2009 Russia - Telecoms, Mobile, Broadband and Forecasts

The recent global financial crisis has dented Russia’s strong economic recovery from the 1998 financial crisis, particularly due to the crash in commodity prices and associated customs duties and taxes which account for nearly half of the federal budget revenue. Exacerbating the situation was the highly leveraged Russian corporations, exposure to US mortgage-backed securities and capital outflows due to concerns over state interference in the economy and increasing tensions between Russia and the West over the conflict in Georgia; these concerns triggered rating agencies to downgrade Russia’s credit rating.

Government assistance in response to the latest economic crisis has included refinancing banks and corporations, as well as a reduction in the corporate profit tax rate. The cost of government intervention and falling tax receipts from energy production have pushed the federal budget into a deficit of at least 7% of GDP in 2009, expected to ease to 5% for 2010. The impact to the real economy is only now becoming evident with the World Bank publishing revised projections in March 2009 of an economic contraction of 4.5% for 2009 with unemployment to rise to 12% by 2010.

Despite the economic slowdown the telecoms market will fare relatively well given the essential nature of most telecom services although market segments will be affected differently; voice is expected to remain stable while the annual growth rate of the pay TV market in 2009 is expected to be half that of the previous year. The other impact is in capital expenditure, with the cost of financing pushing back projects as operators seek to preserve liquidity.

As in other industries within Russia, government participation in the telecoms market is increasing following its deal in July 2009 to acquire the only private ownership stake in telecoms incumbent holding company Svyazinvest, possibly increasing uncertainty over the state of effective competition in the telecoms market. Incumbent and alternative operators alike have spent much effort modernising existing networks or deploying new ones altogether, in hopes of selling broadband and convergence services such as broadband TV (IPTV).

Wireless access platforms such as WiMAX have garnered much interest and publicity, particularly in the regions, as alternative operators aim to capitalise on underserved markets by rapidly launching broadband services and build subscriber numbers while incumbents struggle to modernise existing PSTNs.

Russia posses a vast broadcasting market undergoing rapid change. Both freely accessible and paid content is widely available from cable TV, terrestrial, IPTV and satellite platforms. Competition is driving new network deployments and network modernisation, as incumbent broadcasting network operators face challenges associated with digitising analogue networks and increased competition from new market entrants, particularly from the telecom sector.

The desire to maximise APRU levels has led to the introduction of triple play services, bundling voice, video and broadband to consumers at a cheaper price. Digital terrestrial TV developments are progressing, with the government recently deciding to progress analogue switch off on a region by region basis.

Russia has the largest mobile market in Europe. The rapidly growing sector is dominated by three major service providers (MTS, VimpelCom and MegaFon), and SIM card penetration has surpassed 100%. Perceiving the growth opportunities in the fixed-line market, the two largest mobile operators have acquired major fixed line operators to become integrated service operators. Future growth in the mobile market will hinge upon mobile broadband and applications, with the major three operators deploying WCMDA networks in 2009 and offering mobile broadband services.

Key highlights:

·         Increased government participation; the government reacquires full ownership of telecoms incumbent holding company Svyazinvest after reportedly concluding an agreement with Sistema, the only private shareholder in Svyazinvest, in July 2009 to purchase its 25% stake. This follows the appointment of Leonid Reiman to chairman of Svyazinvest’s board of directors, previously the controversial Minister of Communications and Information Technologies.

·         Fixed broadband penetration grew by 70% in 2008, with DSL the main growth driver as DSL connections doubled during 2008 to represent almost 60% of total fixed broadband connections. Most of the growth has been in the underserved regions as regional incumbents use recently upgraded networks to launch xDSL services. Russia posses a two-tiered broadband market, with Moscow possessing a well developed and highly competitive fixed broadband market. It is only now that other regions are catching up. As a consequence Moscow is losing its significance in the overall broadband market, representing 30% of total fixed broadband connections in May 2009, down from 39% in January 2008. With Moscow’s fixed broadband market maturing, growth in 2009 will be greatest in the outer regions.

·         The broadcasting market is rapidly changing due to digitalisation and competition. The pay TV market is well represented through cable, satellite and IPTV. Satellite has grown in prominence following the recent launch of a number of satellite platforms and take up has grown on the back of widespread availability. Despite representing the majority of pay TV subscribers, the cable TV market is in danger of being left behind as many operators are faced with the challenge of digitalising networks while currently possessing very low ARPU levels. IPTV is only a minor player in terms of subscriber numbers although this will change as numerous telecom operators across Russia gain more experience in marketing video services over recently deployed xDSL/FTTx networks.

·         DTTV development is slowly progressing, with the government agreeing only in May 2009 to perform analogue switchoff on a region-by-region basis.

·         The future for mobile is more uncertain given the saturated voice market. While the operators have managed to reverse sliding ARPU levels for the past 2-3 years by increasing MOU, the easy growth options are disappearing. Other growth opportunities include the high proportion of prepaid users to total users and low take up of mobile broadband services. While the first option is a marketing exercise, the second option is more costly and only now really feasible due to WCDMA/HSDPA networks currently under deployment across Russia.

·         The two largest two mobile network operators have hedged their bets by acquiring some of the most largest fixed line operators - Comstar and Golden Telecom; Comstar majority owns Moscow’s incumbent PSTN operator and recently acquired a group of cable TV operators with networks bypassing 3.8 million households in 40 cities. Golden Telecom is deploying FTTx networks as part of an ambitious plan to reach 15.6 million households and market broadband and convergence services.

Russia – broadband and telecoms statistics – 2006; 2009

(Source: BuddeComm based on industry data)