# Telecom Industryin Samara

By Ekaterina Solovova,BISNIS Representative in Samara

December 1999

#  

# SUMMARY

 

Traditionally, the formerstate providers and their regional subsidiaries monopolized the fixed-linetelecom market in Russia. The wireless telecom market is often characterized asan oligopoly.  However, attempts todemonopolize the fixed-line telecom market and increase foreign and domesticinvestment inflowsto the industry are underway. Additionally, private operators activelyintroduce new telecommunications technologies and offer ~~ ~~their clients substitutionsof the traditional telephone services.   Regional markets, such as Samara, reflect the pictureand changes of the overall Russian market, though with some delay.Nevertheless, as the competition in Moscow and St. Petersburg grows, companieswill expand their activity into the regions, thus increasing competition,equipment purchases, and investment in regional markets.

 

This report gives an insight to the Samara telecommarket and its reflection of the country’s market.

 

**BRIEF SKETCH OFTHE RUSSIA’S TELECOM MARKET**

** **

The Russian telecom industryin general was poorly financed and underdeveloped for years. The number ofaccess lines in Russia is currently about three times less than in the U.S. andJapan. According to different estimates, Russian telecommunication industrieswill require from $20 to $80 billion within the next 10 years. Some nationalcompanies and foreign investors are already implementing their investmentprojects. For example, Transtelecom, an affiliated company of the Ministry ofRail Communications, has launched construction of a communication networkthroughout Russia. This company is trying to compete with Rostelecom, themonopolist in the Russian long distance communication market. 

 

There is noticeable activityin the wireless market as well: foreign strategic partners of the major Moscowand St. Petersburg providers are ready to invest significant amounts into theirexpansion to the Russian regions. For instance, the private company VimpelCom,a major AMPS operator in Russia, started to take over the cellular market ofGSM 900/1800 in a number of regions, such as Voronezh, Rostov-on-Don, Samaraand Novosibirsk. “Mobile communications services continue to show rapid growthdespite the 1998 crisis. It is predicted that the number of mobile phone userswill exceed 1 million by the end of the year 1999.” (*TELECOM NEWSLETTER, #8-9, 1999)*

 

Besides the lack offinancing and technological lag, there are other obstacles to fair competitionand industry development, such as the absence of uniform “game rules”,uncertain legislation and bureaucracy. “Today, a license for constructing afiber optic line is issued for a period of 5 years, whereas its payback periodis at least 7 years”, says Mr. Reiman, the Chairman of Goscomtelecom, in hisinterview for *TELECOM NEWSLETTER (#8-9,1999).* Another example is LeapWireless’s decision to pull out the Russian CDMA market, partly becauseGoscomtelecom has repeatedly refused to grant mobility to CDMA operators.(According to *TELECOM NEWSLETTER, #8-9,1999)*

##  

## Longdistance communications

 

Rostelecom still maintains a monopoly over long-distancecommunication in the country. However, its position could be shaken in the nearfuture. Transtelecom claims to rival Rostelecom, although its attempt to obtaina completed package of licenses has failed so far. Transtelecom intends to sella 49% share to a strategic investor. Other emerging players in the market areRAO United Energy Systems of Russia and AO Gasprom which are developing longdistance communications projects. 

 

According to experts, if atleast one of the above-mentioned projects is successfully implemented, thelong-distance communications market will change considerably. Intensifiedcompetition will reduce prices and increase the availability of services.

 

Regional lines are stillcontrolled by the public switch telephone network that replaced the SovietTelecommunication Department.  InSamara this structure is represented by Svyazinform of the Samara Region. DLDtariffs are controlled by the Anti-Trust Ministry and in many regions they arelower than cost price.

 

## Mobilecommunications

 

At present there are threemajor groups of cellular providers operating in Russia. These three holdings willconstitute Russian cellular oligopoly in the nearest future.

 

�      AO VimpelCom controls the biggestnetwork of AMPS/DAMPS standard in Moscow and Moscow region. VimpelCom operatesin other Russian regions through its subsidiaries and affiliated companies,such as BeeLine Samara. 

 

�      AFK Systema, whichcontrols the Moscow City Telephone net and its subsidiaries. As VimpelCom,Systema actively promotes GSM standard in the regions. 

