The mobile phone has reached unprecedented levels of popularity in Moscow, with a penetration level of over 50 percent. The result is a fierce battle among telephone companies for customer loyalty.

The year 2002 and the beginning of 2003 were something of a great leap forward for mobile operators as the Moscow mobile market continued to boom and operators lured customers with a wide range of special offers.

Analysts at J’son & Partners estimate that Moscow now has more than 7.5 million mobile-phone users, which represents a telephone penetration level of a whopping 50.5 percent in the megalopolis.

For the first time ever, last fall, VimpelCom listed on the New York Stock Exchange (NYSE) and overtook rival Mobile TeleSystems (MTS).

But then MTS lashed back, and, by January 2003, it boasted 55 percent of new subscriptions, compared to VimpelCom’s 30 percent.

MTS achieved its turnaround through the launch and active promotion of its new pre-paid product – Jeans. Its special New Year’s offer of two Jeans for the price of one was a super hit with consumers.

Megafon, for its part, reached its maximum share of new users – 24 percent of the Moscow market – in November 2002 by introducing new "reception" tariffs that permitted free incoming calls. But, by January 2003, its share had stabilized at 16 percent.

Tariffs or quality

J’son & Partners estimates that average annual revenue per user for Moscow GSM operators at the end of 2002 came to $23 (18 percent lower than at the end of 2001).

As the Moscow mobile-telephone market grows, companies have seen the distinct emergence of different classes of customers. Now, companies are adjusting their tariff plans to include more pre-paid programs to appeal to different kinds of customers. Those who have not yet caught on to this trend have suffered.

VimpelCom offered only plans that included voice traffic. Megafon went further, to introduce a new plan that requires users to pay only for outgoing calls. Incoming calls – from any kind of phone – are free. This "Reception" plan dramatically changed the mobile-phone market and gave an enormous boost to the company’s client base.

MTS did not follow suit until February 2003, when it introduced its new VIP, Business and Optima plans designed to target different market niches.

The commercial director of Megafon’s Moscow network, Eldar Razroyev, said, however, that the main battle between operators is not over tariffs, but over services.

MTS – MOBILE TELESYSTEMS

Ownership : MTS was established by the Moscow City Telephone Network (MGTS), Deutche Telecom (DeTeMobil), Siemens and several other shareholders as a private company in October 1993. Four Russian companies owned 53 percent of the shares, and two German companies owned 47 percent of the shares. On March 1, 2000, as a result of a merger between MTS and RTK, the Mobile TeleSystems public company was established.

National market share: approximately 37 percent (as of the end of January 2003)

Services and customers: MTS operates exclusively in GSM standard, and its license footprint covers a population of 106.4 million, or approximately 74.3 percent of Russia’s total population. At the end of January 2003, the company provided services to 7,340,000 customers.

Net revenues:

$262.6 million for the third quarter of 2001 and $388.5 million for the third quarter of 2002 (up 48 percent)

CEO (General director): Mikhail Smirnov

MEGAFON – SONIC DUO

Moscow Oblast’s MegaFon network was launched in November 2001. Sonic Duo, afully owned subsidiary of the public company MegaFon, became the network’s operator.

Total number of subscribers : 3,564,000 as of February 2003.

CEO (General Director): Sergei Soldatenkov

SONET – PERSONAL COMMUNICATIONS

Ownership: A public company established in 1995 as a branch of

MTU-Inform Co.

Services: Personal Communications (brand SONET) provides services in

IS-95 standard (CDMA technology).

Regions: Licenses to operate CDMA networks cover Moscow and Vladimir, Tver, Yaroslavl and Tula oblasts.

Subscribers: Some 75000, as of November 2002

CEO (General Director): Vladimir Morozuk

BEE LINE – VIMPELCOM

VimpelCom (NYSE, VIP) operates under the Bee Line family of brand names.

Services: The first dual band GSM-900/1800 cellular network in Russia. The company offers telecommunications airtime and value-added services through GSM and D-AMPS wireless networks, with around 90 percent of its subscribers using GSM.

Subscribers: 4.52 million (November, 2002), with 3.53 million subscribers in the Moscow license area and 0.99 million in the regions outside Moscow.

Net operating revenues:

$114.1 million for the third quarter of 2001 and $221.1 million for the third quarter of 2002 (up 93.8 percent).

EBITDA: $102.6 million, a 150.5 percent increase from the $40.9 million reported for the same period of 2001.

Net income: $40.5 million, an increase by 191.0 percent from the $13.9 million reported for the third quarter of 2001.

The company’s EBITDA margin for the third quarter of 2002 was approximately 46.4 percent compared to approximately 35.9 percent for the same period of 2001.

