Telecommunication storm – Huawei, 5G, shifts on the Bulgarian market

By Yassen Guev

In your pocket there are keys, wallet and phone. Today, technology allows the phone to perform all of these features. In our country, new technologies come a bit slower than large developed markets, but they do not miss us.

Huawei

The trade war between the US and China has led to serious measures against Huawei. The company is a leading player on the market of telecommunications equipment and mobile phones.

Here are some details to give you insight into the stakes of the big players on these two markets.

https://www.counterpointresearch.com/global-smartphone-share/

Huawei grabs 28% share in global telecom equipment market

ZTE is the second most powerful Chinese company, but a large part of the telecom equipment is in the home country and where Huawei has a lesser presence. Samsung has recently entered the telecom equipment market with the ambition to become a major supplier in its native South Korea, and to become a serious competitor on the world level- currently the three major players are Huawei, Ericsson and Nokia.

The future development of fifth-generation mobile networks will lead to a significant growth in three markets – telecommunications equipment, terminals and services.

According to the international consulting firm IDC the equipment market will generate orders for $ 57 billion over the next four years. Gfk data show that the market for mobile devices in 2018 was worth $ 522 billion. These amounts look impressive, but not against the $ 4 trillion in the next two years that will come from apps, according to IDC.

If we look at these amounts through the prism of the US-China trade war, Americans are about to lose the competitive battle on the least important market and dominate on the largest with companies like Amazon, Facebook, Alphabet (the company owning Google), Apple and many others. The gaming market is growing extremely fast – According to Newzoo in 2019, there are nearly 2.5 billion players in the world who spend over $ 152 billion.

The Global Games Market Will Generate $152.1 Billion in 2019 as the U.S. Overtakes China as the Biggest Market

Big US operators do not use Huawei’s equipment and they don’t sell Huawei’s smartphones. The Federal Communications Commission (FCC) is currently discussing the possibility of funding some small fixed operators using Huawei to replace their equipment.

https://www.cnet.com/news/fcc-commissioner-wants-huawei-gear-out-of-us-networks/

The main reason for the attack on Huawei is related to national security. Each phone manufacturer can gain access to the data collected from each terminal. Software upgrades allow you to access various applications. The same applies to telecom equipment manufacturers. As technology advances, security risks grow as outsiders can reach mobile phones, cameras, sensors.

One of the main risks is the danger that the telecom equipment manufacturer will have the ability to stop coverage on a particular territory – this is usually done before and during police or military operations to prevent the possibility of criminals or military formations to use the mobile communications network.

For manufacturers of equipment and devices, this task is easier, but it is not impossible for secret services of designated countries or for criminal groups with the appropriate equipment and expertise.
It is no coincidence that US Secretary of State Mike Pompeo has said on several occasions that the US will restrict access to intelligence to countries using Huawei’s equipment. The US policy towards this company was followed by Japan, Australia and New Zealand.

The European Union (EU) has taken a slightly more diplomatic stance by asking Member States to analyze the risks to the safety of 5G networks. They must be ready by the end of this year. Britain has decided to authorize the purchase of radio equipment from Huawei, but has banned any other purchases.
The Chinese company has already announced its intention to set up its operating system and application store.

5G

At the beginning it was 2G- simple voice service and SMS. In the third and fourth generation mobile networks, the number of base stations have been increased, and with them the speed of Internet access. Fifth generation networks offer not just faster Internet.
The main advantage of the new network will be the minimal delay of the signal- latency, which will allow the use of autonomous cars, electronic games that react instantaneously to the reactions of each player, medical operations via Internet, firefighters having real time access of the exact location of each of their colleagues in the burning building and its architectural plan on screen. The list can continue with many examples.

For those tempted in technological solutions is this link to a publication that gives a good explanation for the architecture of fifth-generation networks.

https://www.mckinsey.com/industries/telecommunications/our-insights/the-road-to-5g-the-inevitable-growth-of-infrastructure-cost

Building a good fifth-generation network will be something extremely expensive. The reasons for this are several – the need for a new spectrum, new base stations, new small cells and the need for optical connectivity and many more. The network will have more elements, which will also increase the use of electricity.

The incumbent operators are better positioned best to build such a network because they have a fixed network and also operate as mobile operators. They usually have a duct network, an optical cable network is in place, and the addition of new points for them is significantly easier and cheaper than for their competitors.
The large cost of building and operating will force many telecoms to try to go in the direction of network sharing. Another strategy is possible – operators with a fixed and a fixed network have the natural advantage of building better networks from pure mobile network operators.

For some operators, which are third by number of subscribers, it may be that there is no business logic to build a fifth-generation network.

