Three major trends fueled Russian telecom development in 2006: (a) liberalization of the long-distance telecom market and introduction of new operator interconnection regulations, (b) broadband Internet access as the new leading market segment, and (c) the upcoming issuance of third-generation (3G) licenses amid 100 percent mobile-sector penetration and value-added services (VAS)-sector growth.
In 2007, there will be increasing competition in the long-distance market segment. Fixed-line operators will further diversify their services, particularly among broadband and convergent 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 feature increasing competition for subscriber loyalty, offering heavy VAS content (mobile television and interactive games) as operators deploy 3G networks. Cable television, broadcasting, and satellite operators will enrich content and expand their offerings to subscribers.
Russia’s steady macroeconomic performance (6.8 percent gross domestic product growth in 2006) increased government and corporate spending on information and communication technology (ICT) infrastructure and services, and growing regional consumer spending increased telecom-sector growth. In 2006, the Russian telecom-sector revenues reached $29.6 billion, a 26 percent growth over 2005, as reported by iKS-Consulting. The mobile communications sector grew 34 percent and exceeded $10.5 billion. However, broadband access showed the largest 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. Local capital investments totaled $5.6 billion, a 7.1 percent growth over 2005, while foreign investments totaled $4.1 billion, a 19.5 percent annual growth. 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 in 2005.
Liberalization of the Long-Distance Market
January 2006 began with a historic event. Rostelecom, the national carrier and dominant player on the long-distance telecom market, awoke to a new competitive reality–the market was liberalized. Actually, more than 20 new operators received licenses to provide long-distance and international communication services. Analysts estimated the Russian long-distance telephony market size at $1.9 billion to $2.1 billion in 2006.
The challenges for new players remain high. Owning 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. Moreover, new interconnection regulations divided operators into three major levels: local, zonal, and long-distance. Long-distance operators now must connect to end-users only through regional operators (local level) and pay interconnection fees for every call.
The first contender, Multiregional TransitTelecom (MTT), began providing services in 2006 and was expected to challenge Rostelecom’s position. However, with its modernized network, good pricing, and improving customer service, Rostelecom did not yield much ground to MTT in 2006, and the MTT subscriber base reached only 2 million (4 percent). Nevertheless, MTT expects to capture 15 percent of the market share by 2008. With more than 40 million subscribers, Rostelecom gained 60 percent of the market, while the smaller operators, including Internet protocol providers and grey-market operators, fought for the rest.
In January 2007, Golden Telecom (GT), one of the largest alternative telecom operators, launched services. With a strong regional network, developed corporate market segment, and significant distribution network of 30,000 points, GT plans price services at 10 percent less than Rostelecom. GT remains upbeat, expecting to grab some 20 percent of the market share by 2008 and estimating that the market will exceed $4 billion.
Fixed-Telephony Sector: Broadband Access Boom
The boom of the Russian fixed-telecom market was rather predictable. Russian regions outside the more mature St. Petersburg and Moscow markets demonstrated increasing consumer and corporate spending confidence as broadband Internet usage skyrocketed. No wonder the broadband access market has become the leader of 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.
Moreover, the emerging IPTV market is also flexing its muscles. More than 20 Russian operators joined MTU-Intel and other market leaders in providing 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 the 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 just in the third quarter of 2006 fixed operators earned some $14 million. Finally, fixed operators shouldered alternative operators in their traditional spheres of influence, Internet access, and cable television market sectors, offering a whole range of new competitive services.
Russia’s incumbent telecom operator, SvyazInvest Holding, will probably not be privatized until 2009. Security and military agencies blocked this move in 2006, citing national security reasons. Analysts believe that because of the upcoming presidential election, the decision on privatization will be postponed further. However, SvyazInvest’s interregional companies showed some good results, appeasing investors in 2006. The results were reached through an effective cut in operational costs and personnel, as well as through the installation of new enterprise resource-planning solutions to improve enterprise management. At the end of 2006, Comstar UTS, Sistema Telecom’s major fixed telecom asset, purchased 25 percent of SvyazInvest shares from its owners, Leonard Blavatnik and Viktor Vekselberg, for $1.3 billion.
In 2006, some 7,000 WiFi hotspots operated in Russia. J’son & Partners predicts that the number will exceed 9,400 in 2007, growing exponentially in the next five years. Most prominent, however, is the GoldenWiFi network launched by Golden Telecom that added 6,700 hotspots, making it the largest WiFi network in Europe.
Mobile Sector Saturates
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 the CPP regulations helped Russia’s leading mobile operators to soften the gradual fall in average revenue per user. Anticipating a drop in mobile calls, operators quickly moved to ruble-based tariffs, raising average tariffs by 5 to 10 percent. Operators also secured reimbursements of $0.03 per minute by fixed operators, which resulted in a 5 to 10 percent net profit to major operators.
Leading mobile operators, MTS, Vimpelcom, and MegaFon held 85 percent of the Russian mobile market, while the share of regional operators reached 15 percent (22 million subscribers, 3 percent growth). Tele2, SMARTS, SibirTelecom, and UralSvyazInform demonstrated the most dynamic results.
3G Comes to Russia
3G mobile telephony technology finally arrived in Russia. At the end of 2006, the Russian State Committee on Radio Frequencies approved the allocation of 3 × 15 MHz in 1935-1980 MHz and 2125-2170 MHz frequencies, and 3 × 5 MHz in 2010-2025 MHz frequencies for 3G development. This frequency capacity is sufficient to issue three nationwide licenses. The licenses will cost around $100,000 and will be issued for a period of 25 years. Operators are expected to “clear” the frequency and to invest millions of dollars into equipment and network construction.
In April 2007, the tender commission will announce winners according to a scoring system for each operator. The scoring system will use major criteria, such as network presence 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 resurged from its unexpected slump in 2005, the “heavy” content services have not yet emerged as mainstream. In emerging markets such as Russia, where mobile penetration is uneven and customer preferences are based on purchasing power, it is hard to predict the exact start of 3G.
The Russian telecom market is closely following world leaders in ITC development and expects continued growth. Further information on this dynamic industry, including doing business in the Russian ICT sector, can be found in Andrey Gidaspov’s first book, Riding the Russian Technology Boom, which will be published by Futuretext in April 2007 (www.russiantechboom.com).
Andrey N. Gidaspov is a former BISNIS Moscow representative. He currently heads GidaByte (www.gidabyte.com), a telecom business-consulting firm in Hong Kong.