Russia: market leader mts explains the unique market | rcr wireless news

_EDITOR’S NOTE: _RCR Wireless News Editor Sylvie Barak delved deep into the Russian wireless landscape during a recent trip to the country. She delivered a feature report for RCR Wireless

News that was included in our November Special Edition. Click here to read her report. But Barak still had more that couldn’t fit in that report. As such, here is Part 2 of our Feature

Report: Russia: A Vibrant Powerhouse Straddling East and West. To read a journalist’s perspective of the Russian market, Click here. To read NSN’s perspective on the Russian market, Click

here. To read about Brightstar’s wireless distribution plans, Click here. Mobile TeleSystems (MTS) is the largest mobile phone operator in Russia and the CIS, and is a member of Russia’s

“Big Three” operators. Together with its subsidiaries, MTS services more than 97.81 million subscribers, and to top that, also has associates and subsidiaries licensed to provide GSM

services in Armenia, Belarus, Turkmenistan, Ukraine, and Uzbekistan, territories with a total population of more than 230 million. “The Russian market is a lot different than a lot of other

markets,” said Josh Tulgan, head of MTS’ IR department. With 140 million people living in Russia, a very highly educated population, plus guest workers, and a host of different consumer

segments made up of different nationalities, different races, different ethnicities, and speaking different languages “it’s actually a pretty vibrant and rather dynamic consumer market,” he

said. The government, Tulgan told us, was particularly operator supportive too, with the benefits of fostering a regulatory environment considered to be one of the most benign in the world.

”Over 90% of the population in Russia has some telecommunication service, most of which is mobile,” he said noting that in other BRIC nations that figure was somewhat closer to 60%. ”So, the

structure of this market has encouraged us to develop infrastructure, to build out our networks, and to this day, that continues.” The three major operators put at least $3 billion

collectively into the Russian market, “and in many cases, much, much more.” ”There’s always incentive for us to keep building our networks, to extend our coverage, to improve our coverage,”

said Tulgan. As mentioned earlier, there are three major operator players in Russia which together control over 90% of the market in mobile as well as in fixed line. There are, however,

several other regional players that collectively bring the total number of operators in Russia to about 12. We asked Tulgan how MTS had weathered the economic crisis, and indeed, how the

industry as a whole had faired. “The crises was hard here for a lot of companies. But the Russian government itself is very wealthy. They have a lot of cash and reserves built up,” he said

explaining that the government was keen to promote further diversification of the economy, moving away from just raw commodities. ”Telecoms are incredibly resilient. Last year in 2009, the

Russian economy contracted about 8%. Yet we grew organically a couple of percentage points,” he affirmed confidently. The big question in global telecom, not just in Russia, but globally, he

said was how operators plan to grow with data. “This is a question that we’re looking at as well.” The Russian market, however, is a little different said Tulgan, because first of all it is

prepaid. “There are no contracts, there’s no nothing,” he expounded, although he added that despite this there is a high degree of customer loyalty among middle- and high-value segments

because people like to keep their phone number and there’s no portability in Russia. Also, Tulgan explained, people in Russia hold a different view of mobile operators. “Because it’s

prepaid, we’re not selling people handsets on a large scale, and certainly not selling any handsets on a contract basis like you do elsewhere.” Indeed, Russian operators like MTS have their

fingers in numerous pies, including fixed line products and Pay-TV. “We’re now the largest Pay-TV provider in Russia and we rank among the top three or four in terms of broadband providing,”

he boasted, noting the opportunities to be had by expanding from just mobile access into fixed, and other complementary services. In Russia, MTS already boasts around 70 million

SIM-card-using mobile subscribers, but the firm’s combined TV and Internet subscriber base adds another 3.5 million, while other markets in which MTS is present add about 35 million more

subscribers. And then, of course, there’s machine to machine communication. “This is becoming more and more interesting to us. We have projects like the city water companies that put SIM

cards on the meters so they can measure usage and what people’s bills are without have to wire it,” he said. “That’s kind of exciting to us.” Connectivity of any kind, be it M2M or P2P is

something most Russians wouldn’t dream of being without. “In the U.S. there is a sort of amusing statement like, ‘They can pry the gun from my cold dead hands,’ but here in Russia, you can

