6 ноября '06
The Russian Telecommunications Market Development in October 2006
THE DEVELOPMENT OF THE TELECOMMUNICATIONS MARKET IN RUSSIA IN OCTOBER 2006
1. General Trends of the Market Development
1.1. The Saturation Rate of the Cellular Communications Market in Russia
By the end of the 3rd quarter and for 9 months of 2006 summary data on the conditions of the cellular communications market in Russia as a whole, on principal regions and the largest operators still have not been published. Thus, it is reasonable to introduce figures by the end of the 2nd quarter 2006. The newer data, being reported by other analytical agencies or private analysts, will follow.
The saturation level of the cellular communications market in Russia by the end of the 2nd quarter 2005 (according to the number of SIM cards)
Number of subscribers 140.3 mln
Penetration Level 96.6%
Increase in subscriber base +8.2 mln
Volume of the increase 0.679
Penetration level growth +5.6%
By the end of the 2nd quarter 2006 the cellular communications penetration level on the Moscow market had reached 146.9%, on the market of St. Petersburg and the Leningrad region – 126.8%, on regional markets – 88.0%.
Penetration Level
2nd quarter 2006 Growth in the 2nd quarter 2006
Moscow and the Moscow region 146.9% 7.4%
St. Petersburg and the region 126.8% 5.7%
Regions of Russia 88.0% 5.4%
By the end of the 2nd quarter MTS subscriber base had increased up to 48.0 mln subscribers (increase in the 2nd quarter - 2.2 mln), Vimpelcom subscriber base had grown up to 46.9 mln subscribers (increase about 2.1 mln) and MegaFon subscriber base – up to 25.9 mln subscribers ( increase about 1.8 mln).
For the 2nd quarter 2006 the subscriber bases of the Moscow operators have increased by 1.26 mln subscribers and reached 24.98 mln. In the 2nd quarter 2006 the volume of increase of the subscriber bases reduced by 14% as compared to the 2nd quarter 2005.
By the end of the 2nd quarter 2006 MTS subscriber base had increased up to 10.64 mln subscribers (increase – about 0.39%). Vimpelcom subscriber base had grown up to 9.79 subscribers (increase – about 0.27); MegaFon subscriber base had grown up to 4.33 mln subscribers (increase - 0.59mln).
For the 2nd quarter 2006 subscriber bases of St. Petersburg and the Leningrad region had increased by 0.36 mln subscribers and reached 8.04 mln.
In the 2nd quarter 2006 in ST. Petersburg and the Leningrad region as well as on the Moscow market the decline in volume of the subscriber bases increase was observed as compared to the same period of 2005. The volume of the subscriber bases increase in the 2nd quarter 2006 was 84% of the increase volume in the 2nd quarter 2005.
By the end of the 2nd quarter 2006 MTS subscriber base in St. Petersburg and the Leningrad region had increased up to 2.59 mln subscribers ( the increase in the 2nd quarter 2006 – about 0.06 mln); MegaFon subscriber base had grown up to 2.95 mln subscribers ( the increase – about 0.10 mln): Vimpelcom subscriber base had grown up to 1.84 mln subscribers (the increase – about 0.15 mln).
According to the information of Advanced Communications & Media Consulting analytical center the number of subscribers in Russia reached 143.070 mln in July 2006, having increased by 2.850 mln since June 2006. The cellular communications penetration level increased up to 98.5% as compared to 96.6% in June. In Moscow and St. Petersburg the subscriber base volume was 25.299 mln and 8.272 mln in the late July as compared to 24.926 mln and 8.108 mln in June. The penetration level was 149% in Moscow and 130.5% in St. Petersburg as compared to 146.8% and 126.9% in June. Thus, the pure increase in Moscow was 373,000 users and in St. Petersburg was 164,000 users. Both figures were lower then those in June: 407,000 in Moscow and 209,000 in St. Petersburg. The pure subscriber base increase in July was divided as follows: MTS – 41.4%, MegaFon – 27.4%, Vimpelcom – 8.8% of total subscriber base increase. Other operators got 22.4%. As a result by the late June the subscriber base of “Big 3” was as follows: MTS – 49.192 mln (48.043 in June), Vimpelcom – 47.149 mln (46.905 mln in June), MegaFon – 26.687 mln (25.928 mln in June). The Russian market was divided as follows: MTS – 34.4%(the share increase by 0.1% as compared to June), Vimpelcom – 33.0% (the share decrease by 0.5%),MegaFon – 18.7% (the share increase by 0.2%). Other operators owe 13.9% (the share increase by 0.2%).
By July 1, 2006 SMARTS subscriber base had been 3, 293,000 subscribers, the increase by 45.2% as compared to July 1, 2005. The pure increase in SMARTS subscriber base was 492,000 subscribers in the first six months of 2006, despite the presence of MTS, Vimpelcom and MegaFon in regions. In August the subscriber base increase was more then 70,000 subscribers, as a result the total number of SMARTS subscribers in August 23, 2006 was 3.45 mln subscribers. The increase in number of commercial SMARTS subscribers in 2006. For the first half of the year 2006 the amount of GSM base stations had increased up to 2,098. In July 1, 2006 the total SMARTS network capacity was about 4 mln subscribers. According to the results of the first half of the year the aggregate revenue of SMARTS has increased by 11% as compared to the same period of the last year and was 98 mln USD.
According to the estimations of AC&M Consulting by September 2006 the amount of the cellular communications users in Russia had increased by 1.2% as compared to August and was 146,800,000 subscribers. The penetration level, estimated as amount of mobile phones per 100 people, increased up to 101.2% as compared to 100% in August.
The amount of MTS subscribers was 49.99 mln people (in August 49.59 mln). Having this figure, MTS took 34.1% of the market in Russia. In Moscow MTS served42.5% subscribers, in St. Petersburg 31.5%.
Vimpelcom subscriber base exceeded 47.65 mln subscribers (47.49 mln in August) or 32.4% of the market.
By the late September Bee-Line network had been used by 38.4% users in Moscow and 23.2% in St. Petersburg.
Within the month MegaFon has increased the number of Russian users up to 28.07 mln subscribers (27,45 mln in August), that is 19.1% of the market share. In Moscow MegaFon has 18.45 users and 35.4% in St. Petersburg
According to Sotovik Information and Analytical Agency, by the late September 2006 the amount of MTS subscribers had increased by 0.93 mln people (including 0.4 mln in Russia) and achieved 67.6 mln, including approximately 50 mln in Russia.
