General rules

The Polish telecommunications market is subject to sector regulation established at EU level and transposed to national legislation. It is supervised by a National Regulatory Authority, the Office of Electronic Communications (UKE). As a general rule the telecom market is divided into separate markets for wholesale and retail services (so-called “relevant markets”). UKE analyses the level of competition within each of these markets and, based on this analysis, decides on the necessary level of regulations. As a former incumbent operator on the fixed services market, Orange Polska is designated an entity with significant market power and is subject to regulations in certain market segments. As such, this regulatory regime has a significant impact on some of the services we provide. On the mobile market, regulations are equal for Orange Polska and other big market players. Our activities are also subject to supervision by the Office of Competition and Consumer Protection (UOKiK).

Core regulations

We consider the following regulations to be the most important for our business at the moment:

• Access to wholesale broadband services (also known as Bit Stream Access, or BSA) and physical access to last mile infrastructure (Local Loop Unbundling, or LLU) are mandatory under cost orientation obligation (verified by Margin Squeeze/Price Squeeze tests) and non-discrimination rules (including Chinese Walls), and this legislation covers both fibre and copper lines. Orange Polska is not obliged to provide BSA on fibre and copper infrastructure in 151 deregulated municipalities. LLU is not required in 51 deregulated municipalities.
• Regulation of call termination services in the fixed network – Orange Polska is not the only operator subject to this regulation (around 200 operators are regulated) but its regulation is the most restrictive in terms of termination rate and wholesale access conditions.
• European regulations regarding roaming prices in the European Union – Since 15 June 2017, retail prices for roaming services have to be equal to domestic retail prices. Operators are protected against abusive use of roaming through the “fair use” policy. As roaming price regulations have a negative impact on both revenue and profitability, Orange Polska applied to UKE for the right to use surcharge mechanisms for customers who abuse Roam Like at Home rules.
• Regulation of international calls - Since 15 May 2019, prices for international calls within the European Union should not exceed EUR 0.19 per minute for calls and EUR 0.06 per SMS message. The regulation applies to consumers only and will remain in force for five years.

Obviously as a business entity we must also comply with administrative decisions and general law and regulations. Recently the legal environment has been changing dynamically.

Further amendments to telecom rules are pending both at European and national level.

Recent trends in regulatory environment

The regulatory regime over the past few years has been evolving toward a policy of balanced intervention. This is mainly related to changes in the structure of the overall telecom market in Poland and a much higher degree of competition in particular segments (e.g. the emergence of cable operators as important players in retail fixed broadband).

In particular, the Office of Electronic Communications (UKE) has issued decisions that will ensure symmetrical access to cable ducts and regulate access to in-house wiring operated by the largest infrastructure owners. The relevant regulatory obligations have been imposed not only on telecom operators, but also on the biggest cable TV operators.

We also expect a significant change in Fixed Termination Rate (FTR) and Mobile Termination Rate (MTR). In the European Union regulations there are provisions for the implementation of a single wholesale rate for termination of voice calls in fixed and mobile networks in EU countries. The final level of the fees is not known yet. Member states will have to implement the new rates at the beginning of 2021.

Changes in the Polish economy, such as GDP growth, inflation, unemployment, disposable income, interest rates or foreign exchange rates, can influence our ability to create value. Whilst these areas are outside of our direct control, we can use our hedging strategies to mitigate the potential adverse impact of market movements. Poland’s economic situation was relatively strong in 2019 comparing with other European countries and according to economic forecasts formulated in the very beginning of 2020 it is expected that despite the gradual deceleration in the coming years, it will continue to record positive dynamics. Obviously in the eye of the coronavirus epidemic outbreak these forecasts will most likely have to be significantly revised.

GDP Growth

In 2019, the Polish economy grew at a slower pace than in 2018. According to the Central Statistical Office Real GDP grew by 4.1%. The positive economic conditions resulted mainly from strong private consumption supported by investments. These growth engines will face difficult challenges in subsequent years, mainly due to labour shortages and wage pressure. In 2019, household consumption expenditure remained under inflationary pressure, but was stimulated by falling unemployment, growing wages, ‘500+’ welfare programme and low interest rates. Poland’s economic outlook depends also on the condition of other European economies and the economic climate in global markets. The first estimation of Statistical Office for 4Q 2019 GDP growth showed a deceleration to 3.2% yoy.

