OTE Hellenic Telecommunications Organization S.A.

As filed with the Securities and Exchange Commission on June 7, 2010

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Form 20-F

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year ended December 31, 2009

 

Commission file number 1-14876

 

 

 

 

(Exact Name of Registrant as Specified in its Articles)

Hellenic Telecommunications Organization S.A.

(Translation of Registrant’s Name into English)

 

Hellenic Republic

(Jurisdiction of Incorporation or Organization)

 

99 Kifissias Avenue

GR 15124 Amaroussion

Athens, Greece

(Address of Principal Executive Offices)

 

Mr. Dimitrios Tzelepis

Head, Investor Relations Department

Tel: +30 210 611 1574; Email: dtzelepis@ote.gr

99 Kifissias Avenue

GR 15124 Amaroussion, Athens, Greece

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

 

Indicate the number of outstanding shares of each of the Registrant’s classes of capital or common stock as of December 31, 2009.

 

490,150,389 Ordinary Shares

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  þ      No  o

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  Yes  o      No  þ

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ      No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o      No  þ

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

 

Indicate by check mark which financial statement item the Registrant has elected to follow. Item 17 o      Item 18 þ

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o      No  þ

 

 

TABLE OF CONTENTS

 

PRESENTATION OF INFORMATION

 

We have prepared our consolidated financial statements as of and for the years ended December 31, 2007, 2008 and 2009 in Euros in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) . Solely for your convenience, certain Euro or other currency amounts have been translated into U.S. Dollars. Unless otherwise indicated, Euro amounts have been translated into U.S. Dollars at the rate of Euro 1.00 to U.S. $1.2414, which was the spot rate of the Euro on May 24, 2010, as reported by Bloomberg. We make no representation that these Euro amounts have been, or could have been, translated or converted into U.S. Dollar amounts on any particular date at the exchange rate indicated or any other rate.

 

Certain figures have been subject to rounding adjustments; accordingly, figures shown for the same category presented in different tables may vary slightly, and figures shown as totals in certain tables may not be an arithmetic aggregation of the figures which precede them.

 

Our consolidated financial statements and the notes thereto prepared in accordance with IFRS as issued by the IASB were audited:

 

 

As used in this annual report on Form 20-F (“Annual Report”) :

 

 

Solely for your convenience, certain amounts in LEK and BGN have been translated into Euro. Unless otherwise indicated, LEK and BGN amounts have been translated into Euro at the rates of Euro 1.00 to LEK 137.69 and Euro 1.00 to BGN 1.9557, respectively, being the rates effective on December 31, 2009, as published by Bloomberg.

 

All references to “us”, “we”, “OTE”, “OTE S.A.” or “our company” are to the Hellenic Telecommunications Organization S.A. All references to “OTE Group” or the “Group” are to the Hellenic Telecommunications Organization S.A. and its consolidated subsidiaries.

 

All references in this Annual Report to the “State” or the “Greek State” are to the Hellenic Republic and all references to the “government” are to the government of the Hellenic Republic. All references in this Annual Report to “Deutsche Telekom” are to Deutsche Telekom A.G., a company incorporated under the laws of the Federal Republic of Germany, a major shareholder of our company.

 

All references to the “EU” are to the European Union. All references in this Annual Report to “ADSs” are to the American Depositary Shares (each representing one half of one ordinary share of OTE), which are listed on the New York Stock Exchange and registered under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act” ).

 

All references to the “EETT” or the “Regulator” are to Ethniki Epitropi Tilepikinonion & Tahidromion, or the Greek National Telecommunications and Post Commission.

 

All references to the “Telecommunications Law” are to Greek Law 3431/2006 and, where appropriate, applicable provisions of Greek Law 2867/2000, both of which regulate electronic communications in line with the

current EU regulation of the sector. References to “our license” or the “License” are to the general license issued to us by the EETT in accordance with the Telecommunications Law. All references to “long-distance calls”, “traffic” or “tariffs” are to domestic long-distance calls, domestic traffic or domestic tariffs, respectively.

 

All references to the “Voluntary Retirement Scheme” are to a broad voluntary retirement program which we implemented commencing in June 2005, which has facilitated the early retirement of 5,405 of our employees, as of December 31, 2009.

 

All telephony charges described in this Annual Report exclude Greek value-added tax (“VAT”) , which is similar to sales tax in the United States. As of April 1, 2005, value-added tax is imposed by the Greek tax authorities as a fixed percentage of sales of goods and services (currently at the rate of 21% and expected to increase to 23% later in 2010). We believe that the recovery of VAT from customers qualifies as a deduction of VAT expenses incurred to the tax authorities based on sales.

 

All references to ICT are to information and communications technology, which includes the study, design, development, implementation, support or management of computer-based information systems, particularly network equipment, software applications and computer systems hardware.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

We may from time to time make written or oral forward-looking statements, including in this Annual Report, in other filings with the United States Securities and Exchange Commission (“SEC”) , in reports to shareholders and in other communications. The statements relate to analyses and other information, which are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our future prospects, developments and business strategies. Examples of such forward-looking statements include, but are not limited to:

 

 

Words such as “believes”, “anticipates”, “aims”, “expects”, “intends”, “plans”, “seeks”, “will”, “could”, “may” and “projects” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

 

Such forward-looking statements are not guarantees of future performance by their very nature and involve inherent risks and uncertainties, both general and specific, and there are risks that the predictions, forecasts, projections and other forward-looking statements will not be achieved; therefore you should not place too much

reliance on them. If one or more of these materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those anticipated in this Annual Report. There are a number of important factors that could cause actual results and developments to differ materially from those expressed or implied in such forward-looking statements. These factors include, but are not limited to, the following:

 

 

The foregoing list of important factors is not exhaustive. When relying on forward-looking statements to make investment decisions, you should carefully consider the foregoing factors, as well as additional risks set forth in “3.D Risk Factors” and such other matters as you may deem appropriate. Such forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update or revise any of them, whether as a result of new information, future events or otherwise, or to advise you of any factors of which we are or may become aware.

 

PART I

 

 

Not applicable.

 

 

Not applicable.

 

 

You should read the following information about us and our consolidated subsidiaries as of and for the years ended December 31, 2005, 2006, 2007, 2008 and 2009, together with the consolidated financial statements, including the notes thereto, which are contained in this Annual Report and have been prepared in accordance with IFRS as issued by the IASB. The following selected financial data (other than “Dividend Information” and “Non-GAAP Financial Information”) has been derived from our consolidated financial statements, which:

 

 

For a more detailed discussion of our financial results, see “5. Operating and Financial Review and Prospects”.

 

 

 

 

 

Notes:

 

 

 

 

 

Notes:

 

 

 

Exchange Rate Data

 

The following table sets forth, for the periods indicated, the average, high, low and period-end exchange rates of the U.S. Dollar to the Euro.

 

 

 

Notes:

 

 

On June 4, 2010, the spot rate published by Bloomberg was U.S. Dollar 1.2020 per Euro 1.00.

 

Not applicable.

 

Not applicable.

 

The risks described below are not the only risks facing our company. Additional risks not presently known to us or which we currently deem immaterial may also impair our business operations. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. The following discussion contains a number of forward-looking statements. Please refer to the section headed “Cautionary Statement Regarding Forward-Looking Statements” .

 

If we do not respond promptly and efficiently to increased competitive pressures, our market share in fixed-line services may decline further.

 

Since the liberalization of the Greek telecommunications market in 2001, we have faced, and continue to face, competitive pressures in domestic and international fixed-line services. As a result of the migration of certain of our customers to our competitors, we have experienced, and continue to experience, a gradual decline in our share of the Greek market for fixed-line services, in terms of both numbers of subscribers and voice traffic. We expect competition in the Greek telecommunications market to continue to intensify, as a result of a number of factors, including regulatory developments, our competitors improving their infrastructures and an evolving market landscape, due to proceeding consolidation and funding opportunities becoming available to certain of our competitors.

Over recent years, alternative fixed-line operators providing retail services have increasingly relied on local loop unbundling for reaching their end customers and with respect to backbone services, they either rely on wholesale products provided by us, or increasingly deploy their own fiber optic infrastructure and networks, parts of which, in certain recent cases, they have also agreed to share. Alternative operators are becoming increasingly competitive in offering voice, broadband and data transmission , as well as value-added and bundled services, including double-play (voice and internet) and triple-play (voice, internet and IPTV) at higher access speeds and at competitive prices. The competitive market landscape continues to evolve with a number of recent developments and it changed substantially in 2009 following a number of mergers and acquisitions and strategic alliances between fixed-line and mobile operators. This has created strong market players with sufficient financial resources to compete with us on equal or better terms. In particular, in 2009, Vodafone Greece, subsidiary of one of the largest mobile groups worldwide, acquired an 18.5% interest in the share capital of Hellas OnLine, the second largest alternative fixed-line operator, and Tellas, one of our major competitors in fixed-line services, is the fixed-line business unit of Wind Hellas, which is also part of a major international telecommunications group, Weather Investments. Both Wind Hellas-Tellas and Vodafone with HOL promote combined fixed-line and mobile services. Furthermore, Forthnet, the largest alternative fixed-line operator in Greece, also has developed a competitive advantage following its acquisition of Nova, currently the only digital satellite TV platform and until recently the only subscription TV service in Greece with a strong market share. Forthnet promotes combined double play and Nova subscriptions, offering significant discounts on the bundled product. Cyta Hellas, a subsidiary of the Cyprus Telecommunications Authority, entered the Greek fixed-line telephony market in 2009 and has established a strong presence over the last two years. There are also a number of players with a smaller market share, including, among others, On Telecom-Vivodi (formed after On Telecom acquired Vivodi), Net One — Algonet (formed from the merger of Net One with Algonet) and Cosmoline.

 

Moreover, the competitive market landscape is changing due to a number of other factors, including the introduction of mobile broadband and the increasing offers of combined mobile and fixed-line bundles by mobile operators, which we believe may form a significant part of mobile operators’ offerings in the future. We also expect ICT offerings (combined telecommunications and information technology services) to business customers to become an increasingly important part of telecommunications operators’ offerings in the mid-term future.