1.2. The Demand Evaluation
The cellular communications operators are more certain in the conclusion, that to rise income it is more important to take into account the pattern of demand of real and potential subscribers, then to promote its growth by special actions.
1.3. The Offer of Standard and New Services
Two operators of the cellular communications in St. Petersburg are engaged in constructing of fixed networks. MegaFon has already started providing services of the local communications and soon the company will be joined by Sky Link. The target of the project includes subscribers, using local numbers of the operators and the launch of FMC networks.
1.4. The main Companies Potential (capitalization, profit)
Many analysts believe, that shares of Russian cellular communications operators are underestimated. in October 2006 CityGroup Smith Barney raise the price of MTS and Vimpelcom depositary receipts. Citygroup experts advise as before to buy ADR of MTS and Vimpelcom. In the review, published on Friday, October 20 they have changed probable prices for MTS from 46 to 52 USD for one ADR, for Vimpelcom from 56 to 75 USD. At the New- York Commodity Exchange depositary receipts of MTS have been going up since this June. They passed 46 USD price in the late July already, and in October 20 they cost more then 63 USD. At that time ADR of MTS achieved 41.5 USD.
In the opinion of MDM analysts, Russian cellular operators are expected to have a new coil in development as a result of an average revenue per unit (ARPU) and MOU (minutes of use). Other think it can be only favoured by entering the new market of the third generation cellular communications
1.5. The Market Extension Due to Overseas Expansion
At the meeting of President of Russia Putin and President of Angola Dos Santos they discussed the problem of entering by Russian operators the cellular market of Angola. Some commentators think, the first such company could be SV Capital Ltd, founded by the former councilor of Vladimir Androsik, a general director of Svyazinvest. SV Capital representatives intend to invest 100 mln USD in African business. The market participants do not exclude, that the project will be joined by MegaFon.
2. The Regulator Activity and the Legal Field Dynamics
2.1. News in the legislation and other changes in the Legal field
At the meeting of the State Commission for Radio Frequencies (GKRC) in October 23 the Ministry of Defense agreed to give frequencies to deploy the third generation cellular networks (3G) in Russia. The commission approved the frequency allotment for construction of the 3G cellular networks and carrying out a tender for their distribution. Within 45 days the Federal Agency for Communications (Rossvyaz) will have set out for the tender frequencies in the 1935-1980 MHz band, 2010-2025 MHz band and 2125-2170 MHz band. But for all that the consent of the Moscow Region to allotment additional bands for GSM-1800 networks has not been got.
2.1. The State Assets Privatization
The minister of Information Technology and Communications Leonid Reiman has valued the “Svyazinvest” holding capitalization at 5.5 bln USD. Six months ago the Ministry of Information Technology and Communications valued this asset at 4-4.5 bln USD. Analysts believe the holding’s capitalization has grown due to the continuous going up of Rostelecom shares and in case of privatization the asset must be significantly more expensive.
2.2. The Struggle Against Illegal Entrepreneurship
Assessors’ attempts to stop tax frauds and illicit trade were the main subject for struggle. But FAS’s pronouncing the judgment of Big 3 cellular operators’ cartel collusion after CPP principle taking effect was the most sensational. On October, 19th FAS declared the actions of Big 3 operators as cartel collusion. The action against Vimpelcom and MTS has been withdrawn as they agreed to eliminate the violations. MegaFon was directed to eliminate violations of the antimonopoly legislation. Pronouncing the judgment FAS was guided by scientist of MSU Department of mathematical methods of forecasting. According to them, probability of the operators’ decision making independently form each other is 0.0003-0.0012%.
According to the results of the audit of 2003-2004 the Ministry of Tax and Charges has raised a claim of 1.28 bln roubles to MTS. The main part of the claim concerns underpayment of the profit tax on sale of the content, delivered the operator by the content-providers. The second part of the claim concerns underpaid profit tax on the revenues on rate variations, which occurred during the revaluation of the property and liability in foreign currency. The third part concerns mutual payments between the operators, connected with the traffic gap. MTS representatives declared their intension to dispute the claim of the Federal Tax Service in court. Some commentators think, the company has chances because of insufficient readability of the tax legislation. The same claim had been raised to Vimpelcom before.
It was stated in the Moscow Prosecutor’s Office that about 30.000 of cellular phones were stolen and appeared on the “market”. The lot of Motorola C115 (167.500 phones), the total price of 530 mln roubles, was seized by “K” Department from Evroset company in spring 2006. 50.000 phones were called unhealthy and had to be done away. But they suspect in the Prosecutor’s office that about 30.000 phones were stolen and got to the market.
3. The Companies’ Activity and Decision Making That Have Influenced Most the Market Development
3.1. Success and Failure in New Assets Buying
Recently Russian telecommunication companies have failed on large international tenders. Before, in 2005, System’s plans in Turkey had been broken by Vodafone, buying Telsim operator for 4.55 bln USD. The same year 65% shares of the Indian company Aircell, System was interested in, were bought by Malays from Maxis Communications for 1.08 bln USD. System’s participation in the auction for receiving the third GSM-license in Egypt failed, too. The license was received by the Arabian consortium Etisalat, having paid 2.89 bln USD, while the open price was 450 USD.
Reportedly, Megafon failed in receiving licenses for cellular communications in Angola and Cuba in 2003-2006. The negotiations in China are still in process. The only successful bargain overseas was a purchase of 13.2% shares of the Turkish largest cellular operator Turkcell for 1.593 bln USD by Altimo holding. In experts’ opinion, the situation outside CIS is now unfavorable for Russian operators as all attractive companies are overestimated much, and the operators themselves do not have insufficient experience in transnational marketing. In 2006 292.2 mln USD have been invested in the cellular business outside Russia as compared to 2.33 bln USD in 2005.
The business in the CIS has been significantly more successful. According to IKS-Consulting company’s evaluations, Russian operators have managed to take almost 40% of the former USSR market and their presence in the CIS is increasing. There are no more or less large operators on the territory of the former USSR that could attract western companies. In 2006 Vimpelcom, 32,9% shares of which belong to Altimo, bought one company in Georgia, one in Tajikistan, and two companies in Uzbekistan. MegaFon is aspiring to buy Coscom company in Uzbekistan. In analysts’ opinion, Caucasia is the second region of the CIS, attractive from the point of view of the Russian operators’ expansion. For instance, in Armenia and Azerbaijan the cellular communications penetration is correspondingly 23% and 35%.
