Revenge of wires

Cell phone companies have lost momentum at the communication market. Internet and multimedia service providers move to the forefront.

By Elena Rytsareva

It is hard to recall that 10 years ago Russia boasted only 155 thousand users of mobile communications (by January 1, 1997). The recent decade telecommunication press and experts have been actively discussing sweeping growth of cell operating companies. Newspapers closely watched their marketing steps, tough competition and bright rebrandings. Fixed lines companies were gradually losing their market share and moving to shadow. Experts started talking about mobile cannibalization, quick and final rejection of wires, at least, by final users. But it did not happen that way. On the contrary, fixed lines operators have been currently taking revenge.

Internet-euphoria

Table 1 confirms the fact by showing operative indicators of the largest industry companies in 2005. One can see: growing rate of the cell companies’ revenues is almost similar to that of certain fixed lines companies. Traditional companies like Sviazinvest, providing their services to population following the state-assigned low tariffs, are obviously not in the lead – top positions are taken by Internet-business representatives: chief providers (Transtelekom and RTcomm), and operators servicing final users (Comcor, Comstar-??S). The current year Internet companies would definitely leave everybody else behind by rates of growth. The prediction is backed by several reasons.

The market of broadband access to Internet (broadband implies speed of 128kbit\s and more) is at present at the state of inception. Its volume in 2005, according to IKS-Consulting, exceeded 700 million dollars. According to Uralsib, only 16% of households had Internet at home, only 2% with broadband access. Serious networks have only been established. The service has been widely demanded. Young people live and communicate in Internet, education and business move to Internet in front of our very eyes. The process is not characteristic of Moscow and other big towns only. Expert journalists have tested the net, based on the most modern wireless access technology pre-WiMax, connecting dozens of schools in modest Saraktash agricultural area of Orenburg region, a farmer with a notebook to get information on new technologies and business-plans was observed in Kaluga region.

Svyazinvest companies are heading for stagnation

Russian mobile network operators resulted in sharp fall of revenue from a telephone subscriber

Unsatisfied demand means room for investors. Last year there were about a dozen of loud announcements of serious investments to "broadband". Some of them proved to be a simple bluff (for instance, a small American company GlobeTel declared of a 600 million dollar contract with a mysterious Russian company Internafta). Serious investors may be divided into two groups. The first one embraces communication operators entering the new segment (Comstar-OTS, Golden Telecom, certain companies of Sviazinvest). The second group is constituted by people from other branches of business. First, it is Victor Vekselberg – his company Renova purchased Comcor-TV Moscow cable operator (trademark Akado) and 100% of wire communications operator Corbina Telecom. Nafta-Moskva (affiliated with Suleiman Kerimov, a deputy) purchased Mosteleset cable operator – an owner of all the TV cables connecting houses of Muscovites. Next to providing Internet access as it is, many companies try to use their networks to transmit TV programs and even sell movies and music.

By the way, different companies use totally different technologies — Golden Telecom promises to cover Moscow with 500 points of Wi-Fi wireless access, Stream division of Comstar-OTS uses telephone wires already available in buildings, Akado uses TV cable. But they all have one purpose — to secure speedy and inexpensive Internet access for broad masses. By the way, prices in Moscow with its competitive environment have started to go down.

De-monopolization Russian style

Another reason for "wire" revenge has nothing to do with the market. Since January 2006 Russia started to formally de-liberalize its market of long-distance communication, having introduced comprehensive three-level system of connecting traffic and passing it through. Actually, the rules brought down real competition at the market of long-distance and international communications, which had existed semi-legally due to IP-telephony operators (sometimes they are called "card operators", since they mostly provided serviced on the basis of prepaid cards). New rules made their lives more difficult, and there is only one formal rival – MTT – to a current monopolist, Rostelecom. Formerly IP-telephony companies had visibly lower tariffs than Rostelecom. Currently companies with cheap prices have almost totally disappeared.

The new regulation played into the hands of Sviazinvest regional companies. According to Fitch, at present long distance operators get about one third of total revenues for long distance services, the rest goes to traditional fixed lines operators. The results of such redistribution have immediately come to surface: in the first six months of 2006 profit of inter-regional Sviazinvest companies increased by orders. Yuzhnaya telefonnaya kompania achieved the most fantastic results: its net profits increased more than five times, although its revenues even went down a little.

Actually, for Sviazinvest companies it is just one-time outbreak. As distinct from Internet, traditional telephony sector is expected to be more stagnant, with decreasing rate of revenue growth – and no reasons for popular EBITDA indicator to grow.

Cell old-timers

What about cell old-timers? They kept on fighting with each other for more and more marginal users. In August 2006 a notable level was reached – the level of common sense: penetration of mobile communications in Russia amounted to 100%. Formally it means total mobile coverage of all Russian citizens, including senior citizens and babies. But it is not true. The indicator actually shows the number of active SIM-cards. But certain Russian citizens have several SIM-cards, Russian communication services are used by our guests from abroad. Besides, till recently mobile companies themselves tried to boost up their client base and considered their silent clients as "alive", that is, active. True, recently the race of "dead souls" lost its importance. Heads of mobile companies have now been interested in revenue leadership. The sphere faces big shifts. According to ACM Consulting, in 2005 MTS share in aggregated revenues of mobile operators moved down from 40% to 35%. The share of its main competitors, Vympelkom and Megaphone, increased by 2% and 3% accordingly.

At present all the cell Russian companies no longer fight with each other for non-mobilized clients, the main task being increased average monthly revenues from a client — ARPU. All the previous years the indicator was going down and reached critical levels of 9 dollars by the end of 2005. But in the last quarter the tendency was overcome. ARPU of Vympelkom in Russia in the second quarter reached 7.4 dollars comparing with 6.6 dollars in the first one, in case of MTS it is 7.2 dollars against 6.2 dollars. The season factor played its role, too (in summer many people pay higher roaming fares), as well as the factor of making settlements with clients in rubles (operators charged 28-28.5 rubles per dollar), but, hopefully, users simply started talking more.

Definitely, 16% increase of ARPU is a notable achievement. But it is not enough to make up for general slowness of the market growth. In 2003-2005 number of users of mobile services was doubled every 12 months, but operators’ proceeds in 2004 increased by 54%, in 2005 — by 36%, and the current year, according to ACM Consulting forecast — only by 20%.

Therefore mobile communication companies decided to move out. Our leaders were dreaming of entering the far abroad markets. MTS and its largest shareholder AFK Sistema made especially proactive attempts. But a deal with India failed through, nothing came out of talks with Egypt, Turkey, Serbia. Aleksandr Izosimov, Vympelkom general director, closely observed the market in Vietnam, but achieved no specific results in the end. And to penetrate foreign markets is getting more and more complicated. Couple of years ago Western operators were still getting over the crisis and did not plan serious acquisitions, but currently they bucked themselves up and started actively buying "everything that moves", paying extra without any scruples. And their financial capacities so far much exceed those of our companies. Besides, Asian investors have also shown some vivacity. So our companies have no choice but to "ridge up" former CIS countries – and that’s what they do with a vengeance. MTS has already covered 29% of the CIS 70 million clientele (August 2006), Vympelkom - 9%.