The Czech telecoms market is one of the best developed in the Central and Eastern European (CEE) region, with high levels of mobile and fixed-line penetration, as well as rapidly-growing take-up of broadband services. The success of the market is down to the highly-competitive regime that allows alternative players such as T-Mobile, Vodafone, Telekom Austria, GTS Novera and UPC to thrive despite the continued dominance of the incumbent, Telefónica O2.

However, we now have cause to substantially alter our view of the market via our Business Environment Ratings system. Previously, the Czech Republic had come second in our rankings of 17 CEE markets and had been beaten only by the similarly well-developed market of neighbouring Hungary. This quarter, significantly reduced mobile ARPUs and high rates of mobile penetration have conspired to generate a much lower score for potential returns on investments. The mobile market grew by just 6% in 2007 and, based on Q108 and preliminary data for Q208, we expect to see growth of just 2% in 2008. This is despite the arrival of U:fon in the mobile voice telephony services market in Q208 and reinforces Vodafone’s view that investment in 3G infrastructure is not commercially viable at this time.

The fixed-line market is also shrinking as customers elect to replace standard telephone lines with mobile and broadband connections. In the broadband sector, a lack of momentum in getting interconnection agreements between Telefónica O2 and alternative operators is constraining ADSL growth while there appears to be only muted demand for fixed wireless and mobile broadband services. New economic and population data also show that the country has a lowered ability to rapidly adopt new services and technology. Nevertheless, BMI continues to believe that the Czech Republic benefits from a very stable business environment, a supportive government that proactively encourages foreign direct investment and a skilled workforce. A strong economy and stable political climate have allowed us to revise upwards the country’s risk scores.

BMI’s view is that the best growth opportunities are currently being seen in the broadband sector. New historical data for 2006 and 2007 show that the market grew by 46% in 2007 and the indications are that the market will witness growth of almost 33% in 2008, which should bring broadband penetration to 20.9%. With increased broadband investments planned by Telefónica O2, GTS Novera, UPC and Telekom Austria, we believe that the market could grow to support 3.17mn subscribers by the end of 2012. This could be higher if the mobile broadband segment takes off in the interim, though there are few signs at present that it will do so. Similarly, interest in WiMAX-based services is also lacking at present, but could gain momentum over the next five years as fixed-line operators complete their ADSL and cable modem build-out programmes.