3G Could Be a Tough Sell in Russia
Nothing symbolizes the emergence of Russia's consumer market more than its remarkable explosion in mobile-phone ownership. With some 155 million mobile-phone subscribers and $15.3 billion in projected mobile-telco revenues this year, Russia now boasts the third-largest cellular market in the world, behind only the U.S. and China. The market has grown at breakneck speed since the start of the decade, when there were just 1.35 million subscribers.
Breakneck growth comes at a price, however. The market is approaching saturation point. Subscriber penetration has already reached 108%, measured in terms of the number of SIM cards relative to the population. (That means, on average, Russians possess more than one mobile-phone account per person.) Not surprisingly, growth rates are falling fast. In the first quarter of 2007, the number of phone subscribers grew by 17% from a year earlier. By comparison, annual growth topped 106% two years ago. So where do Russia's mobile-phone operators go from here?
They're pinning at least some of their hopes for future growth on new technology. After years of waiting, Russia's government finally awarded licenses in April to provide 3G (third-generation) mobile-phone services. The winners of last month's tender came as no surprise: Moscow Telesystems (MBT), Vimpelcom (VIP), and Megafon, Russia's three major national mobile operators. The big question now is whether the new technology will prove any more profitable in Russia than it has in other countries, where high prices and spotty demand mean that much 3G capacity is underutilized.
Expectations have been scaled back since Western telcos paid inflated amounts for the first licenses several years ago. That explains why Russia sold its 3G licenses for a token $100,000 each, a tiny amount compared to the billions that similar licenses cost in the West. The low license fees help to explain why Russia's leading operators are willing to invest significant amounts in building 3G networks across the country's vast landscape, as they're required to do under the terms of the tender. (It also helps that prices for 3G gear are but a fraction of what they were a few years back, when pioneers rolled out the first networks.)
Russia's largest operator, MTS, has pledged to invest $1 billion over the next three years, with the first services to be launched later this year. Megafon has pledged a similar amount, with services planned from next year. Vimpelcom, Russia's No. 2 operator, has more modest plans, with investments of between $300 million and $350 million over the next 18 months.
Among the three main operators, MTS sounds the most gung-ho about the new technology's potential. Announcing the company's big 3G investments last month, CEO Leonid Melamed predicted that one third of the Russian population—over 40 million people—would use 3G by 2010. "We want to make 3G accessible to as wide a range of customers as possible," says Irina Osadchaya, the company's spokesperson. Osadchaya says that MTS's market research shows high potential demand for 3G services such as mobile broadband, video-on-demand, and mobile TV. She notes that 3G penetration in Western Europe has reached 10% to 20% after two years.
Low Demand for Services
But MTS's bold predictions have raised eyebrows among many analysts. "In my view, it's very optimistic. For us [Russians], 3G can't be based on the mass market," says Irina Astafieva, an analyst at J'son & Partners consultancy in Moscow. She forecasts that just 9 million Russians, mainly corporate customers, will be 3G users by 2010.
Skeptics note that existing attempts by Russian mobile operators to win converts to new value-added services, such as picture messaging, digital music, and the wireless Web, haven't been particularly successful.
These services account for only around 12% of all mobile-phone revenues, with the rest coming from traditional voice. That's significantly lower than the share in other countries.
Mobile Internet access—typically, laptops hooked up wirelessly to access e-mail and surf the Web—accounts for just 3% of operator revenues. The ratio of value-added services to voice revenues has been stable over recent years in Russia, despite the efforts of mobile-phone operators to boost it in order to compensate for flagging subscriber growth.
Lack of demand for nonvoice services in turn reflects relatively low incomes. Average revenue per user (ARPU) in Russia is only $8.40 per head per month, less than half of the level in Western markets. "For now, all services that are used by people can be provided by [existing technology] 2.5G, and that's enough," argues Margarita Zobnina, chief analyst for telecom consultancy IKS-Consulting in Moscow.
Not everyone is so pessimistic about the prospects. "3G isn't only for new services, it's also to increase capacity for existing traffic, enabling the companies to be more cost-efficient," notes Andrei Bogdanov, telecom analyst at Troika Dialog investment bank in Moscow. Capacity is coming under serious strain in booming regions such as Moscow. He sees Russia's low levels of revenue per user and low demand for data services as signs of the large potential still waiting to be tapped. "Russians aren't poor. Judging by current GDP [gross domestic product] per capita and average disposal income, the ARPU should be much higher than we have now," he says.
Even skeptics expect that demand for the mobile Internet will take off in Russia eventually. J'Son & Partners' Astafieva calls it a potentially "killer application" that one day will be seen as a necessity by all Russians, just as mobile voice services are seen today. Much depends on how successful the mobile-phone companies are in marketing their new services and how they charge for them. "If operators can regulate their tariffs, and there are better handsets without such tiny screens, then demand will be much greater," she says.
By that time, though, there's a good chance that 3G technology already will be outdated. Fourth-generation systems allowing transmission of even more data at faster speeds are now under development. "Maybe it would be better to jump straight into 4G," says Zobnina. "In Europe and Asia, we already see that 3G isn't enough." Only time will tell whether Russia's belated 3G gamble pays off—or turns out to be money down the drain.
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