MTS Records 25% Y/Y Subscriber Increase in CIS, Buoyed by Ukrainian Growth

Russia's largest mobile operator, Mobile TeleSystems (MTS), has announced in a press release its end-2006 subscriber figures for the CIS region, according to press reports. Overall subscriber figures in the region rose by 14.67 million to 72.86 million, equating to a 25.2% year-on-year (y/y) increase. Although the biggest country of growth was Russia, with 7 million new subscribers over the 12-month period, the most significant percentage rise was in Ukraine, where the 6.67 million new subscribers reflected a 50% y/y increase.

Outlook and Implications

Russian Subscriber Growth Slowing

MTS's annual subscriber increase of 16% in 2006 compares with 66.6% in 2005 and 98.5% in 2004. This slowdown in growth is a natural consequence of the growing penetration levels in the Russian market, where there are estimated to be around 150 million active SIM cards, equating to SIM penetration of around 100%. Even allowing for multiple-SIM ownership, this indicates that there is little room for further organic growth. This is particularly true in the economic hubs of the capital Moscow and St Petersburg. The higher-end users of this region have in the past been obvious targets for mobile operators, but MTS has recorded that in the Moscow Licence Area, subscribers numbers grew from 10.18 million to 11.21 million, equating to annual growth of just 10%. Similarly, in St Petersburg annual growth was 10% as the subscriber number grew from 2.45 million to 2.69 million. MTS may well be disappointed by its performance in Moscow, given that rival operator MegaFon recently announced annual subscriber additions of around 2.5 million (see Russia: 15 January 2007: MegaFon Records 5 mil. Moscow Subscribers at End of 2006). However, the decline in overall growth in Russia was to be expected. MTS has already made clear that its former policy of frantic subscriber uptake has been consigned to the annals, and the price war in the Russian market appears to have ended. At the end of the third quarter of 2006, MTS had maintained its position at the head of the Russian subscriber market, but it is now focusing more on revenue generation, through increased voice traffic and value-added services (see Russia: 25 October 2006: MTS Outlines Plans for Capex Reduction in 2007). Nevertheless, the large and disparate nature of the Russian population suggests that there may be room for some further growth in the regions in 2007. The operator may also aim to churn subscribers from rival operators, or even espouse the virtues of multiple SIM ownership.

A Successful Year in Ukraine

The Ukrainian mobile market is following the pattern of the Russian market in the early part of the decade, with strong growth in 2006. Following annual subscriber growth of 120.0% and 80.9% in 2004 and 2005 respectively, MTS's Ukrainian unit, Ukrainian Mobile Communications (UMC), has experienced another 12 months of strong uptake. There remains scope for organic growth to continue in 2007, and there is strong competition in the sector, with Kyivstar's 21.5 million subscribers earning it pole position in the country's market (see Ukraine: 16 January 2007: Kyivstar Records 21.5 mil. Subscribers at End-2006). Unlike in Russia, where operators are switching their focus to value-added services and voice traffic, the emphasis in Ukraine remains on subscriber uptake. This is partly due to the refusal of the country's regulators to grant 3G licences, which limits the range of marketable value-added services (see Ukraine: 14 November 2007: Regulator Refuses 3G Licences to Mobile Operators). In the longer-term, Ukrainian operators will almost inevitably follow the Russian model of switching focus to revenue generation. However, in 2007, MTS is likely to pin its hopes of subscriber growth on UMC's operations in Ukraine.

Minor Operations Strengthen the MTS Footprint

MTS's growth in other regions across the CIS has not made a significant impact upon its subscriber numbers, but does have benefits. Established operations in Uzbekistan, Turkmenistan and Belarus help it to expand its geographical footprint and secure its position as one of the leading mobile operators in the CIS. This can help with roaming, and also increase the kudos of the company as it explores expansion opportunities further afield.