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Russia Becomes the World's Number Three (Standard Magazine) [20.02.07]

In 2006 the mobile communication penetration in Russia exceeded 100%. Total user population exceeds 145 million. This makes Russia world number three by the number of mobile phone users with China steadily in the lead (around 420 million) and the US holding the second place (around 220 million).  Analysis of quarterly dynamics of user population in Russia shows considerable decrease in the market growth rate - the number of new subscribers in the first two quarters of 2006 is 39% smaller than the number for the same period in 2005.

In the first six months of 2006 mobile network operators earned 6,2 billion dollars in the Russian market that is 33% more than payments made by the Russian subscribers in the first six months of 2005.  At the moment the wireless communications market in Russia is an oligopoly dominated by three major companies that run 87% of all sales. Market share of JSC Mobile TeleSystems (MTS) dropped from 42% in 2004 to 33% in the first six months of 2006, market share of VympelCom ( Bee Line band) grew from 27 to 30% and JSC Megaphone increased its market share from 19 to 24%.

Regional development, growing competition and entrance to the low-income market resulted in lower ARPU (average earnings per user). In 2005 ARPU in RF dropped by 27% compared to 2004 and totaled at 8,6 dollars that is three times lower than in Europe and 5 times lower than in the US. Average monthly earnings per regional user dropped to 7,3 dollars, that is two times smaller than average earnings per user in Moscow.

In the first six months of 2006 ARPU decrease slowed down compared to 2005 (by 14%) and totaled at 7,8 dollars. Slower decrease of ARPU heralds of gradual stabilization in the Russian wireless service market that is common in all the markets as they mature.  Stabilization of ARPU continued in the second quarter of 2006 that is explained not only by the season but also by the fact that the national leading network operators agreed on the fixed rate of the conventional unit. It is a good sign that in 2006 ARPU in the second quarter grew by 11% compared to the first quarter [in 2005 ARPU grew by 3%].

General Tendencies and Conclusions

The wireless service market in Russia has reached maturity - over 70% of the population use mobile phones. Yet, the market remains strongly fragmented due to the vast territory and differences in life standards in different regions. ARPU shows lower decline common in mature markets. Stabilization of ARPU is expected in the nearest future.  To increase their earnings operators devote more attention to additional services, in particular, they develop their traffic networks for faster data transfer and exercise more control over development of the content market.  Companies are now competing for assets not only in Russia but in other CIS countries. Yet, as was expected, entrance to the CIS markets is complicated and sometimes results in conflicts.

Shareholder conflicts impede development of wireless service providers. For instance, the conflict between Alfa-Group (TM Altimo) and Telenor prevented the Board of JSC VympelCom from adopting the company budget for 2006.  One of the key tendencies of 2006 was gradual transition to ruble tariffs that made wireless communications more expensive for the users. Introduction of the CPP (Calling Party Pays) rule in 2006 resulted in dramatic changes in relations between network operators and in their tariff policies.

Source: "Standard" Magazine, November, #11 (http://www.comnews.ru/index.cfm?id=25805)