6. LEADING MOBILE OPERATORS: ECONOMIC INDICATORS
6.2 V IMPEL C OM
The Open Joint Stock company VimpelCom is the second largest mobile operator in Russia with 31% market share at year-end 2003 [22]. At that time, VimpelCom's total number of subscribers was 11.31 million, with 5.68 million subscribers in Moscow license area and 5.63 million subscribers in the rest of the country. The company operates under “Bee Line” brand and provides mobile communications services through GSM 900/1800 and AMPS/DAMPS networks.
VimpelCom began its operations in 1994. It was the first Russian company to be listed31 on NYSE in November 1996 [10].
30 MTS defines capital expenditures as cash to acquire or upgrade property, plant and equipment and intangible assets.
31 VimpelCom’s American Depositary Shares are traded under the symbol “VIP”.
In 1999, Telenor, a Norwegian communications operator acquired 25.7% of VimpelCom shares. In 2001, Alfa Group (Russia) agreed to buy 25% of VimpelCom and its wholly owned subsidiary regional operator VimpelCom-Region for US$ 220 million [8]. As of December 31, 2003, Alfa Group owns 25% plus two shares of VimpelCom’s voting capital stock and 29.8% of VimpelCom-Region’s voting capital stock; Telenor owns 25% plus 13 shares.
In the middle of 2003 VimpelCom announced the beginning of merger with its 100% owned subsidiary VimpelCom-Region to simplify VimpelCom’s corporate structure. In 2001, when the decision about the VimpelCom-Region’s was made, the risks in regions were significant.
At present, the risk is much lower and the regional operations are now making a positive contribution to net income, rendering integration worthwhile. The company completed merger in the second quarter of 2004 [10].
VimpelCom licenses cover approximately 92% of Russian population (at year-end 2003), including the city of Moscow, which is the company’s primary market. In addition, VimpelCom has expanded into 54 regions outside Moscow mainly by greenfield operations.
VimpelCom launched the activity in St. Petersburg’s market in April, 2003, where the company started active promotion and managed to get 9% of the market [21]. In March 2004 VimpelCom launched the network in its 56th region – Northern Osetiya – Alaniya Republic.
The key financial figures of VimpelCom’s activity in Russia for 2001-2003 years are presented in the Table 12.
Table 12. Key Financial Figures of VimpelCom’s Activity in Russia, 2001-2003
2003 2002 Change
Y-on-Y 2001 Change Y-on-Y Net Revenues32 (US$ million) 1,335.6 768.5 73.8% 422.6 81.9%
Net income (US$ million) 234.0 129.6 80.6% 47.3 174.0%
OIBDA33 (US$ million) 613.2 322.2 90.3% 148.5 117.0%
OIBDA margin (%) 45.9 41.9 -- 35.1 --
Source: VimpelCom, 2004; authors’ calculations
For the year 2003 VimpelCom reported net operating revenues of US$1,335.6 million, a 73.8% increase from 2002. Revenues from Moscow license area operations constituted 68.8%
(US$918.7) of company’s net operating revenues during 2003 compared to 90.9%
(US$698.7) during 2002. Revenue growth in 2003 was primarily due to the overall increase in
32 Net operating revenues and net income excluding inter-company transactions
33 Previously referred to by the company as EBITDA
the number of subscribers in the regions, 301.3% during this period, an increase in revenues from value added services (VAS) and an increase in roaming revenues. VimpelCom provides traditional value added services (voice mail, call forwarding, call waiting, conference calling, call blocking, caller-ID, automatic dialing and voice dialing) and a variety of messaging value added services, such as outgoing SMS34, EMS35, MMS36, e-mail, content delivery, games and other “infotainment” services [10]. During 2003, VimpelCom generated US$103.4 million of revenue from VAS in Moscow license area (7.7% of consolidated operating revenues). This represented a 92.2% increase over revenues of US$53.8 million during 2002.
In 2003 VimpelCom’s net income reached approximately $234.0 million, an 80.6% increase from 2002. Net income excluding inter-company transactions in the regions outside of MLA during 2003 amounted to US$62.4 million compared to US$23.2 million loss during 2002.
VimpelCom’s regional operations became profitable in the second quarter of 2003 and the regional business grows more and more effective.
As of March 31, 2004, there were approximately 13.3 million subscribers on mobile networks operated by VimpelCom and its subsidiaries, an increase of approximately 115% compared to March 31, 2003 (6.19 million subscribers). In the end of first quarter of 2004 company’s subscriber base includes approximately 6 million customers in Moscow license area.
