July 2008 Newsletters Archive

Welcome to the July'08 issue of GidaScope!

Russian telecom sector showed stable growth in 2007. Read about the latest trends, market news, and much more in this issue.

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Russian Telecom 2007: A $40 Billion Year

2007 was another year of stable growth for the Russian telecom sector - $40 billion flew into its coffers. According to the Russian Communication Ministry, the IT and telecom (ICT) market totaled USD 60 billion in 2007, a 25.4% year-on-year growth.  

Moreover, in 2007 the number of Internet users in Russia grew 40% to 35 million, while the number of personal computers reached 31.2 million. The Ministry forecasts that number of personal computers should reach 40 million, a 29% year-on-year growth, and the number of Internet users will grow 31.4% to 46 million in 2008.

Explosive growth in the broadband Internet and triple play projects, new carriers’ advancements on the long distance communication market, VSAT market significant gains, and growth in the VAS market segment amidst serious industry consolidation paved the way for another solid year ahead. The mobile market segment showed healthy revenues, while operators deployed the first 3G networks and look into expansion to the long distance market.  

On top of all these developments, the new Ministry of Communications and Mass Media was created, and Leonid Reiman, the undisputed king of Russian telecom, left his post after almost a decade-long reign. Indeed it was another busy year for Russian telecoms. 

Oil Surfing and Consumer Spending: Russian Economy Flies High in 2007

Let’s look back at some Russian economy milestones in 2007.  According to UNCTAD, Russian GDP grew by 8.1%.  FDI reached $48.9 billion, a 70.3% year-on-year growth. Russia has paid off most of its Paris Club Debt and has become the world’s top oil producer.  Russia’s gold and foreign exchange reserves exceeded $460 billion in 2007 and continue to grow.

Granted, global energy thirst has driven this phenomenal growth.  Yet it is not just oil and gas.  Consider the booming retail, construction, metallurgy and automotive sectors.  Most importantly, his Highness Mr. Russian Consumer showed an insatiable appetite for spending and entertainment.  Russian consumers became ubiquitous mobile subscribers.  And this brings us to two other hidden diamonds – telecom and IT sectors.

Ministry of Communication and Mass Media 2008: New Name, New Powers, New Content

First things first.  Leonid Reiman, Russia’s controversial communication minister, finally stepped down.  Reiman managed to make some good contributions to ICT sector developments.  The long distance market was liberalized. Universal service funded by large operators took off.  Thousands of Russian high schools were connected to the Internet.  3G licenses were issued.  Overall, Russian telecom and IT sectors made some good progress under his reign.

After the coronation of the new Russian President Medvedev, when the Russian government was reshuffled this past May, everyone was almost sure that Mr. Reiman, a St. Petersburg native and close friend to President Putin, would continue his stint at the ministry.  As a matter of fact, Reiman survived an attempt to dismantle his powers in 2004 when for a short period a new mega-Ministry covering both transportation and communication was created and Reiman was given only a deputy role.  (At that time he used all his cabinet charm and connections to regain the newly formed Ministry of IT and Communications that lasted four years.)

However, the Reiman act did not work out that well this time.  Officially, Reiman was promoted to the President’s advisor level.  But so were many Russian regional governors and autonomous republic presidents, and we have not heard of them any more.  Will Reiman re-appear again? Let’s wait and see.

Now let’s look on who is in power in the newly formed Ministry of Communication and Mass Media (MCMM) today.  Medvedev and Putin chose Mr. Igor Tscheglov, Putin’s former protocol department chief, as the new minister.  Mr. Tscheglov, who honed his protocol and media skills under the wings of President Putin, certainly does not come as a technocratic minister.  Days after the take over, Mr. Tscheglov announced that he will be against major shake-ups in the ministry and will keep most of his staff intact. 

Overall, the new agency gained some power.  First, it regained control over lucrative communication licensing area, which was previously under direct supervision of the Russian government.  Secondly, it is now in charge of mass media policy and regulation.  Finally, MCMM now supervises the Federal Agency on Print and Mass Media, which was under the Ministry of Culture’s control before the reform.  Summarizing, while keeping its technology crown, MCMM is increasingly in charge of content.  And this alone is a significant gain.

Major Trends in 2007 – Consolidation, Broadband Internet and VSAT Rocked Russian Telecom

Year 2007 was the year of the telecom industry consolidation.  By far the single largest merger shook the mobile operators’ status quo.  Mikhail Fridman, Alfa Group’s owner, which holds a large stake in VimpelCom, blessed a deal to buy Golden Telecom, one of the largest Russian alternative fixed line providers.  The deal, which is worth USD 4.3 billion, created the first Russian mega mobile-fixed player. 

