Russia’s Quest for Telecom Growth

By Wieland, Ken Morris, Iain

At the inaugural Russian Telecom Opportunity conference – organised by Telecommunications(R) in association with EJ Krause high-level speakers from the operator, analyst and vendor communities debated how best to grow the country’s telecom markets Russia’s economy may be strong, fuelled by the country’s booming energy sector, but there was no sense of complacency from speakers at The Russian Telecom Opportunity conference.

Held last month alongside the Svyaz-Expocomm 2007 exhibition in Moscow, the general tone of the conference was one of caution as speakers recognised the sheer scale of the task to get a satisfactory return on telecom investment.

And in some cases, there was downright pessimism, particularly with regard to the chances of generating high-margin revenue from valueodded services. Although this continues to be a tough nut to crack for operators even in developed Western markets, Vyacheslav Erokhin, a senior business consultant with Nokia Siemens Networks, argued that the job would be even harder in Russia.

“In Russia’s mobile sector, demand for value services is a lot lower than in many other countries,” he said. “Even SMS usage is comparatively very small.”

According to a survey of Russian consumers carried out by Nokia Siemens Networks, only six percent of respondents said that they would use more SMS if prices were lowered. “It’s not a good place to start when trying to build up mobile VAS,” added Erokhin.

Margarita Zobnina, a senior consultant with Moscow-based iKS Consulting, expressed serious doubts that Russia’s big three mobile operators would ever see a return on their 3G investment. “I’m extremely sceptical [about 3G's chances],” she said. “Each operator is to spend about US$ 1 billion on 3G, but they are investing in areas where we already have WiFi networks.”

Given the high level of competition from multiple operators using wireline and wireless technologies – and the prospect of consumer electronics companies, such as Apple, encroaching on the traditional space of telecom operators – Zobnina does not anticipate a telecom revenue boom in Russia. “Earnings are at a high level compared with a year ago but that won’t last long,” she said. “Profitability is likely to decline.”

One conference speaker who welcomed the prospect of increased pressure on Russia’s major mobile network operators was Eldar Razroev, president of Euroset, an MVNO using the network of Smarts, a mobile operator based in the Volga region. “They will not be able to get an adequate rate of return on their 3G investment without MVNOs,” he said. So far, MTS, MegaFon and VimpelCom have rejected the MVNO concept, much to the frustration of Razroev.

What about mobile voice?

Although arguing that mobile VAS was not a significant opportunity – either in Russia or Western markets, Rupert Wood – principal analyst at the research and consulting firm Analysys, did say that mobile operators in Russia are well placed to increase substantially their revenue through voice.

Wood outlined the macro-economic climate in Russia, which, he said, is “unleashing the forces of fixed-mobile substitution”. Since 2003, according to Analysys research, telecom spend as a proportion of GDP has remained stable in Russia at around 2.2 percentwith end- user spending standing at just over RUR600bn (US$23 bn) in 2006. And so long as Russia’s economy remains strong, Wood sees no reason why this level can’t be maintained. (If end-user spending on telecom services remains at 2.2% of nominal GDP, Analysys calculates that annual telecom spend in Russia would reach RUR900bn (US$35 bn) by 2012.

So, assuming that retail unit prices continue to fall and incomes continue to increase, Wood argues there will be a cash surplus that Russian operators will have the chance to grab. “When customers spend less [on cheaper telecom services], they don’t cut their overall telecom spending,” said Wood. “They keep the same ‘share of the wallet’ [for the telecom services].” However, through a combination of the way customers behave regarding their mobile and fixed-line telecom spend and the upward pressure that fixed-line operators will have to raise their prices, Wood sees mobile operators wining hands down over the narrowband fixed-line providers.

“When customers save money through cheaper fixed-line calls they spend more money on mobile,” said Wood. “And if fixedline operators increase their prices [to try and claw back revenue lost to competitors] then mobile becomes even more attractive.”

Given the poor track record of mobile operators in Western Europe to increase mobile date revenue (across both 2G and 3G networks), Wood believes that Russia’s big three mobile operators should focus on the consumer voice opportunity, particularly as 3G networks have the potential to deliver voice far more cheaply than 2G networks.

According to Analysys research, end-user mobile spend in Russia – which grew 30 percent in 2006 – is already outstripping nominal GDP growth (which grew at 28 percent during 2006). However, if fixedline growth is factored in, overall growth in end-user spend on telecom services drops below the nominal GDP growth rate for 2006 to 25 percent.

MTS replies to the sceptics

Marcel Stoeckli, CTO of MTS, predictably did not share the downbeat views on mobile VAS and 3G as expressed by Wood and Zobnina respectively. He even went so far as to argue that 3G will develop much faster in Russia than Western Europe, where it is only now picking up pace more than six years after licences were first awarded.

From left to right: Ken Wieland, editor, Telecommunications(R);, Margarila Zobnina, chief analyst, IKS-Consulting; Rupert Wood, principal consultant, Analysys; Anton Bogatov, chairman of the board, Nexter; Vyacheslav Erokhin, senior business consultant, Nokia Siemens Networks

“The main limitations have been overcome,” he said. “We have avoided problems with handset availability and we did not overpay for licences. That made it difficult to develop that [3G] market [in Western Europe]. It will take time to build up revenue from extra services over 3G, perhaps three to four years, but we can do it.”

Stoeckli also offered some insight into MTS’ positioning of 3G. Confirming the operator’s network will be HSDPA-enabled from day one, he said MTS will provide a laptop-based service to business users in Moscow. “We can differentiate from WiFi through wider coverage from the outset,” he said. “We can cover the whole city, so users don’t have to hunt for WiFi hotspots.”

Another incentive for 3G investment is to boost voice capacity, said Stoeckli. “The main limitation at first is handset penetration, but once that is overcome we can find an appropriate point to shift investments to 3G,” he said.

Although generally upbeat on 3G, Stoeckli did point out that Russia’s terrain posed particular problems for network rollout. “We have a huge country, which represents a challenge, and the base stations have to be able to cope with the climate,” he said.

What’s more, while Russian operators did not pay large sums for their 3G licences, they have yet to clear the spectrum, which until now has been used by the Russian military. “I can only estimate [when spectrum will be cleared],” said Stoeckli. “I expect it will happen next year, but it’s difficult to forecast. The regulator has to decide.”

The road to convergence

If fixed and mobile operators in Russia find it difficult to generate sufficiently high enough margins to please investors, offering triple-play and integrated fixed/mobile services could be a more attractive opportunity.

“Operators need to retain customers through service bundling,” said Torsten Bethke, marketing director of Keymile. “To increase ARPU, triple play is key, but to speed up service creation we need standardised open interfaces and IMS platforms.”

But the success of integrated services will need new business models and innovation, warned Evgeny Solomatin, business development director at Cominfo Consulting. “There will need to be new partnerships between not only the different operators but content providers as well,” he said.

And is Russia’s telecom management ready to implement the radical transformation that is required? “Absolutely,” said Solomatin.

It’s not a view shared by iKS Consulting’s Zobnina. “There is a management crisis,” she said. “They are too technical focused.”

If the management doesn’t get it right, the consequences could be disastrous. “The big danger for Russian operators is that they don’t deliver sufficiently attractive services and that the surplus cash gets spent outside the telecom industry,” warned Analysys’ Wood.

Ken Wieland, editor

(kwieland@horizonhouse.co.uk)

Iain Morris, features editor

(imorris@horizonhouse.co.uk)

Copyright Horizon House Publications, Inc. Jun 2007

(c) 2007 Telecommunications International. Provided by ProQuest Information and Learning. All rights Reserved.