NetCom Systems AB

Skeppsbron 18
P.O. Box 2094
103 13 Stockholm
Sweden
(46) 8 562 000 60
Fax: (46) 8 562 000 40
Web site: http://www.netcom-systems.se

Public Company
Incorporated: 1993
Employees: 871
Sales: SEK 4.03 billion (US$510.6 million) (1997)
Stock Exchanges: Stockholm NASDAQ
Ticker Symbol: NECSY
SICs: 4813 Telephone Communications, Except Radio; 6719 Holding Companies, Not Elsewhere Classified

NetCom Systems AB is poised to become Scandinavia’s leading private provider of telecommunications services, challenging the former government-run telephone monopolies in its native Sweden and throughout Scandinavia. NetCom Systems combines a portfolio of services, including mobile telecommunications, fixed telephony services, Internet access, network systems, and cable television, under principal operating subsidiary Tele2 and its three primary divisions: Comviq, Tele2, and Kabelvision. A young company, NetCom Systems, which represents the former telecommunications holdings of Industriforvaltnings AB Kinnevik, has nevertheless quickly imposed itself on the newly deregulated Scandinavian telecommunications scene. In mid-1998 the company’s Comviq GSM mobile telephone service recorded its one millionth customer. Through Tele2, the company’s fixed telephony business had grown to more than 300,000 customers by the end of 1997, while the company’s Internet services remain the oldest and largest in Scandinavia. NetCom Systems also has been among the first in the region to offer Internet access via satellite. Through its ownership of Kabelvision, Sweden’s second largest cable television network, with 320,000 subscribers in 50 cities, NetCom Systems is preparing to offer both Internet and extended telephony services.

The 1997 deregulation of the Danish and Norwegian telecommunications markets has opened new expansion possibilities for NetCom Systems and its brands, and the company has achieved early success in these countries, principally with the introduction of Tele2’s fixed telephony services. By year-end 1997 the company recorded more than 115,000 customers in Denmark. In just the four weeks following the December 1997 deregulation of the Norwegian market, NetCom Systems added more than 25,000 customers. The company also holds a 25 percent stake in NetCom ASA, its publicly listed cellular phone affiliate in Norway. After strong revenue growth since the mid-1990s NetCom has made advances toward stable profitability. Both Comviq and Tele2, the company’s primary revenue generators at 52 percent and 42 percent, respectively, have posted operating profits since 1996. NetCom Systems also has shown strong revenue growth: its sales of SEK 4.03 billion in 1997 represent an increase of 41 percent over its 1996 figures. Publicly traded on the Swedish and NASDAQ stock exchanges, NetCom Systems is led by 38-year-old president and CEO Anders Björkman.

Breaking Monopolies in the 1990s

Although formed in 1993, NetCom Systems’ involvement in telecommunications began under former parent Kinnevik in the late 1970s. The pending deregulation of the Swedish and Scandinavian telecommunications markets encouraged Kinnevik to begin investing in the new technologies. With the government fixed telephony monopoly still very much in force, Kinnevik’s first step was to enter the nascent mobile telecommunications market. In the late 1970s the company built its own analog mobile telephone network. Comviq AB began operations in 1981 and proved that there was a market for mobile telephones. Kinnevik’s frequency allocations, however, remained limited to just 20,000 subscribers. Nonetheless, Comviq’s analog system, if unable to expand, remained in operation until the mid-1990s.

While operating its analog network, Kinnevik also was investing in the emerging digital and satellite transmission technologies that would transform the telephone industry in the 1990s. Data transmission became technologically and commercially viable during the early 1980s, not only through traditional telephone lines, but also using satellite broadcasting technology. In 1986 Kinnevik inaugurated its own satellite link for data transmission, setting up subsidiary Comvik Skyport AB for its operations. By the late 1980s, with Swedish telephone deregulation scheduled for 1993, Kinnevik began preparing to enter the voice transmission market as well. The company’s first step was a 1989 joint investment agreement with the Swedish National Rails Administration to construct a fiber optic network separate from the telephone monopoly’s primarily copper wire-based network. Fiber optic cables provided the additional advantage of far greater bandwidth than traditional cables, essential for the future boom in voice, data, and video transmission. The National Rails Administration’s fiber optic network later would reach more than 6,000 kilometers, connecting all of Sweden’s urban population. Kinnevik’s telecommunications objectives received an additional boost in 1989 when it was awarded a nationwide license to operate a GSM network. GSM, for Global System for Mobile Communications, was a European-wide collaboration to develop a digital network for voice and data transmission covering the entire continent, and beyond. During the 1980s Kinnevik added another important piece of what later would become the NetCom Systems puzzle, with the Kabelvision AB subsidiary and its cable television network. Despite competition, Kabelvision’s subscriber base would grow to more than 300,000 by the 1990s.