 

�      Telecominvest,based in St. Petersburg. At the end of last year, Telecominvest started toacquire cellular companies in other regions of Russia, such as Mordovia andSaratov. 

 

However, neither thecellular market, nor wire communications in Russia candevelop without foreign strategic investors. For example, all three companiesmentioned above have foreign co-founders: 

 

### Russian company            Foreignco-founder

| VimpelCom     | Telaris (Sweden +Norway)   |
|---------------|----------------------------|
| AFK Systema   | Deutsche Telecom (Germany) |
| Telecominvest | Telaris+Sonera (Finland)   |

 

Telaris, which has someregional affiliated providers of GSM standard, is showing an interest in thebig regional GSM-900 provider Smarts-Samara-GSM, based in Samara. Metromedia(USA) acquired PLD Telekom, which was a shareholder in several regionaloperators. Global One also acquired the full stock of its Russian affiliated providerof data transmission.

#### Source: Expert #45, 1999

 

**SAMARATELECOMMUNICATIONS MARKET**

 

**MarketOverview**

** **

Samara Region is considered to be one of the mostattractive and potential markets for foreign investors because of itsrich resources (oil&gas), advanced economy (Samara produces 4percent of Russia’s GDP) and favorable political climate. It was thecenter of the Soviet aircraft and defense industries, which aregradually being converted into consumer goodsand other types of production.

 

Thepopulation of the region is 3.3 million, of which 80 percent are urban,including 1.2million in the Samara city.Besides Samara, thereare other large cities in the region: Togliatti, Syzran, andNovokuibyshevsk. Togliatti is particularly attractive because of theconcentration of capital around AutoVAZ (the largest car producer in Russia).Taking into account the facts that Samara has one of thehighest per capita consumer spending levelsamong Russianregions(outside Moscow)*,there is growing business activity, and the average wage isabove Russia’saverage by 14 percent,* one may expect an increasing demand for high-quality moderncommunications services in the Samara region. Telecommunications industry isrelatively developed in the Samara region and there are favorable preconditionsfor its further development. There is a Regional State Academy ofTelecommunications in Samara, which supplies highly qualified specialists totelecommunications companies and conducts research in this industry.

 

**Fixed-line Communications**

** **

The penetrationratein Samara is 15 lines per 100 inhabitants, and 30 percent oflines are equipped with metering equipment. About 270 thousands of citizensare in a waiting list now, and 40 percent of residential users aresubsidized.* The deficit stems from the absence oftechnical possibilities of analog telephone exchanges since only 20 percentof lines are digital.* Replacement of old analog telephoneexchanges to the modern digital ones is in the nearest plans of Samara standardtelephone operators. 

 

Although 30 percent ofSamara residential users are low income subsidized households, there is agrowing number of corporate clients ready to pay for the high quality servicesoffered by private providers. Furthermore, one-third of installed capacity isequipped with metering equipment, and talk of introducing local per-minutebilling started to circulate in the government again. The fixed-linecommunications sector is not profitable now due to the low tariffs andgovernment control, however, it is still a good case for the long-terminvestments. This sector will benefit from any positive changes that come toRussia. 

 

## Major Players

 

Since the beginning ofprivatization process in Russia the number of joint-stock companies and limitedpartnerships operating in the sector has increased up to 80. However, allfixed-line operators are interdependent due to the united communicationsnetwork and limited long-distance access. Apart from the corporate fiber opticscommunication lines of RAO UES of Russia and AO Gazprom, Samara has twoMoscow-based companies, that provide local operators with long-distance access:Rostelecom and Global One. The following are local major fixed-linecommunications providers in the region.

