6 апреля '07
The Russian Telecommunication Market Development in March 2007
1. General Trends of the Market Development
1.1. The Saturation Rate of the Cellular Communications Market in Russia
By late February 2007 the subscriber base of MTS had reached 73.8 mln users as compared to 60.3 mln for the same period of 2006. For 2006 the company’s subscriber base in Byelorussia has increased from 2339 thousand to 3208 thousand customers.
According to the data of March 2007, the cellular business of Sibirtelecom serves 3 mln 301.5 thousand subscribers. More than 3 mln 283 thousand users are served in GSM standard.
The major subdivisions of Sibirtelecom: Baikalvestcom in the Irkutsk region –
1 368 thousand subscribers; Eniseitelecom in the Krasnoyarsk region, Hakasiya republic – 1 ml 366.6 thousand subscribers; a structural subdivision of Sibirtelecom’s Buryatuya branch “Ulan-Udenskaya Sotovaya Set” – 404.9 thousand; SteK GSM in the Kemerovo region – 93.9 thousand subscribers.
In total for 2006 the growth rate of GSM subscriber base has been 58%. The growth magnitude of the mobile communications subscriber base was influenced by successful work of Eniseitelecom (the subscriber base growth - 42%), Baikalvestcom (77%), Ulan-Udenskaya Sotovaya Set (55%) and SteK GSM 0 131%.
In contrast to the worldwide trends, sales of mobile phones in Russia is going down. All experts agree, but in the absence there of official data they give different figures: from 29.3 mln to 31.6 mln of sales for 2006 as compared to 31.9 mln for 2005. A phone replacement is the main force of the market as there are less new subscribers.
1.2. The Demand Evaluation
The Information Agency Sotovik has published a rate of customers’ preferences of mobile phones (%): Nokia – 47, Sony Erisson – 19, Samsung – 14, Motorola – 8, Siemens – 2, others – 10.
According to the study, carried out by the analytical company MarketStar, more than 40% of cellular communications subscribers do not buy smartphones. 15% only know, which operational systems are used in smartphones.
1.3. The Offer of New and Standard Services.
Vimpelcom’s innovations were the most noticeable last month. Following MTS, the company decided to refuse to deal with most of providers of mobile content in favour of several large providers, which will belong to the company. Vimpelcom’s management is not satisfied with the quality of a content, supplied by small providers. Hence force, the content of Bee on Line portal will be imbued by several large content-aggregators, including Temafon. In late April – early March Vimpelcom is planning to launch a line of credit tariff plans in regions. Today corporate, VIP and Moscow clients of the company can only use the credit line. Vimpelcom can be followed by MTS this year, and MegaFon considers this innovation is too risky.
The company is launching a new type of mobile communications services “Govoryashee pismo” (The Speaking Letter) as an alternative to SMS messages. The service can be used by the operator’s subscribers of all systems of payment in the home network and in the intranet roaming.
Svyaznoy has began to provide free services of tuning of wireless Internet, e-mail, other wireless connections and software for cellular phones and smartphones.
Euroset has declared a launch of a virtual operator. SMARTS is a partner of the company in the project. At the beginning stage the virtual operator of Euroset will provide services in 5 regions in the Volga Federal region.
1.4. Major Companies’ Potential (capitalization and profit)
According to the president of MTS Leonid Melamed, in 2006 the company’s proceeds have increased by 27.4% as compared to the previous year (up to 6.3 bn USD). For the first time within 2 years MTS has had an increase in the proceeds in the 4th quarter as compared to the 3rd quarter, despite the reduction of payments for roaming calls due to the end of the summer vocation season. After CPP principle introduction the company’s proceeds from incoming calls have decreased, but that was compensated due to new marketing initiatives and growth of income from interconnecting. The incoming traffic has increased significantly: subscribers started calling more often from fixed to mobile phones. According to contracts with operators, made for 2007, MTS average fee for a call is 1.02 roubles, including regional peculiarities of the traffic. In the second half of 2006, after CPP principle introduction this figure was 0.95-1.1 roubles.