essentially change that to, ‘You can pry the cellphone from my cold dead hands.’ I mean, nobody wants to give up their communications capabilities. People want Internet access,” Tulgan

proclaimed. This craving for mobile broadband is good news for Russia’s handset industry, although the lack of subsidization means many of the higher-end smart phones are still too expensive

for most. MTS itself actually has the largest in-house retail operation of any other operator in the country, a sort of misnomer in a country where third-party multi-brand dealers have been

distributing SIM cards for years. “We’re selling more and more handsets now,” Tulgan told us adding, “this gives us a pretty good perspective on the marketplace.” Tulgan reiterated,

however, that operators don’t subsidize phones. “In Russia you buy the phone upfront and there are a lot of legal and commercial reasons why we don’t subsidize them. People have to pay

upfront the full costs of the phone. And if you look at the big three handsets, which are the iPhone, the Android phone, and the BlackBerry, in terms of data usage, and real data usage, the

cheapest of which in Russia is the equivalent of over $500 – that is way beyond the means of your average Russian consumer.” A surprising statistic quoted by Tulgan is that around 90% of

MTS’ data consumption is driven by around just 5% of its subscribers. In order to try and increase smart-phone penetration and up data consumption, MTS told RCR it was beginning to bring in

and sell handsets made in China by the likes of Huawei and ZTE. “But these are obviously lower quality.” ”They have touch-screens, they’re qwerty keyboard handsets, which facilitates usage

of things like e-mail or Internet browsing but it’s still not quite like the Android phone or something like that.” What about enterprise- friendly phones like RIM’s BlackBerry? Tulgan

responded that Russia had had some “security issues” with BlackBerry initially but said MTS came up with a workaround. What kind of a “workaround,” Tulgan wouldn’t say but he did venture to

add: “There’s a big issu e in Russia because companies do not emb race telecom with the same degree of enthusiasm as foreign companies. It’s not a productivity tool per se, it’s more of a

convenience.” The theme of “convenience” also seems to seep through to the infrastructure level of Russian telecoms too, with the Big three relying mainly on three big infrastructure

suppliers; Nokia Siemens Networks (NSN), Ericsson and Huawei. “We’re simply just too big to depend on one or even two suppliers,” Tulgan said. He also bit back at the notion Chinese

infrastructure firms couldn’t match the quality of their European rivals. “It’s actually kind of a misnomer,” he declared. Indeed, he said, with their expert credit support and other forms

of creative financing, along with a longer view toward relationships, Chinese firms like Huawei have actually forced the likes of Ericsson and NSN to become more cost competitive. ”On the

other hand, the quality of Huawei is increasing, has been increasing for some time and we do consider it a higher quality supplier. There’s no question about it,” he emphasized, concluding,

“There’s more parity than I think people assume between those three suppliers.” Asked whether he believed Russia was headed towards 4G anytime soon, Tulgan responded in the negative, noting

“the interest in 4G, we feel is a lot of noise.” Over the past couple of years a couple of small WiMAX players have entered the market at great cost with little reward, and have been able to

build up a presence, but Tulgan says that simply “gives the illusion that they’re successful.” The main Russian operators, for their part, are sticking to 3G for the foreseeable future,

with the migration to HSPA+ set to occur within the next 12 to 15 months. The enhanced 3G technology, said Tulgan “that is at this point on par with virtually anything else in the

marketplace,” and he went on to say that “at this point the technology isn’t there to justify investments [in 4G] because one of the great things about Russia is because it’s a later

developing market you don’t have to be at the forefront of the technology curve. “ Continuing to give 4G technology a conceptual bashing, Tulgan said the technology didn’t even have a proven

technology standard yet. “You don’t have a proven cadre of suppliers and products that have been tested and applied. And the price is high. So, without frequency or equipment there’s really

nothing you can do.” Not to mention that Russia really benefitted from holding out on 3G until just recently. “Our equipment prices were so low,” he said. “In our view, it makes sense to

wait. See how the world develops its LTE platform and then go with the global standard, that will 1) ensure, that nobody is making any multibillion dollar mistakes and 2) it will allow us to

bring these services to our customers much faster because we’ll know what we’re doing as opposed to reinventing the wheel. So at this point we don’t see any eminency for 4G. We don’t see

