Cyclopedia Of Economics 1st edition



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I. An Overview

The Central and East European market will double itself (to $17 billion) by 2003, says IDC. Pyramid Research predicts a $60 billion communications market by 2005. "Information Society", ICT (Information and Communication Technologies), "leapfrogging", and "better online than in line" are buzzwords and slogans oft-used throughout the region. A horde of NGO's - local and international - collaborate with domestic government and local authorities, with foreign governments, multinationals, and international organizations to make the dream of a digital Europe come true.

Russia pledged to attract $33 billion in investments in its telecommunications infrastructure and services by the year 2010 (the "Electronic Russia" initiative). The US Commercial Service, in the American Embassy in Moscow, predicts an annual growth rate of the Russian ICT sector of 15-20 percent through 2003. Conferences abound (an important one regarding municipal collaboration in constructing an information highway is to be held in the Czech Republic on March 26-27).

Even devastated Armenia succeeded to export $20 million worth of IT goods in 2001 (its IT sector has grown by 30% last year). It hosts branches of Silicon Valley household names such as Credence, HPL, and Virage Logic. More than 4000 professionals are employed in 200 companies. Of 60 software development outfits - 26 were founded with American capital. LEDA, a prominent local IT firm, finances IT programs at the Armenian State Engineering University.

All EU candidates strive to get incorporated in existing European networks (such as ELANET, Telecities, IDA, and ERISA) and new, candidate-only, initiatives (such as eEurope+). The EU has applied its "universal (i.e., also affordable) service" rule to Internet access. EU members adopted a variety of measures to increase Internet awareness and usage. Portugal, for instance, granted individuals with tax incentives coupled with free e-mail accounts and Web hosting services to encourage them to purchase PC's. The Dutch established public computer literacy centers for the disenfranchised (e.g., the unemployed) and provided them with discounted and subsidized hardware and connection time.

In one of its more grandiose moments, the heads of governments of the EU countries have decided in Lisbon (2000) that "each citizen should have access to the Internet and the whole European Union should become computer-literate", in the words of the Czech conference organizers.

This is an ambitious undertaking not only because Europe in general is behind the USA where Internet matters (with the exception of wireless Internet) are concerned - but because the countries which used to be behind the Iron Curtain, now lurch in the Digital Divide.

According to Vasile Baltac from the Information Technology and Communications Association of Romania ("The Balkan and Eastern Europe - Digital Divide or Digital Opportunity"), Romania has invested $25 per capita in ICT in 1999 (compared to Greece's $567 and the EU's average of $1215). There were only 2.5 Internet users per 1000 inhabitants in Romania and Bulgaria - compared to 56.4 in Westward-looking Slovenia.

New technologies are used mostly by the elites in CEE (as pointed out by Zassourski and Vartanova in "Transformation in the Context of Transition") - and perhaps advertently so. Still, Baltac fingers the managerial class as the main obstacle to leapfrogging (i.e., the rapid dissemination and assimilation of advanced technologies). They pay lip service to modernization but feel threatened and repelled by it. On the positive side, Baltac notes the annual yield of qualified professionals (who mostly find work in the West) and the emergence of telework and e-commerce. The technological vacuum makes the CEE countries receptive to state of the art technologies. GSM penetration in Romania surpassed the level of fixed line coverage in 1989. The number of cable TV subscribers in the region is projected to double (to 20 million) by 2005.

But the true picture is often obscured by anecdotal evidence, wishful thinking, phobias (e.g., the West European fear of mass migration from East Europe), lack of reliable statistics, and absence of qualified analysts and investment bankers. Factors like hostile terrain and climate, cross-subsidies, lack of real competition, corruption, red tape, moribund financial systems, archaic legal ones, dearth of credit card holders, urban-rural gaps, and English language illiteracy - rarely appear in neat, colorful, presentations.

Pyramid Research is bearish on broadband. "Internet access is and will remain for the foreseeable future a predominantly narrowband, dial-up affair, even in the most advanced countries (in Central Europe)". This despite plans by regional operators to offer DSL, FWA (Fixed Wireless Access), cable TV and leased-line broadband access (already offered in the Czech Republic by cable networks) and despite a regulatory welcome in all three CE candidates (Hungary, Poland, and the Czech Republic).

Luckily, mobile telephony - the other pillar of the leapfrogging theory - is getting increasingly concentrated in the hands of fewer operators (though at least 3 per every major market). Pyramid projects that by 2006, 94 percent of Russia's cellular phone market will be in the hands of the five leading providers (compared to 85 percent at the end of 2001). Mobile penetration will increase (to c. 10 percent) and prepaid customers will account for the vast majority of users.

Revenues from cellular networks exceed revenues from fixed line networks in certain markets. SMS is booming. Second and third mobile operator licenses are tendered by all cash strapped governments in the region (though a Polish attempt to sell an UMTS license ended in a fiasco). Poland introduced a wireless local loop service. Macedonia just handed a second mobile operator license to the Greek OTE.

"By the end of 2005, the total number of mobile subscribers in CEE will exceed 50 million (compared to 30 million by end-2001) and mobile Internet accounts will constitute approximately 21 percent of total mobile accounts", projects Pyramid. The Czech Republic will have 78 mobile users per 100 population - and Hungary 66. In a second tier of countries - the likes of Bulgaria, Romania, Ukraine, and Russia - a mobile phone will remain a luxury and a status symbol.

Hitherto domestic operators - from the Greek OTE to the Russian MTS - are becoming regional. Multinationals, such as the British Vodafone and the French Orange - have entered the regional fray. Some CEE markets are as saturated (and customers as savvy and demanding) as many advanced Western European ones.  A host of value added services (VAS) is thrust upon the - sometimes reluctant - users, leading naturally to WAP (recently introduced throughout much of CEE), 2.5G, and 3G (wi-fi or wireless Internet) services.

Moreover, Pyramid sees an intriguing opportunity in VoIP (Voice over IP) telephony. It says:

"As the incumbents in the CEE markets continue to dominate long-distance circuit-switched telephony, VoIP offers a unique opportunity for new operators to gain a foothold in this traditional monopolistic stronghold."

Internet Telephony Service Providers (ITSP's) have sprung up all over the region (an Israeli firm is now planning to offer VoIP services in Macedonia, Kosovo, and Albania). Even incumbents have been offering VoIP - as early as 1998 in the Czech Republic. In his keynote address to The Economist CEE Telecommunications Conference, in December 2001, Ofer Gneezy, President and CEO of iBasis (a global ITSP), cited industry analysts projecting VoIP average annual growth rates in CEE of 80 percent through 2006.

This, coupled with a growing number of Internet users and access providers (spurred on by telecoms liberalization and growing incomes), may revolutionize the landscape in the next 5-10 years. Pyramid expects annual Internet adoption growth rates of 40 percent through 2005 (that's 30,000 new users a day!). Internet related revenues will reach $10 billion by 2005 (five times today's $1.8 billion - but only one seventh the Internet market in Western Europe).

Internet penetration in Central Europe will reach 15 percent in 2005 (from 4 percent today and 3 percent in Russia) - and 40 percent in Western Europe (compared to 18 percent today). Mobile Internet accounts will constitute one third of the total in CEE - c. 20 million users. Harald Gruber of the European Investment Bank is even more optimistic, saying ("Competition and Innovation: The Diffusion of Telecommunications in CEE", March 2000): "About 20 percent of the population will adopt mobile telecommunications".






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