Have-nots no longer

Service providers based in Central and Eastern Europe are poised to take the continent by storm as they engage in a frenzy of acquisitions and invite new technologies across their borders.

One of the most widely circulated saws of this industry is that nations with an underdeveloped or minimal telecommunications infrastructure have a great, and even enviable, opportunity to leapfrog technology generations and arrive in no time at brand-spanking-new, state-of-the-art networks. In many developing economies, the prospect of being brought up to speed in this way remains a very nice, but very remote, idea.

In some countries in Central and Eastern Europe, however, telecom technology leapfrogging is fast becoming a reality (Figure 1).

Historically speaking

Until the end of the 1980s, Central and Eastern European networks generally were characterized by rigid monopoly stewardship, antique technology and penetration rates that hardly registered on any radar screen worthy of the name. This was not always a corollary of the lack of priority customarily accorded to the telecom sector in command economies. In totalitarian regimes, telecom infrastructure may be viewed as an instrument of political control, and enlarging the citizenry's access may be perceived as a threat to this control.

After 1989, however, the dismantling of the Soviet empire, the election of reform governments and the growing adoption of economic liberalism in the region changed the Central/Eastern European telecommunications landscape completely.

The first wave of telecom regeneration was a quick-fix numbers affair that basically shoveled dial-tone into the region. Service providers installed metropolitan and long-haul digital overlays and overhauled international facilities, initially to meet the needs of the emerging business community. Cellular networks - initially analog because of their coverage advantage and subsequently GSM for its higher density - were built to soak up the unsatisfied demand for wireline connectivity, again with business users as the early target audience.

In a second bout of sector reform, stakes in national telcos were auctioned to strategic (usually Western) partners, shares were sold to institutional and individual investors and employees and competitive carriers - both fixed and wireless - were licensed. The selloff of telco stakes to strategic partners had several attractions. Although not all the money raised is necessarily plowed back into the particular telco network, it can raise fresh cash for expansion and modernization, and it can inject leading-edge technical expertise and private-sector commercial management skills into organizations that hitherto were notably lacking in these.

Typical of such deals were Ameritech and Deutsche Telekom buying into Hungary's national telco Matav; Greece's OTE taking control of ArmenTel in Armenia and purchasing a major holding in RomTelecom in Romania; and Sweden's Telia and Finland's Sonera acquiring a 60% stake in Leituvos Telekomas in Lithuania. There are many more such examples, and the process continues with OTE and KPN of the Netherlands agreeing to pay reportedly more than $500 million for a 51% stake in Bulgarian Telecommunications earlier this year. In the pipeline are some more bigish deals, such as the selloff of up to 35% of Telekomunikacja Polska SA in Poland and the floatation of the Czech government's 51% stake in telecom and transmission concern Ceske Radiokomunikace, and smaller transactions, such as the 30% of Kazakhtelecom that authorities in Kazakhstan could bring to market.

Rags to riches

While Central and Eastern European telcos continue to get hitched to overseas partners, telecom expansion is entering a third phase.

Today, operators in the region increasingly are turning to advanced technologies that still make up minority percentages of the overall technology mix in many more mature networks outside the region. In contrast to these other networks, legacy equipment in Central/Eastern European infrastructure is very often thin on the ground, hence - given the requisite commitment and investment resources - the leapfrog opportunity.

"Service providers in Central and Eastern Europe are developing more advanced networks than many of their West European and North American counterparts," says Chris Stomenov, Newbridge Networks' Central Europe director. "They have built their infrastructures from scratch and hence do not have the migration and integration issues that often delay and complicate upgrades to existing technology."

The move toward state-of-the-art technology solutions in Central and Eastern Europe has many drivers.

One is that, in liberalized or soon-to-be liberalized markets, service quality and customer retention are becoming the new mantras for an increasing number of telcos. Allied to this is the influx of international and multinational business enterprises accustomed to having the latest generation of telecom solutions.

"We're starting to see a growing number of Western conglomerates looking at investing in the region," says Chris Royden, general manager of Africa, Europe and the Middle East for Tellabs. "And one of the things they demand is a good communications infrastructure." Tellabs has established and new business in the Czech Republic, Hungary, Poland and Slovakia, has started working in the Baltic States and now is moving into Russia.

Another consideration in this general context is that newer technologies more readily enable Central and Eastern European operators to overcome more quickly any deficiencies in their extant service repertoire or areas of expertise than would be the case with longer established solutions.

Synchronous digital hierarchy (SDH) transmission equipment bears out some of these points. Operators throughout the region have made significant investments in synchronous transmission without having to amortize huge investments in plesiochronous technology (Figure 2). One of the most prolific investors in SDH solutions is the Czech Republic's SPT Telecom. In three years, SPT built what its main SDH vendor Marconi Communications of the U.K. terms "one of Europe's most advanced long-distance bearer networks." To date, the Czech operator has ordered some $80 million worth of synchronous multiplexers, cross-connects, line systems and network management software from Marconi.

Quoted in a recent Marconi survey of SPT's SDH program, Peter Nemec, SPT's director of network development, says that SDH had some powerful business benefits. "Chief among these is centralized management of the network at all levels - long-distance, intermediate, local and access - from a single site. All management functions are integrated and easy to control, a key benefit in territories where specialized computing skills are in short supply," Nemec notes. "And the value of new infrastructure to an expanding economy is obvious."

The replacement of SPT's national network with SDH should be complete by 2000, one year ahead of the introduction of competition in basic telecommunications in the Czech Republic. By that time, Marconi says, SPT will be considering synchronous overlays and extending SDH into the access network. "SDH opens up a new dimension in the process toward an integrated transmission and switching environment," says Ken Miles, Marconi's senior project manager for Europe. "In doing so, the traditional boundaries between switching, access, junction and trunk topologies are likely to disappear. SDH also provides more flexible access to digital data streams, even at the lowest order."