Inflation

Average annual CPI reached 2.3% in 2019, which was below the inflation target (2.5%). However it was visibly higher than in a previous year, mainly due to a rise in electricity prices and an economic downturn worldwide. Despite growing inflationary pressure, throughout the year the Monetary Policy Council kept the reference interest rate at the record low of 1.5% (set in March 2015), upholding an opinion that the current stable economic growth limited the risk of inflation remaining below the target in the medium term.

Compared with other branches of the economy, the telecommunications sector still reported declining profitability in 2019, which was a result of a decrease in effective prices accompanied by significant capital expenditures required to upgrade obsolete infrastructure in line with the growing expectations of customers and ensure service availability in the areas of coverage gaps. However, 2019 saw price stabilisation in the telecom sector and operators began to focus more on customer base retention rather than aggressive acquisition of customers from other service providers. Operators managed to apply the “more for more” principle and to raise prices for some mobile services.

Unemployment and labour costs

The labour market has been positively affected by the general macroeconomic climate, which was reflected in an increase in employment and a decrease in unemployment to 5.2% (-0.6 pp. year-on-year) at the end of 2019. At the same time, an increase in wages in the enterprise sector was reported (+6.5% year-on-year in nominal terms). For the first time since 2012, there may be a slight increase in unemployment at the end of 2020 compared to the previous year. The labour force shortage and growing labour costs due to wage pressure is a big challenge for the Polish economy. This in turn may negatively affect the mood in some parts of the enterprise sector and constitute a barrier to economic growth by limiting investments.

Interest rates

Once again, 2019 did not bring any changes in the Central Bank’s policy, and interest rates remained stable at a historically low level. In the very beginning of 2020 it was expected that the Monetary Policy Council will keep interest rates unchanged also in 2020, while taking steps to prepare the market for increases if needed. However, eying critical impact on the coronavirus epidemic on economic activity in March 2020 the Council cut its main reference interest rate by 50 base points to 1.0%. Changes in interest rates should not have any major influence on the debt service costs of the Group, as it maintains a high hedging ratio.

Foreign Exchange Rates

Foreign exchange rate fluctuations affect Orange Polska’s liabilities denominated in foreign currencies and settlements with foreign operators. However, this influence is greatly contained by a portfolio of hedging instruments held by Orange Polska. At the end of 2019, Polish zloty lost 1.0% against the US dollar, however gained 1.0% against the Euro. The Polish currency fluctuations were caused mainly by external factors. In medium term any potential depreciation of Polish zloty should not have major influence on Orange Polska’s liabilities denominated in foreign currencies or settlements with foreign operators owing to a high hedging ratio.

The Polish telecom market is mature, with high penetration in most segments. This sector is very important for the Polish economy, particularly in the digital age. Together with the IT and content industries, it shapes the information society and actively participates in the transformation of Polish companies. This has never been more apparent than now, at the dawn of the 5G era and the new solutions and services it promises to bring to the Polish market. To meet this great responsibility, the telco industry faces many business and technical challenges that will require large investments in infrastructure, now and in the coming years, in order to provide individual, public sector and corporate customers with fast and secure internet access (both wired and wireless), as well as new services and equipment to meet new requirements.

The Polish telecom market is characterised by high levels of competition and relative fragmentation. It is mainly driven by mobile services and a high degree of fixed-to-mobile substitution in both voice and broadband. In the past, these factors have had a critical impact on the overall performance of the market. The market landscape changed further in 2019 thanks to mobile operators increasing tariffs in a ‘more for more’ formula. This came as a consequence of the favourable economic situation in Poland, the very low prices of telecom services, the more-or-less equal market shares among major players and upcoming investments in 5G technology. We expect market participants to continue to focus on value generation. This creates a more benign market environment going forward.

