Convergence in Austria

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Telekom Austria is tackling fixed-mobile convergence in a novel way. It has extended the responsibilities of Boris Nemsic, who has run its mobile operations for six years, so that from May he will be CEO of the whole group. Yet he is sceptical about the idea of fixed-mobile convergence as many operators see it

Boris Nemsic picture
Boris Nemsic: looking
for further acquisitions
to the south and east
of Austria

Boris Nemsic is the CEO of Mobilkom Austria, the mobile division of the Austrian incumbent, and is COO of the group's various wireless activities. And we were at the 3GSM conference in Barcelona.

So perhaps it was understandable that, when the first question in the interview was: "What are your plans for Telekom Austria?" he misunderstood and started to answer about Mobilkom.

But that won't last long. When we spoke it was barely a month since Telekom Austria had announced that Heinz Sundt had decided to resign as CEO with effect from the company's annual meeting on May 23.

In the same announcement the company said that, from the following day, Nemsic would take over. He will be not only CEO of Telekom Austria, but will continue as CEO of Mobilkom Austria.

So where some incumbents have decided to announce their intention to reintegrate their fixed and mobile operations with some drama, and of course some share transactions, the Austrians appear to have done it simply by announcing that one person will head the two businesses.

The reality will, naturally, be revealed after May 24 as Nemsic builds his team and develops his strategy. But meanwhile he can be tempted to express some initial ideas about the converged world of the fixed-mobile future.

Nemsic does not fit the stereotype of an Austrian businessman. That's because he's not. He was born 49 years ago in Sarajevo, then in Yugoslavia but now, after a brutal civil war in the 1990s, the capital of Bosnia Herzegovina. He trained as an engineer, and moved to Austria in his 20s as an academic, before working for telecoms equipment manufacturers in Austria, Switzerland and Germany. He's been with Mobilkom for nine years, having joined as a network planner.

All pictures show him with a characteristic stubble on his chin — just as he was at the interview at 3GSM. So, back to the original question: what are your plans? "To continue a successful business," he says. "One of the major points which we've already announced — we are following a horizontal expansion in Serbia and Bosnia Herzegovina, and this is the main point for this year."

Balkan interests

Telekom Austria already has interests in neighbouring Balkan countries. Nemsic himself once headed VIPnet, the company's mobile operation in Croatia. "In Bosnia Herzegovina there is a tender that has been announced, which should be in April or May, for a fixed and mobile operation, with roughly 500,000 mobile customers and roughly 300,000 fixed customers."

The company that Mobilkom will be bidding for has a full nationwide licence in Bosnia Herzegovina. "They are now number two there, but they have good potential," he says. "There will be a tough race for it. Others will bid, but we think we have some advantages in the region. We know it very well. So we will run for it."

In Serbia it's more complicated. Mobtel "which we have been heading for, lost its licence in December, and the government decided to withdraw the licence". Now the company is under state control. But Mobilkom is working with the government and private investors "to find some next steps which will bring the licence and the assets so we can take over later on".

The exact procedure is not year clear, says Nemsic. There will be tendering process, "especially because the licence must be tendered", but he is sure that Mobilkom "can compete, no problem at all".

He seems confident, then, of the chances that operations in Bosnia Herzegovina and in Serbia will shortly join the Mobilkom business, alongside its existing central and eastern European interests — VIPnet in Croatia and Si.mobil in neighbouring Slovenia, both also parts of the former Yugoslavia, plus Mobilkom Liechtenstein. A recent addition is Mobiltel in Bulgaria, owned directly by parent company Telekom Austria.

Is he looking at other opportunities for expansion? "It's always a question of what is available, and that changes from day to day. There are no named projects at the moment. We are watching the area and I am sure something will appear down the road."

How far afield does Nemsic define his boundaries? Where will he look for acquisitions? Vodafone recently made a purchase in Turkey.

"Turkey's a big place," says Nemsic. And at the same time Vodafone sold its Swedish operation. "That's interesting," he says: "A smart, tough move, because it's obvious that big boys are better in big markets, and small or medium sizes — as we are — are better in small markets. It's very good if this kind of reshaping takes place."

He doesn't quite specify where he's looking, except "east and south of Austria", a term which pretty much describes what he's already invested in, or declared his intention — in this interview — to invest in; unless other opportunities arise in places such as Hungary, Romania, Albania or Greece.

Record penetration

Mobilkom is looking outside Austria for its growth opportunities because mobile penetration is 106%. However, in December the company recorded "an all time high in net adds in the history of the company" in its Austrian home market. "If you ask me where the people are coming from, I cannot give you a complete answer. But however we are happy that people are coming. We have passed the number of 3.4 million customers."