 

As our competitors converge their business operations in fixed, mobile and broadband services they may benefit from a larger customer base, increasing economies of scale and opportunities for synergies which could enhance their ability to effectively compete with us in the Greek telecommunications market.

 

In addition, although mobile penetration in the Greek market has increased to levels estimated at over 180%, we continue to experience migration of mainly telephony traffic (and less of customers) from fixed-to-mobile, especially as mobile operators offer competitive products including bundles of minutes at attractive rates.

 

As a result of the above and other factors, our market shares in both business and residential market sectors may decline further over the next few years. We also expect to face increasing pressure to further reduce prices, further enhance the quality of our network, adopt more efficient technologies, improve the level of our services, reduce costs and promote customer satisfaction. If we do not respond to these pressures promptly and efficiently, our market share may decline more dramatically and we could experience a material adverse effect on our business, results of operations, financial condition and prospects.

 

Macroeconomic conditions in Greece and the fiscal position of the Greek State have deteriorated markedly and this could have a material adverse effect on our business, results of operations, financial condition and prospects.

 

The economy of Greece, where the great majority of our revenues are derived (70.0% in 2009, as compared to 70.2% in 2008 and 72.5% in 2007) and operations are located, deteriorated markedly starting as of late 2008, through 2009 and particularly in early 2010. In particular, GDP growth rate in Greece slowed down significantly in 2008 and 2009 and turned to negative growth rates as of early 2010 (according to Eurostat, Greek GDP for the first three months of 2010 experienced negative growth (contraction) of -2.3%).

 

In addition, starting from late 2008, and particularly as of late 2009 and in early 2010, the Greek State has reported a significant deterioration in the levels of budget deficit (of over 13% for 2009) and total public debt and

experienced a resulting significant increase in its cost of borrowing. Over this period, credit ratings assigned by major credit rating agencies to debt issued by the Greek State were downgraded repeatedly (with Standard & Poor’s current credit rating at BB+ with a negative outlook, below investment grade), and concerns were expressed in connection with the ability of the Greek State to refinance its maturing public debt with funds raised in the public debt markets. As a result, the cost for the Greek State of raising debt financing in the bond markets experienced a sharp increase over the period from October 2009 to April 2010. In April 2010, the European Union announced the establishment, in conjunction with the International Monetary Fund (“IMF”) , of a package of financial support for the Greek State, contemplating availability of bilateral loans to be provided by EU countries and the IMF to the Greek State for three years starting in 2010. In May 2010, the Greek State applied for the activation of this package. At this point, the exact terms of the loan facilities available under the package are unclear; to date the Greek State has drawn down funds under these facilities, but it is also unclear what further amounts the Greek State may seek to draw-down in the future and when, or whether the fiscal measures adopted by the Greek State will have the expected results, or whether the Greek State will be required to adopt further restrictive fiscal measures.

 

As a result of the conditions described above, the Greek State has adopted, starting in late 2009 and in 2010, a range of fiscal measures, aimed at reducing State expenditure, including reductions in public investments and reductions in the income of employees in the public sector and pensions, and at increasing tax revenues, including significant increases in direct and indirect taxes, intended to improve the Greek State’s fiscal position. As it is unclear whether the fiscal measures adopted by the Greek State will have the expected results, if the Greek State is required to adopt further restrictive fiscal measures, this can have further adverse impact on prospects for economic growth and disposable income in Greece.

 

We expect that the impact of the deteriorating fiscal position of the Greek State and relevant fiscal measures can have a material adverse effect on macroeconomic conditions in Greece in the short- and medium-term, including negative prospects for Greek GDP growth and a material reduction of disposable income of pensioners and employees in large parts of the economy. In particular, the Greek State announced in May that it expects GDP in Greece to decline by approximately 4% in 2010. In addition, the restricted ability of Greek banks to provide business and retail financing at attractive terms, resulting from the current conditions, is expected to exacerbate these conditions.

 

We expect that the deterioration in macroeconomic conditions in Greece and the reduction in disposable income will have a material adverse effect on our business, as on one hand, corporate clients restrict technology and telecommunications spending, and on the other hand, residential customers of telecommunications services, such as fixed-line and mobile telephony and internet, may also reduce spending for these services (which would negatively affect our revenues from these services), or may turn to lower price alternatives that may be offered by our competitors, which may adversely affect our market share. In the latter case, we may decide to respond to such pressures by reducing our rates for these services, in order to remain competitive, which would also negatively affect our revenues. However, we cannot assure you that the regulator (EETT) will permit us to reduce our rates for certain of our services in response to competitive pressures as we may deem appropriate, in which case we may experience a significant competitive disadvantage, which would exacerbate our market share losses. In addition, the applicable rate of VAT was raised from 19% to 21% in early 2010, and will further increase to 23% in July 2010. This can also have a material impact on our results of operations (both on our revenues and profits), as we expect it to result in a material increase in our tariffs, which could adversely affect our competitive position and market share, or, in the event we decide to absorb a part of the resulting increase, we expect it to have a material adverse effect on our profit margin.

 

In 2009, Law 3808/2009 imposed an extra-ordinary, one-time tax (contribution of social responsibility) on profitable Greek entities, calculated on their total net income for the fiscal year 2008. The respective charge in the Group’s income statement amounted to Euro 113.1 million. In May 2010, the Greek State announced the imposition of a special one-time lump-sum tax on net profits of corporate tax payers for the fiscal year 2009, which is expected to apply on our net income at the rate of 10%. We cannot assure you that the Greek State may not seek to impose further extraordinary taxes, or take other fiscal measures aimed at raising funds, which could have a material adverse effect on our financial results and financial condition.

Furthermore, we cannot assure you that further potential downgrades in the credit rating of the Greek State may not result in downgrades in our own credit rating (currently BBB- with a stable outlook by Standard & Poor’s and Baa2 with a stable outlook by Moody’s), which could have an adverse impact on our borrowing cost and our financial expenses. See “5.B Liquidity and Capital Resources — Outstanding Debt Facilities”.

 

We expect that the impact of deteriorating macroeconomic conditions in Greece, reductions in disposable income and the recent and potential future developments with respect to the fiscal position of the Greek State can have a material adverse effect on our business, results of operations, financial condition and prospects.

 

Regulatory and competitive pressures affect our ability to set competitive retail and wholesale tariffs, which may adversely affect our ability to compete effectively.

 

Under applicable laws, regulations and related EETT decisions, the EETT has the jurisdiction to assess our tariffs ex-ante and ex-post . Tariffs for certain categories of our services should be cost-based. With respect to these tariffs, the EETT uses our enterprise costing and profitability system (“ECOS”) , in order to determine whether they reflect the cost of providing the relevant services. The EETT conducts an annual audit of our ECOS system through external auditors, other than those appointed to audit our financial statements. Based on the findings of this audit, the EETT may object to our application of ECOS and related cost methodologies in the calculation of our tariffs and may require us to make certain adjustments. These adjustments may also have retroactive effect, as has been the case some times in the past. We cannot assure you that future audits of our ECOS system will not result in further recommendations for changes to our costing methodologies and to our tariffs. Since 2007, we are required, under the EETT’s relevant decision notice, to produce financial statements showing accounting separation between our wholesale and retail businesses. Accounting separation requires the preparation of separate accounts for each of the different businesses, separately identifying and allocating the costs and revenues associated with each business. Such statements are prepared using both a fully-distributed current cost methodology and a long-run average incremental costing methodology and should be published annually.

 

In addition, with respect to tariffs that are not regulated on a cost basis, the EETT determines whether such tariffs allow alternative operators to realize sufficient profit margins and, to that effect, they are assessed using both data from our ECOS system and other methodologies approved by the EETT, such as the retail-minus pricing methodology, where the EETT requests data from relevant service operators and calculates a retail-minus price to define wholesale tariffs based on proposed retail tariffs. However, the exact models used for the calculation of retail margins for different services and service bundles have not been made known to us and therefore we cannot predict with accuracy their effect on our tariffs. Currently, the EETT has published a consultation proposal for price control measures for retail services and service bundles (which may include a combination of regulated and unregulated products). We cannot predict the outcome of the consultation and whether new price control measures will allow us a greater pricing flexibility.

 

Regulatory limitations imposed on our ability to set tariffs often require us to charge tariffs which are higher or, in certain cases, significantly higher than those charged by our competitors for the same services, as our competitors are not subject to the same pricing constraints. Given that an important factor for the determination of our tariffs is our cost for providing the relevant services, we must make efforts to increase the efficiency of our operations, in order to reduce such costs, and therefore be able to reduce the cost-based tariffs we charge, in order to make them more competitive. Although we believe that in recent years the repercussions of this pricing disadvantage on the rate of decline of our market share were relatively limited, partly due to the perceived quality and reliability of our services by the market, we cannot assure you that, if we continue to be required to charge tariffs higher than those of the competition, our market share and our revenues will not be materially adversely affected, especially as our competitors improve the quality of their services.

 

The provision of certain mobile telephony services is regulated by the European Union. The mobile termination rates charged by our mobile operators in Greece, Bulgaria and Romania are subject to a glide path of phased reductions determined by each of the national telecommunications regulators. In addition, on May 7, 2009, the European Commission published a recommendation on the regulatory treatment of fixed and mobile termination rates, which would lead to significantly lower estimates of the cost of mobile phone termination services. In June 2009, a new roaming regulation (“Roaming II”) came into force which extends the existing price

caps to wholesale and retail voice roaming charges put in place by the existing roaming regulation (“Roaming I”) and applies new price caps to wholesale and retail short message services (“SMS” ) roaming charges and to wholesale roaming services for data services.

 

If we cannot efficiently reduce the cost of providing our services and the level of our tariffs to be more competitive in a timely manner, we could experience a material adverse effect on our business, results of operations, financial condition and prospects.

 

The regulatory environment for telecommunications services remains complex and subject to change and interpretation. Our compliance with the regulations to which we are or may become subject may require us to expend substantial resources and may have a significant impact on our business decisions.

