Thinking big in a small market: multimedia services for consumers; managed IT services for corporates; mobile expansion in central and eastern Europe. Rudolf Fischer, COO, Telekom Austria , outlines the group's vision for growth

Telecommunications International, April, 2004 by Ken Wieland

How does an incumbent, with a long history of domestic dominance, defend its market share and protect margins in the face of competition? How does an incumbent, listed on the stock market, demonstrate to shareholders a compelling strategy for profitable growth when its home population is a modest eight million?

Telekom Austria has had to wrestle with the first question since 1 January 1998 (when telecom liberalisation was first introduced to Austria) and the second since November 2000 (after an IPO took it onto Vienna's blue-chip ATX index). In each instance, the company believes it has come up with answers but it has required a radical and painful period of structural re-organisation.

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"We've completed a major phase of cost-cutting, which has included a reduction in our workforce by a third since 2000," says Rudolf Fischer, COO, Telekom Austria's Wireline division. "For the last two to three years, we've been focused on getting our cost structure right."

A large part of getting the 'cost structure right' has been--and will be--through Telekom Austria's investment in 'next-generation' infrastructure. The company completed the rollout of its 320Gbps domestic fibre-optic backbone three years ago--which will provide the basis of an all-IP multi-service network--and is managing to reduce substantially its investments in ATM, SDH, PSTN and ISDN. In the first nine months of 2003, capex by the Telekom Austria Group fell by 8.5 per cent to [euro]339.4 m compared with the same period during 2002.

The ability to reduce costs will be of some comfort for Telekom Austria when it ponders its wireline voice telephony business, which has been badly hit by competition. In 1999, the company enjoyed an 85 per cent fixed-line market share (based on minutes, including internet dial-up) but, by 30 September 2003, that share had fallen to 55.4 per cent. Revenues in its wireline business segment also continue to decline: [euro]555.7 m for 3Q 2002 compared to [euro]547.8 m in 3Q 2003.

Fischer takes some satisfaction from the fact that Telekom Austria has managed to stabilise its wireline voice minute share (55.2 per cent at the end of June 2003). "We know there isn't going to be spectacular expansion in this business [domestic fixed-line voice], but we can offset price declines by adding new services [over DSL] to achieve steady growth," he says. Stabilisation in the voice market has been achieved by cheaper tariff packages via the company's so-called 'TikTak' lines, first launched in 2001. It has also employed the tactic of bundling telephony services with its ADSL consumer packages, which is designed to discourage customers from choosing alternative voice suppliers. But where is the 'steady growth' going to come from exactly? "We're moving into multimedia services [over ADSL]," says Fischer. "Last year we launched a video service over our Aon.tv portal, which allows PC users to view video clips [sport, news, music] and live broadcasts from ORF [Austria's state-owned broadcaster]. By the end of 2005 we will be offering content to the TV through set-top boxes at speeds of up to 3Mbps. This is partly a defensive strategy on our part to counter the triple-play strategy of cable operators but it is also an offensive move because we're moving into a totally different business model."

Telekom Austria is currently in talks with major Hollywood studios to increase the attraction of the service. "We're not interested in paying money up front [to content providers] but rather to work together on a revenue-sharing basis," he says. As of 31 December, Telekom Austria had 261,000 ADSL subscribers (including wholesale customers) with a target of 500,000 by the end of 2005. The total number of incumbent copper lines in Austria is three million.

Telekom Austria is also making--what it believes to be--a stronger pitch to the corporate customer. "We've changed our organisational structure from being technology-orientated to customer-orientated," claims Fischer. Of course, 'customer-orientated' is a phrase often bandied about by company executives, but Fischer is able to add some detail. "Previously we sold voice and managed leased lines to our corporate customers through different organisational units. We've now harmonised these organisations to create one point of contact and expanded our product portfolio at the same time," he says. "We're moving more into IT managed services, such as hosting and security solutions."

In terms of achieving top-line revenue growth, it is mobilkom austria--a wholly-owned subsidiary of the Telekom Austria Group--that continues to shine. For 3Q 2003, revenues were [euro]537.1 m (on an adjusted EBITDA margin of 38.7 per cent), a 5.4 per cent increase over 3Q 2002.

In April 2003, mobilkom austria was one of the first mobile operators in Europe to launch 3G services. However, it blames a lack of handsets for not actively promoting the service so far. Mobile data revenue is currently running at around ten per cent, with roughly 80 per cent of that coming from SMS traffic. mobilkom austria had a 43.9 per cent market share at the end of September 2003 with an average monthly ARPU of [euro]37.5 during 3Q.