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RUSSIA INDIA BUSINESS REPORT

IN ASSOCIATION WITH ROSSIYSKAYA GAZETA, RUSSIA

THE ECONOMIC TIMES WEDNESDAY_MAY 12_2010

Technologies

Trends Mobile broadband services are driving the market

Russian telecom: gearing up for 4G

New technology applications and diversified holding companies are the key future trends in Russian telecoms.

VENERA REZTSOVA

RIR

India has become one of the fastest-growing mobile mar- kets in the world.

RIR Dossier: AFK Sistema and SSTL

AFK Sistema is the largest di- versified public company in Russia and the Commonwealth of Independent States. Its prin- cipal shareholder, Vladmir Ev- tushenkov, owns 62.13 pc of the holding’s stock. Its net profits in US GAAP at the end of the third quarter of 2009 totaled $1.684 bn (gross: $5.3 bn). Its over- all assets exceed $41.9 bn. AFK Sistema owns assets in the tele- communications sphere, real es- tate, banking business, tourism, medicine and high technology. Its strategy has been to create leader-companies in promising markets. Its shares have been listed on the London Stock Ex- change in the form of global depositary receipts under the SSA ticker. The holding’s ordi- nary stock is traded on the RTS and MMVB exchanges as well as on the Moscow Stock Exchange. Moody’s has given the company a rating of Ba3, prognosis “sta- ble”; the Fitch Agency has giv- en the company a similar prog- nosis, but with a rating of BB. AFK Sistema is one of the first private companies in Russia to open an office in India.

Sistema Shyam TeleServices

Ltd (SSTL) is a daughter com- pany of AFK Sistema holding and the Shyam Group. The Rus- sian side owns 73.71 pc of the shares in this Indian operator. SSTL was created in 1998. On 30 September 1998 it began of- fering mobile telephone ser- vices with the CDMA2000 stan- dards. Today SSTL is licensed in all 22 of India’s telecommunica- tions districts. In March 2009. Sistema Shyam TeleServices was given the opportunity to use the MTS brand in its image and advertising communications within India. As of January 2010 the company had some 3 mn subscribers. SSTL’s services are used by residents of Rajasthan, Tamil Nadu (including Chennai), Kerala, Calcutta, West Bengal, Bihar, Delhi, Karnataka, Mum- bai, Haryana and Maharashtra. The operator’s subscriber base is growing at a rate of rough- ly 15 pc a month. By 2012 SSTL plans to expand its base to 35 mn subscribers, and by 2013 to achieve a positive EBITDA (earnings before interest, taxes, depreciations and amortisation).

Over the last ten to twelve years, the Russian mobile communi- cations market has been boom- ing. Before the 1998 public debt crisis, mobile phone ownership was a privilege of affluent con- sumers but today the number of registered SIM cards greatly exceeds the total Russian pop- ulation. “This is not so surprising after all. Mobile phones are used even by pre-schoolers and gran- nies who no longer need to walk all the way downstairs for a chat with a neighbour,” says Ilya Fedotov, a telecommunications market specialist at Veles Capi- tal. According to J'son & Part- ners Consulting, Russians have about 209.1 mn SIM cards. With a population of approximately 143 mn people, mobile market penetration has reached 147.3 pc in Russia. Today, the market is dominated by MTS, a subsidiary of the AFK Sistema group that serves 33 pc of Russian subscribers. The other members of the “Big Three” group of cellular opera- tors include Vimpelcom and Megafon – each with a market share of 24 pc. The remaining 19 pc subscribe to smaller provid- ers. Fighting for their clientele, Russian mobile operators have come up with increasingly com- prehensive service packages and are now about to roll out their fourth-generation (4G) project. The main difference be- tween 4G and 3G service is higher speed data transmission. On 28 May, the Russian State Radio Frequency Commission plans to approve pilot zones to test LTE (4G) technology in four federal regions that will tentatively include the Primor- skiy Krai, Kostroma, Rostov and Sverdlovsk regions. LTE-based systems can sup- port upto 326 Mbit/sec down- link speed (from base station to device), while handsets will be able to send out streams of data at upto 172 Mbit/sec. MTS was the first Russian operator to start building a 4G network in

neighbouring Uzbekistan. The project should be completed by 2012.

Expansion of 4G and broad- band Internet access are the prevailing trends in the Russian telecommunications market. While the number of subscrib- ers who use voice services ap- pears to be no longer growing at the impressive pace it previ- ously demonstrated, the army of mobile Internet users is swelling at double its earlier rate. In 2009, MTS expanded its broadband customer base by 39.8 pc over the 2008 level to a total of 1.3 mn subscribers. An analysis from Frost & Sulli- van, Mobile Broadband in Cen-

Expansion of 4G and broadband Internet access are the prevailing trends in the telecom market

tral and Eastern Europe, notes that the market generated rev- enues of €1.1 bn in 2009 and forecasts that revenues will reach €5.2 bn in 2014, with Rus- sia accounting for 50 pc of that growth. Broadband penetration in Rus- sia is currently only 6 or 7 pc versus 30 pc in Europe and 15 pc in Hungary and Poland,

which indicates vast potential for the market. "Most of the market partici- pants start mobile broadband service development from large city centres, where they can count on relatively quick re- turns on investment," states Frost & Sullivan ICT Research Analyst Edyta Kosowska. This move is still economically justi- fied, as the highest demand comes from people with in- creased mobility needs such as corporate employees and stu- dents. "However, in the near fu- ture, growth potential will be mainly visible within rural areas, where overall broadband penetration remains relatively low. Therefore, focusing on this target group can be a worth- while consideration," adds Ko- sowska. Fitch Ratings also believes that the broadband focus of Russian companies makes very good sense and expects that line of business to drive revenue growth in the future. The Ebit- da of Russian mobile operators, which hit historic highs in 2009 on the back of recession-forced cost optimisation, is likely to come under moderate pressure in 2010 as cost-cutting efforts lose momentum. Experts say mobile operators will be keen to expand their retail phone businesses, which have been weaker earners. Vimpelcom,

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one of the three Russian tele- com giants, already took the first steps in this direction when last autumn, it bought a stake in Evroset, a major mobile de- vice retailer in Russia. Another prominent trend is consolidation of mobile com- panies seeking to maximise their service offerings. In 2008, Vimpelcom bought two large Internet providers within the space of six months, Golden Telecom and Korbina. Another player from the Big Three cel- lular group, Megafon, decided to take a stronger foothold on the long-range communica- tions and broadband market. To this end, the operator plans to acquire a 100 pc stake in Sin- terra, a national fixed-line op- erator. In a similar vein, Svyazinvest, the government-controlled holding group, is undergoing a reorganisation to consolidate its seven regional subsidiaries within Rostelecom by May 2011. As a result, the Big Three will turn into the Big Four. AFK Sistema is also taking steps to keep up with the com- petition. In April 2010, it bought SkyLink, a mobile broadband and voice service provider. The deal is a part of a larger asset swap with Svyazinvest, in which Sistema will hand over SkyLink in exchange for the Moscow Telecommunications Network, a Moscow fixed-line operator. "The telecommunications sec- tor stepped into 2010 in good shape after having sorted out li- quidity, refinancing and ex- change rate hassles inflicted by the credit crunch. And this pos- itive trend is likely to continue," says Fitch spokesman Artyom Frolov.

With a population of approxi- mately 143 mn people, mobile market penetration has reached 147.3 pc in Russia.

AFP

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