Telecom

The National Commission for Regulation Communications has developed draft amendments to the conditions for the licensing of mobile services, according to the newspaper “Economic News”. The draft proposes the introduction of certain changes in the dates operators must begin immediately providing telecommunications services and networks covering a specific territory.

The draft states that if an operator has received a license to conduct mobile communications services in certain regions, he has six months to begin service delivery. If the license covers a few regions, an additional two-month period is provided to commence the provision of services in each respective region. If the mobile communications license is national in scope, then the term for beginning to offer the mobile services specified is four years and ten months. Similar rules have already been identified with respect to licenses to use radio frequency resources.

The Working Group established to create this draft also mentions conditions on a few new items. Accordingly, within a year of receiving a mobile license, the provider is required to cover network coverage to at least 90% of the cities in the region specified in the license. If several regions are proposed for coverage, two months should also be awarded to introduce those services in each respective region. Within a two-year period, the operator should cover 80% of all settlements and major transport routes in a particular region. For other regions specified in its license, an additional interval of two months should be provided to achieve this.

“Previously, such a rule did not exist. Now we are proposing its introduction,” commented NCRC Member Vladimir Zverev “The operator simultaneously receives both a mobile and a radio frequency.” Zverev also noted that the main idea embodied in the draft is to increase the effectiveness of the use of frequency resources in Ukraine. At the same time, market operators believe that if the amendments are approved, they may face difficulties in the development of 3G mobile networks, for which there was initially no obligation to cover most population centers, but only major cities.

Our view: If these amendments are indeed accepted, this news is NEGATIVE for existing small mobile players; however, this news is primarily POSITIVE for Ukrtelecom [UTEL UZ, U/R] and for the main 2G mobile players such as Kyivstar, MTS and Astelit. These companies have already built their own network across Ukraine’s regions.

By imposing such strict limits on the timeline and related expansion of one’s coverage in a given region, mobile communications operators will face stringency in their operational plans of offering coverage in Ukraine, which may limit their operations territorially. As such, we may see operators forced to introduce its services in a ‘building block’ fashion, whereby they may expand their network to new regions only once coverage is adequately provided in the particular regions with which is operations began. Particularly demanding for them will be the responsibility to also provide coverage throughout a given region (80% of all settlements and major transport routes of a given region) rather than just to the major cities located therein. Additionally challenging will be the need to achieve that goal within a two-year period.

Ukraine’s giant telecommunications company Ukrtelecom [UTEL UZ, U/R] – the country’s fixed-line incumbent – has affirmed its plans to implement a 53.8% increase in its subscriber base for 3G communication services in the UMTS standard, offered under the brand ‘Utel’, by the end of 2008. Such an boost would bring the number of clients for this service up to 200 thsd.

Ihor Syrotenko, the company’s Deputy Chairman of the Board stated that Utel currently has over 130 thsd clients, while that figure was 54 thsd on October 1, 2008 – representing a two-fold increase in subscribers in just two months.

He attributed this sharp growth to the company’s marketing and sales plan, which he commented on in an interview with the ‘Delo Tekhniki’ magazine, noting that contrary to the previous approach of conducting sales exclusively through ‘Utel’ shops, the company has now expanded this network to a wide span of Ukrtelecom affiliates.

Currently the OJSC Ukrtelecom is the only owner of a 3G license for using the radio frequencies in a band of 2.1 GHz, having received it in December 2005 without competition for UAH 151.39 million. At present, Ukrtelecom controls 78.5% of the fixed line telecommunications market in Ukraine and has more than 10.1 mln clients.

Our view: We think that a two-fold increase in the subscriber pool would definitely be positive for Ukrtelecom. We attribute the significant growth in subscribers on Utel’s marketing efforts via different channels in promotion of the mobile services offered for various types of mobile users. About two months ago, the company signed agreements with new partners, which Utel is now using as a distribution channel for its services. Also, Utel has opened numerous new service centers across Ukraine, which allows customers to gain access to company services and receive similar client support as provided by 2G operators.

We also hold a positive view of Utel’s recent announcement of its new roaming opportunities and coverage in more foreign countries, which will impact on the company’s services package. However, we hold a skeptical view that Ukrtelecom can reach its announced number with 200 thsd users by the end of 2008. Based on the current macro environment in Ukraine, we see that consumer spending on non-essential products is decreasing, which can be a negative trend for Utel. However, we suppose that UTEL may launch a pre-Christmas promotion campaign that will impact on the final number of clients achieved by year end.