Marconi also has supplied SDH systems to Albania, Hungary, Romania, Russia and several Commonwealth of Independent States republics, and it has a new deal in Latvia.

Same equipment, different place

The shift from circuit to packet networks and from discrete networks to integrated service provisioning, which is occurring in some of the planet's most advanced telecom markets, is being mirrored in several Central and Eastern European countries. One is Bulgaria. Earlier this year, BTC contracted Newbridge to supply it with Bulgaria's first fully managed, nationwide, integrated voice and data network. In addition to local and long-distance voice and X.25 services, BTC aims to offer ISDN, virtual private networks, LAN interconnection and IP-based frame relay and native cell relay. Newbridge says BTC intends to develop this network to include ATM facilities.

Newbridge has won contracts totaling more than $100 million to supply ATM, time division multiplexed and frame relay networks to markets such as the Czech Republic, Hungary, Poland and Slovenia. "Six years ago, the majority of Central and Eastern European countries lacked network infrastructures," says Newbridge's Stomenov. "In order to encourage foreign investment, which is crucial to the economic growth of these countries, all privatized - or soon-to-be privatized - carriers require a world-class networking infrastructure. This has resulted in significant investment in advanced networking solutions in this region."

According to Dataquest, Newbridge leads the Central and Eastern European ATM and frame relay WAN market with a 48% and 28.8% share, respectively.

Also hitting the ATM trail is Kazakhstan. This summer, national telco Kazakhtelecom subsidiary Kaznet inked a deal with the Moscow office of Cisco Systems for the construction of a national data network. Cisco was contracted to install 24 ATM switches, 36 backbone routers and 17 network management devices. In total, the Kaznet network will comprise 34 nodes in 18 cities interconnected over terrestrial and satellite links and running at up to 42 Mb/s. Various access technologies will be used, including asymmetrical DSL.

High-tech to be

In addition to ATM, the Internet now looks ready to blossom in the former Central/Eastern European telecom wasteland. IDC believes that Internet penetration levels in Eastern Europe in 2001 will reach those notched up by 1997 in Western Europe. For example, IDC forecasts that Russian Internet users will boom from less than 1 million today to more than 3 million by 2001. However, IDC notes that the obstacles to growth in this sector include a relatively small home market, high access costs and security issues.

Even so, Internet telephony already is putting down roots in the region (Tables 1 and 2). Late last year, incumbent Hungarian operator Matav began trials of an IP telephony service to various international destinations. The move was in response to an announcement that Hungarian newcomer PanTel was planning a similar service.

Russia may turn out to be a major proving ground for regional voice over IP. This year, the country's State Committee for Communications and Information defined the Internet as a class of data transmission. Previously, there had been some speculation that IP telephony would have to be licensed in Russia in the same - and for the license applicant, more onerous - process required for conventional voice service permits. The first seven Russian IP telephony licenses reportedly were being prepared in July.

The Central/Eastern European push toward here-and-now technology is not confined to public network operators. Earlier this year, Irkutskenergo, an electricity utility in eastern Siberia, Russia, was building a Fore Systems-supplied ATM network linked by redundant load-sharing OC-12 fiber systems to carry voice, video, data and telemetry traffic. This network is designed to tie together power plants, maintenance stations and other sites in 25 cities and towns in a WAN spanning approximately 1000 miles.

"Irkutsk is a region with vast economic potential, but it lacks the infrastructure necessary to develop it," says Sergei Glushkov, Irkutskenergo's chief of technology management systems. "Our solution from Fore provides the manageable infrastructure we need to support our applications and eliminates the requirement for separate networks to support each type of traffic."

Glushkov also pointed out that the capacity of the network and its quality of service features would allow Irkutskenergo to offer space to local government bodies and other companies in the area. "Along with linking Irkutskenergo's facilities, we can support the needs of other organizations. This project will positively impact the entire state of Irkutsk," he says.

Doubtless other projects like it, along with the ambitious expansion plans of Central and Eastern European public network operators, will have a similar impact on the whole region.

As one might anticipate, not all telecom projects in Central and Eastern Europe pan out as planned. Joint ventures between foreign and local enterprises, which were often the mandatory "fee" for the former's admission to the market, have met mixed fortunes. The reservation of particular markets for particular vendors has sometimes angered other vendors and even national governments. In May, for example, it was reported that Sweden was prepared to delay Poland's European Union membership talks in protest to the Polish authorities, which awarded all national switching contracts to Alcatel, Lucent Technologies and Siemens. And disputes have arisen over the certification of equipment for use in certain countries and whether overseas systems meet local technical standards.

Circumstances and priorities can, and do, change. Quite apart from the recent bloodying of a number of the constituent Central and Eastern European economies, and continuing civil unrest in some parts of the region, governments change. The newcomers don't always approve of the actions of their predecessors.

The Netherlands' KPN and Swisscom, through their Telsource vehicle, purchased a stake in SPT Telecom of the Czech Republic, a move that has been particularly controversial. First, there were rumors - always adamantly denied by KPN - that payments were made to political parties to secure privatization and the stake in SPT. Then, following the election of a Social Democrat government, ill feeling between the Czech authorities and Telsource became increasingly vocal. The nub of this was that although the Telsource partners had only a minority stake in SPT - currently 33.5% - they had voting powers over the telco. Price increases and tariff rebalancing appear to have exacerbated matters.

This culminated in a struggle between the camps to nominate SPT's chairman and other senior executives for government positions. The existing government talked of ending SPT's public network monopoly one year early, and in reply, Telsource made noises about withdrawing from SPT. In mid-June, however, a truce appeared likely after what appeared to be a compromise about the composition of SPT's board.

Time will tell.