Mobile voice

The traditional voice services have remained the largest segment of our business; however the share of voice revenue in total revenue has been declining every year due to growing mobile data usage and the increasing popularity of OTT content. Despite the decline in revenue, mobile voice communications remain an in-demand service and a part of everyday life in modern Russia. As such, we are committed to the ongoing development of this segment. Furthermore, the potential for achieving high levels of gross margin remains strong for voice services.

In 2015, the majority of MegaFon’s product initiatives in mobile voice services focused on growing the volumes of voice traffic within MegaFon’s own network (on-net voice traffic) and increasing the proportion of subscribers using our ‘Vse vklyucheno’ (‘Everything included’) bundled tariffs.

To increase on-net traffic consumption in July 2015 we refined our ‘Perekhodi na 0’ (‘Switch to Zero’) tariff, introducing free on-net calls within the region in which the subscriber resided. Our marketing initiatives in the voice segment were mostly focused on promoting this tariff plan.

To increase the proportion of subscribers using bundled tariffs we actively promoted our bundled tariff line ‘Vse vklyucheno’, which represents a package of voice minutes, messages and mobile data traffic to stimulate take-up of these tariff packages. The marketing campaigns with special price offers for ‘Vse vklyucheno S’ for RUB 190/month held in March 2015 and for ‘Vse vklyucheno M’ for RUB 290/month held in November–December 2015 enabled us to double the share of customers using the ‘Vse vklyucheno’ bundled tariffs. In March 2016, we transformed our bundled tariffs and tailored them to meet the specific needs of each individual branch according to the local consumption patterns for each service type.

In 2015, our ‘Perekhodi na 0’ tariff and the bundled tariff line ‘Vse vklyucheno’ were the most popular among our subscribers, accounting for 40% and 31% of new subscriptions, respectively.

The deployment of VoLTE (Voice over LTE/Long Term Evolution) technology, a voice service based on the 4G mobile wireless communications standard, to be launched in the nearest future, will become an important milestone in the development of both voice and LTE services. VoLTE’s key benefits include faster call setup times (less than a second), high quality of voice communications creating the effect of presence, and an option to shift part of the voice traffic onto the LTE network, reducing the load on our 2G and 3G networks. As of 31 August 2015, trial VoLTE calls were available on our 4G network in MegaFon’s Stolichny Branch (Moscow and Moscow region). VoLTE will be commercially launched as soon as all necessary approvals are obtained from the industry regulator.

Mobile data

Mobile data remains the key growth driver for our business. In 2015, we focused on developing our 4G and 3G networks by expanding the coverage and improving the quality of communications, stimulating higher mobile data usage through special price offers, new offers, and upgrades of our tariffs and internet options, and promoting data-enabled devices in our controlled retail channels.

In 2015, we upgraded our ‘Vse vklyucheno’(‘Everything included’)packages and internet options, significantly increasing the amounts of available data traffic without increasing the price. Specifically, we doubled the amount of traffic available under the ‘M’ and ‘L’ internet options, increasing the amount of traffic available during the day to the amount available at night-time.

We also introduced two new internet options for tablet users — ‘Internet Tablet XS’ and ‘Internet Tablet S’, available throughout Russia. The ‘Internet Tablet XS’ option was launched for tablet owners who mostly use Wi-Fi networks and rarely use mobile data. As part of the offering, customers subscribing to the option get free 600 MB of traffic per month (20 MB per day) and if they need more traffic on certain days, they can activate an extra mobile data allowance option for an extra charge. At the end of 2015, 75,000 customers were using the option. The ‘Internet Tablet S’ option was launched to target more active tablet users, who get a certain mobile date amount for a monthly subscription fee.

DSU¹,(MB per month)²

1  _{DSU (monthly average data services usage per user) is calculated by dividing the total number of megabytes transferred by our network during a given period by the average number of data services users during such period and dividing the result by the number of months in such period.}
2  _{Some of the operating KPIs presented here vary from those reported earlier due to the change in methodology for data service users calculation. Data service user is defined as a subscriber who has consumed any amount of data traffic within preceding month.}

In September 2015, we ran a marketing promotion to boost 4G internet consumption, under which subscribers for the ‘Internet S-XL’ line were given an extra 4G data allowance good through the end of the year, which was equal to the data allowance already available under their existing plan.

