A new report by the PMR research and consulting company, demonstrates that the value of the telecommunication market in Russia grew by 27% in 2007, achieving the level of RUB 957 billion (US$39.5 billion). The data transmission and internet services sectors grew dynamically, but the market growth was caused primarily by very high dynamics of the largest sector: mobile telephony. In the last eight years, the market developed at an average annual rate of approximately 31%, primarily thanks to dynamic development of the mobile telephony market resulting from a low saturation of services.

The specific geographical features of the Russian state made investments in extension of the mobile telephony network (recently also the development of 3G telephony) much more profitable and economically justified. In particular when compared with the postponed modernisation and extension of the fixed-line telephony infrastructure, requiring relatively higher outlays. In 2005-2007, the growth rate of the mobile telephony market in Russia stabilised at approximately 30%.

PMR also expects that the market will also most likely note a comparable growth in 2008.

The size of the Russian state and the high population density in urban agglomerations make investments in telecommunications infrastructure especially profitable within the largest cities. This results in concentrated activities of telecommunications operators in agglomerations, whilst other area are highly underinvested. The relatively higher disposable incomes of their citizens are an additional factor facilitating development of telecommunications services. This dependency is particularly noticeably in the country's capital, where the average monthly income per capita exceeds RUB 30,000 (US$1,238).

Consequently, the level of telecommunications investments in Moscow clearly differs from other regions, which is also reflected in the market saturation. The mobile telephony penetration in the capital in 2007 was 175%, compared with 121% penetration throughout the country. The second largest Russian city - St. Petersburg - also observed high saturation of mobile services. In this respect, the Central and North-West districts stand out. The lowest penetration in 2007, of 70%, was noted by the Far East region. This district is characterised by very low population density (1 person/kmē) and, consequently, low profitability of telecommunications investments.

A characteristic feature of the mobile telephony market in Russia is a very high share of the pre-paid segment in the total number of mobile telephony users. According to official data provided by operators, at the end of 2007, 90% of SIM cards in Russia were registered as pre-paid.

Another important trend noted by PMR is the increasing share of non-voice services in operators' revenues.

Recently, as well as the most basic services (SMS/MMS), the impact of additional service upon revenues is also increasing. In 2006-2007, except for real increase in prices of calls related to transition to the CPP system (Calling Party Pays), this was one of the factors allowing the Russian operators to reverse the negative trend of declining monthly revenues per customer. The value of non-voice services in Russia in 2007 was RUB 7bn, which represented 14.5% of total revenues from mobile telephony services. In 2008-2012, this segment will grow annually by approximately 35% on average, thanks to which its share in revenues will grow to 27% in 2012.

One of the factors positively influencing the development of additional services in Russia in the coming years will be the development of 3G networks. In April 2007, the tender for reservation of radio frequencies for construction of third generation network was decided. The licence was granted to three leading mobile operators in Russia: MegaFon, MTS and VimpelCom. By the end of H1 2008, MegaFon and MTS launched services based on a 3G network in St. Petersburg. Interestingly, this was not achieved in the capital, which - according to operators - despite the high saturation of internet services, is the largest potential market for the development of third generation services. An obstacle in development of 3G network in Moscow are procedural and legal issues, and specifically the problem of releasing frequencies by current users (primarily the army and related entities).

It is worth emphasising that at present the 3G services market in Russia is almost non-existing. However, in the future it will constitute a vital source of revenues for the largest mobile networks. In PMR's opinion, dynamic development of UMTS in Russia will take place in the period 2008-2012. In the optimistic scenario, in 2012 inflows due to provision of services based on 3G will represent even 20% of the total value of operators' revenues. The main factor that may effectively hamper the market development may be difficulties in network development due to the state administration.

Posted to the site on 11th August 2008

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