MTS

The largest Russian operators: MTS, VimpelCom and MegaFon, served over 31.2 million customers altogether by the end of 2003, what is 85.6% of the Russian mobile market [5]. The dominance of the tree leading mobile operators in Russia is quite evident. Figure 13 presents the shares of leading mobile operators of the total subscriber base that contained approximately 36.5 million in the end of 2003.

Figure 13. Operators’ Market Shares, end of 2003

Total 36.5 million subscribers

MTS 37%

Vimpelcom 31%

MegaFon 17%

Other 15%

Source: J’son & Partners, 2003

The share of mobile services revenues in Russia of leading operators amounted to 88% (MTS – 44%, VimpelCom – 27% and MegaFon – 17%) in the upshot of year 2003 [29]. The analysis of the main economic and operational indicators of “Big Three” mobile operators describes well general trends of the Russian mobile market development.

6.1 MTS

The Open Joint Stock company MTS is the largest mobile phone operator in Russia and Eastern Europe in terms of number of subscribers. Company has 37% share of Russian market and provided services to over 13 million users in Russia, Belarus and Ukraine at year-end 2003.

MTS was established in October 1993 by four Russian telecommunications companies (53%), largest of which is Moskovskaya Gorodskaya Telefonnaya Set’ (MGTS), and two foreign investors (Siemens and Deutshe Telecom’s affiliate DeTeMobile, 47%). In the beginning of 1995, AFK Sistema acquired the shares from Russian shareholders, and DeTeMobile bought shares of the company Siemens. At present, the MTS’s strategic shareholders are Russian AFK Sistema (Russian financial and industrial holding company) and German communication operator T-Mobile (wholly-owned subsidiary of Deutsche Telekom) with shares 51.8% and 25.1% correspondingly. Western investment funds hold 22.3% of company’s shares [9].

In 2000, MTS became listed²⁰ in the New York Stock Exchange (NYSE) through initial public offering (IPO).

MTS has licenses for 76 regions of Russia, and it had been launched operations in 60 regions by December 2003. MTS has been the most aggressive in the regional expansion and has acquired many leading regional operators in addition to greenfield launches [8]. At the beginning of 2004, MTS received GSM licenses to operate in eleven new regions in Russia.

Therefore, the license area of MTS with its subsidiaries has extended to the whole territory of Russia, excluding Penza region and Chechen Republic (87 out of 89 Russian regions).

The key financial figures of MTS’s performance in Russia and Ukraine for years 2001-2003 are presented in the Table 8.

Table 8. Key Financial Figures of MTS’s Activity in Russia and Ukraine, 2001-2003

2003 2002 Change

Company’s revenues were US$ 2.55 billion for year 2003, 87% year-on-year increase. Net income for the full year 2003 amounted to US$ 517.2 million, which totaled approximately 87% increase compared to 2002. Revenue increase was driven by consolidation of a number of local Russian mobile operators acquired by MTS as well as the acquisition of the Ukrainian

20 MTS’s American Depositary Shares are traded under the symbol “MBT”.

21 Net operating revenues and net income excluding inter-company transactions

22 Previously referred to by the company as EBITDA

company UMC²³ in year 2003 for US$ 330.6 million. The company’s results of year 2003 allowed it to step into the list of 500 world largest companies and the list of 250 largest European companies in terms of capitalization²⁴ (Table 9, Table 10, where the financial indicators are presented for year 2003 and the year-to-year change are showed in comparison with year 2002).

Table 9. Financial Indicators of MTS vs. Largest Russian Companies, 2003

Rank (world) Rank (Europe) Revenues (US$ billion) Change Y-on-Y (%) Operational income/loss (US$ billion) Change Y-on-Y (%) Net income/loss (US$ billion) Change Y-on-Y (%)

Gazprom 92 31 20.540 -15.9 4.715 -33.2 0.923 45.3

Table 10. Financial Indicators of MTS vs. Largest European Operators, 2003

Country Rank (world) Rank (Europe) Revenues (US$ billion) Change Y-on-Y (%) Net income/loss (US$ billion) Change Y-on-Y (%)

23 Ukrainian Mobile Communications

24 Market capitalization is a company's outstanding shares multiplied by its share price.

25 There is no information available.

The Table 9 shows that MTS is the most dynamically developing company among largest Russian companies. Only two companies (MTS and Gazprom) managed to obtain increasing net income in 2003.

