St. Pete Expansion Is the Right Call for MTS

ST. PETERSBURG — Moscow-based Mobile TeleSystems is already making plans for constructing and developing a cellular-service network in St. Petersburg through its newly acquired subsidiary, Telecom XXI.

On a recent visit to St. Petersburg, MTS president Mikhail Smirnov talked about the company's success in getting access to Russia's second-largest cellular market and its plans for developing its business in the northern capital.

Q:How far along is your application to the Anti-Monopoly Ministry for approval of the purchase of Telecom XXI?
Are there any remaining regulatory formalities you have to overcome?

A: I hope that we've taken care of all the formalities.
A positive ruling by the Anti-Monopoly Ministry was the primary condition of our beginning work [in St. Petersburg].
The paper informing us of the ministry's positive ruling is lying on my desk right now, so we're absolutely cleared to enter the St. Petersburg market from a legal standpoint.
When we initiated this deal [with Telecom XXI], I decided that we wouldn't take a single step in setting up here before these formalities had been taken care of.
I'm in St. Petersburg, so that just shows that we are clear to launch the project.
Our technical specialists are already out walking along the city's streets — or, to be more exact, walking along the city's roofs — looking for places to set up base stations to cover St. Petersburg with a new network, as we expected.

Q:Why did the decision from the Anti-Monopoly Ministry take so long? It seems that they actually made the decision after the time for the review had expired.

A: No, to the contrary, I'm pleased with the way things went.
According to the ministry's rules, they have one month to investigate a situation and to prepare and then issue a decision.
The ministry returned a decision within that time. If my memory serves me correctly, we received the decision on the 27th or 28th day.
The bureaucratic mechanisms worked very well in this instance.

Q:When your intention to buy Telecom XXI was first announced, it was rumored that you would have to give up some of your bandwidth in Moscow in order to win approval from the Anti-Monopoly Ministry. Was this indeed the case?

A: We had a problem with frequencies, but it was more a question of principle than any real danger to our business.
The Communications Ministry was trying to get some of this bandwidth from us and that's what drove us and Vimpelcom to kind of rebel against the situation.
Technically, we don't need much of the bandwidth in question as it is a frequency with a lowered capacity. We initially received it for usage inside the metro.
Naturally, when the whole question of this bandwidth was raised by the Anti-Monopoly Ministry, we did all the necessary technical preparation to maintain operations if it was taken from us.
We're not worried by the prospect of losing this as it won't really set us back. At present, we still have the bandwidth, though.

Q:Although Telecom XXI will be providing cellular phone service in St. Petersburg, the company will still have to connect to a ground-line network run by one of the local operators.
Each of these companies — Petersburg Transit Telecom, PeterStar and the Petersburg Telephone Network — is either completely or partly owned by Telecominvest or Svyazinvest.
As those two have fairly strong connections with your competitor in the GSM market here — North-West GSM — how do you think this question will be resolved?

A: Well, by the Communications Ministry, which has issued special regulations that require communications operators to connect other operators to their networks in special cases and prohibit them from creating these types of obstacles.
There is, however, still the possibility that there could be financial disadvantages.
The telephone market in St. Petersburg does tend to form into monopolies. As a result, I expect that we will face high tariffs.

But that's business, and we will have to negotiate prices with the local ground-line operators.
What's most important is that we've taken the first steps to enter the St. Petersburg market.
It's too early yet to predict the results, but we're hoping they will be positive.

Q:North-West GSM seems to have been stepping up its activities to attract new subscribers of late. What plans do you have to interest subscribers in Telecom XXI?

A: That's definitely something in the works, and while we're working on our strategy, we're going to keep the elements of that strategy to ourselves right now.
Part of the reason is that some of the details are still being formulated.
We've kept a pretty close eye on the St. Petersburg market and kept track of the changes, and our entrance into the market will further shake things up.
We've seen our future competitors adapting their marketing, advertising and tariff policies, and we've been adjusting our policies accordingly.
Without giving anything away, I can say that our entrance into the market will be a good thing for the residents of St. Petersburg, because we'll bring what we think is a very high level of service.
It will definitely lower prices, both for us and our competitors, and all cellular customers will benefit from that.

Q:Speaking of this, can you make any predictions with regards to your pricing policies in St. Petersburg?
Do you think your arrival could touch off the same kind of price war we saw between MTS and Vimpelcom in Moscow?

A: A price war — I think that may be too extreme a term. That type of situation occurs when two serious players on the market are paying attention to what the other is doing.
There are several ways to win the market. Pricing and tariffs policy is one of the most important.
But there's a limit to how low tariffs can go and still create profits.
Another way to win market share is to provide a better service for the same price.
Our strategy is to focus more on this second factor, although we're not ignoring the first.
I think that a large factor in what some have referred to as the "price war" that took place in Moscow was that we had jumped out ahead of our competitors, and they felt that cutting their prices in this way was the only way to make up ground.
I don't think we'll see a repeat of this in St. Petersburg.
We're going to try to offer prices lower than those currently charged in St. Petersburg.
But we're hoping to focus more on offering a range of new services.
We're going to stress quality of service and good relations with our subscribers. I think that this will play the key role in establishing our place in the St. Petersburg market.

Q:What are your expectations concerning the number of your subscribers?

A: It's hard to say, because it will all depend on how long it takes us to set up our network.
If everything goes as we've planned and we don't run into any of the problems you raised concerning ground-line providers, then we should have 10,000 to 20,000 subscribers by the end of the year.
Naturally, we have short- and long-term business plans. In St. Petersburg, we hope, ultimately, to service 30 percent to 40 percent of cellphone users.