Russian Telecommunications Prepared to Fly as Data Soars

Viktor Klimovich
Analyst
VTB Capital

Integration and consolidation are the two key words to describe the major structural shift currently underway in Russian telecommunications. VimpelCom and Golden Telecom got the ball rolling back in 2008, combining their fixed and mobile businesses, followed by MTS and Comstar UTS in 2009. Now there is also the consolidation of VimpelCom and Kyivstar in Ukraine, Rostelecom and Svyazinvest’s regional operators, MegaFon’s potential acquisition of Synterra in 2010 and perhaps more. The operators are preparing themselves to give us, the customers, a unified telecommunication solution no matter where we are and which services we need.

2009 was a tough year for Russian telecommunication operators but they nevertheless showed once again how resistant a sector this is: The industry grew about 3 percent last year while gross domestic product declined 7.9 percent. The greatest impact was felt from corporate clients: Not only did they reduce staff numbers and, hence, the number of corporate lines, but also optimized remaining telecom costs. However, private customers were reluctant to reduce their expenditure on what they already consider to be necessary services. It would seem that telecommunications now belong in that category. In late 2008 to early 2009, at the peak of the crisis, research showed that Russians would prefer to spend less on food rather than reduce their outlay on telecom services.

In 2009, data traffic transfer became one of the major factors of industry growth. Moreover, operators and market experts consider that data traffic transfer will retain its leading role as the driver for further industry growth over the coming years. Indeed, we see traffic growing tens or even hundreds of times over the next couple of years as Internet penetration in Russia expands from about 42 percent at the end of 2009, with broadband penetration at 22 percent, transmission speeds increase and new applications appear. Operators’ networks need to be prepared for this. This is why the major market players — Svyazinvest, MTS, VimpelCom and MegaFon — started rapidly increasing their infrastructure in anticipation of potential growth, while at the same time consolidating all available network resources and customer bases, which were fragmented by the type of telecommunication service, through mergers and acquisitions.

In the coming years, we expect the Russian telecommunication industry to move toward customer-centric, multiservice, utility-type providers that are also deeply integrated into contiguous businesses like content/media, data centers and even, potentially, banking. What will this mean for customers? It means that we will have more time, a wider choice and a better chance of leading a fulfilling life.

Ongoing developments in hardware design — that is, laptops, netbooks, netpads, smartphones and so on — and competition between producers will expand the range of devices and continue to push down the prices for basic models. At $100 to $150, they will be within a price bracket that most Russians can afford, opening up the world of the Internet and other telecommunication solutions to the wider population.

Historically, the regulatory environment on the Russian telecommunication market has allowed operators to run their businesses with high margins, meaning that they can cover far-flung areas with their networks, both fixed and mobile. And we would expect the current consolidation phase to restrain the market from overcompetition, thus supporting the cash-flow generation needed to strengthen and widen networks further. On the other hand, the current situation, with the four biggest market players and some strong regional operators, prevents there being monopoly high prices for services on the market.

Hence, with the potential to build up a wide network that can carry telecommunication services plus a wide range of content at affordable prices, we expect that Russian operators will have every chance of catching the full potential of any future boom in data traffic.