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March 2007 Newsletters Archive
GidaSCOPE is your bi-monthly newsletter covering the latest news, events and trends in the telecom and IT industry in Russia.
GidaScope will help you to know more about the latest trends in the Russian ICT sector, get the best expert advice on how to do business in the ICT sector, find out about the latest trade shows in Russia, and provide you with useful tips.
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Welcome to GidaScope!
Welcome to GidaScope, your bi-monthly guide to the Russian ICT sector!
The year 2007 will be exciting for the Russian ICT sector. The reasons abound -- liberalization of the long distance telecom market; first 3G license tenders for Russian mobile operators thriving to perform on the saturated market; mobile content market consolidation; booming IT outsourcing sector and growing IT services market; continuous “Webization” and growth of wireless broadband; and resurging satellite communication sector. And this list is not exhaustive (consider networking equipment, information security, IT hardware, mobile billing solutions, etc.) To follow all these exciting changes and new trends, I’ve decided to launch my bi-monthly newsletter, “GidaScope”, for you.
GidaScope helps you threefold – keeps you up-to-date on the latest ICT sector trends in Russia; focuses on promising niche markets; and finally, inspires you with success stories, interviews with market leaders and creative solutions. And don’t get me wrong, I am not providing you with yet another dry statistical report with “no soul” in it. There will be plenty of Russian soul here to keep you interested.
I’m also offering you to glance at the industry via the experience of its leading players – an interview with Russian ICT companies I’ve worked with in the past and advice on how each company can help you on the Russian market.
Finally, so that you don’t get too “businessy”, there’ll be some useful tips and calendar of interesting events that you might consider visiting.
If you like what you see and need more, visit my website at www.gidabyte.com for a full range of ICT news, market snapshots, latest events and weekly ICT reviews.
Now, sit back and relax, and enjoy your morning coffee with GidaScope!
Good luck with your Russian business today!
Andrey N. Gidaspov
Editor and Founder
Gidabyte
Table of Contents
1. Russia’s Day at ITU Telecom 2006: Russian Cossacks Descend on Hong Kong
2. 2006: Cooking Russian Telecom "Borsch"
3. Interview with Market Leaders: Valentin Makarov, President of RUSSOFT Shares the Secrets of Success
4. Useful Tips
5. In the Next Issue
Russia’s Day at ITU Telecom 2006: Russian Cossacks Descend on Hong Kong
Whistling and gesticulating, sporting dark blonde moustaches dancing in the air, a Russian Cossack wearing a wild, wooly hat and red and black Cossack traditional coat baritoned the arrival of Russia’s National Day to the ITU World Telecom 2006 in Hong Kong. A strong performance indeed, to match the Russian ICT sector’s performance this year. Its continuous boom of average 25-30% growth made it the second fastest growing sector after the oil and gas sector. A 24-company strong Russian ICT delegation descended on Hong Kong, the heart of South East Asia, for the industry's largest global event of the year.
On December 6th, a great crowd of Russian ICT VIPs, journalists and trade fair organizers gathered around Pavilion 10 at the Asia World Expo. The number of VIPs per square meter around the pavilion was stunning. One can hardly meet one or two of these big company bosses in a month in Moscow! Oh, how I love these trade shows – this is the best time to make yourself known to the industry leaders.
The official part of Russia’s National Day began with Leonid Reiman, Russian Minister of Information Technologies and Communication (MITC) greeting participants via a Hong Kong -- Moscow video bridge. Dr. Hammadoun Toure, newly elected Secretary General of the International Telecommunication Union (ITU) surprised the audience with his perfect Russian, pointing out that he learned the ropes of the telecom business along with Minister Reiman in Leningrad (currently St. Petersburg), and expressing his wish to maintain good relationships between ITU and MITC in the future.
Yet, despite the buzz, the difference in the number of companies present in HK and Geneva, three years ago, was minimal. The delegation was similar – Rostelecom, RTComm.ru, DalSvyaz, Russian Post, Interregional Transit Telecom (MTT), Voskhod, Space Communication Company.
Still many leading outsourcing, system integrator and mobile content companies failed to show up. Why? Reasons vary -- some companies claimed high cost, while others traditionally shy away from the government umbrella and prefer to do it on their own. For example, CBOSS (www.cboss.ru), one of Russia’s largest mobile billing system manufacturer and integrator, built its booth across from the Russian Pavilion, clearly stating its independence. CBOSS’s strategists explain that the Russian market is too small for a company of its ambitions. The company is seeking to win larger, global markets and has already succeeded. It opened offices in the EU and CIS countries, even in South Africa.
