MegaFon Moscow became profitable in 2003 and had an EBITDA of 30 percent for 2003 and more than 40 percent for the first quarter of 2004. A total of $260 million was invested in the MegaFon Moscow project up to 2004 and investment of at least $100 million is expected by the end of the year. Average revenue per user (ARPU) for the first quarter came to $22, and the subscriber attraction cost (SAC) in the first quarter was $14. MegaFon Moscow subscribers speak on average 10 minutes per month with minutes of usage (MOU) at 30 minutes.

MegaFon burst onto the Moscow market right at the very moment when it seemed that the market had already been divided up between VimpelCom and Mobile TeleSystems. It looked that the company would have a hard time finding its place in the sector, but its European methods of doing business helped it draw customers. Payment and price schemes were varied and flexible, subscribers did not have to pay for incoming calls no matter what kind of telephone, and intra-network roaming within Russia became cheap.

Eldar Razroyev, commercial director of MegaFon Moscow, is one of the people behind the success of the third-largest GSM operator in Russia’s capital. At the end of 2002, the company was on the verge of default, but by the spring of 2004, two-and-a-half years after arriving on the market, MegaFon Moscow had more than 1 million users. The Russia Journal spoke to Razroyev, one of the new generation of dynamic, educated and decisive Russian professionals, about the secrets of the company’s success.

The Russia Journal: How did you come to join the company?

Eldar Razroyev: I have been in the telecommunications sector almost 10 years, since 1995. There came a point in time when I felt I was doing well as a hired manager and I started to want to take part in a larger project. I had worked in management positions at companies such as VimpelCom, VimpelCom-R, Vostok Mobile and Fora Communications. I joined MegaFon Moscow in the autumn of 2002 and I arrived in the company through an ordinary recruiting agency, CornFerry. The telecommunications business in Russia is not very extensive, and everyone knows each other.

TRJ: How have the company’s principles and management style changed over this time?

ER: I always prefer a tough business style. Dmitry Zimin [the founder of VimpelCom] and I have different views on business. He sees it as running along parallel roads, while I see it as boxing. Not kickboxing, in which there are no rules, but traditional boxing, in which you need to look after your partners and treat your competitors and their health with respect. If everything were calm on the market, I would not find it interesting. I like competition. I like my job and my adrenalin comes from competitor’s blood. When our company scores a victory, it makes me really happy, but even when the competition is tough my subordinates and I always act in the spirit of fair play and would not think of going beyond the rules. Business ethics is important to me and it is something that all market players should understand and accept without question.

TRJ: What were your achievements in 2003 on the Moscow market? What did you do to boost your company’s sales?

ER: Any new player on the market never has much choice of development strategies. One option is to breathe down the neck of the first player and try to run a bit faster, repeating his successes and trying to avoid his mistakes. If a third player arrives on the market, he can take the road of drawing the bottom layer away, offering minimum prices and attracting the most mobile segment of customers who do not talk much — the largest client group on any market. All the three large operators use this strategy in their work in the regions, for example. But, in Moscow, these two strategies were not possible for MegaFon. The market was already developed and these strategies had already been used and had shown to be ineffective. The third option is dumping, but this causes the market to collapse and can benefit not so much the most steadfast company as the company with the largest financial resources. We could not take this road as we were a newcomer on the market and did not have the resources. Given all these circumstances, we chose the less popular but more original and effective strategy of what I would call "nibbling away at the competitor’s pie." What this strategy involves is drawing away the middle class of subscribers — the most rational consumer group that pays more attention to the price/quality ratio. This road was open to us. Our competitors in Moscow are large, but their subscriber base is not as solid as it looks — their business is growing very fast and looks financially effective, but from a marketing point of view, it is a case of ‘one size fits all’ without any clear client targeting.

TRJ: So you decided to target specifically the middle class?

ER: Yes, and we were successful. This was not easy, however, because we could not offer the same product quality — I already mentioned the coverage problem — and we did not have the resources to practice a dumping strategy, so we had to act aggressively and maneuver and take decisions very fast. This puts the company into a state of constant mobilization and not everyone is suited for such work conditions.

TRJ: How did you actually carry out the strategy?

ER: Through positioning above all. We did not market ourselves as the one and only operator. Our position is that we are a different operator and clients can find what they would not find elsewhere in our company. We offer innovative services and ideas that have already been realized, and this demands a certain intellectual approach to business. We also have a very flexible strategy. We cannot function on the basis of marketing plans drawn up for a whole year. Most of our programs and campaigns are not tied to calendar dates but to specific tasks. This enables us to react quickly to challenges from our competitors and to the market situation. This has enabled us to reach a financial effectiveness over the last two years that took our competitors a decade to achieve. Our decision to target the middle class definitely helped us here. The middle class is not about income, but more about a certain way of life. Teachers, civil servants and businesspeople can all consider themselves part of the middle class. We try to provide them with affordable mobile communications services no matter what their incomes. We have a very wide range of price schemes. Quite a few of our clients have their own business and this desire of theirs to achieve something means that they lead a socially active way of life. Mobile communications for them is a tool in their work. As well as the traditional mobile communications services, we also offer them many additional information and entertainment services. We also remove the barriers to people using mobile communications. Our "priyom" price schemes have proved very effective in this sense.

TRJ: What are your plans for the future? How is MegaFon going to be different from other companies?

ER: Our strategy will soon get a new impulse from additional services. Over the last 100 years, the cost of telecommunications services has gone down by an average of 10 percent a year. By that logic, we should have free communications today. But the reason why communications are not free is because there are always new services that emerge and they add value which brings companies additional revenue. It is very important that modern mobile operators understand that prices will inevitably come down. Companies need to actively introduce new services and promote them. The most important thing is to open up new market segments for non-voice services. It is clear to me that we need to encourage consumers to move in this direction. All mobile operators should unite their efforts here. Our company is now the leader in innovations on the Moscow market. We chose this direction and we think it will be the most promising road in the long term.

TRJ: How will the Moscow mobile communications market develop over the coming year?

ER: Penetration levels will rise to above 100 percent. There will be a lot of emphasis on subscriber loyalty programs in an effort to reduce the outflow of clients. In our system, we count the time subscribers are in our network in their favor and we have discounts that come into effect automatically. I think this kind of program and direction will be one of the most significant battles in the future.

Sonic Duo is a 100 percent subsidiary of MegaFon and the operator of the MegaFon Moscow network, MegaFon’s network in the Moscow region. MegaFon is the technology leader in the region and gives its users access to the most advanced technology, including services using mobile positioning, MMS and GPRS. The company offers fair and advantageous price plans similar to those found in most European countries. MegaFon Moscow now has more than 1 million users.