Polish telecom market – improving picture

According to our estimates the value of the Polish telecom market stabilised in 2018 after many years of decline. Our preliminary estimates suggest that its value increased in 2019. The key factors that have influenced market performance over the past few years include:

• A very high level of price competition in mobile services, exacerbated by several price wars in both B2C and B2B segments. This has led to prices in Poland being among the lowest in the European Union. The key disruptor was Play, a latecomer to the market, which pursued an aggressive strategy to gain market share.
• The structural decline of fixed voice services, which was influenced mainly by: very fast proliferation of affordable mobile services; partial regulation of this segment; unfavourable demographic trends.
• Underdeveloped fixed broadband infrastructure, especially outside of big cities, which in combination with the rapid development of mobile services and strategies of mobile-only market players resulted in partial fixed-tomobile substitution. Penetration of mobile broadband positioned as home internet access is much higher in Poland versus the EU average.
• These trends have had a significant impact on Orange Polska compared to the overall market, and this has been reflected in many years of falling revenue. This was mainly due to:
  • The need to adjust to high price competition in mobile to defend market shares in both B2C and B2B segments;
  • Very significant exposure to fixed voice, as an incumbent operator;
  • Underperforming the overall market in fixed broadband due to regulations and weak infrastructure in big cities, resulting in the loss of market share to cable operators;
  • No significant exposure to the pay-TV market

The market’s landscape changed again in 2019, with operators introducing tariff increases in a ‘more for more’ formula. The change was most marked on the mobile market, where three of the four MNOs decided to increase their tariffs in return for higher data allowances.

Expected future market trends shape more positive outlook

We expect the following key trends to drive the market in the years ahead:

• We anticipate a more benign situation in the mobile market going forward. Unlimited all-net voice tariffs have become a market standard, the offer positioned as ‘GB with Value Added Services (VAS)’. Moreover the mobile players face upcoming investments into 5G (spectrum and network rollout) while their balance sheets have a relatively significant degree of financial leverage. This suggests to us that the market is increasingly focused on a ‘more for more’ approach and on value generation. This is certainly the case for Orange Polska, which was the first operator in the Polish market to increase tariffs in 2019 – a move that was well received by our customers.
• Data consumption is on the rise, spurred by the proliferation of mobile devices and the very fast growth of data per customer, the latter being driven mostly by multimedia content and social media. We foresee data consumption continuing to grow at the current pace at least for the next few years while the smartphone revolution continues in Poland. Responding to customer expectations of the best possible, always-on internet access requires a convergent approach to connectivity. That is why development of both fixed (FTTH) and mobile networks (4/5G) is crucial.
• Significant investments in high-speed broadband infrastructure will continue. All of the market’s MNOs have chosen to expand their product portfolios with fixed broadband services, through acquisitions, wholesale agreements or partnerships. Better infrastructure combined with growing data needs will drive the migration towards high-speed internet. Taking into account the economics of fibre network rollout as well as all network investment plans announced publicly so far (including Orange Polska and governmental POPC programme), we estimate that in the mid-term the reach of Poland’s fibre network may exceed 50% of households.
• Convergence is increasingly recognised as the household business-winning formula. This is evidenced by the success of our Orange Love offer, the acquisition of Netia by Cyfrowy Polsat Group, T-Mobile buying wholesale access to our fibre network, the Play partnership with Vectra and the UPC launch of mobile services.
• Everything is going to be online and in the cloud, enabling the evolution of such services as Internet of Things, Smart Homes and Smart Cities. These solutions will support us, business, local authorities and customers in the switch towards a more environment-focused approach.
• Marketing based on customer insights and using personal data is on the rise. It is both a source of new possibilities, and a challenge for cybersecurity and personal data protection.
• Fixed voice will further decline, but as time goes on this will have less and less impact on overall market performance.
• The pay-TV market should remain relatively stable. Poland still has very strong linear TV. Of course OTT content is growing fast, but it should remain an add-on to linear TV, rather than a significant substitution factor.
• We expect the gradual adoption of eSIMs on the market. Orange Polska launched this environmentally friendly product in December 2018 as the first MNO on the Polish market.
• The trend towards digitalisation plays an increasingly important role in all spheres of people’s lives, and mobile services are no exception. The widespread adoption of digital solutions – such as app-only services and mobile shopping experiences, or customer care delivered via in-app chats or bots – will create a totally new level of operator-customer interaction.
• ICT services are increasingly seen as synergetic with traditional telco business, strengthening the offer for B2B customers. This is especially visible in the latest market moves: Orange Polska’s acquisition of BlueSoft, Cyfrowy Polsat’s investment in Asseco Poland shares, the acquisition of 3S by Play and the announced investments by T-Mobile in data centres.
• All of these trends, combined with Poland’s favourable economic prospects driving growth of disposable income, suggest to us that the telecom market should be more benign going forward. Recovery in market value will be driven by expansion of fast broadband, stabilisation in mobile, and the decreasing impact of fixed voice on the overall performance. We also believe that the strategy adopted by Orange Polska makes it better equipped to capture positive market trends than it was in the past, thanks to these key enablers:
• Fibre network rollout: Our significant deployment of fibre network is gradually closing the technological gap with cable operators, and has already contributed to our return to a growth path. Orange Polska believes that FTTH investments are the best possible fixed broadband investments – and the most environmentally sound, as this technology is up to five times more energy efficient than xDSL (per Gb).*
• Convergence: Orange Polska is a unique convergent operator in Poland and is pursuing this strategy mainly against cable operators, which have not yet adopted mobile services on a meaningful scale.
• Focus on value: Since 2017 all of our commercial decisions have been driven by value creation. In particular, we have radically simplified mobile tariffs and structured them around a ‘more for more’ strategy.
• Digitalisation: In 2019 we launched an innovative offer called Orange Flex. A fully digital offer supported by a phone app, it is flexible, too, enabling customers to adjust their mobile plans using their smartphones. Customers can also subsequently change packages depending on their needs with no loyalty agreements involved.
• ICT: Orange Polska recognised a market need and in 2019 made the decision to acquire BlueSoft, strengthening its position in ICT and the B2B sector.

