The General Trends of the Market Development in April 2006

1. The General Trends of the Market Development

1.1. The Saturation Rate of the Cellular Communications Market

According to the data for the 1st quarter, 2006, published in April, the number of cellular communications subscribers in Russia has increased by 4.7% and reached 132.1 mln people. The penetration level has grown by 4.3% up to 91%. That has been minimal increase since the 2nd quarter of 2005. Analysts conclude about the coming saturation of the Russian market that leads to the successive ARPU reduction.

By the late March in Moscow and St. Petersburg the subscriber base volume has been 23.663 mln and 7.745 mln users, and the penetration level has been 139.3% (Moscow) and 122.2% (Petersburg) (the figures of February were 136.6% and 120.9%). The pure increase in Moscow is 462, 000, and in St. Petersburg – 82, 000 users.

In March the pure increase of the subscriber base in Russia was divided as follows: Vimpelcom – 34.3% new subscribers, MegaFon – 26.6%, MTS – 18.2%. The rest operators shared 20.9%. As a result, the Big 3 subscriber base numbered 45.835 mln of MTS subscribers, 44.814 mln of Vimpelcom users and 24.153 mln of MegaFon users. The Russian market was divided in March as follows: MTS – 34.7% (minus 0.4% as compared with February), Vimpelcom – 33.9% (minus 0.1%), MegaFon – 18.3% (+0.1%), the rest operators owe 13.1% (+0.4%)

In March in Petersburg pure increase of the subscriber base was 82 thousand users. MegaFon North-West has become a leader managing to attract 54.4% new subscribers. Vimpelcom has got 27%, MTS has only attracted 8.3% of the total subscriber base increase. Tele 2 has got 6% and Sky Link has got 4.3% subscribers.

The cellular market in Petersburg was divided in March as follows: MegaFon – 37.1% (+0.1%), MTS- 32.7% (minus 0.3%), Bee Line – 22.1% (+0.1%), Tele 2 – 5.9% (without change), Sky Link – 2.2% (+0.1%)

On the Moscow market the penetration level has reached 139.5% (+4.9%), in Petersburg and the Leningrad region – 121.1% (+3.8%), in regions of the Russian Federation – 82.6% (+4.3%)/

By the end of the 1st quarter of 2006 Tele 2 subscriber base in Russia has grown up to 3.912 mln as compared to 1.585 mln at the same period of the previous year. The subscriber base increase has been 638 thousand subscribers.

New data of the cellular market condition in 2005 were received in April.

According to the research results of Sotovik, the information and analytical agency, in Russia the market volume of digital surface communication channel rent (without analog and satellite channels) has been more then 315 mln USD, increasing by more then 40% in total.

The market shares of the resource sellers are as follows: Rostelecom – 48%, Transtelecom – 41%, others – 11%. The shares of the resource buyers are: wired operators – 47%, cellular operators – 41%, corporate clients – 7%, the state organizations – 5%. In 2005 the leading position in the segment of interzone channels was taken by Rostelecom. TransTelecom was a leader of the market in the segment of intrazone channels.

Operators of wired and cellular communications are the largest buyers on the market of channels rent. Vimpelcom has showed the quickest growth of demand among cellular operators.

The cost of the channels rent exceeds the corresponding figure of European markets because of length of the country’s territory and inequality of the population density as well as oligopoly on the markets of the channels rent.

1.2. The Offer of New and Standard Services

Since May 1, 2001 MTS has established a zone principle of calls tariffing in overseas roaming. Earlier the prices were fixed for each country. MTS has divided the world in 5 zones (Bee Line has got 8 zones). MegaFon keeps working according to the old scheme. MegaFon prices are lower than those of MTS and Bee Line.

The number of Euroset saloons in the Siberian Federal Region has reached 355 stores.

In the 1st quarter of 2006 sales volumes of smartphones and pocket PCs increased three times as much as at the same period of the previous year. In 2004 this market grew by 53%, in 2005 – by 220.6%, in the 1st quarter of 2006 – by 271.8% as compared to the same period of 2005. In the 1st quarter one of the brightest trends was quick increase of the pocket PC share in the total volume of sales. For two years pocket PCs had been losing smartphones in popularity. Their popularity has grown due to new models, having appeared on the market, and relatively low prices in comparison with communicators and smartphones.

According to the research of consumer preferences of the Internet audience in March, held by Sotovik, Nokia is a leader of the cellular phones market. The research has also showed growth in the demand in the following price segments: less then 120 USD and 301- 400 USD; and reduction in the segments: 121-200 USD and over 400 USD

MegaFon’s subsidiary Mobikom-Kavkaz was forced by Ramzan Kadirov to reduce considerably tariffs for the cellular communications. The company has got many obstacles due to the peculiarities of the territory relief and different risks. 130 base stations hav been launched in the republic, 140 of them have been launched within last year. 80 stations more are planned to be constructed in 2006 that will cover 80% of the republic territory.