3.2. The Personnel Changes in the Main Companies
Gennadi Kiryushin, the main shareholder and founder of SMARTS group has resigned from General Director and became Chairman of board of directors of the company. His position has been taken up by Andrey Girev, the former first deputy general director. The reason for the personnel move in SMARTS is finishing of the new management system creation. Analysts believe such personnel move can be connected with prospects for settlement of the conflict with Sigma company.
3.3. The Companies’ Activity at the Stock Markets of Russia
Several members of the board of directors and minority shareholders of System company have sold their share holdings of the consortium, in total 1.9% of the whole share holding for 230 mln USD. The reason, from analysts’ point of view, is need for money for new projects realization.
In the early September Altimo made an agreement with Deutsche UFG subsidiary for ADR redemption of one of its assets, the cellular operator Vimpelcom within the period from October 26 to January 1 2007. Lately, the volume of the buying up has been told, 3.2% simple shares. Thus, Altimo’s share in the operator, has increased up to 35.8% of voting shares.
4. The Conflict Zones and the Interests Opposition Field
4.1. The Contradictions between Entrepreneurs as a Result of Changes in Property Structure, Merges and Absorptions
Analysts are discussing information about possible sale by the government of Sweden the state share holding of Teliasonera telecommunications company. They are guided by the known already fact of participation of the two Sweden ministers in the conflict between Teliasonera and Alfa-group for MegaFon assets, when the ministers were taking Alfa’s stand. The commentators think, their prospective goal was assistance to the possible large international holding foundation. At that there is an opinion, the sale of Teliasonera state share holding would contribute to the settlement of the conflict with MegaFon as the Sweden company can become Alfa’s strategic partner on a basis of exchange of its share holding for its telecommunications assets.
SMARTS and Sigma group has began negotiations of the agreement of lawsuit on settlement of the situation with SMARTS shares, which Sigma is aspiring to. The Russian Union of Industrialists and Entrepreneurs is an intermediary in the negotiations. In accordance with the information, the intermediary has already negotiated for making an acceptable decision. The parties’ conditions have not been known yet, but the analysts believe the problem may be settled.
On the Moscow Prosecutor’s Office’s petition Zamoskvoretzki Court has made a judgment of default arrest of a businessman Leonid Rozhetzkin in charge of fraud. The action against Leonid Rozhetzkin, the head of LV Finance, was claimed in December 2004, based on the claim of Michael North, president of IPOC, the Bermudan growth fund, who addressed to the Moscow Department of Internal Affairs. According to his statement, in August 2003 Alfa-group bought 25.1% MegaFon shares from Rozhetzkin, in spite of the two agreements of IPOC and Rozhetzkin, on which he had got 40 mln USD from IPOC. The head of LKV Finance was charged in accordance with part 4 article 159 of the Criminal Code. Since 2003 IPOC has been trying to dispute the deal on the sale of MegaFon blocking share holding in Russian and international arbitral courts. Experts think the criminal case of Rozhetzkin can become a start of anew stage of the conflict between IPOC and Alfa-group the present owners of 25.1% MegaFon shares.
4.2. The Competition for New Assets and Markets Overseas
Vimpelcom is negotiating for buying Kirghiz operator Sky Mobile from Altimo. The Total of the future deal can be 400-500 mln USD. If the purchase succeed, Vimpelcom will have a company, owing the property complex and the brand of the Kirghiz cellular operator Bitel, the right for which is disputed by MTS.
THE DEVELOPMENT OF THE TELECOMMUNICATIONS MARKET IN RUSSIA IN AUGUST 2006
1. The General Trends of the Market Development
1.1. The Saturation Level of the Cellular Communications Market in Russia
The saturation level of the Russian cellular communications market at the end of the 2nd quarter 2006 (according to amount of SIM cards)
Amount of subscribers 140.3 mln
Penetration Level 96.6%
Increase of subscriber base + 8.2 mln
Volume of the increase by the 2nd quarter 2005 0.679
Penetration Level growth + 5.6%
By the end of the 2nd quarter 2006 the penetration level of cellular communication on the Moscow market has achieved 146.9%, in St. Petersburg and the Leningrad region 126.8%, on regional markets 88.0%
Penetration level
2nd quarter 2006 Growth in the 2nd quarter 2006
Moscow and the Moscow region 146.9% 7.4%
St. Petersburg and the Leningrad region 126.8% 5.7%
Region of the Russian Federation 88.0% 5.4%
By the end of the 2nd quarter MTS subscriber base has increased up to 48.0 mln subscribers (the increase in the 2nd quarter about 2.2 mln), Vimpelcom’s subscriber base has increased up to 46.9 mln subscribers (the increase about 2.1 mln), MegaFon’s subscriber base has grown up to 25.9 mln (the increase about 1.8 mln).
Within the 2nd quarter 2006 subscriber bases of the Moscow region cellular operators has increased by 1.26 mln subscribers and reached 24.98 mln. The volume of the subscriber bases increase in the 2nd quarter 2006 has decrease by 14% as compared to the 2nd quarter 2005.
By the end of the 2nd quarter 2006 MTS subscriber base in the Moscow region has increased up to 10.64 mln subscribers (the increase about 0.39 mln), Vimpelcom’s subscriber base has grown up to 9.79 mln (the increase about 0.27 mln), MegaFon’s subscriber base has increased up to 4.33 mln subscribers (the increase 0.59 mln).
Within the 2nd quarter 2006 subscriber bases of St. Petersburg and the Leningrad region cellular operators has increased by 0.36 mln subscribers and achieved 8.04 mln.
In the 2nd quarter 2006 on the market of St. Petersburg and the Leningrad region as well as on the Moscow market the decline in volume of the subscriber bases increase was observed as compared to the same period of the previous year. In the 2nd quarter the volume of the subscriber bases increase was 84% of the increase volume in the 2nd quarter 2005.