Mobilkom's share in the contract market is growing, he says. "We are not speaking about growth in unnamed pre-paid but substantial growth in post-paid. Our post-paid growth rate was roughly 8%, and that's with a penetration of 106%."

Data revenues — "real data, without SMS" — are doubling year on year. "Real data revenues have already passed SMS revenues," he adds. "That's really good news."

He is concerned with one aspect of the mobile market in Austria. T-Mobile, owned by Deutsche Telekom, wants to buy a smaller operator, Tele.ring.

This plan has now been postponed, because the European Commission in Brussels appears worried that competition will be harmed. Nemsic is worried about this — perhaps surprisingly, because normally one would expect one operator to be concerned about strengthening opposition.

But it's not that. "Austria is definitely the most competitive market in Europe, or one of the most competitive. It's really on the top. Saying that if number four is merged with number two all this competition will diminish is, well it is really curious. I cannot follow it."

Nemsic is concerned that such a ruling might be "our industry cannot develop". He points out that "consolidation is a normal process of development" and "if this is frozen this will be very bad for the industry".

He's not worried by the prospect of T-Mobile's Austrian operation taking over Tele.ring. "Who cares? We have nine brands on the market. That's not the point. But this is an artificial step."

The previous owners of Tele.ring "have finished their job", he says. They're at the end of their phase. "Why should you force them to keep going if they don't want to." If pressure from government or regulators means companies can't merge, financial investors will be concerned about other investments in the industry, he says.

"They want to sell."

Normal consolidation

Consolidation is "a very normal step", he says. "We are speaking of consolidation in the area of 35-36% market share, which is nothing. We are not speaking about the 60s."

Most countries allow operators to merge: "it worked in the Netherlands, it worked in Iceland, it worked in Finland, it worked in Italy; yet in Austria Brussels is making such a noise. I definitely don't understand what is going on."

If the Commission's view prevails, "it is an extremely bad sign for the industry2, says Nemsic. "I am speaking very openly because we are not involved. T-Mobile is keeping very gentle. This story has been running now for eight months," and it is bound to affect customers and employees.

Does this affect Telekom Austria and Mobilkom directly? No, "because we do not have any consolidation plans because we are number one, so I must assume that we will not be allowed to do major steps". From a commercial point of view "it doesn't affect us at all, no, he says.

One of the suggestions from Brussels for remedy was that "the assets should be handed over to Hutch", which already owns a 3G licence, under the brand name 3, in Austria. "How can you say to Hutch that you must roll out 2G services?" wonders Nemsic.

"I don't understand the rationale behind it. It's simply wrong. For Mobilkom and Telekom Austria it has no influence, but for the industry it's not good."

Customers decide

He is not CEO of Telekom Austria itself yet, so he is understandably cautious about going too deeply into his plans for when he takes over. But what does he think about ideas of convergence between fixed and mobile operations? How is he seeing the future?

"I think in the industry we have a mess with the term 'convergence'. What does it mean?" says Nemsic. "The matter of convergence will be decided by the customer, and from a technological point of view you should not push the customer to use something which we call convergence because it's technically possible today. This is simply wrong."

Instead, find a service from which the customer gets added value. "If you can define that, fine. In some areas there will be a substitution. In some other areas there will be a common solution."

But there's a problem lurking here. "You have to be honest. If a customer thinks about convergence, he thinks about a discount. So let's name it. Are we allowed to give a discount? We have to ask our dear regulators, are we allowed to offer a discount."

And Telekom Austria is the incumbent, so that sort of thing tends to be difficult.

"I'm an engineer," says Nemsic. "I know that we can push the bits this way and that way. That's really not the issue. Each and every market and especially each and every company has to really look very precisely at which way convergence is going."

Telekom Austria has an excellent reputation for developing new services. "We have a very good broadband share, roughly 40% in retail plus 10% for wholesale, 50% together. We have excellent positioning in IPTV. We'll be a triple play offer, and this has to be developed further."

With both fixed and mobile operations in the same company, and soon to be under his management, does Nemsic see much potential for fixed-mobile convergence. "That's for the customer to decide," he says.

"BT is not a good example for us." BT in the UK is promoting fixed-mobile convergence, using Vodafone as the carrier of the MVNO part of the system. BT does not have its own mobile network. "Because we have really two strong arms, fixed and mobile."

And in Austria mobile substitution is among the strongest in Europe, he adds. "Around 53-54% of all minutes are on mobile," he notes, "so we are not talking about 80% — as the German example — and looking for 10% as a mobile operator. In Austria we've passed this stage."

To be clear, Nemsic believes the opportunity for fixed-mobile convergence is being seen in countries where most minutes still travel on fixed networks. That's no longer the case in Austria, where mobile call rates are low. "That's the point," he says. "You can kill all these dual mode stories with a nice tariff."

