Vivid March 2005

Features
TALK TALK TALK
Richard Moat, CEO of Orange Romania

March 2005

Vivid: You have been here for four months now. Where did you come from?
Richard Moat: Denmark. I was two years in Copenhagen, and before that, three years in Thailand.

How long do you expect to be here for? Your predecessor, Bernard Moscheni, was here right from the word go.
I don't know, to be honest. I've got an open-ended contract so I imagine it will be for a substantial period of time. Certainly longer than I was in Denmark.

How do those two markets compare with here?
I don't think there are many similarities, but there are considerable differences. In Denmark, the population penetration of mobile phones is about 95 per cent, meaning that everyone over the age of 5 has a mobile phone. Denmark has a small population (5.3 million) that is albeit relatively well off. But the key thing is that until recently there were five network operators and 14 MVNO's (Mobile Virtual Network Operators, which rent network capacity from a network operator). So 19 players in total. With the recent sale of Orange Denmark to TeliaSonera there is one less player, but that still represents huge competition.

Was Orange in the market early in Denmark, like it was in Romania?
No, we entered when they issued a second set of licences, after the first two were issued. And then later others entered as well. So we were in there mid-stage. We weren't in the market particularly early, and our market share peaked at about 14 per cent, which is OK - you can make a sustainable business from that but never a particularly exciting one, it that's as far as you're going to go. The level of competition there was quite something too. It was mainly created by the MVNOs, which didn’t have the network overheads that the five operators had and were simply making profits from margins on calls. Between September and December 2003 there was a 40 per cent cut in the price of a 1-minute call as a result of the MVNO’s activities. Against a background of such ferocious price competition it’s very difficult to sustain margins at any reasonable level.

And in that market there was such competition, and then it went through a series of takeovers, buyouts and consolidation.
Yes, the market fell back in on itself. It flattened out and then consolidated, because the level it was at was not sustainable. So for all those reasons, it’s quite different from here. At the end of 2004, the level of mobile penetration in Romania was 48 per cent, so there is still quite a lot of room for organic growth. It was 35 per cent at the end of 2003, it might be approaching the 60 per cent level by the end of this year. So there is obviously an opportunity to take new subscribers. In Denmark, you would have to win new subscribers from someone who already had them, which is a different game. That’s a much more ferociously competitive game. The Romanian market is four times bigger than Denmark in terms of population; GDP per capita isn’t as high so your revenue per user tends to be not as high, but the kind of numbers who come into the market compensates for that in terms of volume.

So I’m enjoying this challenge very much. This is the challenge of running a highly successful business and improving its performance, whereas in Denmark my job was to turn around a failing business. It was a painful process – within six weeks of getting there, I had to make 500 people redundant. And then after that I had to monitor the cost base down to the last cent to try and make sure margins were kept up as high as they could be.

What results did you bring to Orange Denmark?
We moved from a loss-making EBITDA position to 50 million euro profit in the first year I was there and we turned cashflow positive as well. Then, as I said, the business became a victim of its own success because the opportunity arose to sell it, and participate in that consolidation in the market. So we didn’t continue on the road we had set out on.

It was a different challenge to here: it was more like trench warfare, day to day fighting from shell hole to shell hole, whereas here you can actually put your head up and have a look around, and decide which direction you’re going in.

And personally, are you settling in OK? Romania is a pretty comfortable country to live in, as long as you don't come with the preconceptions that a lot of the international media puts out about the country.
I didn't come with any preconceptions. Obviously it's not as well developed as Denmark. If you look at any of the EU league tables, Denmark tends to be ranked either one or two, whereas Romania is at the opposite end of the scale. Yes, it's moving up, but there are obvious discrepancies in terms of infrastructure and scale, choices available and so on. But as you say in general terms the quality of life is very enjoyable here. People are friendly, which is really the most important thing. Certainly in terms of business we have some extremely capable people who want to take it places, so we're all pulling in the same direction in that respect. So I'm pleased to be here.

Can you run some numbers past me?
We hit 5 million subscribers on 16th January when everyone got a bonus. At the end of 2004 we turned over 624 million euros, which was a 75 per cent increase on the 2003 figure. So the company is experiencing substantial growth. I think the current trend will continue through the current year.

From the beginning you made good coverage a real focus.
We are continuing to follow that strategy. For two years now we ave coverage in every Romanian city, regardless of the population. We already have 80 percent geographic coverage, and 97 per cent population coverage. And now we also have EDGE, which provides higher data speed delivery capability, so we'll be continuing to roll that out to all the major cities in Romania in 2005 as well.

