Broadband in Bulgaria: the future for Vivacom

Posted by Stephen Wilson Monday, February 15th, 2010

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Deutsche Telekom (DT) would appear the obvious candidate to acquire Bulgarian incumbent Vivacom. The German telecoms group owns direct majority stakes in a few incumbents across Eastern Europe (Hungary, Slovakia), as well as indirect and minority stakes in others in the region. Vivacom is owned by AIG Investments, which is part of the wider AIG Group that was bailed out to the tune of billions of dollars by the American taxpayer. Insiders say AIG would be willing to sell, but any acquisition by Deutsche Telekom would by no means be plain sailing.

The Bulgarian broadband market is fiercely competitive and Vivacom’s market share was less than a third at the end of September. The rest of the market is largely filled by small to medium sized Ethernet players. Their size, however, is no reason to suppose that Deutsche Telekom would be able to outmuscle them, however. These so-called LAN players, using Ethernet based technology, can offer cheap, high-speed broadband. The smaller ones typically employ around 3-5 people, the new young entrepreneurs of Bulgaria, and as such can give very personalized service to their customers.

The cable sector looks increasingly capable of competing too. The two largest cable operators, Eurocom and Cabletel were acquired late last year by Swedish private equity firm EQT whose influx of funds should ensure new services are launched and a rebranding takes place.

Internal wrangles within DT could also prove problematic. Last year, the company increased its minority stake in Greek incumbent OTE, which already owned a majority stake in Romanian incumbent Romtelecom. Insiders have told me that there is debate within the company as to who should control strategy in the Balkan region. But if decisions had to go from Sofia, then to Athens and then to Bonn for final approval vital time could be lost. This is particularly a problem because the LAN players are nimble and can quickly adapt to changing trends.

Those close to the situation tell me that this long chain of command has been a problem in Hungary where decisions over whether incumbent Magyar Telekom should buy up smaller cable players had to be approved in Germany. By the time the decision was made the cable operator had already been snapped up by somebody else. This partly helps explain the extraordinary fact that in a fixed broadband market with less than 40% penetration Magyar Telekom lost retail subscribers in the second quarter of last year.

Another potential downside for Deutsche Telekom is that Vivacom has no TV service at present, a potential handicap when facing the IPTV offerings of the fibre players and the cable TV operators. The obvious solution, following the incumbent’s failed bid to operate the country’s digital terrestrial TV (DTT) network, would be to acquire direct-to-home (DTH) satellite TV operator Bulsatcom which has seen explosive growth in the last couple of years. This would make sense particularly given that Bulsatcom is a customer of Hellas Sat, itself owned by OTE.

In Eastern Europe pay-TV penetration is often far higher than broadband penetration and so there would be the potential for the incumbent to offer bundles of fixed telephony and pay TV and then later attempt to upsell these customers to a broadband connection. Certainly there is potential for such a strategy, especially in light of the underwhelming performance of many of the IPTV services from incumbents in the region.

DT could also make significant investment in new fibre networks in Sofia but this might not be enough to gain ground in the capital, however. The LAN players have a Robin Hood-type image with both the cable players and the incumbent, in the memorable words of one senior executive, being seen as “big gorillas”. The fundamental problem for Vivacom is that subscribers in Sofia are used to receiving high bandwidth access at very little cost. Even if DT launched a fibre network then this in itself would be no differentiator.

And any strategy of upgrading broadband access and launching IPTV, such as Romtelecom is pursuing, is no guaranteed success. With piracy so high (HBO’s subscriber numbers are much lower in Bulgaria than in other markets in Eastern Europe), will customers really be willing to pay for additional services such as video on demand? The jury remains very much out on that question.

One other option open to any potential buyer of Vivacom would be to acquire the LAN players. O2 in the Czech Republic is pursuing a strategy of acquiring some of the numerous small fixed wireless players and then converting the subscribers to DSL. But time is of the essence because both leading cable players, Cabletel and Eurocom, have been pursuing this strategy for a couple of years. Following the acquisition of those two companies by EQT, executives state that this trend will continue. Thus any delays in securing approval from on high could come at the cost of the acquisition opportunity being missed.

There would also undoubtedly be regulatory consequences if Deutsche Telekom did decide to acquire Vivacom. This is because OTE is the owner of Globul Bulgaria and this along with Vivacom’s mobile arm would ultimately give DT stakes in two of the country’s three mobile operators. These problems are surmountable, however. After the acquisition of OTE by Deutsche Telekom a similar situation arose in the Former Yugoslav Republic of Macedonia with the end result being the sale of OTE-owned mobile operator Cosmofon to Telekom Slovenia.

Nevertheless, it would be quite wrong to say that the Bulgarian market holds no promise. Quite the contrary, in fact, as broadband penetration still stood at only 27% at the end of September. Clearly then there is much room for growth, particularly away from Sofia where competition is strongest. Informa is also forecasting the market share of DSL to grow in the next 5 years. However, any DT owned Vivacom would face intense competition in acquiring those new subscribers.