Next year, Ukrtelecom could lose its monopoly status, as the National Communication Regulation Commission (NCRC) recently announced it will start accepting applications from companies wanting to purchase 3G mobile licenses in the UMTS standard in order to render 3G communications services. Last week, the NCRC began to study the demand for such licenses. This no longer excludes the possibility of increased competition and, consequently, a reduced market share for Ukrtelecom. In the summer of 2007, the Ukrainian Government approved a plan for radio frequency resource conversion, which foresaw the attraction of funds from mobile communication operators in return for use of the bands. Originally, the NCRC had planned to open up bidding for 3G frequency access in the second to third quarter of 2008. Subsequently, mobile operator Kyivstar tried to compel the Commission to issue it a 3G license in court, but lost the case.

92.79% of Ukrtelecom is currently owned by the state, with the other 7.14% held by the company’s staff. We currently have this company under review and will keep investors posted as to important developments concerning this company as they arise.

The State Statistics Committee of Ukraine revealed that, in November, revenues of enterprises providing communications services fell by 5.2% in hryvnia terms compared with October, from roughly UAH 3,910 mln to UAH 3,705 mln. Since the hryvnia depreciated in November by an average of 17%, this actually means that telecom revenues decreased by 19% MoM (in USD terms).

This general decrease in revenues is related to an overall decrease in the volume of mobile cellular communications services for the month. Operators' revenues from mobile cellular communications services fell by 4.7% MoM to nearly UAH 2,301 mln. In November, revenues from mobile communications services accounted for 62.1% of all revenues from communications services in Ukraine.

In the period January-November, revenues from all communications services were roughly UAH 41,864 mln (or USD 7,926 mln), representing a 15% increase (in USD terms) from the results for the same period in 2007.

In this same period, mobile telephone revenues increased by 19% YoY to USD 5,345 mln (and 19% MoM in November in USD terms, or 4.7% MoM in hryvnia terms). Fixed-line telephone revenues decreased by 3% YoY to USD 1,745 mln (down 22% MoM in November in dollar terms, or 9% MoM in hryvnia terms). In terms of ISP services, revenues increased by 48% YoY (in USD terms) to USD 426 mln (down 17% MoM in November in USD terms, or 2.1% MoM in hryvnia terms).

As Sokrat reported last month, October communications revenues fell by 2.5% compared with September, from roughly UAH 4,008 mln to UAH 3,910 mln. In 2007, revenues from communications services were roughly UAH 39,870 mln.

Our view: We see this news as NEUTRAL for Ukrtelecom [UTEL UZ, U/R], since the overall drop in revenues for telecommunications service in October was mainly dependent upon the 4.7% revenue drop for the mobile phone segment. In revenue terms, the effect on the market share for UTEL, which has a 3G license and is a subsidiary of Ukrtelecom, is negligible. We see the fact that the overall telecom revenue is down as being directly connected with the current global crisis and a decrease in consumer spending, especially for heavy corporate customers, on telecommunications services in Ukraine. We think that such corporate customers can quickly migrate to using IP service vs. traditional fixed-line services provided by Ukrtelecom, which can negatively impact on the incumbent’s revenue. We think that telecommunications revenues in December will be higher due to increased pre-holiday user activity, especially amongst mobile customers.

92.79% of the OJSC Ukrtelecom is currently owned by the state, with the other 7.14% held by the company’s staff. We currently have this company under review and will keep investors posted as to important developments concerning this company as they arise.

A new initiative whereby Ukrainian subscribers may be able to change from one telephone operator to another while still maintaining their same number and national roaming service thanks to the introduction of Ukraine’s parliament of draft law No. 3420 “On amending the Law of Ukraine “On Telecommunications” (to increase the list of services)” of 28.11.2008.

If the bill is adopted, Ukrainian subscribers will have the opportunity to move from one operator to another while maintaining their number. To that end, the National Commission for Regulation of Communications (NCRC) would allocate operators the right, to some extent, to specifically introduce number portability services (Mobile Number Portability, MNP). Under the bill, these provisions would come into force on May 1, 2009 for mobile numbers and on January 1, 2012 for stationary numbers.

With regard to national roaming, this would take place by operators entering into contracts with one another and then provide roaming services in Ukraine to each other’s clients in the case that subscribers of one operator went beyond its network but still located within the network of its competitor. In that case, the agreement would enable to subscriber to use the network services of its host’s competitor while in that particular zone.

Our view: At this point, we view this news as NEUTRAL, since market participants’ reaction to the bill is, so far, ambiguous, as are the prospects of this legislation actually being adopted. Some are generally supportive, noting that the bill is viable and contains the necessary changes to the conceptual apparatus, establishing the basic principles of the introduction of MNP and national roaming and clearly establishing the public agency that will regulate these processes and develop the provision of these services.

