Komia And The 3G Wireless Phone Auction In Poland
Komia And The 3G Wireless Phone Auction In Poland
Introduction
Communication, especially through telephone has been one of the greatest developments in the 21st century which have enhanced reliability and speed in communication amongst people. Initially, fixed-line telephony was the main mode of communication through telephones. However, the emergence of mobile telephony has seen even greater changes occur in the communication landscape by adding the convenience of being able to reach people through phone virtually from any location without having to be at a particular place with a fixed telephone line. Mobile telephony started with the 2G standards and later technologically evolved on to the 3G standards which enhanced convenience, reliability and also increased the number of potential applications that one could use. These transitions have had various challenges including financial, technological and legal hurdles which have influenced how fast the transitions have been able to materialize in many nations. Earlier fixed-line communication corporations were under the governments’ mandate and any other private companies that ventured in the telephony sector were controlled and licensed by the government through respective ministries of communication.
However, policy changes have led to privatization in most nations which has seen most of these companies go to the private sector where regulatory bodies have been designed to offer control and regulation to the industry (Hardie, Doyle & Colley, 2004). In the process most governments have taken an overall oversight function in overseeing the running of the regulatory affairs which it also has a say in decision-making alongside the designated regulatory bodies. This paper particularly highlights the Polish case study of Komia S. A. which is one of the major players in the fixed-line telephone industry which also offers data transmission services to its subscribers. The company holds 24 licenses and a client base with approximately 320 000 subscribers to its fixed-line services and it ranks second in terms of market share in the Polish industry. The company’s licenses cover an area that makes up 40% percent of the Polish population with an estimated 15 million people. Komia S. A. is a company that was initiated in 1990 by private investors in Poland, but it has sold its equity to various international investors such as Israel’s Dankner and United States based private equity funds-Trefoil and Shamrock.
The company later increased its equity shareholders to 240 after Trefoil and Shamrock sold out their shares of equity. A large number of the 240 investors are mainly institutional private equity fund holders from the United States and Europe. A purchase of 35% of Komia’s equity by Telia in 1995 and subsequently in 1999 saw the company become the major investor in the company. The company finally transformed into a public company after its Initial Public Offer (IPO) on NASDAQ. In 2002 Komia begun trading in the Warsaw stock exchange and this made it the only Polish company so far that was publicly traded. The introduction of mobile telephony and its licensing appeared lucrative and promising for telecom service providers and as a result the initial stage of 2G mobile telephony attracted many investors. At its initiation the Polish government went into extensive deregulation that would later see it develop an independent telecom regulatory body-(Urzad Regulacji Telekomunikaeji) URT-with the government’s ministry of communication (MoC) only taking an oversight role. These changes became effective under new acts of communication.
So far the 2G mobile telephony businesses have been successful, and technological advances have led to the development of the 3G mobile telephony services which are more advanced and can permit more application. These have been favored by many and governments are already offering bids for licenses. Having witnessed the 2G success, Komia has developed and interest in 3G mobile telephony investment however; the license prices and infrastructure costs are prohibitively high and the company is uncertain whether to place its bid or not. The biggest challenge that raises doubts in the bidding process involve the few number of licenses offered, the tussle of 2g investors that are not willing to let the new 3G investors use there infrastructure for roaming and the limited bandwidth offered. This paper shows Anton Kerki’s (Komia’s CEO) evaluation of the situation in a bid to develop a comprehensive report for the board’s use in decision-making.
External Environment Evaluation
The Polish economy so far forms the most significant external environmental factor for evaluation, because it determines how lucrative any business venture set up in its environment may be. The Polish economy is one of the largest in economies in central Europe with a magnitude so big that it could be equal to the combined economies of Hungary, Czech Republic and Slovakia. The nation’s GDP (Gross Domestic Product) was 150 billion U.S dollars in 1999 and there were anticipations that this would grow by 5% in each year for the next decade.
An economy of such a magnitude implies that there will be greater purchasing power among the citizenry and thus implying that investments in this nation within such a new and developing industry may prove to be lucrative. The nation was also underway in making negotiations that would allow it to join the European Union after joining NATO in 1999. Joining the E.U implies that the nation’s trade is most likely to expand because prior to this most of its trade was greatly limited to the Western European nations. Other indicators of good economic performance such the government’s debt to GDP ratio show a drop from 85% (1992) to 44% (1998) and this implies a positive trend of good performance. The government deficit as percentage of GDP also dropped from 3.7 in 1997 to 2.49 in 1998, thus giving a similar impression on the economy.
