FOCUS: Russian Operators Seek Compensation on CPP Launch

MOSCOW, June 5 (Prime-Tass) -- The introduction of the Calling Party Pays (CPP) principle in Russia next month will result in free incoming calls for mobile users, however, at the same time, it might also bring a hike in tariffs for outgoing calls as mobile operators seek to make up for lost revenue, market participants said.

Operators say tariff hikes might be the only way to compensate for losses, estimated at about U.S. $1 billion in annual revenues, resulting from the introduction of CPP. Whether operators will actually hike tariffs for outgoing calls will likely depend on the fixed-to-mobile tariff level chosen by regulators, who must set the tariff by June 20.

"We believe that if fixed-to-mobile tariffs are set at a level lower than mobile operators' costs? it will lead to the hike of tariffs for mobile users," Oleg Nikolayenko, inter-network cooperation department director at Russia?s third largest mobile operator MegaFon, said.

Some analysts believe that regulators have chosen an inopportune time to go forward with CPP. ?Mobile service penetration in Russia is so high that any (regulatory) changes could be very critical. (CPP) should have been introduced earlier or not introduced at all," Yelena Sayapina, telecoms analysts at Advanced Communications & Media (AC&M), said.

Although the CPP principle, which comes into force on July 1, was approved in late February, regulators and mobile operators only now started working out fixed-to-mobile tariffs. The two sides are negotiating on the tariff for fixed-to-mobile calls and the amount that would be transferred by fixed-line operators to mobile operators for such calls.

The tariff service must set tariffs by June 20 as under the law companies have to inform their clients about changes in tariffs at least 10 days before the changes takes place.

Mobile operators suggested at a round table held on May 24 that the tariff should be set at no less than 1.8 rubles per minute, while regulators and fixed-line operators insisted that it should be lower than 1.8 rubles per minute, which is the price of a domestic long-distance call made to an adjacent region.

Mikhail Shamolin, vice president for sales and customer service at Russia?s largest mobile operator MTS, said that mobile operators could suffer annual revenue losses of $750 million, if regulatory bodies set the fixed-to-mobile tariff at 2.20 rubles per minute or about $0.08, of which $0.05 would be transferred to the mobile operator.

MTS' Vice President for Marketing Grzegorz Esz said that mobile operators might hike tariffs for outgoing calls by 30%-40% if they do not receive compensation for incoming fixed-to-mobile calls.

Last week MTS and Russia?s second largest mobile operator VimpelCom softened their demands and said they would be ready to accept payments of $0.041 per minute from July 1 to June 30, 2007, with an increase to $0.05 after that period.

Kommersant business daily speculated on May 31 that mobile operators decided to soften their demands after meeting with government officials, who indicated that they might undertake tougher regulatory measures against the mobile operators.

A source in the IT and Telecommunications Ministry said that a new bill on competition, drafted by the Federal Antimonopoly Service (FAS), envisages tariff regulation if up to three companies together control over 50% of the market. If the bill becomes law, the government will regulate all tariffs of mobile operators, and not only the level of compensation following the abolishment of charges for incoming calls.

MTS, VimpelCom and MegaFon controlled about 86.5% of the Russian mobile service market as of May 1, according to AC&M. MTS and VimpelCom controlled 68% of the market as of May 1.

However, mobile operators may not even get the $0.041 per minute compensation they desire.

A source in Russia's national telecom holding Svyazinvest told Kommersant that the Federal Tariff Service might set the fixed-to-mobile tariff for Moscow at 1.26 rubles, of which the mobile operator will get only 94 kopecks.

"Fixed-line operators want the tariffs to be set at a low level as they are politically dependent (Svyazinvest is 75%-controlled by the government). In addition, they want to keep fixed-to-mobile traffic, as if the tariff is set too high, users will migrate to mobile networks. In any case, it is better for them to get a couple of cents per minute than to get nothing," Boris Ovchinnikov, analysts at J'son&Partners, said.

Although the final fixed-to-mobile tariff has not yet been set, mobile operators are likely to marginally hike their tariffs for outgoing calls, analysts said.

"The average price per minute (APPM) amounts to $0.05-$0.06. Mobile operators' costs stand at about $0.04, which includes all operating expenses, even sales expenditures and payrolls," Ovchinnikov said.

"Taking into account that the issue has a social aspect, a compensation level of $0.025-$0.030 should not cause considerable damage for mobile operators, as some fixed-to-mobile traffic will migrate to mobile-to-mobile traffic," Ovchinnikov added.

Analysts from UralSib have a similar view, noting that at the first stage the CPP introduction will be negative for mobile operators. "In the long-term the mobiles have enough flexibility and market power to offset this negative effect through stimulating traffic migration from fixed-to-mobile to mobile-to-mobile and increases in mobiles' and interconnect tariffs," UralSib said in a research note.

"We believe that CPP implementation will stimulate mobile usage, increasing mobile internet traffic. Moreover, the mobiles have some room for mobile tariff increases and the additional gain from switching to ruble-based tariffs from dollar-based. Tariff rebalancing will largely offset the negative effect from CPP," analysts from UralSib said.

Analysts from Aton Capital disagree, saying that mobile operators "will likely suffer from a change in traffic mix as fixed-to-mobile calls will likely rise given the price reduction; the change in the traffic pattern also implies additional capital expenditures." Aton Capital estimates the possible decline in net profit of mobile operators at 5%-10% and of EBITDA at 10%-20% if compensation for mobile operators is set at $0.03 per minute. EBITDA stands for earnings before interest, taxes, depreciation and amortization.

Sayapina of AC&M noted that the CPP launch would lead to a decrease in revenue and, consequently, to a decrease in the tax base and taxes to the budget. "The regulators should have introduced fixed-to-mobile payments without abolishing charges for incoming calls for mobile operators. In that case, mobile operators would have cut their fixed-to-mobile charges step-by-step," Sayapina said, adding that in that case there would have been no damage to mobile operators' revenues.

As the first step towards compensating for the possible losses from CPP, MTS and VimpelCom have already announced that they are going to increase the price for mobile-to-mobile calls to their networks to $0.05 per minute from $0.01 per minute. Analysts believe that this step will also have a considerable impact on the market and on tariff policy of other mobile operators.

"This will lead to increasing uncertainty on the market. Other operators will have to either amend their tariff policy or accept falling margins. It will first affect unlimited tariffs and tariffs with a large amount of free minutes included in the subscription fee (which are mostly offered by minor operators)," Ovchinnikov of J'son&Partners said. "The main question is what the position of MegaFon will be," he added. MegaFon has not commented on the issue.

Sayapina of AC&M expects that cheap calls to MTS' and VimpelCom's numbers will become a thing of the past, while only intra-network calls will remain cheap.

(26.8868 rubles - U.S. $1)

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Posted to the site on 5th June 2006