The Emerging Russian Mobile Market
By Vijai Maheshwari, Wed Nov 14 00:00:00 GMT 2001
Russia's mobile market is moving in the right direction, but when it will reach a formidable penetration rate is anyone's guess.
Just a little over three years ago, mobile phones in Russia were the provenance of the very rich, or the New Russians as the media dubbed them. Biznismen (businessmen) paid as much as $2000 to sign up for mobile service.
After the August 1998 Russian crash, when the ruble lost over seventy five percent of its value in a day, all that changed dramatically. With the loss of their elite subscriber base, the main mobile operators in Russia, Vimpelcom and Mobile Telesystems (MTS) rushed to turn mobile phones into a mass-market product.
Vimpelcom started to offer subscribers its Bee-Plus service for $49 a month, including handset, while MTS aggressively targeted new clients with an ambitious advertising campaign.
Three years later there are 3.4 million subscribers in Moscow, with a penetration of 23 percent. The whole of Russia boasts 6.2 million subscribers, low for its population of 145 million, but high compared to previous usage.
And although the average Russian subscriber spends an average of just $50 a month on their phones, the market is still large enough to tempt foreign operators.
Breaking into the Russian market
Norway's telenor was one of the first to dip its toes into the Russian mobile market when it acquired a 25 percent stake in Vimpelcom in 1999, Russia's then-largest operator. Vimpelcom hoped that Telenor would help it reorient itself towards a mass market.
Megafon (a holding company, which is owned by Sonera, and by Telia) has ambitious plans for the regions of Russia, where mobile penetration is as low as 1.5 percent. It orchestrated a big advertising campaign in southern Russia, including Stavropol, Rostov and Saratov. Over 10,000 people signed up for its service in just ten days this fall in Rostov, a region of five million people.
Megafon hopes to outmaneuver its rivals outside Moscow and St. Petersburg, where competition is still slim and mobile services underdeveloped. It will also benefit from its main shareholder Telecominvest, which has close ties to the Communications Ministry.
A former member of its board, Leonid Reiman, is now Russia's telecommunications minister. He granted Megafon usage in the scarce 900 Mhz range, which is also used by the Russian Air Force, prompting charges of nepotism from its competitors, and some segments of the press.
Megafon which has mobile licenses covering 80 percent of Russia and which plans to spend $600 million in investment over the next three years, is more sanguine.
Despite these advantages though, Yakoviesky is pessimistic about their long-term prospects. Megafon's share of Russia's total subscribers will grow to 14 percent next year he predicts, up from eight percent this year, most of whom will be based in the St. Petersburg region. He adds that "in Moscow, they have just 20-30,000 subscribers."
Other critics are also less bullish. "It's easy to get the GSM licenses, especially if you're well-connected, but it's more difficult to start selling and get this whole thing running," said Iouli Matevossov of Deutsche Bank, which has a stake in Megafon's competitor MTS.
In the long term, though, competition is only good for the Russian telecom market. It will drive down mobile costs and force operators to introduce innovate features to keep their client base.
But not so fast
While handsets are more popular in Russia than three years ago, the market is still much less developed than in Western Europe. Since fixed line phones have no mobile billing capabilities, users pay for both incoming and for outgoing calls. This has put a damper on handset usage.
Operators are countering with innovative offers which offer free incoming calls from within one particular operator, like in Vimpelcom's network. They also offer special deals to students and middle-income professionals to jumpstart usage.
The efforts are paying off: subscribers have been growing at the rate of 6-7 percent per month in big cities like Moscow and St. Petersburg, which has 600,000 users. But there are other hurdles to overcome in Russia's emerging mobile market.
One is that the main operators like MTS and Vimpelcom only operate, for the most part, in the two metropoles of Moscow and St. Petersburg, while the vast regions of Russia, the largest nation on earth, are serviced by a host of small telecoms. Users of Vimpelcom must use roaming services when they travel within the country, thus ratcheting up their phone costs.
Alliances between regional operators and Moscow-based ones have been fraught with billing difficulties. Then there are the problems with Russia's banking system. With Internet banking virtually nonexistent, and banks not enjoying the public trust they do in the West, users often pay the company directly, standing in long lines to do so.
And while SMS-messaging is more popular, revenues from text messaging are a small fraction of total revenues. An added problem is one of available frequencies for mobile operators, many of which are still held by the Russian military. This limits their availability to obtain licenses and expand into the regions.
Second generation services like WAP, GPRS or UMT are also in their very early stages. MTS does offer GPRS service from this past summer, but has not disclosed the number of users. WAP costs for mobile phones are much higher than in Western Europe, and not reliable at all.
The prospects for Russia are rosier in the long term. Mobile phone usage has come a long way since the mid 90s, when it was associated with the mafia and with illicit wealth. Costs have come down dramatically as competition has increased. And Russia's economy has started to grow at a rate of 5-6 percent every year after the August 1998 crash.
The development will also depend on what happens with Russia's economy in the next years. Overall penetration is just 4.5 percent in Russia, much lower than any other second world nation. If a few more big-name Western telecoms like Vodafone enter the market, that might change. Or it might not. With Russia, predictions are always difficult to make.
Vijai Maheshwari is a freelance journalist based in Estonia who writes for a number of publications including Fortune, the Financial Times, Harper's Bazaar, Gear, Nerve, Salon, and others. He uses an old fashioned Nokia but is still a keen observor of the digital scene, both here and elsewhere.