TeliaSonera: A Nordic Investor in Eurasia

How did TeliaSonera grow from being a local telecom provider in the Nordic region to a trend-setting international player in Eurasia markets?

Today, climbers can have 3G access on Mount Everest to brag about their experience on top of the world. However, not many people know that it is a Nordic company providing this service in such an alien environment. The company is TeliaSonera, which provides telecommunications (hereafter telecom) services in a wide geographic area from Nordic countries to Nepal that includes the emerging and highly valued Eurasia markets. TeliaSonera is the fifth largest telecom operator in Europe and has operations in Azerbaijan, Belarus, Denmark, Estonia, Finland, Georgia, Kazakhstan, Latvia, Lithuania, Moldova, Nepal, Norway, Russia, Spain, Sweden, Tajikistan, Turkey, Ukraine, and Uzbekistan.

As a Swedish-Finnish company, TeliaSonera launched the worlds first 4G network. Spanning from the Nordic and Baltic countries to the Himalayas, TeliaSonera serves more than 150 million customers in total. Listed on NASDAQ OMX Stockholm and NASDAQ OMX Helsinki, TeliaSonera had net sales of around US$15.9 billion and EBITDA of US$5.6 billion and enjoyed a market value of US$31 billion as of April 2010. How did TeliaSonera grow from being a local telecom provider in the Nordic region to a trend-setting international player in Eurasia markets (see Exhibit 1)?

Merger of Telia & Sonera

TeliaSonera emerged as a company after the merger of Telia of Sweden and Sonera of Finland in 2002. Telias history goes back to the early 1900s when the Swedish government established a state-owned monopoly telephone company in the name of Royal Telegraph Service, which became Televerket in 1953. How could a state-owned monopoly evolve into a modern, private, and competitive company?

The rules of the game began to change for the telecom industry toward the end of the 20th century. First, accelerated technologies in the form of cordless and mobile phones forced Televerket to re-evaluate its organizational capabilities. Second, new private players started to enter the Swedish telecom market. Third, the fall of the Berlin Wall in 1989 presented new investment opportunities in Eastern Europe markets. With an urge to modernize the company and respond to these opportunities and challenges, Televerket was privatized and removed from the national budget in 1984. After investing in several Eastern Europe countries, Televerket converted into Telia AB in 1993, a private and competitive company that operated both in Sweden and Europes liberalized telecom market.

Finland was governed by Russia between 1809 and 1917, and its telegraph operations had been part of the Russian state telegraph system since 1855. However, as Finland declared independence in 1917, the countrys telephone system went under the control of private parties, unlike the early state monopoly of Sweden. However, the government still controlled the expansion of telecom systems in rural and international areas. In 1921, about 850 private telecom companies united into a federation, which was named Finnet later in 1996. Eventually, the Finnish telecom market had two major players, one state-owned and one private. The telephone part of the state-owned company turned into a commercial company in 1994 in the name of Telecom Finland. Introduced in the stock exchange in 1998, the companys name changed to Sonera.

COUNTRY	POPULATION	GDP GROWTH	BRAND NAME	TELIASONERA OWNERSHIP	MARKET POSITION	SUBSCRIPTION RATE	MARKET SHARE
Azerbaijan	9 million	2.8%	Azercell	51.3%	1	4 million	55%
Georgia	4.4 million	5.5%	Geocell	100.0%	1	2 million	44%
Kazakhstan	16.5 million	5.9%	Kcell	51%	1	9 million	50%
Moldova	3.6 million	4.5%	Moldcell	100%	2	907,000	32%
Nepal	28.5 million	4.5%	Ncell	80.0%	2	4.1 million	42%
Russia	141.9 million	4.8%	MegaFon	43.8%	2	57 million	26%
Tajikistan	7.1 million	5.8%	Tcell	60%	1	1.7 million	36%
Turkey	73.7 million	4.6%	Turkcell	38%	1	34 million	55%
Uzbekistan	27.8 million	7%	Ucell	94%	2	7 million	32%

Source: TeliaSonera website, http://www.teliasonera.com.

The fall of the Berlin Wall in 1989 and the EUs new telecom policies presented both challenges and opportunities. Financial restrictions and the necessity to face new opportunities with a stronger cooperation led Telia of Sweden and Sonera of Finland to merge in 2002. In the Baltic countries, Telia and Sonera joined forces to build fixed and mobile networks. They were on the scene even before the collapse of the former Soviet Union in the early 1990s. Telia already had experience operating mobile companies in various countries in Asia, Africa, Latin America, and Europe. The most significant aspect of this collective power was displayed in its Eurasia expansion.

