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Data transformation

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Specially for Changellenge Cup Russia 2013

Moscow, 29 April, 2013

Changellenge Cup Russia, 2013

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Svyatoslav Dulyaninov Zamaletdinov Artemiy Artem Kasatkin Anton Boyko 0


TurboBoys, team members Artemiy Zamaletdinov

Anton Boyko

Risk Management

Financial analysis & structuring

Financial analysis

Market analysis

Artem Kasatkin

Svyatoslav Dulyaninov

• MGIMO, 4 year • Winner of Fincontest ’12 • Finalist of FinOpen’12 • Internship in Ernst&Young • kasatkin.artem@yandex.ru

Changellenge Cup Russia, 2013

• MGIMO, 3 year • Finalist and prize-winner of various case competitions • dulyaninov.svyatoslav@gmail.com

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• MGIMO, 3 year • Experience of working in startups • UNCTAD internship • zamaletdinovartemiy@gmail.com

• MGIMO, 3 year • Finalist of FutureToday Changellenge Cup Moscow • anthonyboyko@gmail.com


Agenda MTS overlook Market trends and possible ways of action Monetization

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Promotion Infrastructure Summary Appendix

Changellenge Cup Russia, 2013

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Agenda MTS overlook Market trends and possible ways of action Monetization

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Promotion Infrastructure Summary Appendix

Changellenge Cup Russia, 2013

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MTS shows positive dynamics expanding into the Russian market and reaping benefits VAS1, Russia, mln rub 120.000

High case (16%) Base case (11%) Low case (7%)

100.000

Retail chain evolvement, Russia, number of outlets 4.462 4.147 3.260 1.250

80.000

3.523

1.573 1.686

1.196

+26% 40.000

2.010

2.327

2.461

2009

2010

2011

2.889

0 2008 2009 2010 2011 2012 2013 2014 2015

Franchise

Key assumptions

•High and low case growth rates are constant, in line with benchmarks •Base case growth rates fluctuate slightly based on sundry forecasts

Changellenge Cup Russia, 2013

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MTS revenue from value added services is steadily growing as well as the expansion and thus presence in the regions. 900 towns

1. Value added services Sources: MTS annual reports, vesti, team estimates

2012

71,23 mln subscribers 4

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60.000


Agenda MTS overlook Market trends and possible ways of action Monetization

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Promotion Infrastructure Summary Appendix

Changellenge Cup Russia, 2013

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Consumers are more and more engaged with their mobile devices, but they are talking less Weight of daily minutes of usage, 2011

Year-on-year growth in daily minutes of usage, Europe, 2010-2011, % Browsing social networks on mobile device

44

Reading / writing e-mail on mobile device

18 17

Downloading apps/video on mobile device

16

Listening to music streamed on mobile device

12

Talking on a mobile phone Talking on fixed-line phone

45%

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Watching videos on mobile device

34%

-4

21%

-17

This trend makes MTS face the challenge of changing business environment and the necessity of developing a new approach to the market Sources: McKinsey quarterly, team analysis Changellenge Cup Russia, 2013

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While market volume is rapidly increasing Russian companies fail to respond accordingly thus getting no extra profits

1.200 1.000

120

Value Volume

Mobile data market volume&value in Europe, bln euro, petabytes Petabytes Bln euro

12.000

100

10.000

80

8.000

120

Value Volume

100  80

+34%

766

800

+67%

60 6.578

60

550

600

6.000 +120%

+171% 400

40

4.000

20

2.000

5.121

20  0

3.200

247 200

- 20

75 0

0 2010

2011

2012

40

1.055

- 40 - 60

0

2013

2010

2011

2012

2013

European mobile operators are more fortunate in making use of increasing mobile traffic, while Russian companies, including MTS have to act as soon as possible to turn the situation to advantage. Sources: Statista, Megafon annual report, team estimates Changellenge Cup Russia, 2013

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Mobile data market volume&value in Russia, bln rub, petabytes Petabytes Bln rub


The way to tackle the challenge lies in improvement of the current business model for mobile data transaction

