8 марта '07
The Russian Telecommunication Market Development in February 2007
1. General Trends of the Market Development
According to some studies, in 2006 Russia got over 100% figure in the amount of subscribers. However, some analysts call the figure in question. In their opinion, the reason is that some time later many mobile phone users change an operator, choosing a more profitable tariff. For example , according to the research of Euroset, by late 2006 the number of sold SIM-cards had been 153 mln , while the amount of real subscribers was only 70 mln users.
MTS
has published data about the consolidated subscriber base of January 31, 2007: 73, 410 thousand people as compared to 72, 860 thousand people of January 31, 2006.
In January 2007 MTS and Vimpelcom set a record on a net outflow of subscribers. For the first time both operators have only increased the amount of subscribers in Moscow (the amount of MTS subscribers has increased by 60 thousand, Vimpelcom’s subscriber base has increased by 50 thousand). In other regions of the country the number of outflown subscribers has exceeded the number of newly connected.
Both operators stop taking account of a subscriber six month after he/she stops using their fee services. The operators also carry out marketing actions, targeted to increase loyalty of present subscribers.
MegaFon
has remained the only “Big 3” operator, avoiding this effect. In January the amount of the company’s subscribers in Russia increased by 447.2 thousand people. They explain in the company, they get rid of “dead souls” 3 months later instead of 6, so they do not have much “dead weight”. Besides, MegaFon’s marketing actions are targeted on stimulating of service consumption by present subscribers instead of attracting of new users.
The market participants and experts believe, in 2007 cellular operators’ proceeds growth of additional services will start slowing down. In 2006 the significant growth was observed in this segment of the market: by 34% up to 1.9 bn USD. But its share in the total proceeds of communications has remained on 2005 level. According to the forecast of iKS-Consulting, in 2007 cellular operators’ proceeds of additional services will increase by 19% up to 2.3 bn USD, i.e. 15% of total proceeds of the companies.
In experts’ opinion, the retail market in cellular communications has reached a stage, when price wars go to the past. At present assortment as well as prices are almost equal in all companies. But the market of additional services, that could allow customers to see differences between the leading companies, has not been developed yet. Thus, the priority is precise targeting and understanding who are these or those services for and informing potential consumers about precise offers.
1.2. The Demand Evaluation
In 2006 the volume of the Russian mobile content market increased by 25% up to 410 mln USD as compared to 2005 unlike the forecast: 470-500 mln USD. According to the forecasts of iKS-Consulting, in 2007 the market growth will be 21%, and sales volume of content-providers will be 494 mln USD. In the opinion of the market participants, it has become more difficult to earn money by selling pictures and melodies, that traditionally were the most popular kind of the content. Subscribers have learned to load content from Internet independently and free of charge and set in their phones.
According to the survey (1304 people), introduced in Sotovik.ru, 28% of respondents use regularly express-payment terminals. The same number of the respondents use terminals very seldom. 24% pay for mobile communications via terminals from time to time and 29% of respondents do not use express-payment terminals.
1.3. The New and Standard Services Offer
According to materials of the study, carried out by the information and analytical agency Sotovik, for two of three Moscow operators the recent months were fruitful in concern of changes and innovations.
MTS has changed an outward image and tried to fix it in subscribers’ mind by mass output of new tariff plans.
Vimpelcom, choosing rouble tariffing, also issued a number of tariff initiatives in the second half of the year.
In contrast to them, MegaFon has not either introduced new tariffs or changed an image, but has increased the amount of new connections and the company’s share on the market.
Since February 2007 in Cifrograd company all communications with customers have been supported by a byline “Cifrograd. Centres of Mobile Changes” and by a slogan “Vpered , za njvim!” (Go ahead, for a new!). That was caused by the permanent increase in the total volume of “phones for replacement “ sales. According to the results of 2006, the share was from 75% to 80%. The new positioning of Cifrograd network reflects the company’s goal – to become a leader in this segment of the market.
Vimpelcom’s project “The Mobile Etiquette” has got a special prize of the National Award in the field of PR development “The Silver Archer”. The project was awarded in the nomination “The Best Pr-project 2006” and got a special prize of the trustee council and the jury, consisting of representatives of the largest companies, the state bodes and social organizations.
1.4. Major Companies’ Potential (capitalization and profit)
According to preliminary data, in 2006 MTS consolidated proceeds increased approximately by 20% up to 6.013 bn USD. In 2007 the operator is planning to increase the proceeds by 15-17%, and keep the profitability on 2006 level – 50%. The proceeds increase will be contributed by a switch to rouble tariffs, growing incomes from other operators (since 2006 they has begun to pay for a call delivery to MTS subscribers) and an increase of a talkative activity of subscribers.
The agency Fitch has raised MegaFon’s rating from “BB” to “BB+”, the forecast – “Stable”. The agency was guided by the fact, that proceeds’ weight of the company in “Big3” rose from 21% in the 1st quarter 2004 to 29% in the 3rd quarter 2006. MegaFon has also achieved a significant growth of proceeds (by 61% in 2005, by 55% for 9 months 2006).
