The Race To Rewire Poland

Tiny Netia rushes in as the state phone giant begins to stir

From foreign investors such as French hypermarket Auchan to local dwellers of Gdansk, residents of Poland are fed up with their phone system. More than 1 million are waiting to get hooked up for service by the state-owned former monopoly, Telekomunikacja Polska (TPSA). Even for business customers, repairs of faulty lines can take days. That's why 190,000 customers, including 40,000 businesses, have abandoned TPSA for Netia Holdings--a tiny, unprofitable telecom provider that is TPSA's biggest rival. Says Auchan's information-technology director, Laurent Villain: "Any problem I have, Netia tries to find a solution. That was far from the case with TPSA."

Now, Netia--along with other, even smaller rivals--is gearing up for an explosion in competition. Poland is heading for full telecom deregulation after selling more than 100 local phone licenses to TPSA rivals since 1996. By yearend, the government expects to auction at least two licenses for long-distance providers to compete with TPSA. It also aims to sell up to 35% in TPSA to a foreign investor, probably either France Telecom or SBC Communications, based in San Antonio, Tex. Under World Trade Organization rules, Poland must open its telecom market to full-fledged competition by 2003. But "we believe it will happen much faster," says Netia's CEO, Meir Srebernik, a 40-year-old Israeli.

Netia is taking an expensive, high-risk gamble to grab market share. Already in debt to the tune of $600 million, Netia became the first Polish company to raise capital on Nasdaq on July 29. The $138 million in proceeds from the initial public offering will go toward completing a sophisticated fiber-optic network linking 10 Polish cities by the end of next year. Srebernik wants to offer top-of-the-line voice and data-communications services to snatch high-paying business customers from TPSA before a foreign partner gets the chance to turn the ex-monopoly around. He also wants to lease excess capacity on the network to other new players.

The goal: to gain about 8% of Poland's market for fixed-line phones by 2003, and 20% by 2008. "We are at the beginning of tremendous growth, as long as we are better than TPSA and avoid mistakes," says Andrzej Radziminski, Netia's 56-year-old founder and a member of its supervisory board. The potential is great, he says, because Poland has only 22 phone lines for every 100 inhabitants, compared with 55 in Germany and 94 in the U.S. On top of that, mobile-phone use is surging. Netia isn't in that business yet, but it's keeping an eye out for a strategic partner.

KEY STEP. The hard part will be earning enough income to finance expansion and pay down debt. Netia lost $58.6 million on revenues of $34.4 million in 1998, and probably won't return to the black for three more years, concedes Srebernik. But he predicts that sales will double this year, with operating profits kicking in by yearend. Winning a domestic long-distance license is crucial. Netia can't make money on local calls, which bring in less than 3 cents per minute, but domestic long distance gets up to 22 cents a minute. Says Pawel Zach, a senior research analyst for Citibank in Warsaw: "The only chance for Netia to be profitable is for it to get a long-distance license."

Netia will also have to fend off a raft of other upstarts. One is Elektrim, a Socialist-era conglomerate now remaking itself under an American-born CEO, Barbara Lundberg. Elektrim's new telecom unit recently dealt a blow to Netia by winning the government's tender for a license to provide local service in Warsaw. Most analysts expect Netia and Elektrim to go head-to-head over long distance as well.

However the battle plays out, Poland's telecom market is another example of the country's openness to foreign investment in the post-communist era. Sweden's telecom giant, Telia, Israel's Dankner Group, and E.M. Warburg, Pincus & Co. are all investors in Netia. Dankner brought in Srebernik, formerly its telecom vice-president, as CEO.

With their deep pockets, Netia's investors are betting that the fiber-optic network will give it a formidable position as No. 2 to TPSA. Poland's long-suffering phone customers can hardly wait.