Eurasia Expansion

Distinguishing its markets as mature and growth markets, TeliaSonera identified its operations under three business areas: mobility services, broadband services, and Eurasia (see Exhibit 2). Mature markets especially consisted of the Northern Europe countries, where customers demand value-added services that can best be used with smartphones. The leading growth market, Eurasia, was named as its growth engine by TeliaSonera.

TeliaSonera developed aggressive goals for its Eurasia operations: (1) double-digit revenue growth, (2) defending the EBITDA margin, (3) taking a leading position in mobile data, and (4) increasing ownership in core holdings. What are the underlying reasons that led to the successful expansion of TeliaSonera in these challenging yet attractive markets? TeliaSoneras operations in Eurasia, where the institutional frameworks are either in the transition from planned to a market economy or relatively weak compared to Europe, can be examined under the lens of the strategy tripod concerning the resource-based, institution-based, and industry-based views.

First, TeliaSonera leveraged its decades of telecom expertise developed in Nordic countries in the developing countries of Eurasia region. The technical know-how and deep customer understanding of the company as unique resources enabled operations in difficult areas to be smoother and less problematic. TeliaSonera utilized its know-how specifically in infrastructure investments in the region. The highly technological and better quality network investments provided TeliaSonera a leading edge in the region compared to local competitors. This high investment cost turned into a larger and more satisfied customer base, upgrading TeliaSonera into the leading positions in most countries. Moreover, the technology expertise reflected in infrastructure investments expedited the government relations and related bureaucratic issues.

EXHIBIT 2 TeliaSoneras Business Areas

MOBILITY SERVICES	Mobile communication services. The business area is composed of mobile operations in Sweden, Finland, Norway, Denmark, Lithuania, Latvia, Estonia, and Spain.
BROADBAND SERVICES	Communication and entertainment services to corporate and individual customers. The business area is composed of operations in Sweden, Finland, Norway, Denmark, Lithuania, Latvia, Estonia, and international carrier operations.
EURASIA	TeliaSonera is the biggest telecom investor in Eurasia. The business area is composed of mobile operations in Kazakhstan, Azerbaijan, Uzbekistan, Tajikistan, Georgia, Moldova, and Nepal. The business area is also responsible for developing TeliaSoneras shareholding in Russian MegaFon and Turkish Turkcell.

Source: TeliaSonera website, http://www.teliasonera.com.

Second, TeliaSonera faced certain challenges due to weak institutional settings, especially in former Soviet Union countries in Eurasia. Although each country is in a different phase of transition to market economy, the economic, legal, and regulatory systems are still highly bureaucratic and risky. The ambiguity in the institutional frameworks brings additional risks for businesses, significantly increasing the costs of investments. The telecom industry has further liabilities in terms of infrastructure spending and related fix costs. TeliaSoneras success in its Eurasia expansion lay in the utilization of strong business and government ties that were developed in decades throughout the companys history in the region.

Third, the market conditions in Eurasia countries present many opportunities for technology companies. In contrast to developed European countries, fixed networks are not as developed, which in turn makes these countries rely more on mobile networks. This, in fact, means a jump into a higher technology for consumers. Moreover, mobile network penetration is lower in Eurasia than in TeliaSoneras mature markets, offering a great deal of potential for TeliaSoneras mobile operations. There are fewer competitors, which enables higher margins to be reaped. Moreover, many Eurasia markets welcome foreign direct investments (FDI) as a source of economic development. These market conditions not only increased the attractiveness of the region for TeliaSonera but also the likelihood of future investments.

Another significant aspect of market conditions is a larger and younger population that is the number one customer group of new technologies and telecom services in Eurasia countries. This provided a huge sales opportunity for TeliaSoneras telecom services in the region. For example, although it is below the level of developed economies, the use of mobile data services showed an increasing trend and constituted a big share in total revenues in Eurasia markets (see Exhibit 3). Moreover, improved macroeconomic situations and growing economies led to strong subscription intake, which increased revenues by 16% in 2010. By further leveraging its capabilities, TeliaSonera set its target to become the number one player in Eurasia and neighboring region, which has a population of more than 380 million.

