T-Croatia Instead of e-Croatia

26 November 2006

Compared to the other countries in SEE, the Croatian telecommunications sector is very well developed. The liberalization, i.e. the formal elimination of monopolies, was implemented in all segments of the market, while the state ownership in the incumbent operator is below 50 percent.

Furthermore, a stable regulatory and policy framework was established, providing satisfactory levels of autonomy for the Telecommunications Agency (according to the European Commission) and the Central Administrative Bureau for e-Croatia, which has done strong work to increase public access to information and communication technology. Finally, the availability and quality of telecommunication services, as well as the percentage of population that uses them are among the best and highest in the region (according to the comparative report on telecommunications sector in SEE, prepared by Cullen International).

In terms of prices of telecommunication services � fixed, mobile telephones and internet � they are very close to the EU averages, but bearing to mind that Croatia�s per capita GDP is less than half of the European average (12,400 USD and 28,100 USD, respectively (the data for 2005 is taken from the CIA World Factbook).

In spite of the somewhat discouraging data, when we speak of telecommunications in Croatia and of its telecommunications �market�, we realize quickly that we refer to, more or less, a single company with over 80 percent market share in fixed telephone services and internet, and about 50 market share in mobile telephone services. This, of course, is �T-Hrvatske telekomunikacija� (T-Croatian Telecommunications), the former state monopoly, in which the majority owner is the former German state monopoly, the Deutsche Telekom AG (DT).

�Hrvatske telekomunikacije� were established in 1999, with the separation of Croatian Postal Services and the telecommunications. The privatization of the company started that same year with the sale of 35% of the shares to DT. In 2001, the German telecom bought additional package of 16% of the shares, thus becoming the majority owner.

Both sales have caused great controversies in Croatian public, primarily because of the suspicions that the Government secured some inappropriately large concessions to the German investor, in order to get as high a selling price as possible. The benefits most discussed over the past several years include the guarantees and extended monopoly in certain areas; the obligation of the Government to compensate the damages created to DT by any changes in telecommunications legislation; DT�s right to priority of the remaining shares; etc.

Members of both cabinets that participated in the privatization (HDZ�s Government of Prime Minister Zlatko Matesa and Ivica Racan�s coalition government) deny the existence of some of the least favourable clauses and make every effort to downplay their own contributions to the damages they created and transfer the responsibility �to that other cabinet�. Still, it is beyond any doubt that several rounds of changes and amendments to the Law on Telecommunications and the Law on Privatization of Croatian Telecommunications were used to extend its monopoly in fixed telephone services (which finally ended in early 2005), without any real rational explanation. The existing suspicions about the damaging agreement are further strengthened by the fact that some parts of it remain hidden from the public to this day.

For an interesting time-line of the sale of Croatian Telecom to DT, visit the article �The DaZombix� Code�, posted by t-zombix blogger at pollitika.com.

The European Commission, albeit very generally and superficially, also touched the issue of confidentiality of the agreement between the state and T-HT, in its 2006 Croatian Progress Report. For instance, the Report states that �...the agreement on concessions and other agreements need to be released to the public, and harmonized with the Law on Telecommunications, especially in view on any restrictions to continued liberalization of the market�. Also, the Commission believes that Croatia needs a brand new Law on Telecommunications, harmonized with the acquis communaitaire.

According to �Glas Istre� weekly, the Government hopes that the Commission won�t insist that the integral text of the agreement is published, since the state would be charged to pay penalties to the other contracting party (DT). On the other hand, the Government believes that the publication of the said agreements is not necessary, since the state has no obligations to guarantee T-HT�s preferential position.

This claim, in addition to the fact that it supports the suspicion that the governments hardly had the benefit of the users as their priority in sale negotiations, is probably not entirely true. Namely, for several months now there is a dispute between the state and local self-government units on one side, and T-HT on the other, about the ownership of underground telecommunications distribution channels (DTK). T-HT, in fact, considers DTK as an integral part of what it acquired with the privatization agreement. Although the final solution for this issue may require a court ruling, the very fact that the sales agreement may have opened a possibility for the corporation to own key infrastructure, is sufficient to prove that there are many circumstance that secure it preferential position in the market.

