MTS Group Key Markets
|Mobile communications||Mobile Internet services||Landline communications|
|The leading telecommunications operator in Russia||In 2015, MTS demonstrated the best income dynamics in terms of data transfer among the major competitors in Russia||MTS is among the TOP-3 Russian broadband access operators|
|Fee-based TV||Telephones and smartphones||Financial services|
|MTS is among the TOP-5 Russian pay-TV operators||MTS retail network featuring more than 5,000 showrooms, the largest non-food retail network||15% of subscribers use MTS financial services. Financial Services mean the possibility of combining new telecommunication technology with banking products and services|
Overview of the economic situation and market development
MTS PJSC is licensed to operate in the entire territory of the Russian Federation. In the reporting year, subsidiaries of MTS PJSC continued to carry out their activity in the territory of Ukraine (MTS UKRAINE PrJSC), the Republic of Armenia (K-Telecom CJSC), the Republic of Turkmenistan (MTS-Turkmenistan ES), the Republic of Uzbekistan (Universal Mobile Systems LLC), as well as the Republic of Belarus (Mobile TeleSystems JLLC). The total population of the licensed area covered by MTS PJSC exceeds 230 million people.
The mobile communication market in Russia and the CIS countries was developing rapidly driven by the steady decline in the price level both for the services of mobile operators and the subscriber equipment. In resulted in the increase in mobile communication penetration in the broadening population segments.
In Russia mobile communication services are rendered by four federal operators: MTS PJSC, MegaFon PJSC, VimpelCom PJSC and RT-Mobile CJSC (T2RTK Holding, a joint venture of Rostelecom PJSC and Tele2), as well as regional telecommunication companies operating in different standards for cellular communication: GSM, NMT 450 and CDMA –1х, UMTS (3G).
The largest markets for mobile communication services throughout the territory of the Russian Federation (by the number of subscribers) are Moscow and the Moscow region, as well as St. Petersburg and the Leningrad region.
The trend of slowing down the growth of the mobile operators’ subscriber base first appeared in 2005 and continued in the following years. This can be attributed to the gradual market saturation and operators’ focus on the quality of the subscriber base. Marketing efforts shift from attracting new subscribers towards ensuring loyalty and improving profitability of the existing customers, as well as attracting subscribers of competitors to its network. On December 1, 2013, the law on keeping a number when changing mobile communication operator (MNP) came into force. At the moment, introduction of the possibility to keep the number when switching to another operator has not had a significant impact on the market share of mobile operators in the Russian mobile communication market.
At year-end 2015, the level of mobile penetration exceeded 170% securing the position of Russia among the most advanced telecommunication markets in the world. Being one of the leading players in the telecommunication market of Russia and the CIS, MTS aspires to use the existing growth potential for all of the most dynamic industry segments.
In the Company’s traditional mobile telephony segment, the most important growth factors are the increase in the overall level of using communication services and more active consumption of extra services by the subscribers when increasing their loyalty. MTS offers its customers tariff offers at fair prices, as well as informs them of any changes in connection terms and data plans regularly and timely. Data plan development at MTS is also carried out taking into account regional features, which allows launching offers adapted to each region in the market.
Mobile Internet development is gaining importance for the mobile market growth in Russia and the CIS countries. The basis for qualitative growth in consumption of mobile Internet services is the development of 3G and 4G (LTE) networks.
MTS 3G network operates in all federal districts of Russia, Armenia, Belarus, Turkmenistan and Ukraine. In Russia, growth in MTS revenue from mobile Internet was 20% in 2015, the number of regular users of data transfer services was also increasing. The level of data transfer traffic consumption by mobile Internet users increased by 1.4 as compared to 2014.
LTE networks were commercially launched in all regions of Russia (except for the Republic of Crimea). MTS was the first Russian communication operator to provide an opportunity to use LTE networks in international roaming. LTE penetration among mobile Internet users in 2015 doubled in comparison with 2014.
At year-end 2015, the number of subscribers in Ukraine (MTS UKRAINE PrJSC) amounted to 20.4 million (including CDMA) or 35% of the market. Penetration of mobile services is 137%, according to our estimates. The main competitors: Kyivstar, a subsidiary of VimpelCom Ltd. and Lifecell, a subsidiary of Turkcell.
Launch of a 3G network and a partnership program with Vodafon gave a new impetus to the market development. Enhanced cooperation allows MTS customers in Ukraine to access the latest Vodafone technology and services, as well as provides additional benefits for the mass and corporate market.
