2014/01/09 The peculiarities of fixed broadband in Central and Eastern Europe

Fixed broadband penetration in Central and Eastern Europe (CEE) stands at 41% of households, which is significantly behind Western Europe (WE), at 59% of households.¹  However, when plotted against GDP (PPP) per capita, it becomes clear that CEE is not necessarily underperforming WE (see Figure 1).

Figure 1: Broadband penetration in 1Q 2013 compared with GDP per capita at the end of 2013, Central and Eastern Europe and Western Europe [Source: Analysys Mason's Telecoms Market Matrix and Economist Intelligence Unit for GDP per capita, 2014]

Ukraine, with a household penetration of 22% and GDP (PPP) per capita of USD7600, and Russia (39% and USD18 300, respectively) are the laggards and shift the average penetration downwards – this is also because of their size.²  Therefore, given the current levels of penetration and economic growth potential, it hardly comes as any surprise that broadband penetration has significant growth potential in CEE. Other interesting questions to consider are as follows.

• Which technologies are likely to be used in CEE?
• How ready are the networks in CEE to capture further growth?
• What are the M&A and investment opportunities?
• Which investments are necessary?

To answer the questions above, it is important to understand some fundamental differences between CEE and, for example, WE. In particular, the blend of technology in CEE is very different from what is being used in WE (see Figure 2).

Figure 2: Broadband connections per technology, Central and Eastern Europe and Western Europe, 1Q 2013 [Source: Analysys Mason's Telecoms Market Matrix, 2014]

The chart clearly demonstrates the differences between the two regions.

• WE: Copper (some of which has now been upgraded to fibre to the cabinet) dominates, with the main platform competition coming from cable.
• CEE: Fibre to the home/building (FTTH/B) is three-quarters of the size of the DSL market. Further competition comes from cable (as in WE), and also from fixed wireless access (that is, WiMAX) and 'Other' technologies, which are often made up of non-standardised LAN solutions.

So what are the reasons for these variations in platform market share? Are the incumbents, which are mainly using copper, weaker in CEE than in WE? Figure 3 shows that this is not necessarily the case, as the average incumbent's market share is very similar in both regions (although the range between the minimum and the maximum is much larger in CEE than in WE).

Figure 3: Maximum, minimum and average market share of incumbent operators, Central and Eastern Europe and Western Europe, 1Q 2013 [Source: Analysys Mason's Telecoms Market Matrix, 2014]³

However, incumbents in CEE seem much keener on FTTH/B than their counterparts in WE, with several having launched decent-scale FTTH/B networks that further strengthen the platform's competition point.⁴  The reasons for the differences between the two regions are more likely explained by the following factors.

• Copper networks are less developed in CEE, particularly in rural areas where local cable-TV networks or fixed wireless access technologies are often used instead.
• Later launch of xDSL: in some CEE markets, cable-TV and other alternative operators, using FTTH/B or LAN-based technologies, launched broadband before the incumbent launched DSL.
• Later launch in CEE of wholesale services on the incumbent's network.
• Lower cost in CEE to deploy fibre networks (often done aerially without expensive digging and driven by lower labour costs).
• A more creative approach to deployment by small-scale operators in CEE using non-standard deployment techniques and architecture.

In terms of nominal bandwidth, CEE clearly outperforms WE, thanks to the predominance of FTTH/B and LAN-based technologies. However, for service quality or real bandwidth, this is not always the case, because cable-TV, FTTH/B and especially LAN networks often require substantial upgrades to offer service qualities similar to those of DSL networks in Europe. These upgrades encompass the passive infrastructure, active transmission equipment, customer premises equipment, as well as core systems and processes. Therefore, the main challenge becomes twofold.

• Increasing coverage of fixed broadband to more rural areas.
• Upgrading the established networks.

The business case for the former of these two challenges is likely to be weak (and will become even more so with the deployment of 800MHz LTE networks). However, the business case for the latter is more interesting – upgrading existing networks will attract continued investment activity throughout CEE. Much of this is likely to involve M&A activity, through which small-scale networks that are unlikely to survive in the longer term are consolidated to reach sufficient scale, and then upgraded to be able to provide best-in-class services. This M&A activity is likely to involve incumbent operators, alternative telecoms operators and cable-TV operators, rather than financial institutions, and will face many operational challenges – because consolidating different, and often non-standard, technologies may prove troublesome and require careful planning.

¹ We include the following countries in our definition of Central and Eastern Europe: Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Russia, Slovakia, Slovenia, Turkey and Ukraine. Our definition of Western Europe includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the UK.

² Excluding Russia and Ukraine would shift the penetration rate to 50% of households.

³ Excludes Finland, which has multiple incumbent operators. The maximum market share for CEE is in Turkey and the minimum in Bulgaria. For WE, the maximum is in Denmark and the minimum is in the UK.

⁴ Examples include: Elion in Estonia with 63 000 subscribers in the first quarter of 2013, Lattelecom (Latvia, 109 000), TEO (Lithuania, 166 000), Rostelecom (Russia, 2.7 million), Slovak Telekom (70 000), Telekom Slovenije (33 000) and Türk Telekom (278 000).


Source: MRG Analysis