"Cetin to connect a million households with fibre-optic cable," says Martin Škop

Since September, Cetin has been led by Martin Škop, a fifty-one-year-old manager with international experience at Telefónica in Spain and VimpelCom in Russia. In his very first media interview since becoming Chief Executive Officer, he explains how the firm is launching the largest wave of investment since the 1990s, when Cetin‘s predecessor – Český Telecom – digitised the domestic telephone network. The aim of the current investments is to have one million households connected with fibre-optic cables by 2027.

Unlike older technologies, which were based on copper wires, fibre-optic connections are vital for superfast data transmission. Demand for fast internet has been growing as more and more people watch videos and television online. Laying fibre-optic cables, however, requires many months of administrative preparation, negotiations with local authorities or owners of residential buildings and lengthy applications for building permits.

This year alone, with the “entire machinery of fibre-optic network construction”, as Škop describes it, coming into play, the firm wants to increase the number of households with fibre-optic connections by 90,000 from the current figure of 72,000. Projects covering half a million connections are under way. In addition, Cetin is also starting on the modernisation of the mobile network with the deployment of 5G technology for customers such as O2 and T-Mobile. “These numbers clearly show that we are at the beginning of a massive investment programme,“ Škop explains to the financial journal Hospodářské noviny (HN).

Cetin is part of the international Cetin Group, which PPF created last year and which brings together infrastructure firms from a number of markets, from the Czech Republic to Serbia.

HN: What was your task when you took up the role of Chief Executive Officer at Cetin in the autumn of last year?

The goal is to maintain the company’s growth – that is the basic aim for every shareholder. Our firm is now launching a major technology initiative, from the installation of fibre-optic networks for households through to modernisation of the radio network and the introduction of 5G. Our shareholders also want us to expand. We see opportunities in the media market, which is why we are building a new television platform that will provide broadcasting services, video on demand and other forms of streaming and not just for our group. We are also targeting other customers. So in summary, my task is to make Cetin an even more dynamic company.

HN: You mentioned growth, but can you be more specific? Growth in profits or in numbers of clients connected?

It’s a combination of the two. The value of a firm is measured in terms of EBITDA (earnings before interest, depreciation and amortisation – ed.), which takes account of both the of growth in client numbers and the higher revenue per client. Generally, a firm should be achieving growth in terms of EBITDA to provide a foundation for investment on a greater scale than previously. The aim is to see EBITDA grow by at least one to two percent every year.

HN: Isn’t that on the low side?

Profit growth is of course reduced by investment. We are investing about CZK 4.4 billion a year and we are in talks with shareholders this year about spending a bit more. I don’t want to give any specific numbers, because it is still being finalised, but the aim is to support all the activities that we have coming up. We discussed this with PPF when developing our future plans. Investment programmes are planned out for a minimum period of four years. In the area of installing household fibre-optic connections alone we are targeting one million connections by 2027. At present we have about 72,000 fibre-optic connections. It is clear from these numbers that we are at the start of a gigantic investment programme.

HN: PPF‘s main shareholder, Petr Kellner, tragically died last month. PPF lost a visionary, who, it was often said by colleagues, could think like a chess player – several moves in advance. This was also apparent in his investments in telecoms and media. Do you agree with this view?

Absolutely. PPF was the first in Europe to separate infrastructure from retail, a model now applied by many otheroperators. In the same way, linking up telecoms with media content is a new trend and PPF is part of it thanks to the acquisition of CME. Cetin, has invested billions of crowns into network modernisation since it was established in 2015. This would not have been possible without the backing of its shareholder, and we are benefitting from this now. We were well-equipped to handle the pandemic because our network was sufficiently robust. Petr Kellner was a truly creative individual and I think it is no exaggeration to call him a visionary entrepreneur who always looked beyond the established ways of doing things.

HN: Will the death of Petr Kellner also have an impact on Cetin, with the shareholder perhaps taking a different view of the scale of investment now?

Telecoms forms a significant part of PPF‘s portfolio and thee sector's importance has only increased in recent years. PPF‘s new chief, Ladislav Bartoníček, has already confirmed that one of the group’s objectives will be to build on its strengths in the telecoms area. PPF may have lost its founder, but it is an international investment group, and its firms operate to a large extent independently and with professional management teams. So I do not believe that this tragic event will have any impact on Cetin as a business.

HN: In 2015, Cetin announced a seven-year plan under which it would invest about CZK 22 billion – half in the metallic network and around half in infrastructure for the mobile networks. On the metallic network this mainly involved increasing the density of DSLAM connection elements. Has that modernisation now been completed?

