SERBIA BROADBAND OPERATING IN HOSTILE ENVIRONMENT

1. (U) Only five years after the Southeastern Europe Equity
Fund invested USD 10 million in this cable television and
broadband start-up, Serbia Broadband (SBB) has become a
significant market player in Serbia. Its successful growth
places it squarely as a threat to state-owned Telekom Srbija.
On the verge of expanding its fiber optic infrastructure and
obtaining an international gateway for cheaper bandwidth, SBB
faces an increasingly hostile environment as Telekom fights
to maintain its market dominance. END SUMMARY.

GROWING UNDER THE RADAR


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2. (U) SBB was founded in Kragujevac in November 2000 under
the name KDS (Cable Distribution System). The cable
television market was highly fragmented into small local
providers. In early 2002, the Southeast Europe Equity Fund
(SEEF) invested USD 10 million in KDS, changing the name to
Serbia Broadband. The goal of the USD 150 million SEEF was
to provide capital for new business development, expansion
and acquisitions. The fund was initially managed by Soros
Private Funds Management (SPFM) and financed by the Overseas
Private Investment Corporation (OPIC). In May 2004, the
European Bank for Reconstruction and Development (EBRD)
invested EUR 15 million for 1 million shares in SBB.
Bedminster Capital Management now manages SEEF.



3. (U) SBB then began acquiring some 25 local cable operators
to build a foundation for the business. Its goal was to
become the number one cable television and data
communications provider in Serbia by focusing on customer
care, high-quality programming and community-based efforts.
In the last five years, SBB has achieved annual growth of 60-
70 percent, with annual revenues of EUR 26 million in 2006.
Revenues are projected to reach an estimated EUR 46 million
in 2007. Adding some 20,000 subscribers per month, SBB has
grown from 2,000 cable television subscribers in 2002 to
controlling almost 50 percent of the Serbian market today
with some 350,000 subscribers. Realizing that half of the
Serbian population could not receive cable, SBB developed its
Total TV satellite network to round out its offerings. Total
TV has expanded into Bosnia and Slovenia as well. SBB is
also a leading internet service provider with some 50,000
subscribers.



4. (SBU) Dragan Solak, CEO of SBB, told econoffs that SBB's
strategy from the beginning was to grow quietly, choosing not
to confront Telekom Srbija directly in any one market. SBB,
like all internet service providers in Serbia, purchases its
internet bandwidth from Telekom Srbija. Telekom also owns
the some 6,000 km optical cable backbone, to which other
cable operators may gain access only by signing agreements
with Telekom for interconnectivity. Solak said that SBB
signed an agreement with Telekom in 2003 that provided use of
Telekom's backbone and other infrastructure at agreed rates.

HEAVY-HANDED TELEKOM


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5. (SBU) Confronted with SBB's rapid growth, Telekom informed
SBB that it wanted to renegotiate the agreement, offering the
pretext that Telekom did not understand the technologies SBB
would deploy when the original contract was signed.
According to Solak, more and more banks were migrating to SBB
for data transmission services during this time, hurting
Telekom. He said that Telekom began to search for some
loophole in the contract to give it grounds for cancellation
or renegotiation. SBB refused to renegotiate simply because
Telekom was dissatisfied.



6. (SBU) In the summer of 2006, Telekom attempted to purchase
SBB. Solak said that Drasko Petrovic, director general of
Telekom Srbija, was determined to either buy SBB or destroy
it by making life difficult for the company. Ron Drake,
chairman of Bedminster Capital traveled to Belgrade several
times to confront Telekom, telling Petrovic that if and when
SBB is sold, it will be through a public tender. He refused
Telekom's overtures.



7. (SBU) In September 2006, SBB received a notice from
Telekom that several kilometers of SBB cable should be
removed from Telekom conduits, due to capacity issues and
non-compliant cables. Telekom said that if the cables were
not pulled out, it would pull them out itself. In response,
SBB provided evidence that capacity was not a problem - only
30 percent was in use - and sent pictures of the cables to
show they were in complete compliance.



8. (SBU) Both the Embassy and the European Bank for Regional
Development encouraged Telekom to pursue its case through the
courts if necessary. Telekom then again sought contract
negotiations with SBB. SBB again refused to renegotiate. In
late 2006, a group of Serbian businessmen approached Solak
about purchasing SBB. It was clear that these men were
backed by Telekom; however, SBB rebuffed this approach, too.
Solak said that Telekom has backed off during the recent
parliamentary election season, but he expects renewed
pressure now that a new government has been established.
(NOTE: Aleksandra Smiljanic, a nominee of the Democratic
Party and a U.S.-educated professor of electrical engineering
at the University of Belgrade, was just appointed Minister of
Telecommunications.)