Increase data traffic

Optimize monetization

Sources: team analysis Changellenge Cup Russia, 2013

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Monetization

Increase sales

Increase number of users

Increase time online

Promotion

Improve current business strategy for mobile data

Increase traffic per user

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Optimize cost structure

Infrastructure

Increase connection speed


Agenda MTS overlook Market trends and possible ways of action Monetization

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Promotion Infrastructure Summary Appendix

Changellenge Cup Russia, 2013

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Monetizing users who spend more time online with multiple devices with new ÂŤShared data bundlesÂť Share of respondents using one or more of the selected mobile devices, %

Minutes per day spent on each device, indexed

PC

Smartphone

Tablet

7

PC and smartphone

73

27 100

11

Laptop

5

x2 Tablet

Plus a tablet

109

69

44

223

None1 15 1 They access the internet through a desktop

Offers targeting owners of multiple devices (a large monthly data allowance) can enhance ARPU and reduce churn by increasing stickiness.

Sources: McKinsey, press, team analysis Changellenge Cup Russia, 2013

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27

33

Smartphone


Consumers are willing to pay on top of their bill to be able to watch the same video content on different screens Share of respondents ready to pay more, %

100

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40

32

22 6 5-10% more

Sources: McKinsey Changellenge Cup Russia, 2013

10-20% more

30-50% more

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50% more

Total

11


LTE is increasing the rate of market change that MTS needs to capitalize on through innovative billing system Very short time to market a growing range of offers to an increasingly segmented market

High speed LTE

Data-led services

Diversity of content

Shifting consumer dynamics

Roaming Getting Customers Using Data Roaming by Providing Cost Transparency

Changellenge Cup Russia, 2013

Providing OTT and VAS Bundles Leveraging VAS to Deliver Value to Customers

Policy Controls Providing the Ability to Control Product Features

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Dynamic Offers Providing the Foundation for Value Based Pricing

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Dynamic Services

Simple Pricing for Basic Bundles Encouraging Data Adoption and Usage

12


Introduction of Joyn RCS to Russian market will allow MTS to monetize considerable part of data traffic Value for the client and the company Value for the client

•Launching an RCS •Repulse the attack of OOT services •New torrent of profits •Gaining new segments

•Instant messaging (+group chat) •File share •Video/voice call •Geo location push •Central message storage (cloud) Copyright @ 2013 by TurboBoys. All rights reserved.

Value for the company

Strategy of launching Joyn by MTS

2014

2015

•Contract with Jibe mobile •Free roll-out of Joyn

•Including Joyn service in a

software •Drawing attention to the product and furnishing value to the client Sources: joyn.com, case data, team analysis Changellenge Cup Russia, 2013

2016

Implementing the service tariff plans as an integral part within M2M operations of it, thus no extra pay

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New data plans for smartphones and other phones will increase ARPU

Unlimited Hardcore

Social Networking

Lite

Lite surfing and mail

Changellenge Cup Russia, 2013

Basic surfing, mail+chat

Basic surfing, mail+chat and social networks

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Media content (videos, music), videochat

Unlimited consumption at the highest speed

14

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Basic


MTS monetization strategy includes introduction of crosschannel target marketing system MTS has a large audience for target marketing

1M monthly mobile internet users

1,7B monthly impressions

Sources: Mincomsvyaz, MGTS, case materials Changellenge Cup Russia, 2013

9M monthly paid TV viewers

576M monthly impressions

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•

•

An ad platform allowing brands to target audiences based on aggregate demographic data from TV programs watched or mobile traffic consumption Potential to monetize existing and future MTS mobile data traffic from users.