 

Svyazinformof Samara Region

 

Svyazinform of Samara Region is a government controlled,major regional operator. It previously held a monopoly position for all telecomservices in the Samara Region and at present resells the long distancecommunication to other city telephone companies.

 
| **Indicator**                 | **1998** | **1999E** |
|-------------------------------|----------|-----------|
| Lines in service (LIS)        | 477,600  | 505,600   |
| Revenues, $ mln.              | 79       | 36        |
| Revenue per line (Rev/LIS), $ | 165      | 71        |

*Source:**Troika Dialog Research*

* *

Although the company increased the number of lines andruble tariffs after the crisis in 1998, the revenues are less optimistic indollar terms.  The Rev/LIS ratio isalmost at the Russia’s average (75) level, which is one tenth of the averagedeveloped market economy telephone company.*

 

Svyazinform of Samara Region has 38 branches in the Samararegion. Among them, there are 29 nodes in the city of Samara, providing longdistance and regional telephone services, telegraph, broadcast, data transferand cellular connection. The company holds a stake in a local NMT-450 operator,Samara Radiotelephones, and a 2.5% stake in a local GSM operator,SMARTS-Samara-GSM. Svyazinform of Samara Region has been audited byPriceWaterhouseCoopers. 

* *

*Samara Telecom*

 

Closed joint-stock company SamaraTelecom was founded in 1996, as one of the independent telephone providers inthe city of Samara. This company runs the modern telephone exchange 5ESS ofLucent Technologies (AT&T). Samara Telecom also provides Internetconnection. The company plans to replace two old telephone exchangeswith modern equipment in the business sector of the city. Another stepplanned to upgrade the fixed line communications is construction ofAsynchronous Transmission Modem network in the Samara region. Previous regionalsystems of data transmission are not able to process the existing informationtraffic. The management claims total investments needed for this projectis from 4 to 10 millions of U.S. dollars.

*** ***

#### TeleRoss-Samara

 

Teleross is a regional branch of a telecomnetwork created by the American company GTS and SvyazInform. Thenetwork consolidates 14 regions of Russia by a common digital satelliteconnection. Besides the standard telecom services, TeleRoss provides a directtelephone line to Moscow and the World Access Direct system. 

*** ***

**Mobile****Communications**

*** ***

The lack of highly developedwire telecommunications systems has resulted in increasingly more subscriberslooking for wireless solutions. Furthermore, ruble devaluation after the crisisforced local cellular operators to set prices down. The number of potentialusers increased and enabled operators to expand their market into the lowerincome clients segment. For example, VimpelCom (Moscow) has stated it isplanning to spend $300 millions on its regional projects over the next fiveyears. Mobile communications show rapid growth in the Samara region andincreasing trade and investment opportunities.

*** ***

## Major Players

 

Thereare 6 operators, working in different standards in the region. However, two ofthem, BeeLine – Samara (AMPS/DAMPS) and SMARTS-Samara (GSM 900), cover 90percent of the market. These companies assess potential of the local market as250,000 users, now the total amount of subscribers is about 35,000, including1,500 users of NMT-450 standard**. The number of mobile phones users isincreasing while the prices are coming down. 

 

*BeeLine*

 

BeeLine-Samara was foundedin 1994 as a subsidiary of Moscow-based VimpelCom. It was the first cellularoperator in the Samara region and now remains a leader in this sector, serving60 percent of regional market. In 1998 the company joined the UniversalWireless Communication Consortium. The number of BeeLine’s clients hasincreased from 15,000 in August 1999 to 17,900 in December 1999.

BeeLine has a long-termagreement with Ericsson (Sweden) for equipment supply and technical service.

* *

*SMARTS-Samara-GSM*

 

The Central VolgaInter-Regional Association for Wireless Telecommunication Systems (SMARTS)started to work in Samara region in 1995. This company unites regionaloperators of GSM 900 and covers the Saratov, Astrakhan, Volgograd, Penza andUlyanovsk regions. The company’s next major project is to organize a GSM1800digital cellular communication network in those regions. The project costs areassessed as $ 50 million. Both foreign and Russian investors and companies willbe involved in implementing the project.

*** ***

**Internet and Television Technologies**

** **

Along with conventionaltelecom services and Internet, local providers are developing new markets, suchas IP telephony and cellular television. Approximately two years ago, IPtelephony service first appeared in Samara. Now there are three providers ofthis service in Samara:

 

�      SAMARA INTERNET, 

�      PICSEL 

�      GLOBAL TELECOM

 

SAMARA INTERNET and PICSELare connected to TARIO network, GLOBAL TELECOM is connected to RGC network.Currently there are four IP Telephony servers in Samara with total capacity of240 telephone lines. However, according to expectations of the given providers,the demand for IP telephony equipment will be growing in the nearest future.

