Capturing Growth

Economic News

22 Jul 2010
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The remarkable doubling in mobile phone penetration rates this year has not just exceeded many a wild expectation, it has also set quite a challenge for Ukraine's mobile operators, as the five existing networks fight for market share in one of the country's fastest growing sectors.



By the end of October this year, the number of mobile phone subscribers had reached an impressive 24.9m, more than double the number recorded in October last year. Mobile penetration rates have thus risen from 30% to 60% in just one year, with industry sector insiders already talking of 80% next year.



Adam Wojacki, CEO of the Ukrainian Mobile Company (UMC), one of the two leading GSM operators in Ukraine, recently told OBG that "although Ukraine was initially one or two years behind its East European neighbours in mobile phone development, it is now catching up very quickly".



New subscriber acquisition, analysts say, was driven primarily by improving competition, better price offers for consumers and - fundamentally - a significant increase in people's real incomes.



Low per capita income used to be the main factor constraining the mobile subscriber base. However, recent pension and wage hikes, it seems, have released the genie from the bottle, freeing pent-up demand for mobile telecommunication services.



The latest report published by the State Statistics Committee this week reveals that personal incomes rose by 38% in nominal terms and 21.4% in real terms during the first 10 months of this year.



Yet despite growth rates that are the envy of many Ukrainian economic sectors, mobile operators admit that it is becoming increasingly tricky to navigate in such fast-flowing waters.



Wojacki told OBG that, "The pace of growth is quite challenging for operators who face a tough balancing act in developing their network and deciding how to allocate available capital to capture this growth."



Moreover, he added, mobile operators are having to operate in a low revenue per customer environment, a result of a dramatic drop in average price per minute in the last couple of years.



Subscriber acquisition, Wojacki explained, is driven by the low-revenue-yielding pre-paid segment. This trend, he added, should continue for another two years - until the market saturates.



Nonetheless, the two leading GSM operators, UMC and Kyivstar, enjoy healthy EBITDA margins - currently between 50 and 60%.



Between themselves, the two GSM operators account for slightly over 90% of mobile subscribers, with Kyivstar recently enjoying a slim lead over the long-established frontrunner UMC.



The number of UMC subscribers has risen by 61.5% since the beginning of this year, reaching 11.9m at the end of November. Meanwhile, on this score, Kyivstar has shot past UMC, with 105% year-on-year subscriber base growth at the end of November, or 13.53m customers.



However, UMC's and Kyivstar duopolistic situation now faces a strong challenge from Astelit, the owner of the life:) brand. Launched in Ukraine almost 11 months ago, Astelit had managed to add 1.5m subscribers by the end of October this year, claiming 6.1% of the vastly expanded mobile phone market.



Ahmet Tanyu, CEO of Astelit, said in an interview with OBG last month that the results have so far been in line with his company's expectations.



"Our proactive subscriber acquisition campaign is working and we should reach 2m subscribers by the end of this year," he said.



However, Astelit, which is 54.2% owned by Turkey's leading GSM operator, Turkcell, and 45.8% by System Capital Management (SCM), had until August been offering only pre-paid services. As it continues its network roll out, it is poised to take on the more lucrative corporate segment, and increase the number of post-paid customers.



According to Tanyu, the crucial factor in succeeding as a new challenger is to have full shareholder commitment to investing in a nationwide network, focused on all segments.



"Our experience in other CIS countries such as Kazakhstan, Georgia and Moldova", Tanyu said, "has been a great advantage and we enjoy the benefits of significantly lower telecoms equipment prices which lower our CAPEX costs."



Nonetheless, Tanyu added, a complete network roll out in a country the size of Ukraine would add up to around $1bn.



Meanwhile, the market is expected to get even more crowded after it was announced at the beginning of November that a fourth serious challenger, Ukrainian Radio Systems (URS) - a company that operates under the WellCOM brand - has been taken over by VimpelCom, another leading Russian mobile operator.



Despite the dispute between VimpelCom's share holders - the Russian Alpha Group and Norway's Telenor - both of whom have stakes in VimpelCom and Kyivstar, VimpelCom says it has paid $231.3m for 100% of URS, paving the way for a proper entry of VimpelCom into Ukraine in 2006.



Separately, the fifth player, Golden Telecom, which serves around 50,000 customers, is expected to continue its role as a niche player, focused on the high-revenue corporate segment, positioning itself mainly as a one-stop shop in telecommunications services, with an emphasis on wireline and data services.



Andrii Droniuk, general director of Golden Telecom, told OBG recently that Golden Telecom Inc shareholders did not announce plans to become a mass market GSM service provider. The battle for mass market GSM is therefore likely to become a four-horse race.



While Kyivstar and UMC are undoubtedly ahead of their two challengers - Astelit and Vimpelcom - next year is likely to see an intensification of competition, with all companies aggressively targeting new subscribers through better price and quality packages.



With such intense competition, mobile operators are inevitably going to feel some pressure on their profit margins. As the cost of subscriber acquisition rises, market watchers say, this will lead to a price erosion. According to many market watchers though, none of the old or new players are interested in destroying the high value of the fast-expanding Ukrainian mobile telecommunications market.



With cellular penetration rates expected to reach some 80% in 2006, the Ukrainian mobile subscriber base is expected to exceed 36m. Even with overlap between users estimated at 25-40%, mobile service revenues are set to rise.



Improving purchasing power should also increase the average minutes per user and help to raise revenue from value-added services. Next year, analysts say, will perhaps be the most important year for Ukrainian telecoms since the transition began in 1991.

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