At year-end 2015, the number of subscribers of MTS subsidiaries and affiliates in the CIS countries amounted to: Turkmenistan (MTS-Turkmenistan ES) – 1.6 million, the Republic of Armenia (K-Telecom CJSC) – 2.1 million, the Republic of Uzbekistan (Universal Mobile Systems LLC) – 1.1 million, the Republic of Belarus (MTS JLLC, not consolidated in the MTS Group financial statements) – 5.3 million subscribers.
Cellular communication market in these countries (except Uzbekistan) is characterised by high penetration of over 100%.
Looking into the Future
Global trends in the telecommunications sector
The fundamental present and future challenge for operators is the continuing explosive growth of data transfer volumes in mobile networks. The pace of such growth in both developed and developing markets will not fall below ten percent per year over the next five years, even according to the most pessimistic forecasts. Increased penetration of smartphones, as well as increased consumption by the existing subscribers, not only provide operators with additional revenue (to some extent compensating for the fall in the segment of voice calls and short message service), but, above all, make them face the problem of cost-efficient mobile network capacity build-up.
Although many operators are seeking to enter new markets, including those related to telecommunications, the effect of these efforts is quite unimpressive and does not guarantee future stability. Therefore, the priority of operators is to find a solution to the traffic growth issues. Here, at the intersection of the growing needs of subscribers, technological and financial opportunities, there is and will be a search for innovations meant to provide a stable industry development trajectory.
Growth of LTE-networks’ coverage, redistribution of a frequency resource for LTE (“refarming”), ongoing implementation of Carrier Aggregation and VoLTE functions both by operators and manufacturers of smartphones: all these areas visible to subscribers as well have already gained momentum and are routine for the operators. In terms of industry, the development and implementation of new technologies aimed at helping to cope with the traffic growth and, at the same time, to provide a reasonable return on investment in such growth are of interest.
The already available technologies helping to solve this problem include self-organising networks (SON), massive use of small— and pico-cells and new high-speed RRL in the 70-80 GHz band. All these innovations are already being implemented, including at MTS networks.
These new and promising areas include software-defined networks (SDN), network functions virtualization (NFV) and the use of LTE-Unlicensed spectrum. A number of global operators stated their desire to accelerate development in these areas and, thus, become a locomotive for their promotion along with equipment suppliers. On the contrary, many operators opted for a more cautious approach waiting for the maturity of these technologies.
Another technological innovation area stands apart being LPWAN networks (low-power wide-area networks) characterised by extremely low consumption of subscriber devices (usually a variety of sensors, meters, etc.). Currently, the formation of global standards (NB-IoT, LTE-M) is being terminated, after which the operators will begin deploying such networks based on the existing mobile infrastructure. In the meantime, such networks are developed based on proprietary standards (LoRa, SigFox and similar) by new entrants in the M2M market.
Trends in related areas
The basic movement is carried out in the markets, for which telecom is a source of Internet connection, yet not necessarily the primary beneficiary of the innovations happening.
Such areas as Internet of Things, Smart Home, Smart City, Connected Cars, autonomous vehicles, new technology in medicine, education, finance and banking will become the growth drivers. The main innovation centres will be the manufacturers of telecommunication equipment, IT companies and companies from other industries. Mobile operators need to be prepared in advance to work in a new environment, in particular, due to a significant increase in the number of connections to their networks. On a global scale, independent analysts give an estimate of the number of devices running in the networks of mobile operators by 2020 as exceeding 25 billion. Less than 10 billion devices thereof will fall on mobile phones and smartphones, while all the other connections will be distributed among consumer electronics and M2M/IoT devices.
Thus, there is a further increase in the number of new services based on existing mobile communication networks and the emergence of fundamentally new 5G-based products and business ecosystems is expected. Significant progress in the creation of software for biometric identification systems to carry out financial transactions and get access to confidential information on mobile devices may be noted. there is also a movement toward the direction that mobile networks and smartphones will become a kind of “control centres,” “smart” homes, cars, personal safety, monitoring and health care systems. There is a big probability of the emergence of new companies, which will repeat the success of Uber and make their business by means of combining existing technical advances into a single user-friendly product. Herewith, creation of new products, services and promotion thereof are impossible to implement on their own, so the formation of various partnerships (including with the participation of unexpected players from distant areas) and ecosystems based thereon will go on in the future.
There is no clear answer as to how efficiently mobile operators can take advantage of the new changes and whether they will play the part of just a network provider or become one of the key beneficiaries of this process. Despite this uncertainty, the fact that a growing number of companies from new markets and industries are interested in building their business models based on the networks of mobile operators allows the operators increasing their subscriber base and revenue.
