Telefonica Czech Is ‘Optimistic’ for Auction Rule Changes

Telefonica Czech Republic AS is “optimistic” the nation’s telecommunications regulator will amend disputed rules for a radio-spectrum auction before bidding begins in July, Chief Executive Officer Luis Malvido said.

The Czech units of Telefonica, Vodafone Group Plc, and T-Mobile have criticized the auction draft, saying it would hurt their business by allocating two of six blocks of 800 megahertz frequencies to a new provider and allowing it alone to bid for the remainder as well. Providers need to control at least two blocks to ensure good service, meaning at least one of the current companies would lose out.

“It’s difficult to imagine that these conditions that were so far only drafted would be confirmed,” Malvido said in an interview yesterday in Bloomberg’s Prague office. “So, I’m really optimistic that there will be some changes. This is about our rights and they’re not negotiable.”

The Czech Telecommunication Office proposed in April new terms for the spectrum auction, after unexpectedly canceling the previous tender on March 8 after four months on concern the bids, which totaled to 20 billion koruna ($1 billion), were “excessive, ” and would result in higher prices for customers and slow investment in the domestic industry.

PPF Group NV, a Czech financial group, which also bid in the failed auction, has said its auction participation depends on keeping some of the regulator’s proposed terms including reserving the two blocks for the newcomer or obliging existing operators to provide roaming in 2G and 3G networks to the new entrant.

Future Steps

Malvido declined to say what concrete steps Telefonica would take in case the authority refuses to change the proposed rules for the sale.

“I prefer not to speculate on what we will do if they’re confirmed,” he said. “They’re just a draft, which was done by the previous authority.”

The Czech Telecom Office plans to announce its response to the objections received during the public consultancy period for the drafted rules by June 24 and the auction should start in July, spokesman Frantisek Malina said by phone.

The government yesterday approved the regulator’s intention to bring at least one new operator to the country through the auction, Hospodarske Noviny said.

Operators across the globe are rushing to build faster mobile networks based on Long Term Evolution, or LTE, technology that will enable consumers to use enhanced services to shop online and to communicate better.

Buildup Costs

The initial costs for building such a network in the 800 MHz band, a frequency needed to blanket wider areas, would be between 5 billion koruna ($260 million) to 10 billion koruna, in addition to the spectrum purchase costs, Malvido estimated. The final costs would also depend on negotiations with vendors and the position on the market, he said.

“We believe that 800 MHz is very important to us but we’re not desperate, so if the auction goes against our rights, we believe that the chances of our participation are low,” Malvido said.

Telefonica and other operators have already started deploying LTE in big cities like Prague or Brno. Still, in a long-run, it would be difficult to compete against networks built using the 800 MHz bandwidth.

“We would be competitive at the beginning, but would suffer probably from 2016 to 2020 and have to wait for the next wave of technology,” Malvido said.

Telefonica Czech slashed prices and offered first-ever bundles of unlimited calls, text messages and some data in April. The company doesn’t expect a “huge” drop in revenue in the short term, even though some customers used the offer to cut spending.

Unlimited Calls

“Of course, our revenue would drop at the beginning, but this will be partially already offset as some clients actually choose to spend more,” Malvido said.

Telecommunications companies in the country have been battling a steady decline in revenue over the last few years as customers continued to spend less on calls, competition and regulatory changes eroded prices.

Telefonica said on May that its first-quarter revenue declined 4.4 percent to 11.9 billion koruna from a year earlier. Net income fell to 1.05 billion koruna from 1.62 billion due to one-time costs linked to a business overhaul and a drop in spending on phone calls.

From about 300,000 clients who adopted the new tariffs since April, close to 60 percent reduced spending, while 40 percent chose to pay more for unlimited services. In the last few weeks, the trend is just the opposite as majority of people that choose flat fees are increasing their spending, Malvido said.

He wouldn’t provide details on how the flat fees would affect measures like margins, or average revenue per a user.

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