VimpelCom Looks to Alternative CIS Markets for Subscriber Growth

VimpelCom's first-quarter 2006 figures indicate that flagship operations in Russia are healthy, with net revenue in the period up 46.1% year-on-year (y/y) to US$936.2 million (see CIS: 2 June 2006: VimpelCom Withdraws Kyivstar Bid). However, falling ARPU rates are indicative of a market that has matured, and in which growth opportunities are becoming increasingly limited, amid high penetration and strong competition. The aim in Russia now appears to be to stabilise ARPU; the company is therefore looking to new markets for subscriber growth and revenue expansion.

Outlook and Implications

Ukraine – Renewed Focus on Wellcom: Ukraine is the second-largest mobile market in the CIS, and has more potential for organic growth than Russia. As such, it represents a key component of VimpelCom's operations. CEO Alexander Izosimov was recently quoted by Prime-Tass as telling Vedomosti that in light of the deterioration of relations between shareholders Telenor and Altimo, the much-speculated deal on the purchase of leading Ukrainian operator Kyivstar looks increasingly unlikely. Therefore, VimpelCom will now focus its Ukrainian operations on Ukrainian RadioSystems (Wellcom). VimpelCom purchased Wellcom for US$231 million in November 2005. The latter has only around 278,000 subscribers, less than 1% of the national market, but Izosimov has stated his plans to increase this share to around 10% within three years. VimpelCom has certainly not been afraid to invest in its Ukrainian subsidiary and, significantly, has now brought its Ukrainian operations under its trademark ”Beeline” brand (see Ukraine: 4 April 2006: WellCom Promotes Beeline Brand in Ukraine). Having dropped its interest in Kyivstar, VimpelCom can be expected to continue and indeed increase this programme of investment. However, the plan to acquire 10% of Ukraine's market may be optimistic. Although there is certainly room for further growth in Ukraine, the market is highly competitive. Kyivstar and Ukrainian Mobile Communications (UMC) dominate, and are therefore in a position of strength that allows them to lower tariffs in order to maintain subscriber numbers. Astelit has been aggressively consolidating its position as the third player. Launching GSM operations in January 2005, it has already gained almost 10% of the market (see Ukraine: 2 June 2006:Astelit Records 3.24 mil. Subscribers in Q1). In order to present a challenge in the subscriber market, VimpelCom would therefore need to introduce extremely competitive tariffs and invest heavily in marketing its brand, which in turn means that any significant subscriber gains for VimpelCom would almost certainly come at the expense of ARPU levels.

Kazakhstan – Success, Room for Further Growth: In the first quarter of 2006, VimpelCom's most significant progress was made in Kazakhstan. VimpelCom owns a 50%-plus-one-share stake in GSM operator KaR-Tel, which is competing with joint TeliaSonera and Turkcell-owned K-Cell. KaR-Tel's subscriber numbers rose to 2.12 million, from 1.05 million 12 months earlier - a 101.6% year-on-year (y/y) rise. Net revenue in the period rose 54.3% y/y to US$54 milllion, from US$35 million a year earlier. However, ARPU levels in Kazakhstan have dropped from US$11.50 at the end of the first quarter of 2005 to US$7.80 a year later. This can be attributed to the strong competition offered by K-Cell. KaR-Tel has concentrated on vying with its rival to attract customers, through reduced tariffs and cheaper packages, at the expense of ARPU levels. Although penetration levels of around 25% in February 2006 indicate that there remains room for subscriber growth, the market’s competitive nature is likely to limit the extent of the company's revenue growth.

Uzbekistan – Intense Competition: Competition is particularly strong in Uzbekistan; three GSM and two CDMA operators compete with VimpelCom's Buztel and Unitel (see Uzbekistan: 18 January 2006: VimpelCom Enters Uzbek Market). VimpelCom estimates that in total, it commands around 421,000 Uzbek subscribers - around 31.5% of the market. Net income in the first quarter of 2006 amounted to US$1 million. Having only completed the acquisition of the two operators in 2006, VimpelCom hopes to integrate them into the group brand before the year-end; it will therefore not expect any immediate progress in terms of market share. VimpelCom will expect its investment and marketing campaigns to help it become a major force in the Uzbek market, but the country's growth potential has attracted investment from other overseas operators, including Mobile TeleSystems (MTS). In this competitive, growing market, VimpelCom will have to work hard to become the outright market leader. A low-income country, Uzbekistan will not provide a major source of revenue, but will be seen as having a longer-term organic growth potential.

Tajikistan – 3G a Potential Source of Revenue: In December 2005, Vimpelcom entered the Tajik mobile market with the acquisition of Tacom (see Tajikistan: 30 December 2005: VimpelCom Acquires 60% of Tacom for US$12 mil.). Tacom has around 26,700 subscribers, a 9.5% market share, and owns a GSM 900/1800 licence. The company generated revenues of around US$180,000 in the first quarter of 2006. VimpelCom expects to launch its Beeline brand in Tajikstan by the year-end, as well as potentially lucrative 3G services (see Tajikistan: 26 April 2006: VimpelCom's Tacom Agrees 3G Deal with Huawei ).

Subscriber Growth, Not Revenue Growth: VimpelCom will be pleased with its progress in alternative CIS regions, as these provide some security in terms of medium-term subscriber growth - particularly as the scope for growth in Russia is limited. However, this does not guarantee medium- to long-term ARPU growth. Geographical expansion incurs the costs of marketing, infrastructure development and, in competitive markets, low tariffs. In nascent markets such as Uzbekistan and Kazakhstan, strong competition will continue to force VimpelCom to introduce low tariffs, and this is likely to be detrimental to ARPU levels. VimpelCom will also have to compete with other Russian operators, which find themselves in a similar position of seeing domestic revenue growth slow and are therefore looking to expand into emerging CIS markets. Izosimov has not ruled out further expansion of the company's regional footprint, but opportunities for significant revenue growth are limited.