Fixed telephone services
The quality of fixed telephone services in Croatia is extremely good, compared to the other countries in the region � the network is fully digitalized, no double-user lines. Nonetheless, the technical segment may be as good as it gets, but the economic one is much less satisfactory.

This area was the last to undergo liberalization and establishment of market economy, primarily because of the already mentioned legal provision securing HT with a monopoly on the local loops, i.e. the link between the telephone exchange and the end user, which ended on January 1, 2005. It was only last year that two new fixed telephone operators entered the market � Optima and H1.

That is the main reason why these two companies have much smaller user base than T-HT, i.e. T-Com (�Privredni dnevnik� daily estimates T-Com�s market share at about 89 percent).

On the other hand, since the entry of new operators, the prices of calls have fallen significantly (some estimates claim that they are now a quarter of past levels) and the struggle to attract customers seems to have started in earnest in that market. At this moment, for example, the operators started offering dialling at 0 Kuna inside the network of a single operator, with low monthly charges for establishment of connection.

As we mentioned earlier in this text, the average prices of phone calls are close to those valid for EU. The price of one minute of local connection inside T-Com�s network, in the medium package is 0.28 Kuna (approximately 4 EUR Cents), while one minute of conversation with a fixed network in the U.S., in the same package, costs 4.27 Kuna (app. 58 EUR Cents).

Croatia still has the highest percentage of fixed telephony users in SEE � 37% (Cullen International). Yet, this figure is slightly more than a third of the figure for penetration of mobile telephony (the Croatian Telecommunications Agency operates with a figure of 90% of the population). Furthermore, the use of fixed network is in constant decline, to the effect that the share of minutes spent on fixed networks has fallen by 13.6% (National Bureau of Statistics) over the past year. It seems that, as significant the emergence of working market in fixed telephony may be, they were rather late to take place.

Mobile Telephony
Mobile telephone services in Croatia are, conditionally speaking, closest to true market competition. The second mobile operator (in addition to HT, i.e. T-Mobile), VIPnet entered the market in 1999, which created conditions for stronger competition, ergo, higher penetration of mobile telephony, very early on.

On the other hand, it is well known that market of two players produces, by default, an oligopoly, which may be understood or agreed (a situation in which the players are less prepared for pricing competition and which secures, just like with monopolies, huge profits at lower offer and higher prices, which is expected with a greater number of competitors).

Although there is no firm evidence that T-Mobile and VIPnet have cut a deal, the entry of the third mobile operator, Tele 2, in 2005 soon resulted in a cut of 50% in previously stable prices (Croatian Telecommunications Agency). For instance, the price of a minute of conversation from VIPnet to another mobile network in Croatia is 1.34 Kuna (app. 18 Eurocents).

Nonetheless, the current market shares indicate at strong domination of the first two players in the market. According to the information presented by �Poslovni dnevnik�, T-Com still leads in the market with about 50%, followed by VIPnet with 42% and Tele 2 which controls 8% of the market.

Internet
According to GfK Market Research of July 2006, about 45 percent of the population in Croatia has access to internet, with 35 percent of the population being active users. However, only 2.2 percent of the population has access to broadband connections (Central Administrative Bureau for e-Croatia), with huge majority still relying on the dial-up connections.

Majority of broadband users access internet through T-Com�s ADSL service, while other types of broadband (cable, wireless, mobile broadband) are far less represented and significantly more expensive. In spite of the fact that there are nine operators in Croatia that offer internet services, according to the information presented by �Vecernji list� daily in June 2006, T-HT�s share in that market is about 83 percent.

The current price of the cheapest T-Com ADSL package (1GB traffic at 1 Mbit/s download and 192 Kbit/s upload is 99 Kuna monthly (approximately 13.38 EUR), while the flat-rate price for the same speed is 278 Kunas (37.6 EUR). However, just two years ago, in spite of the technical capacities not much different than what is available today, the prices were several times higher, while ADSL was almost beyond reach for average citizens.

