ENDA: Third mobile phone entrant moves closer

VILNIUS – Lithuania has a prospective new player in its mobile telephone market. But this one is finding it hard to gain a level playing field with the existing competition. Tele2, the Lithuanian subsidiary of Sweden's Netcom Corporation, is looking at an investment of hundreds of millions of litas to set-up a mobile network and is finding an array of technical and political obstacles in its path.

If Tele2 successfully completes its bid to become Lithuania's third player, Lithuania's mobile phone industry, which has already seen impressive price wars, could see even more dramatic price discounts and service alternatives. However, in a moribund economy dominated by two competitive multinationals, Omnitel and Bite, Tele2 has its work cut out for it.

For starters, it has a relatively limited GSM 1800 license. To compete, Tele2 needs a GSM 900 license – both a political and economic hurdle.

"If we had just an 1800 license we would have to build roughly more than double the number of stations in order to have the same coverage. And on top of that we can't compete because phones in Lithuania are not dual-band," says Carl-Magnus Stenberg, the international project manager for Tele2's mobile network. "The existing phones in the market are using only the 900 frequency band. So we can't really sell our service to the existing customers."

Stenberg reports that a tender was issued for a 900 license, but Tele2's attempts to win it have been delayed for roughly six months. "Since we are already active in the market it's very important for us to have equal competition," he says. "Our growth is directly related to that issue."

The next challenge for Tele2 is the financial demands of setting up the network. Hundreds of radio bay stations, which connect the mobile phones to the network, have to be installed all over Lithuania. Stenberg reports that one single bay station can cost up to 1 million litas ($250,000).

But Tele2 is undaunted. In Sweden, the company's parent is second in mobile phone penetration to Telia, one of the chief shareholders of Omnitel. The company, says Stenberg, has more than 60 percent of the market in Scandinavia and Finland. Here it hopes to cash in on the popularity of pre-paid calling cards and simplicity of service – strategies that have succeeded there.

"In Sweden we have 1.7 million mobile subscribers out of a population of roughly 9 million. It's a huge penetration and we've had big growth in the last two years since we launched the pre-paid subscription. That is a key approach," Stenberg said.

But it's a long road ahead if Tele2 is going to achieve the market share of its Swedish counterparts. In Lithuania, Tele2 claims it has between eight and nine percent of the total penetration, while over 60 percent in Scandinavia and Finland. In Estonia, Stenberg claims, his company has already achieved bona-fide third-operator status.

"The growth has been going up to 27 percent and my interpretation of that is a big focus on prepaid cards and especially a third player in the market."

Stenberg maintains that the third player's job is to fill a void traditionally ignored by the two large players – personal users.

"In Sweden, mobile telephony traditionally had been targeted to business people. If you have two players they will not try to get the entire population. If you have three players you have to differentiate yourself even more," he says.

Last fall, Omnitel and Bite engaged in a mini-war after Omnitel reduced its rates. Bite followed with even deeper discounts, and then Omnitel countered with yet another reduction. This trend could very well continue if Tele2 becomes the third player.

"We are committing ourselves to be the price leader, especially in the pre-paid segment," says Stenberg. "It's very simple for us because they could offer whatever, and we could always be the price leader."

Besides the technical issues, what isn't helping Tele2 right now is Lithuania's struggling economy – a conflict not ignored by the competition.

"Now consumers especially are not buying [mobile phones] because it's expensive for them," says Irena Ceikauskiene, head of Omnitel's marketing department. "They spend about 50 percent of their salaries to buy food and for other inevitable services. The average salary is roughly 1,000 litas [per working person]. We have an unemployment rate of 11 percent. So you see that the economic situation is not very supportive of the growth of penetration of mobile services in Lithuania. Should this situation improve I believe that the use of mobile services would really increase."

And, Ceikauskiene maintains, the market might not be ready for the entry of the third player.

"I would say that the market is not a mature market in general. The maturity of the mobile market in Lithuania is not enough to market mobile communications services at full speed, as they are done in Scandinavia. Conditions of the market are so different when you compare the Lithuanian with the Scandinavian market, especially now when the economic situation is so low. The penetration in Lithuania now is approximately 11 percent." In terms of penetration, she adds, "Lithuania is lacking behind more technologically sophisticated Eastern European countries such as Poland, Estonia, and Hungary."

Stenberg, of course, disagrees.

"The technologies in Lithuania are quite, quite mature actually. In Estonia big growth has started. If you compare that with Lithuania, if you just have the right possibilities growth will increase quite rapidly. The economic situation is poor of course, but still there are big possibilities."