LONDON-After years of uncertainty and confusion, the Russian wireless telecommunications market finally seems set to come out of hibernation and deliver what investors and analysts have been expecting for some time.
There’s certainly possibilities for growth following a slow start. At the end of 1997, Russia had only a 0.3-percent cellular penetration with 438,000 subscribers, a 109-percent increase compared with 1996. Analog still is the largest cellular platform in Russia, with approximately 71 percent of the market; the remaining users comprise GSM (Global System for Mobile communications) subscribers.
In terms of total number of access lines, Russia is the seventh-largest market in the world. By the end of 1997, there were approximately 27 million telephone lines connected to local exchanges, out of a total population of approximately 150 million. Historically, the low penetration in Russia is due to several factors, including low digitization (less than 15 percent), service exclusivity, tariff imbalances and low international usage.
The demand for cellular service in Russia is heavily dependent on the degree of political stability and economic growth during the next several years. So far, cellular service has experienced low growth due to political and economic uncertainty as well as an inconsistent and bureaucratic regulatory policy.
A key element in understanding the market is to appreciate the political and administrative complexity of the country. At last count, the Russian Federation was divided into 89 administration regions, comprising 21 republics, 52 oblasts, 6 krais (territories) and 10 autonomous okrugs (districts).
Republics are areas of certain ethnic or national minorities, which since 1991 have gained a certain degree of autonomy with their own constitutions and their own elected president. Russia’s president used to appoint governors of oblasts and krais, but they now are elected directly by the people. Autonomous okrugs are ethnic sub-territories of oblasts or krais, which have special status because of their specific economic conditions.
The political structure and geographic limitations mean that each administrative region has had its own communications company administrating postal, radio, telephone and telegraph services. Regional authorities finance development of local communications and network maintenance. In bigger cites such as Moscow, St. Petersburg and Novgorod there are multiple telecom operators, while in some rural areas there is hardly any access to telecom services.
In 1992, Russia’s telecommunications system was divided up into Rostelecom, a long-distance and international carrier; 88 regional telephone companies; and 10 other smaller operators. Approximately 80 of these regional telcos have since been privatized, and about 58 are actively traded on the Russian OTC market. The State controls Russia’s telecommunications through Svyazinvest, a 75-percent state-owned holding that has a 51-percent equity stake in Rostelecom.
Regulation
The Ministry of Communications (MoC) is responsible for issuing cellular licenses, allocating frequencies and certifying the infrastructure and end-user equipment.
The MoC’s “Conception of the Development of Cellular Communications in Russia to the year 2010” forms the regulatory and framework basis for cellular telephony in Russia. The paper stipulates duopoly regional licenses will be established in 60 Russian cities to develop a federal network of regional licenses. Two federal technology standards have been chosen: GSM 900 and NMT (Nordic Mobile Telephone) 450. In addition, local authorities may award other cellular technologies, such as AMPS (Advanced Mobile Phone Service) and CDMA (Code Division Multiple Access) licenses.
The Russian State Communications Inspectorate, Gossvyaznadzor, comprises the main administration and 76 regional departments. This body, instrumental in nearly every stage of a company’s telecommunications activities, is involved in allocation of frequencies, equipment importation, license-holder registration, control of licensed-carrier activities, equipment registration, and certified equipment use.
Cellular
In the 1980s, many telcos operated the Russian-developed wireless system Altai. The technology has since been superseded by cellular-type technologies based on the NMT, AMPS and GSM standards. To stimulate competition, the MoC licensed two or three competing operators on different standards in each region.
The sheer size and regional diversity of Russia has resulted in a challenging and complex market. Constraints include the high cost of investment, an uncertain regulatory environment, lengthy and bureaucratic licensing procedures, and conflicts of interest between different regulatory authorities.
According to the MoC, 155 cellular licenses so far have been issued, with about 50 operators offering full commercial service at the end of 1997. Furthermore, in early 1998 Russian authorities issued tenders for GSM 1800 networks in eight regions with a 2×20 MHz frequency allocation.
Based on the current licensing scheme, infrastructure investment and international development, it is likely that GSM 900 and GSM 1800 networks will support the highest number of subscribers by 2003. They will capture 48 percent of the 7.8 million subscribers expected by 2003, while NMT 450 networks will have 31 percent and the remaining essentially AMPS customers, The Strategis Group has forecast.
