6 июля '06
THE DEVELOPMENT OF THE TELECOMMUNICATIONS MARKET IN RUSSIA IN JUNE 2006
1. General Trends of the Market Development
1.1. The Saturation Level of the Cellular Communications Market in Russia
Within May 2006 the number of cellular communications users in Russia has increased by 2% up to 137, 415 thousand people. The increase for a year has been 48 mln people. The penetration level has reached 94.7%, increasing by 1.9% as compared to April.
By the late May in Moscow and St. Petersburg the volume of the subscriber base has been 24, 519 thousand and 7, 899 thousand people correspondingly, the penetration level has been 144.4% in Moscow and 124.6% in Petersburg as compared to 141.6% and 122.8% in April.
In May pure increase of the subscriber base in Russia was divided as follows: Vimpelcom – 31.5% of the total subscriber base increase, MTS – 29.9%, MegaFon – 21.6%, other operators – 17%. As a result the Big 3 subscriber base includes (figures of April in brackets): MTS – 47.159 mln (46.348 mln), Vimpelcom – 46.202 mln (45.373 mln), MegaFon – 25.322 mln (24.737 mln). In May the Russian market was divided between the operators as follows: MTS – 34.3% (the share decrease by 0.1% as compared to April), Vimpelcom – 33.6% (the share decrease by 0.1%), MegaFon – 18.4 % (without changes), other operators has owed 13.7% (the share increase by 0.2%). In June 1 Vimpelcom published a report, containing results of the 1st quarter of 2006 on the Russian market. The company’s proceeds were 871 mln USD, increasing by 40 % as compared to the 1st quarter of 2005. Thus, the company has been pressing the other largest players on the market MTS and MegaFon. At the same time ARPU has reduced by 8% as compared to the same period of the previous year. 1.2. The Offer of New and Standard Services The main problem for the operators has been adaptation to CPP (calling party pays) principle, legally confirmed and going into effect in July 1, and the gradual tariffs transfer to a rouble equivalent. Since June 20 MTS has introduced a fixed dollar rate of 28.7 roubles for subscribers payments. The market participants consider such measure a latent rise in prices, carried out for the compensation of losses from the new principle introduction as well. Since June 15 Vimpelcom has established 5 new rouble tariff plans, in the frame of which all incoming calls are free. Besides, the company has established the internal rate, according to which dollar tariffs must be converted. The rate is 28.7 roubles per a USD, that is a bit higher then the current rate of the Bank of Russia. Besides, the operators offer services, which in their opinion correspond to the summer time specific character. For instance, the cellular operator Sky Link has offered its subscribers 50% discount on Internet traffic in summer time in the frame of “On line” tariff plans. SMARTS declared a new strategy of its positioning as “ the first family operator”. The operator’s authorities, providing services in the Volga region and in the South of Russia, hope, the new positioning will allow to increase proceeds. The main target group will be families, but the company keeps making for young customers, regional companies and private entrepreneurs. 1.3. The Main Companies Potential (capitalization, profit) In June 8 MegaFon published the financial statement for 2005. The growth rate of almost all figures has been higher, then that of MTS and Vimpelcom. The proceeds have increased by 61.4% (Vimpelcom – by 52%, MTS by 29%), the operation profit has increased by b78% (45% and 15%), the pure profit has become 2.3 times as much (75.6% and 14%). In 2005 ARPU in MegaFon was more then 10 USD per month. ARPU in MTS has decreased from 9.1 to 7.3 USD for a year. ARPU in Vimpelcom has been 7.5 USD. The rating agency Standard & Poor’s has reduced Vimpelcom’s Rating of Corporate Management (RCM) from RCM-7 to RCM-6. At the same time according to the Russian scale RCM has been reduced from RCM-7.4 to RSM-6.4. Both ratings remains in the list GovernanceWatch (“RCM jn revision”), having “negative” forecast. The rating drop reflects risks, caused by the inability of the company’s main shareholders, Telenor ASA and Altimo, included in Alfa-group, to settle the conflict because of difference in opinions, concerning Vimpelcom’s strategy in Ukraine. Uralsvyazinform has introduced the nonconsolidated operation and financial