Portfolio.hu Interview: Pannon CEO

In retrospect, he believes the introduction of regulated roaming rates by the European Union benefited everyone, but does not see iPhone revolutionising the market of mobile operators.

Pannon is set to move into one of Hungary's most cutting-edge office building the company has built for itself, and which might be even put up for sale in the future. Meanwhile, the carrier could become market leader in Hungary, as the already cut-throat competition is looking to become even fiercer... 

Price regulation was not so bad after all

Portfolio.hu: In recent interviews, an increasing number of CEOs in the mobile industry said that the market benefited from regulated roaming rates introduced in the EU. This seems to contradict pre-introduction resistance against regulated rates. How do you evaluate regulated rates now, more than six months after these were put into effect?

Ove Fredheim: It is like hearing my own opinion. But all joking aside, regulated prices are not welcome by any industry around the globe. Consequently, initial resistance was quite natural. Nevertheless, looking back you have to admit that retail price regulation introduced in the EU last August has really made market pricing a lot more transparent. It is good for customers because it simplifies the evaluation of service quality, and it is good for operators because it boosts cross-border mobile usage. 

P.: How much revenue did Pannon lose exactly because of price regulation?

O. F.: If our EU-based roaming volume was to be the same until August as it was last year, we would collect 48% less revenue from roaming. However, lower rates have encouraged our customers to use their phones more abroad, which means we do not expect such a sharp drop in revenues. As the price cut was substantial, we will surely see a decline but it will not be as large as earlier expected. Nevertheless, the impact can only be reliably assessed based on the results of a longer period.

P.: Do you expect the EU to radically intervene also in mobile data roaming rates?

O. F.: As the EU wants to improve the transparency of pricing and boost usage in this segment, too, I expect Viviane Reding to introduce some sort of regulation. I do not think, however, that this would be similar to that used in voice roaming.

The regulation of voice roaming was based on retail prices, but the process of data roaming has a very different structure which makes me expect regulators to give a kick-start to market mechanisms from the wholesale side.

All international players had bilateral collaboration agreements in place for voice services, which is not the case with data roaming. As a result, retail price regulation would trigger some very strange trends in the market.

P.: Do you expect the omnipotent EU regulatory authority envisioned by Viviane Reding to be established?

O. F.: This has been a hot issue recently, but I believe the specific features of national markets prevent the creation of a regulatory authority of this type. It remains to be seen, however, what the integrated telecom market will look like in ten years from now, but I do not consider this plan feasible in the foreseeable future.

P.: The launch of iPhone has ruffled feathers in the telecom market. Apple persuaded AT&T to share its revenues in return for exclusive distribution rights. Will this generate far-reaching changes, or is it just a passing whim?

O. F.: Apple's iPhone is a major innovation. It is not only an excellent phone and music player, but it is also a real icon and a status symbol. Given this, we would be happy to sell iPhone in Hungary. I won't be disappointed though if we do not get a licence, as I expect other vendors such as Nokia or SonyEricsson to launch a similar product soon.

Revenue sharing is not a revolutionary thing in the industry. It has been used, for example, for simple ring tone download services before. I believe the iPhone will revolutionise the market of handsets rather than that of mobile operators. Our responsibility is to provide a suitable network infrastructure to support mobile digital content made increasingly popular by the widespread use of such handsets. 

Hell yeah, we've got competition

P.: The Hungarian market seems to have an established status quo with frozen market shares. Do you think Pannon has a chance to become a market leader in Hungary?

O F.: I am a very optimistic type of person who firmly believes that we have a chance to become the market leader. The freezing of market shares is an interesting phenomenon. If you have a look at the past three years, market shares seem to be established once and for all.

Nevertheless, I expect the telecom sector to change out of recognition in the next five years. After this period, market share will be measured based not only on voice usage and number of SIM cards. Just think of new trends such as the growth of digital content, mobile control of various household and electronic devices and other new concepts.

Here at Pannon, we are not just sitting back and relax. And in the international landscape, Vodafone is not known as a company willing to play the third fiddle either. They are also likely to fight on. Competition is fierce and the outcome of the battle has not been decided yet. 

P.: Yet, current market shares indicate a non-competitive market...

O. F.: It may look calm from the outside, but there is strong fight going on for customers. Just think of the fact that Hungary's three mobile operators are among the top five Hungarian media buyer companies. If we do not compete, then what explains our massive spending on advertisement, sponsorship and other purposes?

But let's have a look at it from a different angle. Think of the huge amounts operators have invested in Hungary over the past one or two years. We developed the broadband network ( EDGE and 3G/HSDPA) , purchased the necessary licences and renewed our 2G licence, too. Not to mention the HUF 20 bn commitment made to the regional roll-out of our further 3G/HSDPA network focusing on rural areas of Hungary. I see very strong competition in the market from this aspect, too.