Low tariffs

And in Austria these tariffs are already in operation. "For example with us, for a lump sum of €3 a month you have free calls to the fixed network. For a further €3 or €5 a month, it depends on the package, you get free calls on net with 3.4 million Mobilkom customers."

Why should anyone build complex new technology in order to achieve savings on mobile phone calls, by diverting them to IP networks, when lower tariffs can keep those calls on the GSM networks, he wonders.

"The community is made by the tariffing, and you don't need a complicated device that recognises wifi, Bluetooth, GSM, UMTS, DSL — who cares?"

And the customer making a half-cent phone call does not care which technology is behind all this, he adds. So he doesn't understand "these moves that we see in Europe, and BT is an excellent example, and Germany is the second excellent example".

It is all "triggered by low substitution of minutes, and high pricing", he warns. "And we already have substitution and low pricing, so this is a problem that doesn't exist in Austria — I would say fortunately."

Why are prices so low? "In Austria we had quality competition from day one," he says. "We tried to position ourselves on the quality side," and others did the same. "Austria has excellent quality and then you have to compete on price."

Quality is such that "when people ask if you have indoor coverage or not, we don't know what people are talking about, because of course you have indoor coverage". That's different from many other countries.

Meanwhile Mobilkom has launched HSDPA commercially and "it's really sexy, it's brilliant", says Nemsic. Mobilkom has an alliance with Vodafone, so markets the Vodafone Mobile Connect card in Austria "and this can be upgraded to HSDPA with a software download", he says. "Within two weeks 2,000 people had downloaded it. And when you use it you can take a two metre screen and show video on it with HSDPA and you have high definition TV."

It's a bit too early to say exactly what that will do to his network loading, "but people have the feeling of their mobile office with their laptop as if they are directly plugged into the internet. That's the big point. You don't have the feeling that you're wireless. It's really great."

It's been rolled out in Vienna and will be in the main cities by the middle of the year. "UMTS coverage will be identical with HSDPA coverage," he adds. The tariffing "is absolutely the same for all data — GPRS, EDGE, UMTS, HSDPA, all the same". Mobilkom offers a 500 megabyte package for €29.90 a month, a promotional offer at €10 less than it will eventually be. "People understand the tariffing. It's €30 and that's enough."

People "are receiving huge PowerPoint presentations without any problems". And the uplink speeds are better. Downlink speed is 1.8 megabits; uplink is 384 kilobits maximum. "That's maximum of course. The normal throughput on the downlink is somewhere around one megabit, which is more than comparable with DSL, you know. But with DSL you can do more. No doubt about it."

And he doesn't worry that some people might be trying to use HSDPA for voice over IP. "The on net call is one cent or zero cents. What's the difference? It's much better they pay us €30 for the card. No problem."

What about investment plans in the network? "We have very clear plans for a next generation network, which is a fully IP network. But we are the incumbent, and we have a lot of equipment, so we will not throw everything away for new. That's not the point."

The company plans "a normal evolution" in equipment and services. "Technology will exist in parallel. We will make a normal migration and evolution." GTB

Mobilkom Austria

Revenues: €1.72 billion (+2.4%)
Adjusted EBITDA: €612.8 million (+3.3%)
Operating income: €358.8 million (+5.2%)
ARPU: €35.90/month (-2.4%)
Customers: 3.39 million (+3.6%)
Mobile penetration: 106.0%
Market share: 39.1%

Mobilkom group
Revenues: €2.49 billion (+17.1%)
Adjusted EBITDA: €969 million (+26.6%)
Operating income (EBIT): €552.2 million (35.5%)
Employees: 6,038 (+66.6%)
Customers: 8.96 million (81.1%)

Boris Nemsic
CEO of Mobilkom Austria since May 2000
Also CEO of Telecom Austria from May 2006
Born in 1957 in Sarajevo, then in Yugoslavia but now the capital of Bosnia Herzegovina
1980: degree in electrical engineering from Technical University of Sarajevo
1988-1990: assistant lecturer at the Institute of Communications and Radio Frequency Engineering, Vienna University of Technology, Austria
1990: graduated from the Vienna University of Technology
Directed the mobile communications development department for Ascom and Bosch Telekom in Vienna, Austria; Solothurn, Switzerland; and Berlin, Germany
1997: Hired by Mobilkom Austria as department head for network planning
From November 1998, led the team at VIPnet, Mobilkom Austria's Croatian subsidiary
From 2001, in addition to his post as CEO of Mobilkom Austria, Nemsic's responsibility for the board's technology division.
In July 2002, appointed to the managing board of Telekom Austria as COO Wireless
Married and the father of two children