results of the work for the 1st quarter of 2006 in accordance with RSBU (Russian Standards of Accounting). As a result of the finishing in June 30, 2005 the reorganization in the subsidiaries, which provide cellular communications services (Ermak RMS, The South-Ural Cellular Phone, Tumenruscom) and date connection services, in the form of joining a parent company, since July 2005 the financial statements of Uralsvyazinform according to RSBU has included the property, obligations and the activity results of the associated subsidiaries. The company’s proceeds has increased from 6, 543.8 mln roubles to to 7, 630 mln or by 16.6%, the expenses has increased from 4, 811.5 mln oubles to 5, 503.9 mln or by 14.4%. The pure profit has increased from 536.5 to 1, 016.4 mln roubles or by 80.4%. The amount of wired communications subscribers has increased from 3.6 mln people to 3.8 mln . The amount of the mobile communications (GSM) subscribers has increased from 2.4 mln to 3.8 mln people (+ 60.6%). 1.4. The Market Extension Due to Overseas Expansion Systema company has finished the deal of purchase of the Greek Intracom Telecom, that is 100% subsidiary of Intracom Holding Group. The Greek company will be integrated in Infocommunications subdivision of Sytronics concern, the subdivision of Systema. According to Systema’s managers, this purchase will help the company to enter the European Union market, and also to increase its total capitalization before IPO, planned for February 2007. 2. The Regulator’s Activity and the Legal Field Dynamics 2.1. News in the Legislation and Other changes in the Legal Field. The main event of the month: the Federal Service on Tariffs (FST) has passed the tariffs on outgoing calls from fixed phones to mobile phones (CPP principle). The maximum fee for 1 call will be 1.5 roubles, the minimum fee will be 0.75 roubles. 2.2. The State Assets Privatization According to Minister of Information and communications L. Reiman, Svyazinvest privatization can be held by late 2006. That will depend on passing of the corresponding law by State Duma. According to many analysts, this statement is doubtful. They think, it reflects lack of the consensus of opinion on this issue in the government, and that the privatization will hardly be held earlier then the 2nd half of 2007. Meanwhile preparatory act are being produced. According to the statement of Chier of the RF government apparatus Sergey Narishkin , the government will probably agree to sell the blocking share holding of MGTS to Komstar-OTS company. 2.3.The Legislation and Law Enforcement Authorities’ Evaluation of Legality of Deals Held The conflict, concerning Vimpelcom’s activity in Ukraine, has not been finished yet. The Moscow Arbitrage dismissed the second of the three claims of Telenor against buying of the Ukrainian cellular operator URS (Ukrainian Radiosystems) by Vimpelcom. The opposition between MegaFon and IPOC continues as well. Deputy chairman of the 2.4. The Struggle with Illegal Entrepreneurship The interregional inspection on the largest tax payers # 6 has asserted the tax claims of 3.47 bln roubles to Rostelecom for 2003. 2.18 bln of them are taxes, not paid by the company, and 1.29 bln are fines. The inspection was planned and was carried out from October 3, 2005 to April 27, 2006. Inspectors do not agree with the interoperators’ payments system, concerning passing of international and inter-city traffic, in accordance with which by August 2003 all Svyazinvest’s interregional companies had used an integral rate of payment, amount of which had been confirmed by the former Ministry on Antimonopoly, for mutual payments on inter-city traffic. The document, having been in force at that time, permitted mutual payments between Svyazinvest’s companies. Rostelecom from its part, does not agree with the claims and intends to dispute them in court. In June 6 tax officers produced to Vimpelcom a regular preliminary statement, concerning surcharges of 1.9 bln roubles for 2003-2004. Vimpelcom intends to dispute the preliminary conclusions of the statement in court. According to analysts, more then a half of the sum, written in the statement, is connected with violations when writing off “bad” subscribers’ debts: 22% - with content-providers’ payments, 13% - with payments for inter-city and international connections. TM SAT company, an exclusive service-provider of Thuraya mobile satellite communications in Russia has lost a license on satellite communications services provision. That has been caused by the default of conditions of licensing for an interface station construction in Dubna. A number of Ural operators has made a complained to the social organization “The Ural Mobile Association” about aggressive behavior of MTS company, trying to pirate their subscribers by means of the advertising company, promising more profitable tariffs. 