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0,65M monthly MGTS internet users

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M2M market will increase seven-fold with MTS capitalizing on value rather than raw data M2M market growth in 5 years, thousands of devices

Health e-care or security monitoring revenues in two business models

53779 Security systems Industry, energy Health e-care Payment&retail Consumer goods Transport Highest available data speed Premium for prioritization of data trafic

6437

2013

2018

We think that the most promising areas are transport, energy, consumer electronics and health e-care. Sergey Irevli Sources: J’son & Partners Changellenge Cup Russia, 2013

Preventive care premium

Raw Data

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x7

Healt insurers partnership

Value

MTS will increase revenue from M2M services based on market growth and innovative business model

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Agenda MTS overlook Market trends and possible ways of action Monetization

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Promotion Infrastructure Summary Appendix

Changellenge Cup Russia, 2013

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Taking into account current data consumption by devices and operating systems‌ Mobile data traffic by device, Exabytes per Month Nonsmartphones M2M Other portable devices Tablets Laptops Smartphones

4,9

2,9 2013

2014

2015

2016

2017

Megabytes per Month by Operating System

Android smart phones create greatest opportunity to increase traffic per user

2012 2011

1,610 1,108 1,300

968

782

Android

iOS

Proprietary

911 481

PalmOS

Windows

Sources: case data, Cisco Mobile Data Traffic Forecast 2013 Changellenge Cup Russia, 2013

Linux

Blackberry

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Symbian

18

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2012

7,5


…to increase data consumption per user we recommend to enhance subsidy of smartphones with larger screens Correlation matrix: screen size vs data use via cellular connection

100

Daily data downloaded (MB)

90

- Devices contributing data

80  70  60  50 Copyright @ 2013 by TurboBoys. All rights reserved.

40  30  20  10  0 0,0

5,2 5,4 5,6 5,8 6,0 6,2 6,4 6,6 6,8 7,0 7,2 7,4 7,6 7,8 8,0 8,2 8,4 8,6 Screen area (sq inches) Each additional square inch of screen area leads to 288MB of extra data downloaded per month

Sources: case data, OpenSignal, team analysis Changellenge Cup Russia, 2013

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To provide access for all devices we recommend to aggressively promote MTS 4G Connect module

Positioning as an all-inone will increase traffic by 23%*

*: increase in household and small business sales Sources: case data, team analysis Changellenge Cup Russia, 2013

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Home broadband Wi-Fi environment


Youths have 1,5 - 2,0 times the penetration for mobile data traffic compared with older users Penetration rate of device ownership

Penetration rate of digital activities

Online video

63 38

58

1,7x

86

Social networks Tablet

65

19 13 VoIP/video chat

1,5x Youth users Adult users

OTT video

23

1,3x

44 1,9x

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Smartphone

85 1,5x

41 22

+86%

Youth drives adoption of many devices and services. MTS can’t fail to gain attention of the young segment . Sources: McKinsey iConsumers Life online Changellenge Cup Russia, 2013

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Taking into account current trends in mobile traffic, we recommend to position new services in 18-34 year segment Monthly Data Usage by Age (MB)

578

534

412 321 264

232

177

Age:

133

122

90

59

13-17 2010

18-24

25-34

35-44

45-54

55-64

30

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216

70

65+

2011

People with high mobile traffic are more likely to be interested in LTE speed Sources: case information, Nielsen Changellenge Cup Russia, 2013

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Agenda MTS overlook Market trends and possible ways of action Monetization

Copyright @ 2013 by TurboBoys. All rights reserved.

Promotion Infrastructure Summary Appendix

Changellenge Cup Russia, 2013

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Employing LTE has high potential for MTS’ traffic augmentation LTE devices sales growth in Russia, millions of units +2.519%

LTE subscriber base growth in Russia, million people 15

5,50

0,50 10

+58%

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1,70 6

0,21 0,01 0,10 0,10 2012 Tablet PCs

3,30

1,5 USB devices

2015 Smartphones

2013

2

2014

2,5

2015

2016

2017

2018

Sales of LTE devices are going to triplicate by 2015 and demand for LTE services is projected to grow exponentially, while negative shift of the trend is unlikely Sources: J’son & Partners Consulting, team estimates Changellenge Cup Russia, 2013

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Gradual expansion will ensure the LTE coverage of 75% of Russia’s territory 2013

2014

2015

Medium coverage

High coverage

2016

2017

2018

No LTE coverage

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• 7 regions

Far East

North-West Center 2000

40 Povolzhye

Ural

Siberia

South 40

Sources: team estimates, MTS report, team estimates Changellenge Cup Russia, 2013

