With a population of 146 million people, Russia is one of the biggest mobile markets in the world, but it is a market that is wracked with problems and challenges. According to Russian regulators, around 100 million SIM cards are sold in Russia every year, a situation that is “ridiculous” according to Vasyl Latsanych, the chief marketing officer at MTS, the largest mobile operator in the Russia and Commonwealth of Independent States region.
“There’s a huge number of SIMs being sold into the market and taken out very quickly,” he explains. “There is a way out of this, but we need cooperation to make the whole market healthier.”
In Russia, a huge swathe of the market is operating on a pre-paid SIM basis – though with the launch of 4G in 2012, that is beginning to change, albeit slowly.
“In a lot of eastern European markets there are fully pre-paid markets and that leads to higher churn rates. For us, it is 99% of our market and that makes the market much more fluid in terms of its SIM card attachment rates.”
The introduction of number portability to the market in December 2013 was supposed to help customers to move networks, but instead it revealed a key problem with Russia’s mobile market.
Number portability “raised questions as to whether it was the market which was liquid or if it was just an accounting issue,” Latsanych explains. “It showed that very few people are actually migrating across networks as they weren’t taking their number. It is down to hypersales in the market, with the majority of churn coming from new customers. That led us to look at why SIMs are sold with such low quality but such high quantity and we realised this is because the whole market is set up to sell more, instead of competing on base.”
The way out, he says, is by working with MTS’s main rivals, MegaFon and Beeline – owned by VimpelCom, now Veon – to look at how to decrease the huge retail portfolios selling SIMs in the country.
To put the problem into perspective, some more numbers. MTS has around 6,000 retail outlets across Russia including 800 stores in Moscow.
By comparison, Vodafone has 80 in London, according to Latsanych. Though Moscow is bigger than London, it is not ten times the size, yet MTS has a huge sprawling retail footprint. It is too big, the CMO says.
“This growth in retail was fuelled by awkward M&As, creating unnecessary pressure in the market. This pushed us to respond, so we increased our retail footprint beyond what it needed to be,” he adds. “We have 6,000 outlets in Russia and 800 in Moscow only – by comparison, Vodafone has around 80 stores in London and it is a much more spread-out city than Moscow. That shows how inefficient it is.”
So what does MTS want to do about it? “We don’t have to fuel the symptoms – we have a plan on how to cope with that. We want to dramatically decrease the number of stores – which will have an effect on the sales and then on churn, but it will have a beautiful effect on our financials because it is unprofitable the way it is set up,” he says.
“It doesn’t add to the bottom line. We need to be accurate enough to cut out those less performing outlets and contribute positively to both the top and bottom line.”
This could help cut inefficient sales of around 40% across the market. If its rivals were to follow suit, Latsanych predicts sales of SIMs would drop to 60 million within the next two years, and this would be positive for the operators.
“It is a question of how we manage the flows, but the bigger question is around how the market manages the competition. We can’t just decrease our number of stores without our competitors doing the same or we will lose the traffic. So we would need to see similar movement in our competitors, because in that case, the whole market will be healthier.”
So has MTS began discussions already? Latsanych smiles and says it is not that simple. Relationships between Russia’s top operators are strained and this means industry-wide engagement can be tough in that market. He adds: “It is very much like the Cold War, which doesn’t work until one side starts do something. There needs to be an understanding. We don’t talk enough with our competitors because there are not positive relationships there, but we want to say to them ‘Look guys, you’re struggling too, perhaps even more than we are.’ Both of our rivals are suffering.”
In most markets, this is the kind of situation in which operators would turn to regulators to push a consensus amongst them. But Russia is not like most markets. There are, however, some moves from the Federal Service for Supervision of Communications, Information Technology and Mass Communications (Roskomnadzor), which could help.
Raids for illegal SIM cards
Last year, Roskomnadzor moved to take care of unlicensed SIM cards in the country, raiding more than 800 locations. During the year it seized 28,516 illegal SIM cards. Half of them are VimpelCom; 18% on MegaFon; and more than 16% MTS according to Srtlr.com news service.
In Russia, SIM sellers need to register the SIM or take passport details: failure to do so is illegal. “There are certain regulatory initiatives that might work both ways – there is one to cut the sales of SIM cards from uncontrolled outlets,” Latsanych adds.
“Walk down the streets of Russia and you will find people selling SIM cards with no registration, no need for passport information, which is required by law. So there are ways to avoid certain procedural things that no one – the regulators, the secret service are not happy with, we’re not happy with because we don’t control those cells and more.
“We represent 10-15% of those sales – the rest is our rivals. So regulation there could be more traumatic for them. That could have an impact on the retail sales.” The impact on all of this is increased churn and lower ARPUs. MTS has managed to keep revenue relatively neutral: first quarter group revenues fell 1.1% to 104 billion roubles ($1.8 billion) but revenue in Russia actually grew by 0.9% to $1.7 billion.
“When the market is not booming any more, the best case is to compare our performance with our rivals’,” he explains. “For us, revenues have been relatively neutral recently. This is because we are well diversified to offset negative trends.”
What is this diversification? “ARPU has been falling in our key markets for more than a decade but we’ve managed to do over the last few years is to stabilise it. Voice has become more on-net free and calling was more on-net, so there was less opportunity to boost ARPU by selling more minutes. So with increased data, we adopted a strategy of voice/data conversion where we’ve pushed to sell more of the voice and data plans with monthly allowances into the base,” he says. “We can’t just up the prices because the regulatory environment is strong, so we worked on the frequency of the payments, migrating people through promotions onto higher ARPU tariffs. ARPU is growing slightly now – 1% or 2%. Long-term we see more 4G adoption, more adoption of services, people will be interested in migrating upwards and that will drive higher ARPU. We see the growth potentially 10% and upwards, but customers who come onto that at first represent a lower ARPU, and that does dilute the numbers. We do foresee a situation where there will be less SIM cards sold, and that will help with this.”
Russia isn’t the only market MTS operates in, and it could be looking to expand to more, despite some issues with previous expansions. It left the Uzbekistan market after just two years, selling a 50.1% stake in UMS amidst a US probe into the market that also tied in VimpelCom, Telia and former president Islam Karimov’s daughter.
Latsanych declines to speak about the probe, just saying it sold up because “we did not want to have a miniscule business – we wanted to be first or second in any market we compete in. So it wasn’t a business we wanted to compete in.”
This has not put the company off making further moves, however. He confirms that MTS took several looks at Serbia Telecom “but it didn’t happen”. It has also been approached about possible deals in Kazakhstan, but said there is nothing in the immediate pipeline.
“We would still look at other possible markets if there is an opportunity there,” he adds. “We’d only be looking at situations where the asset is generally depressed value and we understand the cash flow it generates is good enough to justify the investment, given the relative high cost of the capital in Russia.”