Play tries to win in Poland

By bne IntelliNews May 25, 2007

Jan Cienski in Warsaw -

The advertisements are impossible to miss. Half-naked people entwined on sheets of purple and white, or a hand with the fingers cut off, or a huge mouth with a finger poking out from between the lips instead of a tongue adorn enormous billboards scattered across Poland's largest cities. They aren't promoting a high-end bondage boutique, though. Instead, it is the advertising campaign for Play, the newest entrant into Poland's mobile phone market.

Play is a joint venture between Netia, the country's second largest fixed-line operator, the Icelandic venture capital fund Novator and Germanos, the Greek owner of a chain of retail telecommunications shops.

Play launched on March 16, almost two years after Netia bought Poland's fourth mobile operating license.

The new company's goals are ambitious. It hopes to have more than 500,000 subscribers by the end of this year, and to be up over a million within a year of entering the market.

But achieving that goal will be difficult and very costly.

Selling points

Currently, Poland's 38m mobile phone users are almost equally divided between three providers: PTK Centertel, owned by France Telecom, operates the Orange network; Polkomtel, part of the Vodafone group, operates Plus; and Polska Telefonia Cyfrowa, owned by Deutsche Telekom, has Era.

Each of these companies in turn has sub-brands aimed at particular market niches. For example, Era launched its Heyah brand, relying on cheaper pre-paid cards, as an edgy youth brand.

Play had decided to also aim for a more youthful clientele – hence the eye-opening ads - and to focus on the fast-growing pre-paid sector. Its main selling point is its cheaper price – it says its prices are about a third lower than its rivals - and its simple tariff plan. Play has a single price for making calls, unlike its competitors who have complicated schemes with different prices for calls to different networks at different times.

However, that approach is easily copied by deeper-pocketed rivals. So far, the big three have not reacted to Play's arrival, but when Heyah was launched it ended up causing a round of steep price cuts across the sector.

One big problem for Play is that is has only a rudimentary network of about 150 transmitters in Poland's largest cities. Management hopes to increase that by a factor of 10 within a year. But until its footprint expands, Play has been forced to rely on Polkomtel's network, buying airtime at wholesale prices from its rival. However, Play pays slightly more for access to Polkomtel's network than it gets from its clients, making all calls not carried by its own network loss leaders.

Another is the enormous ad spending needed to attract clients from their existing providers. Analysts expect that Play's annual advertising budget will have to be about PLN100m (€26m).

Current subscribers of the big-three providers have recently acquired the right from Polish regulators to switch to another provider while retaining their numbers, but can still face penalties of several hundred zlotys for breaking an existing contract. That makes many users reluctant to switch to another operator.

Play only expects to make a profit within five years. It could make a loss of as much as PLN400m this year, and Netia, its principal owner, is not expected to pay out a dividend for the next couple of years, says Pawel Puchalski, a telecom analyst with the BZ WBK brokerage.

"There is no doubt that they will be making losses until 2010 and these losses will be enormous," says Mr Puchalski. "The risk is large because they have to continue advertising to attract clients. It's much easier to defend a position than to attack."

So far Play has managed to attract about 50,000 clients. It has been helped by its partnership with Germanos, which pulled its 170 shops out of a deal with Era and joined Play in return for a 22% equity stake. Germanos' shops are located in some of the country's best retail locations, allowing much better access for prospective clients.

Play also started with a lower cost base, paying a fraction of what the three older operators did for its mobile license. The big three were outraged at that decision by the telecom regulator, which argued it was acting to increase competition in an oligopolistic market. The three threatened court action, but in the end their challenge withered.

Having attracted the attention of prospective clients with its outrageous ad campaign, Play is now toning down its approach, getting rid of severed fingers and naked people, and stressing that they are a cheaper and more youthful alternative.

“They are really a demonstration that advertising works,” says Puchalski.

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