The profitability level has increased from 46.4% for 9 months 2005 up to 50.5% for 9 months 2006. Fitch also supposes that being the third largest operator regarding a subscriber base volume, MegaFon has good positions due to competitors. As result, to increase an own share on the market, each of the operators can take an equal market share. The agency also emphasizes a tough control, MegaFon has in concern of the company’s costs.
MegaFon has the highest ARPU among “Big3” operators, that is caused by targeting of the company’s marketing policy to an optimal correlation of a price and quality as well as the conservative approach to defining of active subscribers.
In spite of disagreements among MegaFon’s majority shareholders on the blocking share holding at 25.1%, that has not prevented the board of directors from strategic decision taking and has not caused errors in the operating activity so far.
MegaFon’s
In late January 2007 the agency Moody’s raised MegaFon’s rating from B1 to Ba3, the forecast – “Stable”.
As a result MegaFon has got ratings, equal to the ratings of the major competitors. The current credit ratings of MTS and Vimpelcom from S&P are correspondingly: BB ( the forecast – “Positive”) and BB+ (the forecast- “Stable”). Moody’s ratings are Ba3 for both operators. In analysts’ opinion, the ratings’ rising reflects the fact, that since late 2006 MegaFon has started generating of the free money flow, increased financial figures and strengthened the position on the market.
Euroset
Today Euroset owes more than 5 thousand saloons of communications in Russia, the CIS and Baltic countries.
In 2006 the company sold 25%of phones more than in 2005. The turnover has increased up to 3.1 bn USD, i.e. by 84% as compared to 2005.
However, at the same time the company’s debts have multiply grown: from 12 mln USD in 2003 to 609 mln USD in 2006.
In February 28 at the New York Stock Exchange Vimpelcom’s share cost 80.5 USD, a share of MTS – 51.2 USD.
1.5. The Market Extension Due to Foreign Expansion
The Russian companies’ activity overseas is introduced mainly in the CIS as before.
Vimpelcom is very active. In Kazakhstan the company is represented by Beeline and K-Mobile and owes the local operator KarTelKompaniya. The company intends to increase the amount of subscribers from 4 mln to 5 mln people in the country by late 2007 and assesses the share on the country’s market at 47-48%.
Today the largest operator of cellular communications in Kazakhstan is GSM-Kazakhstan, owing the brands K’cell and Active, 49% of which belong to the largest operator of fixed communications Kazakhtelecom.
In Tajikistan Vimpelcom’s subscriber base has increased by 700% within 5 months: from 14.5 thousand people in September, 2006, to 100 thousand in January 2007. Due to the dynamic development Bee Line has become one of the large cellular operators in the country.
By late 2006 in Uzbekistan five Vimpelcom’s operators provided services to about 2,7 mln people, while the penetration level of mobile communications was 10.1%.
Vimpelcom’s major competitor in Uzbekistan is Russian MTS, having provided services to 1.5 mln people by the end of January 2006.
The Ukrainian Radiosystems (URS), 100% subsidiary of Vimpelcom, informed that in 2006 BeeLine’s subscriber base had increased more than 7 times as much and in December 31, 2006 it had 1.876 thousand subscribers. According to the results of 2006, BeeLine was declared the highest growth cellular operator in the Ukrainian telecommunication market.
In the Crimea BeeLine has finished the process of modernization of cellular communications network, turning to a new hi tech equipment Erisson. Due to that the communications quality has been improved and the covering area has been extended. BeeLine covers 70% of district centers and 93% of towns of the Crimea. The covering area extension has led to the communication providing over the routs Simferopol-Alushta-Yalta-Sevastopol, Simferopol-Evpatoriya, Simferopol-Feodosiya-Kerch, Simpferopol- Djankoi-Krasnoperekopsk. The communication is also provided to all recreation areas of the Southern seaside of the Crimea from Sevastopol to Sudak.
CEO of MTS Leonid Melamed declared, in 2007 the volume of investments in the development of “The Ukrainian Mobile Communications” (100% of shares belong to MTS) will be 700 mln USD. Basic subsystems and radio network optimization, the communications quality improvement, a sale of fixed and mobile communications services in one block for corporate clients, and rebranding of UMC into MTS were called among strategic initiatives of the company in 2007.
The only example of the Russian companies’ activity overseas in February is Altimo, managing telecommunications assets of Alfa Group. The company has associated with Hinduja Group and Qatar Telecom to get a control share holding of the forth largest Indian operator of mobile communications Hutchison Essar Ltd.
The British Vodafone Group and a number of Indian groups have already showed interest to Hutchison Essar. According to the information from Indian mass media, the company was assessed at 16-20 bn USD.
2. The Regulator’s Activity and the Legal Field Dynamics.
2.1. The Struggle with Illegal Entrepreneurship.
In February 28 the Moscow Arbitrage validated a decision and an order of FAS of Russia in the case of MegaFon: the concerted action of operators of cellular communications. Vimpelcom, MTS and the Association of Regional Operators of Mobile Communications were taken to the legal investigation. Earlier FAS declared that Vimpelcom, MTS and MegaFon had violated Article 6 of the Law “On Competitiveness and Monopoly Activity Restriction on Commodity Markets”. At the same time FAS closed the procedure in case of Vimpelcom and MTS because of the voluntary removal of the violation. MegaFon is ordered to remove consequences of the antimonopoly legislation violation.