 

The following trends can benoted regarding modern TV technology:

 

�      Cellular TV. The newly foundedcompany OAO Telecommunications Network is to develop this market in Samararegion. The company assesses the potential market as 300,000 users. The mainshareholders of the company are the Administration of Samara Region and SamaraTelecom, 51 percent of shares is to be sold to the potential investor. The costof a pilot project is $1 million. The total cost of the whole project is about$18 – 20 million.

�      Interactive channelsintroduced by the Teleradiocompany RIO.

�      Commercial satellite digital TV.The Moscow based company NTV+, which has a representative office in Samara,serves this market. 

*** ***

There are also a number of paging companies in Samara, thelargest of which are: ADVK, Radiocommunications, and Westcom.

 

**Telecommunication Equipment**

 

## Local Production

 

Local production of the modern telecommunication equipmentis insignificant and hardly competes with leading foreign manufacturers. Thereare some attempts to design cellular equipment for NMT-450 and GSM operatorsundertook by ZAO MOBICOM. There is an optical fiber cable production: SamaraOptical Cable Company (SOCC) and number of companies offering design ofdifferent corporate networks.

* *

*Samara Optical Cable Company*

 

SOCC wasfounded in 1997 as a joint venture between Samara Cable Company and CorningInternational Inc.(USA). The company’s quality management system has ISO 9002certificate, issued by Dutch Certification Company KEMA (member of IQNet).Corning Incorporated is an exclusive supplier of optic fiber to SOCC; theequipment used in the production is supplied by SWISSCAB (Switzerland) and MALI(Austria). One of the main customers of SOCC is Rostelecom. The company is alsolooking to expand its market by participating in different tenders and studyingexport opportunities.

 

*MOBICOM*

 

MOBIKOM is a small company, which produces base stationscontrollers for cellular connection in small regional towns. These controllersare used in NMT-450 and GSM-900 standards.  To produce them, the company buys foreign hardware andinserts the necessary software. MOBIKOM started to develop base stations forSMARTS-Samara GSM. MOBICOM is interested in products of EXCEL SWITCHING CORP(USA) especially EXCEL platforms, which could be transformed particular to theregional needs.

##  

## Competition and Purchase Patterns 

*** ***

The majority oftelecommunication equipment used by Samara providers is imported. Equipment,offered by Russian producers is either not of adequate quality or made withforeign hardware and technology.Besides MOBICOM there is another example ofsuch production: Moscow-based company SVETETS, which produces equipment for IPtelephony, using Dialogic (USA) platforms. 

 

This situation offers anopportunity for U.S. manufacturers to form joint production with small Russiancompanies. By switching the assembly and adjustment of components to theRussian partner, import duties, and therefore, retail prices of the equipmentmay be reduced.

 

Private companies withsignificant capital investments work only with leading foreign brand names.Cellular operators use equipment supplied by Ericsson (Sweden, BeeLine),Siemens (Germany, SMARTS) and Nokia (Finland, NMT-450). BeeLine also sellsMotorola (USA) cell phones. Fixed-line communication provider Samara Telecom ispartly equipped by Lucent Technoloies (AT&T, USA). Other foreign companiesrepresented in the Samara market are Italtel (Italy), Alkatel (France).

 

Although Europeancompetition is very high, U.S. equipment producers also take significant marketshare. Internet and IP telephony providers prefer to buy equipment from CiscoSystems.  Most of the satellite TVequipment sold in Samara is American.

 

Usually, equipment for bigprojects is bought from manufacturers directly along with supporting services.Small and medium-sized companies buy their equipment in Moscow and St.Petersburg. Due to difficult customs clearance at the regional level, there areno direct purchases from Samara. Small trading companies in Samara prefer to pay additionaltransportation costs rather than going through the bureaucratic andtime-consuming process of dealing with local customs. American equipment isrespected for quality, but often is more expensive than that of Europeancompetitors’. However, there is a good opportunity to take over Russianregional markets by organizing a consignment warehouse in Samara and supplyingproducts to surrounding regions. Some local suppliers of cable TV equipment areready to organize sales in the Volga regions and beyond.