I was going to ask you about EDGE. So it is really successful technology?
Very much so. It delivers live TV on the phone, which is an excellent application. It's the first time I've seen it, and I think it's a first for the Orange group as well. So yes it is being very sucessful, and it is one area we intend to push very hard during 2005. It's got a lot of capabilities - it's got live TV, it's got video streaming - which can be used with GPRS, but EDGE is about three times the speed of delivery. With EDGE, we intend to ensure that we cover 70 per cent of the Romanian population in 2005.

What about investments in 2005, in dollar terms?
Overall we're going to be spending about $220 million on capital expenditure in 2005. We've spent about $1 billion altogether so far, and another $220 million on top of that in 2005.

EDGE technolog is what is happening in Baneasa, right?
No, that's a proprietary technology called Navini; ordinary voice technology is delievered at a relatively slow speed. If you're going to deliver data at all elegantly, you have to use higher speeds. So the first development from voice was high speed circuit switch data, then we moved on to general packet radio systems (GPRS) then the next development in GSM is EDGE, which provides theoretical data speeds of up to 180 kilobytes a second. Actually I've seen it tested in this building and it's gone up to 230 kilobytes a second, which is pretty good. I use a mobile office card on my PC when I'm surfing the Internet and it's a pretty good speed, it's a pretty good user experience, and that's the first time that I can actually say that about mobile data being downloaded to a PC. So it makes a big difference in that respect.

Baneasa wa initially a sort of pilot project using Navini, technology which operates at 3.5 gHz at very high data speed downloads. That's basically a single transmitter that covers quite a wide area and allows for wireless broadband-type access to anybody who is using a PC within that area. But you need a special sort of modem to access it. We ae now expanding that to other area in Bucharest because it has been quite successful and we think that there is an opportunity to take that piece of the market. The key reason that it is possible to do that here and not in several other countries is that Romtelecom hasn't invested significantly in broadband-type technology. Therefore if you can deliver it on a wireless basis you can deliver it as a mobile player.

But given that most people here use mobile phones just for speaking and text messages, do you really think that its going to be justifiable to bring in to bring in this new technology? How are you going to sell it to people?
I think there is an opportunity to educate people as to what is available with respect to data, and I think that we could do a better job in terms of what is available now. But certainly the intention is to enrich the content which we offer during 2005 and also to increase our portal capability by making it easier to use and access. And therefore develop more demand simply by making it easier to use. The key thing about improving the uptake of data is making it relevant and affordable. And entertaining – or, for that matter, whatever it needs to be. There’s no point in putting it on the portal and just leaving it there. It won’t go anywhere. But we’ve done some very interesting things in 2004 like the UEFA Championships and various films that came out last year, and we intend to continue down that road, particularly enriching the video streaming content with pop music and that type of thing. There is a distinct opportunity to drive upwards the proportion of revenue we make from data. It’s currently about seven per cent which is quite low in terms of Western European benchmarks, where it’s more normally upwards of 15 per cent. Having said that, there is going to be a limit to how much money people are going to be prepared to pay on mobile telephony, but I think there is a gap between what is available and what people perceive is available. And therefore we need to demonstrate that there is something out there that could be useful.

The actual take-up of SMS usage itself is quite low too, and I think that as people become aware of how easy it is to send text messages that that take-up will increase. Obviously as I’ve said with average revenue per subscriber being lower in Romania than many countries, which is representative of a lower GDP per head, the investment in these new technologies is more problematic in terms of getting a return on it. So the key thing is to try and scale investment in terms of the likely take-up of products and services. We feel that EDGE is the technology that will provide the most benefits to consumers, and compared to other technology it is relatively cheap to roll out.

Certainly to spend large sums of money right now on all the latest technologies would not make sense based on the likely data take-up in this country. I suppose what I’m saying in a nutshell is that the level of uptake in data today doesn’t represent what it could be, if people were more familiar with what was available and if it was delivered more eloquently.

But yes, you’re right, you have to be realistic in terms of what the potential of data take-up is, and scale your investments accordingly.

Should sending text messages be more popular? I was under the impression it was already quite popular here.
It should be more popular. SMS represents a far higher proportion of revenue elsewhere. It’s on a higher growth curve though. It grew by about 200 per cent last year, compared to the previous year.

