FOCUS: Tele2 could hit VimpelCom most while elbowing on Moscow market

By Yekaterina Yezhova

MOSCOW, Feb 15 (PRIME) -- Mobile operator Tele2’s entrance into Moscow’s lucrative market has intensified competition on the tight market. Analysts say the company will pursue its aggressive low-cost marketing policy, trying to compensate for a gap in coverage, and could mainly threaten VimpelCom as the most vulnerable of the Big Three.

“According to our data, Tele2 signed its first million subscribers in Moscow already in the middle of December 2015. Keeping in mind that the region has almost no new subscribers with mobile penetration over 220%, it’s evident that Tele2’s share will grow only by eating into the market shares of the Big Three,” Anton Pogrebinsky, a partner at research company Advanced Communications & Media (AC&M), told Russian Connection.

Tele2 started working in the capital in October 2015 after merging with cellular assets of state-controlled Rostelecom. The joint venture, named T2 RTK Holding, functions under the Tele2 brand.

“We will see the first results in the middle of March when all operators will report on the 2015 performance,” Pogrebinsky said.

The Big Three – MTS, MegaFon and VimpelCom, working under the Beeline brand – dominate the Moscow market, which counted 41.3 million mobile subscribers as of the end of September 2015, according to AC&M. VimpelCom had 35% of the market, and MTS controlled 33% and MegaFon – 32%.

“It’s a densely populated and lucrative area, and its share in total revenue of the Big Three from domestic operations amounts to 30–40%,” UralSib Capital said in a research note.

Despite a firm footing, the analysts said VimpelCom looks the weakest of the trio. “The appearance of the new federal player with a democratic price policy will certainly heat up rivalry. It primarily concerns VimpelCom’s share,” Finance Broker’s analyst Anna Ustinova told Russian Connection.

VimpelCom’s positions also seem vulnerable to UralSib Capital, which said that the firm “lags behind in data transfer and is in a more disturbed financial health than the others, meaning fewer opportunities for maneuvering from the point of view of expenses and investments into network development.”

Ustinova said the country’s telecommunications market is generally depressed by the economic decline, galloping inflation and the ruble’s tailspin, which are undermining the operators’ financial success. “We don’t expect any dramatic changes on the Moscow mobile landscape soon,” she said.

Aggressive marketing

Tele2’s trump card is its low tariffs and a strategy of a cheap connection provider.

“Judging by the speed of subscriber growth, the company’s current marketing policy is rather successful. I doubt it would change soon,” Pogrebinsky said.

“The operators stick to a wait-and-see approach: there have been no ‘product’ responses to Tele2’s entrance so far. But everything could change after the company announces its first official financial and operating results in Moscow. Should they prove the company’s success, competitors could start taking actions.”

UralSib Capital’s analysts said that Tele2 is running an aggressive marketing policy that will most likely trigger chain reaction from the Big Three.

Tele2 offered its most expensive package tariff of 1,199 rubles per month with 2,000 minutes of calls and 15 gigabytes of Internet in early February.

“The tariff was created for the subscribers who need more traffic and minutes. It shows that Tele2 focuses not only on those who consume few mobile services, but also on higher-margin, ‘heavy’ clients,” Pogrebinsky said.

Ustinova said that the market dictates its own rules: buyers prefer “all included” package offers. “Tele2’s new tariff is response to demand. The offer is similar to those of the Big Three, but costs less,” she said.

Barriers

“A weakness so far is the coverage that is certainly worse than of the Big Three; but Tele2 is expanding rather quickly and closing the gap. On top of that, unlike its peers, Tele2 still lacks the service in the underground, but the company intends to provide subscribers with a full coverage until the end of 2016,” Pogrebinsky said.

The analysts said the quality of Tele2’s services is still below that of its main rivals.

“The quality of Tele2’s service could also fall below expectations, at least, at the first stage, because rolling out networks with coverage equal to the competitors will need time and sizeable investments,” UralSib Capital said.

“We are somehow skeptical about Tele2’s chances for creating a profitable business in the region since the local market is very saturated and courting subscribers of the big three will cost too much.”

(79.4951 rubles – U.S. $1)

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