Until recently Bee Line had been a single operator of the cellular communications in Chechnya. But since April 25 MegaFon has been allowed to work there too.

1.3.The Main Companies’ Potential (capitalization, profit)

In April 18 Vimpelcom declared financial and operational result for the 4th quarter and for 2005. According to the results of the year, the net profit has increased by 76%, from 350.4 mln USD in 2004 to 615.1 mln USD. The total operational proceeds have grown by 52%and is 3.21bln USD. In 2005 the company revised its strategy of development in Russia, placing the emphasis on proceeds and income increase due to the present subscriber base. According to the growth rate of the main figures, Vimpelcom has left MTS behind. The companies have almost got an equal ARPU – 7 USD approximately. Within the current year the company intends to focus efforts on aggressive advertising strategy and target marketing. The planned investments in the network development are 1.6 mln USD. The company has managed to get good results, in spite of lack of the consensus in the international expansion questions between the key shareholders.

The investment company Troika-Dialog has raised the value of Vimpelcom’s papers fair cost by 6% up to 52 USD. That was caused by a large amount of active subscribers and relatively stable figures of the revenue. However, other investment companies have not seen any unexpectedness in Vimpelcom’s good results and have not changed their evaluations. 

Volgatelecom company, also providing the cellular communications services, has introduced the audit statement for 2005. According to the results of the year, the proceeds have been 21, 348.4 mln roubles (the growth rate 114.7%). The revenue from the communications services has been 787.6 mln roubles (114.4%). The share of the revenue from the communications services has been 97.4 %. 57% revenue has been received from the communications services providing to the population. The main increase in revenue has been provided by increase in incomes from providing services of the local communications and services, connected with new technologies use. The expenses have been 15, 333 mln USD, ( the increase 114.7%). The net profit – 2, 261 mln roubles (the growth rate 110%).

In the 1st quarter of 2006 the net profit of Euroset was 12 mln USD, the turnover was 845 mln USD.

1.4. The Market Extension Due to Overseas Expansion

Sistema is planning to participate in the tender for the purchase of GSM in Iraq. Presently the company is looking for a local partner to found a consortium as independent entering of the Iraqi market is difficult. The penetration level in Iraq is assessed at 20%, though the amount of subscribers has increased by more then 300% within the year. However, political and military risks are very large.

MegaFon has made a contract with the Kirghiz company of cellular communications Bimocom (Megacom brand) to provide consulting services and roaming support. At that Bimocom remains a pure national operator, the network of which will cover Bishkek and the adjacent territory. 90% cellular communications market in the republic belongs to Bitel company, the control holding of which is being struggled by MTS and Rezervspezmet.

According to the data of GSM association, Bee Line network has taken the 1st place in the world in the amount of countries and territories, where GPRS roaming is provided to a subscriber. 

2. The Regulator Activity and the Legal Field Dynamics

2.1. News in the Legislation And Other Changes in the Legal Field

In April 17 FAS sent a letter, containing offers, concerning the State Commission on Radio Frequency (SCRF) reorganization, to the RF government. According to FAS, it is reasonable to place amendments to the law “On Communications” and transfer the commission under control of the state as SCRF activity does not contribute to effective competitiveness on the communications market. As an example, they speak of Vimpelcom’s failure in efforts for getting frequency to spread GSM network in the Far East. However, according to Minister of Information and Communications Reiman, regional bodies have not just been able yet to find free frequencies for MegaFon in the Far East. Nevertheless, many experts give FAS offer a favourable receipt, believing, that SCRF activity is not unbiased and transparent enough.

The government commission on the administrative reform carrying out has approved the draft order of Rossvyaznadzor work. The order will take effect after it is updated and approved by the Ministry of Justice, the Ministry of Economic Development and the Ministry of Information and Communications within two months. In particular, the order provides for reduction in amount of papers, the operator is obliged to introduce to Rossvyaznadzor. An original license must be made within a month and a half instead of three months. Operators’ applications for a license period of validity prolongation must be taken up within a month instead of a month and a half. A maximum period of time, during which Rossvyaznadzor must respond to operators’ requirements, is also fixed in the order (30 days for written inquiries, 2 days for e-mail inquiries). However, the operators note, the draft order does not contain an order of licenses issue procedure for the communications objects exploiting.

2.2. The State Assets Privatization

In the late April Svyazinvest was permitted to sell 28% shares of MGTS.

Tax authorities can be a certain obstacle for the privatization. In April 26 Svyazinvest subsidiary Centertelecom (50.69% shares) got a notification of indebtedness to the state at 2353 mln roubles for 2002-2003. The summary of the Federal Tax Service is being disputed by the company.

In the middle April the information, concerning buying by Vekselberg a share of Svyazinvest from Blavatnik, appeared. That leads to suggestions about their possible participation in privatization of the company, for instance, in cooperation with Sistema or Alfa group.