Revenues and net income (excluding intercompany eliminations) from MTS’ operations in Russia during year 2003 were US$ 2.15 billion and US$ 449.8 million, respectively, compared to US$ 1.36 billion and US$ 277.1 million, in 2002 [9].

In the end of 2003, MTS’s consolidated subscriber base in Russia was 13.38 million, about 44% of which was enrolled in the prepaid tariff plans – the most dynamic and the least profitable share of users. In December 2003 the company’s market share in Moscow was 43%; in St. Petersburg - 34% [21]. The year-on-year increase of subscribers in regions (excluding Moscow) is 137%, what is about twice more than the growth of subscriber base in Moscow license area (MLA includes the city of Moscow and the Moscow region). This data confirms that the regional expansion of MTS is continued (Figure 14). Table 11 shows the main operational indicators of MTS’s activity in Russia for years 2001- 2003.

Table 11. Key Operational Indicators of MTS’s Activity in Russia, 2001-2003

2003 2002 Change

Source: MTS, 2003; authors’ calculations

26 Average Monthly Revenue per Unit (per subscriber) is calculated for each month in the relevant period by dividing service revenue during that month, including roaming revenue, but excluding revenue from connection fees and sales of handsets and accessories, by the average number of the subscribers during the month.

27 Monthly Average Minutes of Use per User is calculated for each month of the relevant period by dividing the total number of billable minutes of usage for incoming and outgoing calls during that month (excluding guest roamers) by the average number of subscribers during the month.

28 Churn rate measures subscriber’s attrition, and is defined as a number of subscribers who discontinue a service during a specified time period divided by the average total number of subscribers over that same time period.

29 Subscriber Acquisition Cost per subscriber is calculated as dealers’ commissions, advertising expenses and handset subsidies for the period divided by the number of new subscribers connected to the operator’s networks during the period.

The company’s ARPU decreased by 25% in 2003 because of the changes in the subscribers base: the rapid growth of the number of the subscribers and the increased number of low profitable subscribers.

Figure 14. Trends of MTS’s Customer Base Structure (Moscow vs. Regions), 2001-2003

2.04

Source: MTS, 2003; authors’ calculations

Average monthly minutes of usage per subscriber (MOU) in 2003 were 144 minutes compared to 159 minutes in 2002. The company’s subscriber acquisition cost (SAC) per gross additional subscriber in Russia in 2003 declined to US$ 25.6 compared to US$ 35 in 2002.

The decline occurred because of a cheaper cost of attracting mass-market subscribers and increased economies of scale [9].

The increase of the churn rate corresponds to a general tendency of the market. There are no long-term subscriber contracts in Russia and subscribers do not have to pay for the connection here, therefore, they can easily migrate from one network to another. The MTS’s yearly churn rates for 2000, 2001, 2002 and 2003 years are 21.6%, 26.8%, 33.9% and 47.3%

correspondingly.

The main MTS’s funding source is Western bond market. The company issued Eurobonds for US$ 50 million in 2002, which brings the three-year Eurobonds borrowing to US$ 300 million. The Eurobonds issued by MTS mature on December 21, 2004. In 2003 company floated international bonds for US$ 400 million with a 5-year period of repayment. In 2003

MTS spent approximately US$ 958.8 million on capital expenditures³⁰ excluding acquisitions (US$ 712.5 million in Russia and US$ 246.3 million in Ukraine), which amounts about US$

125 for one new customer. During 2003 MTS spent approximately US$ 702.2 million on acquisitions of other mobile operators that significantly enlarged MTS’s subscriber base and exposed the company to new markets. Figure 15 demonstrates the trends of the company’s capital expenditures for the 2000 – 2003 period.

Figure 15. MTS’s Capital Expenditures, 2000-2003 (US$ million)

225

441

574

959

0 200 400 600 800 1000 1200

2000 2001 2002 2003

Source: MTS, 2004