The telecommunications market
in the Czech Republic
In the first half of 2011, the telecommunications market in the Czech Republic saw a decline. The reasons included the difficult economic environment in the marketplace including a fierce competition, and further cuts in the mobile termination rates. The situation improved slightly in the second half of the year, particularly as the consumption of mobile customers in the residential segment stabilised.
Despite the challenges of the environment, Telefónica CR managed to maintain a solid growth in the number of customers, especially in the area of mobile services and broadband internet.
In 2011, the number of mobile customers increased by 103 thousand to 4,942 thousand. As T-Mobile Czech Republic (T-Mobile) and Vodafone Czech Republic (Vodafone) use a different methodology of accounting for mobile customers, a true comparison is not possible; still, Telefónica CR significantly strengthened its market position as measured by the number of contract customers with an increase of 186 thousand, which represents a 49.5% share in the total additions of contract customers in the Czech mobile market in 2011. At the end of the year, the Company’s market share stood at 39.4%, up 0.5 percentage point year on year.
All mobile operators directed their investments at improving their broadband data networks and increasing the network capacity, to prepare for future growth.
The modernisation and expansion of the 3G network in all parts of the Czech Republic continued in the first half of the year. In February, Telefónica CR and T-Mobile signed an agreement to share their 3G networks in the rural areas. The shared infrastructure should, in the future, include 1,000 BTS, with each of the two operators building a half of them. Telefónica CR committed to covering the eastern part of the Czech Republic with the network, while T-Mobile will roll out the network in the western part.
As part of the 3G network sharing arrangement, T-Mobile and Telefónica CR harmonised their methodologies for the calculation of the population coverage. At the end of December, the Company covered 73% of the population with signal.
Telefónica CR also continued to roll out its optical networks and pursued further investments in the WiFi segment, with a view to strengthening its market position.
Two new virtual operators started up in the Czech market in 2011. OpenCall uses the CDMA network of U:fon operated by MobilKom and offers wireless fixed access and a mobile service with a prepaid card. The other one, Mujoperator, also uses the network of U:fon to carry its service.
Trends on the fixed internet access market
Several changes occurred during 2011 in the ownership structure of market players.
In January, the Office for the Protection of Economic Competition gave permission to sell České Radiokomunikace to funds managed by the Macquarie Group of Australia. The seller was Falcon Group, which also owns close to 40% of T-Mobile.
In February, MobilKom, which operates the U:fon network, announced a change of ownership: Penta sold its 100% interest in the company to Divenno Holdings, the mother company of Dial Telecom.
Also in February, UPC Česká republika (UPC) took over Sloane Park Property Trust, which allowed UPC to integrate the optical backbone networks of the two companies. A new unit, UPC Business, was created, with a sole focus on the business segment. UPC opened its first data centre in Prague in December.
In early June, České Radiokomunikace (ČRa) merged with Morava Czech Communication Holdings, which had owned close to 100% of all ČRa’s stock.
In the fixed access segment, VOLNÝ made a strategic decision top offering ADSL internet connectivity using other operators’ infrastructure to residential customers. Telefónica CR took over close to 11 thousand non-business customers. The migration started in mid-March 2011; the price and service parameters remained the same.
Telefónica CR continued with improvements to its fixed internet access service by expanding the VDSL reach and increasing speeds to existing customers.
In early May, Telefónica CR premiered a new technology, VDSL (Very High Speed DSL), which allows up to two times faster home internet. Existing customers were given a speed increase without a price hike. The technology is available to approximately 45% of homes that are within a 1.3 km radius from the exchange. The new technology also ushered in changes to the fixed internet tariff structure – customers could benefit from a promotion offering new tariffs at reduced rates. The attractiveness of the technology is attested by the fact that more than 100 thousand customers, both existing and new, opted for VDSL by the end of 2011.
Trends in the mobile data market
A number of significant events happened in 2011, which affected the whole telecommunications market. The mobile market was dominated largely by the news of innovated or new data services. Below we list those events that we regard as most influential.
From March 2011, Telefónica CR cut the prices of its basic data roaming service for all zones; the biggest price cut was in the EU zone, with the price going down from CZK 240/MB to CZK 24/MB, i.e. by approximately 90%. Roaming data bundles also saw major price slashing.
Telefónica CR continued to strengthen its leadership in the 3G network coverage. The Company added 126 locations in June 2011. The advantages of fast mobile data were available to the residents of 1,699 towns and villages at the end of 2011, which represents 73% coverage of the Czech population.
The Company raised awareness of the advantages and extent of 3G network coverage through its ‘Smart Network’ campaign, which explained to the public the benefits of having internet in a mobile and of mobile internet.