 

The provision of telecommunications services in Greece is subject to regulation based on EU legislation, competition law and sector-specific regulation relating to various issues, including numbering, licensing, tariffs, local loop unbundling, interconnection, leased lines and privacy issues. The Telecommunications Law currently in force for four years contemplates the enactment of a series of secondary legislation, most of which has already been adopted, but the joint ministerial decision on the procedures for granting rights of way, which is critical to the deployment of new networks, has still not been completed. In certain cases, secondary legislation and regulatory remedies do not reflect the current level of competition and can be burdensome, particularly regarding the conditions for tariff approval. Although experience with the regulation of fixed-line voice services in Greece has increased over recent years, the emergence and introduction of new technologies and new types of services together with the lack of clear guidelines in their regulatory treatment has led and may lead in the future to a lack of clarity, at a national and European level, in the regulatory framework governing the provision of such services. In addition, amendments to existing regulations have resulted in us being required to utilize substantial financial and human resources in order to comply with changing requirements and we expect to continue to be bound by such obligations in the short- to medium-term future.

 

The market analyses that were initiated in 2009 based on the Relevant Markets Recommendation (a recommendation issued by the European Commission in November 2007 that designated seven electronic communications markets as candidates for potential regulatory intervention) will continue in 2010. These analyses may result in the introduction of new remedies, such as duct access, and may result in certain existing regulatory remedies that affect our business being amended or no longer available. In addition, in December 2009, the European Commission approved significant amendments to the current regulatory framework, that must be transposed into national law by May 25, 2011. See “4.B Business Overview — Regulation — Telecommunications Services Regulation in Greece — EU Regulatory Framework”.

 

As a result, it is sometimes difficult for us to accurately predict the exact manner in which new laws and regulations affecting our business will be interpreted and/or implemented by regulators or courts, the impact such regulations may have on our business, or the specific actions we may need to take, or the expenditure we may need to incur in order to comply.

 

Furthermore, as a provider of telecommunications services, we are also exposed to certain additional regulatory compliance costs, which range from our obligation to provide universal service to increased expenses relating to investments for the protection of customers’ privacy and personal data. See “4.B Business Overview — Regulation — Telecommunications Services Regulation — Telecommunications Framework in Greece”.

 

In addition to the substantial resources we may have to commit to comply with the regulations to which we are or may become subject, fines can be and have been imposed on us, if the relevant regulator rules that we do not comply with the applicable regulatory framework. Over recent years, the EETT has imposed a number of fines on us with respect to a number of our business activities, including both retail and wholesale services, certain of which have been for significant monetary amounts. See “4.B Business Overview — Legal Proceedings — Greece — Regulatory Matters”. We believe that in certain cases such regulatory remedies imposed on us did not fully take into account the current level of competition in the Greek telecommunications market, which has evolved significantly over recent years. Although these fines are subject to remedies before Greek administrative courts and we have so far, in a number of cases, succeeded in having certain of these fines either repealed or reduced, we have in recent years paid, or provided for significant amounts in our financial statements, in relation to fines imposed on us by the

EETT and we cannot assure you that further fines will not be imposed on us in the future. In addition, regulatory remedies, including fines, that have been, or may be, imposed on us not only have a direct impact on our financial condition, but also impact our business decisions and strategy. The imposition of significant regulatory fines could have a material adverse effect on our business, results of operations, financial condition and prospects.

 

Failure to comply with regulatory requirements with respect to unbundling the local loop and providing wholesale leased lines, or competitive pressures arising from an increased number of unbundled local loop sites, could have a material adverse effect on our business, results of operations, financial condition and prospects.

 

We are required to provide other Greek telecommunications operators with full and shared access to local loop services, distant and physical collocation and backhauling services, as well as wholesale leased line services upon their request. See “4.B Business Overview — Other Services — Leased Lines” and “4.B Business Overview — Other Services — Local Loop Unbundling”, respectively. Responding to requests for the provision of such services, and especially access to local loop services and distant and physical collocation services, is a logistical process which requires us to devote significant managerial, technical and financial resources within an uncertain and evolving regulatory environment, in which we are exposed to increased regulatory and litigation risk. We cannot assure you that we will be in a position to respond effectively to requests for provision of access to local loop or wholesale leased lines (which may continue or increase in the future) in a timely manner. If we fail, or are considered to have failed, to effectively respond to such requests (especially if they are based on timely submitted annual forecasts), we may be deemed to be in violation of our obligations under the applicable legal and regulatory framework and, as a result, we could be exposed to regulatory action. This may include paying compensation for delayed provision of the relevant services, as well as the imposition of fines by the EETT or litigation by other operators. Over recent years, alternative carriers have taken legal action against us before the EETT, civil or administrative courts, claiming that we have not complied with our obligations. Such actions were less frequent in 2009 than in previous years, mainly due to our improved performance in responding to relevant requests. See “4.B Business Overview — Legal Proceedings”.

 

In addition, devoting increased human, technical and financial resources to responding to requests of this nature has resulted and may, in the future, result in the unavailability of such resources to support other activities of our Group. We cannot assure you that we will at all times be in a position to fully and timely satisfy the regulatory and logistical requirements imposed by new reference offers for unbundled access to the local loop and related services (“RUO”) issued by the EETT. In particular, during 2009 the EETT imposed additional obligations on us to provide duct access and access to dark fibre to alternative operators. On the other hand, as our competitors increase the number of unbundled local loop sites, they extend the scope of their coverage and may improve the quality of their products and services and potentially reduce their prices and the competitive pressures on our products and services will increase. Our failure to comply with regulatory requirements with respect to local loop or leased lines, or to contend with competitive pressures arising from an increased number of unbundled local loop sites, could have a material adverse effect on our business, results of operations, financial condition and prospects.

 

As alternative telecommunications operators extend their own networks, they are expected to improve the quality of their services and become more competitive.

 

A number of telecommunications operators in Greece, including both fixed-line and mobile operators, are currently in the process of developing and extending their own networks, while they expand their customer bases. In addition, certain of our competitors are receiving subsidies under government programs to develop regional network infrastructure. We expect that, as these operators continue to extend their networks by extending backbone network coverage and increasing the number of unbundled local loops, they may gradually improve the quality of their services, as well as reduce their operating costs, as a result of them reducing their reliance on leasing capacity from our network. As a result, they may become more competitive, both in terms of service quality and pricing. This could have a material adverse effect on our market share, or on our revenues and our profitability, any of which could have a material adverse effect on our business, results of operations, financial condition and prospects.

Our revenues from the provision of wholesale services may decrease, as alternative telecommunications operators expand, and increase their reliance on, their own networks.

 

We derive a portion of our revenues and profits from the provision of wholesale services, wholesale leased lines, wholesale line rental and interconnection services, bitstream access and unbundling services, to other, mainly Greek, telecommunications services providers, including alternative fixed-line and mobile telecommunications operators. In recent years, we have experienced a shift in our revenues from wholesale services from bitstream, leased lines and interconnection, to local loop unbundling which has resulted in revenues from wholesale activities overall remaining relatively stable. A number of alternative fixed-line and mobile telecommunications operators are currently in the process of extending and upgrading their own networks, while their customer bases increase. As these operators expanded and continue to expand their own networks, their reliance on our network and, in particular, our wholesale services, such as leased lines and wholesale broadband services, has decreased and we expect it to continue to decrease. As a result, our revenues from the respective wholesale services have been and may continue to be adversely affected. In addition, potential consolidation of Greek fixed-line telecommunications operators may have a negative impact on our revenues from the provision of wholesale services, mainly due to increased efficiencies and economies of scale that may result from the consolidation of infrastructures of the relevant operators. Furthermore, new factors, such as the requirement to provide leased lines on a trunk terminating segments basis (while we are reintroducing point-to-point wholesale leased lines), may also negatively affect our revenues from the relevant wholesale services as this gives a higher pricing flexibility and choice to our competitors. Significant declines in the revenues we derive from wholesale services could have a material adverse effect on our business, results of operations, financial condition and prospects.

 

In addition, the Greek State recently announced a plan to update its long-term project for the development of a fiber optic network connecting Greek households (“FTTH” or “Fiber-to-the-home”) . Based on recent governmental announcements, the exact technical, financial and other parameters of this project are expected to change. At the same time, we are planning to develop our own fiber solutions. See “4.B Business Overview — Fixed-line Services — Greece — OTE — Fixed-line Network”. As a number of factors relating to the State’s FTTH project, including the cost of the project, the potential allocation of its cost and its future impact on fixed-line competition in the Greek market, remain unclear, we cannot predict the impact of this project on our own investment plans, the development of Next Generation Access (NGA) infrastructure in Greece and fixed-line competition, and, therefore, we cannot assure you that it will not have a material adverse effect on our business, results of operations, financial condition and prospects.

 

Increased competition in wholesale services and financial difficulties our wholesale customers face could materially adversely affect our business, results of operations, financial condition and prospects.

 

Wholesale activities are subject to a significant degree of regulation, in particular with respect to the tariffs we charge for the relevant services. Our customers for wholesale services are mainly alternative providers of telecommunications services, which make, and are expected to continue to make, significant investments in developing their own infrastructure with a view to reducing their reliance on, and use of, our own network infrastructure. Certain of our customers for wholesale services also face increased competition with respect to the tariffs for the services they provide, combined with significant capital expenditure requirements, in order to develop their own networks and a number of them are highly leveraged in order to fund their capital expenditure. Financial difficulties these telecommunications providers already face, or may face in the future, especially exacerbated by the current deteriorating economic and financial conditions in Greece, may lead to increases in our bad debt provisions. We cannot assure you that we will not have to increase our provisions for bad debts relating to debts owed by alternative operators facing financial difficulties, especially in the event that macroeconomic conditions in Greece continue to deteriorate. Loss of wholesale business and/or potential financial difficulties faced by our wholesale customers could have a material adverse effect on our business, results of operations, financial condition and prospects.

If we do not comply with certain applicable rules and regulations, the EETT may amend or revoke one or more of our licenses. Outside of Greece, we also face uncertain and changing regulatory restrictions in the countries where we operate.

