Had Net Fixed Assets Of Last Year-End And This Year-End Russian Telecom Sector – Dynamic Growth in 2006

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Russian Telecom Sector – Dynamic Growth in 2006

Three main trends fueled the development of Russian telecommunications in 2006: (a) liberalization of the long-distance telecommunications market and the introduction of new regulations for the interconnection of operators, (b) broadband Internet access as a new leading market segment, and (c ) the upcoming issuance of third generation (3G) licenses on the back of 100 percent mobile penetration and growth of the value-added services (VAS) sector.

In 2007, there will be increasing competition in the long distance market segment. Fixed operators will further diversify their services, especially among broadband and converged services. Other leading market sectors are 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 heavy VAS content (mobile TV and interactive games) as operators roll out 3G networks. Cable TV, radio broadcasting and satellite operators will enrich the content and expand their offers for subscribers.

Market overview

Russia’s robust macroeconomic performance (6.8 percent growth in gross domestic product in 2006) increased government and corporate spending on information and communication technology (ICT) infrastructure and services, and rising regional consumer spending boosted growth in the telecommunications sector. In 2006, Russian telecommunications sector revenues reached $29.6 billion, a 26% increase over 2005, according to iKS-Consulting. The mobile communications sector grew by 34 percent and exceeded $10.5 billion. Broadband, however, showed the biggest growth of over 42 percent.

In 2006, according to the Russian Ministry of Information Technologies and Communications (MITC), the total ICT market exceeded $40 billion. Domestic capital investment totaled $5.6 billion, a 7.1 percent increase over 2005, while foreign investment totaled $4.1 billion, an annual increase of 19.5 percent. Russia’s web user base reached 25 million, and revenues from Internet access and data transmission services reached $2.1 billion, or 24 percent growth, compared to $1.7 billion in 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 communication services. Analysts estimate the size of the Russian long-distance market at $1.9 to $2.1 billion in 2006.

The challenges facing new players remain great. Holding a long distance service license is not a panacea. A new operator must have a national network and an agreement with regional operators for last mile connectivity. In addition, the new interconnection regulations divided operators into three main tiers: local, zonal and long-distance. Long distance operators now have to connect to end users only through regional operators (locally) and pay interconnection charges for each call.

The first contender, Multiregional TransitTelecom (MTT), started providing services in 2006 and was expected to challenge Rostelecom’s position. However, with its modernized network, good prices and improved customer service, Rostelecom did not give 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 ISPs 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 to price services 10 percent lower than Rostelecom. GT remains optimistic, expecting to grab about 20 percent of the market share by 2008 and estimating that the market will exceed $4 billion.

Fixed line sector: broadband boom

The boom in the Russian fixed telecommunications market was quite predictable. Russian regions outside of the more mature markets of St. Petersburg and Moscow showed growing consumer confidence and corporate spending as broadband usage jumped. No wonder the broadband market has become the leader of the information technology sector. MITC believes the data transmission market will grow from $1.18 billion in 2005 to $2.8 billion in 2008.

Additionally, the emerging IPTV market is also showing muscle. More than 20 Russian operators joined MTU-Intel and other market leaders in providing video services. According to iKS-Consulting, in 2006 there were about 150,000 IPTV subscribers in Russia, and by 2010 this number could reach 1.4 million.

Thanks to interconnection and the “Calling Party Pays” (CPP) regulations ratified in 2006, Russian fixed operators received a significant financial boost. Long-distance and mobile operators reported that in the third quarter of 2006 alone, landline operators earned about $14 million. Finally, fixed operators have taken on alternative operators in their traditional spheres of influence, Internet access and cable TV market sectors, offering a whole range of new competitive services.

Incumbent Russian telecommunications operator SvyazInvest Holding is unlikely to be privatized until 2009. Security services and the military blocked the move in 2006, citing national security concerns. Analysts believe that due to the upcoming presidential elections, the decision on privatization will be postponed further. However, SvyazInvest’s interregional companies showed some good results, reassuring investors in 2006. The results were achieved by effectively reducing operating costs and personnel, as well as by installing new enterprise resource planning solutions to improve enterprise management. In late 2006, Comstar UTS, the main fixed telecom asset of Sistema Telecom, bought 25 percent of SvyazInvest shares from its owners Leonard Blavatnik and Victor Vekselberg for $1.3 billion.

In 2006, about 7,000 WiFi access points were operating in Russia. J’son & Partners predicts that number will exceed 9,400 in 2007, growing exponentially over the next five years. The most famous, however, is the GoldenWiFi network launched by Golden Telecom, which added 6,700 hotspots, making it the largest WiFi network in Europe.

The mobile sector is getting saturated

In 2006, the Russian mobile market became the third largest in the world in terms of subscribers and revenue, after China and the United States. Mobile penetration exceeded 100 percent because about 152 million subscribers (population of Russia is 145 million) used mobile services in 2006. Major mobile operators face saturation and increased costs for marketing and development of VAS services.

The introduction of CPP regulations has helped Russia’s leading mobile operators mitigate the gradual decline in average revenue per user. Anticipating a decline in mobile calls, operators quickly switched to ruble-based tariffs, raising average tariffs by 5 to 10 percent. The carriers also secured a $0.03 per minute reimbursement from the fixed carriers, resulting in a 5 to 10 percent net profit for the major carriers.

The leading mobile operators MTS, Vimpelcom and MegaFon hold 85% of the Russian mobile market, while the share of regional operators reaches 15% (22 million subscribers, 3% growth). Tele2, SMARTS, SibirTelecom and UralSvyazInform demonstrated the most dynamic results.

3G is coming to Russia

3G mobile phone technology has finally arrived in Russia. In late 2006, the Russian State Committee on 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 for the entire country. The licenses will cost about $100,000 and will be issued for a period of 25 years. Operators are expected to “clear” the frequency and invest millions of dollars in equipment and network construction.

In April 2007, the tender committee will announce the winners based on a points system for each operator. The evaluation system will use basic criteria, such as the presence of a 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 decline in 2005, “heavy” content services have yet to emerge as mainstream. In developing 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 the development of ITC and expects continuous growth. Further information on this dynamic industry, including doing business in the Russian ICT sector, can be found in Andrei 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 heads GidaByte (www.gidabyte.com), a telecommunications business consulting firm in Hong Kong.

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