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Keynote Address

STANDARD | Infocommunication Business in Russia and Emerging Markets | February 2011

Mobile Potential

photo: MegaFon


The size of Russian mobile broadband Internet access market will exceed $2 billion in 2010, according to experts’ estimates. It is the segment that becomes a priority in the development of the mobile communication market. According to operators’ statistics, only USB modem new connections doubled the size of this market in 2010 in comparison to 2009, and the penetration levels of mobile Internet access devices in Russia is already above 35 %. Valery YERMAKOV, MegaFon JSC Deputy General Director for Operation, speaks about development drivers in the telecom industry, about the common cellular market trends, forecasts and plans.

– In what direction the cellular communication market is moving today, from your point of view? – When Alexander Bell invented the telephone, a minute was the main measurement unit in telecommunication, and as voice was, and still is, the basic service, and it is measured in minutes, a common

knowledge has it. Switchboards and billing that processed necessary calculations were the key elements of network functioning in voice communication. But the telecom industry is evolving, and today we are facing the time when our market is satiated with voice services, and consumption growth is practically flat. This is what

I would call the first trend in the cellular communication market. The second trend is associated with the fact that voice communication will, in this or that way, embrace IP technologies. We are launching a huge program to transfer our networks to VoIP which will be completed in a few years. When this

program has been completed, the signal will be transported through IP connection without any coding or transformations from the moment when the subscriber initiates a call to the termination point. Voice traffic is transformed into data traffic. And it is absolutely clear that the megabyte, and not the minute, will be the measurement

Keynote Address 15

STANDARD | Infocommunication Business in Russia and Emerging Markets | February 2011

unit used by the telecom industry a few years later. Everything will be measured in megabytes. As a result, telecom operators will be transformed into ISPs, in fact. So we face this question: what will be the metamorphosis of the operator? The operator can be a “clever pipe” or a “stupid pipe”. I believe that the operator should not be just a “clever pipe”, they should be a “pipe” which, on the one hand, can process data traffic and, on the other hand, functions as a customer information portal. The customer is not interested in a simple data transfer service, he or she is interested in concrete information. People use their mobile devices to have access to concrete resources. So, in 5-6 years the telecom industry will be transformed from the industry processing voice and data to the industry that starts to embrace information. – This development requires matching data transfer speeds in networks. Do you count upon the development of 3G networks? What was your strategy of 3G network development in Russia regions, and what is it like now? – MegaFon was one of the first companies to get licenses for the deployment of a 3G network in 2007, and it was the first to deploy a commercial 3G network in St. Petersburg which was the biggest network of this type at that moment. We have been actively deploying 3G all over the RF territory since 2009. Today, having reviewed two versions of coverage (hot spot or carpet), we have chosen the strategy of high quality coverage of major populated centers where subscribers can use their 3G terminals. And this strategy was successful. Traffic rapidly grows when the customer doesn’t think where the connection is available. It resulted in an explosive growth of traffic in 2009, the increase was tenfold. We have already registered an eightfold increase of our network traffic in 2010. In 2010 we have launched commercial 3G networks in all Russian regions and provided access to high speed mobile communication networks to 65 %

of Russian residents. Our goal is to continue this development in 2011, and we expect that 95 % of our customers (and this is essentially 95 % of the Russian population) will have access to high speed Internet in the course of 2011. – Do you feel competition on the part of other players that do not belong to “big Russian three” (MTS, MegaFon and Vimpelcom dominate the Russian cellular communication market – Standart notes) using other technologies (like 2G, CDMA, 4G)?

Professional expertise of the staff which maintains the operation of a huge network is also important. About 20,000 people work for MegaFon. They provide technical support, network maintenance and services. The company invested about $300 mln. in personnel training and education programs to develop professional skills of its employees during the last 8 years. Every year we invest about $15 mln. in the retraining and competence building program for our technicians, for technologies come and go very quickly in the telecom industry, and it is important to stay in pace with them.


In the course of 5-6 years the telecom industry will be transformed from voice and data industry to the industry that will start to deal in information»

– There is difference between the “big three” and other companies, you know. The “big three” operators position themselves as federal level communication operators providing services in the territory of all the subjects of the Russian Federation, they offer a transparent system of rate plans, transparent customer management systems and the same standards. There are other companies operating in the regional markets. It is important to remember that all these companies face absolutely different conditions. So, today only three operators match the requirements of a federal player. Besides that, a federal level operator needs certain resources: it is a large network, first and foremost. Today the MegaFon network has about 30,000 base stations all over the country and more than 120 switches. We own one of the largest trunk line networks in Russia which can transfer all the traffic generated inside the company, reducing service cost. This helps our company to get a significant position on the fixed line access market.

The customer is mostly interested in a product, a service, the price or some innovation which makes his or her life more interesting, which improves it. In order to provide what our customers need, we mainly focus on investing – both in technology, and in people. This helps our company to be successful in the market. – How did the mobile broadband access ARPU change? – The Russian market is gradually transforming into a multi-device one: one subscriber can have several sim cards, some of them are used for consumer voice services, others provide data transfer services. As a result, ARPU remains practically flat, but there is growth, at the same time, as the customer uses several sim cards simultaneously. Value added services generate about 22 % of our returns. The growth is both relative, and absolute. About 50 % of VAS revenue is generated by data transfer services. This year data transfer revenue make up almost 12 % of the total revenue

of the operator. This figure is big enough – it was 6 % a year ago. We expect to get 15-16 % next year. This growth, we believe, is associated with the substantial increase in the number of customers which use data transfer services, and with the growth of consumption per every customer and of the average ARPU per the customer who uses data transfer. Quite often it is the same person who uses both data transfer, and voice communication services, so I would not treat these two figures separately. – What do you believe is behind impressive enough dynamics in the development of Russian cellular communication market? First and foremost, we should “thank” our rivals and the market as a whole for such a highly competitive environment where every operator is forced to seek new solutions to gain better results. It is very important today, and the Russia mobile market is a brilliant example in the economy of the country, the example of colossal results produced by high competition and reasonable government regulation. Russia has made a huge leap, as far as mobile communication is concerned, during the last decade. Its penetration in the Russian Federation was one of the lowest in the world 10 years ago – about 2 %. Today our country is one of the largest global markets according to the number of subscribers – it is the fourth market in the world according to the number of sim cards, and the second according to the communication penetration levels. And I believe that the success of our company has mainly been formed by the competition environment in the cellular market that urges players to offer high quality products for affordable prices. We do not fight our rivals, as a matter of fact, we strive to bear our customer interests in mind: we think what he or she needs, prepare the most affordable offers, and – the most important thing – we want to bring innovation into our customer’s life. And the operation which embraces such approach always wins.

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