By the end of the 2nd quarter 2006 in St.Petersburg MTS subscriber base has increased up to 2.59 mln subscribers ( the increase in the 2nd quarter 2006 about 0.06 mln), MegaFon’s subscriber base has increased up to 2.95 mln subscribers ( the increase about 0.10 mln), Vimpelcom’s subscriber base has grown up to 1.84 mln subscribers ( the increase about 0.15 mln).
According to the information of Advanced Communications & Media Consulting, in July 2006the amount of subscribers in Russia achieved 143.070 mln, having increased by 2.850 mln since June 2006. The cellular communications penetration level has increased up to 98.55 as compared to 96.6% in June. By late July in Moscow and St.Petersburg the subscriber base volume was correspondingly 25.299 mln and 8.272 mln subscribers as compared to 24.926 mln and 8.108 mln in June. The penetration level in Moscow and St. Petersburg was correspondingly 149% and 130.5% as compared to 146.8% and 126.9% in June. Thus, pure increase in Moscow was 373.000 and in Petersburg 164.000. Both figures was lower then those in June: 407.000 in Moscow and 209 in St. Petersburg. In July pure increase of the subscriber base in Russia was divided as follows: MTS 41.4%, MegaFon 27.4 %, Vimpelcom 8.85 of increase of the total subscriber base. Other operators got 22.4%. As a result by late July the subscriber base of the Big 3 operators (MTS, Vimpelcom and MegaFon) has been the following (figures in June in brackets): MTS – 49.192 mln (48.043 mln), Vimpelcom – 47.149 mln (46.905mln), MegaFon – 26.687 mln (25.928mln). In July the market of Russia was divided among operators as follows: MTS – 34.4% (the market share increase by 0.1% as compared to June), Vimpelcom – 33.0% (the share decrease by 0.5%), MegaFon – 18.7% (the share increase by 0.2%). Other operators owe 13.9% ( the share increase by 0.2%).
In July 1 2006 SMARTS subscriber base was 3.293 thousand subscribers, the increase by 45% as compared with July 1, 2005. In the 1st half of 2006 pure increase of SMARTS subscriber base was 492.000 subscribers and due to that SMARTS managed to increase its market share by 0.7% despite the presence of MTS, Vimpelcom and MegaFon on regional markets. In August the subscriber base growth was more then 70.000 subscribers and as a result in August 23, 2006 the total amount of SMARTS subscribers was 3.45 mln. Increase of the number of commercial SMARTS subscribers in 2006. For the 1st half of 2006 amount of GSM basic stations has increased up to 2.098. In July 1, 2006 the total SMARTS network capacity was about 4 mln subscribers. According to the results of the 1st half of 2006 the aggregated revenue of SMARTS has increased by 11% as compared to the same period of the previous year and has been 98 mln USD.
1.2. The Demand Evaluation
According to the results of Internet audience poll, carried out by Sotovik, the information and analytical agency, in August the most popular phone model was Nokia N80. Nokia has also kept leadership as a producer. The demand in price segment of over 400 USD has increased most (+4%), The demand in price segment 301-400 USD has grown by 1%. The largest demand decrease has been observed in price segment 201-300 USD (- 4%).
1.3. The Offer of New and Standard Services
The common innovation for all cellular operators has become an increase of marketing actions as a response to CPP principle introduction. First the operators set the connection charge, then instead of it they increased the cost per minute of a talk and then simultaneously they offered various bonuses and discounts.
MTS has given discounts on night and weekends talks, on intranet outgoing calls in rush hours and while using MTS Numbers and Favourite Numbers. MegaFon has given the discount White Nights similar to Night Talks of MTS and also introduced the bonus system for subscribers of “Light” prepayment tariff plans. The bonus system is used by Bee Line ,too. Regional operators are working the same ways. For instance, SMARTS intends to cancel fee per second from the first minute of a talk for some tariffs. Utel (Uralsvyazinform) has raised the cost per the first minute, except for intranet calls. Tele2 has introduced a new tariffs line, less profitable for outgoing calls then the line, offered before.
1.4. The Main Companies Potential (capitalization, profit)
Because of the capitalization decrease of its telecommunications subdivisions MTS and Komstar, in the 2nd quarter 2006 System got pure loss of 14 bln roubles according to RSBU (Russian Accounting Standards) . In the 2nd quarter 2005 System got pure profit of 8.9 bln roubles. According to System’s analysts the loss is connected to overestimating of shares in MTS (52.8%) and Komstar-OTS (51%) as in the 2nd quarter Russian MTS and Komstar quotations were falling.
MTS informes, ARPU in the Russian Federation has reached the limit of decrease and should be flattened out at level of the 1st quarter 2006 (6.2 USD). In the 4th quarter 2005 it was 7.3 USD, in the 1st quarter 2005 it was 9.1 USD. In Ukraine these figures were 7.5, 9.1 and 10.0 USD correspondingly. MTS intends to hold ARPU in Ukraine at level of the 1st quarter 2006 (7.5 USD). A new president of MTS Leonid Melamed plans to increase proceeds by 10-15%, to hold ARPU at the level of the 1st quarter (about 6.2 USD per month), and also to hold profitability according to OIBDA on the level of the previous year, no lees then 50%.
In the first half of 2006 MTS proceeds according to RSBU were 48 bln 652.2 mln roubles, that is more by 59% then the figure at the same period of the previous year (30 bln 661.2 mln). The cost price has increased by 63.24% up to 17 bln 859.4 mln roubles as compared to 10 bln 940.0 mln roubles. The sales income has increased by 56.2% up to 19 bln 501.4 mln as compared to 12 bln 481.8 mln. The profit before taxation has been 2.5 times as much up to 18 bln 792.6 mln roubles as compared to 7 bln 587.3 mln. Within the 1st half of the year the short term debt of MTS has increased from 20 bln 391.7 mln roubles to 28 bln 437.1 mln roubles. The long term debt has increases from 76 bln 71.3 mln roubles to 89 bln 32.3 mln roubles. The short term obligations has increased from 22 bln 014.8 mln roubles to 41 bln 290.2 mln roubles. The account payable has grown from 20 bln 240.7 mln roubles to 22 bln 361.5 mln.
The cellular operator MegaFon has published results of the 1st quarter 2006 according to US GAAP. According to the quarter results, MegaFon’s proceeds are 700.2 mln USD. It can be compared to figures of MTS and Vimpelcom: 929 mln USD and 871 mln USD correspondingly. Volgatelecom Ltd has published a financial statement. on the 1st half of 2006. The proceeds are 10,170.3 mln roubles, while income from the communications service has reached 9,602.8 mln roubles. The pure profit is 1,482.2 mln roubles.