In the meantime, Russian ICT companies faced some tough choices and bitter defeats on the global arena. The largest Russian telecom holdings Sistema Telecom and Altimo battled in vain to buy some lucrative mobile assets in Europe and South East Asia. However, none have succeeded so far, except for Altimo’s purchase of Turkcel, a Turkish operator, thanks to the President Putin’s direct involvement.
Conclusions? The Russian ICT sector is growing strong. Unsatisfied with the local market offering, Russian telecom and IT companies seek to expand globally. To be successful, they must actively learn the rules of the new global market game. Aggressive marketing, strong PR and alliances with other players should compliment their advantages in creative solutions and unique offerings.
* For more on ITU-2006 please check out www.gidabyte.com/special.
2006: Cooking Russian Telecom "Borsch"
There are many recipes for good borsch -- ask any Russian grandma. Yet the main ingredients which make the borsch real are fresh cabbage, purple beets and strong meat bouillon. The rest are a careful selection of other vegetables and spices that make up taste variations of this legendary Slavic soup. Well, a Ukrainian might add some fried salo (pig fat)and some chili to make it spicier. Still, borsch is good when it looks purple and tastes real.
For Russian telecom borsch, the cabbage and beets are fixed and mobile markets. They create that essential substance of the market taste. Yet to make it spicier three important ingredients were added in 2006: 1) liberalization of the long distance telecom market; 2) further delay in privatization of SvyazInvest; and 3) the decision to issue 3G licenses amidst mobile sector saturation. The rest are the salads.
January 2006 began with a historic event: Rostelecom, the dominant power of the long distance telecom market, awoke to a new competitive reality – the market was liberalized. As a matter of fact, over 20 new operators received licenses to provide long distance and international communication services. New contenders MTT, Golden Telecom and TransTelecom are expected to challenge national carrier Rostelecom.
However, not everything is so simple. It is one thing to own a license, but to actually develop the network is quite different. To successfully compete with an experienced long distance Goliath, new Davids must have some deep pockets, as they must have an operational nation-wide network (costs approximate to USD 20+ million to build). And more importantly, they must mount an marketing and advertising attack to gain the share of the uneasy consumer market.
So far, in 2006 only Interregional Transit Telecom (MTT) received necessary access codes and actually started its business. And not without its first share of profits. The company’s plans are quite optimistic -- MTT wants to gain 15-20% of the market.
In 2007 we are awaiting a major push from Golden Telecom (GT), another strong alternative player that received its codes right before the end of the year. With a strong regional network and good experience in the corporate market segment, GT is well posed to gain another bite from a lucrative pie.
Market Highlights:
-- Telecom revenues reached USD 29.5 billion (growth of 26%)
-- Svyazinvest investments lowered to USD 1.1–1.2 billion (decrease of 10–20%)
-- Spending for communication services grows
-- IPTV subscribers reached 100,000, and IPTV operators revenues reached USD 2.7 million
-- Mobile Internet market in Russia grew to USD 380 million and its share in VAS – to 25%.
Source: IKS-Consulting, Russian Ministry of Information Technology and Communications (MITC)
Fixed Telecom Market Developments
The Russian fixed telecom market is booming. Everyone is echoing the notion that broadband has become that “killer application” for rapid growth in the sector. Regional fixed operators showed good profits. The largest potential remains in the broadband sector. According to the MITC, its present penetration is 19 % in the corporate sector, and only 3 % in private sectors. The Ministry believes that the data transmission market size has significant potential to boost the operators’ ARPU, and will more than double from USD 1.18 billion in 2005 to USD 2.8 billion in 2008.
The IPTV market is flexing its muscles as well. Over 20 Russian operators joined MTU-Intel and other market leaders in providing video services. According to IKS-Consulting, there are more than 100,000 IPTV subscribers in Russia, and by 2010 their number may reach 1.4 million.
Telecom Infrastructure Development 2006:
In 2006 some 50,000 km of cable and radio relay communications were launched.
2.3 million fixed telecom lines, and 26 million of mobile communication lines have been built.
Source: MITC
Yet, some solid monetary luck fell on Russian fixed operators by the end of 2006. Thanks to the introduction of the “Calling Party Pays” (ÑPP) principle, fixed telecom operators amassed good profits from the mobile market segment, when mobile operators were charged by their fixed peers for the connection. As IKS-Consulting reported, just in the 3rd quarter of 2006 fixed operators earned some USD 14 million. The universal services legislation established that 1.2% of operators’ revenues will be used for universal services, and this brought additional boon to fixed operators. To make things even more difficult for mobile operators, fixed operators also actively promoted the Internet access and cable TV market arena.