The Ministry of Internal Affairs of Russia has finished investigation of the criminal case of swindlers, registering illegally credits for mobile phones buying. The gang participants, working in Pskov, misappropriated mobile phones at more than 600 thousand roubles. Working in the mobile phones sales department of one of the town stores, three swindlers registered credits on men of straw. Their accessories brought jobless or alcohol abusing people, registered credits on them, indicating wrong data about a place of work and a salary.
2.2. The Regulator’s Activity Assessment by Entrepreneurs and Mass Media
MTS has managed to contest tax claims at 1.2 mln roubles of the Interregional Tax Inspection on the largest tax payers, which were counted for the company in September 2006 for 2003-2004. The operator contested the claims in the Moscow Arbitrage and the court answered the company’s claim, declaring illegal the claims at 1.216 mln USD. The company agreed with the inspection’s claims at the remained 68 mln roubles and paid the sum. In the opinion of the tax inspectors, the major part of the claims was connected with the wrong computation of taxes on the company’s mutual payments with content-providers, who worked without licenses for communications services providing in 2003-2004.
3. Companies’ Actions and Decisions, Influencing Most the Market Development
3.1. Personnel Changes in Major Companies
Pavel Pavlovski, a head of MTS – Foreign Companies, was appointed CEO of “The Ukrainian Mobile Communications”, 100% subsidiary of MTS, instead of Adam Voyatzki.
A new position has been established in Vimpelcom – director on the service quality of marketing and sales block in Russia and the CIS. The position has been taken by Elena Elizarova, a former CEO of the subsidiary Mobile Center. Her duties include the corporate standards forming and development of the service quality methodology.
Eurocet has declared about appointment of Dmitri Denisov for the position of a manager of the branch office “Centralnii”. Earlier Denisov was a director of the company’s subdivision “Russia”. Being the manager of the branch office, he is obliged to optimize the business and get higher level of the company’s activity.
4. The Conflict Zones and Interests Opposition Fields
4.1. The Fields of the Most Active Struggle For Division and Revision of Markets and Assets
In February 26 the reception of applications for participation in 3G licenses tender was finished. 12 companies applied to Rossvyaz: MTS, Vimpelcom, MegaFon, SMARTS, Novaya Telefonaya Kompaniya, Investelektrosvyaz (Corbina Telecom), Summa Svyaz, Setevaya Telekommunikacionnaya Kompaniya, Chelyabinskaya Sotovaya svyaz, Aurora-Telecom, Astelcom, Komtel Plus.
The disputes among cellular operators, regarding tariffs changing after CPP principle introduction has not been finished yet. But MTS has reached the conclusion with regional cellular operators, that the company will take 1.02 per minute from them for calls to MTS subscribers. The sum is 0.08 roubles less that the company demanded earlier, but it is 0.07 roubles more than Vimpelcom and MegaFon will pay to MTS.
4.2. The Contradictions Between Entrepreneurs During and As a Result of Property Structure Changing, Merges and Absorptions.
SMARTS and Sigma Capital Partners (SCP) continues sorting out relations in a court. In February 13, at the second trial the Arbitrage of ST. Petersburg and the Leningrad region rejected a claim of SCP on delegation on the company of rights and obligations of a buyer of 799 shares of SMARTS (20% minus 1 share). Thus, the decisions of previous courts regarding lack of SCP rights for 5 shares of SMARTS (that would make the company the operator’s shareholder) were confirmed.
According to the statement of the head of TeliaSonera, his company intends either to get full control over the Russian cellular operator MegaFon and the largest Turkish GASM operator Turkcell or to get rid of these assets. Via the sub-companies TeliaSonera owes 43.9% of MegaFon and 23% of Turkcell.
The Ministry of Finance of the Bermudas has made a claim to Supreme Court of the country to liquidate IPOC company, owing about 40% of MegaFon shares, and the affiliated companies. The claim was made because of accusation of the company’s owner Jeffrey Galmond of illegal entrepreneurship on the market of telecommunication assets and of illegal incomes.
4.3. The Competition in the Struggle for New Assets and Markets Overseas
The Council on Capital Markets of Turkey has ordered Alfa Group to make an offer to minorities of Turkcell, the largest cellular operator in the country, about redemption of their stock within 15 days. In 2005 Alfa Group bought 13.22% of Turkcell shares for 1.6 bn USD. The regulator is also contesting the decision of the Ankara court, that made it to make such judgment.
has declared about the development strategy changing towards increase of profitability. Earlier the company paid more attention to rapid growth and the company’s share on the market of mobile phones in Russian has reached 43%. According to the company’s strategy, its share in any segment of the market must not exceed 45 % in order to avoid problems with FAS. In February the company declared already they intended to close about 50 stores in Russia as unprofitable. Instead, the company is planning to enter the Indian market in the nearest future.credit rating has been raised by Standard & Poor’s (S&P) agency. In December 2006 the agency changed the rating form BB- to BB, the forecast - “Positive”.