2.5. The Regulator’s Activity Evaluation By Entrepreneurs and Mass Media In May the Moscow Prosecutor’s Office and the Criminal Investigation Department started revealing unregistered violations by means of phone questioning of people, having recovered their lost SIM cards. The action has led to an ambiguous reaction of people and Mass Media. 3. The Companies’ Activity and Decision Making, Influencing Most the Market Development MTS Megafon board of directors has recommended the annual meeting of shareholders to uphold the decision of non-payment of dividends for 2005, and send the whole profit on the company’s development. The same decisions were made two previous years. MegaFon first has began to expand its activity in the far Moscow region, in Orekhovo-Zuevo in particular. Earlier the company limited its activity to towns-satellites of the Moscow region. The bank “Russian Standard” has established a credit of 10 mln USD by December 31, 2007 to “Svyaznoy” group of companies in the frames of EBRR (the European Bank of reconstruction and Development). The goal is sponsoring the import of the largest foreign companies’ mobile phones. 3.2. Success and Failure in New Assets Buying in Russia and Overseas The Sweden holding Tele 2 is finishing the negotiations on buying the cellular companies SMARTS and MST Corp. By uniting these assets Tele 2 will serve more then 8 mln subscribers in 33 regions of Russia. Tele 2 has increased its share holding in the Siberian Cellular Communications from 70% to 100%. In June a new owner of Vostok Mobile Volga holding must be defined. The holding owes three cellular operators of the Volga region: Saratov Mobile, Chuvashiya Mobile and Penza Mobile. Presently the holding belongs to the Cyprian Eventis Telecom, negotiating its sale with Volgatelecom, MTS and Tele 2. In June 22 Sky Link declared finishing of the deal on buying 7.5% chartered capital of Personal Communications (P-Com), having belonged to Qualcomm company before. The purchase was made by way of “Moscow Cellular Communications”, a 100% subsidiary of Sky Link. The rest 92/5% has already belonged to the company. That is a part of the strategy of Sky Link’s assets consolidation in the Moscow region. Earlier, in 2005 the operational integrations of MCC and P-Com in the united structeru Sky-Link-Moscow was completed. 3.3. The Companies’ Activity on Stock Markets of Russia. Euroset has placed bonds of 3 bln roubles on the Moscow International Currency Exchange (MICEX). The funds are aimed to finance the short-term credit liabilities. 3.4. Personnel Changes in the Main Companies In June 14 at the special meeting of MTS shareholders Leonid Melamed has been assigned a president of the company for a 3-year term. Earlier he was general director of the insurance company ROSNO, included in Systema. In June 23 at the stockholders meeting MTS shareholders changed a procedure of the company’s president election. Henceforth he or she will be elected by the majority of votes among elected members of the board of directors for 3-year term or less. Earlier a president had been elected by the meeting of shareholders. General director of Vimpelcom Alexander Izosimov, whose 3-year contract is over in October 2006, stipulated that the company’s clear strategy would be approved by board of directors for his further holding this position. In his opinion, the company should have an independent chairman. The problem is caused by the conflict of Vimpelcom’s main shareholders, Telenor and Alfa-group, concerning the independent Vimpelcom’s entering the Ukrainian market in late 2005. In June 23 the shareholders elected the company’s board of directors, consisting of 9 people and including independent candidates, offered by Alfa and Telenor and three people from each of the two shareholders. Chairman of the former board of directors David Haines was promoted to the new board of directors by minority shareholders, but