In the meantime, despite the legislation clearance, it looks like Russia’s major fixed telecom operator SvyazInvest holding, will not be privatized until 2009. The last chance was in 2006 when the President could sign the bill, but delayed the decision due to opposition from security agencies. Now analysts predict that due to the highly politicized 2007-2008 presidential election years, the decision on the holding privatization will be made not before 2009.
Nevertheless, the shares of regional SvyazInvest operators have grown in price, showing the tremendous potential of the fixed market segment in Russia. Apparently, SvyazInvest showed that the holding can operate efficiently. The holding operators managed to successfully cut the operation costs and personnel, completing installation of ERP solution to improve the enterprise management. Finally, Comstar, Sistema Telecom’s fixed operator, purchased 25% of SvyazInvest shares for USD 1.3 billion at the end of 2006, resolving uncertainty about the company’s shares.
Large scale implementation of new generation networks continued throughout 2006. The majority of large fixed operators started construction of the optical nation-wide networks, which fueled the demand for DWDM-equipment.
However, the overall investment growth secured by the modernization of the mobile and fixed network infrastructure fell in 2006. MITC reported that external investment also decreased, as for example, in 2005 there were 91 transactions which amounted to USD 3.6 billion, while for the first 5 months of 2006, only 10 transactions worth USD 680 million were recorded.
Russian Mobile Market Insights
3G has finally arrived in Russia. At the end of 2006, the Russian State Committee on Radio Frequencies approved allocation of 1935–1980 MHz and 2125–2170 ÌHz frequencies 3 x 15 MHz, and 3 x 5 MHz in 2010–2025 MHz for this purpose. According to the Committee, the frequency capacity is sufficient to issue three nationwide licenses. The licenses will be issued for a period of 25 years.
It is expected that in April the winners will be announced. So far, the competition is quite high. In addition to three major
Russian mobile operators (MTS, VimpelCom and MegaFon), other contenders (Tele2, SMARTS, Summa Telecom, etc.)appeared to be interested in receiving a 3G license. Again, the SCRF emphasized that one of the major factors for successful bid will be serious investment plan.
Luckily for Russia, the industry did not follow the disastrous global telecom rush of 2001. Slowly coming out of the crisis, the world telecom industry is in sailing mode again. 3G is spreading its wings throughout Asian and EU markets. What should we expect from 3G in Russia? Are the Russian subscribers ready for new bandwidth-thirsty applications?
According to analysts, the Russian mobile market will need at least 5 years to come to terms with the new services. While the mobile content market has resurged from its unexpected slump in 2005, the “heavy” content services have not yet emerged as mainstream.
As we see from other markets, many forecasts about mobile TV and other “heavy” applications proved to be too good to be true. In emerging markets like Russia, mobile penetration is uneven and customer preferences are based on their purchasing power. While Moscow and St. Petersburg have become mobile connoisseurs with over 100% penetration, the outlying regions report lesser density of mobile service penetration.
So mobile operators will introduce 3G services to some selected key urban and business mobile zones, gradually migrating further region-wide. Solid marketing campaigns and extensive educational efforts will be necessary to help the take up of 3G.
3G licensing was not the only good news for Russian mobile operators in 2006. Despite some gloomy predictions that the mobile services market would fall dramatically, this did not happen. Let’s look at some facts. The mobile market is definitely reaching its saturation, and operators’ extensive growth that we witnessed during the past few years is over.
Overall, national mobile penetration surpassed 100%, as according to the MITC some 150 million subscribers used mobile services in 2006 (Russia’s population is 145 million). The trio of the largest Russian mobile operators, MTS, VympelCom and Megafon, played increasingly in the CIS yard, grabbing major mobile telecom assets in the former Soviet Union republics (Central Asia, Ukraine, Belarus).
Anticipating CPP’s negative results in the end of 2006, mobile operators declared a state of alert in their financial reports, planning for at least 10% loss from expected revenues. Yet this did not happen. In fact, all three major mobile operators recorded solid profits. The reasons for this “misfortune” are simple. While whining about losses, mobile operators quickly saw that the best defense lies in aggressive offence. First, the operators declared their move to tariffs based on rubles, and set an exchange rate of 28.7 rubles per 1USD (the actual exchange rates were less than 27 rubles per 1USD), gaining on the balance. Second, according to CPP agreement, they received payment of 95 kopeck (0.03 USD) from fixed operators. And finally, they raised average subscriber tariffs by 10%. In the end, CPP actually helped mobile operators to gain some unexpected profit of at least 5%!
