FOCUS: Digitalization can help mobile companies on stagnating market

By Yekaterina Yezhova

MOSCOW, Apr 3 (PRIME) -- All three Russia’s top mobile operators – MTS, MegaFon and VimpelCom – have shifted their focus to digital technologies amid falling incomes from traditional connection services in their 2016 financial statements. Analysts said this market is still hibernating, but MTS and MegaFon have the best chances to perform better in 2017.

“It should be said that all three operators showed quite lackluster results for 2016. MTS led by revenue growth, but they have comparable OIBDA as they have to keep rather low tariffs. MTS succeeded in raising revenue thanks to business diversification with retail and new digital services,” Natalya Milchakova, deputy director of Alpari’s research department, told PRIME.

Below is a breakdown of some nationwide figures for 2016 as given by the operators in their statements:

	MTS, Bln rbl	MTS, Change yoy, %	MegaFon, Bln rbl	MegaFon, Change yoy, %	VimpelCom, Bln rbl	VimpelCom, Change yoy, %
Total revenue	400.6	+2.4	311.6	+1.0	273.0	-1.5
Mobile service revenue	295.0	-0.4	259.0	-2.3	218.2	-0.4
Fixed-line service revenue	61.2	-0.7	25.6	+9.5	44.4	-7.0
Subscriber base, mln	80.0	+3.5	75.6	+1.1	58.3	-2.5

Promsvyazbank senior analyst Ilya Frolov said income from data transfer services is rising and despite a rapid fall in the price of a megabyte, total revenue of the big three rose 26% thanks to growing traffic consumption.

The ongoing stagnation of the mobile connection market undermined revenue from mobile services of the big three amid high penetration of services, as Milchakova at Alpari said.

Penetration of SIM cards added 3 percentage points in 2016 to 179%, as research group AC&M said in a recent report. In Moscow, the indicator rose eight percentage points to 240% as of the end of last year, and in St. Petersburgh it increased 14 percentage points to 239%.

As of the end of 2016, MTS had a 31% share of the market by the number of subscribers, MegaFon – 30% and VimpelCom – 23%, the researcher said.

Growth opportunities through expanding the operators’ client bases are restricted. The firms have to maintain low tariffs to keep clients after the mobile number portability service, allowing subscribers to change providers while keeping their phone numbers, was introduced in 2013, Milchakova said.

MTS and MegaFon’s revenue from sales of goods spiked 23.1% and 35.5% to 49.6 billion rubles and 27 billion rubles respectively.

“The reason behind the trend is that competition between monobrand and multibrand chains plays into the hands of operators’ own brands. Moreover, after buying a phone, smartphone or any mobile device, one can immediately join an operator. It’s convenient for the client,” Milchakova said.

Frolov at Promsvyazbank said the increase in goods sales pulled consolidated OIBDA down.

The retail business has been in focus for a while after the operators said there was an excess in retail outlets, and MTS and MegaFon said they are ready to curb down their chains. The same idea seems to drive MegaFon and VimpelCom to split their equally-owned handset retailer Euroset in two, which will improve their margins.

Citi said that the local mobile environment remains challenging and recovery may be slow, even if the Euroset split is agreed soon. “The state of the industry can be best described as stagnation with limited potential for near-term spontaneous recovery,” the bank said.

Milchakova thinks MTS has chances to keep its leadership, which will be challenged by MegaFon thanks to possible monetization of subscriber base of VKontakte, a social network of Mail.Ru Group, in which the operator has recently gained control.

MTS and MegaFon could show growth thanks to broadband and cloud services, the analyst said. “As to VimpelCom, we think its parent company (VEON) bets on business development and promotion of mobile services abroad,” Milchakova added.

VimpelCom’s sole owner, Amsterdam-based VEON, earlier known as VimpelCom Ltd., rebranded to accentuate its gravitation towards digital services, including the eponymous Internet platform.

Citi said in a research note that none of the major local operators believes in the telecoms business model any more, hence they want to go digital.

MTS President Andrei Dubovskov said during presentation of the 2016 results that the operator will become dedicated to digital technologies, differentiation and higher efficiency and yield for shareholders.

(55.9606 rubles – U.S. $1)

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