Because fees and tariffs charged by cellular operators are not regulated, cellular operators so far have been pursuing a skimming pricing strategy: Handsets cost on average between US$500 and US$1,000; a deposit fee also is between US$500 and US$1,000; the activation fee is US$300 to US$700; the monthly service fee is US$20 to US$50; and the per-minute tariff is US$0.20 to US$0.60.
As a result of this skimming strategy, cellular providers in Russia have experienced some of the highest usage levels in the world, with an approximate average of 400 minutes of airtime per subscriber and monthly revenue per sub of US$300.
Paging
The high ownership cost of cellular service has made it possible for paging operators to develop a significant and promising market niche. About 350 paging licenses have been issued in Russia, of which 250 currently are active in 52 regions.
Moscow has 35 licensed operators, although the number of commercially active operators is closer to 25. Of these, approximately 60 percent have fewer than 4,000 subscribers.
Based on The Strategis Group’s current knowledge of the Moscow and St. Petersburg markets, it is estimated there are approximately 20 “operational” licenses covering the Moscow region and approximately 17 “operational” licenses covering the St. Petersburg paging marketplace.
Competition and pressure from the ministry is forcing many of the smaller paging operators to consolidate, and it is therefore expected that in the next two to three years only three to four paging operators will remain solvent in Moscow and St. Petersburg.
Paging is a relatively recent phenomenon in Russia, having been introduced in the early 1990s. Initially, demand for service was limited due to poor frequency allocation and high prices. Demand for paging services in Russia has increased rapidly in the last few years, and subscribers have grown from approximately 40,000 in 1994 to more than 315,000 in 1997. Growth has been driven primarily by supply-side issues relating to new investments and network expansions, as well as introduction of high-speed protocols.
Due to the relatively recent introduction of paging services in the country, the vast majority of pagers are alphanumeric, with the remaining-less than 2 percent-being numeric.
More than 90 percent of pagers in service are based on the POCSAG system, with the rest using FLEX and FM technologies. The Minist
ry of Communications now includes FLEX and ERMES (European Radio Messaging System) as federal standards; T
herefore, it is likely that both technologies will have a presence in Russia. Based on the current industry climates and public operator plans, it appears FLEX will be adopted more widely than ERMES. The Strategis Group estimates FLEX will take a 38-percent market share by 2003.
Future paging market growth will depend on the networks’ abilities to meet customer needs and for the regulator to provide a more structured and transparent environment. Further industry consolidation likely will take place, allowing the remaining operators to focus on network investments, expanding coverage and upgrading to advanced messaging services.
Unlike in most other European countries, paging in Russia still has substantial growth potential, due to patchy cellular coverage and limited fixed-telephony availability.
Assuming that supply-side issues will not hinder further industry growth, The Strategis Group estimates total subscriber levels will reach 900,000 by 2003. This growth will entail strong development of regional paging networks outside of the main areas of Moscow and St. Petersburg.
Land mobile radio
The largest, yet most complicated telecom sector in Russia is without a doubt the LMR (Land Mobile Radio) industry. With an estimated 1.2 million to 1.5 million users at the end of 1997, the sector has experienced steady growth in recent years. The vast majority of subscribers are VHF/UHF conventional radio users, though an increasing number of trunking systems also are being sold in Russia.
The market is characterized by a multitude of different analog technologies-some foreign made, some Russian made and some Eastern-European made. Prior to the collapse of the Soviet Union, the majority of PMR (Private Mobile Radio) radios were built and assembled in Eastern European countries such as Hungary and Bulgaria. Since the collapse, the supply of new radios from Eastern Europe has declined dramatically, leaving many users with obsolete systems.
Major drivers for further growth in the industry include the need for network upgrades, the technology’s cost advantage compared with mobile communications technology, the relative ease for buying and using the equipment, the advent of digital LMR and the licensing of PAMR (Public Access Mobile Radio) operators.
The Strategis Group projects the market to grow from approximately 1.3 million in 1997 to almost 2 million by 2003.
Luca Tassan is the director of The Strategis Group Europe. The Strategis Group, with offices in Washington, London and Singapore, provides research and formulates and executes strategies in the wireless communications, competitive telephony, satellite and cable fields. Contacts: Tel: (+44) 171 363-5600; www.strategisgroup.com
