At a glance
According to the data provided by the Russian Ministry of Economic Development in its monitoring report on the results of the social and economic development of the Russian Federation, in 2015 the total size of the telecoms market shrank by 1.4%, as compared to 2014 when it grew by 2%.
Among key industry trends, the Ministry of Economic Development points to a slowdown in the growth of mobile services provided to the population (the share of these services in total mobile communications services in the period January–September 2015 shrank to 85.1% from 86.8% in the period January–September 2014), which analysts attribute, in particular, to saturation in the mobile services market.
Experts at the Ministry of Economic Development note that, despite a challenging economic situation, leading Russian mobile operators remained active in 2015. In particular, they offered new services, continued to expand significantly the geographic coverage of high-speed 4G internet and LTE networks, suggesting that they anticipated considerable 4G and LTE traffic growth going forward.
According to TMT Consulting, the size of the Russian telecommunications market in 2015 reached RUB 1,674 bn, while analysts estimate the market’s annual growth in 2015 was 2.1% versus 1.7% in 2014.
This growth was driven by a significant increase in revenue from Pay-TV services, as well as the impact of changes in FX rates on settlements for wholesale services at the international level.
TMT Consulting predicts that in the next five years the rate of growth in the Russian telecoms market will slow to 1.3% per year on average, as a result of declining voice revenues which will be partially offset by increased revenue from mobile internet and value-added services. Its analysts anticipate that there may be a new breakthrough in the telecoms market linked to the introduction of 5G technology; however, commercial launch of such technology is not expected until after 2020. In the meantime, mobile operators will look to developing data centre and cloud services for further growth, with Big Data services being the most promising segment.
According to the forecast of the Ministry of Economic Development, despite a difficult macroeconomic situation and a slowdown in infrastructure construction, the mobile communications market will remain healthy. The industry will benefit from the geographical expansion of 4G and 3G networks, as well as growing consumption of mobile internet services and bundled tariff offers.
Cisco predicts that by 2020 the volume of mobile internet traffic will have increased eight-fold, growing at an average annual rate of 53%. Video content will account for 75% of mobile traffic in Russia. It is anticipated that 4G will take over as the prevailing technology in Russian mobile networks.
The Russian mobile communications market is characterised by high penetration rates and intense competition. According to AC&M Consulting, at the end of 2015 the total number of mobile subscribers in Russia totalled 251.9 m, up 4.8% year-on-year. The average mobile communications penetration rate across Russia reached 176.3%, while in Moscow and St Petersburg it exceeded 230%.
MegaFon is currently the second-largest mobile operator in Russia in terms of revenue and subscriber base, with a 29.7% market share in total mobile subscribers. 1
According to estimates by TMT Consulting, in 2015 the mobile communications segment accounted for about 58% of the total Russian telecoms market, although its rate of growth was lower than the market and - in the prior year (1.2% in 2015 against 1.9% in 2014).
1 Company’s estimate based on data provided by AC&M Consulting.
The traditional voice services segment, while remaining the largest segment of the mobile communications market, experienced a further decline in revenue. Due to the rapid development of 3G and 4G networks and growing popularity of OTT content, consumer focus is shifting from voice services to mobile data.
In a bid to support demand for voice services, all the “Big Three” operators have introduced special tariffs to increase on-net voice traffic. MegaFon’s range of tariffs includes the ‘Perekhodi na 0’ (‘Switch to Zero’) tariff which provides free minutes for on-net calls within the region in which the subscriber resides.
In 2015, data services remained the most rapidly developing segment of the Russian mobile communications market. In 2015, the Russian mobile data market grew by around 19%, to RUB 210.0 bn4, and the share of mobile data in total wireless revenues increased from 19.9% in 2014 to 23.7% in 2015. The main drivers for the data market growth were the increasing adoption of data-enabled devices, the rapid expansion of 3G/4G networks and the popularity of “data-heavy” content.
According to estimates by J’son & Partners Consulting, in 2015 there were approximately 93 m active SIM cards with mobile internet access in Russia and 52 m unique users. Mobile internet penetration in 2015 reached 64% against 58% in 2014. Mobile internet users are mainly the owners of smartphones or tablets. In 2015 the number of active smartphone users in Russia reached 68.2 m (up 28% year-on-year) and the number of tablet users was 13 m (up 26% year-on-year)5. According to Google6 , 85% of smartphone owners use the internet every day, spending 82% of their time using internet-enabled “apps”.
The number of LTE users continued to grow in 2015. According to J’son & Partners Consulting , the number of LTE users in Russia was in excess of 10 m at the end of 2015. J’son forecasts that by the end of 2020 this number has the capacity to approximately treble, coming close to 30 m. The main constraint on this growth is the likely slowdown in 4G investment due to the overall unfavourable economic situation and, in particular, the Russian rouble depreciation.
