Global Insight Perspective | |
Significance | Various reports indicate that MegaFon is considering obtaining either a licence or a stake in an existing operator in the Iranian mobile market. |
Implications | It would be an unusual step for an operator that has previously shown limited interest in overseas expansion and that is prospering in its domestic Russian market. |
Outlook | A young population, low penetration, and high ARPU levels within the Middle East region may explain the appeal of Iran to MegaFon, but the operator is hardly under pressure to expand, given its strong domestic performance. |
Russia's third-largest mobile operator by subscriber numbers, MegaFon, is planning to launch a unit in Iran, according to numerous press reports. Prime-Tass cites an unnamed company spokesperson as saying that the operator will try to acquire either a mobile service licence or a stake in an existing mobile operator. Dow Jones, citing Vedomosti, quotes another unnamed source as suggesting that the MegaFon board has approved participation in a tender for a mobile licence in Iran, which would cost between US$600 million and US$800 million.
Outlook and Implications
An Unusual Step for MegaFon: Expansion beyond its domestic Russian market would be an unusual step for MegaFon. The strategies of its principal Russian rivals, Mobile TeleSystems (MTS) and VimpelCom, are largely focused upon expansion across the entire Commonwealth of Independent States (CIS), with plans now in place for development in emerging markets further abroad (see CIS: 31 October 2007: MTS and VimpelCom in the Near Abroad—An Update and Vietnam: 31 January 2008: Vietnamese Government Approves Mobile Joint Venture with Russia's VimpelCom). By contrast, MegaFon owns only one asset outside Russia, in Tajikistan. Although company chief executive Sergei Soldatenkov last year hinted at possible moves into the near abroad, mentioning Kyrgyzstan, Armenia, and Uzbekistan as possible targets, no firm action has been taken (see Kyrgyzstan: 14 January 2008: MegaFon Outlines US$1.7-bil Investment Plan for 2008). More recently, the company said that part of its US$1.7-billion capital investment planned for 2008 would be directed towards exploring "external growth opportunities", although no further detail was provided. The news that the company is now seriously considering entrance into the Iranian market may therefore be the culmination of momentum that has been gradually increasing for overseas expansion.
Emerging Middle East Market Could Fit Within MegaFon's Strategy: Currently, there are two mobile operators in Iran. The first, MCI, is the mobile arm of state-owned incumbent Telecommunications Company Iran and the second, Irancell, is 49% owned by MTN and entered the market in October 2006. Since the end of 2006, the government had been planning to license a third national GSM operator during 2007. Until now further investment in the country has suffered because of poor service take-up, lack of capacity, poor service reliability, and price. ARPU levels in Iran are amongst the lowest in the Middle East, Irancell having published levels of US$9 at the end of 2006. However, penetration levels have been increasing steadily, at 22.2% and 29.7% in 2006 and 2007, respectively. The government has set targets to achieve mobile penetration levels of 50%, equating to 36.6 million customers. Such a market therefore has growth potential for MegaFon in the long term. Within Russia, MegaFon's policy has been to concentrate more on subscriber quality than massive uptake. Given the generally high ARPU levels of the Middle East region and Iran's young population, the country would fit within MegaFon's strategy of high-quality subscriber uptake.
MegaFon's Russian Operations in Good Health: Any move into Iran should not be construed as MegaFon's hand being forced by a critical domestic situation. To the contrary, MegaFon's Russian operations are in extremely good health. Although the smallest of the "Big Three" by subscriber numbers, MegaFon has reported that its revenue market share is 31% and rising, and projects that it will have overtaken its two rivals within two years. At the end of the third quarter of 2007 MegaFon had comfortably the highest ARPU and minutes of use (MOU) of the Big Three, and it is the only operator with complete nationwide coverage. It is also the only operator currently offering 3G services, and this week announced plans to move into the fixed-mobile convergence (FMC) and mobile broadband markets. Therefore, any move into Iran or other foreign markets would represent long-term thinking, rather than any essential short-term measure.