New EU members lag behind in broadband but expect fast growth, says Yankee Group

August 30, 2004 Boston--On May 1, 2004, the biggest extension in membership occurred since the formation of the European Union (EU) in the 1950s: 10 new countries (collectively know as the accession countries) joined the 15 existing members of the EU. The EU now comprises a single economic and political entity with a population of 470 million and a GDP that is larger than that of the United States.

August 30, 2004 Boston--On May 1, 2004, the biggest extension in membership occurred since the formation of the European Union (EU) in the 1950s: 10 new countries (collectively know as the accession countries) joined the 15 existing members of the EU. The EU now comprises a single economic and political entity with a population of 470 million and a GDP that is larger than that of the United States.

The new members are a mixed bunch, including three former states of the Soviet Union, four that were part of the Soviet Bloc, one former Yugoslavian state, and two Mediterranean islands. For potential suppliers, the opportunity they represent is varied, but some countries will see strong growth during the next 2 to 3 years, according to market researcher The Yankee Group.

Membership of the EU does not in itself create a completely new market opportunity for international vendors and service providers. However, it does mean that the new states have to fall into line with EU regulations in key areas, such as competitive provision of telecommunications and legislation covering those with significant market power, including all incumbents. Therefore, all of the new members must implement rules on local loop unbundling (LLU), potentially allowing new competitive service providers to enter the market and take market share from established providers.

The 10 new members of the EU do not provide rich choices for those seeking to supply broadband services or equipment in Europe. Although the accession countries collectively account for about 19% of the new EU's population, they account for only 6% of the GDP. The region fares better when measured by total phone lines, but broadband penetration--at 1.9% of all households in the accession countries at the end of 2003--was lagging far behind penetration in the old EU, which was 12% at the end of 2003.

Despite this, the region is now witnessing rapid growth in broadband driven by:

• A relatively more affluent, urban, techno-literate middle class;

• Strong competition in some countries between telcos and cable TV companies;

• Strong political support for Internet usage in some countries, part of a strategy to improve the economic prospects of these nations.

As a result, The Yankee Group expects to see strong overall growth in the new countries during the next 5 years.

Cable TV is a surprisingly important Internet access methodology in some of these countries, especially in the three central European nations, Czech Republic, Hungary, and Poland. In the Czech Republic, cable Internet access is well ahead of DSL. Pan-European cable giant UGC has significant operations in all three countries, as well as Slovakia, and has been pushing broadband Internet in all its territories.

Internet penetration is highest in Estonia, where there has been strong government support for Internet access, and in Slovenia, which has a relatively
advanced economy.

Matav in Hungary has been most aggressive of the three big incumbents in pushing broadband. The company had 104,000 business and consumer DSL customers at the end of 2003 and is continuing to add subscribers at a fast pace.

For suppliers and service providers, the three former Soviet Bloc nations of Czech Republic, Hungary and Poland clearly offer the most promise. These countries account for almost 90% of the phone lines in the new accession region, and Poland alone accounts for 50% of phone lines.

In Poland, TPSA currently dominates the supply of broadband services. The company started later than some other Eastern European incumbents, but it has
seen very rapid growth in uptake during the past 12 months, especially since it cut prices. Total DSL base(including business subscribers) grew to 270,000 at the end of 2003, but had reached 300,000 by the end of the first quarter of 2004. TPSA has also worked hard to extend access and claims that 75% of its phone lines are now DSL-enabled. It hopes to reach 600,000 subscribers by 2006. The strongest competition to TPSA comes from the cable TV companies in Poland.

Slovakia has been the slowest to develop; broadband has only recently become available here. Latvia, Lithuania, Malta and Cyprus all have average penetration for the region, but they are small countries with limited opportunities for outsiders.

In the Czech Republic, Cesky Telekom got off to a very slow start in providing DSL compared to its close peer Matav in Hungary, and had only 23,600 users at the end of the first quarter of 2004, of which only about 10,000 are residential customers. Almost half the subscriber base is in Prague. However, the company has cut the price of DSL. As such, Yankee Group analysts expect to see much more rapid take-up in the second half of 2004 and in subsequent years.

Market predictions
Overall, broadband penetration in the Czech Republic, Hungary and Poland will grow from around 2% at the end of 2003 to around 17% at the end of 2008. Yankee Group analysts expect to see rapid growth in the next few years, and penetration in major urban centers could match that in the rest of the EU before 2008.

However, mass-market "universal" broadband could take a lot longer--unless certain key impediments are removed. The cost of suitable PCs is a major barrier among the lower income groups, and terminal innovations, together with pay-as-you-go broadband, may be the only way to take penetration beyond the 20% range. Many regions in accession countries are entitled to financial support under EU Structural Funds programs, and this may be the best route to more widely available broadband, especially in remoter areas.

Alternative technologies to DSL and cable modems also may be necessary given that over one-quarter of households are unconnected. For these customers, powerline, and broadband wireless are worth investigation in the longer term.

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