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FM AMEMBASSY BELGRADE
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INFO RUCPDOC/USDOC WASHDC

UNCLAS BELGRADE 000775 
 
SIPDIS 
 
DEPT PLEASE PASS TO US/TDA 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ECPS EFIN BTIO PGOV KPRV SR
SUBJECT: SERBIA BROADBAND OPERATING IN HOSTILE ENVIRONMENT 
 
SUMMARY 
------- 
¶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 
----------------------- 
¶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 
-------------------- 
¶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 
---------------------------------------- 
¶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 
-------------------------------- 
¶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 
--------------------------------------------- 
¶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 
------- 
¶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