MTS Lines Up US$424-mil. St Petersburg 3G Investment

Russian mobile operator Mobile TeleSystems (MTS) has indicated that its investments in 3G infrastructure development in St Petersburg will amount to 10 billion roubles (US$424.79 million) from 2008–2010. This sum will also be directed towards improvement of the existing GSM network and quality of services. According to various press reports, MTS President Leonid Melamed announced this at a press conference, in which he also revealed that the company's revenues had risen by around 25% in 2007 to over US$8 billion. As such, revenue growth exceeded the 22% figure MTS had previously projected. MTS' full financial results for 2007 will be published later this month.

Outlook and Implications

• Moscow Frequency Problems Force Initial 3G Roll-Outs Elsewhere: MTS has previously indicated that around 38 billion roubles will be invested in 3G networks across the country by 2011, a figure expected to rise to around 73 billion roubles by 2020. The breakdown of these sums is gradually being revealed—MTS last month confirmed that US$100 million would be invested from 2008 to 2010 in 3G network construction in the Republic of Tatarstan (see Russia: 13 March 2008: MTS Pledges US$100 mil. on 3G Development in Tatarstan, Plans Backbone Network Installation). Melamed confirmed that 3G roll-out would be completed in St Petersburg before the capital due to the ongoing problem of frequency shortages caused by military use in the latter. He indicated that by the time the first 3G base station was constructed in Moscow, it was likely that around 100% 3G coverage would have been achieved in St Petersburg. The problem of a frequency shortage in Moscow is not unique to MTS, with fellow 3G licence-holders VimpelCom and MegaFon facing the same problem. It is likely that each of these operators would have preferred to have initially launched 3G services in Moscow, given that it is the economic hub of the country and home to a wealthier population. However, each of the operators has had time to adjust to this and, as MTS' investment policy indicates, funds are accordingly being directed elsewhere as roll-outs in other geographic regions take precedence.
• MTS Pins Hopes on Continued Uptake of Value-Added Services: MTS has reported notable increases in the uptake of value-added services in 2007, with ARPU from mobile internet increasing by 214% and ARPU from MMS increasing by 117%. Melamed has pointed to these as indicators that the proportion of value-added services within the overall revenue mix is increasing, and suggested that these could bode well for the prospects of 3G service uptake. He projected that the value-added services market would generate US$4.2 billion by 2012, with mobile internet provision totalling US$3.4 billion. Melamed has outlined that the company's long-term aim is to increase its proportion of revenues from value-added services, with gains targeted in the audio, video and game content markets. He noted that should such an aim be met, one logical consequence would be that the proportion of voice services within the total revenue mix would decrease. The increased focus on value-added services is a consequence of the high penetration level in Russia, and indicates that the broader strategy for mobile operators is now to improve subscriber quality, rather than gaining large numbers of low-spending subscribers.
• Broadly Similar Strategies from Each of Russia's Big Three: The 3G investment plans outlined by MTS do not massively differentiate it from its rivals, VimpelCom and MegaFon. While VimpelCom has yet to elaborate on the geographical elements of its 3G investments, it has outlined that its initial outlay will be US$350 million in 2008, a figure certain to increase in the longer term. It has also indicated that the provision of value-added services will play a greater role within its strategy as it aims to improve subscriber quality. MegaFon last year became the first Russian operator to offer commercial 3G when it launched services in St Petersburg. It has previously indicated that its investment in 3G will total US$1 billion by the end of 2009. The figures of all three 3G licence-holders are likely to change as more detail is provided of geographical preferences and precise amounts. However, each operator received its 3G licence at the same time—in April 2007—and each is faced with the same problems of frequency shortage in Moscow and general worries about the speed of 3G uptake among a population dominated by lower-end, post-paid subscribers. As such, Global Insight expects that the strategies of MTS—of prioritising St Petersburg ahead of Moscow and aiming to increase value-added service uptake—will be broadly similar to those articulated by its rivals' 3G deployment gains momentum in the coming months.

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