In November 2015, we offered our customers a completely unique product – a driver’s tablet, which is a plug-and-play complete packaged solution. The package includes a tablet, tablet car charger, in-car tablet holder, and pre-activated ‘Internet S’ option. The package was priced at RUB 2,490. This was the first solution of its kind offered in the Russian market. The pre-activated internet option enables our customers to use the device not just to navigate the car, but also to read news online or use social media without leaving their car.

By the end of 2015, MegaFon’s data service user base increased 6.8% to 29.9 m people. At the same time, the number of data service users in Russia grew by 6.9% to 29.3 m, accounting for 39.2% of our overall subscriber base in the country. This growth was driven by our marketing efforts, continued development of our 3G and 4G networks, higher penetration rates for data-enabled mobile devices, and promotions in our controlled retail channels. At the end of 2015, the share of data-enabled devices on the MegaFon network increased to 53%.

In 2015, as mobile data usage grew, DSU (monthly average data services usage per user) in Russia increased by 25.7% year-on-year to 3,286 MB per month. Our ARPDU (average monthly revenue per data services user) increased by 10.4% year-on-year to RUB 233. Overall, in 2015, our revenue from mobile data services was RUB 79.9 bn (or 25.5% of total revenue), up 19.0% from 2014.

In 2015, the increase in the volume of traffic was driven mostly by traffic in our 4G network, which grew 45% year-on-year, accounting for approx. 40% of the total traffic. As of 31 December 2015, 7.85 m 4G-enabled devices were registered on the MegaFon network, up 34% compared to 2014.

With the active development of 4G networks, subscribers are becoming more demanding of the quality of data transmission services they get. As services such as audio streaming, HD video, online games, and social media are gaining in popularity, and consequently boost the volumes of traffic flows, customers increasingly seek consistently high-speed data services and fast response times. Therefore, ensuring adequate network capacity is on top of the current agenda for operators.

To address this need Megafon commercially launched the 4G/LTE-Advanced standard in 2014. It is currently the most advanced standard in mobile data services, enabling subscribers to use video chats with no video or sound latency, watch TV programmes or HD movies online, and download large image galleries or archived files virtually wherever they are. At the end of 2015, LTE-Advanced services were available in nine major Russian cities at speeds of 150 Mbit/s–450 Mbit/s.

In 2015, MegaFon continued to roll out its LTE-Advanced network based on the existing 4G base station infrastructure. At the end of 2015, LTE-Advanced 4G high‑speed internet services with the speeds of 150 Mbit/s‑450 Mbit/s were available to subscribers in nine major Russian cities.

MEGAFON 4G NETWORK ROLL-OUT MAP

Mobile devices

The sale of our branded (customised) affordable data-enabled devices is one of the key elements of our marketing efforts to promote higher data usage among customers. MegaFon sells the following types of branded mobile devices: smartphones, tablets, WiFi routers and modems. At the end of 2015, the Company’s portfolio comprised 50 models of MegaFon-branded devices, including eight smartphone models and three tablet models. In addition, our product range included 29 models of 4G-enabled devices.

In 2015, to stimulate sales of branded devices we ran several marketing promotions offering MegaFon Login smartphones and big-screen MegaFon Login phablets at MegaFon Retail stores specially priced for customers subscribing to MegaFon’s internet option or tariff plans. We also promoted our branded routers, in particular MegaFon MR300 router, which was offered at a reduced price.

MEGAFON BRANDED DEVICES SOLD¹

1  Sales of own-branded devices via controlled retail channels, including MegaFon Retail, Euroset and franchised stores.

B2X telecommunication services

Across our B2X portfolio, which combines the B2B, B2G and B2O segments, we provide a full range of telecoms services, with a focus on connecting employees, and monitoring and managing corporate SIM cards and devices. MegaFon’s sustained growth in the corporate segment is driven by our commitment to deliver high reliability and assured quality of service, flexible tariffs, and multifunctional solutions tailored precisely to customer requirements.

In 2015, the number of MegaFon’s B2G and В2B customers grew 5% year-on-year to 286,000 legal entities. In the B2B and B2G segments, we managed to acquire several large and medium-sized corporate and government customers, some of whom became our clients as a result of the implementation of the MNP (mobile number portability) process.

In 2015, we delivered strong performance in the B2B and B2G segments, growing total revenue by 8.2% year-on-year, mobile voice revenue by 6.6% year-on-year, and mobile data revenue by 30.9% year-on-year.

