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August 3, 2012
Russian incumbent operator Rostelecom is doing whatever it takes to achieve its goal of becoming the country’s fourth largest mobile operator. This may involve a joint venture with a foreign firm in order to gain market share in the mobile sector.
On July 27, it announced the last stage of a plan to create a single mobile operation by gaining full ownership of Skylink’s operation under Rostelecom, with a rebranding exercise underway. Furthermore, this week, according to a source close to the deal, Rostelecom is in advanced discussions with Tele2 Russia, the fully owned subsidiary of Tele2 Group, to either consolidate the two companies’ assets and create a joint venture or for Rostelecom to acquire a majority share in Tele2 Russia in exchange for giving control of Skylink to Tele2 Russia along with cash considerations.
Despite Tele2 being a larger operator in terms of subscriptions compared with Rostelecom, this deal is still interesting to the operator. Tele2, the fourth largest mobile operator in the Russian market, currently holds 2G licenses in 43 regions across the country, excluding Moscow, which translates into strict limitations compared with other large mobile operators. Merging with Rostelecom will enable the Swiss investor to upgrade its network to 3G and 4G networks as well as to expand to Moscow, which is unlikely to be achieved by Tele2 Russia on its own. The other option would also permit Tele2 Russia — which only has 2G licenses — to eliminate its technological disadvantage compared with other large operators, because SkyLink alone holds UMTS (3G) licenses in 65 regions and would help Tele2 Russia expand to new locations (such as Moscow) where the operator does not have licenses to operate at the moment.
This is also an important move for Rostelecom, which has faced serious challenges competing in the mobile market and could hence use Tele2’s expertise. While year-on-year subscription growth for the total mobile market in Russian stood at 4.9% in 2011, Rostelecom (including SkyLink) underperformed with only 1.3%, while Tele2 impressed with 11% year-on-year subscription growth for the same year. In such a highly competitive market, where the “Big 3” mobile operators – MTS, MegaFon, VimpelCom – have already developed 3G networks and are starting to deploy 4G, it will be an uphill task for the incumbent operator to shift market power on its own.
Exhibit: Russian mobile market, year-on-year growth in subscriber terms, 2011
*In 2011 MTS was clearing its subscribers base, thus y-o-y growth does not reflect market growth.
Sources: Pyramid Research, operators
Should the two operators join forces under one option or another, we expect the combined unit to capture a 15% share of total mobile market subscriptions by year-end 2012, bringing their market share closer to that of the “Big Three” operators. This move will complement Rostelecom’s leading position on the fixed side, where it covers 43m households across the country, and will put it in a better position to compete in the overall telecom market with the “Big 3” operators that are stronger on the mobile side.
Exhibit: Mobile market share breakdown by operator, 2011
Sources: Pyramid Research, operators
-- AME Regional Manager Badii Kechiche contributed to this report.
— Olena Kaplan, Analyst
Related resources:
Russia Mobile Forecast
Forecast published quarterly
Pyramid's Mobile Forecasts have been widely used by clients for years. Our methodology looks at market segments, enabling technologies and marketing strategies. The 10 year quantitative forecasts consist of historical and projected information for over 80 countries, with a special focus on emerging markets. Key data points included in the forecasts are country demographics, macroeconomic environment, segmented technology and application adoption, usage and revenues, market shares of top players and capital expenditures in equipment.
Russia: Next-Generation Network Rollouts Drive and Bolster Revenue Growth
Country Intelligence Report published February 2012
Russia: Next-Generation Network Rollouts Drive and Bolster Revenue Growth offers a precise, incisive profile of the Russian converged telecom, media and technology sectors based on proprietary data from our research in the Russian market. It provides detailed competitive analysis of the fixed and mobile sectors, tracks the market shares of technologies and services, and monitors the introduction and spread of new technologies. Published annually, this study provides a comprehensive view of the communications market by analyzing key trends, near-term opportunities and upcoming risks factors.
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