 

We rely on a number of licenses in order to provide some of our fixed-line, mobile and other services. In Greece, the EETT may, under the Telecommunications Law, amend or revoke our licenses, if we do not comply with certain applicable rules and regulations, or if we do not meet certain terms and conditions. Our license to provide fixed-line services in Greece does not have an expiry date, and we believe the possibility of its material adverse amendment or revocation is minimal. In addition, Cosmote’s 2G license for the GSM 1800 frequency band has a term of 25 years expiring on December 4, 2020, its 2G license for the GSM 900 frequency band has a term of 15 years, expiring on September 8, 2017, and its 3G license has a term of 20 years, expiring on August 5, 2021. Each of these licenses is subject to renewal by resolution of the EETT, according to the legislation in force at the time of the renewal, and we believe the possibility of its material adverse amendment or revocation is minimal. Any material adverse amendment or revocation of one or more of our licenses would restrict our ability to conduct business and would therefore have a material adverse effect on our business, results of operations, financial condition and prospects.

 

Outside of Greece, we also face uncertain and changing regulatory restrictions in the countries in which we operate. The telecommunications industry is highly regulated in all countries in which we operate. In some of these countries, regulation of the telecommunications sector falls within the competence of bodies that may not be able to act independently from the government and are subject to political pressures. See “— Political, economic, legal and regulatory uncertainties prevailing in many of the international markets in which we have invested, or plan to invest, could have a material adverse effect on our international investments”. We need licenses or similar permits to carry on our business in each of these countries. Our ability to establish new networks depends on obtaining appropriate licenses, which in some cases will require adopting and implementing new regulatory regimes. In some cases these licenses are subject to expiry dates.

 

Our ability to continue to provide services depends on our licenses remaining valid. Although we have had favorable experience obtaining, maintaining and renewing licenses in the past , we cannot assure you that we will be able to obtain, maintain or renew licenses for our services on commercially viable terms in all jurisdictions in which we operate. The loss of one or more of our licenses, the imposition of substantial limitations upon our license terms, or any material changes in such license terms or in the regulatory environments in which we operate, could have a material adverse effect on our business, results of operations, financial condition and prospects.

 

We may be unable to implement new technologies and launch new products in a timely and cost-efficient manner or to penetrate new markets in a timely manner in response to technological advances, changing market conditions or customer requirements.

 

The telecommunications industry is subject to rapid technological changes. Advances in telecommunications and information technology have in the past created, and may in the future continue to create, alternatives to fixed-line transmission based on switching or may facilitate the provision of telecommunications services that circumvent conventional tariff structures. We expect that new products and technologies will continue to emerge and that existing products and technologies will further develop. Unexpected rapid changes in modern telecommunications equipment could render current telecommunications technologies obsolete in the future, which, in turn, could render our technologies, products or infrastructure obsolete. Although not yet fully realized, the current trend towards convergence of the telecommunications, broadcasting and information technology services may also affect further developments.

 

Changing technology intensifies competition for operators of fixed-line and mobile networks, including our company and Cosmote, as existing and new competitors develop and/or adopt new or advanced technologies and compete in terms of service quality and pricing. We are already using, or plan to implement, several new technologies in our network and in our new service offerings. We cannot, however, be certain that we may continue to have cost-efficient access to know-how for such state-of-the-art technologies, or that we will be able to implement them as quickly, or as effectively as our competitors. Furthermore, as new technologies develop, difficulties in accessing such new technologies or competitive pressures may force us to implement these at a

substantial cost. For example, plans by the Greek State relating to the development of an FTTH network throughout Greece, or the increasing use of IP-VPN connections for corporate customers and the continuously increasing demand for higher capacity over existing networks, resulting from the development and use of new applications requiring higher bandwidth, may result in additional investments or fundamental changes in the way in which, or the terms upon which, we compete. Furthermore, the increasing development of Wi-Fi local networks in public areas and the use of those networks by mobile users may have a negative impact on traffic over mobile networks and revenues of mobile operators. We cannot predict with accuracy the effect of technological changes on our business or on our ability to provide competitive services.

 

If we fail to timely and efficiently introduce our new products and services under evolving market conditions, to take advantage of the recent expansion and upgrade of our network and/or to effectively respond to competition from new technologies, we could experience a material adverse effect on our business, results of operations, financial condition and prospects.

 

We continue to invest in upgrading and expanding our network in order to be able to offer a range of technologically advanced services, mainly in the broadband area. We are expanding our broadband coverage in our local access network and investing in infrastructure in order to deliver other services, including integrated voice, video and data and other multimedia services to our customers. Our commercial success with these services depends on a number of factors, including:

 

 

The absence of, or our failure in, any one or more of these factors, could materially adversely affect our business, results of operations, financial condition and prospects.

 

The interests of Deutsche Telekom and the Greek State may conflict with each other and this may have a material adverse effect on our business, operations and financial performance.

 

On May 14, 2008, Deutsche Telekom and the Greek State entered into a shareholders’ agreement, the provisions of which govern certain matters of corporate governance and management of our company, including the size and composition of our Board of Directors, the party or parties responsible for nominating our Chairman, Managing Director, the establishment, composition and powers of committees of our Board of Directors, a requirement of a supermajority vote of our Board of Directors for certain matters and the preservation of veto rights of the Greek State with respect to certain corporate actions and business matters. This shareholders’ agreement also contains provisions relating to the voting of shares by the parties. For more details regarding this shareholders’ agreement, see “7.A Major Shareholders and Related Party Transactions — Major Shareholders”. In the event that Deutsche Telekom and the Greek State disagree regarding the interpretation and/or implementation of the shareholders’ agreement, or their opinions with respect to matters of material importance regarding our strategy and management materially diverge, such disagreement or divergence of opinions could result in delay or a lack of clarity in the implementation of our strategies or investments, or conflict with, or deviate from, previously adopted and implemented strategies or investments. This could have a material adverse effect on our business, results of operations, financial condition and prospects.

The Greek State and Deutsche Telekom, our two major shareholders, may have common interests or take common positions or actions that may not coincide or may conflict with the interests of other shareholders.

 

Deutsche Telekom and the Greek State are our two major shareholders, controlling voting rights of 30.0% and 20.0%, respectively, in our share capital as of the date of this Annual Report. In May 2008, Deutsche Telekom and the Greek State entered into a shareholders’ agreement, the provisions of which govern certain matters of corporate governance and the management of our company. See “7.A Major Shareholders and Related Party Transactions”. As a result, Deutsche Telekom and the Greek State may have interests, take positions or take actions regarding a number of matters, including our business, strategy, investments, which may not coincide, or may conflict with, the interests of our other shareholders. These matters relate to decisions of our board of directors and resolutions of any general assembly of our shareholders, concerning, among other things, amendments related to appointments of directors, decisions with respect to mergers, business combinations, and acquisitions or dispositions of assets and dividend payouts. In addition, we have been informed that in early 2010, the European Commission wrote to the Greek State requesting further information regarding the arrangements between Deutsche Telekom and the Greek State regarding the management of our Company (see “7.A Major Shareholders and Related Party Transactions — Major Shareholders”).

 

Political, economic, legal and regulatory uncertainties prevailing in many markets outside Greece in which we have invested, or plan to invest, could have a material adverse effect on our international investments.

 

We have made equity investments in telecommunications operators and have acquired regulatory licenses to provide telecommunications services in a number of Southeastern European countries, including Romania, Albania and Bulgaria. See “4.A History and Development of the Company” and “4.B Business Overview”. Investments we have already made, and additional investments we may consider in the future, were or may be located in countries that present a different, and in some cases greater, risk profile than that of the telecommunications sector in Greece. Relevant risks could include, but are not limited to:

 

 

The majority of Southeastern European countries where we have made investments are at varying stages of transition to a market economy. Consequently, they have experienced, or may experience, changes in their economies and their governmental policies that may affect our investments in these countries. Although these countries are at different stages of developing institutions and legal and regulatory systems characteristic of parliamentary democracies, including having recently become, or aspiring to soon become, Member States of the European Union, these institutions may not yet be as firmly established as they are in Western Europe. Similarly, the interpretation and procedural safeguards of the new legal and regulatory regimes in these countries are still developing and in certain cases existing laws and regulations may be applied inconsistently. In some circumstances, it may not be possible to obtain the legal remedies provided under those laws and regulations in a timely manner. As a result, we may face further uncertainty as to the performance of our international investments.

 

Recently, Southeastern European countries in which we have made investments have experienced negative rates of economic growth, or significantly slower growth rates, as compared to previous years. We expect that the macroeconomic environment in these still-developing countries may continue to deteriorate, which can have a material adverse impact on the operating and financial performance of our businesses in the respective markets. In

addition, in recent years, certain of these countries have experienced high inflation, which may result in high interest rates, devaluations of local currencies and government controls on currency exchange rates or prices, any of which may affect our results. Currencies in certain of the countries in which we operate (other than Greece) have been subject to devaluations in certain cases in recent years and may suffer further devaluation, which could adversely affect the stated value of our shareholdings in entities in these jurisdictions, although certain of these currencies have recently appreciated against the Euro. All of these conditions in Southeastern Europe could have a material adverse effect on our international investments and, accordingly, on our business, results of operations, financial condition and prospects.

 

Potential disputes with major suppliers, or failure by such suppliers to perform their obligations, could cause us to incur significant cost overruns and delays in implementing our investment plans.

 

We rely on a number of suppliers to satisfy our requirements for telecommunications equipment. Our main suppliers of fixed-line network equipment include Nokia-Siemens, Alcatel-Lucent, Cisco, Ericsson and Huaweii. Nokia-Siemens, Ericsson, Huaweii and ZTE are Cosmote’s main suppliers of equipment for its second generation (“2G”) , 2.5G and third generation (“3G” or “UMTS”) networks. If we have significant disputes with our suppliers, or if our suppliers fail to perform their obligations to us, we may incur significant cost overruns and delays in implementing our investment plans. Shipments of equipment could also be delayed or we may be forced to seek alternative suppliers using procurement procedures approved by the European Union. Any of these developments could have a material adverse effect on our business, results of operations, financial condition and prospects.

 

We may be required to make additional contributions to IKA-ETAM in connection with the Voluntary Retirement Scheme which we commenced implementing in 2005, that significantly exceed our initial estimates.

