View on the Baltics: Mobile Market Overview

Onerous investment in digital infrastructure has made the Baltic mobile markets more developed than most of their regional peers in Central and Eastern Europe (CEE). However, the small size of each market means that there are few growth opportunities and operators will need to focus on upgrading their existing networks and expanding postpaid services for revenue growth. Operators in Estonia must focus more on quality and breadth of service rather than engage in aggressive price competition, while the industry in Lithuania faces a small addressable market for premium services and should therefore focus on pricing and network expansion. Meanwhile, operators in Latvia will need to further their multi-play strategies and invest in their networks.

The Baltic countries have highly mature mobile markets, supported by robust investment in digital infrastructure and the presence of strong operators. All three markets are, however, small and saturated, making it difficult for operators to grow organically and pushing them to focus on postpaid services as pressure on revenues grow.

Estonia stands out as a regional leader, boasting a high mobile penetration rate due in part to high incomes relative to regional peers and early adoption of services. The market adopted data services at an early stage. However, non-voice revenue growth has failed to keep pace with demand for services, putting operators under pressure. This conspires to keep ARPU levels flat, with blended ARPU coming to €10.30 per month for Telia in Q416, up from €10.00 a year earlier. Data revenue continues to be dwarfed by income from voice, meaning that Telia and its peers still have much to do to offset the falling value of traditional services.

The market offers few organic growth opportunities, and subscriber growth witnessed a slight decline towards the end of 2016, falling to 2.037mn in Q416. Smaller operators such as GO Network could become acquisition targets. Cable broadband operators Starman and STV lack their own mobile networks and would benefit enormously from acquiring GO or its mobile business to exploit demand for multiplay converged services. Under private equity ownership, Starman has made selective acquisitions in the Baltic region and new owner Elisa has the potential to transform it into a challenger brand in the converged services market. We believe their attention could easily turn to GO Network, or even STV, for the right price.

Operators in Lithuania are focused on migrating customers from low-value prepaid services to premium postpaid plans for revenue growth. In Q416, the market reached 2.771mn postpaid subscribers, up from 2.684mn in Q415, while prepaid subscribers declined to 1.464mn. Incumbent Telia (created through the February 2017 merger of TEO and Omnitel) leads the way in offering mobile-centric dual- and triple-play bundles to its customers. The closer integration of the two businesses allows for the possibility of developing quad-play services in the future, particularly now that 4G network rollout is well advanced. Lithuania continues to be regarded as one of Europe’s most broadband-rich markets, owing to the extensive availability of wireline (xDSL, FTTx, cable, fixed wireless) and mobile (3G UMTS and 4G LTE) networks. However, the adoption of premium converged voice and data services is not as high as it could be, as TEO lacked a mobile network prior to its acquisition of Omnitel, while competitors do not have the requisite financial and technical resources.

Finally, Latvia’s mobile services are less developed than its regional counterparts, and quad-play services are yet to emerge, despite the market leader LMT’s and Baltcom’s ownership of the country’s fourth mobile broadband licence. That said, the country boasts one of the most advanced mobile and broadband infrastructures in the region. The robust economy ensures that, despite the relatively small addressable market, operators of advanced infrastructure can benefit from the provision of premium converged services. The market is dominated by a handful of next-generation wireline and mobile broadband networks. Lacking the scale and the finances, the many small rural and regional players that remain will either be forced out of the market or become acquisition targets. The former is however more likely, since minor players’ small footprints and ageing infrastructure can be seen as significant disincentives for mergers.

In the face of market saturation and limited organic growth opportunities, we expect operators to focus on developing advanced data services and multi-play strategies in Estonia and Latvia, while Lithuania will see a deepening of broadband infrastructure - both fixed and mobile - within cities and rural areas.

The launch of LTE services has already accelerated high-speed mobile broadband coverage and gives operators greater incentive to develop more advanced services. The sustained investments in the advanced mobile data infrastructure and LTE-A base stations with 1Gbps download capacity and continued investments into 5G capabilities in Estonia and Latvia suggest that operators are gearing up to compete in the high-speed data segment as competition intensifies on the basis of price. With consumers increasingly turning to in-home and public Wi-Fi for their mobile broadband requirements, operators will also need to invest in proprietary applications and solutions as well as collaborating with over-the-top (OTT) service providers.

