Telecom. The hunger games of operators
For cellular operators last year became one of the most eventful and, at the same time, one of the most complex in the history of mobile communication. Against the backdrop of increased competition the main condition of survival for them will be innovation implementation.
According to the Committee on statistics, by the end of 2015 Kazakhstani enterprises had delivered services for total amount of 684.253 bln tenge, that just 1.6% more than a year earlier. For comparison: in 2014 the market rose by 4.64%, in 2013 by 7.6, in 2012 by 9.6, in 2011 by 18.7%. There is a stable dynamics of a slow down. To understand why this happened, we will provide a picture on separate kinds of services. Among the outsiders are international and intercity telephone communications, whose revenue dropped by 17% last year – to 34.4 bln tenge, local telephony by 7.2% (to 47.9 bln tenge), as well as mobile communications by 12.62% (to 249 bln tenge).
Given that regular communications now provide only 12% of total Telecom revenue, and the share of mobile segment was 36.45%, it can be stated that the mobile communications are primarily credited for the slowdown. Moreover, the remaining components of the market either grew or remained steady.
The same “black swans” loom over the mobile operators of Kazakhstan as over the rest of global Telecom. The revenue from the “voice” are declining for the third year already, the competition is growing, and the traditional voice billing is replaced with a variety of online instant messengers, among which around here the most popular are WhatsApp and Viber. As a result, compared to 2012, when the peak of 307.31 billion tenge was reached, last year the revenue from cellular communication already has dropped by almost 20%.
Significantly more favourable situation emerged with revenues from the Internet access. In 5 years this market has increased from 50 billion tenge to 194 billion tenge. A few years ago, the assumption that the revenues from Internet access will catch up with voice communication, would cause a well-founded scepticism, however, in 2015 we came close to such event, now they already cover 28.37%. The angle of the trend, with whom this segment of the market is growing, is very high, and there are all good reasons to suggest that this trend will continue for numerous years.
This is the area where the most severe competition between mobile operators will take place. An effective tool for this competition was already presented to the companies in the form of 4G. (It is worth noting that the peak data transfer speed in fourth-generation networks is almost 30 times faster than in 4G – 100 Mbps vs. 3.5 Mbps.)
In part, this is confirmed by the results of a survey conducted by the website Computerworld.kz. Its respondents were asked to select 5 most important technological trends in 2016. The 4G has earned 54% of the votes, 20% have chosen “Mobile payments”, with 11% “Service IT-model in the government agencies” ended up on the third place, and on the fourth place with 8% is “National payment system”. Closing the top-5 with 7% is a trend on so-called “business uberization” (this term imply a highly distributed model of outsourcing). Thus, according to the respondents, current year for the telecommunication of Kazakhstan can easily be called “The year of 4G”.
Gains and losses
If we consider the Telecom market of Kazakhstan at the level of the financial results of individual players, it may be noted that last year the operators finished in a mixed manner. For example, the Kazakhtelecom has reported very positively: the revenue of the industry’s flagship increased compared to 2014 by almost 2% (to 198 bln tenge), and gross profit by 13.7% (to 66.5 bln tenge). The overall gross margin looks record-breaking, which amounted to nearly 28.4 bln tenge after the tax payments, about 65% higher than a year earlier.
The KazTransCom also recorded the revenue growth up to 17.7 bln tenge (+14.6%), and profit after tax increased by 2.4 times – to 3.83 bln tenge.
The Tele2 Kazakhstan finished 2015 with positive EBITDA (earnings before taxes, interest and depreciation). Reaching 1.37 bln tenge, this figure for the second year in a row demonstrates positive yield.
However, the leading mobile operator in Kazakhstan – Kcell – reported that in 2015 its net profit decreased by 20% – to 46.6 bln tenge.
The overall situation with finances and marginality for the major operators of the telecommunication sector looks very good. Moreover, it rases envy among representatives of other sectors.
To buy, or to sell-that is the question
In the conditions of market turbulence, for the global stock exchanges the year 2015 passed under the sign of bursting the overpriced high-tech bubble. The shares of the Telecom companies didn’t stay on a sidelines and got a scolding as well. Making it more interesting to analyse what happened with security papers of our operators.
There are only two companies that we can look at, and they both are market leaders. The first is the Kazakhtelecom with capitalisation of nearly 100 bln tenge, the second is Kcell with slightly less than 230 bln tenge (as of the time of writing).
The shares of the Kazakhtelecom spent the whole last year in quite a narrow range – 7 000–13 000 tenge. Starting from 9500 tenge, the paper recorded its minimum in February, and maximum in July. The price of the Kazakhtelecom share finished at around 9 000 tenge, thus coming down 5.5% in value. Even more obvious negative dynamics is visible on a large temporary horizon: if a hypothetical private long-term investor bought the papers of the operator in 2007 (and then they cost 30 thous. tenge), at the beginning of 2016 he would have to record the loss of 27 thous. tenge per share.
The Kazakhtelecom repeatedly expressed dissatisfaction with the underestimation of its security papers, and also stimulated the demand for them using high dividends. But these steps have not changed the situation fundamentally. It is possible that the upcoming “big IPO”, about which some experts already talking, can contribute towards fixing of the situation. Although, this is not the best time for it: the world economy is ill, and the doctors are not yet ready to give a prediction for when a patient will be on the mend.
The picture with Kcell is pretty much in the trend with what’s happening with the Kazakhtelecom, with the only difference that the volatility of the paper of Kazakhstan’s largest mobile operator is higher. Last year the shares started from 1 700 tenge, and finished approximately at 1 350 tenge (-21%). If the same private investor bought the papers of Kcell in end of 2012 for 1 600 tenge, then selling them in January of this year for 1 150 tenge, he would have lost about 28% of his investment. However, there were good times for Kcell paper as well, when it reached the mark of nearly 2 900 tenge.