VimpelCom’s market share in Moscow license area was 49.2% as of December 31st 2003 compared to 51.6% as of December 31st 2002; in St. Petersburg the market share was 9% at year-end 2003 [21].
The company's regional subscriber base increased by about 301% during year 2003, to reach approximately 5.78 million subscribers in the end of period (Figure 16). Thus, the regional business grows faster than in Moscow.
34 Short Messages Service
35 Extended Messages Service
36 Multimedia Messaging Service
Figure 16. VimpelCom’s Customer Base Structure (Moscow vs. Regions), 2000-2003
0.78
1.91
3.71
5.66
0.05 0.2
1.44
5.78
0 1 2 3 4 5 6 7
2000 2001 2002 2003
Subscribers (Million)
Moscow Regions
Source: VimpelCom, 2004
VimpelCom is the leading operator in terms of mass consumer market development with prepaid services. The year 2003 was marked by a further increase of prepaid subscribers share in total VimpelCom's subscribers base: this indicator was 79% in the end of 2002 and amounted to about 87% (9,946 thousand subscribers) in the end of 2003 (Figure 17).
VimpelCom has the eighth rank in terms of size of prepaid subscriber base among the largest European operators with big number of prepaid customers [6].
In the case of prepaid tariff plans usage, customer pays for service on-line (the user account is charged practically instantly after service use). Contract subscribers (postpaid) use services on credit and receive invoice later on. To subscribe for a contract tariff plan, it is necessary to deposit a guarantee fee that can be paid back if all invoices were paid in time.
Figure 17. VimpelCom’s Customer Base Structure (Prepaid vs. Postpaid), 2000-2003
The main operational indicators and subscriber statistics of VimpelCom for 2001-2003 years are presented in the Table 13.
Table 13. Key Operational Indicators of VimpelCom, 2001-2003
2003 2002 Change
Y-on-Y 2001 Change Y-on-Y Total subscribers, end of
period (thousands) 11,437 5,153 122% 2,111 144%
Moscow 5,660 3,713 52% 1,911 94%
Source: VimpelCom, 2004; authors’ calculations
ARPU declined in 2003 by approximately 25.7% to US$ 13.6, compared to US$ 18.3 in 2002, due to a reduction in tariffs as a result of increased competition and the growing share of regional subscribers (who generate lower ARPU than Moscow subscribers as the tariffs in regions are about 20% lower then in the capital). This indicator for regional subscribers was US$ 10.8 for 2003, while capital customer paid on average US$ 16.4 per month for this period. The main reason of decreasing ARPU in Moscow region (from US$ 19.4 for 2002) is the subscriber base structure change in favor of prepaid customers. In the fourth quarter of
2003 ARPU for prepaid subscribers was US$ 9.1 compared to US$ 9.4 in the same period of 2002, and for contract subscribers US$ 52.7 and US$ 48.9 accordingly.
MOU decreased during 2003 to 89.8 minutes, compared to 92.3 minutes in 2002. The decrease in MOU was primarily caused by the growing share of prepaid subscribers. At the same time, the regions are experiencing a period of MOU growth (from 84.7 minutes in 2002 to 92.4 in 2003) due to increasing consumption of telecommunications services.
The increase in churn rate was primarily the result of the high subscriber growth rates in previous periods, particularly in the low-end user segment, as well as internal migration and increased competition. Migration of VimpelCom’s subscribers from DAMPS network to GSM network, as well as migration between tariff plans were technically recorded as churn, therefore increasing the churn rate recorded in 2001 - 23.0%, in 2002 – 30.8% and in 2003 – 39.3% although these subscribers were not lost [10]. For the comparison, the churn rate of European operators is about 25%.
The SAC indicator decreased by approximately 25% during year 2003 due to the more effective advertisement and growing share of new regional subscribers. Regional SAC is lower than in Moscow because of the comparatively low dealers’ commissions.
VimpelCom’s total capital investment for 2003 was approximately US$770.5 million, with US$728.0 million for the purchase of property and US$42.5 million for the acquisition of new entities. In the future VimpelCom intends to continue the development of the existing regional networks and to start to develop the Far East market. The company expects to invest US$ 400 million to the network infrastructure development during 2004 (Figure 18). Table 14 demonstrates VimpelCom’s investments and operating revenue in MLA and regions for the period of year 2003.