MTS also demonstrated a growth of ARPU in the 4th quarter of 2006 in Russia. As compared to the 3rd quarter ARPU has only gone down by 1% from 8.6% to 8.5%, while the traditional reduction of ARPU is 10-20%, taking into account seasonality. According to results of 2006, OIBDA has increased up to 3.23 bn USD and the margin has been 50.6%. Melamed said, according to results of 2006, the dividend policy of MTS will remain the same as in 2005, when dividends were 50% of net profit.
Major Financial Figures of 2006:
Consolidated proceeds – 6.384 bn USD, consolidated OIBDA – 3.230 bn USD ( the margin – 50.6%), consolidated net profit – 1.246 bn USD. A positive net flow of funds for the year – 646 mb USD.
For the first time in the company’s history, the board of directors of Vimpelcom has recommended the meeting of shareholders, scheduled for June 29, to approve payment of dividends according to results of 2006 at the rate of 166.88 roubles for a simple share or of about 1.6 USD for an American deposit receipt. In total the sum of payments may be 8.8 bn roubles (330.5 mln USD). Altimo and Telenor representatives have voted at one with each other, because according to both shareholders’ statements, the conflict between them only concerns the problem of Vimpelcom’s entering the Ukrainian market.
In March 28 a price of Russian shares at the New York Stock Exchange: Vimpelcom – 97.5 USD; MTS – 56.7 USD.
1.5. The Market Extension Due to Overseas Expansion
Vimpelcom has demonstrated the most activity in this field. In Armenia the meeting of heads of Vimpelcom and the subsidiaries was carried out. They are Armentel (Armenia), Mobitel (Georgia), KaR-Tel (Kazakhstan), Takom (Tajikistan) and The Ukrainian Radiosystems (URS, Ukraine). They were discussing major directions of Vimpelcom group development. According to an executive vice-president of Vimpelcom on business development in the CIS countries Sergey Avdeev, the company is planning to apply a united tariff and service policy in the networks of its subsidiaries in the CIS. The government of Armenia has decide to sell its belonging to the state 10% of Armentel to the Russian Vimpelcom. The deal has been conditioned by full liberalization of the wired communications market by the end of 2007. According to the license, regulating Armentel’s activity, by late 2009 the company had to be a monopolist in the field of fixed communications, Internet Services and international communications. At present the operator is providing services to 607 thousand subscribers of fixed communications. The company is the second largest cellular operator (475 thousand subscribers), having the market share of 38.2% (according to iKS-Consulting).
In Ukraine Bee Line’s network has covered about 500 towns and build-up areas with more than 5 thousand population.
Vimpelcom has declared the company begin to provide mobile communications services in Georgia under Bee Line brand via tits subsidiary Mobitel. According to Sergey Avdeev, the executive vice-president of Vimpelcom on business development in the CIS countries, Mobitel has constructed a modern network GSM(GPRS)EDGE, ready for 3G services introduction. Firstly, Bee Line communications will be available in Tbilisi and Rustavi. By the end of the year the company is planning to cover regional centres on the licensed area of Georgia.
Vimpelcom has declared a launch of a network of HSDPA (3.5G) standard of the mobile operator Takom in Tajikistan.
The board of directors of Vimpelcom has put to the discussion at an annual meeting of shareholders a question about changing in the charter concerning extension of the company’s field of activity outside Russia and other CIS countries. Today Vimpelcom’s charter contains a regulation that the company carries out its activity in Russia and other CIS countries. The annual meeting of shareholders is timed for June 29.
Altimo has declared, they made an agreement with Deutsche Bank regarding two-year credit at 1.5 bn USD for their investment projects on mobile communications markets of Eurasia. They speak of growing markets of Southern and South-eastern Asia – India, Indonesia and Vietnam.