The Polish population has socially embraced mobile telephony amongst its ranks of society and this can be portrayed by the high rate of penetration and increase in the number of subscribers that are embracing mobile telephony. The expansion of the market’s size by 73% within a single year (2000) is an indicator of how socially well this technology and its application are acceptable among all social classes. The market currently has 6.9 million subscribers and this is an indicator of a vibrant market that has indeed become socially acceptable. The 2.9 million purchases of mobile phones experienced in 2009 increased penetration to 18 percent and according to analysts the penetration is expected to rise with the introduction of the 3G mobile telephony technology. The mobile culture is actually becoming acceptable as portrayed by this penetration rates.
The general political environment of Poland is stable and as such it is not expected to present any challenges to the new entrants and old investors that would wish to diversify their portfolio by venturing in to the 3G mobile telephony market. However, the regulatory part presents a bigger challenge. This could be well exemplified by the MoC nature of conducting the auction. Despite the lack of consensus on the use of 2G investor’s infrastructure in roaming, the minister still pushes on without offering legal highlight on how the issue might be handled. The 2G owners are legal licensees and thus have legal control and say over their infrastructure and thus may deny any usage to any party legally as already implied by their protests. This is a clear failure on regulation which may challenge the investors ability to roll out their services considering that they are supposed to do this in an already set up target plan.
Notably, according to this case the Polish regulatory commission on UMTS (Universal Mobile Telecommunications Systems) keeps on changing and this fact coupled with the observed constant shifting of rules on the auction create uncertainty in the mind of investors that have to make resolute decisions which are supposed to influence the investment choice. The auction preparation process is already marred with a lot of ambiguities and disputes which have been made worse by the fact that interested companies are unable to influence or communicate with the government. This is mainly because any form of lobbying in Poland is deemed as a form of corruption and as a result, any engagement in such might spoil a company’s image. Thus, far regulation on the industry seems to be a greater challenge partly because it is not very well defined.
Technological changes and developments show that indeed 3G is the next big step in communication and it is being taken up by many nations as portrayed by the auctions going on all over Europe. The technological trend shows that the technology is being well embraced all round the continent and beyond and thus missing out in its roll out is indeed missing a great chance, because entry at a later date may not be as lucrative as an early entry (Hardie et al. 2004). The fact that there is an ability to technologically take advantage of the 2G infrastructure to roll out presents a good chance of having lesser infrastructural costs in rolling out. However, this will only prove beneficial if the issue on roaming can be amicably solved between the regulatory authorities and the 2G investors on how such usage can be facilitated without inconveniencing their performance in the market.
Global and demographic changes show that there is an ever growing embrace of 3G mobile technologies all over Europe because Finland, Germany, France, Italy, Portugal, Norway, Netherlands, Spain, Sweden, United Kingdom, Czech Republic and many others are rolling out auctions that will see licenses offered to 3G service providers. The demographic data also shows a high and ever rising penetration rate of mobile purchase and usage and therefore, these positive trends imply that the market is actually on an upward trend.
Industry Structure
The telecommunication industry mainly include firms involved in offering telecommunication services via fixed-line and mobile telephone communication as well as data transmission through provision IP addresses. This may also involve the provision of cable television and radio broadcasting. The degree of product differentiation is very low because whatever services are offered by the company are similar any other communications services offered elsewhere, but there are slight differences such as pricing (Grant, 2005). Other slight differences may include the coverage of the network, in that in some places there may be a total lack of availability. The industry may be widely divided along the four lines of type of services offered, however; the similarity of these services at times leads most companies to invest in offering more than services. For example Polish company Elektrim offers wireless telephony.
Fixed-line telephony, data transmission, cable television and internet however, the most recognized differentiation occurs between fixed line and mobile telephony service providers. The telecommunication industry is usually fragmented along these lines and it has an oligopolistic nature because it usually has a minimal number of service providers. The lesser number of players and many at times nation-wide operation levels imply that these companies have to be large scale companies and their economies of scale are large because they have to operate on a large scale. The telecommunication industry is a large industry that is at its maturity level as more hi-tech discoveries are made and technologies merge into single gadgets. It is not strange these days to encounter a person with a mobile phone that can offer radio reception, television reception, access to the web and a camera.
This hi-tech merging shows the maturity of the industry. However, on more specific terms the mobile telephony industry is not as old as the telecommunication industry, and it can be said to be in the growth stage. The telecommunication industry in Poland is of a national size in terms of operations because its jurisdictions of operations is limited only to the Polish nation and outside the Polish nation it has no legal mandate, but could link international communications through internationally defined protocols of communication between different nations. Therefore, the operations of Komia are specifically restricted to Poland and if it happens to extend its services onto another nation, then it may have to abide to the rules set up in the other nation of operation. The telecommunication industry is very dynamic and it experiences tremendous growth and development in terms of technological advancements, each year because of new discoveries from research. The pace of technological change is very high and this may be exemplified by the quick transitions that the world had from 2G to 3G and the ever changing mobile telephone manufacture which happens at a dynamic speed.