Table 14. Investments and Operation Revenues (MLA and Regions), 2003
Area Investments Revenues
MLA (US$ million) 234.6 918.7
Regions (US$ million) 535.9 416.8
Source: VimpelCom, 2004
Figure 18. VimpelCom’s Capital Investments, 2001-2004 (US$ million)
Source: Sovremennye Telekommunikatsii, 2003, VimpelCom 2004 6.3 MegaFon
The Open Joint Stock company MegaFon is the largest investment project of the St.
Petersburg’s company Telecominvest. This project aims at development of nation-wide network of GSM-900/1800 standard [15].
MegaFon was established in May, 2002 by merger of ten Telecominvest’s subsidiary companies (a St. Petersburg-based North-West GSM, a Moscow-based Sonic Duo, and eight regional GSM 900/1800 operators). A new company became the only operator in Russia having a license with 100 % coverage.
MegaFon is the third largest mobile operator in Russia with 17% market share in the end of 2003 [22]. As of December 31st, 2003, MegaFon had 6.34 million subscribers, including 0.85 million subscribers in Moscow license area (9% of region’s share). At the beginning of 2004 the company was the leader in the mobile market of North-West macroregion with more than 50% of the regional mobile market.
The largest MegaFon shareholders are Finnish-Swedish Telia-Sonera Group (35.6%), Telecominvest (31.3%), TsT-Mobile (25.1%), IPOC International Growth Fund Ltd (6.5%) and WestLink Ltd. (1.5%).
In August, 2003, Alfa Eko (a part of the Alfa Group) bought the company TsT-Mobile from LV Finance. The Alfa Group tried to merge two Russian mobile operators VimpelCom and Megafon (Alfa Group owned more than 25% of VimpelCom’s share). In September, 2003,
another MegaFon’s shareholder IPOC brought an action before the Russian court, which cancelled this deal [16].
According to MegaFon’s data, company has launched operations in 56 regions by January 2004. In 2003, MegaFon built networks in 25 Russian regions, 9 of them are currently serving only the roaming users, and in 2004 new local users will be subscribed.
In February, 2004, MegaFon announced its preliminary financial results for 2003. For this period, MegaFon reported revenues of US$ 821.7 million (US$ 405.5 million in 2002).
Revenues increased due to the subscriber base growth.
Table 15 presents the dynamic of main financial indicators of MegaFon for 6 months, 9 months and 12 months of 2003. In 2003 EBITDA for 2003 was US$ 377.6 million, which is 162.6% more, than in 2002 according to preliminary data, which has not yet been audited.
Table 15. Key Financial Figures of MegaFon’s Activity in Russia
2003 2002 Change Revenues (US$ million) 821.7 405.5 102.6% 333.2 577.2 EBITDA37 (US$ million) 377.6 143.8 162.6% 158.4 278.6
EBITDA38 margin (%) 46 36 -- 48 48
Source: MegaFon, 2003; authors’ calculations
During the year 2003, MegaFon’s subscriber base increased by 115%. The company had a market share of 51% in St. Petersburg at the year-end 2003 [21]. The striking growth of subscriber base comes from the active regional expansion of the company and modern services providing. In 2003, MegaFon set in commercial operation the provision of the data transmission services based on the GPRS39 technology in St. Petersburg and the Leningrad region. This action was the first of its kind. The HSCSD40 technology was launched in whole North-West macroregion.
As to another operational indicators, in 2002, ARPU was US$ 17 for Russia; it decreased by approximately 32% on a year-to-year basis. This indicator was US$ 20 in Moscow licensing
37 Earnings Before Income Tax, Deprecation and Amortization - an indicator of a company's financial performance calculated as: = Revenue - Expenses (excluding tax, interest, depreciation, and amortization). EBITDA is used to analyze the profitability between companies and industries, because it eliminates the effects of financing and accounting decisions.
38 EBITDA margin is defined as EBITDA as a percentage of the revenues.
39 General Packet Radio Service
40 High Speed Circuit Switched Data
area for year 2002 [7]. The company does not give information about operational indicators for year 2003 but announced that ARPU and MOU were not less then in the previous year.
For third quarter of 2003 ARPU amounted to US$ 17.1 (2% increase compared to the same period of 2002) and MOU totaled about 120 minutes.