According to Cisco, in 2015 mobile internet traffic in Russia reached 224.6 PB per month, up 56% year-on-year. Mobile traffic grew on average twice as fast as fixed-line IP traffic. In 2015, every data-enabled device generated an average of 947 MB of data traffic per month (up 52% year-on-year), while smartphones consumed a monthly average of 1,493 MB.
For mobile operators providing mobile data services, revenue growth in 2015 did not correlate directly with data traffic growth. Revenue growth was slower than the growth rate for data traffic because of the extensive promotion of bundled tariff plans and packaged data tariff options where, the more traffic that is available in the package, the lower the cost of each megabyte of traffic becomes. According to J’son& Partners Consulting, the average cost of 1 MB of mobile traffic in 2015 was RUB 0.09, a reduction of RUB 0.04 year-on-year.
According to a forecast by J’son & Partners Consulting, by 2018 the number of mobile internet subscribers (SIM cards) will reach 121 m, a 31% growth from 2015. Internet traffic on mobile devices is anticipated to grow 2.6-fold in the next three years, driven by steady reductions in tariffs.
MegaFon is very well positioned to take advantage of the growing demand for data services and increased traffic due to the wide coverage of its 4G network and the high data speeds which it provides. According to the Federal Service for Supervision of Communications, Information Technology, and Mass Media (Roskomnadzor), the leading Russian mobile operators significantly increased the number of their LTE stations in 2015. The total number of active 4G base stations at the end of 2015 increased 2.1-fold year-on-year to more than 72 units. MegaFon owns 36% of the total number of 4G stations in Russia and provides 4G services in 77 Russian regions.
In 2015, Russian operators’ VAS revenues continued to grow. According to AC&M Consulting, at the end of 2015, the aggregate revenue from these services (short messaging, content services, e-commerce, etc.) was RUB 127.7 bn, up 3.0% year-on-year.
The share of VAS in the revenue structure of mobile operators keeps growing as well. In 2015, it averaged 14.4% of the total revenues.
The range of VAS services being offered is expanding. These new areas include M2M services, or the “Internet of Things” (IoT). M2M solutions have been widely adopted across the energy and utilities sectors to provide for wireless transfer and analysis of data generated by meters, as well as in security and other sectors. Using high-speed data transfer networks to make M2M services available appears to have - the highest potential in the medium term. In Russia, M2M solutions are mostly used in the transportation industry (taxis, information boards at public transport stops, traffic speed controls, etc.). MegaFon actively develops and promotes M2M services targeting mostly the B2B segment, but is developing some B2C solutions, as well. MegaFon has made product and service development in this area a major strategic priority (for more information see page).
iKS-Consulting estimates that at the end of 2015 the number of SIM cards in the M2M/IoT segment had reached approximately 8 m (up 20% year-on-year), with the B2B segment accounting for over 97% of the market. Industry analysts believe that in the coming years the M2M/IoT market will continue to grow rapidly, both in the B2B segment, which is far from being saturated, and in the B2C segment, where special tariff plans for device users in this segment are being introduced. According to forecasts by iKS-Consulting, in 2020 the Russian M2M/IoT market will grow to 26 m SIM cards, 18% of which will be used in the B2C segment, primarily in connected cars, “smart homes” and consumer electronics.
According to Cisco, in 2015 M2M modules accounted for more than 9% of connections in Russia, while one average M2M module generated 127 MB of mobile traffic per month. At the end of 2015, M2M connections accounted for about 1% of the total mobile data traffic.
Another key VAS area is digital media content, which comprises information and entertainment (e.g. game and video) content and mobile TV. According to Ericsson ConsumerLab, Ericsson’s research arm, in 2015 half of Russian internet users watched TV and video on their smartphones, which is almost 4 times more than in 2013. The Russian mobile TV market was driven by growing penetration of mobile gadgets, lower-priced mobile internet services and enhanced quality of 3G/4G infrastructure.
To develop mobile TV, which is gaining in popularity, in 2015 MegaFon updated its MegaFon TV service. Along with an expanded content base, the Company started offering movies, TV series and programmes in its ‘Vse vklyucheno’ (‘Everything included’) bundled tariffs. A user of the MegaFon TV service may watch TV on up to five devices using one account (for more information see page).
In 2015 the Big Data segment (Big Data collection, storage and processing technologies) experienced rapid growth. These technologies enable the analysis of customer preferences or marketing campaign performance, as well as risk assessment. For instance, Big Data is widely used in the telecommunications, trade and financial sectors, and in public administration. It is currently one of the fastest-growing IT markets. Frost & Sullivan analysts project that in 2015 the global market for Big Data technologies grew 32% year-on-year, or by USD 21 bn. Russia currently accounts for less than 1% of this market.