The industry’s fast paced technological advancement may be fueled by its lucrative nature and the fact that most companies involved are lucrative enough to support research in to improvements. The research has mainly contributed to innovations that enabled various technologies to be merged such as radio, televisions, telephone and computing all in one. Enhancement of features such as the Geo-global Positioning System (GPS) has brought more functions to the telecommunication industry. The high penetration experienced by telecommunication industry, especially through mobile telephony has ensured that the industry is very profitable and lucrative. The penetration of mobile usage has greatly expanded because it has been quickly embraced by all people both young and old across all walks partly because the mobile phone manufacturers and service providers have tailored other different categories of services. According to Grant (2005), the lucrative nature of the industry makes it very attractive, but unfortunately the capital required is very high and prohibitive. A bigger portion of the capital required goes to the acquisition of licenses which take hundreds of millions of dollars and the rest goes to the development of supportive infrastructure necessary for the roll out of services.
Porter’s Five Force Analysis
Porter’s five force analysis constitutes five grouped forces that affect the micro-environment of the business. These constitute forces that are close to the business in general and have a direct influence on its ability to serve the clients as well as maintain its profitability (Grant, 2005). The Porter’s five force analysis brings each company to a close realization of its position in the industry and the difference that it has from other companies and how it can work towards making a better achievement. This an essential evaluation tool for any firm because, even though an industry has signs of good business and lucrative appearance not all companies may be able to make it big in the industry (McBrewster, Vandome & Miller, 2011). This is because each company’s success is determined by its ability to exploit the chances presented by the market. Thus a lack of preparedness could simply imply failure to exploit the market even when it is lucrative (Porter, 1980).
Threats of new competitors
The first analysis under the Porter’s five force model is the entry of new competitors that are likely to come in as the market appears to be more lucrative (Grant, 2005). In Komia’s case such a threat may be termed as zero if the company ever makes it to win the bid. The strict licensure by MoC has only offered to give five licenses that are supposed to be valid for over ten years and that means that there will be no company able to get into this field of business for competition. The lack of new entrants anywhere in the near future is a good sign for any prospective entrants that would like to get their way into the industry. Perfect competition may not be realizable in this case and the barriers to entry are high because the quota of companies to enter the field is already limited by law.
The threat of Substitutes
The existence of products outside the realm of business that can serve the same purpose poses a great threat, but especially if they can be used to readily replace the products offered. (Baumol, 1986). In Komia’s Polish case there is no likely substitute service from other entrants, but probably only a slightly stiffer competition from the few selected companies. This competition could easily overcome through oligopolistic means to ensure everyone gets a fair share of the market.
The bargaining power of consumers
There will be high dependency on the new set up firms and it is very unlikely the consumer will have much of a choice in selecting the service provider (Grant, 2005). Therefore, consumers are more likely to have less bargaining power and therefore may be unable to stand up for their course in the telecommunication
The bargaining power of suppliers
There are definitely a number of suppliers in this industry, but these have to a limited group because requirements for these industries are in most times made as per the order rather than through an open and available market where you can easily bargain them. This scenario presents little bargaining power to Komia-the lesser the companies the lesser the bargaining power (Baumol, 1986).
The intensity of competitive rivalry
There may be a few competitors in this case, but competitive rivalry will be high because there only a few companies and each one of them would like to take the lion share of the market. The negligible differentiation in services provided will elicit other modes of competitions that will set apart the better competitor. As such the competition in this case is likely to be based on factors such as price, innovation and quality which help differentiate a company positively.
Current and future industry attractiveness/unattractiveness
The mobile telephony industry seems to be very attractive due to the innovations that keep coming up from new technological discoveries that happen each day. The transformation of 2G in to 3G brought about a new communication platform that would deliver graphics, video and voice. Additionally, it was intended that there should be improved internet access after the use of WAP in the earlier cellular phones had displayed great slowness and inefficiency. The integration of features such as graphics, video, sound and other broadband elements will make the use of the 3G service provision even more appreciated amongst the populace and these enhanced uses are likely to lead to the higher demand in services, phones and accessories. The fact that entry will be restricted to a few firms in the 3G mobile telephony industry will make business in this industry appear even more lucrative because there will be few competitors and thus there will be slightly less competition (DeNisi, Robinson & McDougall, 1992). The few firms involved may likely form an oligopoly and there may be no realization of a perfect competitive environment and therefore the firms will have ample time to recover their initial capital. The changes in the telecommunication rules that prohibit a certain level of foreign investment percentage in a company’s portfolio are also one among the things that show that there might be an attractive future in the industry. The 49% percent restriction on investment will make it possible for the companies to seek more capital from foreign investors in cases where the may fail to find readily available local sources of capital.