was supported actively by Alfa. A new position, strategy director, has been introduced in MegaFon. The head of Motorola representative office in Russia Sergei Kozlov will be also responsible for sales in the subdivision of the company’s communications networks in CIS countries. Deputy general director of Svyazinvest Stanislav Panchenko has taken up a position of chairman of the Central Telegraf board of directors. General director of the cellular operator Turkcell Muzaffar Akpinar, having the Russian holding Altimo as one of the shareholders, has resigned. That was probably caused by the conflict with the Turkey shareholder of the operator Cukurova Group company. Disagreements occurred in March, when Cukurova, owing 27% share, fired several leading managers of the company without agreeing on that with general director and the large shareholder TeliaSonera. In June 26 a new board of directors was elected in Volgatelecom. It consists of 11 people.Sergey Kuznetzov has been elected chairman, and Sergey Omelchenko is deputy chairman. 4. The Conflict Zones and the Interests Opposition Field In June 8 IPOC fund registered a claim to the US circuit court on the South District of New York. The claim was registered to Alfa-group structures, chairman of the company’s board of directors Mikhail Fridman, president of Alfa bank Petr Aven, the investbanker Leonid Rozhetzkin and Hans Bodmer, a former head of the Zurich company Von Meiss Blum&Partners, who had been a middleman in selling of 25.1% of MegaFon shares in 2003. The claim includes a history of selling by LV Finance, having belonged to Rozetzkin till the middle of 2003, 100 %shares of the Bahamian company Transcontinental Mobile Investment, owing 25.1% sares of MegaFon. They confirm in IPOC, they paid to Rozhetzkin “more then 50 mln USD for those shares. But Rozhetzkin and Fridman invented a scheme, allowing Rozetzkin to get IPOC funds and Fridman managed to take the control over IPOC assets. In June 6 Motorola company filed a claim to the Moscow Arbitrage, demanding to pay the damages of 18 mln USD, caused by the information, spread by RussGSP company. The company’s representative stated, according to data of the independent examination, Motorola phones did not contain a device, patent by RussGPS. Motorola demands of RussGSP a refutation of the charge in their patent violation on model 31 183. Telenor has began to buy Vimpelcom shares, circulated on the free market. Analysts suggest, thus Telecom want to influence Altimo and make the company yield in the negotiations, concerning buying of Vimpelcom control share holding. According to the statement of Telenor representative, in 2006 the company intends to buy up to 3.5% shares of Vimpelcom, circulated on the free market. To do that the company has signed a contract with the international bank ING for 1-year term. According to the contract, the London subdivision of ING Bank N.V. will buy ADR of Vimpelcom. Altimo has made a decision to procure the removal of Vimpelcom shares, belonging to ING Bank, from participation in Vimpelcom management. The reason is that after making the agreement with Telenor ING bank will vote by his Vimpelcom shares in the interest of Telenor. As a result the number of voting shares under Telenor’s control, will exceed 30% of the total of the voting Vimpelcom shares. According to Altimo, that violates the existing legislation. Vimpelcom has started struggling with MTS and several overseas companies for control over the Armenian communications operator ArmenTel. ArmenTel is the only large operator on the communication market of Armenia. In early April 2006 the Grek operator OTE, owing 90% of the company’s shares (the rest shares belog to the state), declared an intension to sell its share.
3.1. The Investments in Extensive Growth and Innovation Development
has declared a change of the development strategy. The company will emphasize expansion to Russian regions and Ukraine.According to the state of the demand we can show figures on the sales volume of Euroset mobile phones in the Ural region. In the 1st quarter of 2006 it reduced by 17% as compared to the same period of the previous year. At the same time the income increased by 6 %. According to the information from the company, that was a result of quite popular demand for expensive phone models. Such tendency resides in the whole Russian market of mobile phones.