On the other hand, we will be under further pressure from negative trends in legacy services and old technologies in fixed broadband. More details on our strategy are presented in the strategy section.

These enablers significantly contributed to the improving revenue trend at Orange Polska. In 2019 we reported our first revenue growth in 13 years. We plan to sustain growth in 2020 however this will now be much more challenging as we have entered at the end of the first quarter in unprecedented economic and social crisis.

Orange Polska: a key player in all market segments

The Polish telecom market is fragmented, both in mobile and fixed segments. Market consolidation has recently accelerated with Vectra (the second largest cable company) completing the acquisition of Multimedia Polska (the third largest cable company) after a very long regulatory approval process. The market is visibly turning towards mobile-fixed combinations. This direction can be seen in the business moves made by our competitors: the acquisition of Netia (the largest alternative fixed operator) by Cyfrowy Polsat Group; T-Mobile’s wholesale agreements with Orange Polska, Inea and Nexera; and Play’s partnership with Vectra on a fixed broadband offer.

Orange Polska is the leading telecom operator in Poland operating in all market segments. We have the largest customer base in both fixed and mobile segments.

We aim to build strong, long-term relationships with our suppliers. We want our relations with suppliers and business partners to be based on transparent principles and a mutual obligation to abide by ethical standards.

Supplier assessment

We take an active part in the implementation of the Orange Group’s global supplier assessment programme, QREDIC. The results of the assessment are used in the process of negotiating with and selecting suppliers at the global level; for example, for subscriber devices or network equipment purchases. A supplier is disqualified if the assessment reveals definite non-compliance with ethical and environmental standards.

At the global level, Orange Group is a founding member of the Joint Audit Cooperation (JAC), an association which groups together telecommunications operators to control, evaluate and develop the implementation of CSR principles by global suppliers of the ICT sector. The initiative aims at ensuring compliance with ethical, environmental and health and safety standards, as well as a ban on child labour across common suppliers. In 2019, 84 new audits were conducted within the JAC framework.

Local suppliers are required to sign up to a compliance clause, which is included in agreements with our company. The clause includes an obligation to comply with ethical and responsible conduct rules, particularly concerning human rights, environmental protection, sustainable development and anti-corruption. In addition, an anti-corruption clause is included in all purchase agreements.

Building long-standing relations with suppliers

In 2019, we cooperated with 3,317 suppliers in Poland, including subscriber and network equipment suppliers, network contractors, IT equipment suppliers, personnel outsourcing agencies and media houses. We strive to build our relations with suppliers on the basis of long-term contracts providing for transparent terms of cooperation. Over 97.9% of purchases (by value) are executed under long-term framework agreements. We are working towards effecting all payments to suppliers within due time. The timely payment rate is 88%. The standard term of payment to suppliers is up to 30 days (96% of agreements).

Transparent supplier selection process.