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Gradual expansion will ensure the LTE coverage of 75% of Russia’s territory 2013

No LTE coverage

2015

2016

2017

2018

• 14 regions

Medium coverage

High coverage

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• 7 regions

2014

Far East

North-West Center 2312

768 Povolzhye

Ural 624

Siberia

South 456

Sources: team estimates, MTS report, team estimates Changellenge Cup Russia, 2013

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Gradual expansion will ensure the LTE coverage of 75% of Russia’s territory 2014

• 7 regions

2015

• 14 regions

No LTE coverage

Medium coverage

2016

2017

2018

• 22 regions

High coverage

1307

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2013

Far East

North-West Center 2312

1243 Povolzhye

Ural 743

Siberia

South 931

Sources: team estimates, MTS report, team estimates Changellenge Cup Russia, 2013

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Gradual expansion will ensure the LTE coverage of 75% of Russia’s territory 2014

• 7 regions

• 14 regions

No LTE coverage

Medium coverage

2015 • 22 regions

2016

2017

2018

• 33 regions

High coverage

1961

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2013

Far East

North-West Center 2312

1243 Povolzhye

Ural 1200

Siberia 2615

South 931

Sources: team estimates, MTS report, team estimates Changellenge Cup Russia, 2013

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Gradual expansion will ensure the LTE coverage of 75% of Russia’s territory 2014

• 7 regions

• 14 regions

No LTE coverage

Medium coverage

2015 • 22 regions

2016

2017

• 33 regions

• 50 regions

2018

High coverage

2214

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2013

Far East

North-West Center 2565

1749 Povolzhye

Ural 1200

Siberia

3536

2615 South 1437

Sources: team estimates, MTS report, team estimates Changellenge Cup Russia, 2013

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Gradual expansion will ensure the LTE coverage of 75% of Russia’s territory 2014

• 7 regions

• 14 regions

No LTE coverage

Medium coverage

2015 • 22 regions

2016

2017

• 33 regions

• 50 regions

2018 • 60 regions

High coverage

2214

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2013

Far East

North-West Center 3159

1749 Povolzhye

Ural 2389

Siberia

3833

2912 South 2031

Sources: team estimates, MTS report, team estimates Changellenge Cup Russia, 2013

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The expansion will be profitable for MTS in any scenario Return on investment, bln.dollars.

Required investments for expansion, bln.dollars.

7

0,93

5,57

1

0,65

0 2013 2014 2015 2016 2017 2018

2013 2014 2015 2016 2017 2018

Total

Revenue (high scenario) Total investments Revenue (base scenario)

6  5

1,58

4

1,02

3

0,74

2

0,65

LTE expansion from 2013 to 2018 will require 5.5 billion dollars, reaching breakeven point by 2018 Sources: team estimates, MTS report Changellenge Cup Russia, 2013

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Revenue (low scenario)


Employment of femtocells will increase MTS’ mobile traffic Femtocell units in Russia and in USA, October 2012

Average download speed in Moscow, %

1,7 million

Beeline MTS

-87%

0

+849.900%

10  20  30  40  50  60  70  80

Average upload speed in Moscow, %

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The technology is not widely used in Russia yet it has potential

Megafon

Beeline MTS

2 thousand

-56%

Russia

Megafon

0  10  20  30  40  50  60  70  80  90 Low speed Medium speed High speed <200kb/s 200-1200kb/s >1200kb/s Sources: team estimates, Expert, J’son & Partners Consulting Changellenge Cup Russia, 2013

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2 thousand USA

MTS can gain competitive edge by improving mobile internet connection quality and femtocells are the solution

32


Eliminating ‘blind spots’ in Moscow will significantly increase the quality of MTS’ services Blind spots with no coverage in Moscow center

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All the operators have the ‘blind spot’ problem Femtocell is a cheap and efficient way of solving it.

Blind spot area Sources: team estimates, Expert, Moscow Government IT dept Changellenge Cup Russia, 2013

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Eliminating ‘blind spots’ in Moscow will significantly increase the quality of MTS’ services Blind spots with no coverage in Moscow center

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Getting rid of ‘blind spots’  will allow MTS to take a lead in quality and gain advantage over competitors.

