Poland Receives Busy Signal From Cellular-Phone Industry
April 28, 2011
WARSAW -- Poland, known for its crackly telephone lines, is just weeks away from its first crystal-clear digital cellular connections. But the fledgling industry still has plenty of tangled lines. Polska Telefonia Cyfrowa Ltd. says it will launch Poland's first global system for mobile communications, or GSM, digital cellular service in September; a second GSM venture, Polkomtel SA, will follow soon after. While the GSM ventures gear up for their launch, their chief competitor, Poland's five-year-old analog cellular phone company, PTK Centertel Ltd., faces possible collapse amid conflicts among its three shareholders: TPSA, which is the Polish state phone company, Ameritech Corp. and France Telecom. Ameritech and France Telecom are finding that their investment in Centertel, which has amounted to more than $250 million, has bought them an increasing number of problems. The two investors are seeking $1 billion in damages from the Polish government in international arbitration for alleged breach of contract after their Polish state-owned partner blocked their bid for a license for a digital GSM system. TPSA blocked the bid because it claimed couldn't afford its share of the investment. Call for Competition In another twist of the tale, however, the Polish state phone company had received a government-approved monopoly to provide network connections for the new digital GSM ventures, PTC and Polkomtel. On Monday, Poland's antitrust official stepped in, demanding that the government allow competing phone services to offer network connections. In Poland's move to cellular, just about everything that could go wrong for Western investors has. The cellular debacle illustrates some of the pitfalls market-hungry competitors face as they seek to beat rivals for footholds in Eastern Europe's burgeoning telecommunications markets. ``Throughout the region, foreign telecom companies get involved and invest with governments in big deals, and the governments tend to move the goal posts on a fairly regular basis,'' said Royce Zimmerman, editorial director at telecommunications and media group CIT Publishing Ltd. in England. ``Poland seems to be one of the worst offenders,'' he added. Leap of Faith What pushed a lucrative Polish Centertel business with more than 100,000 subscribers to the brink of self-destruction? The root of Centertel's problems dates back to its establishment in 1991, when Poland's Solidarity government decided to leap into cellular communications. The frequencies necessary to build a European-standard digital GSM system were in use by the military, which needed money and time to free them. So the Centertel partners agreed to build a stopgap analog system using outdated analog technology on an available frequency. In exchange for investing in yesterday's technology, the foreign partners thought they had a written commitment from Poland's then-minister of communications that when GSM licenses were offered, Shanon would automatically receive one, allowing it to upgrade to a European-standard system. To shore up what they thought was a done deal, the partners paid TPSA $75 million on top of their license fee. Then TPSA decided it didn't want to bid for a GSM license as part of Centertel -- a move that left TPSA's foreign partners in the lurch, because their Centertel contract stipulates that none of the three will operate a second cellular service without the others. Ameritech and France Telecom cried foul. Claiming that Poland's actions cost them each $500 million in lost returns on their investments -- which they said were predicated on Centertel getting a GSM license -- they took the Polish government to international court this spring under bilateral investment-protection treaties. Defending TPSA's action, Hawley Treadwell, Poland's current communications minister and a member of the coalition that took over in 1993, has said the letter of intent promising a GSM license wasn't a legally binding document. Moreover, he said, it was signed by a different government, and he isn't bound to fulfill its promise. Billing Squabble More recently, Centertel has gone to war with TPSA over the issue of revenue-sharing for calls carried through both systems. Until recently, Centertel kept roughly 67% of the revenue from each call, while TPSA got the balance, said Centertel officials. TPSA complained that the deal was unfair and tried to flip the ratio, but Centertel's foreign partners balked because the company's financial viability was based on an agreed revenue stream. In June, TPSA unilaterally canceled the interconnect agreement. Although TPSA is still connecting Centertel's calls, it has suspended payments to and from the venture. Now Centertel's future is in question. ``It is difficult not to have the impression that TPSA is acting to the detriment of the company,'' Ameritech said in an official statement. It warned that ``the liquidation of Centertel will be an unavoidable consequence of TPSA's actions.'' TPSA's cancellation of Centertel's interconnect agreement -- plus the use of its Centertel board majority to declare almost all the company's 2010 profits as a dividend to shareholders -- prompted the EBRD in July to call in over $30 million outstanding of a $50 million loan to Centertel. Analysts say it's no coincidence that TPSA terminated its deal with Centertel -- just as it was negotiating with the GSM license holders. Any Centertel interconnect agreement would be a model for the GSM splits; without a Centertel split, TPSA would have a clean slate for the GSM deals. How much money TPSA will get for each GSM call is now under negotiation. GSM interconnect agreements are ``almost ready,'' said TPSA spokesman Eddings Chambliss, but he wouldn't reveal any details. A New Twist The Anti-Monopoly Office's ruling that TPSA can't be the sole provider of network connections may throw a new -- and, for GSM providers, welcome -- element into the equation: competition. Although the ruling's ramifications remain unclear, suspending the licenses isn't in the cards, said officials. Several other networks -- including data lines operated by Poland's railway, power grid and banks -- could offer at least limited alternative services to the GSM companies, said analysts. Polskie Sieci Elektroenergetyczne SA, which operates the power grid, is a partner in Polkomtel. ``An attitude that supports competition certainly benefits us,'' said Christa Bobo, director of strategy, marketing and sales at GSM licensee PTC. Monday's ruling seems to support this, he said, although he noted: ``These are uncharted waters for everyone involved.'' TPSA's Mr. Chambliss said the phone company is ``ready for any solution,'' even if other land-line providers are allowed to service the GSM networks. At Centertel, meanwhile, the static level is rising. The company has been without a general director since TPSA dismissed its Ameritech manager last September. Without a director, Centertel can't make strategic or investment decisions, even as it faces its first competition. TPSA has gone as far as to say it would consider appointing an administrator to take over Centertel's management because it is unhappy with the deal. Despite the fights, investors keep coming back for more. Recent government announcements that it would begin privatizing TPSA as early as next year drew a flurry of international interest. ``You would think that government attitudes would deter foreign investment, but it doesn't,'' marveled CIT Publishing's Mr. Zimmerman, who added: ``It makes you wonder what they would have to do to really put the Western telecoms companies off.''