the value of not working through the existing telecommunications infrastructure.” Did the operator’s objection to 4G partially come from the rumors that spectrum would be doled out to new

players and would likely be sold to the Big Three at an inflated rate? From our perspective anybody who comes in with just 4G is already at a disadvantage, said Tulgan, noting that they’d

have to find a site, hire people, develop everything from CRM to accounting systems, brands and a whole host of other things that “would be redundant and delay the availability of these

services by years and costs literally billions of dollars to do.” MTS does have an LTE test network in Uzbekistan but says that because the gateways coming into those types of countries in

terms of global Internet access is restricted, people wouldn’t fully benefit from top speeds like 100 megabytes per second anyway. This top-down approach to deciding what technology is best

for customers is a typically Russian phenomenon, in a country where people – for years – had had their wants, needs and dreams dictated by the state. Though that is no longer the case, Big

Business is Russia still doesn’t put much stock in things like “customer voice” or indeed in customer service. “Within reason we do listen to customers, says Tulgan, but goes on to say that

“because the purchasing power of so many of our customers is so much lower, we have to work for the greater good if you will.” At the end of the day, MTS’ argument comes down to ARPU, and

the ARPU in Russia currently stands at about $10. In Russia, money talks, and Tulgan said that if a customer was considered a VIP client, spending on the level of an average U.S. customer,

$50 or more a month, then one would actually get access to a personal manager at MTS. “Someone who you can call if you feel that you’ve been – anything from over-billed to you don’t have a

tariff plan that you like to you have to hook up your stylus and your kit to your plan,” he explained. But providing world-class customer service to such a vast amount of population would be

impossible, Tulgan said. “You have to understand that the economy of Moscow is larger than that of I think Belgium at this point.” This same ARPU calculation, however, is also one that

prompted MTS to move more in a content and services direction. “If somebody is going to use Skype, that means they’re going to subscribe to a data plan, which would immediately increase the

ARPU dramatically. And they would also have a different phone that’s 3G capable, said Tulgan noting that this would raise ARPU dramatically over time. But can the networks handle such a

large population of people on the cusp of a data revolution? “We have tariff plans that are ‘unlimited,’ but the first X number of megabytes are at full speed and then the speed decreases

thereafter within a 24-hour period for example. “ According to Tulgan, customers are OK with this. “In America obviously there’s discussion about net neutrality and so forth. Here, people

just want net. They’re not really so much concerned about how some data might cost more than others, they just want to be able to get online and start exploring this incredible world that’s

out there and they want to have basic communication.” MTS has a rather broad definition of what constitutes “basic communication,” however. “We are offering services that nobody else is

offering in Russia,” boasted Tulgan referring to the Omlet.ru content portal. “People can download applications, music, movies. You can sign up for ring-back tones, do a whole host of

things.” Then there are also the subscription services, which allow Russians, for instance to use their phone at the turnstiles in the metro as a pass, billing them directly through the

carrier. Toward the end of our interview with Tulgan we asked what the market was like for foreign players that tried to penetrate Russia. “Historically there have been a number of foreign

operators in Russia,” he said. For instance, MTS for a longtime could boast Deutsche Telecom as a minority shareholder. Vimpelcom still has Telenor as a shareholder, and Tele2 also operates

in Russia. In addition TeliaSonera is a shareholder in MegaFon, so, I think we’ve been very friendly to foreign operators. I mean, Deutsche is no longer with us but they exited on their own

volition, not under any pressure or duress or anything about the Russian market,” he ventured. The Russian Authority, he posited, is “perfectly OK with foreign operators coming in or out,

it’s just a question of how.” The only real impediment Tulgan sees for foreign operators coming in is the scarcity of frequencies and the need to build a network, which he says is

“prohibitively expensive.” While others look to Russia for investment opportunities, ho wever, Russia is already looking outward tow ard investments of its own. “We see a lot of regulatory

risks in emerging markets. We see a lot of regulatory risks in developed markets too. But we are looking for opportunities that are creative to us in terms of our revenues, our EBIDA and our

return, the net income of the company, or enhancing our cash flows,” he explained. In conclusion, said Tulgan, MTS certainly feels that the Russian market offers a lot of opportunity “and

we’re very pleased that we’re in a position to capitalize on that.”