Telekom Austria Issues 2010 Earnings Warning as EU Clears Broadband Deregulation Plan

Telekom Austria has announced it expects a drop in full-year earnings in 2010, as it predicts EBITDA of 1.6 billion euro (US$2.36 billion), down some 11% on its full-year earnings (EBITDA) forecast of 1.8 billion euro in the current year. The Austrian incumbent has also predicted that revenues next year will come in at around 4.7 billion euro, a drop of 2% from its stated 4.8-billion-euro sales target for 2009.

The news has caused an 11% drop in Telekom Austria's share value, and the operator is largely blaming the continuing global economic downturn for the gloomy forecast, as its Eastern European markets continue to drag down a relatively flat performance at home.

The announcement comes as the EU has stated that the Austrian regulator can proceed with its planned deregulation of the broadband sector in the country, after the European Commission (EC) had voiced concerns about the definition of the access market (see Austria: 6 October 2009: EU Calls on Austria to Suspend Broadband Access Deregulation). The EC has now formally defined the wholesale broadband access market in Austria as including wireless, and has approved the regulator RTR's exclusion of all bit stream access for residential customers from regulation.

Outlook and Implications

• Further Gloom for Telekom Austria: Telekom Austria has faced difficulties this year, as the ongoing decline in its domestic fixed-line sector is exacerbated by problems in its Eastern European markets and the effects of the economic slowdown (see Austria: 12 November 2009: Telekom Austria Swings to Q3 Net Loss on Belarusian and Serbian Write-Downs), and price pressure from both regulators and competitors stays high. The operator was majority privatised in 2000, but still retains a large number of staff hired on civil-service contracts, making it hard for the operator to cut jobs—something which the Austrian government is finally looking to address with a deal to transfer surplus staff to other roles (see Austria: 26 November 2009: Telekom Austria Reaches Government Agreement to Transfer Surplus Staff to Police Force). However, the ongoing decline in traditional fixed-line services at home is largely being offset by modest growth in mobile and broadband services, meaning its performance in Austria has been relatively flat. Despite alarming declines in its once-hopeful Eastern European markets, a solid customer base at home should protect Telekom Austria from the worst of the economic downturn.

• Eastern European Investment Continues: Before the financial crisis, Telekom Austria made some promising investment inroads into Eastern Europe and the CIS, with key mobile operators in Bulgaria, Croatia, Serbia, and Belarus. However, it has now tightened the purse-strings, saying it has no plans for any further overseas acquisitions, and is now focused on growing its free cash flow, with a target of generating some 1.1 billion euro in cash this year, as it has been was forced to write some 352 million euro off the value of its mobile operators in Belarus and Serbia. Nevertheless, Telekom Austria continues to invest in its existing markets, particularly in increasing mobile network speeds (see Europe: 1 December 2009: Ericsson Wins Network Upgrade Contract from Eight Telekom Austria Units), and has recently shown further interest in entering the Serbian fixed-line market (see Serbia: 8 December 2009: Telenor, Telekom Austria Obtain Tender Specs for Serbian Fixed-Line Licence).

• EU Gives Green Light to Broadband Access Freedom: In October, the EU clashed with RTR, asking the Austrian regulator not to adopt plans to deregulate the wholesale access market in the country, questioning the differentiation between mobile and fixed-line broadband access. However, now EC Competition Commissioner Neelie Kroes has stated that wireless residential broadband can be considered a functional substitute for fixed broadband access in the country—something the regulator had used as the basis for its argument for deregulation. The implication is that residential users can easily switch between DSL, cable and mobile connections to access the internet—making both fixed-line and wireless broadband accesses part of a single market. The EU has criticised the continued dominance of the incumbent Telekom Austria in the fixed-line market earlier this year (see Austria: 25 March 2009: EU Criticises Telekom Austria Dominance of Fixed-Line Market—Report), and is likely to keep a close eye on the operator's ambitious next-generation network investment plans (see Austria: 6 July 2009: Telekom Austria Outlines US$2.1-bil. NGN Investment) to ensure fair access to competition is guaranteed. However, the EU decision that the Austrian market can be deregulated reflects an advanced level of competition and mobile technology in the country—and reflects an increasing blurring between fixed-line and wireless broadband services.