 

On January 19, 2010, the Greek Minister of Labor and Social Security advised us that IKA-ETAM had incurred significant deficits attributable to the incorporation of the pension segment of TAP-OTE into IKA-ETAM as of August 1, 2008, as a result of our Voluntary Retirement Scheme, that further deficits were anticipated for 2010 and that we should contribute funds towards these deficits. In addition, on February 23, 2010, the Ministry formally advised us that it had estimated that IKA-ETAM had foregone contributions and pensions of approximately Euro 340.0 million, as a result of the Voluntary Retirement Scheme, and required that our relevant outstanding contributions which up to that point we paid on a monthly basis should be settled in full.

 

In March 2010, a Ministerial Decision was issued and published in the Government Gazette (FEK 333/26/03/2010), requiring us to make a lump-sum payment by the last working day of September 2010, covering the additional financial burden incurred by the Pension Section of IKA-ETAM, the Auxiliary Insurance Sector for OTE personnel of TAYTEKO and the Medical Segment of TAYTEKO, resulting from our Voluntary Retirement Scheme (which the Ministry advised were up to approximately Euro 340.0 million). According to the same Ministerial Decision, the exact amount of this additional financial burden will be determined by an actuarial study to be performed by the Directorate of the Actuarial Studies of the State’s General Secretariat for Social Security in conjunction with the Directorate of Actuarial Studies and Statistics of IKA-ETAM, by August 31, 2010. See “5.A Operating Results — Recent Developments — Additional contributions to IKA-ETAM in connection with the Voluntary Retirement Scheme”.

 

Having examined the Ministry’s position, we believe that it is unsubstantiated, as we have fulfilled and continue to fulfill in their totality our financial obligations towards social security funds, paying all contributions, as they are due, both in the context of our ordinary course of business, as well as the ones related to the our voluntary retirement plans, in compliance with relevant laws, rules and regulations. On May 11, 2010, we filed an appeal against the relevant Ministerial Decision before the Administrative Court of First Instance of Athens, requesting the annulment of Article 3, on the grounds that it is in contravention of article 34 of L.3762/2009 and on May 15, 2010 we filed an appeal before the same court requesting the suspension of enforcement of this Ministerial Decision.

 

We cannot assure you as to the exact amount of the additional financial burden that will be determined by the actuarial study which is mandated to be performed, or that we will be successful in contesting the relevant provisions of the Ministerial Decision, or as to whether and what additional amount we may be eventually required to contribute to IKA-ETAM. As we have not recorded any relevant provision in our financial statements, if we are

eventually required to contribute additional amounts to IKA-ETAM which materially exceed our initial estimates in connection with the cost of the Voluntary Retirement Scheme, this could have a material adverse effect on our business, results of operations, financial condition and prospects.

 

We have an active, union-represented work force, which has in the past gone on strike and may cause work stoppages.

 

Almost all of our full-time employees are members of the OME-OTE labor union. OME-OTE is strong and influential within our company and has consistently opposed disposals of ownership interests in our company by the Greek State. In recent years, we have experienced a number of strikes, both on a nationwide basis and in specific geographic regions. These included 6 strikes in 2009, mainly relating to the closure of OTEShops, 16 one-day strikes in 2008, mainly relating to the pension reform bill and the sale of an interest in our share capital to Deutsche Telekom by the Greek State and two one-day nationwide strikes and 26 one-day strikes in specific geographic regions in 2007. In addition, since January 1, 2010, we have experienced four nationwide one-day strikes, mainly relating to the fiscal measures recently adopted by the State. For more information, see “6.D Employees — Relationship with the Union”. There can be no assurance that strikes or work stoppages or other industrial action will not have a material adverse effect on our business, results of operations, financial condition and prospects.

 

If we are unable to recruit and retain key personnel, our plans to maintain our positions in the fixed-line and mobile telecommunications markets and to expand and grow in the areas of internet, high-speed data and business telecommunications services could be impeded.

 

Competition for qualified personnel in the Greek telecommunications market is intense, and the costs of retaining such personnel have increased and may continue to increase. Recruiting specialized technical, commercial and information technology personnel is crucial to our future success and efficiency. Since 2006, following the enactment of Greek Law 3522/2006 and the adoption of our new Internal Personnel Regulation, we have implemented flexible recruitment procedures in order to recruit experienced and specialized personnel, for both entry level and managerial positions, with higher salaries and more attractive benefits. Potential failure to recruit experienced and specialized personnel and to retain necessary skilled personnel could significantly impede our plans to maintain our position in the fixed-line and mobile telephony services market and to expand and grow in the areas of internet, high-speed data and business telecommunications services, and could have a material adverse effect on our business, results of operations, financial condition and prospects.

 

Criminal investigations relating to improprieties in relation to the conduct of our business could have a material adverse effect on our business, results of operations, financial condition and prospects.

 

In 2007, the District Attorney of Athens undertook a preliminary investigation with respect to the propriety of the acquisition of Germanos S.A. (“Germanos”) by Cosmote, following allegations by a number of members of the Greek Parliament, claiming that the acquisition was not in the business interest of Cosmote. During the course of the preliminary investigation, the members of the Board of Directors of Cosmote at the time of the acquisition of Germanos were called and requested to submit explanations in connection with the case. Following the recent completion of the preliminary investigation, a formal criminal investigation was ordered in connection with the potential perpetration of the criminal offence of abuse of trust against seven former and current members of Cosmote’s Board of Directors. The 20th Investigating Judge of Athens, who was appointed in charge of the criminal investigation, has ordered two accounting firms to produce an expert’s report, which was submitted to the Investigating Judge on March 17, 2010 and concluded that the price paid by Cosmote for the acquisition of Germanos was fair and that Cosmote did not suffer loss or damage as a result of the acquisition (rather the acquisition was to the corporate benefit of Cosmote).

 

In addition, Greek and German judicial authorities have been investigating allegations of bribery, money laundering and other criminal offences committed by employees of Siemens AG and a number of Greek government officials and other individuals, relating to the award of supply contracts to Siemens AG. In that connection a former senior executive of our Group was last year remanded in custody pending his trial for similar charges. Furthermore, at times, Greek judicial authorities have undertaken other criminal investigations with

respect to alleged improprieties involving current or former members of our senior management. See “4.B Business Overview — Legal Proceedings — Greece — Other Proceedings — Criminal Proceedings”.

 

To the extent we have been, or may so be, requested, we have cooperated and intend to cooperate in relation to such investigations. In addition, we have taken and continue to take measures designed to ensure the appropriate conduct of our personnel, as well as to request information in order to investigate such allegations. Also in certain cases, we intend to pursue compensation for damages incurred as a result of illegal conduct. We cannot, however, give any assurances as to the outcome of such criminal investigations, including in connection with the potential filing of criminal charges or imposition of criminal convictions on former or current members of our Boards of Directors or senior management, or of related civil litigation. Potential filing of criminal charges, or imposition of criminal convictions, in relation to improprieties by our management and related civil litigation against our Group could adversely impact our reputation, our ability to conduct business in Greece or abroad and could result in a material adverse effect on our business, results of operations, financial conditions and prospects.

 

If we fail to operate IPTV services in a reliable, competitive and profitable fashion, our reputation and our market share, including voice and internet access services, may suffer.

 

In February 2009, we began offering IPTV (video over broadband) services to customers, initially in major urban centers, after commencing with a soft launch in the autumn of 2008. See “4.B Business Overview — Other Services — Other Telecommunications Services — IPTV”. As at December 31, 2009 we had 16,075 IPTV customers in 60 urban areas and had signed exclusive deals with major European Leagues and international channels. However, as we expect that there will be a significant percentage of the Greek population that will not be able to receive IPTV service, we are also planning to launch a satellite Pay-TV service (DTH) in 2010, through which we expect to expand the availability of our Pay-TV content to all households throughout Greece. A number of our competitors in the Greek market are already offering IPTV services, while Forthnet, our fixed-line services competitor, operates Nova, the only active satellite Pay-TV service (DTH) in Greece, since August 2008. We cannot assure you that we will operate and provide IPTV services in a timely and reliable fashion, including offering attractive content, as compared to our competitors. If we fail to do so, our reputation may suffer and our market share, including that for voice and internet access services, may decrease, as a number of our voice or internet access customers may turn to competitors providing more reliable, more attractive, or cheaper triple-play (voice, internet and IPTV) services. Furthermore, if we fail to grow our customer base for IPTV services in accordance with our expectations, we may not realize the expected benefits from our IPTV-related investments. In general, our failure to establish and operate IPTV services in a competitive and reliable fashion, could have a material adverse effect on our business, results of operations, financial condition and prospects.

 

Cosmote’s ability to continue to grow and maintain its market leading position is subject to certain factors that may be outside Cosmote’s control.

 

A significant portion of our revenues and profits are contributed by Cosmote’s Greek activities. Given high mobile penetration rates, subscriber numbers of all mobile operators, including Cosmote, can be expected to grow at a slower rate than in previous years or suffer a decline in revenues and profits. The continuation of Cosmote’s growth and the size of Cosmote’s future customer base will depend on a number of factors, some of which are outside of our or Cosmote’s control. Such factors include general economic conditions, the gross domestic product per capita in Greece and other markets in which we operate, developments in the regulatory environment and the application by the EETT of relevant legislation, the development of the GSM market and any rival technology for the provision of mobile telecommunications services, the development of 3G operations, the price of handsets and improvement in the quality and availability of fixed telephony as an alternative to mobile services in Greece and the competitive behavior of mobile operators. Any of these factors could materially adversely affect our business, results of operations, financial condition and prospects.

Cosmote faces strong competition from other mobile telephony providers in Greece and in other markets in which it operates and may experience loss of market share or significant price pressures resulting from intensifying competition.

