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Russia hits mobile saturation point

Russia's ‘big three’ mobile operators post Q1 2012 connection declines as penetration hits 160%

Russia’s three largest mobile operators all lost subscriber connections in Q1 as the country’s mobile penetration rate topped 160 percent. According to the latest GSMA Intelligence data, the total Russian mobile market contracted by 1.7 million connections in Q1 compared to the previous quarter, as declines were recorded at market-leader MTS (down 570,000), second-placed MegaFon (-1,000) and third-placed VimpelCom (-1.6 million). These three operators account for 83 percent of the Russian market, though some of the country’s smaller players continued to add subscribers, notably discount operator Tele2.

GSMA Intelligence calculates that Russia’s mobile penetration rate has increased by about eight percentage points over the last year, nudging 160 percent in Q1 – a threshold that historically sees operators begin reporting flat connections growth (as seen in other highly-penetrated mature markets such as Italy).

VimpelCom attributed the 1.6 million decline at its Beeline brand to “more targeted sales activities” and a slowdown following the traditionally strong Q4 holiday quarter. It also noted that, rather than focusing on growing market share, it is “resetting the overall commercial model” in order to protect future profits. While its total mobile subscriber base only increased 5 percent (to 55.6 million) year-on-year, it highlighted a 12 percent increase in mobile broadband subs (to 2.6 million), and a 42 percent rise in fixed broadband (to 2 million). On an organic basis, VimpelCom’s Russian sales were up 11 percent to US$2.2 billion.

MegaFon cited “the impact of the New Year holidays and other seasonal factors” for falling Q1 sales and flat subscriber growth. Revenue fell 3.6 percent sequentially to RUB62.6 billion (US$1.9 billion) but was up 14.5 percent year-on-year. While the operator’s Russian customer base declined only very slightly, the period marked a sharp slowdown after several quarters of strong growth (MegaFon has been the fastest-growing of the big three firms). It noted that its subscriber base would have grown 0.5 percent over the prior quarter (to 63.1 million) if its subsidiaries in Tajikistan, Abkhazia and South Ossetia were taken into account.

Sales at market-leader MTS surpassed US$3 billion in Q1, up 1.1 percent on the previous quarter and up 2.7 percent year-on-year. The operator noted that “growth in voice and data consumption” had offset subscriber declines. It described its data traffic growth as “dramatic,” increasing from 70MB per user month in Q1 2010 to 455MB two years later, with data revenue doubling over the same period. Last year, the big three operators – plus national broadband operator Rostelecom – agreed to unite behind the LTE network being built by former WiMAX player Yota, avoiding the need for the participants to build-out their own networks. Yota is planning to provide high-speed mobile broadband services across 180 Russian cities, covering a total population of more than 70 million citizens, by 2014. However, the project reportedly ran into problems regarding the perceived high prices the operators would need to pay to buy a stake in the JV (each has option to buy 20 percent after 2014) – as well as a regulatory enquiry that questioned the exclusion of smaller players such as Tele2. This led to MTS and VimpelCom reportedly striking a deal last year that would allow them to build a shared LTE network outside of the Yota arrangement.

However, MegaFon proceeded to ink a deal with Yota in February 2012 to use the latter’s LTE spectrum, enabling it to become the first of the big three operators to launch commercial 4G services (Yota has access to MegaFon’s network for its own operations in return). MegaFon subsequently switched on LTE networks in Moscow, Krasnodar and Novosibirsk, and last month in Sochi, the venue for the Winter Olympics in 2014. It plans to go live in at least four more cities by year-end.

MTS secured a TD-LTE licence (2595-2620 MHz) covering the Moscow area in February, but is also thought to be close to finalising a deal with Yota. Rostelecom is due to launch as an LTE MVNO (via Yota) in Moscow in September, while Yota itself is reportedly already live in Moscow, Sochi and Samara. The military-affiliated start-up operator Osnova Telekom is another notable LTE licensee in the country. Fresh LTE spectrum auctions are due this year.

Matt Ablott, Senior Editorial Analyst, GSMA Intelligence:

The decline in the Russian mobile connections base has been sudden and dramatic. Russia is Europe’s largest mobile market by connections (227.1 million in Q1), and has been growing strongly in recent years, usually adding more subscribers per quarter than any other country in Europe. Mobile penetration levels are not uniform across the country, thought to be as high as 210 percent in urban centres (such as Moscow and St. Petersburg) and close to 150 percent in most regional areas. Nevertheless, the market does appear to have reached a saturation point, which may mean flat or weak growth for the foreseeable future. There are several parallels with Italy, another heavily penetrated mobile market. Like in Italy, Russian operators do not subsidise devices, which means the market remains predominantly prepaid (85 percent) with no contract lifecycles and relatively high churn. However, local operators are already adapting models to move toward a value share (rather than market share) approach as they prepare for LTE. Meanwhile, the Yota arrangement was hailed as one of the world’s largest network-sharing deals when it was unveiled last year – but the JV appears to have run into numerous problems. With reports emerging that operators are unhappy with the costs involved and concerned about capacity on the fledging network, many seem to be looking at alternative routes to market. With ownership changes afoot at operators such as MegaFon, and fresh LTE auctions coming up this summer, the situation could look very different a year from now.

Net adds (thousand) ARPU
MTS 69.4 31% -1% -3% -570 9.33
MegaFon 61.6 27% 0% 9% -1 9.98
VimpelCom 55.6 25% -3% 5% -1,600 10.44
Tele2 20.9 9% 1% 10% 304 7.25
Rostelecom 12.7 6% 1% - 166 -
Others 6.9 2% - - 11 -
  227.1 100% -1% 3% -1,700 9.61

Russia mobile connections, Q1 2012
Source: GSMA Intelligence

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