DELAYS IN INTERNATIONAL GATEWAY APPROVAL


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9. (U) In the current market situation, only Telekom Srbija
has authorized access to the international gateway exchange.
Therefore, all internet service providers (ISP) must purchase
broadband internet wholesale from Telekom. There are claims
that Telekom even sells high-speed internet to its retail
customers at rates lower than the wholesale rates it offers
to other ISPs.



10. (SBU) On March 17, 2007, SBB applied for international
gateway access from the Regulatory Agency for
Telecommunications of the Republic of Serbia (RATEL). Solak
said that once SBB and other providers are granted such
access, Telekom's business model will collapse. For example,
Telekom sells high-speed internet to ISP providers at a rate
of approximately EUR 800,000 for 2.5 Gbit/s transmission
speed per month. SBB received quotes from a Romanian company
that would sell this same 2.5 Gbit/s for approximately EUR
10,000. SBB has the demand to justify leasing of 1.5 Gbit/s
but can only afford 1.0 Gbit/s at Telekom prices. It is
paying some 80 times more than the average regional cost for
high-speed internet. Solak said that once SBB is granted
independent access, Telekom would not only lose SBB's volume
business, but also other ISPs who would start purchasing
wholesale from SBB. He estimates that it would mean a EUR 20
to 30 million revenue loss to Telekom if SBB is granted
access.



11. (SBU) In order to grant approval, RATEL first must
receive permission for the project from the military, police
and secret police to ensure that the project would be not
adversely affect national interests. Inside sources within
RATEL told Solak that approval was granted by the military,
but responses from the others were still pending. Solak is
concerned that Telekom will continue using its influence to
block this approval through its political connections.



12. (SBU) On May 8, Milan Jankovic, Executive Director of the
telecommunications department at RATEL, told econoff that
telecommunications operators are not satisfied with Telekom's
rates and are seeking international gateway access. However,
Jankovic said that Telekom is inclined to offer more capacity
to these operators at much better rates. He contended that
operators, given a new proposal expected from Telekom, would
most likely not want international gateway access.



13. (SBU) Another hurdle for SBB and other ISPs is useage of,
or interconnectivity to, Telekom's backbone infrastructure.
Various state-owned entities like Elektroprivreda Srbija
(EPS), Serbian Railways and the military have their own
networks through public right of ways. The GOS has
effectively blocked access to these networks. Telekom has an
exclusive agreement with the Serbian Railways and EPS refuses
to allow private companies use the unused cable already laid.
In an effort to expand its network towards the Romanian and
Hungarian borders, SBB has quietly entered into an agreement
with Vojvodina Water to use its extensive irrigation system
for laying optical fiber. It recently received the necessary
building permits to move forward with this project but is
waiting for RATEL approval for international gateway access.

COMPETITION COMMISSION FINES SBB


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14. (U) Most recently, SBB has come under fire by the
Commission for the Protection of Competition. On March 27,
2007, the Commission ruled that SBB had conducted a
promotional campaign which resulted in "the prevention,
limitation and violation of competition" on the relevant
market.



15. (U) In March 2006, AVcom, a cable television operator
with some 10,000 subscribers, conducted a promotional
campaign in the municipalities of Stari Grad and Palilula in
the City of Belgrade. The promotion offered three months of
free cable and internet with free installation. Wanting to
expand its market share in these areas, SBB offered a year of
free cable, internet and installation with the stipulation
that the user would sign onto SBB for three years. As a
result of the promotion, between 500 and 600 subscribers
switched to SBB.



16. (U) France Presetnik, General Manager of AVcom, filed a
motion against SBB in the Commercial Court in Belgrade asking
for a temporary injunction against the promotion, claiming
that SBB was abusing its market position. Presetnik, also
president of the Business Association of Cable Distributors,
allegedly used his position to file these motions on behalf
of the association. (NOTE: Solak told econoff that members
of the association were unaware of these proceedings against
SBB until after that fact.) The Commercial Court and the
Higher Commercial Court both rejected the motion and found
SBB's behavior did not violate the Competition Law.