They can remain a low-cost player and be more efficient on the basis of lower spectrum and networking costs. Such a strategy is possible in countries with a large number of customers who are not interested in using mobile internet or for which third or fourth generation networks are sufficient for the services they use.

Another option is to compensate for the lack of enough optics with a larger investment in frequencies. The one who goes first with a fifth-generation network will attract the customers with high bills. The roaming revenue will also go to the best 5G network.
The Bulgarian Telecom Market

The big news for the bulgarian market over the last few months is the unofficial information about the upcoming sale of Vivacom.

https://www.capital.bg/biznes/kompanii/2019/05/14/3905596_zapochva_prodajba_na_btk/

According to Mergermarket, quoted by Capital weekly newspaper, the Russian VTB is the initiator of the sale, the transaction consultant is the investment bank Lazard and the goal is to transfer to the new owner 100% of the shares. Offers are expected to be submited in autumn this year, and change of ownership will happen early next year.

https://www.capital.bg/biznes/kompanii/2019/05/14/3905596_zapochva_prodajba_na_btk/

Last week the information was officially confirmed by the majority shareholder of the incumbent Spas Rusev.

https://www.bloombergtv.bg/bulgaria/2019-06-27/spas-rusev-prodava-vivacom-za-pone-1-mlrd-evro

46% of the operator’s shares are owned by local businessmen Spas Russev, the Russian VTB has direct 20% and another 19% through its Sofia office, and 15% are in the hands of a group of international investors.

BTC is a company that is having good results. Here’s a quote from the company’s latest release of its financial results:

“For the sixth consecutive year, VIVACOM retains a leading position on the Bulgarian telecom market with total revenues of BGN 948 million at the end of 2018, 6.6% more than in 2017. The telecom also recorded a steady growth of 12.8% in the adjusted EBITDA to a total of BGN 359 , 8 million, while investment costs increased by 3.6% to BGN 187.5 million. This was announced by VIVACOM Chief Executive Officer Atanas Dobrev at the presentation of the annual Integrated Telecom Report. ”
Sofia, May 29, 2019

Last year, Vivacom increased subscribers to pay-TV services by 4.7% to 468,000 compared to 447,000 in 2017.
The company is a leader in the fixed broadband market, with total subscriber numbers increasing by 2.8% to 444,000 from 432,000 in 2017.

Vivacom and A1 are the only operators offering fixed and mobile services. The former state monopoly first entered the TV content market by creating a movie channel, but it did not bring any extra revenue. A1 invests in sports content and creates an additional source of revenue through subscribing to Max Sports channels.

One of the last hits was the acquisition of broadcasting rights for the Champions League’s Tuesday matches, with the remaining matches being broadcast by bTV. It is not difficult to assume that in the future Vivacom and A1 will enter direct competition for the rights not only of the Champions League, but also for the broadcasting of the Premier League of England, which is now broadcast by the Nova TV group in the Diema Extra channels.

New TV produces the channels of A1 Max Sport. It will not be surprising if future new owners of bTV and Vivacom also develop a similar type of partnership.

The new owner of Vivacom and bTV may be the same

In the publication of Capital weekly newspaper about the upcoming sale of Vivacom, there is speculation of interest in the deal by the French operator Orange. The big european players like Deutsche Telekom, Vodafone or Orange are nor present in Bulgaria.
The truth is that is highly unlikely that a big telco group will be interested to buy any Bulgarian operator. To date, large groups are focused on changing their business model because of the upcoming switch to fifth-generation networks.

It is much more likely that offers would come from investment funds. A possible candidate is United Group- the company owns fixed, mobile networks and tv stations in the countries of former Yugoslavia. Recently, the US KKR Fund has sold a majority stake in this company to BC Partners- UK Fund. KKR still ownes minority share.

News

BC Partners refused to comment on their potential interst in investing in Bulgaria or possible participation in the deal for Vivacom.

The eventual purchase of Vivacom and bTV by United Group or another large investment company has the potential for a good return on investment within 3-5 years. Combining the best fifth-generation network with the sale of sports content can lead to increased revenue.

With good governance for such a term, Vivacom can equalize and outperform the number of A1 mobile subscribers, as well as continue steady revenue growth.

Conclusion

The conversations between the state and the operators regarding the allocation of spectrum and the public demonstration of working base station by A1 are a good start but the truth is that Bulgaria is years away from building of a working 5G network.

The investment will be significant and the return (ROI) questionable. On top of that everybody should expect a public discussion on the issue of the effect on health of the electro magnetic field (EMF) because 5G will require putting large number of antennas in order to achieve good coverage.
For most of the subscribers the current 4G network is enough for the services that they use.

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