A New Era in Mobile: Opportunity Knocks

February 3, 2012


The panelists discussed the future of the telecommunication industry, focusing on the emergence of new technology that might shape a new era, as well as prevailing trends and industry obstacles.

Michael Hecker has a positive outlook for the sector and anticipates healthy growth at telecom companies driven by data and voice usage, which still has potential in Russia to increase from the current level of around 270 minutes to 600 minutes. He thinks that, compared with where we will be in five to 10 years, the industry is still in the Stone Age. At the moment, our only connection devices are mobile phones, smartphones, tablets and computers, whereas there are billions of home appliances, cars and other appliances that in the future will be connected, delivering traffic and revenues for operators. As an example, he cited machine-to-machine (M2M) services, which in Europe generate ARPU of $5-10. In Russia, there are already around 2.5 mln M2M sim-cards, and this number is growing dramatically.

Answering a question about why we need LTE, Denis Sverdlov said that in practice, once the network exits, i.e. has been constructed and becomes available to customers, massive demand appears. The reason for this at least in Russia is in undeveloped cable infrastructure and people requiring mobility. Talking about why operators can still make money, he said that because Skartel was building infrastructure from scratch, they could apply a business case that is more suitable for data services, as the company from the first day of its operation has been focusing on data. He thinks that the industry should prepare itself for a decline in revenues per base station from the current R500,000-600,000/month to at best R150,000/month for data. At the same time, operating expenses will not decrease, which implies that most operators have the wrong operational model for data. Skartel focuses on revenues per employee, and has the highest in the industry.

Commenting on the issue of fixed lines competing with mobile networks, Alexander Provotorov stressed that these two technologies do not substitute, but enhance each other. In Italy, only 10% of people use mobile connections at home, and this is the country that has the highest ratio. Mr Provotorov believes that fixed-line broadband will remain popular in Russia, as for some services mobility is not necessary, for example television. The main growth area for the company is pay-TV and there is a trend where people initially subscribe to pay-TV and only then opt for broadband. Therefore, the challenge for equipment vendors and appliance producers is to make equipment that would enable the convergence of fixed-line and mobile services that would enable people to automatically switch from one to the other, depending on where they require an internet connection.

Andrey Semerikov noted that people have been discussing competition 15_20 years already, but revenues from fixed-line services continue to grow. His main thesis was that the capacity of existing networks is insufficient to digest exploding traffic that, among other things, is driven by content created by users (which is starting to exceed professionally produced content) and cloud services. In his view, not a single company will be able to digest this coming traffic on its own and, hence, infrastructure should be integrated.

Svetlana Skvortsova believes that despite being not among the Big Four operators, Tele2 does not consider itself an outsider. In the 37 Russian regions where the company operates, it holds first place in nine and is among the top three operators in 20. Tele2 has the lowest churn rate in Russia, implying that customers are currently satisfied with the speed that the network offers. However, the company wants to develop further and offer customers services using new technologies, such as mobile TV. Hence, the issue of technology neutrality is important, as it would enable the operator to launch a next-generation network. It is also possible to launch LTE networks in the 900 MHz spectrum. Tele2 is ready to participate in financing the conversion of frequencies. She agreed with Mr Hecker that the growth drivers are data and voice usage.

Ole Bjorn Sjulstad thinks that we are witnessing a continuation of the current mobile era, rather than the end of a past era. The dream of mobile business is adapting to the needs of people but also driving these needs. While new technologies are important, five principles are crucial if the company wants to deliver profitable growth, he said. The first is services that are offered by the operator. Then frequencies and licenses. Companies paid a lot during the allocation of 3G licenses, whereas now they are trying to reduce expenses by teaming up with other operators in rolling out networks. Mr Sjulstad also said that effective procurement processes would push down prices. Distribution (staying in touch with customers) is an important aspect of the business; operators that can reshape distribution will rule the market. Another important principal is pricing of services.

The speakers could not reach a unanimous opinion on the cost of the LTE network roll-out. While Mr Hecker thinks that upgrading MTS’ existing network will incur less expense than constructing a network from scratch and will not require substantial investments. Mr Sverdlov, on the contrary, insisted that for Skartel, building a new network would require the same investments or even less than for MTS to upgrade its network. Mr Provotorov said that LTE would require huge investments, as it is necessary to invest in the cable that goes to the base station, which is costly, but without which it is impossible to reach the full data transfer speeds implied by LTE.

The speakers also defined opportunities and challenges facing the telecom industry in Russia. On one hand, they agreed that they should focus on reducing operating costs and capex. On the other, though, they said they need to seek alternative revenue sources, among which might be considered offering value-added services to keep their business from becoming a pipeline.