Russia’s Northern Capital is seeing harsh competiton in the race to scoop up mobile-telephone subscribers.

St. Petersburg has been the site of one of the fiercest battles in Russia’s mobile-telephone war – and things are set to get even hotter.

High-speed Generation 2.5+ services, increased competition and more price wars are in store for Russia’s second-largest city and its No. Two mobile-phone market. And the big players from Moscow are expected to put more heat on hometown product Megafon in the battle to build up subscriber bases in an increasingly saturated playing field.

The local market was already buzzing in 2002, after Moscow-based Mobile TeleSystems (MTS), Eastern Europe’s largest mobile-phone company, put its St. Petersburg activities into high gear. By February 2003, MTS (which uses GSM standard) had more than 800,000 subscribers in St. Petersburg, according to J’son & Partners research.

That still trailed Megafon (also GSM), which increased its subscriber base 76 percent over the past year to 1.3 million. Meanwhile, Fora Communications (AMPS standard) hiked its subscriber base 34 percent to 41,844, and Delta Telecom (NMT-450 standard) gained 14 percent to 100,000, of which slightly more than 2,000 subscribed to SkyLink (IMT-MC-450).

MTS’s attack on Megafon’s home territory was a multi-pronged offensive, focusing not only on attracting first-time subscribers but also on winning over customers dissatisfied with the competition. That effort, led by an aggressive marketing and advertising campaign, gained MTS a 37 percent share of the Petersburg subscriber base, J’son & Partners analysts say.

Part of MTS’ marketing arsenal was a plan that offered rates of a cent a minute for calls within the network, bettering Megafon’s cheapest rate, which was five cents, not including value-added tax, and valid only from midnight to 8 a.m.

The MTS cut-rate offer ended with 2002, and now both GSM-standard operators’ rates are similar. That, analysts say, is making it harder for MTS to make further big inroads into Megafon’s base.

Some analysts say that MTS may have moved too fast to build up its network, which has led to overloads, erratic sound quality and gaps in coverage. But analysts add that MTS, with the expertise it has built up over recent years, is likely to smooth out the problems as it solidifies its Petersburg operations.

Megafon has a 56 percent share of the market, a solid number but down from two years ago, when it controlled all GSM-standard subscribers in St. Petersburg.

But though it has lost customers as competitors have undercut its prices, analysts say Megafon still has some competitive advantages over rivals MTS and VimpelCom, which operates the BeeLine brand and is entering the market. Megafon’s base stations provide full city coverage, it has plenty of payment points and a number of additional services, say experts, who also cite the company’s billing system and a network that does not suffer from overloads.

And, although it has lost subscribers overall, Megafon has managed to hold onto its wealthy corporate clients. Company officials say they are confident that they can maintain a strong subscriber base despite the increased competition and the decreasing number of potential new customers.

"The St. Petersburg market is close to saturation, but we think there is still potential here," Megafon spokeswoman Marina Belasheva said. "Analysts were pessimistic a year ago about the prospects for getting new subscribers, but we nonetheless nearly doubled our subscriber base. We have new, interesting offers, and we’re expecting more subscribers to come our way this year."

Fora Communications, with just 2 percent of the market, and Delta Telecom, with 5 percent, are still too small to take over market leadership any time soon, but they nevertheless are bidding for new customers through lower rates that the standards they use allow them to provide. The down side, analysts say, is that these companies offer limited or no roaming possibilities.

Delta Telecom’s SkyLink company could also attract new subscribers with its 450 megahertz (IMT-MC) frequency range. The SkyLink system is said to have a peak data-transfer speed of 153 kilobytes/second.

With 2.18 million subscribers at the start of 2003 and a 33 percent mobile-phone penetration level, St. Petersburg and surrounding Leningrad Oblast make up the No. Two market in the country after Moscow, which has a penetration level of more than 50 percent.

Mobile operators have launched three new high-speed data-transfer networks in St. Petersburg over the past few months. Megafon began testing its GPRS network in December. Delta Telecom launched its IMT-MC-450 (CDMA-2000 1x) for commercial use, also in December. MTS started test runs of its GPRS network in January. Megafon plans to start commercial operation of GPRS in the first quarter of this year.

VimpelCom, which had been expected to make a foray into the Petersburg market since autumn 2002, when VimpelCom-Region, its subsidiary, received a license to operate a GSM-1800 standard network in the Northwest Region, which includes the city.

In April of last year, VimpelCom-Region carried out the technical launch of its BeeLine GSM network in St Petersburg. BeeLine GSM will eventually cover most of the city and also a number of outlying suburbs. By summer, 100 base stations are expected to be in operation, with double that amount planned by the end of the year.