VimpelCom, the number two Russian mobile operator,  which provides mobile services to over 65 million subscribers in Russia, Armenia, Kazakhstan, Ukraine, Georgia, Tajikistan, and Uzbekistan, decided to diversify its services into providing mobile broadband.  Golden Telecom, which is traded on the NASDAQ and holds a large chunk of the Russian Internet, voice and data market, seems to be satisfied.  In the meantime, Golden Telecom has announced that it plans to invest over USD 1 billion to expand its fiber-optic network to cover the territory with population of 65 million.

Broadband Internet continued to be the key driver of the telecom market.  Nation-wide ADSL has remained one of the fastest growing segments of the broadband market.  However, despite the dominance of DSL, wireless services over Wi-Fi or WiMAX connections are rapidly emerging as a cost-effective alternative to DSL. By the end of 2007, broadband penetration in Russia was estimated at 3.2%.

Broadband technologies also boosted IPTV and HDTV exposure.  Naturally Moscow and St. Petersburg lead in this market segment.   Outlying regions have only 17% PC penetration, while Moscow is well over 70%.  At the same time 50% of Moscow has BWA connection.  Technology-wise great prospects have technologies supporting broadband, such as VDSL, HDSL, ADSL2+ and FTTx.  For example, in Moscow where the most of last mile lies in copper, FTTC technology is widely used.  The reason is that Moscow began launching BWA networks much later than Europe and was fortunate enough to choose more modern technology.  As a result, the FTTx share in Moscow is over 50%, according to MForum.  Similarly, in outlying regions other technology combinations are being used for BWA, including FTTB, FTTC and FTTH.

Triple Play market demonstrated healthy growth of about 25% to 30% in 2007.  According to the National Cable Networks, total investments in the BWA and TriplePlay markets may reach $4 billion in 2008.  As of April 2007, there were over 1 million Russian cable TV subscribers, and 7.4% of all cable TV subscribers used digital TV.  Today Russian subscribers have at least 50 channels to choose from.  Almost 10% (4.7 million households) of Russian households watched digital TV. 

Various sources estimate the Russian long distance communication market size at about $3-3.5 billion in 2007.  CNews Analytics believes that the volume of the Russian international and inter-city communication in 2007 reached about $2.2 billion.  Inter-zonal communication alone brought $1.3 billion.  The inter-city communication market segment holds 43.3% of the long distance market, while inter-zonal has 36.4% and international accounts for 20.3%, according to CNews Analytics.

After Rostelecom lost its monopoly on long distance communication, other operators jumped on the bandwagon.  Today MTT, Golden Telecom, TransTeleCom, Orange Business Services, Arctel and Synterra also provide long distance communication services nation-wide.  ComStar also is planning to capitalize on its dividends.  Overall, according CNews Analytics, about 30 companies have licenses for long distance communication in Russia. 

Rostelecom remains a major power on the long distance market, and according to its own research holds 57% of the market.  Most of its revenues, about 80%, come from long distance.  Nevertheless, by the end of 2007 the inter-city communication market had grown only 0.7%, while its share of the international market segment fell 6.8%.

Golden Telecom produced good results, stating that over 1 million clients used its long distance communication services in 2007. MTT doubled its revenues from $92 million to $208 million in 2007, and according to the company’s sources its share of the long distance communication market reached 6.8%.

The biggest news is that Russian mobile operators are keen on advancing this market.  MTS planned to launch 6,000 km of network in 2008 and by 2011 is set to build another 12,000 to 15,000 km of network. VimpelCom built a network of over 7,000 in 2007.  Naturally, newly acquired Golden Telecom adds a significant capacity to this market.  On top of that VimpelCom is building more than 1,000 km.  MegaFon’s backbone network has about 10,000 km.

Communication Ministry announced that during the first nine months of 2007 over 6,000 km of international communication cables were built, which is a 48.5% year-on-year growth.   Led by liberalized long distance market and explosive growth of traffic transit market as well as new regulations requiring new operators to build their own networks nation-wide, operators invested heavily into the infrastructure upgrades.   

One of the year’s major highlights in the carrier market segment was the launch of the new undersea fiber optical cable system between Russia and Japan by TransTeleCom and NTT Communications (NTT Com). This new 570 km DWDM network has a capacity of 640 Gbit/s and has great potential for expansion of Eurasian traffic. According to CNews, the NGN market in Russia will be about $1.5 billion in 2009.

Mobile operators surprised analysts with peaking ARPU numbers.  In fact, the ARPU of VimpleCom and MTS showed very high growth compared to that of Western operators. The whole market surpassed USD 22 billion in 2007, while operators continue to invest into the network expansion.  In 2012 mobile Internet services are predicted to bring some 10% of all revenues of mobile operators of the mobile service segment, or about $3.4 billion, according to MTS CEO Leonid Melamed.