Upselling high-speed advanced data services is the main way for operators to cope in Latvia’s highly saturated market, where q-o-q subscriber growth was at an historic low (0.1%) in Q117, reaching 2.93mn subscribers. Operators are investing in upgrading their 4G platforms as they prepare for heated competition in the advanced mobile data services segment. Both Bité and LMT are actively investing into mobile data service innovation and LMT announced in Q117 that it deployed its first 5G trial base station in coordination with Nokia as it plans to undertake a pioneering role in the future of mobile technologies.

Increasing take-up of more advanced services in both markets will pose a threat to smaller operators. Latvia’s Tele2 focuses heavily on the low-value prepaid services market and, despite success in growing non-voice usage on its networks, it could suffer if consumers were to show an increased preference for higher-value multi-play postpaid services in the future. For now, the company relies on its ability to offer cheap alternatives to wireline broadband in the cities and in rural areas. The emphasis on postpaid in Estonia has prevented Tele2 from taking a greater share of the market than it would like and it is beginning to lose ground to incumbent Telia Eesti and Elisa Eesti.

In Lithuania, the emergence and development of such services is hampered by the relatively small size of the addressable market: there is no room for any new entrants unless smaller players combine and there needs to be greater integration between wireline and mobile players before mobile- and TV-centric quad-play services emerge. Lithuania’s economy also depends on neighbouring Russia and the latter’s increasing belligerence on the global political stage has had a deep negative impact on its economy as well as its trading partners. Now is not the time, therefore, for telecoms players to invest significantly in new premium services. Rather, the next five years will see a deepening of broadband infrastructure - both fixed and mobile - within cities and rural areas. The current service providers will remain dominant with little incentive to develop advanced converged services that will fully exploit the capabilities and value of this infrastructure.

Regulatory risks are reflected in the Industry Risk scores of BMI’s Risk/Rewards Index for CEE Telecoms. Latvia obtains a score of just 70 out of a potential 100 in terms of attractiveness, the lowest in the Baltic region as the government remains the partial owner of a major wireline and wireless carrier in the country. The regulator has not been very effective in promoting competition in the country and has taken a relaxed approach towards innovation in the market. The regulator’s decision to block Telia’s plan to merge wireless provider LMT and wireline provider Lattelecom in order to increase operational efficiency, demonstrates the government’s reluctance to divest itself from its ownership stakes in both the companies and desire to maintain a presence in the market.

Contrary to Latvia, Lithuania boasts a strong telecoms regulator, receiving one of the highest Industry Risks score we assign, at 90 out of 100 compared to a regional CEE average of 68.3. This is reflective of the prudent and proactive regulatory policy, with the Communications Regulatory Authority (RRT) taking active steps to boost competition, adopt internet and wireless uptake policy and enhanced service modalities. The regulator works closely with European Union bodies to ensure fair prices and to bolster innovation in the sector.

Estonia’s ECA and the TJA are highly proactive regulators, consulting on a wide range of topics to help guide industry guidelines and policy. Their soft approach to policing the market is due to the small number of players they oversee as well as the fragmented nature of the wireline broadband and pay-TV markets. There have been some delays in transposing EU laws into local legislation and, for this reason, we ascribe a lower overall score of 85 points than for the much more dynamic Lithuanian market. Nevertheless, the core EU regulatory package is in place and Estonia scores well in terms of digital inclusion and can be seen as a role model for the EU’s Digital Single Market owing to its vibrant content services sector. Approval of the merger of the Telia-owned incumbent wireline and mobile businesses also bodes well for the market.

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The Baltic markets, with their proximity (in both geographic and economic terms) to the Nordic markets, are highly developed in terms of mobile technology and have shown a commitment to developing technology which far surpasses that of most western European countries.

Taking a pragmatic view, Baltic MNOs seem to be keen to reduce costs by sharing infrastructure and the small independent players in the market are diversifying well beyond a simple ‘stick in the ground’ model to offer a full digital/IoT solution. This not only adds a new revenue stream to their bottom line, but also means they are opening up new uses for their towers, from aviation network tenants to IoT technology, allowing them to maximise the assets they already have.

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