Uralsvyazinform has introduced the statement of unfunded and financial results for the 1st half of 2006. The proceeds have increased by 16.5%, reaching 15,620.8 mln roubles. The pure profit is 1,571.4 mln roubles. The proceeds from the communications operators have increased by 51.9% up to 2,687.3 mln roubles. The proceeds of the GSM operators are 4,4 times as much that is 4,806.3 mln roubles. That was contributed by joining Uralsvyazinform by the subsidiary cellular operators Ermak RMS, the South-Ural Cellular Phone and Tumenruskom, and also by increase in the amount of mobile subscribers by 44.5% up to 4 051.9 thousand users.
1.5. The Market Extension Due to Overseas Expansion
According to the information of iKS-Consulting, since the expansion to the CIS countries in 2001 Russian operators have spent 1.38 bln USD on purchase of local companies.Vimpelcom and MTS has invested about 700 mln USD each in the cellular market of the CIS. For the 1st half of 2006 the operators’ subscriber bases in the CIS have increased as follows: Vimpelcom by 69%, Megafon by 24%, VTS by 16%. Since early 2006 the amount of cellular communications subscribers in CIS has increased by 21 %. Vimpelcom activated significantly in the 2nd half of 2005 – 1st half of 2006.But the company’s share in the CIS subscriber base is not so considerable while MTS is leading due to the Ukrainian market, where the company has been working since 2003.
According to general director of Vimpelcom Alexander Izosimov, the company can buy the Kirghiz cellular communications company Sky Mobile, a subsidiary of the Russian Altimo, one of Vimpelcom’s shareholders. Though the negotiations about Bitel’s property assignation to Sky Mobile are not over, partners of Bitel has already received the information about rewriting of its property on Sky Mobile. The other Vimpelcom’s shareholder Telenor is watching the situation and reminds that the possible buying of Sky Mobile by Vimpelcom must be founded economically as it was with URS buying.
2 . The Regulator Activity and the Legal Field Dynamics
2.1. News in the Legislation and Other Changes in the Legal Field
A new version of the law “On Advertising”, having come into force since July 1, 2006, prohibits telecommunications companies to spread an advertisement without a preliminary agreement of a subscriber.
In September the State Duma deputy M. Korobov is planning to put for discussion draft amendments to Article 2 of the law “On Communications”, according to which the possibility to declare a communications operator considerable shall be spread on all participants of the telecommunications market. Thus, the Big3 operators (MTS, Bee Line and MegaFon) can be declared considerable, too. In that case they must take a separate stock of their incomes and expenses, and their intranet tariffs will be regulated by Rossvyaznadzor.
The Ministry of Information Technology ad Communications decided to postpone on six years the introduction of the principle of possibility for a cellular communications user to be transferred to other operator, holding a mobile number (MNP). That was first mentioned by Leonid Reiman on the Russian Economic Forum in April 2005.
2.2. The State Assets Privatization
Svyazinvest is lacking in the forecast plan of the federal assets privatization for 2007, confirmed by the Russian government by the order of August 25, 2006.
Minister of Economic Development German Gref does not exclude, that Svyazinvest privatization will not take place. According to his words, the situation has not been defined yet, and different variants are still been worked over. But for all that he emphasizes, that though the decision of Svyazinvest privatization has not been made yet, in 2006 they must make a decision about excluding of the company from the list of strategic enterprises. In his opinion, privatization is the most optimum alternative: it is necessary for the whole state holding of Svyazinvest to go private at the rate 75% minus 1 share.
2.3. The Legislation and Law Enforcement Authorities’ Evaluation of Legality of Privatizations, Merges and Absorptions Held
FAS (the Federal Antimonopoly service) has filed a charge against MTS, Vimpelcom and MegaFon with having breached Article 6 of the Federal Law of March 22, 1991 #948-1 “On Competition and Limitation of Monopolistic Activity in Commodity Markets”. Article 6 provides a number of prohibitions, regarding agreements and concerted practices between economic entities. That was caused by the agreement of the operators, concerning establishing interconnect tariffs for each other and third-party players. According to FAS, that put obstacles for regional operators in the way of entering the mobile communications market. In response to FAS activity several federal operators has stated that establishing of lower tariff was conditioned by wide practice of discount use for bulk buyers. In experts’ opinion, that will, probably, be disputed in court.
According to FAS, the department will conclude regarding the information, introduced by MTS, Vimpelcom and MegaFon about simultaneous first minute cost increase after pronouncing of a judgment on the case, concerning interoperators payments between the Big 3 participants. Rossvyaznadzor has not carried out the decree of the Moscow Arbitrage, which in August 18 obliged it to give Vimpelcom a license for work in the Far East. The Court invalidated the April order of Rossvyaznadzor, refusing the company to licensing. The court decreed to oblige Rossvyaznadzor to give the license within 10 days from the date of the decision taking. The term was over in August 28. The Far East is the only federal region, Vimpelcom is lacking a license in.
In August 23 the Arbitrage Court in St. Petersburg confirmed the decision, taken in May, according to which Sigma Capital Partners (SCP) company was a rightful owner of 799 share (about 20% of the chartered capital) of SMARTS. Presently SCP authorities intends to demand convening of the meeting of shareholder to elect a new board of directors. According to SMARTS, they will dispute this decision in a cassation instance.
2.4. The Regulator’s Activity Evaluation by Entrepreneurs and Mass Media
At the press-conference in August 30 general director of Vimpelcom Alexander Izosimov disputed offers to establish the state regulation of interoperators tariffs of MTS, Vimpelcom and MegaFon. According to his information, the cellular communications services in Russia are one of the cheapest ones: ARPU (7 USD per month) is lower then in China (9 USD), India (10 USD) and Brazil (12 USD). At that the economic efficiency of the Big 3 is very high (about 50%). The regulation can decrease investment attractiveness of the cellular market.
According to the information of MGTS, CPP principle introduction has led to decrease of traffic volume from wired phones to cellular phones by 30% in July as compared to July 2005, taking into account season and total dynamics of wired operators’ traffic. At that in July MGTS sent 1.8 mln bills as compared to 380 bills in June 2006. In August the traffic volume is being grown again.