Market Development Forecast for Russia and Ukraine for 2016 and the Medium Term
Macroeconomic background in Russia being our main market remains complicated, but we do not see any catastrophic events or a significant reduction in the demand volume. Moreover, in current conditions, we are able to steadily increase the revenue amount annually. The year of 2015 did not become an exception in this regard (the total revenue volume within MTS Group increased by 5% compared to 2014). Our expectations regarding the macroeconomic parameters over the next 2–3 years are moderately conservative: we are ready to stabilisation or even to their deterioration to some extent. We are confident that, within the framework of the current strategy taking into account the efforts that we make in all areas of our business, we will be able to level the negative market trends and ensure that the target values for the main operating indicators are met.
In conformity with global trends, reduction in the revenue volume from traditional voice and non-voice services is detected in the Russian telecommunication market being key for us. In this direction, we expect a further decline. This fall may be compensated by the growth of revenue from data transfer services, which in the short and medium term will be the main telecommunication sector growth driver. For our part, we intend to promote consumption of such services by a set of measures, including the following:
- Offer of rates combining voice, SMS, data and content (Voice & Data rates)
- Active sales of smartphones and other data-oriented subscriber equipment (including at minimum prices for the ultimate decrease of the entry threshold for subscribers)
- Further development of 3G and LTE networks in terms of reasonable investment planning and possible cost minimisation
- Data service range expansion, including in partnership with the major market players of services and content (social networks, e-commerce companies)
During 2015, Russian mobile market profile in terms of active players changed to a certain extent as there took place the final formation of the fourth federal operator established on the basis of Rostelecom and Tele2 assets united. We would like to note that this event did not cause redistribution of market shares or a significant pressure on us and we hope that the situation would not change dramatically in the future.
In terms of the fixed line telephony market, where our company is a significant player, we expect a further decline in revenue from voice services and a slight increase in revenue from high-speed access to the Internet and pay-TV (primarily due to the potential of penetration growth which is now exceeding 50% a little).
In our opinion, the slowdown in the telecommunication market growth rates to a minimum (according to our forecasts, about + 0.5-1% per year on average over the next 3 years) and macroeconomic uncertainty create preconditions for some system changes. Reduction in the total volume of connections and weakening of the struggle for sales, a more balanced approach toward investment, including an operators’ partnership when constructing LTE networks, a rational pricing policy will allow market participants to stabilise their operating and financial performance and ensure further development.
In addition to the telecommunication segment which is traditional for us, we see growth potential in a number of related sectors. In order to implement it, we have adopted the concept of “differentiation” as one of the key strategy elements, implying distribution of operations in such markets as financial services, satellite television, development and sales of branded devices, implementation of Big Data technology, system integration, digital commerce (online store, self-service portal), M2M (Internet of Things). The company implements projects of a strategic status by each and every one of these directions. Currently, their contribution to the company revenue compared with the telecommunications segment is small, but we consider them as potential growth points, a way of levelling the industry risks and enrichment of the main business due to synergies. Our approximate guide in the differentiation segments’ share in the total company income exceeds 15% in the five-year term.
2015 became one of the most challenging years for the Ukrainian economy. Negative dynamics of key macroeconomic indicators had a negative impact on the level of paying capacity and demand volume leading to some deterioration of the main operating parameters of MTS-Ukraine. Nevertheless, we look at the 2016 prospects with cautious optimism. We expect that the crisis peak will be passed in 2016 and the main macroeconomic indicators, including GDP, industrial production and retail trade volumes, will show positive dynamics at the level of 1-3%.
In accordance with the trends common to the developed telecommunication markets, the services based on the data transfer will become the principal Ukrainian market growth driver, and we connect further growth prospects with this class of services. In 2015, MTS-Ukraine won the tenders for frequencies and a 3G license, arranged spectrum clearing and invested a substantial amount of funds in the network construction. As a result, at year-end, the company was among the leaders in terms of population coverage by a 3G network which is the most important factor for achieving our long-term goal in this direction being confident leadership in perceiving quality, reliability and speed rate in the data transfer services segment.
It should be noted that the penetration of smartphones in the Ukrainian market is at a lower level compared with the Russian market (lagging behind by about 1.5 years), where we see a growth potential, rather than a limiting factor. In implementing the prospect for economic recovery and growth of effective demand, we can expect acceleration of the “smartphonisation” pace which in combination with the already achieved high level of the 3G network development will have a significant positive impact on the volume of demand and, consequently, on the revenue from data transfer services.
The most important event of 2015, which, we believe, will have a significant positive impact on the future company operation, is the signing of an agreement on the use of the Vodafone brand in the Ukrainian market. We are sure that rendering of services under one of the strongest European brands will further strengthen the company’s competitive position in the fight for the data services’ segment.