Little Room for New Players in the Telecom Sector


Russia's telecom market is a paradox: highly competitive yet difficult to enter. With Tele2 now part of Rostelecom the country has four players on the federal level. All are involved in rolling out the latest-generation LTE services.††

Russia's telecom market is likely to keep growing thanks to the development of mobile and data services, and subscription television, compensating for lower revenues from voice services. They may also help cushion the industry from the economic slowdown.

The growth of data services may eventually cannibalize other traffic such as voice and SMS, as users go online to use services that were traditionally the role of the mobile phone. †

"We expect the pace of growth in Russia's telecom market to slow down," said Renaissance Capital's telecom analyst Alexandra Serova. "This is due to the high penetration of mobile devices, cannibalization of telecom services and the overall macroeconomic situation. This in turn has an impact on demand from individual and corporate customers, the sales of more contemporary mobile devices and the investment plans of telecom companies."

She does not expect stagnation in the market, she added. "Over the next couple of years, telecom operators' revenues will continue to grow at a slow pace."

Anna Lepetukhina, senior analyst, Sberbank Investment Research, said voice traffic services are no longer growing and in some segments they are shrinking. "Even though there might be nominal growth, its pace is decelerating from year to year."

However analysts say considerable growth is still possible in mobile internet and data services. The increased penetration of smartphones and subscribers' growing willingness to use data services will drive average revenue per user (ARPU) higher, ensuring continued growth in the segment, Lepetukhina said.

There is already a trend for revenue growth in mobile internet at the expense of ARPU for voice services. Revenues in the mobile internet segment are increasing at a rate of over 30 per cent , year-on-year, according to Serova. "However, we expect that at a certain point mobile internet will more actively cannibalize SMS and voice services, also because of the spread of instant message services."

In the fixed-line segment, internet services will drive growth, along with subscription television, Serova said, although at a more moderate pace than earlier. "We expect revenues from voice services, both in the fixed-line and mobile segments, to continue to decline," she said. "In the longer term, we expect more active development of mobile financial services and machine-to-machine technologies."

Looking at the broader economic outlook, the telecoms industry has been less affected than many other sectors by slowing growth. The telecom sector has always been considered to be less susceptible to micro economic fluctuations than other sectors. "In the mass segment, we expect a negative impact from the likely optimization of corporate spending and roaming services, given a decline in tourism and business travel abroad," Serova said.

The mass appeal of telecoms services is likely to protect the sector to a degree. "Crisis factors are not having any major impact on the pace of growth because we are talking about services that are basic for the majority of the population," Lepetukhina said.

As for handset sales, the crisis might put a lid on plans to sell more smartphones along with additional services, as the falling ruble makes imported devices more expensive. Such phones remain costly, although telecom operators have spent time and effort on promoting the use of smartphones among the population, offering basic models that allow people to access the internet. This trend may slow, as people become less willing to upgrade their smartphones to more expensive models. "Upgrading smartphones will be more problematic," said Lepetukhina.

Whether mobile phone operators respond by cutting rates or prices is a moot point, experts say.

"There is a probability that one of the operators will go ahead and offer "crisis tariff plans," said Lepetukhina. "If it happens, other operators will have nothing to do but follow suit, which would lead to an overall decrease in prices. But it won't necessarily happen."

Russia's telecom sector is highly consolidated, and the arrival of new major players in the short term is unlikely. In the mobile segment, the big three companies, Mobile TeleSystems (MTS), MegaFon and Beeline account for 83 per cent† of all Russian mobile subscribers, according to data for the second quarter of 2014 provided by ACM-Consulting.

According to Lepetukhina, a completely new player is unlikely to enter the market as there are restrictions on available frequencies. "There are no indicators that there will be a sufficient frequency resource for a new player in the near future," she said.

Opportunities for new entrants is likely to remain limited, making unlikely the introduction of virtual operators, or licensed providers that buy network services at wholesale rates and sell them on to customers. The big three have no reason to introduce mobile virtual network operators (MVNOs) by their own initiative, said Lepetukhina. "The existing operators aren't interested in creating competitors for themselves. Nothing obliges them to allow other companies to use their networks. And building a completely new network would be costly and difficult."

Still, the country's fourth-biggest mobile operator is gaining momentum. Tele2 Russia was sold to the Russian bank VTB last year and then to Rostelecom, giving it access to the LTE licences that it failed to win on its own. While expanding operations to new Russian regions, it also plans to launch operations in Moscow in the near future. Currently, it accounts for roughly 15 per cent† of the market.

Tele2 already operates in many regions and may grow further, leading to some increase in competition and perhaps downward pressure on prices. Rather than kicking off a new round of competition, however, this could simply raise the bar for new entrants. †

"Given Tele2's development plans, which include the launch of 3G and entering new regions, the competitive environment will become more active, which will make it difficult for new players to enter the market," Serova said.†

Doing Business in Russia 2014
Doing Business in Russia 2014
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