3. The Companies’ Activity and Decision Making, Having Influenced Most the Market Development
3.1. Success and Failure in New Assets Buying
In August 8 during the talk with President V.Putin president of Alfa-bank Petr Aven stated, the group intends to found a large telecommunications company, having main assets in Russia, in which Alfa group will be a leading shareholder. According to his words, this kind of business is being actively developed in the company. In autumn 2005, in particular, the group bought 13.2% of Turkcell in Turkey. But primarily Alfa would like to be a Russian company and also shows interest to the CIS. According to commentators, Aven’s words are not in accord with the last year’s statements of the main co-owner of Alfa Mikhail Fridman. He stated, he would like to create a global operator on the basis of a large multinational company. In July 31 it became known officially, that 100% shares of the federal retailing network Ultra had carried over to Euroset Holding, which would invest in further development of the network and would be its logistic operator. Former president and general director of Ultra Temur Amidjanov and Sergey Vilski have been included in the board of directors of Euroset. The brand of Ultra, independence of the trade and marketing policy and the personnel have been held.
The group of companies Dixis has declared the results of regional development in 2006. Since the early 2006 the retail network of digital technics shops, working under Dixis brand, has increased by 70% up to 1201 shop. Dixis shops work in 73 regions of the Russian Federation as compared to 57 in early 2006. By the end of the year the company will have started working in 4 more regions minimum, own shops will have been opened in 7 new regions. In regions the market share of Dixis is from 10% to 25%. By the end of the year the company hopes to cover no less then 15% of the Russian market of cellular retail. Since 2006 Dixis network has been working in all federal regions of the Russian Federation. The company has opened 11 sister companies, own private shops and more then 500 shops of franchising partners. The largest sister company is the North-Western company.
The telecommunications holding Telenor has bought 100% shares of the Serbian cellular operator Mobi 63 (Mobtel before) for 1. 513 bln euro. MTS also pretended to the operator.
Kievstar GSM, the Ukrainian operator of cellular communications, has refused Euroset to the possibility of work as a Mobile Virtual Network Operator (MVNO) in the own network. According to Kievstar, having studied working experience of virtual operators in Ukraine and overseas, the company concluded, that currently the cooperation with MNVO-operators is inexpedient from the marketing point of view.
3.2. Personnel Changes in the Main Companies
In August 14 a new structure of the corporate management was confirmed in MTS. The united managerial center of MTS is divided on the corporate center “MTS groups” and three subdivisions: MTS Russia, UMS and Foreign subsidiaries. According to the information from the company, they believe, that will lead to reduction in personnel and managerial expenses. The new structure of management has been created to raise the operative efficiency and decrease managerial expenses. The personnel reduction must contribute to recovery of the operator’s economic efficiency. Reductions in the Corporate center will concern 3% of MTS personnel, but in future they can be more significant.
A new position, vice-president on operations, has been introduced in Vimpelcom. Peter Kovell, since 2004 having worked a general director on operations of the Bulgarian Telecommunications Company, has been applied for the position.
4. The Conflict Zones and the Interests Opposition Fields
4.1. The Contradictions Between Entrepreneurs As a Result of changes in Property Structure, Merges and Absorptions.
Euroset has ceased connecting clients to the network of the cellular operator Tele 2. Six months ago Euroset cancelled a bonus for sellers in its outlets for Tele 2 contracts sale. According to the company, it is not profitable to sell Tele 2 contracts as if a client, connected by a dealer, does not speak a certain number of minutes, the dealer is obliged to give a bonus back to the operator. It concerns almost half of connections. In 2005 Euroset agreed with such conditions as they and Tele 2 were planning to found a Mobile Virtual Network operator (MVNO), working in Russia and the Baltic countries, but the plans has not been realized. In 2005 Euroset sold about 80 thousand contracts of Tele 2 monthly, before the New Year Holiday it sold about 100 thousand.
Chairman of Euroset board of directors E. Chichvarkin has raised claims to Nokia, concerning, as he confirms, the facts that the company does not deliver fashionable models, plans to give a profitable business to the other company and has not chosen Euroset as its distributor in the CIS. To influence Nokia the employees has been offered to put Nokia phones’ instructions away, take the phones away and sell them only on customers’ persistence.
The lot of 117 thousand Motorola phones, arrested in March 29, 2006, has been returned to the rightful owner, the company Euroset, Both parties has stated, they are glad to resume the relations and intend to forget the incident.
4.2. The Competition for New Assets and Markets Overseas.
The Appeal Court of the Kharkov region postponed from August 22 to September 5 the hearing on Telenor’s appeal on the decision of the Moscow District Court of Kharkov, dated November 3, 2005, which had set equal rights for Kievstar’s shareholders: the Norwegian holding and Storm, being under control of Altimo. Telenor owes 56.5% shares of the Ukrainian cellular operator Kievstar, 43.5% belongs to Storm.
THE DEVELOPMENT OF THE TELECOMMUNICATIONS MARKET IN RUSSIA IN JULY 2006
1. The General Trends of the Market Development
1.1. The Saturation Rate of the Cellular Communications Market in Russia
Some companies have published reports of their financial results in the first half of the year. Besides, Sotovik, the information and analytical agency, has published results of its own research, concerning active subscribers of the cellular communications in Russia. ‘An active subscriber’ is the cellular communications customer, having used the cellular communications once within the month at least. Besides, one ‘active subscriber’ is one user of the cellular communications, regardless of the amount of active SIM-cards he owes. By the end of the 2nd quarter 2006 the number of ‘active users’ in Russia has been 95.9 mln people. At that an increase of active subscribers has been 40% less as compared to SIM-cards amount increase. The penetration level, according to the number of ‘active subscribers’ has been 66.1%. By the end of the 2nd quarter the ‘active subscribers’ share in the volume of the operators’ subscriber bases has been 67.1%. The North-Western and Central licence regions have the highest penetration level according to the number of ‘active subscribers’. Their leadership is mostly provided by the markets, having high penetration level: Moscow and the Moscow region, St. Petersburg and the Leningrad region. The Povolzhye region is a licence region , having the highest penetration level according to the amount of ‘active subscribers’, not including the capital markets. The Far East and Siberian licence regions have the lowest penetration level according to the number of ‘active subscribers’.