 

Competition for products and services in the Greek mobile telecommunications market remains intense. Each of Vodafone and Wind Hellas, Cosmote’s competitors in the Greek market, belong to large international groups and benefit from group-wide efficiencies in international operations in areas such as international roaming, marketing product offerings and procurement. Cosmote’s competitors may succeed in attracting some of its customers which could reduce Cosmote’s market share and have a material adverse effect on its business, results of operations, financial condition and prospects. Furthermore, as a result of intensifying competition, the Greek mobile market, as well as the other markets in which Cosmote operates, has recently experienced remarkable price pressures. Our mobile subsidiaries in Albania, Romania and Bulgaria are also facing and are expected to continue to face similar competitive and pricing pressures in their respective markets, which could result in loss of their respective market shares, or adversely affect their operating and financial performance. Competitive pressures related particularly to prepaid mobile telephony products and services, as well as newly-introduced products combining fixed-line and mobile features. Heightened competitive pressures may also result in higher marketing, selling and distribution expenditure, as well as increased capital expenditure and, therefore, have a negative impact on profitability. In the future, there may also be new entrants to the Greek mobile market, which could result in further price pressures. Furthermore, other factors, including new market conditions and trends or technologies may also affect the competitive landscape and increase competitive pressures having an impact on our financial and operating performance. For instance, the increasing development of Wi-Fi local networks in public areas and the use of those networks by mobile users may have a negative impact on traffic over mobile networks and revenues of mobile operators. Loss of market share or significant price pressures resulting from intensifying competition could result in a material adverse effect on our business, results of operations, financial condition and prospects.

 

The acquisition and integration by Cosmote of new businesses may present certain difficulties that could have a material adverse effect on our business, results of operations, financial condition and prospects.

 

Cosmote has grown partially through a number of acquisitions. In 2006 and 2007, Cosmote acquired approximately 100.0% of Germanos, a Greek company principally engaged in the distribution and sale of telecommunication and digital technology products and services. See “4.B Business Overview — Mobile Telephony Services — Greece — Cosmote — Germanos”. In addition, in October 2009, Cosmote acquired Telemobil S.A. (“Zapp”) , a mobile operator in Romania, operating 3G and CDMA networks. The acquisition and integration by Cosmote of any other businesses it may acquire in the future may present certain challenges for Cosmote, including, but not limited, to the following:

 

 

If Cosmote fails to integrate new businesses and control their activities or benefit from the relevant synergies and economies of scale it hopes to realize from this integration, this could have a negative effect on the value and performance of our investment in Cosmote, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

Cosmote’s ability to provide commercially viable telecommunications services depends upon its ability to interconnect in a cost-effective manner with the telecommunications networks of other operators.

 

Cosmote’s ability to provide commercially viable telecommunications services to meet the needs of its customers depends upon its ability to interconnect in a cost-effective manner with the telecommunications networks of other operators in order to complete calls between Cosmote customers and parties on fixed-line networks or other mobile telecommunications networks. Cosmote maintains interconnection agreements with us and with other operators of mobile and fixed-line networks in Greece and in other countries in which it operates, but has no control over the quality and timing of investment and maintenance activities conducted by these operators, which may be necessary to provide Cosmote with interconnection services of acceptable quality. The failure of these operators to provide reliable and economic interconnection services to Cosmote, a reduction in the interconnection fees paid by these network operators to Cosmote, or an increase in the interconnection fee paid by Cosmote to these operators for delivering calls originating on Cosmote’s network, could have a material adverse effect on our investment in Cosmote and, consequently, on our business, financial condition, results of operations and prospects.

 

Perceived or actual health risks related to mobile telecommunications equipment and devices could adversely affect demand for our mobile telephony services or could lead to environmental or planning restrictions on the location of mobile base stations.

 

Media reports have suggested that there may be health risks associated with the effects of radio waves emitted by transmitter masts and mobile handsets. Research and studies are ongoing. Regardless of whether such research or studies establish a link between radio frequency emissions and health and despite the recent suggestions by authorized organizations such as World Health Organization (“WHO”) , International Commission on Non-Ionizing Radiation Protection (“ICNIRP”) and Scientific Committee on Emerging and Newly Identified Health Risks (“SCENIHR”) that the limits of radio frequency emissions do not need to be lowered, these concerns over radio frequency emissions may result in significant restrictions on the location and operation of transmission facilities and antennae “base stations”, which could have a material adverse effect on our mobile telecommunications services business. Moreover, litigation initiated by local authorities and private persons regarding the removal of individual base stations for health reasons has been increasing, while, from time to time, proposals have been made by independent advocates for the general removal of base stations from inhabited areas. We can give no assurance that legislative bodies, regulators or private litigants will refrain from taking additional actions adverse to our business based on purported health related risks associated with radio frequency emissions, which actions may result in significant costs and could materially adversely affect the business, results of operations, financial condition and prospects of our mobile telecommunications services business.

 

Capacity limitations and network infrastructure faults of Cosmote could adversely affect the growth of its business which could, in turn, materially adversely affect our business, results of operations, financial condition and prospects.

 

The number of customers that can be served by Cosmote’s network is ultimately constrained by the spectrum allocated to Cosmote and is dependent on usage patterns and the quality and design of Cosmote’s network infrastructure. Any reduction in the availability or allocation of spectrum or capacity of Cosmote’s network could impede the growth of its business, which could have a material adverse effect on our business, results of operations, financial condition and prospects.

 

 

Hellenic Telecommunications Organization S.A., known as OTE or OTE S.A., was incorporated as a société anonyme in Athens, Greece, under the laws of the Hellenic Republic in 1949, pursuant to the provisions of Legislative Decree 1049/1949. We operate as a société anonyme subject to the provisions of Law 2190/1920 (the “Greek Companies Law”) and Law 3016/2002, as amended and supplemented by Law 3091/2002. Our registered office is located at 99 Kifissias Avenue, Amaroussion 15124, Athens, Greece. Our telephone number is +30 210 611 1000. Our agent for service of process in the United States is Puglisi and Associates, 850 Library Avenue, Suite 204, P.O. Box 885, Newark, Delaware 19711.

 

We are a full-service telecommunications group and the leading provider of fixed-line voice telephony and internet access services in Greece. We also provide mobile telecommunications services in Greece, through Cosmote, our wholly-owned subsidiary. In addition, we provide fixed-line voice telephony and internet access services in Romania and mobile telecommunications services in Albania, Bulgaria and Romania (and in the Former Yugoslav Republic of Macedonia (“FYROM”) until May 2009).

 

As of the date of this Annual Report, Deutsche Telekom held 30.0% plus one share of our issued share capital and the Greek State held 16.0% of our issued share capital and controlled voting rights in respect of an additional 4.0% (such interest owned by IKA-ETAM, the Greek pension fund). See “7.A Major Shareholders and Related Party Transactions — Major Shareholders”.

Significant milestones in the history of our business include the following:

 

 

 

We are a full-service telecommunications group and the leading provider of fixed-line voice telephony and internet access services in Greece. We are also the leader in providing mobile telecommunications services in Greece, through Cosmote, our wholly-owned subsidiary. In addition, we provide fixed-line voice telephony and internet access services in Romania and mobile telecommunications services in Albania, Bulgaria, and Romania (and in FYROM until May 2009).

 

Fixed-line services.   We provide local, long-distance and international fixed-line telecommunications services in Greece and Romania. We also offer internet access services and fully integrated IP-based telecommunications solutions. In addition, we offer a range of other telecommunications services, including value-added services, IN services, IT application development and IP-based hosting services, leased lines, public telephone services, operator assistance services, sales of equipment, directory services and satellite telecommunications.

 

As of December 31, 2009, we had 3,787,132 PSTN lines, 517,369 ISDN BRA retail lines and 5,677 ISDN PRA lines in service, compared to 4,110,102 PSTN, 548,388 ISDN BRA and 5,971 ISDN PRA lines as of December 31, 2008. As of December 31, 2009, we had 1,060,064 retail and 52,714 wholesale customers for our broadband services in Greece.

 

Mobile services.   We offer mobile telephony services through Cosmote and its subsidiaries in Greece, Albania, Bulgaria and Romania (and in FYROM until May 2009):

 

 

Wholesale services.   We provide telecommunications services on a wholesale basis to other telecommunications providers and ISPs in Greece, including wholesale ADSL access services, interconnection services, leased lines, data telecommunications services and local loop unbundling.

 

Capital expenditure.   Our capital expenditure program is currently mainly focused on:

 

 

For information about our capital expenditures, see “— Investment Program 2010/2011 — Capital Expenditure”.

 

Our aim is to deliver increasing value to our shareholders, while improving the quality, value and profitability of the products and services we deliver to our customers.

 

Our main strategic goal for our fixed-line telephony operations is to enhance operational performance in order to achieve profitability in line with our European peers. We aim to accomplish this by implementing the following strategic goals, while continuing our effort to derive benefits from synergies available within our Group:

 

 

 

 

 

 

 

Through Cosmote, we aim to maintain our leading position in the mobile telephony market in Greece and to strengthen our position in southeastern Europe. Our key strategic objectives in this area are:

 

 

Our main strategic focus with respect to our international fixed-line operations is to strengthen the competitive position of RomTelecom, our 54.01% subsidiary in Romania, as a provider of telephony, broadband and satellite television services. Our key strategic objectives in connection with RomTelecom are to:

 

 

Our marketing strategy aims mainly at:

 

 

In 2009, our business marketing efforts were focused mainly on advertising activities, which included the re-branding of our business portfolio, the creation of business corners at OTEShops and the OTE Business website (www.otebusiness.gr), various campaigns including Conn-x @Work, OTE Business voice pack products and an OTE Business corporate campaign, and promotional material at OTEShops and other points of presence. In

addition, we engaged in other promotional activities, including business and corporate customer events, sponsorship of, and participation in, exhibitions and other activities.

 

We re-branded our business portfolio in order to reposition our business products and services, to promote convergence of communication (voice, internet and other services) and the quality of our business offerings, to strengthen our brand and to enhance the innovation and simplicity of the solutions we offer.

 

The objectives of our Conn-x @Work campaign were to achieve sales targets, to increase brand awareness, to increase market share and to provide greater information to customers, particularly in relation to prices, value-added services and new features.

 

Our OTE Business voice packs campaign launched a new suite of single and double play products for SMEs and was aimed at winning back customers as well as retaining existing customers in order to increase our market share.

 

Our OTE Business corporate campaign re-launched the re-branded “OTE Business” brand and was aimed at enhancing awareness of the OTE Business portfolio, promoting OTE Business’ ability to offer tailor-made solutions for ‘every business need’ (“each company a different story”) and communicating innovation and customization.