17. (U) Presetnik then filed a complaint with the
Commission. The complaint included the promotional campaign
in March 2006, and also alleged that SBB had abused its
dominant position in signing contracts with foreign
production companies like BBC Prime and National Geographic
for exclusive broadcasting rights. The Commission released
its decision on March 22, 2007, finding that SBB has a
dominant market position in the distribution of radio and
televisions programs through the cable distribution network
in the City of Belgrade, and that it had abused its dominant
position in Palilula and Stari Grad by employing a
promotional campaign that resulted in the "prevention,
limitation and violation of competition on the etermined
relevant market." The Commission ordeed SBB to modify the
agreements with the users acuired during the campaign to
allow them to cance without penalties. The Commission
rejected theclaim that SBB abused its position by signing
exlusivity agreements with foreign production companes.



18. (SBU) On April 23, SBB appealed the Commssion's decision
to the Supreme Court. SBB chalenged it primarily on the
basis that the Commisson erroneously defined the relevant
geographicalmarket by starting with the City of Belgrade andextrapolating that
to the two municipalities mentioed above.
SBB contended that the Commission faild to show how this
promotional campaign was an ause of market position and bad
for consumers. I also asserted that the Commission's order
to amnd user contracts would itself violate the competiton
law. Allowing users free installation and a 2-month
subscription with no obligation would itelf be a predatory
act with the sole purpose of acquiring subscribers and
squeezing competition out of the market. SBB also challenged
the decision on procedural points.



19. (U) The Supreme Court has yet to render a decision in
this matter. Meanwhile, according to the Law on Competition,
SBB can be fined from one to 10 percent of its total combined
annual worldwide turnover. This penalty will now be decided
in lower, misdemeanor court, and SBB is challenging his in
hopes that the Supreme Court will issue it decision prior to
the misdemeanor court.



20. (U) At the same time that SBB is appealing the finding
that it is a monopolist, Telekom Srbija has signaled its
intent to use aggressive tactics in search of market share.
On May 7, it launched a bundled offer to provide ADSL
Internet access at a reduced monthly rate with unlimited
landline calls within the same area code and calls from a
fixed line to two chosen mobile numbers within Telekom's
mobile network at a significantly discounted rate.
Essentially, Telekom is using its fixed line monopoly to
offer benefits other ISPs cannot.

CRITICISM OF THE TELELCOMMUNICATIONS STRATEGY


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21. (U) ISPs have voiced their concerns about the GOS's
Telecommunications Strategy adopted in September 2006.
Slobodan Markovic, President of the Center for Internet
Development in Serbia, criticized the strategy as one that
in reality supports Telekom Srbija's monopoly. There were
also complaints about the short two-week time frame for
experts to provide feedback to the GOS before the strategy
was adopted. Slavoljub Kacarevic, Assistant Director for
Marketing, expressed concern that "RATEL did not recommend
the strategy as an independent regulatory body, but in the
name of preserving the Telekom monopoly at the request of the
government."



22. (U) On May 24, the Foreign Investors Council (FIC)
released its annual "White Book" which contains proposals for
improving the Serbian investment climate in a number of
sectors. The FIC urged the GOS to develop an interconnection
regime in line with EU standards in the shortest possible
time. It also emphasized the need to liberalize internal
infrastructure and open up for use alternative infrastructure
(i.e. optical cable used for utility purposes, broadcasting
or other) for all kinds of electronic services. RATEL should
also develop provisions and guidelines for eliminating the
cross-subsidization in the telecom sector as well as bylaws
allowing for competition in the fixed telephony network. The
FIC contends that Telekom's monopoly of the fixed network
will prevent further development in this area. (NOTE: The
telecommunications industry made EUR 1.3 billion in 2006
revenues, up 40 percent from the prior year, contributing to
5.6 percent of GDP. The mobile business accounts for some
48.8 percent and fixed-line operations for 34.7 percent of
the sector's overall revenues.)

COMMENT


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23. (U) SBB's experience is illustrative of the challenges
facing the Serbian telecommunications sector. Telekom
Srbija, which will not be privatized before 2010, based on
current plans, continues to use aggressive tactics and
political influence to retain its monopolistic position and
make it difficult for other players. Whether it is in mobile
telephony or broadband internet, we continue to hear stories
in which Telekom threatens corporate customers who are
considering leaving Telekom to go to a competitor. This
behavior will most likely continue as Telekom fights to
preserve its market dominance. END COMMENT.

POLT