The Russia Journal

MOSCOW - The company Mobile TeleSystems (MTS) has completed a deal to purchase a number of regional mobile operators from the MST corporation, including Volgograd Mobile, Astrakhan Mobile and Mar Mobile GSM. As a result, MTS has become the owner of three subsidiaries and the holder of licenses for mobile services in 76 regions of Russia, with a population of 128.3m people. Given its operations in Ukraine and Belarus, MTS’ license zone covers 186.3m people.

The newly acquired mobile operators together have about 12,000 customers. Although this latest acquisition does not make any significant addition to MTS’ client base, it shows the direction of its expansion policy. These deals are in line with the company’s strategy of property consolidation in the subsidiaries. The operator tries to gain full control wherever the opportunity presents itself. In mid-September, MTS purchased a 47.3 percent stake in Kuban GSM, the largest operator in southern Russia, for $107m, and became the full owner of this regional company. In August, MTS completed the acquisition of SibChelendzh, a mobile phone operator in the Krasnoyarsk region, for $45.4m. MTS has already agreed to buy Ukraine’s UMS, Russia’s Uraltel, Telecom 900 and some other operators.

While MTS implements its expansion program successfully, its position in Moscow is weakening. Perhaps, it is time for the company to consider where its Moscow clients go. In September, Moscow’s youngest mobile operator MegaFon outstripped MTS, the oldest GSM mobile operator in the capital, in terms of winning new clients. According to the research company ACM-Consulting, VimpelCom accounted for 41 percent of client base growth in September, MegaFon –36 percent, and MTS –23 percent. In August, VimpelCom also was the leader on the Moscow market in terms of new subscriptions (51 percent); MTS was second (27 percent) and MegaFon was third (21 percent). MegaFon is gathering momentum in Moscow: in June, its customer base increased by 8 percent, in July – by 16 percent, in August – by 21 percent and in September – by 36 percent.

Over the past few years, MTS and VimpelCom have been struggling for new clients in Moscow. For the first time during its two years’ operation in the capital, MegaFon took the lead. “For the first time in the history of the Moscow market, MegaFon’s share in new subscriptions exceeded 30 percent,” said Anton Pogrebinsky, an analyst at ACM-Consulting. Vimpelcom's managers explain the company’s leadership by new marketing initiatives. For its part, MegaFon also links its September performance to interesting offers, such as the pre-paid tariff “O’Light”. As for VimpelCom, it focuses not just on popular tariff plans but also on raising the quality of service in the Moscow region. In September, the company built 58 base stations there.

Yevgeny Golosnoy, analyst at Troika Dialog brokerage, told RBC Daily that the September statistics should be assessed in a more critical way. Firstly, in absolute terms, a rise in the MTS client base remains impressive. Secondly, it is a good strategic move to concentrate on the regions at a time of growing competition on the Moscow market.

“It is more important now to be in the regions. Opportunities are much better there compared to Moscow, both in terms of potential clients and revenue per customer,” Mr. Golosnoy says. According to him, the annual average revenue per user (ARPU) will be falling in Moscow, because of competition, while profits will remain high in the region. Indeed, the percentage of mobile users is high in Moscow, unlike in the regions.

In addition, as MTS focuses on contract customers, a decrease in the percentage of low-profit and least loyal users of prepaid tariff plans is logical. According to Mr. Golosnoy, the operator does not seem to be very concerned about the loss of such clients.

Andrey Braginsky, MTS Director for External Relations, says that the growth of client base slowed down after MTS customers switched to new Jeans tariffs in the spring and summer of 2003. “Part of our contract customers switched to Jeans tariffs, and now, two months later, we stopped reporting them as our active contract customers,” Mr. Braginsky noted.

Apparently, the loss of some low-profit and disloyal clients in Moscow cannot significantly affect MTS’ profits. It is much more important for the company to retain its contract customers, generating the bulk of profits, especially given that the year 2003 will become the last year when mobile operators can increase their customer bases significantly in Moscow and St. Petersburg, according to Georgy Kikvadze, Investment Director at Sistema Telecom. In his opinion, the main growth will be in the regions now. And in 2006-2007, growth on the Russian mobile market will slow down.

With such prospects, it is high time now to consolidate mobile assets in the regions. In the future, well developed regional networks will ensure stable profits. This potential of the regional market will allow MTS to compensate for its losses in Moscow and St. Petersburg and focus on enhancing customer loyalty.