Three main trends drove the development of Russian telecommunications in 2006: (a) the liberalization of the long-distance telecommunications market and the introduction of new operator interconnection regulations, (b) broadband Internet access as the new segment market leader, and (c) the upcoming issuance of third generation (3G) licenses amid 100 percent penetration in the mobile sector and growth in the value-added services (VAS) sector.
In 2007, there will be increasing competition in the long distance market segment. Fixed line operators will further diversify their services, particularly between converged and broadband services. Other leading market sectors include digital subscriber line technology, Internet Protocol Television (IPTV) solutions, next-generation network equipment, and passive optical network technology. The mobile sector will see increasing competition for subscriber loyalty, offering rich VAS (mobile TV and interactive gaming) content as operators roll out 3G networks. Cable TV, broadcast and satellite operators will enrich the content and expand their offerings to subscribers.
Market Overview
Russia’s consistent macroeconomic performance (gross domestic product growth of 6.8 percent in 2006) increased government and corporate spending on information and communication technology (ICT) infrastructure and services, and rising consumer spending regional growth increased the growth of the telecommunications sector. In 2006, the revenue of the Russian telecommunications sector reached 29.6 billion dollars, a growth of 26 percent over 2005, according to iKS-Consulting. The mobile communications sector grew by 34 percent and exceeded 10.5 billion dollars. However, broadband access showed the strongest growth of more than 42 percent.
In 2006, according to the Russian Ministry of Information Technologies and Communications (MITC), the total ICT market exceeded 40 billion dollars. Local capital investments totaled $5.6 billion, a 7.1 percent growth over 2005, while foreign investments totaled $4.1 billion, an annual growth of 19.5 percent. The Russian web user base reached 25 million, and revenues from Internet access and data transmission services reached $2.1 billion, or 24 percent growth, compared with $1.7 billion 2005.
Liberalization of the Long Distance Market
January 2006 began with a historic event. Rostelecom, the national operator and dominant player in the long-distance telecommunications market, woke up to a new competitive reality: the market was liberalized. In fact, more than 20 new operators received licenses to provide long-distance and international communications services. Analysts estimated the size of the Russian long-distance phone market at $1.9 billion to $2.1 billion in 2006.
The challenges for new players remain high. Having a license for long distance services is not a panacea. A new operator must have a nationwide network and an agreement with regional operators for the last mile connection. In addition, the new interconnection regulations divided the operators into three main levels: local, zonal and long distance. Long distance carriers must now connect to end users only through regional carriers (local level) and pay interconnection fees for each call.
The first competitor, Multiregional TransitTelecom (MTT), began providing services in 2006 and was expected to challenge Rostelecom’s position. However, with its modernized network, good prices and better customer service, Rostelecom did not lose much ground to MTT in 2006, and MTT’s subscriber base reached only 2 million (4 percent). However, MTT expects to capture 15 percent of the market share by 2008. With more than 40 million subscribers, Rostelecom won 60 percent of the market, while smaller operators, including Internet protocol providers and gray market operators fought for the rest.
In January 2007, Golden Telecom (GT), one of the largest alternative telecommunications operators, launched services. With a strong regional network, a developed corporate market segment and a significant distribution network of 30,000 points, GT plans service prices 10 percent lower than Rostelecom. GT remains optimistic, expecting to capture around 20 percent of the market share by 2008 and estimating the market to exceed $4 billion.
Fixed Telephony Sector: Broadband Access Boom
The rise of the Russian fixed telecommunications market was quite predictable. Russian regions outside of the more mature markets of St. Petersburg and Moscow demonstrated greater confidence in consumer and business spending as broadband Internet use soared. Not surprisingly, the broadband access market has become the leader in the information technology sector. MITC believes that the data transmission market will grow from $1.18 billion in 2005 to $2.8 billion in 2008.
Furthermore, the emerging IPTV market is also showing its muscles. More than 20 Russian operators joined MTU-Intel and other market leaders to provide video services. According to iKS-Consulting, there were about 150,000 IPTV subscribers in Russia in 2006, and by 2010, that number may reach 1.4 million.