While undoubtedly there is still some good potential in the outlying regions, mobile operators realized that the next development stage lies in offering Telco 2.0 services. The task is to increase subscriber loyalty and enhance brand image, by providing advanced value added service (VAS) and moving towards convergent solutions.
Outlook - 2007
Summarizing, in 2007 we will see increasing competition in the long distance market segment. Fixed operators will continue to diversify their services, introducing more broadband and convergent services. In the mobile sector, operators will invest in the 3G network infrastructure, increase development of VAS, and hone mobile TV and other interactive services.
Other Best Prospects include:
- Further take-up of the broadband Internet access services
- xDSL technology solutions growth
- IPTV solutions
- Web-content and media development companies
- IP/MPLS equipment, call centers and NGN-solutions
- OSS/BSS solutions;
- NGN: DWDM-equipment, BWA-solutions, Wi-Fi equipment of operator class and WiMAX.
- VAS service applications: Ring Back Tone, mobile games, Interactive Cell Broadcast
- Metro Ethernet solutions
- VPN and IP-telephony solutions
- PON technology
Ah, and what about that borsch, you may ask? Well, after all, I still prefer my grandma’s recipe, where she adds a little bit of vinegar to the beets so that they sustain their rich purple color. Then the borsch looks fantastic. And tastes better too…
Interview with Market Leaders: Valentin Makarov, RUSSOFT President, Shares Secrets of Success in Russia
In the interview for my book "Riding the Russian Technology Boom" I asked Valentin Makarov, President of Russian Software Association (RUSSOFT) just two questions regarding the ways RUSSOFT can help Western companies in identifying best Russian partners, and here is Mr. Makarov’s advice:
"Russian developers are particularly strong in innovative, science-intensive projects. They often look far beyond your task and may generate new horizons for your products. You may trust them as they are very much committed to solving your problem.
So my advice is as follows:
► do not try to find in Russia a provider of routine work for minimum price;
► look for a long-term partnership for difficult science-intensive projects;
► formulate your task as large as possible rather than making over-detailed specification;
► let your Russian partner to help set the job specifications together with you;
► listen to your Russian partner. They will surely tell you the whole truth, predicting where they feel
risks in their program and where you may enhance your product;
► you need to limit their creativity by establishing strict borders of time and resources.
There is a choice in Russia as there are many good candidates. Russian developers are creative, thus there is also a great diversity of companies. So you may choose your partner based on on how much they match your business style and character. In order to make a good choice, make sure to communicate with 2-3 of them which seem good (check their web-sites).
Place trial projects and see how they work. Choose those who fit your business style the best. You may easily find a good partner in any city. Still – if you need good constant communication – choose Moscow and St. Petersburg. If you do not care about constant communication and your price is limited, choose regional companies. You will find even higher commitment and creativity in regions.
RUSSOFT may be your first window to the Community. We could name for you 3-5 potential partners according to your request for proposal (RFP). Then you will choose yourself with whom to work.
Contacts: www.russoft.org
Useful Tips for You
Useful Tips:
• Having a good product or service that has good sales in the US, EU, or Asia is not a panacea for success. Consider all the factors including right pricing, attractive packaging, quality translation to Russian.
• Internet is the single most accessible and affordable tool for you in order to figure out your partner’s real value, contacts and connections. You can also check similar products existing on the Russian market, see their pricing.
• Persistence and clear goal setting will help you to deal with your future partner.
• Remember, it is all about relationships. Establish your trust and focus on learning more about your partner.
• When discussing business, be sure to demand 100% commitment from your future partner. It is better to work with a smaller but dedicated distributor, then conceding your rights to a large giant system integrator who has no time and desire to represent your product.
• Make sure that you maintain constant contact with your partner. Travel at least once a year to see your partner face to face. In the meantime, use your e-mail and fax on routine business matters.
Read more of these tips and also see a comprehensive coverage of the Russian IT and telecom business in my upcoming book -- "Riding the Russian Technology Boom" (click to find out more HERE -- www.russiantechboom.com).
You can also buy this book here (www.russia.futuretext.com).
Enjoy your business in Russia!
In the Next Issue
The next issue of GidaScope will be available in May. Here are a few highlights of what you can expect:
1) Updates on the Russian Satellite Industry
2) Recent news from the Russian IT sector
3) Interview with Leonid Lazovsky, President of Universal Communications
4) Don't waste your time at trade show -- easy steps to have your trade fair visit efficient
And much more!
So, if you haven't yet subscribed to GidaScope, do it here now: www.gidabyte.com/subscription
See You in the Next GidaSession!
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