The program of the MegaFon’s regional development for year 2004 consists of the network operations expansion in Siberia and Far East, and the completion of development of the Volga’s licensing areas. The company expects to invest more than US$ 500 million to the development of network infrastructure in 2004; US$ 250 million of which is internal funds (Figure 19). According to the company, the subscriber base will be doubled in 2004 and will reach 11-12 million subscribers; revenues are planned at the level of US$ 1.3 billion [15].
Figure 19. MegaFon’s Investments to Network Infrastructure Development, 2001-2004 (US$ million)
170
260
350
550
0 100 200 300 400 500 600
2001 2002 2003 2004
Source: Sovremennye Telekommunikatsii, MegaFon, 2003 6.4 Comparison and analysis
On average, MTS and VimpelCom have shown better financial indicators and larger subscriber base (based on the results of 2003) than MegaFon (Table 16).
MTS was the leader in terms of absolute regional subscriber base growth in 2003. The company captured 34% of all regional net additions, having connected almost 4.9 million new subscribers. Great results were shown by VimpelCom holding the second position in terms of the regional subscriber base growth in 2003 (30%). In 2003 the company has managed to
increase its regional subscriber additions more than 3.5 times compared to 2002 (Figure 20).
MegaFon connected 20% of all new regional subscribers in 2003 [1].
Table 16. Main Indicators of Russian Mobile Leaders
MTS VimpelCom MegaFon
Active regions/license coverage (end of 2003) 60/76 55/74 55/89 Subscribers, thousands (end of 2003) 13,379 11,437 6,340 Share of subscriber base, % (end of 2003) 37 31 17
Net revenues, million US$ (2003) 2,546.2 1,335.6 821.7
Share of total mobile revenues, % (2003) 44 27 17
Source: AC&M, J’son & Partners, companies’ data, 2004; authors’ calculations
Even if MTS is the market leader, Megafon has the best net revenue development in 2003 (Figure 20). Therefore, MTS is not absolute leader in ever sense: there are some indicators, where MegaFon and VimpelCom have better performance.
Figure 20. Main Indicators of Russian Mobile Leaders (growth rates, %)
0%
Source: Companies data, 2004; authors’ calculations
The extensive mass-market development is an important trend of Russian mobile market, which is highly completive. The share of subscribers using the prepaid tariff plans, targeted for low-end users, is constantly increased in the subscriber base of “Big Three” operators.
The leader of this segment is VimpelCom, who was a pioneer in providing of prepaid services, and is actively developing this sector (Figure 17). MegaFon was the next one that went into the struggle for mass subscribers. The share of the prepaid subscribers in the MegaFon’ subscriber base was about 40% at year-end 2002. MTS neglected for a long time the prepaid market, but the loss of the leading position in Moscow in 2002 forced it to change business strategy [18]. In the end of 2003, about 44% of MTS’s subscriber base was enrolled
in the prepaid tariffs (compared to 25% reported in the end of September 2003). Nevertheless the billing system used by MTS is not designed for on-line payment and user can overuse the account money. It is necessary to close up this gap for further mass-market development.
The share of prepaid subscribers in Russia totaled 47% in the end of year 2003 (for comparison in Finland – 4%). In contrast to contract customers, prepaid subscriber base is characterized by lower ARPU, MOU and churn rate indicators value, higher tariffs and lower subscriber acquisition cost (SAC).
The mass-market development by all operators resulted in the decline of ARPU indicator that was about US$ 21 in 2002 (45% decrease compared to 2001). In particular, VimpelCom’s ARPU is less that of MTS (18.3 and 22.9 accordingly in 2002) due to the predominance of the prepaid subscribers in company’s subscriber base.
Increased competition forced operators to reduce the tariffs. With reduced tariffs, operators attracted proportionately more mass-market users, typically generating lower ARPU. In addition, the subscriber growth in the regions has led to increase in the number of mass-market subscribers in the total subscribers base. These factors contributed to the ARPU decline (Figure 21).
It is expected that this trend will continue due to increasing competition. VimpelCom estimates that ARPU of new prepaid subscribers (the most dynamically growing subscriber category) is US$ 9 per month. In the opinion of Ministry of Communications it is not worth expanding mobile services if ARPU is below US$ 10 per month.