A number of Russian operators and IT companies are now engaged in developing the Big Data segment. MegaFon’s strategy has been, and continues to be, to develop its Big Data services as a value-added service and an efficient tool to drive performance for corporate and government customers (for more information see page).
1 According to J’son & Partners Consulting.
2 Based on data provided by Consumer Barometer, Google/Ipsos.
3 Roskomnadzor’s method of calculating the number of base stations differs from the one used by MegaFon.
4 Сompany’s estimate based on data provided by AC&M Consulting.
5 TMT Consulting.
In 2015, revenues continued to decline across all segments of fixed services, due to traffic migration to mobile networks and OTT services. TMT Consulting estimates that, in the past year, 1.8 m subscribers stopped using telephony services. The decline in revenue in this segment is estimated at 8.1% (the same as in 2014). Nevertheless, according to TMT Consulting, this business will still be viable in the coming years, though its penetration rate will drop to 34% by 2020 from the current 45%.
In 2015, shrinking fixed-line services resulted, in particular, in the reduction of revenue from services to corporate customers. Specifically, iKS-Consulting analysts estimate that revenue from business communications in 2015 fell 1.5%–2% to RUB 148 bn, whereas in 2014 it had grown 1.5%. Revenue from fixed telephony fell by about 5% (7%–8% for inter-city and international long-distance calls). This decline was partly offset by the growing revenue from data services (up by about 4%).
Meanwhile, a current prominent trend is for operators to offer a range of options enabling corporate customers to optimise their mobile and fixed costs, including bundled offers combining these options.
MegaFon is actively promoting fixed communication services for corporate and government customers, offering a comprehensive range of services and options. As a result of these, in 2015, MegaFon grew its fixed-line revenue by 5.6% year-on-year.
According to TMT Consulting, in 2015, the number of broadband subscribers (B2C customers) in Russia grew by 3.6% year-on-year to 29.9 m. Household penetration of broadband was 54% (up 2 p.p.). In 2015, the top five internet providers accounted for 67% of the B2C broadband subscriber base in Russia. Internet providers’ revenues grew 3.2% year-on-year to RUB 121.1 bn.
The B2C subscriber base in Moscow comprised 4.2 m customers, while the broadband penetration rate increased by 2 p.p. year-on-year to 90% . In 2015, the top five internet providers accounted for 90% of the B2C broadband subscriber base in Moscow.
The Russian fixed-line broadband market has reached saturation. The market growth rate keeps falling, and in the short term is not expected to exceed 1%–2% . This slowdown is largely due to market saturation in large and medium-sized cities; spread of wireless technologies (primarily LTE); slowdown in network construction by Russia’s largest operators due to the Russian rouble depreciation and the resulting higher costs of infrastructure equipment; and increasing price competition. With opportunities for organic growth nearly exhausted and the positions of some local players weakened, the market may see a rise in M&A activities and further consolidation in the industry.
According to iKS-Consulting, in 2015, the Pay-TV market grew by 11.7% to RUB 68.4 bn. The number of households subscribed to Pay-TV services increased by 5.4%, reaching 39.2 m, while the number of digital TV subscribers grew by 7.9% to 23.9 m. Pay-TV penetration rate is nearly 70%.
One of the key trends in recent years has been the dynamic growth of the digital TV segment with a simultaneous decline in analogue connections. At the end of 2015, about 61% of the total Pay-TV subscriber base used digital TV services. Demand for digital TV services is driven by the development of new technologies (IPTV, OTT), falling prices of digital TV equipment (offered by many operators for a small lease fee or free of charge), along with the universal availability of satellite TV.
The Russian Pay-TV market is controlled by five largest players whose combined share of the market is 72% by subscribers, and 64% by revenue .
The increasing affordability of mobile services, the need for “heavy” content (video and music), and the expansion of data transmission continued to stimulate demand for data-enabled sophisticated, high-performance devices in 2015.
In 2015, for the first time in several years, smartphone sales fell in unit terms as a result of reduced personal incomes caused by the generally unfavourable economic situation. At the same time, the sales volume in roubles increased. According to Evroset’s preliminary estimates, in 2015, smartphone sales in Russia declined by 8.4% year-on-year in unit terms to 25.5 m units. However, in monetary terms, the smartpnone market size was approximately RUB 258 bn, up 5% year-on-year. The discrepancy was largely due to higher per unit prices in 2015: the average smartphone price was RUB 10,100 against RUB 8,800 a year earlier.
As reported by the Svyaznoy retail chain, all in all, the share of smartphones in total mobile handset sales in 2015 was about 70% in unit terms and close to 95% in money terms.