Following upon the agreement with the National Rails Administration, Kinnevik changed the name of its Comvik Skyport subsidiary to Tele2, not only to group its increasing fixed telephony interests, but also to emphasize its goal of challenging the nation’s telephony services monopoly. Tele2 began operations of its data networking services in 1991, while continuing to build its network in preparation for the coming deregulation. Also in 1991 Tele2 received its license to offer telephony services. At the same time, Tele2 discovered a new market—the Internet. Although the explosion of the Internet market would not occur until the mid-1990s—with the appearance of the graphically friendly World Wide Web—in 1991 Tele2 became the first to offer Internet access in Sweden, giving the company a long lead ahead of competitors, including the telephone monopoly.

Kinnevik’s mobile telephone subsidiary changed its name to Comviq GSM and began offering services in September 1992. One of the first GSM operators in Europe, Comviq aimed at building an extensive network of transceivers (antennas), controllers, switches, and other equipment needed to provide full coverage in Sweden. The Swedish regulatory body, the National Post and Telecom Agency, was charged with enforcing a European-wide requirement that all highways and all urban centers with populations of 10,000 or more receive mobile telephone coverage. Comviq initially focused on the most dense urban areas, before rolling out the service to the rest of the country. Initial operations remained fairly modest, however. By the end of 1992 the company had enrolled 2,000 subscribers, a number that would grow to only 21,000 by the end of the following year. With Europe slipping deeper into an extended economic crisis during the first half of the 1990s, real growth in the mobile telephone market seemed to be on hold temporarily. Nevertheless, Comviq continued investing in building its network, utilizing both its own network of radio transmission equipment and the National Rails Administration’s fiber optic network.

Deregulation and the Formation of NetCom, 1993

The formal deregulation of the Swedish telecommunications market in 1993 led Kinnevik to regroup its telecommunications activities into a separate subsidiary. Called NetCom Systems AB, the new subsidiary began operations chiefly as a holding company for the former Kinnevik subsidiary Comviq. Tele2 and Kabelvision also were added to the NetCom Systems holding. With the deregulation of the Swedish market, Tele2 could at last begin offering its own telephone services. Tele2 began these operations in March 1993, with international calling services. Customers wishing to use Tele2 needed to dial 007; this requirement, viewed as giving the former government monopoly, now renamed Telia, an unfair advantage, was slated to be dropped in 1999. Also expected to be added in 1999 was telephone number portability, meaning that customers would be able to keep their telephone number regardless of the provider chosen. In 1994 Tele2 began offering domestic telephone services as well. By the end of that year the company had established itself firmly as Sweden’s number two telephone company.

Company Perspectives:

“‘The new nomad must be prepared to accept change in different forms, to change location and living conditions, and to see the rules of the game changing while the game is under way.’

The Swedish poet and philosopher Lars Gustafsson formulated this idea in an essay on nomadic life and the forgotten virtues of that lifestyle. His arguments that all of us—and not just a few of us—will become nomads was an important insight for me. It underscored the importance of being able to feel secure in an environment of change rather than in static structures. The quality of being able to adapt to change will continue to be a decisive strength of NetCom Systems.”—Anders Björkman, President and CEO

The year 1994 proved to be a breakthrough year for Comviq as well, as its subscriber base expanded to 136,000. By the end of 1995 Comviq’s subscribers would surpass 450,000. In that year NetCom Systems began acting as an operating company, rather than a holding company. Tele2 and Kabelvision were grouped more directly under NetCom Systems. An early investor in Tele2, Britain’s Cable & Wireless, which had controlled 39.9 percent of Tele2’s shares, agreed to the restructuring, exchanging its Tele2 shares for a 9.2 percent stake in NetCom Systems. Both Tele2 and Comviq would register dramatic revenue growth from 1994 to 1995, boosting NetCom Systems’ total sales to SEK 2 billion in 1995 compared with less than SEK 1 billion for 1994. Apart from the more than tripling of the number of Comviq subscribers, NetCom Systems was equally boosted by 1995’s surge in Internet interest. While Tele2 would continue to seek the majority of its sales in telephone services, Internet access quickly became Tele2’s second largest revenue source.