1.2. The Demand Evaluation
According to the forecast of International Data Corporation (IDC) the mobile phone sale in Russia is expected to decrease by 9% as compared to the previous year, when 31.9 mln were sold. It is a result of the previous rapid increase, analysts of the company said. IDC believes, the mobile phone market will recover, but the process will be long. In the 2nd quarter 2006 the sales decreased by 8.8% as compared to the same period of the previous year and were 7.12 mln phones. In the 2nd quarter in the sales volume the share of Nokia delivery was 24.4%, the share of Samsung delivery was 20.3%, Motorola – 16.6%, BenQ-Siemens – 15.4%, SonyEricsson – 11.5%, LG – 3.5%. The share of other suppliers was 8.3%
1.3. The Offer of Standard and New Services
MTS company has started developing its own network of outlets, selling its phones and contracts. The first such outlet has been already opened in Moscow. By the end of the year 545 MTS outlets will have worked according to this scheme. In accordance with cellular dealers evaluations, the constructing will cost the company more then 15 mln USD . “Eldorado” network has stated its interest to the market of the cellular retail. By the end of this year the company is planning to open more then 450 outlets of communications, doubling its mobile phone retail network.
1.4. The Main Companies’ Potential (capitalization, profit)
MTS company has declared financial implications of the 2nd quarter 2006. If compared with the same results of Vimpelcom, having been published before, it is obvious that MTS keeps leading the Russian and CIS markets in proceeds and amount of subscribers. Within the quarter the company has increased the proceeds by 15.8% or by 20.7% as compared to the same period of the previous year. The operation income before depreciation deduction and intangible assets amortization (OIBDA) has increased correspondingly by 22% and 12.1%. The pure profit has decreased by 3% as compared to the same period of 2005. As they explain in MTS, this happened because of increase of the costs on the amortization and the unfavourable change in exchange rate. MTS keeps taking the head over Vimpelcom by the figures, but the company is losing by the growth rate as in previous quarters. For the year MTS pure profit has decreased while Vimpelcom’s pure profit has increased by 22.7% and by 29.8% as compared to the 1st quarter 2006. For a year MTS has increased OIBDA by 12.1% and the company’s competitor has increased this figure by 42%. In 2006 MTS has increased ARPU as well as Vimpelcom has done. They connect this in the company with the season growth of the traffic, the launch of rouble tariffs and the aggressive marketing policy. As a whole the results are positive, experts said. The negative factor for MTS is a fact that the company’s competitor on the Russian market Vimpelcom keeps reducing the gap in proceeds. MTS share price growth was observed at exchanges. According to experts that is connected with the declared programme of buying 10% ADR, confirming the shareholders’ rights to the company’s simple nominal shares.
The successful financial results of MTS and the news of buying of 10 % ADR induced analysts to revise the estimation of the operators’ share fair value in favour of increase. For instance, UBS investment company has raised the fair value of MTS ADR from 40 to 51 USD per share by changing the recommendation from HOLD to BUY. Other companies also publish their forecasts, changed in favour of the rise.
MegaFon has published the financial results of the 1st half of the year 2006 on US GAAP. The pure profit has increased by 70% as compared to the same period of 2005 and achieved 318.6 mln USD. The proceeds have increases by 51% and achieved 1.551 bln USD. EBITDA figure has increases by 72% up to 786.5 mln USD. In the 2nd quarter the proceeds was 851 mln USD (the increase of 51% as compared with the same period of the previous year), EBITDA was 443 mln USD< (the incease by 76%), the pure profit was 186.5 mln USD (the increase by 67%). According to analysts’ evaluation dynamics of the operator’s figures is quite comparable to MTS and Vimpelcom. According to the data of iKS-Consulting, in the 1st half of this year MegaFon passed ahead of MTS and Vimpelcom on APRU.Megfon’s APRU has achieved 10.2 USD, APRU of MTS is 7.3 USD, and APRU of Vimpelcom is 6.7 USD.
1.5. The Market Expansion due to Overseas Expansion
According to iKS-consulting, since 2001 the Big 3 (MTS, Vimpelcom and MegaFon) has spent 1.38 bln USD on the purchase of operators in the CIS. Vimpelcom and MTS spent in equal parts: 691 USD each. The most significant deals were carried out in Ukraine and Kazakhstan. MTS bought the Ukrainian operator UMS for 373.47 mln USD, Vimpelcom paid 350 mln USD for Kazakh Kar tel, taking debt instruments of 75 mln USD. Later 50% of Kar tel was sold to Crowell Investments, affiliated with one of the largest Kazakh bank APF bank. Now each of these companies is working in 5 republics: Vimpelcom in Georgia, Ukraine, Kazakhstan, Uzbekistan and Tajikistan; MTS in Byelorussia, Ukraine, Uzbekistan, Turkmenistan and Kirgizia. But in Kirgizia MTS , buying 51% of Bitel operator 150 mln USD, still has not taken control over its network and office.
2. The Regulator Activity and the Legal Field Dynamics
2.1. News in the Legislation and Other Changes in the Legal Field
Due to the summer vocation of the legislative authorities, finished in September, there were not evident changes in the legal field.
Amendments to the act “On Banks and Bank Activity”, consummated in August, forbid the sale of express payment cards for cellular communications and the Internet without making an agent contract with a bank. According to analysts and Mass Media, this makes impossible their sale in most retailing outlets and prices will raise because of bank’s commission charges..
2.2. The State Assets Privatization
In spite of the fact, that Svyazinvest privatization in 2007 has remained doubtful, the market participants and analysts keep discussing any events that could be related somehow to the problem. Recently this has been caused by promoting by Lider company, managing assets of the pension fund, their general director to the board of directors of Svyazinvest’s interregional company “Uralsvyazinform” (USI). Lider’s shareholders are “Gasfond”, the Joint-Stock Bank of Gas Industry of Gasprombank Ltd, “SOGAS”. Besides, recently Lider has bought 7.5% shares of the other Svyazinvest’s interregional company – the Southern Telecommunication Company (STC). Almost all commentators believe, the telecommunications assets are not interesting to Gasprom and Gasprom’s participation in Svyazinvest privatization is improbable. Concerning the minority share holdings of the interregional companies. Lider owes, they speak of investment only to make profit. But some observers think, some participation of Gasprom in Svyazinvest privatization can be provided to keep the state control over the company.