A survey by Ipsos Tambor showed that Telefónica CR had the best mobile data and the most extensive coverage. The respondents confirmed that, compared to the competition, Telefónica CR offered the best mobile internet service.
Regulation
Several changes occurred in 2011 in the regulatory environment which governs the field of electronic communications in the Czech Republic. The most material changes included the following:
- changes in the legislation;
- changes in the areas of markets analysis and product regulation;
- changes in the Universal Service provision and in the government’s policy and support of broadband internet access.
Below are the main changes to the legislation in the area of electronic communications:
- Promulgation of the Act No. 468/2011 Coll., amending the Act No.127/2005 Coll., on electronic communications, and on the amendment to some related laws (Electronic Communications Act), as amended, and some other laws;
- Promulgation of the Judgement of the Constitutional Court No. Pl.ÚS 24/11 dated 20 December 2011, cancelling the provision of Section 88a of the Act No. 141/1961 Coll., on criminal procedure (Code of Criminal Procedure), as amended, by expiration on 20 September 2012, which relates to the treatment of records of telecommunications traffic by law enforcement authorities;
- Promulgation of the Judgement of the Constitutional Court No. Pl. ÚS 24/10, cancelling the provision of Section 97(3) and Section 97(4) of the Act No. 127/2005 Coll., on electronic communications, and on the amendment to some related laws (Electronic Communications Act), as amended, and Decree No. 485/2005 Coll., on the extent of traffic and location data, the time of retention thereof, and the form and method of the transmission thereof to bodies authorised to use such data;
- Promulgation of the Government Regulation No. 156/2011 Coll., amending the Government Regulation No. 154/2005 Coll., on the determination of the amounts and the method of calculation of the charges for the use of radio frequencies and numbers, as amended;
- Promulgation of the Decree No. 53/2011 Coll., amending the Decree No. 117/2007 Coll., on the numbering plans of electronic communications networks and services, as amended;
- Promulgation of the Decree No. 22/2011 Coll., on the method of determination of coverage of terrestrial radio broadcasting over selected frequencies;
- Continuation of the implementation of the revised regulatory framework for electronic communications networks in the Czech law:
- Directive 2009/136/EC of the European Parliament and of the Council amending Directive 2002/22/EC on universal service and users’ rights relating to electronic communications networks and services; Directive 2002/58/EC concerning the processing of personal data and the protection of privacy in the electronic communications sector and Regulation (EC) No 2006/2004 on cooperation between national authorities responsible for the enforcement of consumer protection laws;
- Directive 2009/140/EC of the European Parliament and of the Council amending Directive 2002/21/EC on a common regulatory framework for electronic communications networks and services Directive 2002/19/EC on access to, and interconnection of, electronic communications networks and associated facilities, and Directive 2002/20/EC on the authorisation of electronic communications networks and services;
- Regulation (EC) No 1211/2009 of the European Parliament and of the Council establishing the Body of European Regulators for Electronic Communications (BEREC) and the Office.
Telefónica CR was involved in the preparation of the above legislation by providing consultation either directly or on the platform of industry associations of telecommunications operators or through its parent company Telefónica.
Relevant markets analysis and product regulation
Telefónica CR continued to meet its duties with which it was tasked based on the relevant markets analysis undertaken by the Czech Telecommunication Office (CTO) in previous periods.
In January 2011, the CTO published its selection of Ernst & Young, s.r.o., to produce the LRIC methodology, including a model for call termination in fixed public networks. The outputs of this model are expected to be used by the CTO to set the maximum call termination rates in fixed public networks in late 2012 and early 2013.
Also in January 2011, the CTO decided to appoint the Asset Valuation Institute of the University of Economics in Prague to deliver a calculation of a WACC value for the purposes of regulation in the sector of electronic communications. Telefónica expects that the updated WACC will be used for the determination of regulated prices from next year onwards.
In February 2011, the CTO commenced the third round of analysis of the relevant market No. 5 – wholesale broadband access in electronic communications networks. Telefónica expects that the analysis will be published in the form of a general measure by the end of the year.
In April 2011, the CTO issued a decision, reflecting on the results of its analysis of the relevant market No. 6 – wholesale terminating segments of leased lines irrespective of the technology used for the provision of leased or reserved capacity, which changed the regulatory measures applicable to Telefónica in this market. Based on the decisions, pricing regulation no longer applies to the wholesale service; however the imposed regulatory measures now apply also to Ethernet leased lines.
Effective from 1 July 2011, the regulated wholesale price for mobile termination was reduced to CZK 1.08 per minute.
Regulation of international roaming
In keeping with the presently applicable regulatory framework, the regulated international roaming rates went down effective from 1 July 2011 as had been planned.