In mid-October of this year, Croatian Government adopted the Strategy for Development of Broadband Internet access by 2008, as well as the Action Plan for Implementation of Strategy for 2007 (the strategy is available for download at e-hrvatska.hr). The Strategy aims at 12 percent coverage with broadband access by the end of 2008. One of the key instruments for its implementation will be the regulation that will obligate T-HT to define the conditions for gross-sale of ADSL to other internet service providers.

This is, by all means, a worthy goal, although, evidently, not very ambitious. The current average coverage of households with broadband internet in the EU is 32%, according to Eurostat, november 2006 � which in itself is rather weak, comparing to countries some of the member countries (Netherlands, for example, boasts 66% coverage of households). It means that the Croatian Government aims to reach a bit more than a third of the the relatively low current EU averages in two years time. One advantage of this rather moderate goal lies in the fact that it seems perfectly achievable, i.e. almost nothing needs to be done to achieve it, having in mind that the number of broadband lines in Croatia has risen by 230% last year (according to Cullen International).

The way things are, it is very likely that T-HT offer will dominate the planned 12 percent coverage. Namely, in June this year T-Croatian Telecom acquired full ownership over the most successful, up to that time, alternative ISP in Croatia, Iskon. In spite of the fact that the Telecommunications Agency strongly opposed this merger, believing it would damage the recently started liberalization, it is now obvious that there were no legal grounds to prevent it.

The Government had a very interesting position on this merger. It said that, as minority owner, considers this acquisition a legitimate business move in conditions of consolidating telecommunications market. Really, every minority share-holder interested in nothing but the dividends with little care for the well-being of the society will rightfully hold that view.

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The current situation in Croatian telecommunications is marked by strong misbalance in favour of the incumbent operator which, in spite of the formal loss of monopolistic position, maintains its dominant position and control over the offer of most services. In such a situation, the existence of individuals and organizations the will accept the role of watchdogs, opposition and control of powerful positions is more than necessary.

On several occasions, that role fell on �Potrosac� Consumer Association. Its most important and most visible action so far was the civil lawsuit against T-HT on charges of illegal billing of telephone subscription fee and rounding up all phone calls to full minutes of conversation. The lawsuit was filed to the Municipal Court in Zagreb at the start of 2005, on the behalf of 35,000 citizens who gave �Potrosac� power of attorney.

Interestingly enough, less then two months after the lawsuit was filed, T-HT, upon request by the Telecommunications Agency, introduced another system of tariffs that used one second as main unit of calculation (although, according to Ilija Rkman from �Potrosac�, T-HT claimed less than a year before that that the company lacks technical capacity to measure calls in units smaller than one minute. Even more peculiar, somewhat funny actually, was the fact that T-Com launched a huge advertising campaign under the �One Second!� slogan.

Nonetheless, the most important and possibly most influential instance of control and resistance to the �fiddling� and monopoly in telecommunications in general and specifically in H-TH is the t-zombix blog. The author of this blog, in addition to being highly informed and knowledgeable in all issues regarding telecommunications, uses lucid, relaxed, almost colloquial language and style to criticize and comment on events and developments in the sector, both in Croatia and abroad.

What amazes the most is the sheer amount of daily information, sometimes obviously totally insider information, the blog carries daily. "As people started reading what I write, and I wrote on basis of weak and rather unclear information, drawing somewhat far-fetched conclusions, the very same people that read my blog started correcting me. Real information started coming, in the form of authentic internal documents and such. When it all fermented enough to make it well-visited and well known, even people from telecommunications companies started calling. Some wanted to talk, some even offered me to work for them or offered several internet links. That is how it all started, T-zombix said to Jutarnji List daily.

The official statistics (357083 total visitors; 560403 total hits) makes zombix.net one of the most visited and popular blogs in Croatian blogo-sphere. In addition, t-zombix was the first blogger quoted as source of information by HRT�s central news programme (see je prvi blogger kojeg je citirao centralni dnevnik HRT-a (vidi vijest National TV Used Blog as Source of Information).