As NetCom Systems expanded its activities in Sweden, it also was preparing to enter the markets of its Scandinavian neighbors. Already present in Norway through a 25 percent holding in NetCom ASA, formed with the deregulation of part of Norway’s telecommunications market in 1993, NetCom ASA’s chief activity became mobile GSM services, adding retail activities in the mid-1990s. NetCom Systems’ direct participation in the Norwegian market remained limited to Internet and data transmission services, as the company awaited full deregulation of the Norwegian system, including its telephone system, slated for January 1998. In the meantime, NetCom Systems entered Denmark, with that country’s deregulation in 1996, forming Tele2 A/S. The first company to break the 100-year-old government telephone monopoly, Tele2 A/S began building its infrastructure and client base, offering domestic and international telephone services, as well as Internet access and services.

NetCom Spun Off, 1996

In 1996 Kinnevik spun off NetCom Systems as an independent, publicly traded company. NetCom Systems shares were distributed among Kinnevik’s shareholders, and NetCom Systems was listed on the stock exchange in Sweden. Listing on the NASDAQ exchange would take place the following year. With the spinoff came new leadership: Anders Björkman, who had served as the company’s vice-president since 1995, was named president and CEO in 1996. Under Björkman, NetCom Systems completed the transition from holding company to active operating company. Grouped directly under the newly public company were Comviq GSM AB and Tele2 AB, while the company’s Kabelvision operations continued to be listed as an associated company.

Both Comviq and Tele2 continued to post impressive gains into the second half of the decade. Comviq, after seeing its subscriber base stall somewhat in 1996—hovering at 466,000—once again recorded a dramatic increase in 1997, building to more than 810,000 by the end of that year. By mid-1998 the company had recorded its one millionth customer. Aiding Comviq’s growth were not only expanded GSM services, including data transmission and e-mail services, but also the successful launch of a prepaid, nonsubscription telephone credit card. The increasing popularity of GSM-based telephones in the rest of Europe also contributed to Comviq’s fortunes at home, as customers moved to take advantage of a network that covered nearly the entire European continent.

Tele2 also achieved important growth in 1997, raising the number of customers to more than 310,000. In addition, Tele2 began marketing mobile telephone subscriptions based on the Comviq GSM network. At the same time, Tele2’s Internet services were booming, more than doubling the number of subscribers to some 260,000, as the company maintained its position as Sweden’s leading Internet services provider. Meanwhile, Tele2 began eyeing the synergy possibilities available through Kabelvision, including not only Internet access, but telephone applications as well. To strengthen these opportunities, NetCom Systems reorganized the company’s operations in December 1997. All of the company’s subsidiaries, including Kabelvision, now were grouped into a single subsidiary, Tele2 AB. The company’s Danish and Norwegian subsidiaries, as well as its recently launched networking services subsidiary, NatTeknik, were placed under Tele2 AB. Each division would continue to operate under their well-established brand names.

NetCom and the Future

The deregulation of the Norwegian telephone system occurred on January 1, 1998. NetCom Systems, through subsidiary Tele2 Norge AS, appeared to make strong gains into the new market, adding some 25,000 customers in just the first four weeks of operation. The company also boosted its network services position throughout Scandinavia by purchasing the Swedish, Danish, Norwegian, and Finnish Datametrix operations from Innova International Corporation. After announcing its one millionth Comviq GSM customer in mid-1998, NetCom Systems continued adding products, including an enhanced version of its prepaid GSM card, and testing of satellite telecommunications services. As in most Western European countries, the deregulation of long-held government telecommunications monopolies introduced enormous new opportunities. NetCom Systems’ more than two decades of experience suggested that the company was prepared to meet the competition to conquer at least its Scandinavian region.

Principal Subsidiaries

Tele2 AB (Tele2; Comviq; Kabelvision); Tele2 A/S Denmark; Tele2 Norge AS; NatTeknik; NetCom ASA (Norway; 25%).

Further Reading

“NetCom Systems Not Affected by Economic Fluctuations,” Dagens Industri, January 15, 1997, p. 7.

“New NetCom Systems Head to Pursue Existing Strategy,” Dagens Industri, October 2, 1996, p. 12.

—M. L. Cohen