During 2015, we enhanced our customer offering by launching a number of new products and services. In particular, in June 2015, we commercially launched our Wi-Fi with Authorisation service at the federal level. The service will enable MegaFon’s partners to offer Wi-Fi access to customers, e.g. visitors in a café or a store, as well their employees. Customers will be provided with user authorisation service to access the internet, in full compliance with the statutory requirement for mandatory identification of users accessing public WiFi hotspots. Several major corporate clients and the Constitutional Court of the Russian Federation have already signed up to the service since its launch.

In 2015, to keep up with the current trend of document management automation, MegaFon launched its Electronic Document Flow service. Businesses can use this service to deploy e-invoicing and e-signature solutions enabling e-document exchange with other businesses using the service. Corporate users of the service also benefit from instant access to communications service invoices and bills. The Electronic Document Flow service enables our customers to streamline administrative processes and achieve significant cost savings.

In June 2015, we launched a unique service for secure encryption of data transmitted over VPN networks. The service enables full protection of data transmitted over fixed lines against external intrusion or theft. To deploy this solution an existing VPN network is equipped with a special tool which encrypts all data flows that pass through it. The cryptographic service is provided in full compliance with the applicable Russian national standard, GOST 28147–89, and meets regulatory requirements, including those by the Federal Security Service of the Russian Federation (FSB). We expect that the bulk of the demand for this service will come from government agencies, financial organisations, security services, and entities focused on personal data processing.

In 2015, we also further refined our Online Conferences, Virtual Office and Employee Monitoring services.

We maintained our focus on developing our M2M Monitoring (machine-to-machine) service, which enables our clients to control and monitor the movements, location and condition of devices and equipment via a SIM card transmitting mobile data. Over 2015, the M2M Monitoring solution was deployed across all of MegaFon’s operations; its performance was enhanced; and the service was integrated with other MegaFon’s platforms, enabling integration with IT systems of our corporate clients via API. At the end of 2015, the total number of users of this M2M service (SIM cards) exceeded 1.6 m.

We continued developing our content delivery network (CDN), offering our customers customised CDN solutions to meet their diverse content-related needs: assured delivery of content to remote areas, streamlining video files during online broadcasts, ensuring accessibility during peak hours, providing high-speed transmission, etc. Our clients in this area include Russia’s leading content providers, software suppliers, online movie portals, TV channels, online stores, and game developers. In 2015, we added Russia’s largest TV channel, Channel One, to our list of clients. During 2015, we completed modernisation of our CDN network and increased its capacity by over 40%.

In the B2O segment, the DREAM project remains our top priority. The project aims to optimise and enhance connectivity between Europe and Asia. By the end of 2015, we had ten leading global and Russian operators connected to the DREAM backbone line, including China Telecom and China Unicom, and Europe’s Deutsche Telekom and Interoute.

During 2015, as part of the project, we made upgrades to some sections of the backbone line, improving DREAM’s performance on several measures. In particular, we successfully reduced the stated signal latency on Frankfurt to Hong Kong route (measured by RTD) from 175 ms to 169 ms – an industry-leading performance level. We also built an alternative gateway to Kazakhstan, which enabled us to expand our partner network in this country, and as a result, set up Europe–to–Asia links with geographic redundancy across Kazakhstan. The backbone line’s total capacity currently in use (including for MegaFon’s infrastructure needs) is 1 Tbit/s. According to TMT Consulting, our DREAM project has an approximately 8% share of the Europe–to–China landline links market.

Another key project in MegaFon’s inter-operator business was the construction, in conjunction with Georgian operator SilkNet, of the first overland cross-border backbone passage linking the two countries, along the Verkhniy-Lars–Kazbegi route. The new backbone line is offering initial capacity of 100 Gbit/s. The project enables MegaFon to offer telecoms operators in the Transcaucas region and South-West Asia access to both Russian and European internet exchange points. The project was commercially launched in early 2015. Currently, we provide IP transmission and leased line services to several local operators.

During the year, we signed contracts with several major corporate and government customers, including Novolipetsk Steel, Rosselkhozbank, VTB 24, PJSC Enel Russia, DIXY retail chain, OJSC PhosAgro, JSC Mercedes-Benz RUS, Boehringer Ingelheim, LLC Siberian Generating Company, the Ministry of the Internal Affairs of the Russian Federation, the Federal Guard Service (FSO), GAS Pravosudie, and LLC RT-Invest Transport Systems. And, as noted above, we provided communications support to a number of high-profile events, most notably the summit meetings of the SCO and “BRICS” groups, as well as the 2018 FIFA World Cup draw.