With 2.18 million subscribers at the start of 2003 and a 33 percent mobile-phone penetration level, St. Petersburg and the surrounding Leningrad Oblast make up the No. Two market in the country after Moscow.

The technical launch in St. Petersburg coincided with the news that another VimpelCom unit, VimpelCom Finance, would be issuing a 3 billion ruble, three-year security, with the proceeds earmarked toward developing its network throughout the country. But analysts expect VimpelCom to concentrate those efforts on St. Petersburg.

"We are preparing seriously for our entry into the St. Petersburg market," said Alexei Mishchenko, VimpelCom vice president responsible for regional development. "At the moment, we’re looking for the frequencies we need to be able to have a full-scale, two-frequency-range network by the time commercial operations begin."

In January, VimpelCom acquired Kaliningrad’s biggest mobile-network operator, Extel (with 105,000 subscribers at the time), for $25 million. The deal did not fit into Vimpelcom’s traditional strategy, which usually centers on developing its own network (unlike MTS, for example, which likes to acquire existing operators). But VimpelCom felt it had little choice as it urgently needs to build up its resources in the northwest.

At the same time, VimpelCom has been establishing base stations in St. Petersburg at a rapid rate. J’son & Partners analysts say that when full commercial operation of the network begins, VimpelCom will have 110 base stations. By comparison, Megafon has 550, while MTS entered the market with 130 stations.

VimpelCom’s Mishchenko said the company will offer St. Petersburg clients the same range of services as it does for Moscow users. "This includes various SMS services, voice mail, ‘beepay’ payment services and ‘beeinfo’ and ‘beeonline’ information and entertainment services," he said. "There will also be GPRS-based data-transfer services and services for sending MMS multimedia messages. Of course, we are also planning a number of nice surprises for our future users."

"Right from the start, BeeLine GSM’s coverage in St. Petersburg will be comparable to that in the areas covered by the competitor networks," said Mikhail Umarov, VimpelCom’s spokesman. "The next step will be to cover roads and railway lines between Moscow and St. Petersburg, and from St. Petersburg to the border with Finland."

While VimpelCom is striving to cover St. Petersburg and the railways and roads to Moscow and the Finnish border, Megafon and MTS have already accomplished this. Analysts feel, however, that VimpelCom’s plans are realistic and that the market can handle one more large operator. But the costs of the project will be high, and it will be almost impossible for VimpelCom to make a return on its St. Petersburg investments anytime soon.

Some reports say the initial stage of investment will be worth about $50 million. J’son & Partners estimates that VimpelCom will capture 3 percent of the market by the end of this year.

By summer, when VimpelCom and Fora are up and running in St. Petersburg, the city’s market will be in the unusual position of having seven mobile networks and nine mobile licenses – and a population of less than half that of Moscow. That, experts say, will fragment the subscribers, with the non-GSM standard operators getting only a small fraction of the market. Penetration is expected to reach 50-55 percent by the end of the year.

Oksana Pankratova, an analyst with J’son & Partners, said Megafon should be able to survive the onslaught of MTS and VimpelCom. But it will be a fierce fight for customers and profits. "Megafon is unlikely to maintain the high market share that it has now in St. Petersburg and may fall below the 50 percent level, especially with the arrival of VimpelCom," she said.

Mobile news

MegaFon gets ready for the stock market

MegaFon, Russia’s third-largest mobile-phone operator, plans to consolidate all its subsidiaries by the end of the year so as to be ready for its entry into the stock market.

"By the end of the year, we will liquidate all our subsidiaries and they will become branches," said MegaFon General Director Sergei Soldatenkov. "We only have eight of them. By the end of the year we have to be ready for our IPO. "

MegaFon’s earnings grew in 2002 to $409 million, from $215 million in 2001. Its EBITDA rose to $141 million from $86 million, the company’s investments went up from $170 million to $260 million, and its subscriber base increased from 1 million to 3 million. In 2003, the company plans to raise earnings to $700 million and make investments of $400 million.

New contract between Ericsson and VimpelCom

This is the second contract between the two companies this year. It involves equipment supplies to expand the GSM 900/1800 network in the Volga region, Siberia and the North Caucasus. The contract is worth over $25 million and provides for supplying and installing new communication centers and base controllers, supplying new equipment for existing stations and supplying base stations. Also, Ericsson will supply software for OOS and BSC.

The contract will allow VimpelCom to considerably expand the capacity of its networks in Saratov, Ulyanovsk, Astrakhan, Ufa, Rostov, Makhachkala, Krasnodar, Novosibirsk, Kemerovo, Krasnoyarsk and Omsk and to achieve a drastic expansion of its service area in the Volga region, Siberia and the North Caucasus.