2.3. The Legislation and Law Enforcement Authorities’ Evaluation of Legality of the Privatizations, Merges and Absorptions Held
In September 9, 2006, the Court of Appeal left the decision of the Moscow Arbitrage, favouring Vimpelcom on one of the claims, registered by Telenor, changeless. Recently the Norwegian company has demanded the court to declare invalid Vimpelcom’s decision of buying of the company “Ukrainian Radiosystems” (URS), but that claim has not been allowed either. Now in Telenor they are waiting for the decision of the Moscow Arbitrage about the deal’s legality. The session is scheduled for October 18, 2006.
2.4. The Struggle with Illegal Entrepreneurship
FAS could not prove the fact of Big 3 (MTS, Vimpelcom and MegaFon) cartel collusion after CPP principle taking effect. But on the plaintiff’s, the Association of Regional Operators of Cellular Communications, insistence a new claim was raised : as if regional operators can lose profit or will be forced to raise tariffs on their services because of the Big 3 activity. Leonid Reiman stated, the Ministry of Information and Connections will analyse MTS tariff policy.
Bee Line has stated the intension to address FAS, concerning the confrontation policy of regional operators. According to Vimpelcom authority, some operators in regions set wittingly low tariffs and do not respond to the company’s offers to establish mutually beneficial conditions. But regional operators regard this as an infringement of freedom of competitiveness. Bee Line has accused Uralsvyazinform (Utel trade mark) of monopolism on the basis of the fact, that being simultaneously the operator of wire and cellular connections, the company set a group of tariffs, giving users of wire phones baseless advantages for calls on cellular phones. The Moscow Arbitrage rejected the 291 mln roubles claim of Motorola cellular phones producer on protection of reputation to the Russian company RussGPS. The claim on protection of Motorola’s business reputation was the result of the scandal, concerning the seizure from Euroset company a lot of phones on more then 19 mln USD, legally imported to Russia. In the late March RussGPS stated they have several patents, protected in Russia, for most of the seized Motorola phones.
2.5. The Regulator’s Activity Evaluation by Entrepreneurs and Mass Media.
The changes at the cellular communications market after introduction of CPP principle since July1, 2006 are still being discussed. In MGTS they said that within July they had sent 8 mln bills, including the column ‘intrazone connection’, but they did not mention any statistics of amount of calls from fixed phones to cellular phones. The amount has admittedly decrease much at first, and in August it started growing again. The cellular operators’ representatives think they could hardly speak of considerable tendencies before the end of summer season. A large lot of 117.000 Motorola phones, arrested on the Russian border in March , has been returned to the rightful owner, and this has changed the situation in the field of mutual relations between the law enforcement bodies and trader companies. Actually the racket action of the security agencies has been foiled. The goal of the action was sales of the seized goods without the court decision. The dismissal of the action and restitution of the goods to the owners were preceded by Euroset’s and Motorola’s protest and other delays from the direction of the prosecutor’s instances.
The State Commission On Radio Frequency stated it had found the frequency resource for Vimpelcom in the Far East and was ready to give it to the operator under the tender by early 2007.But Vimpelcom intends to assert its rights on licenses and frequency without the tender.
3. The Companies’ Activity and Decision Making, Having Influenced Most the Market Development
3.1. Success and Failure in New Assets Buying
System telecom is handling the problem of expediency of participation in the tender for buying of 65% share of the state communications operator Telekom Srpske (the Serbian Republic in Bosnia). 11 companies has shown interest to the shares buying. Beside System telecom, they are Telekom Srbije, Mobilkom Austria (Austria), Magyar Telekom (Hungary), Elisa (Finland), Telenor (Norway) and others. In addition to payment of the share holding value, the tender winner will have to invest 50 mln euro in Telekom Srpske development within the first year after the share holding buying. The company’s capitalization is valued at 250.6 mln euro. The number of fixed connections subscribers is 344.47 thousand people, the number of cellular connections users is 571.78 thousand people.
In September 18, the time of the price offers introduction in the tender for sale of 90% shares of Armentel telecommunications company, belonging to the Greek company OTE, was up. 16 companies participated in the tender. Vimpelcom, MTS and two Arabian companies has reached the second round. After the applications introduction OTE must offer the government of Armenia, the owner of the rest 10% shares, to sell its share to the company. If the government rejects, it will have to say which company from amongst pretenders it gives preference to. It is known that the starting price, declared by OTE, is 637 mln USD.
Megafon is negotiating with the American company MCT Corp the buying of 85% shares of the third largest Uzbek cellular operator Coscom. Buying of this asset will become the first step on the assets market outside Russia for MegaFon. According to participants of the Russian cellular market, Coscom costs about 180-200 USD. The company was founded in 1996. 85% shares of the company belongs to MCT Corp., 15% shares belongs to a group of private persons and the management. The company possesses GSM network, covering all large cities of Uzbekistan. Presently the only foreign asset of MegaFon is a small Tajik operator TT-Mobile, founded by Megafon in cooperation with Tajiktelecom in 2001. Analyst notes, the level of competitiveness may be high for MegaFon against the background of mass poverty of the population. In Uzbekistan 8 cellular companies work, the largest of which, Uzdunrobita and Unite, belong to MTS and Vimpelom correspondingly and serve 1.4 mln users in total, that is more then two thirds of cellular communications users in the country.
3.2. The Companies’ Activity at the Stock Markets of Russia.
Volgatelecom has started placement of the bonded debt to the sum of 3 bln roubles. On money received the company is planning to improve fixed network and increase the service revenue by 40%. They’re also planning to increase the subscriber base of the cellular operators, controlled by the company, by more then 34%.
3.3. The Distribution of Securities Overseas
According to MegaFon the company will not enter IPO. This year the company is figuring on the positive money flow. Besides, the company has already had several open credit lines, that has not been chosen yet. One of the credit lines was closed by MegaFon ahead of schedule. The company cancelled the credits of the European Bank Of Reconstruction and development and Ithe International Financial Corporation (IFC).
3.4. The Personnel Changes in the Companies.
The board of directors of Vimpelcom has taken the decision of making a new 2-year contract with general director Alexander Izosimov by simple majority of votes. At that Alfa-group’s representatives (32.9% shares) voted for Izosimov and Telenor’s representatives (26.6%) shares) voted against him. As the qualified majority of votes “for” has been got, the result of the elections can be disputed in court.
