In Moscow, Phone Wars Can Get Nasty

A murder highlights the struggle to seize the cellular market

Three shots shattered the morning silence of a quiet Moscow neighborhood on Mar. 25, killing one of Russia's most prominent telecom executives, Konstantin S. Kuzovoi. The 52-year-old Kuzovoi made his fortune as co-founder of cellular-phone operator VimpelCommunications, the first Russian company to be listed on the New York Stock Exchange, in 1996. Just a few months before his death, Kuzovoi had left the company to head Personal Communications, a rival cell-phone company. Police don't know who killed him--and his partners and rivals decline to discuss the killing.

What businesspeople fear, however, is that the murder may be connected to the rising competition in Russia's lucrative $800 million cellular phone market. In the rough-and-tumble world of Russian business, executives in the aluminum, banking, and hotel industries have all been killed in what police believe are contract hits over the last several years. Rivalries are fierce in the cell-phone business, since it's one of the few expected to triple in the next five years despite the country's economic collapse. VimpelCom, which reported $360 million in sales last year, has stood out as one of Russia's most successful private companies and dominated the cellular-phone market until recently. But now it's facing pressure from tough rivals.

OFFSTAGE PLAYER. The strongest competition comes from companies linked with Moscow Mayor Yuri M. Luzhkov. The mayor himself holds no telecom stocks. But AFK Sistema, a holding company owned by staunch allies of Luzhkov, has snapped up controlling stakes in some of VimpelCom's cell-phone rivals and launched a price war to grab a big chunk of the growing market. Sistema's founder is Vladimir Yevtushenkov, chairman of the Moscow government's science and technology committee and a close friend of Luzhkov's.

The race took off last year. In May, 1998, Sistema upped its stake in Mobile TeleSystems, a joint venture between Deutsche Telecom MobilNet and Moscow City Telephone Network, the city phone company, to a controlling 47%. Last summer, Sistema helped another one of its subsidiaries, the same Personal Communications that Kuzovoi was heading, in rolling out a new cellular network in Moscow. Then, while VimpelCom was busy regrouping from last August's ruble devaluation, Mobile TeleSystems began cutting prices. It dropped the connection fee from $2,000 to $100, waived the $200 monthly fee, and began charging 46 cents a minute for calls.

The attack by Sistema, combined with Russia's financial crisis, took its toll on VimpelCom. The company reported losses of $4.7 million for last year as its market share slumped from 52% in 1997 to below 40% now. But VimpelCom is fighting back. In response to Sistema's moves, it recently cut its rates to $99 for a connection, and lowered its monthly fee to $19.

FINNISH HELP. Now, VimpelCom CEO Dmitri B. Zemin is moving quickly to shore up the company's cash position and expand its network. On June 1, VimpelCom will finalize an agreement to sell 25% of its shares to Norway's state-owned telecom company, Telenor, for $160 million. VimpelCom also has signed a multiyear contract with Nokia under which the Finnish company will provide equipment for VimpelCom's planned regional cellular network. Zemin is fighting hard to win customers outside Moscow before Sistema's Mobile TeleSystems. VimpelCom is also hoping to gain new business by offering marketing innovations such as prepaid phone cards. On the strength of this new plan alone, VimpelCom lured 15,000 subscribers in April, its best month of sales ever. "We have turned the corner," says Zemin.

The rewards could be rich for whoever wins the phone war. Analysts believe cell phones could capture 10% of the total telecom market within five years as Russia's fixed-line phone system breaks down. The battle for market share is bound to intensify. And other telecom companies--both foreign and local--may try to muscle into the lucrative market. Even though no one is talking publicly about Kuzovoi's murder, the business community still can't help wondering if it was linked to the phone fight. In the hottest businesses, competition in Russia, it seems, can get bloody.