Age must be relevant too, in terms of how open you are to new technology. Is SMS typical of the age at which people react positively to new technology? I would have thought that sms would have begun being popular with younger people, and then widened in popularity to more mature users.
I think that is broadly true. And if you think about its take-up, in the UK when Orange launched in 1994, it launched with digital technology, which was new back then. Everyone was using analogue technology, and digital allowed you to send text messages. I can remember thinking that people who would send text messages must be slightly geeky. It was two or three years until I started to use it. And once I started using it I thought, yeah, this is cool. But before that, I couldn’t work it out at all. (laughs)

I’m sure everyone goes through that understanding curve. It must have been the same with the Internet too, for many people. It’s just a matter being shown what to do.
In our shops we employ people called Phone Trainers. We recognise that some of the technology has become so sophisticated and the features on some handsets have become complex, so users can go into one of our shops and ask a trainer how to use their handset. People find that very useful.

How many Orange shops are there, in Romania?
We opened our twentieth, yesterday in Pitesti. And we intend to roll out at least another five this year. It’s part of our strategy to get closer to our clients. It’s not only the phone trainers, it’s the fact that you can actually get face to face service rather than just phoning a call centre. And you can pay your bill and cash in loyalty points. So its not just a point of sale, its more a point of presence.

The shops must also help to make it more attractive to buy from Orange, rather than from a dealer.
Yes. I think generally the standards are very high in the shops. It costs $160,000 to fit out the shop in Pitesti. And so the look and feel of the shop is tremendous. They would look tremendous anywhere. So I’m sure they will have a positive effect in pulling the whole retail sector up around them.

What else are you doing in terms of getting the brand name out there? The look and feel of Orange is pretty good now I think.
It’s unlikely that we would change the look and feel. We couldn’t, because we franchise the Orange brand, and there are strict brand guidelines. We’ll be refreshing it from time and slightly changing its positioning, but it will always recognisable as Orange.

In the February Vivid, Paul Wood coined the phrase the Orange Revolution. As you know Basescu’s colours were orange, as were those used by Yuschenko in Ukraine. I was wondering whether you might have drawn a parallel.
No, we wouldn’t want to be associated with one political party over any other. We’re not a political organisation – we’re a commercial one. If you look at Holland, we probably have the strongest possible reason to try and associate ourselves with the national colours but we don’t because that has nothing to do with who we are.

You had a meeting with the new minister for telecommunications this morning – how did that go?
It was only a brief introductory meeting but I am sure we will get on very well. We worked very successfully with the previous government and I’m sure we will continue to work well with this one. We’re apolitical. We’ve no reason not to want to work well with the government, the ministry and the regulators.

And they have every reason to work well with you, presumably.
Well, we’ve been quite a positive influence on the development of telecommunications here. We’ve invested a billion dollars, and I think I’m right in saying that we’ve only ever paid a dividend of $16 million to our shareholders – everything else that we have earned has been reinvested, and there is another $220 million being invested this year.

So if the government stands back and looks at what we and our competitors have done here, there is a pretty sophisticated voice and data network right across Romania compared with how it used to be. And its become quite a central feature of many people’s lives, and been a driver for economic expansion.

Do you find that the level of awareness of technology is high amongst Romanians?
ICT is a key area of focus for Romania and needs to be to move Romania up the leagues tables. The focus placed on it here is excellent, and we obviously play a part in it.

What is the trend in fixed line growth?
Fixed line numbers have been relatively static for some time. There are about 4 million fixed lines, and well over 10 million mobile, and we are continuing to see substitution from fixed to mobile.

Re competition, do you consider Romtelecom a competitor?
Romtelecom has obviously got Cosmorom, which isn’t really going anywhere at the moment, but I think the government would like to find a way of revitalising it if they can. So I wouldn’t write them off. We’ll have to see what happens there.

And Zapp?
Zapp has been quite successful in building a niche for themselves in high speed data with their EVDO, CDMA-based technology. The issues they have are breadth of national coverage - on which I expect they’re working quite hard – and perhaps more importantly if you’re a business subscriber you can’t easily roam to other countries, because Europe tends to be GSM-dominated.

It’s always been interesting to observe how close you have been in competitive terms with Connex. It’s been great for Romanians to witness two very large, successful companies competing head-to-head with each other. You don’t feel that that is just a little bit unhealthy, given the virtual duopoly that exists?
Well it might be unhealthy if we didn’t compete amongst one another, but we do, and quite strongly.

You keep each other on your toes.
Yes, some of the offers that we put in the market recently are quite aggressive. And actually if you look at the price of mobile telephony here it is really quite competitive. I think we compete quite well with each other.

And they are a good competitor too – you probably wouldn’t be so strong today if you didn’t have them, and they you. You wouldn’t have a benchmark, for one thing.
Exactly. We certainly would not have driven ourselves so hard without them.