Alliances and Acquisitions in Eurasia

How could a Nordic company with roots in highly developed markets in Europe expand in such politically risky and institutionally ambiguous settings? Savvy use of alliances and acquisitions in Eurasia appeared to be a key. Itself the result of a merger between Telia of Sweden and Sonera of Finland in 2002, TeliaSonera certainly understood the importance of alliances and acquisitions. Its alliances and acquisitions throughout Eurasia resulted in an enviable performance in many host countries, often commanding either the number one or number two positions (see Exhibit 1).

EXHIBIT 3 TeliaSoneras Mobile Data Potential and Revenues

Our strategy has three parts:

Developing the core business in the Nordic and Baltics

Take Eurasia to the next level

Invest in areas that complement and strengthen the core business:

Value through superior network connectivity

Secure the transition from Voice to Data through further proof network access to end customers.

Customer loyalty through convergence

Create a seamless experience across technologies, services & channels.

Competitive operations

Simplify operations and transform legacy to create agility and cost efficiency.

Source: TeliaSonera website, http://www.teliasonera.com.

Nepal is an interesting case study for TeliaSonera`s challenges in Eurasia. After TeliaSoneras acquisition of 80% equity of Nepalese youth brand MeroMobile in 2008, the start-up company, which was now called Ncell, grew into a GSM leader in the whole country. However, the road to success had serious difficulties. There was an ongoing political and security crisis involving terrorist attacks and union strikes, which negatively affected multinationals. TeliaSonera contributed to the efforts to overcome such host country difficulties by offering world-class technologies to this country traditionally suffering from poor telecommunications and also by generating local jobs and employment opportunities. The base stations (cell transmission towers) increased from 300 to 1500 in three years. As a result, the percentage of the population covered by mobile TeliaSonera networks increased from 44% to 80%. Another significant contributor was the use of local employees. Other than employing 25 expatriates, Ncell created 500 solid jobs for locals in a variety of positions.

TeliaSoneras operations in Eurasia aimed to be the trendsetter in these highly dynamic and low penetration markets. For example, its alliance with a local player, Kcell (in which TeliaSonera held a 51% share), was the first company to launch GPRS technologies that provided Kazakhstan people the opportunity to access Mobile Internet, WAP, and MMS services. Kcell owed its reputation for providing the best network coverage and also distribution systems in the whole country. Also, the young and dynamic population generated a promising customer base for mobile data services, which already made 8% of total Kcell revenues.

New Branding Strategy

Operating in such a broad geographic area, TeliaSonera refined its branding strategy to identify its operations under one brand image in 2009. Eighteen brands of TeliaSonera from Nordics to Nepal began to use the same brand image to convey the customers the message of unity under a strong, multinational brand. At the same time, the local brand names were not altered. Lars Nyberg, CEO, and president of TeliaSonera explained:

Our strength lies in the combination of two features: leading and local. We are one of Europes leading operators with international strength and reach. At the same time, we have strong local brands and operate very close to our customers in each market. Therefore, it is natural to keep the name of the strong local brands but adding a unifying visual brand symbol. This strategy also clearly differentiates us from our competitors.

The most interesting aspect of this change was that the new branding strategy was first tested in the Eurasia markets in Kcell (Kazakhstan), Geocell (Georgia), Ncell (Nepal), T-cell (Tajikistan), Azercell (Azerbaijan), Moldcell (Moldova), and lastly in Ucell (Uzbekistan). The new brand identity united the local companies under the same umbrella and turned out to be a success in the region that led the companies to protect their leading market positions. Defined as the next step on our journey to unify the company by Lars Nyberg, the new branding strategy took off from Eurasia and spread to the Nordic and Baltic region. This harmonization in branding enabled TeliaSonera to spread further and better defend its extensive telecommunication technology in risky but high opportunity markets.

Sources:

Based on publicly available information and press releases of TeliaSonera. The following sources were primarily helpful:

(1) TeliaSonera CEOs speech Annual General Shareholders Meeting April 6, 2011;

(2) TeliaSonera Annual Report 2010;

(3) TeliaSonera Investor Day, 2011.

Questions

How would you characterize the competitive intensity and attractiveness of the telecom industry in Eurasia by using Porter`s Five Forces?

Many multinational companies fail in their expansion in emerging economies. What are the main capabilities and resources that drive TeliaSonera`s successful growth in Eurasian markets?

Given the institutional differences between European and Eurasian markets, what are the main challenges faced by TeliaSonera in its international expansion strategy? Which strategies enable TeliaSonera to minimize the risks of these challenges?

How does TeliaSonera differentiate itself from its competitors in Eurasian markets?