Employment of femtocells has been approved by regulations in 2012. The market is likely to explode, following the global trend.

Femtocell-equipped area Sources: team estimates, Expert, Moscow Government IT dept Changellenge Cup Russia, 2013

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Agenda MTS overlook Market trends and possible ways of action Monetization

Copyright @ 2013 by TurboBoys. All rights reserved.

Promotion Infrastructure Summary Appendix

Changellenge Cup Russia, 2013

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Strategic timeline November 2014: • New flexible billing system deployed • Move from tiering pricing to valuebased pricing

2014

July 2015: • Free Joyn roll-out • Major partnerships with 3rd party content providers

2015

September 2015: New tiering pricing with 4G upgrade available for certain MBB plans + Pure 4G offer “What plan fits  your need?” “Can be  upgraded to 4G”

2016

Changellenge Cup Russia, 2013

2017

October 2017: • M2M project rollout: mobile revenues triple

2018

September 2016: New pricing with 4G included in three additional data plans + router option "Give your all gadgets the maximum connection" "4G router and 3 months of maximum speed included” (Oct 2011 campaign offering max speed of 80 Mbit/s to all 4G plans)

“4G included” Sources: McKinsey, press, team analysis

August 2016: • Development of M2M value based applications • B2B target marketing solution

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January 2014: • Mobile tariffs: smartphone, shared data bundles • Develop data-based billing system


The initiatives proposed will boost LTE penetration and hence change revenue structure: 90% - traffic revenue Iniatives

MTS LTE subscribers

Technical part  Enhancing infrastructure by building new stations and femtocells

Thousands

10.000

600 90% of total revenue comes from mobile data processing

450

Pricing  Value-based pricing Services  Launch series of new services, including data heavy videoservices such as exclusive access for tablets  Joyn launch

50

Promotion  Focusing on youngsters, aggressive marketing  Promotion of wide screen devices and 4G module Sources: team analysis and estimates Changellenge Cup Russia, 2013

June 2012

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October 2012

Actuals

June 2013

2018

Target

37

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+2.122%

Devices  Broadens devices portfolio from PC data only to tablets and smartphones with tethering feature


Agenda

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Appendix

Changellenge Cup Russia, 2013

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Backup: Go-To-Market approaches vary widely, depending on the market context and individual competitive position LTE pricing versus 3G

How can 4G grow revenues?

Market expansion (new services and customer segments)

Gain market share (attacker proposition) Changellenge Cup Russia, 2013

 In Austria, the top telcos charge a significant price premium for LTE (~100-150% more than HSPA+) but still quite in trial stage

Key findings  No one-size-fits  First mover with willingness to develop a technology all rationale for LTE image and change the market share game deployment Potential to grow residential mobile broadband in  Market context areas not covered by DSL and player position First mover with willingness to underline innovative technology position in mobile  Strong plans to develop and sell new services with 4G broadband are key for LTE GTM  Strong focus on fixed broadband/ telephony market  LTE products and (LTE offer for rural DSL "white spots“ and DSL pricing very specific substitute in urban areas) to player priorities Attackers founded network joint venture in Sweden and are aggressively marketing their mobile broadband products to increase market share

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Price premium (speed, quality of service)

 > 50% premium for 4G offers (€11/month)  First mover strategy in Sweden by the incumbent and in Norway by the attacker


Backup: The major part of mobile data traffic in Russia comes through usage of USB devices 2012 Type of gadget 2,5

22,5

40,5

Average internet traffic, mb/month

450

303

<50

≈120 Petabytes of information traffic in 2012

x3,6

≈ 430 Petabytes of information traffic in 2012

≈ 550 Petabytes of information traffic in 2012

Cellphones smartphones tablets ≈120 Petabytes

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Number of subscribers, mln

USB modems ≈430 Petabytes

Sources: J’son & Partners, Megafon annual report, team estimates Changellenge Cup Russia, 2013

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