FOCUS: Russia’s Yota can only become niche mobile operator, not major one

By Yekaterina Yezhova

Mobile internet company Scartel, operating under the Yota brand, may have started to provide voice communication services in European Russia to become the country’s fourth largest mobile operator, but analysts say the service only caters for rich clients and cannot compete with larger, cheaper networks.

Yota provides voice wireless connection and internet coverage of the second, third and fourth generation in Moscow, St. Petersburg, the Moscow and Leningrad regions with no roaming, Yota’s General Director Anatoly Smorgonsky said, promising to announce the company’s further expansion plans later.

“Yota is a mobile virtual network operator (MVNO), which provides services on the basis of (its parent company) MegaFon’s infrastructure. Yota focuses on a particular group of consumers who will generate an average revenue per user above market medium,” Vitaly Solonin, director of J’son & Partners Consulting wireless technologies department, said.

In 2013, the Russian cellular market was dominated by MTS with a 31% share. MegaFon and VimpelCom, operating under the Beeline brand, had the shares of 28% and 23% respectively, according to AC&M-consulting. Tele 2 Russia occupied 10% of the market with over 38 million subscribers, making it a company threatened by Yota’s intention to become the country’s fourth largest operator.

“Tele 2 (OOO T2 RTK Holding) is a well-established operator, a low-cost company focusing on the mass market. That is why positioning Yota as ‘the fourth federal player’, in my view, is not quite right. Yota is most likely to become an effective sales channel for MegaFon, an additional source of high-end subscribers. In Western terminology, Yota is a sub-brand of the main operator, MegaFon, whose subscribers should be taken separately from those of independent MVNOs, which do not belong to cellular operators,” Solonin said.

Tele 2 Russia’s spokesman Konstantin Prokshin agreed with the analyst and called the project a “niche MVNO”. “We’ve already seen examples of such projects, such as MVNO of retailer Auchan on the basis of MTS or ‘Simply for Communication’ from MegaFon. They produced no serious impact on the market and positions of major players, since the difference between such an MVNO and new tariffs is small,” Prokshin said.

MegaFon said that it had created the new operator to segment its target audience with Yota to focus on advanced internet users.

Yota says that its philosophy focuses on high-quality services, rather than competition. The company’s spokeswoman Lina Udovenko said that “Yota could be viewed as the fourth federal mobile operator in terms of coverage and service provision.” Yota plans to have 10 million subscribers in five years.

A monthly payment for Yota’s services amounts to 750 rubles in Moscow and 590 rubles in St. Petersburg. MegaFon will provide cellular networks for the new operator, while long-term evolution connection will be provided by Yota itself. Smorgonsky said in late April that the new operator targets active users of smartphones and tablets.

“It is no secret that the segment of data transfer is soaring. Smartphone penetration is rising; tablet sales show three-digit growth from year to year,” Yota’s spokeswoman said. According to Gfk, tablet sales in 2013 rocketed 125%. Smartphone sales will rise about 50% by 2015, J’son & Partners Consulting says.

The new operator will work in a narrow segment with an existing audience of loyal users, amounting to about 1 million. “Later the audience may grow thanks to additional integrated services, which the company plans to develop to increase competitiveness of the offer,” Finam Management analyst Maxim Klyagin said.

“I presume that Scartel may occupy a specific minor, marginal market niche. Given synergy with its parent company MegaFon, diversifying brands and using infrastructure and frequency resources in the best way will become an efficient strategy.”

Yota is unlikely to face serious obstacles. The only barrier for its development could be low demand and strong competition in regions.

“As a rule, MVNOs work in niche segments, that is why their market share is small, about 10% of all virtual operators on developed markets at best. MNVO discounters could become serious rivals for classic operators, though this business-model is now the past and is not regarded as promising for an MVNO,” J’son & Partners Consulting’s Solonin said.

(35.0343 rubles – U.S. $1)

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