Figure 21. Average Revenue per Unit, 1998-2003 (US$)
0 50 100 150 200 250 300 350
1998 1999 2000 2001 2002 2003 MTS
Vimpelcom Megafon
Source: AC&M, 2003
The average monthly revenue per subscriber decrease has caused the growth rate deceleration of the mobile operators’ revenues. To retain the profitability of operations, mobile companies have changed development strategies. They decided to improve quality of services and expand the services’ assortment. In 2003, mobile operators actively developed the modern services based on the 2.5G technologies. These services are Multimedia Messaging Service (MMS), Location Based Services (LBS), General Packet Radio Service (GPRS) and service base on the SIM Tool Kit (STK) technology. Operators aim at the growth of the revenues from value added services, mainly from GPRS based services. Nowadays the number of GPRS users is very small. VimpelCom operates about 300 thousand of GPRS subscribers (including 180 thousand in Moscow license area) that is approximately 2% of the total subscriber base of this most high-tech operator. Consequently, the major barriers to the raising in sales of GPRS based services are the lack of demand for these services and insufficient content.
7. Trends of Russian Regional Mobile Market
In 2003, the regional subscriber base grew more than two times faster, than that of Moscow license area (130% versus 60%). As of December 2003, the number of regional subscribers exceeded Moscow mobile users by two times and reached 24.8 million [1].
Penetration level in MLA keeps the leading position (68.3% as of year-end 2003), compared to St. Petersburg license area (SPLA) (55.8% penetration level). The analysts’ prediction on the Moscow’s market saturation was not justified in 2003; the growth of penetration was about 25% (compared to 16% in 2002). The rest of the regions remain quite immature with average mobile penetration of 17% [21] (Figure 22).
Figure 22. Regional Penetration Rate, 2000-2003
0%
10%
20%
30%
40%
50%
60%
70%
80%
2000 2001 2002 2003
MLA SPLA
Regions excl. MLA Regions excl. MLA and SPLA
Source: J’son & Partners, 2003
The nation-wide Russian operators accelerated regional expansion in 2003. MTS, VimpelCom and MegaFon launched 40 greenfield networks and acquired 9 regional operators. As of December 2003, MTS provided services in 60 Russian regions, while VimpelCom and MegaFon had 55 regional operations each (according to MegaFon’s data, the company has launched operations in 56 regions by January 2004) [5].
The activity of largest mobile operators in regions is resulted in rise of customers number in such macroregions as Volga, Ural and Siberia. Figure 23 shows that the share of Central macroregion in total subscriber base has decreased year by year.
Figure 23. Subscriber Base by Macroregions, 2000-2003 (%)
Source: J’son & Partners, 2004
Table 17 presents ten regions with highest penetration level in first quarter of 2004. Note, that this indicator exceeds the overall penetration level at this date (29.3%) in 8 regions. It provides an evidence of the uneven mobile development in Russia and of the existence of potential for the substantial growth of the regional mobile markets.
Table 17. Leading Regions by Mobile Penetration Level, 2004
Region Penetration level
(%)
The revenues of operators from the mobile services for three quarters of 2003 with distribution by Federal districts and revenues obtained from services provisioned to public users are presented in Table 18.
Table 18. Revenues from Mobile Services by Federal Districts, 2003
Total mobile services revenues Revenues from the services provision to public users
Source: Sotovik, 2004; authors’ calculations
Among nation-wide operators, MTS is the leading in terms of the revenues size in all macroregions except North-West and Volga, where MegaFon outstrips it. However, in Volga macroregion SMARTS has the biggest revenues [29]. Table 19 presents ten regions where the biggest mobile service revenues were obtained during 2003. In these regions live more then 60% of Russian subscribers.
Table 19. Leading Regions by Mobile Revenues, 2003 Region
2 St. Petersburg and Leningrad region 642 13
3 Krasnodar Territory 279 6
Nowadays ten Russian regions leading in terms of the mobile services revenues size provide for 75% of totals mobile revenues in Russia. There are in this list the regions with the high penetration level and high ARPU indicator (Primorsk Territory, Tyumen region). Sverdlovsk region is the big market in terms of absolute number of subscribers.
In the last years, the regional market share expanded massively. While the ratio of the subscriber bases in Moscow and regions was 51% / 49% in the end of 2001, this proportion
amounted to 32% / 68% in the end of 2003. Taking into account the fact that mobile penetration level in regions is five-ten times lower than in Moscow and the high regional activity of the largest mobile operators, we can expect that regions will experience an appreciable growth in the near future in both absolute and relative terms.
amounted to 32% / 68% in the end of 2003. Taking into account the fact that mobile penetration level in regions is five-ten times lower than in Moscow and the high regional activity of the largest mobile operators, we can expect that regions will experience an appreciable growth in the near future in both absolute and relative terms.