Fixed-line communications for the mass market

In addition to high-quality mobile services, MegaFon also offers a range of fixed-line broadband, Pay-TV and telephony services. The Company provides its fixed-line services through NetByNet Holding LLC (which operates under the NETBYNET brand), our wholly-owned subsidiary acquired in 2011. NETBYNET provide services to individual and corporate customers in seven Russian federal districts: the Central, Northwestern, North Caucasian, Southern, Volga, Ural, and Far Eastern Federal Districts.

Asset acquisitions enabling the Company to enhance its presence in the key markets and enter new territories are an important component of NETBYNET’s development strategy. Since 2011, the operator has acquired and integrated over 15 companies across Russia, significantly increasing its coverage. Rather than investing in blanket expansion of its network, the Company makes selective upgrades where they are necessary and economically viable.

In January 2016, NETBYNET completed another acquisition. The company acquired CJSC Startel and fixed assets of CJSC Startelecom-Centre. These businesses provide fixed-line services to corporate customers in the Moscow region and Tver. The acquisition of two operators with a stable customer base and attractive resource sharing potential provides a platform to consolidate NETBYNET position in the corporate market in 2016.

During 2015, NETBYNET also focused on improving service to existing customers and development of additional services. NETBYNET was the first fixed operator to launch customer support via popular messenger Viber and WhatsApp. Marketing efforts included offer customers a new bonus programme and focussing on increasing bundled sales.

In 2015, we further developed our WiFire product. In January 2015, WiFire Mobile, based on MegaFon’s infrastructure, was launched, offering unlimited mobile Internet in Moscow and the Moscow region. It became the third service in the WiFire package, complementing the previously launched WiFire TV (wireless digital TV) and WiFire Home (residential broadband).

Our efforts to further develop the wireless digital television WiFire TV service, launched by NETBYNET in 2014, included the roll-out of the service across the network’s entire coverage area, enabling access to the WiFire TV app on Samsung and LG Smart TV television sets, having the Wifire TV solution pre-deployed on Philips Android TV television sets, and the establishment of content partnerships with Disney and MEGOGO.

Due to our organic growth, asset integration and acquisitions, MegaFon’s fixed-line subscriber base exceeded 944,000 retail customers at the end of 2015, while the total number of Pay-TV B2C users increased by 45% to 226,000 as a result of the stepwise development of WiFire TV.

Plans for 2016 include enhancing NETBYNET’s presence in Russian regions, active promotion of the WiFire product, expansion of the Wifire TV service, and growing the share of the corporate segment in total revenue.

Roaming services

MegaFon’s roaming services are available across Russia and in more than 224 countries worldwide.

In 2015, we continued offering our customers new or improved roaming services. In particular, we launched our ‘Bood kak doma’ (‘Feel at Home’) tariff option, a unique offer that helps slash mobile costs when travelling in Russia. Customers subscribing to the option get the same rates for all calls, text messages, and mobile data services when travelling through Russia as they are charged in their region of residence.

During the year, we also launched a new, smart notification system. All our customers travelling beyond their region of residence now receive smart international and domestic roaming offers based on a customer’s profile. In 2016, we plan to develop a notification system which will help predict customer behaviour and target our subscribers with attractive, more personalised deals.

In 2015, popular roaming products included the ‘Ves mir’ (‘Around the World’) tariff option, offering 30 free incoming minutes per day anywhere in the world, the ‘Internet za granitsey’ (‘Internet abroad’) tariff option, which in addition to an attractive mobile data deal provided genuine transparency in mobile costs, and the ‘Bood’ kak doma’ (‘Feel at Home’) tariff option, mentioned above.

During 2015, despite the volatility in currency exchange rates we adjusted our international roaming rates just once – in February. Despite the currency exchange challenges, MegaFon has retained its leadership as the operator offering the most attractive international roaming deals.

4G roaming services

MegaFon’s international LTE roaming services were first launched in January 2014, and in two years we have grown the number of countries where MegaFon’s LTE roaming services are available to 66, with roaming agreements in place with 79 operators.

With this growth, we have consolidated our position as one of the world’s leading telecom operators in terms of LTE-roaming coverage. In many countries of the world, we offer access to LTE networks via multiple roaming partners, which ensures better coverage and connectivity.

Our 4G roaming service is definitely in demand among our customers, as they need the same fast mobile data services when travelling outside their region of residence as they enjoy at home. Accordingly, we intend to maintain our focus on growing the list of our LTE roaming partners. Countries with access to 4G-account for around 71% of the traffic consumed by our customers roaming internationally.