Croatia’s Top Dog

The undisputed leader among Croatian internet service providers is Hrvatski Telekom (HT), which controls about three quarters of the broadband market.

Of the top 10 broadband providers, HT controls three, while three others are starting bankruptcy procedures. Regardless, HT—along with the national Regulatory Authority for Network Industries—is on a mission to overturn broadband retail market regulation.

The Croatian broadband market has evolved over the past 15 years. And there seems to be no space left for anyone else to enter the market as HT remains the king of the hill, while the smaller alternative operators are struggling to cope with the realities of a skewed marketplace.

Dominating the market

Hrvatski Telekom (HT) was established in 1999 after the breakup of the Croatian Postal and Telecommunications company. Ten months later the government sold its 35 percent share of HT to Deutsche Telekom for US$ 850 million.

In 2001, Deutsche Telekom increased its share to 51 percent to become the majority shareholder. HT’s second largest shareholder (8.7 percent) is Raiffeisen Mandatory Pension Funds, while the third is a fiduciary account at Splitska Bank (6.6 percent); the remainder is held by minority shareholders.

Service is delivered by a variety of technologies. About 60 percent of Croatia’s internet users gain access via coaxial (copper wire) cable and as a former monopolist, HT today owns by far the largest coaxial network in the country.

The term “cable network” includes both coaxial cable service and fiber optic cable. The Croatian Surveying and Mapping Authority refused to provide detailed data regarding the ownership of the entire cable network, while the Regulatory Authority for Network Industries (HAKOM) does not have such data.

It did, however, provide a list of the top 10 cable network owners. HT sits at the top, followed by VIPNet, which will be described below. The third and fourth largest providers are Iskon Internet, which is owned by HT, and Optima Telekom, which is indirectly controlled by HT.

Overall, HT, Iskon Internet and Optima Telekom held 76 percent of all connections on the broadband retail market at the end of the first half of 2014. In terms of income from broadband access services, their share was 77 percent.  Only 23 percent of income on the market was therefore left to alternative operators, like VIPnet, H1 Telekom, Amis Telekom and others.

Take-over without taking over

Iskon Internet is wholly owned by HT and managed by its former employees with one member of Iskon’s supervisory board simultaneously heading HT. In March 2012 HAKOM—after analyzing the broadband market—declared HT and Iskon “operators with significant market power” and set strictures on them to lessen their dominance of the market.

Currently, HT is also managing Optima Telekom, the fourth largest broadband provider, which had an 8 percent share of the market in 2010. In 2013 a pre-bankruptcy settlement procedure was begun, as Optima was out of cash and carrying too much debt.

As Zagrebačka Bank and HT were the largest creditors—Optima owed both the bank and HT around € 84.2 million (US$ 92 million) apiece–Optima proposed “a strategic partnership” with HT, in which HT would manage Optima during restructuring.

In September 2013 the agreement between HT and Zagrebačka Bank was signed, pending approval by the Croatian Competition Agency (CCA). Six months later, in March 2014, the market regulator issued “temporary and conditional” permission for HT to control Optima.

The permission was good for four years, with no possibility of extension, and carried several further conditions and rules of conduct. The Croatian subsidiary of Ernst & Young was appointed as trustee to monitor the implementation.

Among the conditions set by the CCA is an obligation for HT to ensure that Optima’s management and supervisory board remain independent of HT. Managers installed by HT at Optima cannot simultaneously serve on management or supervisory boards of HT or connected entities. Similarly, HT cannot install its own managers or supervisors on Optima’s supervisory board.

However, five out of nine of Optima’s supervisors have various functions at Hrvatski Telekom, primarily as sector directors. Furthermore, the deputy president of the supervisory board, Ariana Bazala-Mišetić, is the wife of HT’s deputy president of the supervisory board, Ivica Mišetić.

Additionally, Siniša Đuranović, the president of Optima’s supervisory board, has been helpful in the past to HT’s majority owner, Deutsche Telekom. In November 2013 he lobbied Slovenia’s former state secretary at the Ministry of Finance, Mitja Mavko, with regard to the privatization of Telekom Slovenije.

He was then HT’s Head of Operations, and visited Mavko along with Axel Scheuermann, senior project leader at Deutsche Telekom, and Oliver Knipping, member of the supervisory board at Hrvatski Telekom. Deutsche Telekom was long thought of as the frontrunner to buy the Slovene state’s majority shareholding in Slovenia’s largest ISP, Telekom Slovenije.

After the CCA reached its decision, in July 2014 HAKOM declared Optima was a (temporary) operator with significant market power, and assigned it the same regulatory obligations as it had previously assigned to HT’s Iskon Internet. It noted that these obligations would remain in place until HAKOM completed analyzing the broadband internet retail market.