For this initiative to go ahead, it would be necessary for the NCRC to develop a sub-legal framework to outline the details of implementation. It is likely that the speed of the bill’s introduction would entirely depend on the actions of the NCRC and market participants themselves, as to whether universal consent can be rapidly achieved.

Yet other mobile operators feel that the introduction is untimely and that the services would bring additional costs which would have to be compensated – directly or indirectly – through fees charges to subscribers. This perspective decreases the likelihood of the introduction of national roaming or MNP, based on the increased cost of services to subscribers, since they are unlikely to appreciate such innovations. Given the current market conditions, they further argue that operators, regulators, providers must avoid any negative market trends related to price increases.

At present, there are not many examples in the world where the MNP service has been implemented, and its introduction in Ukraine requires that operators will need to purchase additional equipment and software, as well as upgrade existing ones. At the same time, Beeline has been providing a national roaming service for Utel subscribers for a year already, and the company has not seen much difficulty in implementing the project with other operators. Beeline Implementing roaming at the domestic level, in this respect, takes about two months, with no additional cost to operators expected.

In those countries where the MNP service does exist, experts noted that it is not particularly popular service. The agency Sunrise Consultants, the number of subscribers moving from one operator to another while using MNP in Australia, Sweden and Britain have not even reached a subscriber base of 2% per year. The rate is highest in Hong Kong and Finland, with rates of 8-10% respectively.

For Ukrtelecom, we think this news can be positive if the law will be accepted. The Ukrainian mobile market is growing, meaning that user numbers from 2G operators can move to Ukrtelecom, which provides 3G services to its customers. We see a negative reaction from 2G operators, which would like to protect their own user pools and not share existing clients with their competitors.

Leading telecommunications provider Ukrtelecom [UTEL UZ, U/R], which offers broadband internet services under the ‘Ogo’ brand, has confirmed its lead position on the internet service provider market in 9M08. This information was revealed based on statistics released by the company ‘iKS Consulting’, which studies telecommunications markets in Russia and the CIS.

According to its announcement, Ukrtelecom reported a 38.1% market share and 430,000 internet subscribers in 9M2008. In this same period, the number of subscribers to Ukrtelecom's internet service grew by 52.7% YoY in 9M08. The company’s nearest rival, Volia Cable, achieved a subscriber base of 347,000 in 9M08.

The iKS Consulting company also disclosed that Ukrtelecom's mobile communication unit boosted its subscriber base by 47% MoM in October to 92,000 subscribers, according to the company ‘iKS Consulting’, which studies telecommunications markets in Russia and the CIS. The month’s results for Utel compare favorably to the overall change in this segment. In October, the number of mobile communications subscribers in Ukraine fell by 0.05% or by 30,000 subscribers to 55.42 mln.

To date, Ukrtelecom is the only company in Ukraine to have received a 3G license of the UMTS communications standard, under the “Utel” brand (trademark). That decision, made back in December 2005, was not subject to a tender process. The operator finally launched 3G services under the "Utel" brand in November 2007.

At present, Ukrtelecom – the country’s fixed-line incumbent – controls 78.5% of the fixed line telecommunications market in Ukraine and has more than 10.1 mln clients. The company ambitiously aims to achieve a total of 200,000 3G service subscribers and 700,000 internet subscribers by the end of the year.

Our view: This news is POSITIVE for Utel. The high growth in October is a direct result of the improvement in the company’s marketing and sales strategy. We attribute the significant growth in subscribers on Utel’s marketing efforts via different channels in promotion of the mobile services offered for various types of mobile users. The company has recently signed agreements with new partners, which Utel will use as a distribution channel for their services. Also, Utel has opened numerous new service centers across Ukraine, which allows customers to gain access to company services and receive more comprehensive support than 2G operators provide. We also hold a positive view of Utel’s recent announcement of its new roaming opportunities and coverage in more foreign countries.

Ukrtelecom could soon lose its monopoly status, as the National Communication Regulation Commission (NCRC) recently announced it will start accepting applications from companies wanting to purchase 3G mobile licenses in the UMTS standard in order to render 3G communications services. The NCRC just began to study the demand for such licenses this week. This no longer excludes the possibility of increased competition and, consequently, a reduced market share for Ukrtelecom.

Ukrtelecom’s internet services have been flexible, offering various prices and options, including retail-priced packages for small enterprises. Its growth rates are higher than its competitors and we are confident in Uktelecom’s broadband capabilities. The company’s advantage in terms of infrastructural development may help the company remain competitive in future. However, we reiterate from previous Sokrat news, our expectation that the company will fall significantly short of its target number of subscribers for the ‘Ogo’ service.

We currently have this company under review and will keep investors posted as to important developments concerning this company as they arise.