Russian Triple Play is On

The Triple Play market in Russia is on the go.  Bursting growth of the broadband Internet access makes triple play technology more and more attractive to both operators and end-users.  With its flourishing middle class and unquenchable entertainment consumption, Moscow and St. Petersburg remain the two most competitive and sught-after markets for any operator.  The outlying Russian regions come second, but presents an even more lucrative prize for telecom operators.  Yet this market is not exactly meant for newcomers. 

Fixed operators (voice services), ISPs (data transmission networks) and cable providers (home networks) are three main players on the Russian Triple Play market.  With their distinctive advantages, such as developed voice services for fixed operators, advanced data transmission networks for ISPs and established home networks for cable service providers, each player is making its way to the market.  Naturally, fixed and increasingly also mobile operators, have better positioning than cable operators – great subscribers’ penetration and quality of services. 

Based on Standard Magazine research, in April 2007 Central Telegraph became the first operator in Moscow offering triple play services via its multi-service Ethernet network QWERTY.  Central Telegraph has already invested about $90 million in this project, while in the future total investments might reach $150 million.

In August 2007, ComCor TV came up with its newly branded ACADO triple play service package that included TV, Internet and phone services.  In 2007 ACADO investments totaled USD 120 million, while this year they are set to reach some USD 160 million.  Mostelecom, created by the Moscow government (41% shares) and NAFTA-Moscow Group (59% shares), will invest over USD 280 million in development of triple play services in the next two years.  Mostelecom’s network covers 2.8 million Moscow households. 

Comstar-Direct (“Stream” and “Stream-TV”), backed by AFK SISTEMA, is one of the leading players on the broadband access market in Moscow.  However, its closest competitors, Corbina Telecom and Comcor TV, showed great results in 2007, and signed on some 200,000 and 250,000 broadband subscribers respectively, according to ComNews.  Fourth place on the Moscow’s broadband market is held by Net By Net Holding.  QWERTY holds fifth place, providing Ethernet-access to about 50,000 Moscow’s households.

Standard Magazine reported that North West Telecom launched its interactive digital TV project in February 2007 under the "Avangard TV” for broadband ADSL-access to Internet which has over 200,000 subscribers.  At the same time another operator, Metrocom, announced its triple service (telephone, Internet and TV).  Finally, West Call alternative operator announced its Enternet-network with IP-TV service in St. Petersburg.

Russian regional operators also boosted their IPTV efforts.  Last year Sibirtelecom announced its plans to launch a test IP-TV network in Krasnoyarsk Region in 2008, so that it could cover the majority of its customers by 2009.  R-Telecom, another large telecom holding, began providing IP TV services in 15 Russian regions.  Currently its services are accessible in Perm, Samara, Penza, Kazan, and Izhevsk. 

Russian Mobile Operators Bet on VAS, 3G and Long Distance Exposure

According to AC&M Consulting, the number of mobile subscribers in Russia exceeded 160 million in 2007, and the penetration level reached 111%.  In 2007 the mobile market surpassed USD 22 billion and is set to grow further. 

Nevertheless, despite growing value-added services (VAS) share ($2.8 billion in 2007) in mobile services portfolio, voice traffic revenues remain strong.  On the most part Calling Party Pays (CPP) rules implemented in 2006, spurred the growth for top 3 mobile operators.

At the same time, mobile content market estimates in 2007 vary between $470 million and $530 million, according to IKS-Consulting.  WAP-penetration remains at 20%.  Last year Russian mobile subscribers purchased about 31 million new phones, and the total mobile retail market reached $6 billion, according to Euroset.

The last larges surge in mobile subscriber base in Russia happened in 2005, when the number of mobile communication connoisseurs doubled.  By 2006 active growth of the mobile base practically came to a halt.  Soon after Russia crossed 100% penetration border, SIM cards sales also dropped significantly.  Yet despite the doomsayers prophecies, average revenue per user (ARPU) began its unexpected growth and peaked high. 

The reasons are many, but core factors include: CPP regulation that required regional operators to pay their mobile peers for the interconnection; both voice and data traffic consumption jumped due to growing purchasing power and rising incomes. 

Still mobile operators are at awe on how to increase average call time per user.  Russians speak much less than Europeans or Americans.  According to Comnews Research, the peak of call time remains at about 1,000 minutes per month.  Operators use various methods to encourage Russian subscribers.  For example, effective May 2007, all three major mobile operators set new subscriber credit tariffs. 