To regulate or not regulate

In 2012, before the temporary decision regarding Optima Telekom’s significant market power status under temporary management of HT, HAKOM had completed an analysis to determine whether the market is susceptible to ex-ante regulation, meaning rules should be passed governing anticipated future actions, such as rate increases, given the internet’s importance as a utility.

It found that the broadband internet retail market in Croatia needs such rules because of HT’s dominant position in the market. Consequently, HT and Iskon were given the status of “operators with significant market power”.

The CCA supported HAKOM’s findings, albeit with some reservations. HT opposed them, while Optima Telekom supported the findings and added that “regulation of the broadband internet retail market comes too late”. Moreover, Optima claimed the proposed rules still left enough maneuvering space for HT to push smaller operators out of the market as the question of broadband access via optical fiber cables (FTTH) was not addressed, as HAKOM felt it represented a new service.

Three years later, with Optima under HT’s belt, the story is quite different.

In 2015, HAKOM completed another market analysis, this time concluding that due to increased competition, the rules could be eased for HT, Iskon Internet and Optima. At the same time it stated it would monitor the development of the market and perform the analysis again, if necessary.

The regulator found that HT’s market share (along with Iskon and Optima) has been declining since the 2012 analysis, falling 10 percentage points to a 77 percent market share. Meanwhile market shares of alternative operators like VIPnet and H1 have grown 5.5 percentage points and 3 percentage points, respectively.

Regardless, under the new findings HT’s market shares remain high nationally as well as in terms of income from its broadband segment. Yet, Optima Telekom’s stance changed significantly and it now supports the analysis findings.

Ultimately,HAKOM decided to free HT, Iskon and Optima of regulatory restraints, and issued a decision to this effect in June.

Second best

VIPnet, the second largest Internet Service Provider according to HAKOM, opposes market deregulation. It said in April 2015 that freeing HT, Iskon’s and Optima from the rules would not create equal market competition.

Of the top 10 broadband service providers, only VIPnet seems problem-free. Its market share increased while HT and its affiliated companies were regulated and it currently has nearly 16 percent of the cable internet market, while owning the second largest share of Croatia’s telecommunications infrastructure.

VIPnet is wholly owned by Austrian Kroatien Beteiligungsverwaltung, whose ultimate owner is Telekom Austria Group. Its majority owner with a 60 percent shareholding is the Mexican company America Movil, controlled by the Slim family.

And the rest is (almost) bankruptcy

The future of HT and VIPnet could benefit from other developments.

The sixth largest Internet Service Provider is Amis Telekom, which was owned by the Belgian company Amisco, which also owns Slovenia’s Amis internet provider. Amis was recently bought by Telekom Austria’s regional company Kroatien Beteiligungsverwaltung, as HAKOM was informed in June 2015, approving the merger a few weeks later. Croatia’s company register does not show this change yet. With Amis’s users, VIPnet’s market share will rise 2.3 percentage points to 18 percent.

At the end of November Amis Telekom merged with VIPnet.

Amis is so far surviving in Croatia’s market. However, three others—H1 Telekom, Metronet and Novi-Net—are undergoing pre-bankruptcy settlement proceedings.

Proceedings for H1 Telekom began in September 2013, and the amount of established claims ran up to € 70 million (US$ 76.4 million). In June of the same year Metronet, Croatia’s 7th largest ISP, filed for pre-bankruptcy settlement. Its established claims are € 69 million (US$ 75.3 million).

Last but not least, Novi-Net, which is Croatia’s 10th largest broadband provider with only a regional reach, entered pre-bankruptcy in December 2013 with € 589,000 (US$ 643,000) in claims.

Novi-Net’s immediate owner is an offshore company, Herlong Investments, which was incorporated in Cyprus. In 2012 the American company VelaTel Global Communications acquired 75 percent of Herlong and along with that control of Novi-Net and the Montenegrin ISP Montenegro Connect. But the partnership went sour quickly.

Novi-Net’s business plans were ambitious. In 2006, 20-year old Karlo Vlah, then the company’s owner and director, announced significantly faster yet cheaper internet access through WiMAX (Microwave Access) technology as Novi-Net was the first company to receive a permit to use it. After its owner Herlong was acquired by VelaTel, Vlah announced at the end of 2011 the company will build base stations on 50 locations for a total value of € 4.8 million (US$ 5.2 million). Again, he maintained, its service will be significantly cheaper.

Today, Novi-Net is still the sole holder of a WiMAX permit. When HAKOM was performing its recent broadband retail market analysis it noted that it did not take into account the market for microwave broadband access because it found there was “little interest for WiMAX access in Croatia”. Only Novi-Net was offering this service, and only in of one out of 20 Croatian counties.

By Anuška Delić Delo

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