2. The Regulator’s Activity and the Legal Field Dynamics
2.1. News in the Legislation and Other Changes in the Legal Field
Supreme Court of the Russian Federation has validated fee collection for calls from fixed to mobile phones in “unlimited” tariff, rejecting the claim of the Unit of Consumers.
Moscow Arbitration has rejected MegaFon’s claim to the FAS. MegaFon is trying to obtain setting aside an order of FAS , concerning reduction of tariffs for interconnecting with regional operators. The company is trying to prove a lack of violations of the antimonopoly legislation in regard to setting by “Big3” operators higher tariffs for regional players.
2.2. The State Assets Privatization
Buying a blocking shareholding of Svyazinvest in late 2006 and getting representation in the company’s board of directors, AFK Sistema is trying to get a right to participate in the management of the holding and its subsidiaries as well by promoting its candidates to the companies’ boards of directors. AFK Sistema has promoted its representatives to almost all companies’ boards of directors and intends to take several seats in each regional company of the holding. But as the state is a major owner of Svyazinvest and the shareholders’ shares do not exceed its share, we should not expect any reforms in management of the holding, experts believe.
2.3. The Struggle with Illegal Entrepreneurship
In February 2007 scheduled actions on distant control over following by Vimpelcom of necessary demands and norms in the field of communications, were carried out by Rossvyaznadzor departments on Moscow, the Moscow and Kaluga regions.
According to results of the control, the operator of cellular communications was exploiting 7 base stations on the area of Moscow and the Moscow region, which were not placed in operation in accordance with an established order. In the Kaluga region Vimpelcom was exploiting 3 unregistered base stations and 11 base stations that used unlicensed radio frequency channels. Vimpelcom has been imposed administrative fines and given orders to eliminate the violations.
MTS, Vimpelcom and MegaFon are strengthening the struggle with non-payers. Since April bans will be able to get access to D-Telecom system, which contains information about subscribers – non-payers of MTS, Vimpelcom and MegaFon. To achieve this, data from an non-commercial partnership NKB will be delivered to the Bureau of Credit Stories “The National Credit Bureau” and then the data will be available to banks.
While relations between Russian large retailers and their foreign suppliers are improving, the detention of a set of contraband phones at 1 mln roubles by Dagestan customs inspectors seems an insignificant episode. The phones were tried to be transported from Azerbaijan across the state border in an Ikarus bus.
3. Companies’ Activity and Decision Making, Influencing Most the Market Development
3.1. Investments in Extensive Growth and Innovation Development
Receiving of applications for a license for 3G services providing has been finished. Beside Bg3 operators, other companies will also participate in the tender, including Investelectrosvyaz (a subsidiary of Corbina Telecom), a cable TV operator Komtel Plus, Summa telecom and Setevaya telecommunication company, representing SMARTS and Tele2.
Analysts of the market believe, today it is difficult to assess the candidates’ chances. However, they also emphasize priority of Big3. According to the tender conditions, companies, having the most licenses and the largest area to provide services of communications, are more preferable.
According to a forecast of MTS president Leonid Melamed, within nearest 5 years investments of Russian mobile operators in 3G networks construction can reach about 7.5 bn USD, i.e. a half of the total volume of investments in the Russian mobile branch. At that an annual volume of investments will remain on the level of the present year, and operators will transfer a half of the investments to the new generation network. According to evaluations of MTS, by 2012 about 30% of Russian subscribers will use 3G services.
MegaFon’s shareholders have approved formation of a credit at the sum up to 640 mln USD from 3 100% subsidiaries. Creditors will be the Moscow company Sonic Duo (up to 200 mln USD), MSS-Povolzhye (up to 140 USD) and the South Russian company Mobikom- Kavkaz (up to 300 mln USD). A crediting rate will be no more than 11% per annum. The funds will be spent on cellular networks extension in regions, buing of equipment and the corporative goals. MegaFon had to make credit agreements, because most of the company’s subdivisions are independent legal entities.