Russian operators do not control the sales of mobile phones and do not provide subsidies.  Hence, the operators cannot influence vendors.  Who is in power then? Russia’s major five mobile retailers, Euroset, Svyaznoi, Divizion, control 90% of the mobile phone market.  Another distinctive feature, according to I-Free research, is that off-portal mobile content market was shaped before the on-portal market model.  During the first five years, mobile operators gave in the market control to content providers and aggregators.  However, lately all three major operators quickly gained their share by deploying their own portals and increasing their revenue share.

The Value Added Service (VAS) market has great potential for further growth.  In Russia the share of non-voice services does not exceed 12% (compared to 17% in Western Europe).  Operators continue to launch new services.  It’s interesting that regional operators often surpass the Russian mobile trio in terms of assortment of mobile services just because VAS contributes greatly to their revenues.

3G Game Has Begun

Russian operators are expanding their networks, adding thousands of new base stations.  3G networks have been deployed in St. Petersburg and Moscow.  Still, the operators are not over optimistic about the 3G take-up. These developments might take years before the critical mass of users will be using it.  Among the hurdles are expensive terminals and content piracy.  Analysts predict that in 2008, revenue growth will further slow. 

In October 2007, St. Petersburg-based MegaFon, Russia’s third largest mobile operator, officially launched a commercial 3G network in St. Petersburg.  The first two people to experience the 3G communication were former Minister Reiman and Valentina Matvienko, St. Petersburg Governor.  Capital investments by MegaFon in 2007 reached $1.3 billion, while they will total USD 1.7 billion in 2008, a 30.7% growth, according to RBC.  $250 million will be invested in 3G networks.  According to ComNews, an average 1 MB of 3G traffic from MegaFon costs $0.06. Even those subscribers who do not have 3G terminals may sign up for new services and new tariffs.  MegaFon claims that the current speed in its HSDPA network is 3.6 Mbps.

However, SMS remains the most profitable service for operators, bringing them an estimated USD 1.5 billion in 2007 by Comnews Research. In 2007 mobile content sales are estimated at about USD 480 million to USD 580 million, while mobile Internet access is estimated to be USD 475 million – USD 510 million.

For example, MTS, a leading Russian mobile operator, earned 13% revenues from VAS in the third quarter of 2007, and for VympelCom, its closest rival, this figure was similar (13.6%), reported Comnews Research. 

The main driver of the VAS – mobile Internet access, which has brought operators 25% of growth, according to iKS-Consulting.  Mobile content sales growth is slower, at about 22%.  MTS and Megafon identified Ring Back Tone (RBT) as the best content service in 2007.  For example, 3 million new subscribers used this service at the operator’s network in 2007. At the same time the third largest operator Megafon believes that some 3.5 million subscribers used RBT in its network. 

Finally, the mobile game market in Russia is estimated at $60 million to $80 million.  Analysts believe that in 2008 this market may double.  Another best prospect segment is mobile micropayments and mobile marketing. In 2007 Russian mobile marketing market reached $12–$16 million.

Mobile Operators’ Shares in 2007

VSAT Market Rides on National Projects

Russia’s sheer size and lack of adequate infrastructure in remote areas was a blessing in disguise for satellite communication service providers. In 2007 universal services and Russian high schools helped the VSAT market to explode. Remarkably, due to the implementation of these large-scale projects, the number of VSAT terminals grew from 6,000-8,000 to stunning 25,000!

Nevertheless, mobile operators and carriers remained valued customers of VSAT services, biting a sizeable market segment for lucrative inter-zonal traffic exchange. Moreover, TV and radio stations historically depend on satellites. Finally, large corporate customers, like Russian industrial conglomerates, including oil & gas, retail, transport and logistical companies (15%-20%) and government structures (50%-60%) consumed the lion share amount of the VSAT market capacity in 2007.

According to Settelecom, some 25 VSAT operators worked in Russia in 2007. Among them: Amtel-Svyaz, VSAT-Tel, Global Teleport, Crossna, Morsvyazsputnik and others provide services to government structures. Others, like GASCOM, DEK-Optika and Bashkortostan Satellite Telecommunications, offer services internally to their corporate affiliations. Several terrestrial operators operate VSAT affiliates, such as Golden Telecom, Sakhatelecom, Uralsvyazinform, Orange Business Services.  Universal VSAT operators, such as IPNet, Settelecom, Web Media Services, DOZOR Teleport, and Race Telecom, provide services to all customers.

Number of VSAT terminals in 2007

            Operator                                  Number of VSAT terminals

1          Global Teleport                          Over 9,000

2          Settelecom                                Over 3,200

3          Uralsvyazinform                         Over 1,600

4          STEK.COM                               1,500-1,600

5          IPNet                                        1,500-1,600

6          Web Media Services                  1,500-1,600

7          CB Iskra                                    1,300

8          RuSat                                       1,100

9          Equant                                      700-800

9          Central Bank of Russia               700 – 800