At first glance, Central and Eastern Europe’s fixed-line telecom incumbents would seem to be in a fortunate position. In 2001 most of them—helped by big profits from monopoly-priced long-distance and international calls—boasted respectable profit margins (Exhibit 1) compared with their Western European counterparts, which are burdened with massive debt and dwindling margins.

Such high returns will be hard for the incumbents to sustain. Most of these former monopolies are now either deregulated or nearly so, and competition will increase when the European Union admits their countries—some probably as soon as 2004.¹

Increased deregulation—which among other things will allow competitors to use the incumbents’ networks at lower prices determined by costs—will open the door to full competition. The incumbents will have to respond by cutting their rates for long-distance and international calls, which have been a money-maker for most of them, and by increasing their access fees and rates for local calls, thereby better aligning their prices with their cost structures. Poland is by far the region’s biggest fixed-line market (Exhibit 2), and here the incumbent, Telekomunikacja Polska, will lose its monopoly in international voice telephony in January 2003. Matáv, Hungary’s incumbent, which is controlled by Deutsche Telekom, rebalanced...