FOCUS: Wiser tariffs push Big Three’s Q3 revenue up, eyes on data law, 5G in future

By Yekaterina Yezhova

MOSCOW, Dec 11 (PRIME) -- Nationwide revenue of Russia’s Big Three mobile operators – MTS, MegaFon, and VimpelCom – exceeded growth in client numbers in July–September thanks to their abandonment of limitless tariffs and a switch to the more-services-for-more-money approach. MTS and MegaFon will compete for absolute leadership in 2018, while the data retention law still poses risks, analysts said.

“The market players’ service revenue was enhanced by higher prices of connection services at a principle of more services at a higher price, an end to limitless tariffs, a moderate improvement of the economic situation and a ruble strengthening,” Otkritie Broker analyst Timur Nigmatullin said in a research note.

MegaFon’s mobile revenue grew slightly less than that of its peers, which could be the result of repeated network troubles that occurred earlier this year, the analyst said.

All the three operators showed strong results for July–September, and MTS maintained its leadership by revenue and the subscriber base volume.

Below is a breakdown of the companies’ main nationwide results for July–September:

Operator/Indicator	MTS	MTS	MegaFon	MegaFon	VimpelCom	VimpelCom
	Amount, bln rbl	Change YoY, %	Amount, bln rbl	Change YoY, %	Amount, bln rbl	Change YoY, %
Revenue	106.3	+3.2	83.5	+4.6	72.6	+2.9
Mobile revenue	79.2	+4.4	67.6	+1.3	59.2	+4.2
Fixed-line revenue	15.1	+0.1	7.0	+11.5	10.1	-11.7
Wireless subscriber base, mln	78.5	-0.6%	75.6	+0.2	58.8	+0.7

Mobile revenue was the main growth driver for MTS in the reported period. “However, the subscriber base dynamics has turned negative for the first time since 2013 – the fall amounted to 0.6% on the year,” Nigmatullin said.

“It seems that one of the main reasons behind the shrinking base was active reduction of the retail chain, which, as it was earlier expected, cannot compensate a steadily high churn rate.”

The number of MTS stores tumbled to 5,710 at the end of July–September from its peak of 6,194 outlets at the end of October–December 2016, franchise included.

MTS said, “Compared to July–September 2016, the average number of stores in the period decreased by 4% on the year, which helped support Russia OIBDA growth due to lower personnel and rent costs.”

Nigmatullin attributed the mixed dynamics of the subscriber base and mobile revenue to higher prices of connection services primarily under the principle of “more services for a higher price”.

“The same strategy is applied by other players of the Russian market in view of its saturation and a local decrease in competition because of a better market situation and revised tariff lines,” the analyst said.

MegaFon’s revenue from sales of equipment and accessories in the country rose 29.8% to 8.9 billion rubles thanks to sales of expensive gadgets from Apple and Samsung, while total nationwide smartphone sales grew 18% on the year to 101.4 billion rubles in July–September, or 12% to 8.2 million units, as electronics retailer M.Video calculated in early October.

“Most likely, sales were boosted at the cost of a lower segment margin as the number of sales points fell. It’s worth noting that the company is yet to close the deal on splitting retailer Euroset, and a 1.25 billion ruble payment (for half of Euroset’s stores) has not been received so far from VimpelCom,” Nigmatullin said. MegaFon and VimpelCom, which currently own Euroset on a parity basis, will close the deal by April 2018.

VimpelCom’s nationwide total revenue grew 2.9% to 72.6 billion rubles, “driven by an increase in mobile service revenue and sales of equipment and accessories,” said VimpelCom’s sole owner, VEON, in a quarterly financial report.

“Mobile service revenue increased 4.2% to 59.2 billion rubles, driven by growth of mobile data, value added services, and mobile financial services, partially offset by a decrease in voice revenue.”

The operators’ future is clouded by the uncertainly about the data retention law, in force from July 1, 2018, and the upcoming capital-consuming 5G technology, whose standard is to be introduced by the International Telecommunication Union by 2020.

Alpari senior analyst Anna Bodrova has a reserved outlook for 2018.

“Now when the mobile connection market has developed into a fully-fledged segment, and competition has passed all the stages from a rush and a battle for every subscriber to sound marketing approaches, the market shares are quite evident,” she told PRIME.

“The telecom market is stable and static now. It means it has no room to grow in quantity, but it can evolve in quality. In 2018, VimpelCom will keep the current 23–24% of the market and the third place in the Big Three, while the main war for absolute leadership will be fought by MTS and MegaFon.”

Nigmatullin at Otkritie Broker said the recent easing of price competition in the industry looks only a matter of time, and rivalry could revive next year if the number of the main players maintains.

At the end of November, MTS cut tariffs and increased the volume of services in 10 regions of the country. Not directly referring to the move, MegaFon CEO Sergei Soldatenkov said the operator is ready to fight “an irrational war for the market” with other firms.

(59.2811 rubles – U.S. $1)

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