2.3. The Struggle with Illegal Entrepreneurship

In April 12 the Moscow Regional Prosecutor’s Office on Supervision over Laws Execution on Air and Water Transport brought an action, concerning illegal import of cellular phones at 530 mln roubles, seized from Euroset company. The investigators are only interested in 50 thousand of Motorola C115 phones, produced in Brazil. Motorola company has confirmed their origin, but, according to the information, primarily this country was not mentioned in the accompanying documents, and the corrections were made later. Euroset is not mentioned among direct participants of the contraband. However, the company can have direct losses due to the incident, and that can result in indirect losses while preparing to the public stock floatation on the international market.

In April 10-12 one of the storage complexes of Technosila was arrested by Department K of the Ministry of Internal Affairs. The total value of the seized mobile phones and technics is 30 mln USD.

The North-Western Custom-House has informed Petersburg large bulk suppliers of cellular phones of the intension to check their tax returns.

The check up of Vimpelcom activity for 2003-2004 by the tax authorities, started in January 2006, is going on..

2.4. The Regulator Activity Evaluation by Entrepreneurs and Mass Media

Since July 1 amendments to the law “On Communications”, concerning prohibition for operators to take a fee for outgoing calls, will have taken effect. Due to that the companies are looking for ways of tariffs revision to avoid big losses. According to experts’ assessment, the proceeds of the Big 3 (MTS, Vimpelcom and MegaFon) contain 10% income from outgoing traffic, when an annual turnover is approximately 10 bln USD.

3. The Companies’ Activity and Decision Making, Influencing Most the Market Development

3.1. Success and Failure in New Assets Buying in Russia and Overseas

Euroset and Samsung, the Korean producer of cellular phones, have reestablished relations, having been ceased by the Russian party because of the contract breach by the Korean party in summer 2002 and in August 2005.

The amount of Euroset saloons in St. Petersburg, the Leningrad region and the North-Western region has reached 265 outlets and in the North Federal Region – 376 outlets.

Cifrograd company, having about 1000 communications saloons and being the third largest company among retailers, according to proceeds, has made a franchise contract with Symphonya network of saloons (the Ural group, 107 saloons)

3.2. The Companies’ Activity on the Stock Markets

In April 19, Chairman of board of directors of Sistema V. Evtushenkov stated, that approximately 2.5% shares of the corporation at 300 mln USD, will not be floated on the Russian stock market, as it was planned in the early March. Experts explain, that within March and the 1st half of April the shares have gone down by 11% after reduction of MTS shares quotations. Meanwhile, Sistema’s capitalization has reduced from 13 bln USD to 11.6 bln USD, ADR has gone down by 11% at the London Stock exchange. According to analysts, that was caused by results of the activity for 2005, declared by MTS in the late March, that were worse then it had been expected. Since March 3 MTS capitalization has reduced from 14.5 bln USD to 13.4 bln.

Volgatelecom authorities have decided to issue bonds of BT-4 series at nominal value of 1 thousand roubles at 3 bln roubles. At present three issues BT-1 at 1 bln roubles, BT-2 at 3 bln roubles and BT-3 at 2.3 bln roubles are current.

3.3. Personnel Changes in the Main Companies

In April 10 Board of directors of MTS approved dismissal of the company president Vasili Sidorov. Leonid Melamed, general director of the insurance company Rosno, included in Sistema holding, was assigned an acting president. The final decision on the candidature must be taken at the special meeting of MTS shareholders in June 14. Commentators think, Sidorov’s dismissal was caused by the shareholders’ discontent with results of his activity.

In April 28 Board of directors of Svyazinvest dismissed general director of the company Valeri Yashin. Alexander Kisilev, deputy minister of communications and representative of the Petersburg group of telecommunications workers, supervising the post reform, was proposed for the position. They inform, his candidature has been approved in the government. 

4. The Conflict Zones and Interest Opposition Fields 

4.1. The Contradictions between Entrepreneurs as a Result of Changes in Property Structure, Merges and Absorptions

In April 24 the Arbitrage of St. Petersburg and the Leningrad region take a decision to arrest 25.1% shares of MegaFon by a writ of IPOC fund of March 30, concerning the proprietorship admitting of 25.1% shares of Megafon. The arrest will last up to June 19. A preliminary hearing has been fixed for this time. That is the first success of IPOC against Alfa in Russian courts. But it is doubtful, if the conflict can be settled in court, so the suit is expected to be long.

In the late April Telenor company informed, it was ready to extenuate the terms of Kievstar redemption by Vimpelcom. Telenor authorities agreed, that the sum of 5 bln USD can be paid partly with money and partly with shares of Vimpelcom. The proportion of the parts will be discussed later on.

4.2. The Competition in the Struggle for New Assets and Markets Overseas

MTS representatives are still trying to get back a share(51%) in the assets of the Kirghiz cellular operator Bitel, intercepted by Rezervspecmet, probably connected with Alfa-group. The suit, concerning the problem, has been brought to the Supreme Court of Kirghizia again. There is no certain information, if Rezervspecmet is really a representative of Alfa’s interests. The case prospects are vague.