Russia’s First Fixed-Mobile Operator Emerges as VimpelCom Acquires Golden Telecom

| Dec 28, 2007 | Consumer Broadband Services - Europe | Competitive Intelligence Report

| Analyst: Bernt Ostergaard

Current Perspective: Positive/Neutral
Vendor Importance: Very High
Market Impact: Very High

Event

On December 21th VimpelCom announced that will acquire Golden Telecom in a merger agreement with an equity value of approximately $4.3 billion. The purpose is to transform VimpelCom from a mobile-centric operator to an integrated service provider and create the first fully integrated telecoms service provider across Russia and the CIS. VimpelCom’s positioning as a market leader is strengthened as a result of product bundling opportunities and Golden Telecom’s significant infrastructure.

Analytical Summary

• Current Perspective: Slightly positive on mobile consumer services operator VimpelCom’s acquisition of broadband business services operator Golden Telecom in Russia, because it signals more cooperation between Telenor and Altimo, the major shareholders in both carriers, as well as a little stability in an otherwise turbulent, but very dynamic Russian telecoms market.

• Vendor Importance: Very high to VimpelCom and Golden Telecom, as they seek to improve their competitive positions. However, they are located at opposite ends of the telecoms market (one in consumer mobile, the other in broadband business); thus, they face significant merger challenges.

• Market Impact: Very high on the Russian consumer and business telecom markets, because this is the first real fixed-mobile company tie-up between leading operators, and it may well trigger a series of tie-ups between fixed and mobile operators, leading to greater stability in the Russian telecom markets.

Recommended Competitor Actions

• AFK Sistema should now move to merge MTS and Comstar operations to counter the VimpelCom acquisition by creating a bigger fixed-mobile operator and retain its market lead. This is urgent given VimpelCom’s higher ARPU and profitability levels.

• As the number three mobile operator, MegaFon needs to get its ownership structure sorted out before it can move decisively into triple play. Altimo claims to own 25%, Telecominvest owns 31%, TeliaSonera owns more than 30% in the company (according to MegaFon's Web site) and Russian tycoons Alisher Usmanov and former Minister of Telecommunications Leonid Reiman are also nebulously involved. This volatile cocktail is not likely to provide MegaFon with the longer-term stability to acquire and integrate a fixed broadband operator.

• Orange now has a license that allows it to offer national and international long-distance services to both large and medium-sized companies across Russia. With 800 employees in place in Russia, serving 4,000 business customers across all 85 regions of the country, Orange is well placed to offer IP services, but it should also consider mobile services.

• Other global operators (AT&T, BT Global Services and Verizon Business) also need to speed up their license negotiations with the Russian telco authorities. The Russian market, both fixed and mobile, is ready for consolidation and market opportunities are strong. BT specifically needs to understand what this deal brings to the table for its existing network interconnection agreements with Golden Telecom.

• On the national consumer broadband front, operators will face more and more pricing scrutiny from telco watchdogs as customer numbers grow. These operators need to stabilize their ownership structures and evolve their services to include IPTV and mobile service bundles to avoid pricing commoditization.

Recommended End User / Customer Actions

• Fixed-mobile consolidation is good news for Russian consumers that have seen little cooperation between the plethora of service providers on the market, which is characterized by anything but stability. Customers should not expect stability any time soon either, given the complex ownership structures; thus, customers must look closely at the operational history of the operators before choosing a supplier.

• Customers looking for triple play services should primarily expect this from the new VimpelCom-Golden Telecom company. Customers of MTS should expect the operator to announce its fixed expansion roadmap in Q1 2008. Customers of MegaFon should not expect any triple play offerings from this operator any time soon.

• Customers looking for an IPTV service provider should be especially wary of high-profiled marketing that is not substantiated by proof of QoS in the last mile. Given the regulator’s downward pricing pressure in the broadband market, many DSL operators will be launching IPTV services, but few will provide any sustainable quality.

• Business customers should explore the new Orange Business Services option as a more stable regional and global service provider for managed IP services.

CLIENTS ONLY

Current Perspective

Competitive Positives and Concerns

Recommended Vendor Actions

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