We follow a competitive and open procurement policy. The transparency of our supplier selection process is ensured by the Procurement Process Code, a set of rules which must be followed by all procurement organisation employees in their direct and indirect contacts with suppliers. The Code includes procurement procedures which transparently regulate supplier selection, contracting and confidentiality. In 2019, a separate corporate social responsibility clause was included in all contracts. In 2019, 94% of buyers from the procurement department of Orange Polska completed online training dedicated to the main CSR aspects in procurement.

Currently, over 71% of orders (by volume) are placed electronically, via an online procurement tool that automatically analyses submitted offers. Moreover, suppliers who want to cooperate with Orange Polska can register to join a database of potential suppliers, allowing them to participate in the Company’s procurement processes.

Although Poland’s standard of living and employment rate have moved significantly closer to the EU average, a number of challenges remain. At the end of the third quarter, the employment rate stood at 73.6% - slightly lower than the EU average, although the gap is now just 0.5 percentage point and shrinking. Still, the rate in Poland varies considerably across educational attainment levels and with respect to gender: while visibly higher than the EU average for people with tertiary education (87.9%, as compared to 84.7% in the entire EU28 area), it remains much lower for those with primary and lower secondary education (47.3%, which is over 10 pp. less than in EU average), and in case of women in this educational category - one of the lowest in the EU (only 31.5%, compared to 45.9% at the EU level).

The rate of unemployment (according to register data) has continued to fall, reaching just 5.5% in January 2020. However, late data from Labour Force Surveys suggests that this trend has reached its bottom and is now reversing. Regardless of this, Poland is still facing the problems of a rapidly ageing population and high emigration. The unfavourable demographic trends are already reflected in a decline in the working-age population. The percentage of elderly people in the entire population is expected to grow from 20.9% in 2010 to 58% in 2050, according to the European Commission’s Country Report Poland 2016.

Much progress has recently been made in addressing inequality and poverty. The number of individuals affected by poverty or social exclusion has steadily decreased since 2008. The Gini coefficient of income inequality, which measures the distribution of (equivalised) disposable income across the society, has fallen from almost 35.6 in 2005 to only 27.8 at the end of 2018, thus moving Poland significantly below the EU28 average. Although this metric has decreased steadily across the last decade, it is being more and more criticized as not accounting for (understating) actual income inequalities. Some new studies on the topic, using alternative data sources such as National Accounts and tax data (see ex. Blanchet, Chancel, Gethin 2019) place Poland among the countries with highest levels of income inequalities in Europe. Even so, the trend in officially acknowledged measurements reported by Central Statistical Office indicates positive changes in this respect, and it has gained new momentum in the last two years, as the government has introduced new social transfers and favourable labour regulations. The increase in the minimum wage, changes in civil contracts and – above all – a huge programme of new social benefits for families (PLN 500 monthly allowance per each child, PLN 300 yearly allowance for school starter kits) has radically improved the situation of many vulnerable groups, particularly those of lower social and economic status. The long-term effects of these regulations are however uncertain, as they may stimulate the outflow of young women from the labour market and increase inflation (which is already reported).

Digital exclusion is one of the factors leading to social exclusion. Internet access is nowadays not only a convenience, but by no doubt a precondition of full participation in social, cultural and professional life. According to the Central Statistical Office, as of 2019 86.7% of Polish households had access to the internet (and 83.3% had a broadband connection). According to the GUS survey “Information Society in Poland in 2019” and similarly to findings from previous years, the key barriers to broader internet use are lack of motivation (67.6% of non-users) and lack of the relevant skills (52%). 14.7% of households (almost 3 pp. less than previous year) say that for them, the barrier to internet access is financial, while technical provision at the place of residence is almost never an issue. On the other hand, we have observed an interesting new trend: a growing share of people deliberately eschewing the internet, and expressing their aversion to the medium as a main reason for not being connected. This group’s share almost doubled in 4 years perspective, from 7.3% of non-users in 2015 to 13.7% in 2019.

Use of the internet and modern technologies varies with social and demographic factors, especially age and education. The internet is used by the great majority of young people and very few seniors. Internet use and ICT skills are also correlated to wealth and size of town, though the role of these factors has been declining.