The retail rates for incoming calls went down on 1 July 2011 to EUR 0.11 per minute; the price for an outgoing call was brought down to EUR 0.35 per minute. The price for an SMS stayed at the level of EUR 0.11. The prices, expressed in Czech crowns, were adjusted based on the applicable exchange rate.
On 6 July 2011, the European Commission published a proposal encapsulating its vision for Phase III of mobile roaming regulation. The proposal foresees the regulation to apply also after 31 July 2012 (when the so-called Phase II of roaming regulation expires). The proposal expects that regulatory action in the area of international roaming will be expanded; the regulatory measures applied to date (price regulation) are to be joined from 1 July 2014 by giving customers the option to choose a different roaming provider to the provider of their national mobile service. The proposal is subject to approval by the European Parliament and the Council of Ministers of the EU.
Imposition of duties related to the provision of the Universal Service
Telefónica provided the following services during 2011 as part of meeting its duties imposed by the CTO in relation to the Universal Service provision:
- the public payphone service;
- access to the public telephone service, of the same quality as for other end users, for people with disabilities, namely by means of special terminal equipment;
- special price plans for persons with disabilities, which are different from the regular price plans provided under the standard commercial terms and conditions.
As to the service under (a), a CTO decision from 2009 led to a significant reduction in the number of public payphones operated as part of the Universal Service in 2011; the duty to operate public payphones as part of the Universal Service concerns municipalities with 4,999 or more residents. The CTO reviewed the service under (a) and decided to uphold the Universal Service obligation until the end of 2013 for municipalities with 4,999 or more residents, and, for municipalities with a population under 1,999, until the end of 2014. The CTO also commenced the process to select a provider of the public payphone service under the Universal Service, which is expected to conclude in mid-2012.
As to the services under (c), the Czech Telecommunications Office imposed on Telefónica CR the duty to offer special pricing under the Universal Service obligation, for a period of three years commencing on 2 July 2011.
Funding of the Universal Service
Telefónica CR submitted its claim for compensation for the loss incurred as a result of Universal Service provision (including the loss incurred as a result of offering special price plans for people with disabilities) in 2010. The CTO then proceeded with verifying the amount of the loss and examining the supporting documents, and made the payment in December 2011.
The CTO published a final and conclusive decision determining the amount of the loss incurred as a result of Universal Service provision in 2009, and the loss incurred as a result of Universal Service provision (including the loss incurred as a result of offering special price plans for people with disabilities) in 2010.
State policy and support in the area of broadband internet
In January 2011, the Czech government approved a State Policy in the Area of Electronic Communications – Digital Czech Republic. The strategy deals with the development of ICT, with a special emphasis on bridging the digital divide between urban and rural areas. The document set the following objectives:
- to ensure that broadband internet with the minimum (downlink) speed of 2 Mb/s, and 10 Mb/s in towns, is available in all populated locations in the Czech Republic by 2013;
- to ensure that, by 2015, broadband internet is available in all rural settlements, with a speed which will equal at least 50% of the average broadband speed in towns. 30% of homes and businesses in towns should have internet with a speed of at least 30 Mb/s available to them.
As part of delivering on the above objectives, the Ministry of Industry and Trade released a draft paper setting out the development criteria for the planned auction of frequencies in the range of the so-called digital dividend in September 2011.
Also in September 2011, the CTO published guiding principles for the upcoming unction of 800 MHz, 1 800 MHz and 2.6 GHz frequencies.
Structural funding from the EU continued to support various projects in the area of ICT development in public institutions. The support went in the direction of mainly regional networks connecting public institutions, as well as the private sector.
In April 2011, the European Commission called a public consultation on the Community Guidelines concerning the state aid rules with regard to fast roll-out of broadband networks.
Telefónica CR is a member of prominent industry associations that work to develop the market in electronic communications in the Czech Republic: ICTU (Association for Information Technologies and Telecommunications), APMS (Association of Mobile Network Operators), ČAT (Czech Telecommunications Association) and ČAEK (Czech Association of Electronic Communications).
The Company is also a member of several other structures that are important for Telefónica’s activities: HK ČR (Chamber of Commerce of the Czech Republic), SDT (Association for Telematics in Transport) and others.
The Government of the Czech Republic started the process of programming the EU Structural Funds for the period 2014–2020. With regard to the overall objectives of the EU, as expressed in the policy paper Digital Agenda for Europe 2020, we can expect that support will focus also on the field of ICT.
Telefónica CR submitted its comments on the proposed development criteria and on the guiding principles of the planned frequency auction – on its own behalf and also jointly as a member of the above associations.
The Company is constantly monitoring options offered to customers by structural funds, and modifies its products and services so that they are eligible for subsidies. A special attention was paid to Call 8 under the Integrated Operational Programme for the development of eGovernment services in the regions. Telefónica successfully participated in tenders for projects co-funded from Structural Funds.