The displayed attractiveness is however accompanied by some form of unattractive nature in this case. For example the fact that 2G infrastructure owners cannot agree to the use of their infrastructure in the first roll out implies that the selected companies may have to spend more as they roll out the new infrastructural facilities. This implies that they may take longer to recover their initial costs and thus have less time to make profits. This challenge is made worse by the fact that the stipulated license fee and initial infrastructural roll out costs are even higher, implying that companies which successfully bid and get the contracts will have a rough and longer time before they could reach any profits. High license fees and roll out costs for infrastructure coupled with targets to achieve certain percentage coverage and penetration imposes heavy initial costs on the companies that may be successful in attaining the bids and this poses even greater challenge on their ability to make profit. Currently, the UMTS commission keeps on changing leadership dynamically whereas, the URT regulatory body is not yet well established. This also does not present an attractive future because the prospective investors seem to be entering a market that is unsettled yet and as such may present numerous challenges to the investors just incase during proper settlement new alterations to regulations come in unexpectedly (DeNisi et al. 1992).
Major competitors
The major competitors in the bidding auction include local Polish companies already in the telecommunication industry as well as other foreign companies that have expressed interest. Perhaps the major local competitor is TPSA, which netted an average of $ 215 million net profit in 1999. TPSA was the former national Polish telecom monopolist. The company offers fixed telephony services to 9.5 million subscribers, which makes up 95% of the total Polish fixed telephony subscription. TPSA also offer radio broadcasting, internet, data transmission and mobile telephony services to 1.6 million subscribers in the wireless telephony industry and these make up 24% of polish subscribers in the mobile telephony industry. At the end of 2000 the company had reached 9.5 million lines accessed by fixed-line subscribers. The second competitor was Elektrim which offers fixed telephony services to 320000 subscribers that make up 3% of the total subscribers in fixed telephony within Poland. Additionally, Elektrim offers internet and data transmission. Elektrim was formed by a large conglomerate which had its focus on cable manufacturing, power construction and telecommunications. Polkomtel is also another competitor with 2.4 million subscriptions to wireless telephony. The company also offers internet services and data transmission. The company is a great competitor too because it has a market share of approximately 35% percent.
Assessment of External Environment
Opportunities
Komia has a number of external environment opportunities. Firstly, the introduction of 3G offers a totally new market that no company has yet exploited. This means its is a green exploitation niche of operation and the company will have the chance to go in to work at the same time as any other company with an equal capability. The 3G market is not yet exploited and since the company is going to introduce new technology that has not yet been in place, there is definitely bound to be a market and the Komia will be sure to sell. This implies that this is a great and sure opportunity that any investor goes into knowing that they will sell because there is sure market (DeNisi et al. 1992). The elimination of the maximum foreign investment imposed level from 49% to a higher percentage implies that the local investors that are unable to raise capital locally from investments funds or under-subscribed IPOs still have an option. The option to seek international investors can be beneficial for local firms unable to access capital. Komia currently relies only on fixed-line business operations and this would their only way to diversify their portfolio, which will also offer them a new way to earn more revenue. Komia has a better placed chance of having little or no difficulties when there shall be a need to raise capital. This is because Komia is already listed at NASDAQ and can thus raise capital through an IPO (Jones & Hill, 2007). Additionally, Komia stocks trade at the Warsaw stock exchange. The listing implies that Komia is a reputable company and that is in itself away to gain reputation as a company, which will in turn allow easy access to capital and investors that seek secure companies to venture into their investment endeavors. Currently, Komia has attracted the Swedish Telea company that is a major investor in the telecom industry in Europe, and with such backing the company may not be short on capital that will enable it to tackle any new venture. Komia may not be the first largest subscribed company, but at least it is the second biggest company and as such it has a brand name in place and a reputation as the second biggest company in terms of fixed-line subscription and with such a reputation the company can be able to sell unlike any other new entrant with a totally unknown brand name (Sahnley & Fombrun, 1990).
Threats
Major threats to Komia include the fact that it does not already own any 2G infrastructure on the ground which may enable it to effectively hand le the rolling out of the 3G plan. Other competitors already have a 2G infrastructure and may thus have it easy in rolling out their 3G because they can use some of their 2G faculties. Komia on the other hand may experience greater difficulties because the holders of 2G infrastructure are protesting its usage by and successful bidders that may get the contract
Conclusion
In conclusion, there seems to be more opportunities in 3G investment than the threats or disadvantages. Additionally, Komia has a great capacity to gather the required capital through its major investors such as Telea (Sweden) or alternatively through a public IPO because it is already listed at NASDAQ and Warsaw stock exchange. The only challenge is that it may lack an already existent 2G infrastructural network that will assist it in running the roll out program of its 3G program if it acquires the contract. The company has fair and equal opportunity to diversify its portfolio because it had already not ventured into the mobile telephony industry and since licenses may not be issue any soon again for any mobile telephony venture Komia should not let the opportunity to go.
References
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