##  

##  

## Best Sales Prospects

 

Based on the above mentioned upcoming changes anddevelopments in the telecommunications market in the Samara region, the demandfor the following telecom technologies and equipment exist in this region:

 

1.    Asynchronous Transmission Modems

2.    Digital telephone exchanges

3.    IP telephony and supporting equipment (servers)

4.    Satellite digital TV equipment (converters, receivers,amplifiers, etc.)

5.    Cellular TV technologies and supporting equipment

6.    Hardware and technologies for production of basestations and controllers, working in different cellular standards (GSM,NMT-450)

** **

** **

**ContactList:**

 

*1.    **Department of Information and Communications*

*at the Samara Regional Administration*

*210 Molodogvardeyskaya street, 443006 Samara*

*Alexander Kartashkin*

*Tel.: +7 8462 32 39 83*

 

2. ZAO Samara Cable Company

*9,Kabelnaya street, 443022 Samara*

*Tel.:+7 (8462) 271 717, 271 080*

Fax: +7 (8462) 272 200, 270 824

*Email:[email protected]*

*GeneralDirector: Anvar Bulkhin*

* *

3.ZAO Samara Optical Cable Company

*9,Kabelnaya street, 443022 Samara*

*Tel.:+7 (8462) 27 06 20*

*Fax:+7 (8462) 27 11 93*

*Email:[email protected]*

*GeneralDirector: James Boyette*

* *

4. ZAO Mobikom

*2, Dachnaya street, building 2*

*Tel: +7 (8462) 381 837, 389 487*

*Fax: +7 (8462) 381 837*

*Email: [email protected]*

*General Director: Sergey Yurtaev*

 

5. Svyazinform of Samara Region

*24,Leningradskaya street,*

*443099Samara*

*Tel.:+7 (8462) 32 10 20*

*Fax:+7 (8462) 70 40 20*

*General Director: Boris Skvortsov*

* *

*6. ZAO Samara Telecom*

*43,Polevaya street,*

*443001Samara*

*Tel.:+7 (8462) 70 40 70*

*Fax:+7 (8462) 70 41 22*

*http:// www.smrtlc.ru /*

*General Director: Andrey Skvortsov*

* *

*7. TeleRoss Samara*

*43,Polevaya street,*

*443001Samara*

*Tel.:+7 (8462) 79 20 20*

*Fax:+7 (8462) 79 20 22*

*General Director: Grigoriy Mostovoy*

* *

*8. Global-One*

*17,Krasnoarmeyskaya street,*

*443010  Samara*

*Tel.:+7 (8462) 78 40 00*

*Fax:+7 (8462) 38 42 02*

*http:// www.global-one.ru /*

*General Director: Uiry Sshelocov*

* *

*9.BeeLine Samara*

*77,Moscowskoe Shosse,*

*443090  Samara*

*Tel.:+7 (8462) 22 60 26*

Fax: +7 (8462) 22 61 34

*General Director: Sergey Shvaikin*

* *

*10. Smarts Samara GSM*

*2,Dachnaya street, build. 2*

*443013  Samara*

*Tel.:+7 (8462) 36 05 89*

Fax: +7 (8462) 43 80 44

*General Director: Gennadiy Kiriushin*

* *

*11. Samara-Internet*

*1, Akademika Pavlova, Samara*

*Tel.: +7 8462 70 31 08*

*Fax.: +7 8462 16 14 26*

*Email: [email protected]*

*Commercial Director: Nikita Sinyaev*

* *

*12. Teleradiocompany RIO*

*122, Dybenko street, 443066 Samara*

*Tel.: +7 8462 22 08 51*

*Fax: +7 8462 22 43 91*

*President: Vitaly Dobrusin*

* *

*13. Radiocommunications (OAO Telecommunications Network)*

*Samara*

*Tel.: +7 8462 16 16 46*

*Email: [email protected]*

*President: Valery Semyenychev*

* *

*14. Westcom*

*29, Volzhskiy prospect “Volga Hotel”*

*Tel.: +7 8462 42 18 80; 42 11 77; 42 35 78*

*Tel/fax: +7 8462 42 35 76*

*General director: Igor Nalivayko*

----

 **Source: TroikaDialog Research “Regional Telecoms” October 21, 1999*

**Source: Troika Dialog Research “Regional Telecoms” October 21, 1999*

***Source: BeeLine Development Department*