 

We held customer events in order to build customer loyalty and to inform our clientele of products and services offered by the OTE Business portfolio. The events for business customers took place in carefully selected cities according to specific sales oriented criteria.

 

OTEShops.   Our owned network of shops, branded “OTEShops”, offers a complete range of telecommunications products, including fixed-line telephony, broadband and IPTV products, as well as Cosmote’s mobile telephony products. In 2009, we implemented a program to optimize the geographical presence of our own retail network in Greece. As of December 31, 2009, our OTEShop retail network consisted of 225 outlets across Greece; 206 shops owned by us, 19 on a franchise basis and 61 service points.

 

Cosmote and Germanos Shops.   Our products are also sold through Germanos retail shops, and, since April 2008, also through Cosmote stores. See “— Mobile Telephony Services — Greece-Cosmote — Distribution” and “— Germanos — Business of Germanos.” In 2009, we focused on increasing sales of fixed-line, and especially broadband-based products through Germanos and Cosmote shops.

 

Other Retailers and Distributors.   We also use other retailers and distributors, including the major retail chains in Greece, making our product portfolio present in more than 500 points of sale.

 

Contact Centers.   We continue to transform our telephone contact centers into sales channels of increasing significance. We believe that this effort has already resulted in increasing sales and improving the quality of our customer care services. Sales through outbound telemarketing have been increasing, and cross- and up-selling through the number 134, which is our main inbound contact center, are also increasing. We are also developing special contact center teams focusing on customer retention and churn reduction, in order to reduce the rate of customer migration to competitors.

 

OTE Business Customer Service “13818”, operates both as a sales channel by performing telesales and direct marketing campaigns and as a single point of contact for customer care and support for the whole of the OTE Business customer base.

 

Electronic Channels.   “www.oteshop.gr” is our electronic sales channel for residential customers and small businesses. Part of our sales strategy is to increase the usage of our electronic channels by offering new electronic services such as “My e-Bill” (electronic billing presentation and payment) and “My e-Services” (online activation for phone services). We have also upgraded and enhanced “www.otebusiness.gr” to improve the promotion of OTE Business’ services and for greater interaction with OTE Business’ users.

 

Account Managers and External Sales Advisors.   Our corporate and business customers have been assigned dedicated key account managers who serve as a single point of contact for all their business needs. We continue to develop our customer-focused organization and operations by incorporating our external sales advisors into our

account management structure. This enables us to develop small and flexible sales teams to promote our products and services to SMEs.

 

We have developed an extensive network of other contact centers for our customers, focusing on their after-sales support and needs. Our after-sales support channels mainly comprise:

 

OTEShops.   Customer care and complaint management services are provided through our own retail network in Greece.

 

Contact Centers.   Our customer inbound technical support lines (numbers 121 and 1242 for residential and business customers, and 13818 for business customers) are supported by our in-house call centers and operate on a daily basis. We continue to develop call center services based on specific customer service level requirements. We provide call center services 24 hours a day, 365 days a year.

 

We provide fixed-line retail and wholesale telecommunications services in Greece and in Romania through RomTelecom Romania, in which we hold a 54.01% interest.

 

We also hold a 20.0% interest in Telekom Srbija a.d. (“Telekom Srbija”) , which provides fixed-line and mobile telephony services in Serbia and in the Republic of Srpska in Bosnia and Herzegovina through Telekom Srpske and in Montenegro through Mtel.

 

Our retail and business customers access our fixed-line transmission network to place local, long-distance and international calls. We offer a variety of tariff packages that generally consist of a monthly fixed payment for access to our network and a variable usage-based component.

 

Historically, fixed-line telephony was our primary business in terms of total revenues. See “5.A Operating Results”. However, the contribution of fixed-line telecommunications services to our total consolidated revenues has declined over a number of years, principally as a result of the rapid growth of our mobile telephony operations, as well as due to the adverse impact on our Greek fixed-line revenues of competition, tariff reductions and discount plans. Our operating revenues from domestic and international fixed-line telephony services represented 31.3% of our consolidated revenues in 2009, compared to 32.8% in 2008 and 36.8% in 2007, while the contribution to our total consolidated revenues of other non-mobile services (including internet access, services rendered, as well as wholesale services, such as interconnection, leased lines and local loop unbundling) was 28.7% in 2009, as compared to 28.6% in 2008 and 28.2% in 2007 and the contribution of mobile revenues to our total consolidated revenues was 40.0% in 2009, compared to 38.6% in 2008 and 35.0% in 2007. Revenues from ADSL services are classified in our financial statements under “Other Revenue”.

 

We are the leading provider of fixed-line voice telephony and internet access services to residential and business customers and on a wholesale basis in Greece. We provide local, long-distance and international fixed-line telephony services, internet access, ISDN, high-speed data telecommunications, ADSL-based broadband services, value-added services, IN services, IP-based solutions, IP-VPN services, IPTV services, connectivity services, system integration solutions which combine ICT, public telephone services, operator assistance and directory services, equipment sales and satellite telecommunications services.

The following table sets out certain key operating data regarding our fixed access lines in Greece as of December 31, 2007, 2008 and 2009:

 

 

 

Note:

 

 

As of December 31, 2009, we had 3,787,132 PSTN lines, 517,369 ISDN BRA lines and 5,677 ISDN PRA lines in service, compared to 4,110,102 PSTN, 548,388 ISDN BRA and 5,971 ISDN PRA lines as of December 31, 2008.

 

Residential Customers Division.   Our residential customers division focuses on improving our offerings to, and the overall customer experience of, our residential customers, including improving customer care and enhancing the range of our products and services, through the offering of bundled services and the offering of integrated or hybrid services, with a particular focus on ADSL-based products. The main categories of retail fixed-line telecommunications services we provide to residential customers are:

 

 

Enterprise and Business Services Division.   Our Enterprise and Business Services Division offers products, services and integrated solutions, combining network and ICT, with a focus on business customers’ satisfaction through efficient and competitive sales channels and project implementation processes and effective customer support services. The main categories of fixed-line telecommunications services we provide to enterprise and business customers are:

 

 

We provide a range of wholesale services to Greek alternative fixed-line, mobile and other telecommunications operators, international telecommunications companies and other wholesale clients. The main categories of wholesale fixed-line telecommunications services we provide are:

 

 

For more information regarding our wholesale services, see “4.B Business Overview — Other Services”.

 

As the incumbent telecommunications services provider in Greece, we own and operate the most extensive fixed-line network in the country.

 

During 2009, we continued to upgrade and expand our network and made significant investments aimed at improving its capacity and the quality of services we offer to our customers. Our key investments in network in 2009 focused on the following areas:

 

 

Voice Network.   As of December 31, 2009, we had 3,787,132 PSTN retail lines, 517,369 ISDN BRA retail lines and 5,677 ISDN PRA retail lines in service, compared to 4,110,102 PSTN, 548,388 ISDN BRA and 5,971 ISDN PRA lines, as of December 31, 2008. In 2008, we installed new platforms that support the provision of number portability and ring-back tones (“RBT”) services. Our voice network also contains a Next Generation (“NGN”) component, comprised of voice gateways in 43 sites linked with digital switches, the IP network and one soft switch controller offering VoIP services to the public sector (government) through the Sizefxis project, covering approximately 4,300 points of the public sector throughout Greece, as of December 31, 2009.

 

ADSL Network.   We continue to expand our ADSL network in line with demand. As of December 31, 2009, our ADSL network comprised 1,562,478 installed ADSL ports and 1,501 points of presence (“PoP”) , compared to 1,410,163 ADSL ports and 1,420 PoP at the end of 2008.

 

Transmission Network.   We have been installing fiber optic cable to further improve the capability and increase the capacity of our trunk network in Greece. As of December 31, 2009, we had a total of 30,526 km of fiber optic cable installed (25,257 km core; 2,435 km access; 2,834 km submarine). Although our network is mainly based on fiber optic cables, in some cases where cable is not economical, such as in remote and rural areas, we deploy microwave links. The total number of Metro Ethernet points of presence in Greece was 800 as of December 31, 2009. Moreover, during 2009 we installed 13 new NG-SDH rings. Our core transmission network consists of 12 DWDM rings, and through 2009 we increased its capacity to further support increasing broadband traffic.

IP Network.   Our IP Network consists of a core part and an access (edge) part. In 2006, we converged and enhanced the two networks then operated by our Group (by us and OTENet, respectively), thus creating the largest IP network in Greece. OTENet was in charge of operating our converged IP network until June 27, 2008, when we merged with OTENet and assumed management of the Group’s entire IP network.

 

Our Multi Protocol Label Switching (“MPLS”) based core network carries traffic generated by the broadband network, connects the BRAS to Internet Service Providers in Greece, carries the traffic of our NGN switching network and connects our edge networks. It consists of gigabit and terabit routers in seven sites, two of which are located in Athens. The routers from the other sites are connected to the two sites in Athens.

 

Our edge IP network provides IP-VPN services to corporate customers. Following the consolidation of our and OTENet’s networks in 2008, the total number of edge IP sites throughout Greece amounts to 108. These are now linked to the IP core network through the Ethernet network with Gigabit Ethernet links. Digital leased lines are used to provide access to IP-VPN services.

 

Operational Support Systems.   In the area of operational support systems we are working on two major projects, Service Fulfillment and Service Assurance, with the goal to reduce operational costs and assure the quality of our broadband service offerings. As regards the Service Fulfillment project, relating to fulfillment of service orders, our Network Inventory and Service Activation Systems are already operational and provide automated service fulfillment for broadband services. In addition, the Service Assurance project, which relates quality and assurance to our services already provided, is under development. The Service Assurance infrastructure already covers our xDSL, Metro Ethernet and SDH network domains for Fault, Performance and Service Management functions. The xDSL access services, Metro Ethernet connections, SDH leased-line connections and IP services (IP-VPN) are being monitored by service management applications. In 2010, we plan to include IP-core network and to apply automated network discovery which will further utilize our Service Assurance platform.

