Nominal Maturity

Economic News

22 Jul 2010
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With the number of mobile phone SIM cards in circulation now higher than Ukraine's total population, it is almost certain that the period of aggressive subscriber acquisition witnessed in 2006 is coming to an end. Instead, the Ukrainian GSM players are expected to focus on squeezing more revenue from existing customers by offering new services and products.

Having added a total of 19m new subscribers between January-December 2006, the number of SIM cards in circulation has reached 49m - some 63% higher than at the end of 2005, bringing Ukraine's nominal mobile penetration to 105% up from 64% in 2005.

The two leading mobile operators, Kyivstar and Ukrainian Mobile Communication company (UMC), which account for 85% of the current subscriber base, admit the market is approaching full maturity in terms of penetration and are preparing themselves for a change in strategy - shifting their focus from customer expansion to product expansion.

Adam Wojacki, CEO of UMC, told OBG this week that 2006 was an extraordinary year for mobile operators even by Ukraine's own impressive growth standards. "It was the last year of rapid growth driven by improving economic conditions as well as the entry of two new players," he said

Trond Moe, head of the representative office for Norway's Telenor in Ukraine, the majority shareholder in Ukraine's leading mobile operator Kyivstar, said, "Kyivstar has become Telenor's biggest consolidated subsidiary worldwide."

The fundamentals, according to Moe, are very healthy in Ukraine. "A lot of people have relatives in rural areas or other urban centres. Mobile communication has made it possible for them to communicate regularly for the first time in their lives," he explained.

Despite reaching full nominal penetration, industry insiders argue that the mobile phone market is not fully saturated, yet. The market consensus is that the real mobile penetration, i.e. the number of unique users is still at around 60%. Thus 40% of the current mobile accounts allegedly belong to double or even triple SIM-card users.

The existence of double-SIM card users has also been partly responsible for a drop in average revenue per user (ARPU) levels, as operators are sharing customers.

Ukraine's mobile ARPU continues to be among the lowest in Eastern Europe - currently, at around $8 per month. The share of more lucrative post-paid (contract) customers is also quite low by regional standards, with more than 90% of all subscribers using pre-paid services. Wojacki says his company is determined to arrest the decline of ARPU this year by offering new products, particularly in data services.

Meanwhile, Moe argues that blended ARPU statistics mask a significant growth in minutes of usage (MOU) among the old subscribers. According to Moe the ARPU levels were largely brought down by new subscribers, which tend to belong to lower income groups.

The good news for Kyivstar and UMC, however, is that, despite additional pressure on mobile phone revenue from increasing market competition there have been no signs of significant price erosion.

Although new mobile players, Astelit and Vimpelcom have indeed pursued quite aggressive pricing strategies to attract new subscribers the market did not descend into a full price war, as some have feared.

Keeping up with the rising number of subscribers has therefore been one of the main challenges for leading mobile operators last year. "In a country of Ukraine's size and in a market that is growing at such a pace, it is no easy task to service the rise in voice traffic," says Wojacki.

UMC had to double the number of its base stations, from 4500 to 9000, to service the new traffic, with its cumulative capital expenditure to date rising to approximately USD2bn. According to Moe, Kyivstar has invested well over USD2bn into its network so far.

Astelit, owner of Life:) brand, and Russia's Vimpelcom, which is present in Ukraine with its Beeline brand, have also been beefing up their efforts to roll out their relatively young networks.

Astelit, majority owned by Turkish mobile operator, Turkcell, has recently announced its plan to boost its investment by 50%, injecting some $250m into network expansion and subscriber acquisition. Meanwhile, Vimpelcom announced at the end of 2006 it was aiming to expand its network in Ukraine to cover 90% of the population.

The main challenge for new players is to reach the critical mass quickly enough in order to get a decent return on the sizeable investment into their network.

While the two established players, Kyivstar and UMC, are already enjoying earnings before interest, taxes, depreciation and amortization (EBITDA) of around 60%, the new players need much more volume to get similar results.

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