As a telecommunications company, we must respond to the diverse needs of our customers, both the older ones, who are less convinced of the need to adopt new technologies, and the younger ones, who are used to constant online presence and try to keep up with the latest technological trends. Telecommunications expenditure is a permanent component of any household budget, and we try to ensure that each customer, regardless of their income, can find a suitable offer for them and their relatives. Nowadays, it is no longer network access itself but rather the ability to use new technologies wisely and safely which has become a social challenge.

Owing to the nature of our business model and supply chain, we follow the human rights policy formulated at the international level by the Orange Group. In addition to the general framework of the International Labour Organization conventions, the Universal Declaration of Human Rights and the Global Impact principles, Orange Group complies with the UN Guiding Principles on Business and Human Rights adopted in 2011.

The Group’s activities with respect to safeguarding fundamental human rights focus on three main areas:

• relations with employees;
• relations with suppliers; and
• privacy and freedom of expression.

These areas are all addressed in the Orange Polska Code of Ethics. We respect all people and their right to privacy. We accept diversity in terms of background, race, gender, culture, age and marital status as well as religious beliefs, political views and membership of social or professional organizations.

We use a Supplier Code of Conduct at Orange Polska. The Code has been developed at the Orange Group level and adapted to national laws and regulations. It seeks to encourage compliance with and respect these laws and regulations, and ensure that they are faithfully and effectively enforced. Suppliers are required to respect human rights and avoid being complicit in human rights abuses of any kind.

The Code covers the following areas:

• social responsibility: freedom of association and the right to collective bargaining, forced labour, child labour, diversity and non-discrimination, remuneration, working hours and health and safety;
• environmental responsibility: environmental protection, natural resources and waste management; and
• prohibited business practices: anti-corruption policy, competition, sponsorship, political contributions, money laundering, data security and data protection.

The Code has been published and incorporated into our contracts with suppliers. We are currently working on a human rights policy specific to Orange Polska.

We also launched an e-learning training on human rights that was completed by 94% of the purchasing team. Rights related to diversity are covered by our diversity management policy (more on page outputs & outcomes); privacy and data protection by our customer safety policy (more on page outputs & outcomes).

In 2019, a separate corporate social responsibility clause was included in all contracts. Pursuant to the clause, the parties undertake to comply with, and ensure that their employees, suppliers and sub-contractors comply with all national, European and international rules associated with standards of ethical and responsible behaviour, including standards on human rights, environmental protection, human health and safety, and sustainable development. They also undertake to combat any infringements of human rights and fundamental freedoms, as well as any risks to the health and safety of persons and the environment. In addition, they declare that they will require their employees, suppliers and sub-contractors to refrain from using child labour or forced labour, and shall combat any discrimination. The clause has been included in all new purchasing contracts since 2019.

Orange Polska takes all issues related to human rights very seriously, paying particular attention to the rights to privacy and personal data protection. In order to prevent theft or unauthorised modification or processing of personal data of its customers and employees, or personal data entrusted by Orange Polska, we have implemented security measures consistent with international standards. In addition, we are introducing a process to identify and prevent violation of rights and freedoms of data subjects.

Orange Polska is sensitive to global challenges related to the natural environment and natural resources. We have set ambitious goals and are taking concrete actions across all our business units to reduce our environmental impact. We also incorporate initiatives to raise environmental awareness and respect for the environment into our business activities. Within our environmental protection policy, we ensure compliance of our operations with the law and other regulations regarding ecology.

In addition to the efforts we make to reduce the impact of our own operations on the environment, as a provider of telecommunication services we can significantly contribute to reducing the negative impact of business as a whole. Digital technology is now integrated into all sectors of human activity, and developing its uses is our daily challenge. Moreover, by radically transforming the industrial world, digital technology also creates the potential for more innovative and sustainable solutions to the challenges posed by energy use and ecological damage.

By offering services that can replace traditional communications or written documents, we promote environmentally friendly solutions which help to reduce greenhouse gas emissions. Thanks to tele- and video-conferences, electronic document flow, online shopping, e-services, e-invoices and comprehensive ICT systems for business and administration, we make environmental protection part of everyday life.

We know that also our own operations as a telecommunications company affect climate change. Hence, our efforts to reduce our greenhouse gas emissions. Orange Polska’s environmental policy, which addresses these challenges, is based on three main principles: reduction of CO₂ emissions, incorporation of circular economy into processes and operations, and use of digital technology for environmental and energy transformation. It is the Group’s commitment to achieve climate neutrality by 2040.