According to Svyaznoy, the increase in prices moved many data-enabled devices into higher price categories. In 2015, sales in the cheapest smartphone segment (under RUB 3,000) dropped on average by 25% year-on-year, while sales of expensive units (over RUB 30,000) increased manyfold. Meanwhile, LTE smarphones performed much better that the market in general. The share of LTE smartphones exceeded 20% of total smartphone sales in unit terms.
According to J'son & Partners Consulting, 6.2 m tablet PCs were sold in Russia in 2015, a decline of 33% year-on-year. This trend is not limited to Russia: global sales of tablet PCs also fell by 10% in unit terms. However, the global sales have not plummeted as dramatically as sales in the Russian market. The main reasons for shrinking sales in Russia were the unfavourable economic environment and an oversupply of inventory.
Along with sales declines in unit terms, the average device price fell as well: from RUB 8,600 in 2014 to RUB 8,400 in 2015. This was due to the rouble depreciation and wider penetration of cheaper devices (B and C brands), along with a reduction in the number of producers offering premium tablets in the market.
The main trend in 2015 was the growth of sales of phablets (smartphones with screens of five inches or more), which for the first time overtook the sales of tablet PCs. Phablets appeal to consumers because they offer a potential for cost optimisation as users buy “two-in-one” devices rather than smartphones and tablet PCs separately. Phablet sales also grow as multimedia mobile content gains popularity and 4G technologies spread and get cheaper.
According to Evroset, in 2015, 7.5 m phablets were sold in the Russian market (as compared to 4.8 m in 2014), and revenue from phablet sales grew by 63% y-o-y to RUB 101 bn.
Retailers note that phablets have become more popular because they can be placed in the medium and low price segments: this kind of device can now be purchased for under RUB 5,000. At the same time, while the average smartphone price grew by 10%–11% y-o-y in 2015, the average phablet price remained flat throughout the year at around RUB 12,800 .
Sales of modems and routers in Russia have been declining every year. Smartphones and tablets are becoming devices of choice for internet access because they are small, do not need additional equipment to provide a fully operational internet connection, and can themselves serve as access points. Falling sales of USB modems are also due to the shrinking laptop market .
The market and operating environment are continually impacted by regulatory developments.
In 2015, significant changes in the field of processing internet users’ personal data were made. In particular, from 1 September 2015, Russian citizens’ personal data must be recorded, systematised, accumulated, stored, clarified and retrieved through databases located within the territory of Russia. Further amendments to the regulation of internet users’ personal data processing are expected to be introduced in the future. Specifically, in accordance with the list of instructions issued by the Russian President following the meeting with participants of the First Russian Internet Economy Forum that took place on 22 December 2015, federal executive authorities are to present their legislative proposals on the regulation of the processing on the internet of personal data of Russian citizens. MegaFon expects that it will be able to comply with the new requirements; however, this compliance may entail additional costs for the Company.
In November 2014, the Government of the Russian Federation amended the procedure for setting up data communications networks for federal government bodies. Instead of using a tender process, federal bodies may now connect to the Government’s data communications network administered by one of the communications operators. In 2015, the Russian Ministry of Telecom and Mass Communications issued a decree to support the implementation of this initiative, and guidelines were developed for the design of data communications networks of federal government bodies. The implementation of this regulatory initiative could result in MegaFon losing B2G market share in the provision of data transfer and telematics services to federal government bodies. However, during public procurement tenders in 2015, MegaFon retained all of its key government clients.
During 2015, the Government Communications Commission considered amendments to existing regulations regarding inter-operator cooperation.
In January 2015, a decision was taken to gradually amend these regulations. The decision was made at a meeting of the Analytical Centre at the Government of the Russian Federation attended by representatives of the Presidential Administration, heads of federal executive bodies, and top managers of fixed and mobile operators. The first phase of this development initiative involves measures to determine a single rate for calls within individual regions of the Russian Federation. It also involves simplifying the requirements concerning traffic transfer at relevant connection levels.
At the second stage, in around two years’ time, authorities are expected to consider possible methods of regulating inter-operator cooperation among fixed operators and mobile operators, taking into account the technological, financial and socio-economic implications of such changes.
On top of that, in December 2015, the Government revisited the issue of regulating call termination rates set by mobile and fixed operators. Various regulation scenarios have been examined to assess their potential impacts on the Russian communications industry, along with international experience of regulating inter-operator cooperation.
The implementation of the Government’s initiatives may lead to lower call rates and reduced telecoms services costs.
We are also aware of a number of other regulatory changes concerning our industry that need to be monitored and for which we should be prepared.
Further information about the way the Company addresses these challenges is available in the “Risk Management” section.
MegaFon’s key competitors include
1 Company’s estimate based on data provided by AC&M Consulting.