telecoms sector.

All of Romania's main mobile phone service providers have reported reduced earnings so far this year, with market leader Orange Romania, which has some 10m subscribers, announcing revenues of $366m for the first three months of this year, well down on the four-quarter average of $453m in 2008.

Vodafone Romania has also seen reduced incomes, announcing profits of $731m for the fiscal year ending March 31, down 3.5% on the preceding 12 months. This drop in profits was despite adding almost 670,000 new subscribers over the year, the 7.5% increase taking its customer base to 9.58m.

An additional factor for lower earnings is the highly congested nature of the mobile phone market. Romania has one of the highest penetration rates in the world, 133% as of the end of 2008, according to a report by the National Communications Administration andRegulatory Authority (ANCOM) issued in early June.

With five service providers currently in the market, competition is fierce. Though there was a 44% increase in the amount of mobile minute usage last year, with users racking up 30bn minutes of conversation, along with 4bn text messages sent, up 36.5% on 2007, campaigns by networks to retain customer loyaltyreduced earnings, ANCOM said.

According to ANCOM's president, Catalin Marinescu, it will not be until after summer when the full impact of the economic downturn on the telecoms sector will be felt.

"The effect of the current economic climate on telecoms in Romania is to be evaluated only in the autumn of this year, when we have data on the first half," he said on June 4. "We expect stagnation in some sectors and maybe even drops, but we will certainly have an increase in broadband penetration."

Though profit margins may have shrunk and the market is approaching saturation point, there is still some overseas interest in the sector, with Turkish fixed-line service provider Turk Telekom considering buying into the market. In mid-May, Hakam Kanafani, the development director for Oger Telecom, the Dubai-based majority shareholder of the Turkish firm, said Turk Telekom had built up a $1bn acquisitions fund, some of which could be used to gain a stake in an existing Romanian telecoms operator.

"I'm not sure whether it will be spent or not but these are sort of opportunities we're looking at in 2009 and 2010," Kanafani said in an interview with the Reuters news agency.

It is not the first time the Turkish firm has floated the idea of expanding into the Romanian market. In mid-2007, Turk Telekom's chief executive officer, Paul Donay, was quoted by local media as saying the company was examining fixed and mobile telephone business opportunities in Romania, along with other countries in Central Europe, though nothing came of the proposal at the time.

Interestingly, just as Turk Telekom was again talking up the possibility of buying into Romania, its parent company Oger was finalising a deal to sell its Romanianmobile service provider Telemobil, the owner of Zapp, to Greek telco Cosmote and its subsidiary Cosmote Romania.

The $277m buyout is a strategic move by Cosmote, which is the only mobile service provider in the Romanian market that does not have a 3G licence that would allow it to offer internet access to its customers. Cosmote missed out on winning a 3G licence in the last round of tenders and was not expected to have another chance to obtain one before 2011 at the earliest.

By acquiring Zapp's operations, which run on a CDMA platform, the company will put itself on an equal footing with the two market leaders in the domestic market, Orange Romania and Vodafone Romania, along with the relatively small RCS&RDS. Currently, neither Oger or Cosmote are publicly commenting on the sale, thoughindustry analysts expect it to be sealed in the second half of this year.

Equipped with fast next-generation data services, Cosmote is expected to step up efforts to rein in the big subscriber gap between itself and Orange and Vodafone, though with an estimated 6m registered customers it has a long way to go before Romania's mobile phone sector becomes a real three-horse race.


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