P.: Is Hungary a highly competitive market in regional comparison?

O. F.: All in all, I consider Hungary to be one of the most competitive markets in the region. Still, competition is very difficult to evaluate as national markets are very different. In Montenegro, for example, the third operator entered the market when penetration already exceeded 100%. In this environment, the new entrant has to make extraordinary efforts to succeed. Austria is also likely to have stronger competition than Hungary has.

P.: What is your estimate for the CAGR of SIM card penetration in Hungary over the next five years?

O. F.: Based on our calculations, SIM card penetration will exceed 200% in Hungary in the next five years, which indicates intensive growth. Very soon you will be able to link your security camera at your holiday house at Balaton with your mobile phone to check whether everything is safe there. Some countries already have chocolate vending machines sending replenishment alerts in text messages to their operator. Built-in car phones are already working with various affiliate card solutions. We expect such “linked objects" to spread at lightning speed which will make customers use 4 or 5 SIM cards each.

P.: Will Hungary have a fourth/virtual mobile operator one day? At the year-end press conference of NHH, representatives of the authority expressed their hope that a fourth operator will enter Hungary without them having to force this...

O. F.: I believe a market watchdog should serve consumer interests in the first place. If I am right, NHH has every reason to be proud of its performance. It has significantly reduced mobile termination fees also lowered by fierce competition. Moreover, competition was further fuelled by regulated roaming rates. In addition, these events took place in an environment whose three operators invests heavily in local infrastructure development.

Pannon has a 3G/HSDPA Mobile Internet coverage of about 50% in Hungary. In Budapest, it offers a speed of 7.2 Mbit/s. This service quality is not available to customers even in the Nordic states. Having said this, I do not think it would make sense for a fourth mobile provider to enter the market and I do not expect this to happen as long as Hungarian mobile customers are so well treated. 

One of (if not the) most advanced HQs in Hungary

P.: If you have a closer look at subscriber data submitted by the three Hungarian mobile operators to NHH, Pannon has an unusually low number of used cards compared to active cards. What is the reason of this gap?

O. F.: It has a purely mathematical reason. This ratio can be largely distorted by campaigns under which, for example, we grant free rechargeable SIM cards with new subscriptions. NHH requires us to report the number of active cards and cards in use and we comply with this requirement, although I believe it makes sense to report only the latter figure.

When mobile penetration exceeded 100% based on the number of active cards last April, NHH wanted to organize a conference to celebrate this milestone but I did not support the idea because this result had nothing to do with real-life market processes. Based on cards in use, we exceeded 100% penetration only in December 2007. That is, we communicate only the number of our cards in use and use this as an index for internal performance measurements. 

P.: Pannon will soon move to a new HQ. When exactly do you plan to move and why do you have to change your seat?

O. F.: Yes, you are right. We started constructing our new HQ four years ago and we expect to move by December this year. We have outgrown our current HQ in Budaörs and we had to lease additional buildings. As a result, we now have about 10 lease agreements, each with a different term. We tried to find an optimum solution to resolve this issue and concluded that the best thing is to construct a new HQ in Törökbálint. We simply did not find in the market an office building satisfying our needs.

P.: Well, Budapest has some very nice and modern office blocks...What was wrong with them?

O. F.: We had some criteria not satisfied by any of them. We wanted an office facility offering the best combination of efficiency and homeliness where our employees can spend their day in perfect harmony. Following the model of our parent company, Telenor, we are implementing an open office concept which means nobody will have an office or desk of his/her own. All employees can work wherever they are needed most which will offer incredible flexibility.

Our new HQ will be unique also in terms of its environmental consciousness. Our buildings located in a green area will be heated by an underground heat pump system relying on 180 geothermal probes. This system is one of (if not the) most advanced solutions of its kind in Hungary.

P.: Isn't it too expensive for a telecom company to invest such a huge amount in constructing an ultramodern HQ of its own?

O. F.: I have faced this criticism many times but I always have the same answer: just on the contrary, it is a very cost efficient solution. We know it from the example of our parent company, Telenor, that the open office concept has a huge cost savings potential in itself. In a leased office building you have many corridors between offices which is unused space. Not to talk about the energy savings offered by the use of renewable sources of energy or the prestige value of Pannon having the most innovative and most famous office building in Hungary.

P.: Is it possible that you will eventually sell this complex and lease it back?

O. F.: Yes, of course. We wanted to create an office building in line with our concept and as the market had no such facility, we had to take the initiative and construct it ourselves. We faced no difficulty financing the project, but we are not a property company, therefore, we are open to any solution."

Source: Portfolio Online Financial Journal