3.2. Success and Failures in New Assets Buying
For the 2 first months of 2007 Betalink network has opened 77 new stores of mobile innovations in 38 towns of Russia. The company’s geography has increased by 15 towns of Russia (Gus Khrustalni, Pavlovsk, Kirov, Murom, Protvino, Kamesk-Uralsk, Zverevo, Armavir, Kropotkin, Gryazi, Omsk, Spassk, Buguruslan, Satka and Ribinsk). Betalik’s stores of mobile innovations are working in 132 cities and towns of Russia. The total number of Betalink’s stores in Russian is 722.
By January 1, 2007 an amount of Telephone.ru stores has been 318 in 71 cities and towns of Russia. The number of stores has increased by 66% (126 outlets) for the previous year. For 2006 total proceeds of the company have been 185.8 mln USD, increasing by 93.3% as compared to 2005.
3.3. Companies’ Actions at Stock Markets
3.4. Personnel changes In Major Companies
Marcel Shtekli has appointed a technical director of MTS. Within 4 years before MTS he was a head of the Department of Planning and Work of Network in Swisscom Mobile AG in Bern (Switzerland). Earlier within 6 years he was holding a number of positions in the Swiss representing office of Ericsson company. According to information from MTS, his high-priority objective will be complex development of the company’s technical base and IT infrastructure during a period of 3G networks construction.
Sergey Beshev, a former commercial manager of Akado network, was appointed a new head of the Moscow macro region of MTS.
Vimpelcom has declared about 2 new assignments in the marketing and sales block of the company. Anton Telegin, a former commercial manager on Russia, was appointed a commercial manager on the CIS countries. Natalya Chumachenko, a former head of the sales management on the Moscow region, became a head of the commercial management on Russia.
The board of directors of VolgaTelecom has decided to dismiss Denis Pozdnyakov as a member of the board. Instead of him, Denis Kostin, deputy CEO of the company on corporative development, has been appointed a member of the board. Posdnyakov, having taken a position of the first deputy CEO on economics and finance, has got a new position – deputy CEO of Svyazinvest.
4. The Conflict Zones and Interests Opposition Fields
4.1. Fields of the most active struggle for division and re-division of markets and assets.
Experts are commenting actively the information about interest, shown by the Norwegian telecommunications concern Telenor to a possibility to buy a share in the Swedish-Finnish company Teliasonera. The deal can change considerably alignment of forces on the Russian market as well, because both operators are among the largest investors of the market and partners of the Russian Altimo. Another candidate for the share in the company is Altimo.
If Telenor becomes a co-owner of TeliaSonera, there will be a new alignment of forces on the Russian telecommunications market. Telenor and Altimo are co-owners of 3 large telecommunication companies: Vimpelcom (26.5% and 36.9% of voting shares correspondingly), Golden Telecom (20% and 29.9%) and the Ukrainian Kievstar (56.5% and 43.5%). Alfa also has a joint business with TeliaSonera: they are partners in MegaFon (25.1% and 43.7%) and the Turkish Turkcell (13.22% and 37%)
Negotiations between Altimo and TeliaSonera about the assets exchange have been hold up. The parties cannot agree on several items, including a size of the holding, the Russians could get in TeliaSonera. According to experts’ evaluation, to get the desired 17% Altimo should sell the Scandinavians shares in MegaFon and Turkcell and in Vimpelcom as well. At the same time the deal with Altimo would allow the Scandinavians to get control in MegaFon and be close to the control over Turkcell. Thus, commentators believe, suspension of the negotiations is probably temporary.
4.2. Contradictions between Entrepreneurs during and as a Result of a Property Structure Changing, Merges and Absorptions.
