Impressions from the GSM 3G Russia conference

On 5, 6 and 7 June 2006 many members of the Russian mobile industry came together at the GSM 3G Russia conference in Moscow. This report summarises our observations from the conference.

Russia’s mobile industry is still in a significant phase of growth and transformation. The mobile industry is dominated by three large operators – Megafone, MTS and Bee Line – but there also several smaller regional players. Growth has been significant and penetration is now at over 80%. Russia is poised to become the third-largest mobile market in the world by 2007. However, ARPUs, particularly for data, are behind other markets, signifying the challenges that still lie ahead. Regional differences are substantial: Moscow and St Petersburg are close to saturation and behave more like developed markets, while the rest of the country has low ARPU but more room for growth.

The official answer on 3G licensing still seems to be ‘later this year’. However, we were left with the impression of ‘probably next year’. Different factions are lobbying for different decisions on 3G. Mobile operators are moderately positive about 3G, but also wary of the cost and benefits (particularly considering Russia’s geography and the income levels of the population). They are also still facing many other issues such as internal business integration, improving network quality, launching new services and implementing calling party pays.

Some conference participants proposed to wait for 4G – whatever this means (the answer seems to be an all-IP network based on mobile WiMAX). However, the answer appeared to be related to their company’s interests and position, including, for example, whether they already owned spectrum suitable for WiMAX. Russia’s CDMA operators would benefit from further delays of UMTS licences to develop the CDMA2000 network further before UMTS 3G is launched by the mainstream operators. The government will have to make some difficult decisions on how to further develop the sector, including perhaps whether to extract a lot of value from it or to set criteria to promote service launches and network rollout. The issues of whether and how to develop a fourth player may also arise.

Notable developments this year are the introduction of a calling party pays regime. Mobile number portability (MNP) seems to be on the horizon, and it also seems likely that MVNOs will be permitted (though not mandated). Large local mobile distribution and media companies might be interested in this, but most operators seem lukewarm, arguing that they lack spectrum/capacity and that the market is already extremely competitive (aren’t they all?). Nevertheless, some operators might see MVNOs as welcome helping hands to more effectively grow, retain and service customers. Last but not least, the fixed line market is being liberalised, which offers new opportunities for fixed–mobile convergence (FMC). We see FMC, MVNOs and MNP as offering significant opportunities and challenges for the operators.

Does Russia need 3G? Nobody seemed to be too sad about the idea that it might not happen this year, but there were concerns about a delay beyond 2007. In 2006, 3G in Russia still seems to fascinate the technical departments of the operators rather than their marketing departments.

Overall, 3G (and everything that comes with it – handsets, equipment prices, the ecosystem) will have matured and developed substantially by the time network operators have to finalise their business plans and place orders (2007), but the technology will face stiffer competition from new wireless technologies. Russian consumers, whilst status-conscious when it comes to handsets, are thrifty and smart when it comes to consumption of services.

Of particular concern here is the still low level of data/value-added services (VAS) as a percentage of total revenues (below 15%). This is a concern to the operators in general and a vital barrier to the success of 3G. Greater development of local content, higher-quality VAS and more transparent (and lower) pricing were all raised as key issues during the conference. It was also pointed out that operators are not sufficiently segmenting the market and are trying to retain too much control. The counter-argument here was that consumers have suffered in the past from poorly designed VAS provided by third parties, suggesting operators need to ensure that quality is good to protect consumers (particularly for subscription-based services).

The development and implementation of a national strategy and policy framework towards ICT and digital media development seems to be lagging. Greater transparency and clarity are needed to attract investment and develop the sector. Given the strong correlation between telecoms, ICT and economic growth, this would potentially provide strong support for future economic growth and exports.

Nevertheless, with the growth momentum evident at the moment, consolidation, new regulation and technologies, FMC and more demanding consumers, Russia’s mobile market, and the telecoms industry as a whole, will continue to be an extremely interesting, but also very challenging, environment.