Thanks to interconnection and the CPP (Calling Party Pays) regulation ratified in 2006, Russian fixed operators received a significant financial boost. Mobile and long distance operators reported that in the third quarter of 2006 alone, fixed operators earned about $14 million. Finally, the fixed operators supported the alternative operators in their traditional sectors of influence, Internet access and the cable television market, offering a whole range of new competitive services.
Russia’s incumbent telecommunications operator, SvyazInvest Holding, is not likely to be privatized until 2009. Military and security agencies blocked this move in 2006, citing national security reasons. Analysts believe that due to the upcoming presidential elections, the decision on privatization will be further postponed. However, the interregional companies of SvyazInvest showed some good results, appeasing investors in 2006. The results were achieved through effective reduction of operating and personnel costs, as well as through the installation of new enterprise resource planning solutions for improve business management. At the end of 2006, Comstar UTS, Sistema Telecom’s main fixed telecommunications asset, bought 25 percent of SvyazInvest’s shares from its owners, Leonard Blavatnik and Viktor Vekselberg, for $1.3 billion.
As of 2006, about 7,000 WiFi hotspots were operating in Russia. J’son & Partners predicts that the number will exceed 9,400 in 2007, growing exponentially over the next five years. However, the most prominent is the GoldenWiFi network launched by Golden Telecom which added 6,700 access points, making it the largest WiFi network in Europe.
Saturated Mobile Sector
In 2006, the Russian mobile market became the third largest in the world by number of subscribers and revenue, after China and the United States. Mobile penetration exceeded 100 percent because some 152 million subscribers (Russia’s population is 145 million) used mobile services in 2006. Major mobile operators faced saturation and increased spending on marketing and development of VAS services.
The introduction of CPP regulations helped Russia’s major mobile operators smooth out the gradual decline in average revenue per user. Anticipating a drop in mobile calls, operators quickly switched to ruble-based rates, raising average rates by 5 to 10 percent. Operators also got rebates of $0.03 per minute from fixed operators, resulting in a 5 to 10 percent net profit for the major operators.
The leading mobile operators, MTS, Vimpelcom and MegaFon, had 85 percent of the Russian mobile market, while the share of regional operators reached 15 percent (22 million subscribers, growth of 3 percent). Tele2, SMARTS, SibirTelecom and UralSvyazInform demonstrated the most dynamic results.
3G arrives in Russia
3G mobile phone technology has finally arrived in Russia. At the end of 2006, the Russian State Committee for Radio Frequencies approved the allocation of 3 × 15 MHz in the frequencies 1935-1980 MHz and 2125-2170 MHz, and 3 × 5 MHz in the frequencies 2010-2025 MHz for the development of 3G. This frequency capacity is enough to issue three licenses nationwide. The licenses will cost around $100,000 and will be issued for a period of 25 years. Operators are expected to “clean up” the frequency and invest millions of dollars in equipment and network construction.
In April 2007, the tender commission will announce the winners based on a scoring system for each operator. The scoring system will use main criteria, such as the presence of the network in each Russian region and the amount of potential investment in new networks. According to analysts, Russian mobile operators will first launch 3G zones in about 20 Russian regions. Although the mobile content market has rebounded from its unexpected slump in 2005, “heavy” content services have yet to become mainstream. In emerging markets like Russia, where mobile penetration is uneven and customer preferences are based on purchasing power, it is difficult to predict the exact start of 3G.
The Russian telecommunications market closely follows the world leaders in ICT development and expects continued growth. More information on this dynamic industry, including how to do business in the Russian ICT sector, can be found in Andrey Gidaspov’s first book, Riding the Russian Technology Boom, to be published by Futuretext in April 2007 (www. russiantechboom.com).
Andrey N. Gidaspov is a former representative of BISNIS Moscow. He currently runs GidaByte (www.gidabyte.com), a telecom business consulting firm in Hong Kong.