CEO: Jo Lunder

MSS – MOSCOW MOBILE

The public company Moskovskaya Sotovaya Svyaz emerged as the initiator of the SOTEL (Russian Cell Phone) project, which was supported by the government.

Founded in 1992 by US West (USA) and Millicom International Cellular together with Moscow City Telephone Network (MGTS), Long Distance Domestic and International (MMT), MNTK Eye Microsurgery, and State Institute of Television and Radio.

Subscribers: Some 100,000.

CEO (General Director):

Vyacheslav Gurkin

"It’s possible that tariffs will drop in 2003," he said, "but not by more than 10 percent, which is not dramatic for the market. The main thing is that operators will offer customers new, completely innovative information and entertainment services using 2.5 G technology. We’re moving toward a sort of mobile-phone market typical of European countries, where clients get a maximum number of needed services from various operators. A customer can have several SIM-cards and change them depending on his needs."

The number of people using pre-paid systems is also on the rise. VimpelCom, the first operator to offer pre-paid services, says 80 percent of its users choose this scheme. Megafon comes second, with 40 percent of its users opting for pre-paid services. MTS is third, with 5 percent of its users being pre-paid, though this figure is increasing.

Sonet and MSS have concentrated on no-limit tariffs in an effort to attract business users with medium income levels and a demand for tariffs that do not impose limits.

Sonet public-relations director Anastasia Markovich said the market is gradually approaching the European model. "The market for basic telephone services is already saturated and the prices and services offered by various operators are now similar," she said. "Now, users are going to be looking, above all, not so much at the price but at the quality of service provided."

More for more

The rapid growth for SMS services last year was partly a result of SMS message-exchange agreements between the large Moscow operators. Previously, text messages could not be sent between different operators. VimpelCom and Megafon began SMS exchanges in February 2002; exchanges began between VimpelCom and MTS in April 2002, between MTS and Megafon in February 2003 and between MTS and MSS in May 2002.

At the end of 2001, SIM cards with an SIM Application Toolkit – which enables GSM network operators to offer clients services ranging from the latest sports news and traffic information to flight schedules and updates on stock markets – appeared in Moscow.

Megafon was the first operator to introduce information and entertainment services based on this technology. In May 2002, MTS launched similar services under the brand name MTS-Info, adding new sections and expanding existing ones over time. VimpelCom later followed suit.

Wireless-application protocol (WAP) technology that gives mobile-phone users simple and quick Internet access was expected to be popular but has not lived up to expectations. Connections have been slow, viewing WAP pages on a mobile-phone display screen has been inconvenient and there has been little content to offer subscribers.

Still, operators hope that offering access to WAP sites through high-speed general packet radio services (GPRS) data transfers will prove more popular than WAP access through the usual GSM network.

GRPS and reception of short multimedia messages (MMS) promise to be the measure of successful competitors in coming months. Megafon and VimpelCom have both launched GPRS services commercially, but only Megafon has an MMS service. These services will develop more intensively only as equipment manufacturers and content providers begin promoting them more actively.

Non-voice traffic made up 1 percent of MTS’ revenues in 2001 and 2-3 percent in 2002. The figures for VimpelCom were 5 percent in 2001 and 8 percent in 2002, while non-voice traffic accounted for 8-9 percent of Megafon’s revenues at the end of 2002.

All but talk

GSM operators have for the most part divided the Moscow market among themselves, and this is unlikely to change anytime soon. This year will see the active introduction of next-generation 2.5G service, for users who want to get more than just regular GSM voice services from their phones.

Roman Kaspary, director of marketing planning and tariff policy at MSS, said growth in the number of users in Moscow is expected to slow down. "The GSM networks will keep the lead, but the new IMT-MC-450 standard will win over users interested in something new and corporate clients with its attractive range of modern services," he said.

"The development of CDMA2000 networks in Korea and Japan is an excellent example of how a market can be conquered," Kaspary said. "In just a few months of operating its CDMA2000 network, Japanese operator KDDI attracted more than 1 million users through being able to offer them high-speed access to multimedia content, and modern telephones with color displays. We see very good prospects here, given that Russian mobile-phone users change their telephones, on average, once every year to 18 months.

Nikolai Pryanishnikov, first vice president of VimpelCom, says that overall user growth rates would slow down this year, a view held by all operators. "We predict that, this year, we’ll see the first signs of saturation on the mobile-phone market in Moscow," he said. "But the market will continue to grow, and the penetration level will also rise. Tariffs in Moscow and the regions are lower than in many countries, and the market does not need them to go any lower at the moment. In the future, there will be a gradual decrease of tariffs, but we won’t see any dramatic changes."