In March 14, 2007 the Arbitration of St. Petersburg and the Leningrad region rejected a claim of Sigma Capital Partners about transfer of rights and obligations for 3, 816 shares (95.4%)of SMARTS. Registering the claim, Sigma Capital Partners referred to a copy of the agreement about buying of the cellular company’s shares by the Society. The document was signed by some mr. Fyodorov on behalf of the sellers, the shareholders of SMARTS. The court has ascertained, that no shareholder of SMARTS authorized mr. Fyodorov and signed an agreement for selling of the company’s securities.
The conflict between Alfa Group and IPOC is going on. At present the Investigation Committee of the USA Congress has begun an investigation regarding the international detective agency Diligence, which is suspected by IPOC in corporative spying in favour of Alfa Group. The Committee asked documents from IPOC, which prove, that Alfa Group had hired Diligence and BGR company “to get confidential business information about the fund”. They suppose, Alfa could use the information against IPOC during the hearing about the share holding of MegaFon.
Analysts say, it will be difficult to prove a fact of cooperation between Alfa’s structures and Diligence agency. If IPOC manages to do that, the case of MegaFon can be tried under the other angle, without taking into account the circumstances, which were got by Alfa illegally.
IPOC has withdrawn a claim from the arbitration of the Hanti-Mansiisk autonomous region, in which they ask to declare invalid the buying of 25.1% of MegaFon shares by CT-Mobile company. Instead, the fund is planning to continue the hearing in the frames of the criminal case about fraud, brought before a court by the Moscow Prosecutor’s office. According to analysts, IPOC will have more chances to assert its rights for the arguable share holding of MegaFon in the Prosecutor’s office.
4.3. Competition in the Struggle for New Assets and Markets Overseas
Altimo and Telenor continue arguing about Kievstar. Altimo’s management were satisfied with the decision of Telenor’s board of directors about deconsolidation of financial results of Kievstar’s activity. According to Altimo, this decision has proved, that no one of Kievstar’s shareholders have control over the company and is able to consolidate results of the company’s activity.
At the same time Telenor has registered a claim to the Federal Circuit Court of the USA against Alfa Group and the affiliated companies about non-execution of the previous orders o the court and introducing of “the black PR” against the company in Ukraine. The company refers to the fact, that in December 18, 2006 the Federal circuit court of the USA prohibited the companies of Alfa Group (Altimo, Storm and Alpren) to initiate claims in Ukraine or try to fulfill decisions of Ukrainian courts, which could postpone or prevent the arbitration procedure between Telenor and Storm in New York. Nevertheless, recently Telenor has been informed that the company must fulfill a decision of the Ukrainian court, which answered to the claim of Alpren company against Storm. The claim concerns obligations of Telenor and Strom not to participate in the Arbitration procedure in the New York court. Storm company possesses 43.5% of Kievstar shares and Telenor has a majority holding of 56.5% of shares.
Telenor has also asked the Federal Circuit Court of the USA to charge Strom and Alpren companies with contempt of court for an attempt to postpone an issue of the arbitration in New York by initiating 3 new claims in Ukrainian courts in order to prevent auditing of the financial results for 2006 of Kievstar.
MTS has registered a claim to Supreme Court of Man county about recovering of losses, caused by the illegal alienation and seizure of Bitel company. The respondents are Altimo and 10 legal entities.
MegaFon has planned re-branding of its Tajik subsidiary TT Mobile for March , because the growth rate of the company’s subscriber base are slowing down due to the competition. They suppose in MegaFon, under MegaFon brand TT Mobile will compete more successfully with Bee Line on the cellular market of Tajikistan.
Alfa Group has bought 2,9 % of voting shares of Vimpelcom and increased its share holding from 39.5 to 42.4 (%). The company has to acquire less than % of shares to get control over the operator. According to experts, Altimo’s shares are enough to get a majority de facto at the meeting of Vimpelcom’s shareholders. That could be an instrument to influence the Norwegians in conditions of the conflict of Altimo and Telenor. At the same time to get the control Altimo will have to get an authorization of FAS, that is neutral regarding the conflict between Vimpelcom’s shareholders.