 

International Fixed-Line Network.   Our international telephony traffic is currently routed through three international digital switches, two in Athens and one in Thessaloniki. These international switches are connected to international networks via submarine and terrestrial cables, as well as satellite links operated by our subsidiary, OTEGlobe. We hold rights to several international submarine cable systems and terrestrial networks of older and modern technologies. In particular, we own a DWDM/SDH international submarine cable, connecting Greece with Italy (Kokkini to Bari) and thereafter with other large terrestrial networks. As of April 1, 2007, OTEGlobe owns, manages and develops all our other international fixed network assets and cable infrastructure. See ‘‘— Other Services — International Wholesale Telephony and Data Services — OTEGlobe”.

 

NGA Projects.   We are currently considering the technical and economic aspects of our own fiber deployment plan. We are planning to adopt a fiber-to-the-curb (“FTTC”) architecture, extending our fiber network to street cabinets situated close to our customers’ premises. We plan to develop installation of VDSL DSLAMs in street cabinets through 2010 and expect to gradually increase the total number of VDSL DSLAMs installed to the end of 2012. The aim of this Next Generation Access (“NGA”) network is to offer higher speeds to subscribers (for example, 50 Mbps download speed), by shortening loop-length.

 

In January 2010, the Greek Ministry of Infrastructure, Transport and Networks published a public consultation on the selection of a new advisor to propose a new strategy for the development of a financially and economically viable FTTH Point-to-Point national access network (based on open-access architecture). It is expected that different deployment and funding models used worldwide will be studied and a proposal will be submitted again for public consultation. A final proposal is expected by the end of 2010. As a number of factors relating to this FTTH project remain unclear, including the cost of the project, the potential allocation of this cost, the work required for the project and its future impact on fixed-line competition in the Greek market, we cannot accurately predict its effect on our plans to develop our own NGA solutions and its effect on competition in the Greek fixed-line market or on our business and financial condition.

 

The Greek fixed-line telecommunications market is highly competitive. Since the liberalization of the market in 2001, and especially in recent years, we have gradually lost a significant part of our share of the Greek fixed-line

telecommunications market to competitors, although we still remain the principal provider of fixed-line telephony services in Greece. As of December 31, 2009, we had a total of approximately 4.27 million fixed lines in service out of a total of approximately 5.25 million lines in service in the Greek market. We aim to continue to defend our market share in fixed-line telephony, although we believe that it may decline further over the next few years. We have defended and aim to continue to develop and offer new products and services in order to enhance our revenues from fixed-line telecommunications services.

 

Over recent years, alternative fixed-line operators providing retail services have increasingly relied on local loop unbundling to reach their end customers and with respect to backbone services, they deploy their own fiber optic infrastructure and networks (which in some limited cases they may share), or rely on wholesale products provided by us.

 

Our main competitors include a number of fixed-line and mobile operators, such as Forthnet, Hellas OnLine, Vodafone, Tellas Wind, OnTelecoms, Cyta and others, some of which are cooperating in order to provide integrated fixed and mobile solutions to the Greek market. System integrators are also seeking to work with telecommunications providers to develop ICT solutions. Alternative operators are becoming increasingly competitive in offering voice, broadband and data transmission , as well as value-added and bundled services. Most of our competitors offer a range of voice, broadband and double-play (voice and internet) products, either over unbundled local loops, or using our own network. In addition, certain of these operators have recently started offering IPTV services, as part of fixed-line bundles, combined with broadband internet and voice services (triple-play) at higher access speeds and at competitive prices.

 

The competitive market landscape continues to evolve with a number of recent developments, having changed substantially in 2008 and 2009 following a number of mergers, acquisitions and strategic alliances between fixed-line and mobile operators. This has created strong market players with sufficient financial resources to compete with us on equal or better terms. In particular, Vodafone Greece, a subsidiary of one of the largest mobile groups worldwide, acquired an 18.5% interest in the share capital of Hellas OnLine, the second largest alternative fixed-line operator, in 2009. In addition, Tellas, one of our major competitors in fixed-line services, is the fixed-line business unit of Wind Hellas, which is also part of a major international telecommunications group, Weather Investments. Both Wind Hellas-Tellas and Vodafone with HOL promote combined fixed-line and mobile services. Furthermore, Forthnet, the largest alternative fixed-line operator in Greece, also has developed a competitive advantage following its acquisition of Nova, currently the only digital satellite TV platform and until recently the only subscription TV service in Greece with a strong market share. Forthnet promotes combined double play and Nova subscriptions, offering significant discounts on the bundled product. Cyta Hellas, a subsidiary of the Cyprus Telecommunications Authority (CyTA), entered the Greek fixed-line telephony market in 2009 and has since established a strong presence. There are also a number of players with a smaller market share, including, among others, On Telecom-Vivodi (formed after On Telecom acquired Vivodi), Net One — Algonet (formed from the merger of Net One with Algonet) and Cosmoline.

 

Our competitors pursue an aggressive market share acquisition strategy by focusing on differentiating their offers based mainly on prices, which are, in many cases, much lower than ours, as they are not subject to the same regulatory constraints and pressures as we are with respect to the requirement for the cost-orientation of our tariffs. Despite significant competitive price pressures we have experienced over recent years, we have managed to contain the rate of our loss of share of the Greek fixed-line market mainly due to the strength of our brand and the perceived reliability of our services.

 

In the future, we expect competition in the market for fixed-line telephony services to be affected by such factors as:

 

 

 

Our tariffs for fixed-line services in Greece are subject to approval by the EETT, which annually reviews such tariffs to confirm that they conform with the applicable regulatory framework and, in particular, with respect to considerations relating to our cost of providing the respective services.

 

Accounting separation is an accounting method by which non-discrimination is achieved by placing the retail arms of the incumbent and new entrants in the same position. In effect, accounting separation statements ensure that the prices paid for wholesale services and products by competitors and by the significant market power operator’s retail arm, are the same. A vertically integrated company is prevented from improperly allocating costs from its retail arm to its wholesale arm and from raising the prices of the wholesale products that are most likely to create competition at the retail level. To avoid the risk of price squeeze, accounting separation takes place at both the wholesale and the retail level.

 

In particular, with respect to retail services tariffs and offerings, we use fully distributed costing methodology, based on current cost data, while with respect to tariffs for wholesale services, such as interconnection and unbundled local loop services, our decisions are based on the long-run average incremental costing methodology, as applied to current cost data. All adjustments to tariffs require approval by the EETT, including any reductions to tariffs which had been previously approved by the EETT. See also “— Regulation — Telecommunications Services Regulation — EU Regulation”.

 

In order to ensure that we take into account applicable EETT requirements with respect to our tariffs, we form the tariff proposals that we submit to the EETT, including in our latest submission in 2010, on the basis of the findings of the ECOS costing system, our internal system providing costing information with respect to services we offer. We operate the ECOS costing system internally, but its principles and methodology are audited and approved by the EETT on an ongoing basis, based on two-year cycles. In particular, the EETT conducts an annual audit of the ECOS system through external auditors, other than those auditing our financial statements. Based on the findings of this audit, the EETT may object to our application of ECOS and related cost methodologies in the calculation of our tariffs and may require us to make adjustments to our tariffs and the ECOS methodologies.

 

The audit of our ECOS 2005-07 methodologies began in March 2007 and was completed in June 2007. The relevant EETT decision, which approved the costing methodology, was published in August 2007 with retroactive effect from January 1, 2007. The audit of the ECOS 2006-08 methodologies began in December 2007 and was completed in April 2008, and the relevant decision was published on April 23, 2008. The audit of our ECOS 2007-09 methodologies began in October 2008 and was completed in March 2009 and the relevant decision was published on May 6, 2009. The audit of ECOS 2008-10 methodologies began in October 2009 and was completed in April 2010. With its decision in May 2010, the EETT approved new prices with retroactive effect as of January 1, 2010.

Under applicable law, ECOS 2009-11 costing methodologies will be submitted to the EETT one month after the approval of the annual financial statements by the General Assembly of our Shareholders. Our General Assembly of Shareholders is expected to be held on June 16, 2010.

 

We believe that the tariff policy we have pursued in recent years based on the results of the ECOS system has supported our effort to set our tariffs in compliance with EU and EETT regulations. In the future, we intend to continue to consider the requirements of the EETT with respect to our tariffs, in the context of applicable regulatory rules, competitive conditions in the Greek telecommunications market and our obligation to provide universal service at reasonable prices to all users.

 

Domestic fixed-line telephony services include local and long-distance telephony services within a country (excluding calls to international destinations), provided by us in Greece and by RomTelecom in Romania.

 

Revenues

 

Revenues from domestic fixed-line telephony services, including local and long-distance telephony services, accounted for 27.1% of our total consolidated operating revenues in 2009 compared to 28.3% in 2008 and 32.0% in 2007. These services are provided by us in Greece and by RomTelecom in Romania.

 

In 2009, 2008 and 2007, 43.9% 44.5% and 46.7% respectively, of our revenues from domestic telephony services were derived from local and long-distance call charges. These amounts include charges to customers on outgoing calls to subscribers of unaffiliated mobile telephony operators. We do not charge interconnection fees for calls placed from our network to subscribers of unaffiliated mobile operators.

 

An additional 52.2%, 50.2% and 48.9% of our domestic telephony revenues in 2009, 2008 and 2007, respectively, were derived from monthly network service fees; while the remaining 3.9%, 5.3% and 4.5% of our domestic telephony revenues in 2009, 2008 and 2007, respectively, related to other domestic telephony charges such as operator assistance, extension lines, directory and various other services.

 

Volume and Traffic

 

The following table provides information regarding our total domestic fixed-line traffic volume in Greece as of December 31, 2007, 2008 and 2009:

 

 

Tariffs

 

Our revenues from domestic fixed-line voice telephony services are derived mainly from local and long-distance call charges and monthly network service fees.

Local calls.   Our tariff policy for local calls is based on per second billing, which applies after the first two minutes, and a minimum charge for each call. In addition, we apply four distinct charging periods (peak, off-peak, Saturday and Sunday).

 

The following table sets out the development of our domestic local telephony tariff structure (excluding VAT) in 2007, 2008 and 2009: