BELFAST, United Kingdom-With a mobile penetration of just 1.4 percent, less than that of many third-world countries, the Russian mobile segment appears to offer little excitement. At closer glance, however, most factors that contribute to investor satisfaction are securely in place.
The country’s hot spots are Moscow and St. Petersburg, which might well be considered independent city-states for cellular purposes. These cities, with 60 percent of all Russian subscribers, dominate the sector, which is dynamic and growing, buoyed by several factors.
The economy is recovering, following the 1998 financial crisis, and exports are being driven by a devalued ruble. Foreign investment is increasing again, with Norway’s Telenor, for example, developing a strong fixed/mobile presence. There is renewed investment in and rapid commercialization of the fixed sector, which will benefit cellular by providing faster connections and higher quality of service. Tariffs and handset prices are falling. The Russian parliament (the Duma) is debating calling party pays (CPP) legislation, which would turbo charge the market as it did in Latin American countries, which legislated CPP in the late 1990s. Prepaid services have become a significant driver since last year. Market leaders Vimpelcom and Moscow Telesystems (MTS) are locked in a price war.
For these and other reasons, industry analyst Fleming UCB Research noted: “We expect continued rapid cellular growth as penetration reaches 10 percent by 2005. The cellular sector is expected to consolidate around a few main groups as the regional operators sell out.”
Those main groups are led by MTS, with 29 percent of Russia’s total fixed and mobile telecom sector, and Vimpelcom, which has 11 percent of the same pie.
Vimpelcom
Vimpelcom is one of the largest operator in the Moscow region, with about 700,000 subscribers in September. In December 1998, Norway’s former state telecom monopoly, Telenor, became a strategic partner with an investment of US$163 million for 25 percent of Vimpelcom. Telenor had previously taken a strategic share in North-West Cellular, based in Russia’s second-largest cellular market, St. Petersburg.
The company, trading as BeeLine, is led by Dmitri Zimin, formerly deputy chief designer of the Soviet Union’s anti-ballistic missile radar defenses. Vimpelcom did not weather the 1998 financial crisis as well as rival MTS, posting a net loss of US$39.6 million in 1999, with Fleming UCB Research predicting a loss of US$43.8 million this year, followed by a return to profitability in 2001. Heavy GSM buildout and rapid customer growth beginning in 1999, have yet to be amortized.
The company has GSM 900 MHz and D-AMPS licenses covering 70 percent of the Russian population of more than 100 million people, one of the largest licensed populations outside China and the United States, covering 12 of Russia’s 13 “super-regions.”
Fleming UCB’s London-based Robin McCartney, chief analyst on Russian telecom, said: “Eight GSM operators currently have licenses in 10 or more (super-regions). However, we expect consolidation to reduce this number to four: Vimpelcom, Sistema (MTS), Telecominvest and Smarts.”
Vimpelcom, which was the first Russian company to list on the New York Stock Exchange (NYSE) earlier this year, has operated AMPS since 1994. However, gaining a GSM license in 1998 gave it the infrastructure base to aggressively launch prepaid services. In 1999, it was the first in Russia to launch a korobochka, or boxed product, with a phone and US$10 airtime for US$49. In a recent Russian Academy of Sciences paper, telecom economists I. Kalinin and E. Nikulina noted, “This (makes cellular) accessible even to the lower middle class with monthly income of US$400.”
Nearly all of Vimpelcom’s current net new additions are prepaid. Conversely, MTS, which somewhat reluctantly launched prepaid in April, has given prepaid marketing a low priority, considering its culture of creaming the top of the market. Vimpelcom’s prepaid installed base is nearly 70 percent, or 90 percent of net new additions. That is forecast to increase to 78 percent by year-end 2000 and account for 87 percent of all subscribers by 2005.
Mobile Telesystems
MTS, with about 885,000 subscribers, raised US$371 million, at US$21.50 per American Depositary Receipt (ADR) on the NYSE on 1 July, capitalizing the company at about US$2.1 billion. It was the first Russian company to stage an IPO.
Post-IPO, the operator is owned 42 percent by Moscow-based Sistema Telecom and 41 percent by Deutsche Telecom (DT). The DT involvement provides several advantages in procurement and technology transfer, particularly for 2.5-generation and third-generation (3G) technologies.
With a two-year head start on arch-rival Vimpelcom, MTS captured the majority of Moscow’s early adopters, corporates and expatriates.
Moscow’s third operator, Moscow Cellular Communications (MCC) has a slowly declining subscriber base of about 99,000 subscribers. It is a niche player with an NMT 450 network, rolled out in 1991 by Ericsson and Nokia. NMT 450 has advantages in rural and coastal areas due to extended range. However, it is obsolete for high-traffic urban areas. MCC also plans to launch a GSM service.
New GSM player
A new GSM dual-band license covering greater Moscow was awarded to Sonic Duo in May, surprising analysts who had expected an open tender. Sonic is composed of Finnish operator Sonera (35 percent) and government-owned Central Telegraph (65 percent). Sonic Duo expects to launch in mid-2001.
Another GSM license may be in the cards, and recent Russian government announcements have been upbeat on expanded competition and investment in both fixed and mobile telecom. Fears that the accession of Vladimir Putin to the presidency could signal a slowdown of free market development have proven unfounded so far.