Yes, the modernisation of the metallic network has been completed and it was basically brought to a close last year. It has enabled us to achieve substantially greater speeds, with average connection speeds across our network now in excess of 100 megabits per second. During the time I was at Telefónica and their speeds were between 20 and 25 megabits per second. Almost 84 percent of households can now enjoy speeds of 50 megabits per second or more. Our measurement figures show that these speeds meet customers’ needs even in today’s challenging circumstances, when COVID means that households may have several videoconferences running in parallel due to working from home and alongside studying at home.

And now we are bringing the entire fibre-optic network construction “machine” into play. This year alone we will have all the preparations in place for half a million homes. The preparations for construction work are extensive, needing administration, building permits and other planning materials, amongst other requirements. It essentially takes a whole year just to get the paperwork to enable us to go somewhere and start digging. The target for this year is to complete about 90,000 connections, mostly in residential buildings.

HN: So most of that four billion crown investment is going into construction of the fibre-optic network?

It certainly is. But this year we will also begin modernising the mobile network, which includes the deployment of 5G technology. We are carrying out the project with the Swedish firm Ericsson, as we announced at the end of last year.

HN: How has Cetin‘s investment policy been influenced by Vodafone’s 2019 acquisition of cable TV operator UPC – including its Czech arm – from Liberty Global? Has this had any impact on your planning?

UPC has been here for years, as has its infrastructure. The combination of mobile and fixed networks has enabled Vodafone to improve its position and it is a strong competitor for the other operators. So there are now three strong players here with a full array of infrastructure.

HN: But UPC does not have fibre-optic connections to households. Most of the connections direct to households use another technology …

Yes, and it is not fully comparable with optical connections, but it provides sufficient speed for the applications that are currently on the market. The main disadvantage of coaxial cables is the low upload speeds.

HN: Another interesting story in the media recently is that ČEZ is in talks to acquire the Czech business of Vodafone. If the plan works out what would this mean for Cetin?

Our infrastructure is built to cover all areas nationwide with a core fibre-optic network in every town and in every significant locality. So, our position is – and always be – better. If the acquisition you are talking about does take place it would strengthen Vodafone’s position to some extent. The strength of ČEZ lies in the fact that it owns and is developing fibre-optic networks. For Vodafone, that would mean a boost to their fixed infrastructure. And then there is the matter of ČEZ’s customer base. I can’t really say any more about it at this time.

HN: So it would not force you to change your strategy?

The market forces us to react. There are three strong players here who are betting on a combination of fixed and mobile networks and who want to move into fibre-optics. We know, for example, that T-Mobile is intensively developing an optical network and we are also seeking to collaborate with them, because any option that speeds up the construction of fibre-optics and reduces costs is welcome. In the end it will bring more optical connections to customers and this is vital for the competitiveness of the Czech Republic. We are open to any form of collaboration.

HN: In the Czech Republic, however, firms that want to build optical networks come up against slow approval processes and a complex administration. T-Mobile has also discovered this over the past two years. How are things going with Cetin‘s fibre-optic development?

It takes at least a year to get the documentation and the permits to start digging – to open up pavements, for example. Getting the permits and choosing locations involves long negotiations with mayors and local authorities to convince them that we can do something for their municipality and improve the quality of life in their area. During COVID, we have seen an enormous growth in demand for high-quality internet connections. Users have found out that shared local wi-fi networks are not enough if they want to run several videoconferences in parallel and so on.    

HN: COVID and the subsequent lockdown brought a step change in operations on your network. How did the infrastructure handle this?

COVID increased network traffic by 20 percent, both on the mobile side and on the fixed side. We had no problem increasing capacity and our customers did not notice any restrictions. We must continue to invest so that we can cover both this growth and the enormous growth that is coming in the future. Our infrastructure held up and we made some minor additional investments of course, in order to maintain a healthy reserve. The critical systems and routes have to be fully redundant or duplicated, so that customers do not experience any outages that may occur.

HN: I am asking because PPF was addressing outages on O2 TV during important sporting events even before COVID. Your shareholder was not too happy about the outages …

I cannot respond to that in detail because it’s a matter for O2. We provide the communications infrastructure, but all the administration of content, customers’ equipment and authorisations are on the O2 side. The outages were not caused by the network infrastructure.

HN: In the Czech Republic, there are dozens of local telecoms firms that essentially introduced the internet into the country. They began offering internet connectivity years ago on a local basis via wi-fi and later they also began to build optical networks. We are now in a period of consolidation and these players are being scooped up by firms such as Kaprain. It came to light recently, for example, that ČEZ is purchasing three local telecoms operators, one in Frýdlant, FDLnet.CZ, and then ISP West and TaNET West, operating in the Plzeň and Karlovy Vary regions. Is Cetin also interested in firms like these? Or could this raise problems with the antitrust authority?

The antitrust authority would probably not mind in these cases. We keep an eye on the market, of course, and we have looked at a number of operators with optical networks that were attractive to us but the problem is price. These firms are up for sale at several times the EBITDA. I don’t even want to say what the multiple is.

HN: I've heard it's sometimes as high as twelve times the EBITDA…

Maybe even higher. That might make sense for a firm going into a locality where it has nothing on the ground. But it made no sense for us because we already had a core optical network in the areas concerned. Basically, we would be buying something that we already own in part and where we need only the local connection, the last mile.

HN: So Cetin has not joined the recent race to snap up such firms?

We have carried out some analysis and we did our calculations, comparing the price of building our own network with the price of purchasing firms such as these. For us it is not simply a matter of what sort of customer base a network has, but how it has been constructed, whether it is reliable, whether it has been documented to a high standard. In order to monitor and remotely manage a network we need a huge amount of data describing the network, specifying what is where and what happens in the network.

HN: When this consolidation does take place how will it affect you? Will it change your strategy in any way?

Our investment strategy takes account of competition. We know, of course, that we sometimes go into areas where other players are also operating. But we trust in our strength, in the strength of our wholesale model and in the strength of PPF. Our investment strategy is well under way and I can see from my evaluations that we are meeting it.

HN: At the start, you mentioned the creation of a television platform. What will it be like? What does the term “television platform” really mean?

Television platforms make it possible to distribute content, typically television broadcasting, for example, via fixed networks. The operator provides the content and we provide the operator with distribution of the content to the customers via the platform. Either as a dedicated transmission over a privately managed internet network (IPTV), or via the internet (OTT). This is where 5G also comes in. Everyone is asking what the operators will do with 5G. We believe that the capacity of 5G networks will enable the growth of multimedia services. We can already see this today, as video, streaming, video on demand and OTT television generate most of the traffic in mobile networks. Facebook and Instagram also have videos. We think we will experience huge growth here too. Therefore, as we develop the 5G network, it also made sense to create the conditions for content distribution. Thanks to the high speeds and low delay rates of 5G technology, we believe that video services will become, and perhaps already is, the main new application for consumers.

The platform will be available across markets. Each of our partners will determine the specifications for their own country and we will develop the application in the in line with their orders. At core the application will remain the same and the customer interface will be as standardised as possible, but there will be differences for example in logins or in the use of local languages.

HN: PPF‘s aim in establishing Cetin as a multinational group was to exploit synergies and savings, for example through joint purchasing. Has this happened yet?

Yes. For example, with the centralised selection of radio technology. Ericsson, which was our selected partner for the Czech Republic, will also be deployed in Slovakia. Since September, when I joined, these purchasing tendering procedures have been coordinated across the entire group. That is always the first thing to produce savings: combining everything together into one tendering process and making the most of unified purchasing. Another example might be the television platform.

HN: What is happening on the issue of whether or not to use components from Huawei?

The warning from the National Cyber and Information Security Agency (NÚKIB) concerning Huawei and ZTE is a fact and we must learn to live with it having used their components in the past. We therefore included the warning among the criteria for the last tendering procedure for radio technology.

HN: Will the political pressure really be so strong that Huawei completely quits the European market?

I don’t think so. Huawei is still reporting growth despite these restrictions. The products Huawei sells are changing. There is no reason to restrict end equipment such as the mobiles or routers used in everyday life.

HN: What will Cetin do with the Huawei components that are already in the network? Will you replace them with others, or does the warning only impact new tendering procedures where there may be increased security requirements?

We are definitely not – and nor will we be – considering the early replacement or phasing out of the Huawei equipment we already have in the network. The NÚKIB has not asked us to do that.

HN: But the NÚKIB has ordered checks on systems that include Huawei components. In an interview for HN, Petr Slováček from Cetin‘s Supervisory Board confirmed that such checks would take place and that new risks would be taken into account…

Security checks and verifications were carried out on our networks and where we identified possible risks we took measures to eliminate them.

HN: And will you be using Huawei components for the 5G network in the Czech Republic?

In our last tendering procedure we chose Ericsson technology. It was more than just a security issue – we took into account several aspects and it was a multi-criteria tendering procedure.

HN: There will be other calls for tenders though, for other, possibly transport-related, components of the network and so on … Can Huawei succeed there?

I can’t say. The tendering procedures are open. We haven’t put Huawei or ZTE on any blacklist. We will continue to hold multi-criteria tendering procedures.

HN: The Czech Republic is due to receive around 230 billion crowns as part of the EU’s Recovery Fund. The Fund is aimed at overcoming the COVID crisis and achieving a more digital, greener and more resilient Europe. Will you be applying for this money as well?

We are following developments, of course, and we’ve already submitted applications related to coverage for remote areas – so-called “white areas”. If something is announced that would fit with our business, then we are ready to participate. First and foremost, we can offer a secure communications infrastructure, for example for units of the PPDR integrated rescue service, and we can prepare a nationwide communications infrastructure that has all the necessary security elements, back-up solutions and a special monitoring centre, all separate from everyday operations. Thanks to the robust nature of our infrastructure, I think we can develop solutions that no one else in the Czech Republic is capable of developing.

HN: So it depends on what projects the government comes up with or where it wants to spend that money …

Yes, the government must evaluate its priorities.

HN: According to our information and reports from Bloomberg, PPF is considering selling part of the Cetin group on the stock exchange. PPF itself has not denied this information. What would such a change mean for the Czech part of Cetin?

We would simply be the subject of such a transaction so we cannot comment. That is not our initiative, it’s an initiative of our shareholder.

HN: During the pandemic, your owner – PPF – discovered the benefits of having a business spread across a number of sectors. Telecoms proved to be a stabilising factor in the COVID period, while the lending business was severely impacted. What will the shareholder want from you in the future?

The whole world is dependent on high-quality telecoms infrastructure. If there is an outage, you cannot make card payments, you cannot withdraw money from an ATM, everything grinds to a halt. So the main attributes we discuss with our shareholder relate to the security and reliability of the network. The network simply cannot be allowed to fail. It has to function under all circumstances. But it is interesting that our corporate customers do not always understand this.

In tenders, we often see firms moving away from dedicated and highly reliable data services to mass services intended for domestic use, in other words to the standard internet, where continuous operation cannot be guaranteed. For systems where there cannot be any outages, highly reliable data services that are capable of ensuring continuous operation must be used.

HN: We are entering an era of artificial intelligence and 5G, which places even greater emphasis on the security of these technologies. Wouldn’t it therefore be sensible to exercise caution over the use of equipment from China’s Huawei?

That’s a question for the NÚKIB, and we will follow its recommendations. But that is not the only aspect of security. The network must be backed up and monitored so that we can quickly spot when something bad happens. This is not only a matter of whether the technology comes from supplier A or supplier B. There are a whole range of issues to consider, such as the architecture of the network, how robust it is and how it was built. One person might lay a cable 20 centimetres below ground whilst another might lay it a metre and a half below ground. These are all things that will become increasingly important in the future. We are building our network to a high standard so that the infrastructure can resist all of the factors related to physical security and logical security. So that we can monitor and react when something happens and transfer data traffic to another part of the network. No one has a network like Cetin‘s in the Czech Republic.

HN: How is the development of the 5G networks progressing for your customers – the operators? How much progress have you made?

The plan for this year covers Prague but we are also planning to launch the 5G network in other parts of the country. We are changing all the equipment, the antennas, the cabling and also the transmitter design at existing locations. A specific transmitter is prepared in advance and then the old equipment is quickly removed and the new equipment is installed and brought on stream all in the course of a single day. For the short time that the transmitter is out of operation the service is provided by the surrounding stations. From the customer’s perspective, this means that everything continues to work without interruption.

HN: 5G generally requires a denser network of transmitters. Are you concerned that this might provoke public opposition at some point?

In Prague, the network is now sufficiently dense and there is no need to make it denser. There are localities with transmitters every 100 or 200 metres. However, it is true that greater densities will be needed in order for us to keep up with increase in traffic across the network. All of our base stations meet the applicable health standards for the Czech Republic, which are among the strictest in Europe. So far, we have not encountered much opposition. The fake news and myths surrounding 5G will clearly need to be countered. I believe, however, that our networks will mainly bring greater use and enjoyment to end customers.

Author: Marek Miler, Published on 28 April 2021

Online article available in Czech: https://archiv.ihned.cz/c7-66912360-oqmd5-a64abc3fb3375d3

What is Cetin?

The firm was established in 2015, when PPF separated the telecoms infrastructure from O2. It is a wholesale provider of services to operators and broadband providers. They then supply services to end customers through Cetin’s infrastructure. Cetin operates 46,000 kilometres of fibre-optic cables and 20 million kilometres of paired metallic wires, through which most households still access the internet. The firm also operates 6,400 base stations for the networks on which mobile phones operate. Cetin also provides data services for corporate networks, including international connections. Last year the company earned net profits of CZK 2.5 billion for its shareholders.

Fibre-optics in the Czech Republic

According to data from the European Commission, about 1.3 million households in the Czech Republic have high-speed internet connections. This statistic, however, includes both fibre-optic connections and cable TV connections. The number of actual fibre-optic connections to households is estimated to be around 700,000 or 800,000. At the moment most of these connections are owned by firms such as PODA, SMART Comp. (operating the netbox brand and the Kuki internet TV service) or Nej.cz from the Kaprain group. Cetin currently has around 72,000 fibre-optic connections to households and homes. It wants to increase this number to 1 million over the next 6 years.