To reiterate, that everything that happens to the security papers of Kazakhstani operators, is not something special and inherent exclusively to us. AS noted by the industry expert, managing partner of ACM Consulting, Mikhail Alekseev: “The market has gone towards the descending trajectory. And this is already a global trend”.
Cellular M & A
One of the most drastic intrigues of 2016 is the merger of the ALTEL and Tele2 Kazakhstan operations. The main idea of this joint venture is the synergy obtained through combination of two elements – 4G from the ALTEL (until recently this company was the exclusive licensee), as well as a strong network and managing experience of the Tele2. That the JV will lean on the managing technologies of the Tele2 Kazakhstan indicates the fact that in the beginning Pietari Kivikko was appointed Head of this JV, who worked six years in Kazakhstan, and then Roman Volodin, who succeeded Mr. Kivikko as Director General of this company. The new joint venture has great ambitions. At the very least to get 30% share of the domestic mobile market, but as the maximum to shift Beeline Kazakhstan from second position. However, according to sceptics, for this the JV will have to solve a variety of complex tasks. Starting from infrastructure merging to billing and investing in the development of 4G. By the way, on the sidelines of industry forums Pietari Kivikko was asked numerous times if there are any other reasons for the merger. It is believed that one of them is a desire of the Tele2 Kazakhstan to avoid the cost of purchasing 4G frequencies (besides the point, Kcell will pay 22 bln tenge for that). In addition, some experts believe that the joint venture has become a kind of compromise of failed acquisition of the Tele2 Kazakhstan by the ALTEL and Kazakhtelecom. Mr. Kivikko commented on these versions: “Neither the first nor the second is correct. Merge is quite a normal situation for Telecom. Thus (through the JV) the opportunity to optimise expenses and cut costs arise.
The abolishment of the “mobile slavery”
Another trend that we cannot fail to mention is the implementation of MNP (Mobile Number Portability), implying a possibility for subscribers to entirely keep their phone number, including prefix, after switching the operator. The process started at the beginning of 2016, once the legal basis for this procedure was secured in corresponding decree of the President of Kazakhstan. At the time of writing this review approximately 30 thous. subscribers already used such opportunity. Most of them (about 20 thousand) made their choice in favor of Tele2 Kazakhstan and ALTEL.
Nevertheless, there is no reason to expect that the practice of “numbers transfer” will have the scale that is able to dramatically change the distribution of the base among the major players. Thereby, the expert of the rating agency Expert RA Kazakhstan Vasiliy Kalabin notes that the most prominent indicators of MNP were achieved on the undeveloped markets where there was a low competition. For example, in Turkey 29 mln people used the opportunity to transfer their number to another operator, and it’s almost 40% of the subscriber base. In developed countries these figures were significantly less. Moreover, even in the post-Soviet space we are talking about a very modest figures (for example 0.2% in Azerbaijan, and less than 1% in Russia). The expert estimates that in Kazakhstan the most interesting events in terms of MNP will occur within one year from the date of introduction. The share of the market leaders is unlikely to change much. In this way, to see the reason of significant changes of operators positioning due to “numbers transfer” would be imprudent.
Mobile payments and multimedia
The beginning of 2016 was marked by two more interesting news. Firstly, the operators are entering the market of mobile payments. The long-awaited and paramount event, and its preparations took several years. However, its importance for the operators proceeds so far should not be overestimated. It is known that the companies are now actively pursuing this direction in cooperation with banks and card giants. So, in mid-January, Beeline Kazakhstan presented the first peer2peer payment service. Now the subscribers of this operator using the balance of their phone can make purchases on network and coupon services, credit funds to betting and gaming accounts, make regular payments for the utilities, Internet, television and education.
Another trend, which cannot be passed, is the entrance of Kcell to the market of multimedia services. So far, the attempts of the operators in Kazakhstan to sell the content were sluggish and had a predictable results – to recall at least one such successful case is likely to be very difficult, if not impossible. However, in the case of the latest announced projects, it seems, things will be different. Firstly, today the networks are technically prepared to transmit streaming multimedia content, and secondly, users are now accustomed to paid content, largely thanks to Apple. And finally, the smartphones have become a key devices in the life of Kazakhstan citizens. Sales of multimedia streaming services for these gadgets looks like a very promising affair. In this new paradigm Kcell has offered the mobile TV, music application and electronic library to the subscribers. Still, the CEO of the company Arti Ots is rather reserved when assessing the prospects in part of the proceeds: "We don't expect that tomorrow we will start obtaining significant income. But maybe in a few years it will become one”.
A bit more about the future
Of course, all these events are setting a high bar for the Telecom already at the beginning of 2016. And this bar is correlates very negatively with the income of the players. Some experts say that in the current environment in order to build a 4G network, mobile operators in Kazakhstan may resort to external borrowings. Indeed, there is the logic in it, considering that the companies receive the revenue in tenge, and the technological component of the industry is nearly 100% import-dependent. At the same time, according to various estimates, for the modernization of the network more than $100 mln will have to be invested. It is not surprising that the operators are considering options that would help reduce its costs. For example, in the form of joint 4G infrastructure.
That said, as Mikhail Alekseev puts it, “sweet pill” for the domestic players is that in Kazakhstan the market potential is far from exhausted. "The operators have the opportunity to extend the growth cycle. And we observe it now. For example, in the field of data transfer”. In reality, today 45% of income the operators receive from “voice”. The rest, respectively, brings data and other sources. By the year 2025 for each inhabitant of the planet there will be approximately three SIM cards. In addition, the world stands on the threshold of the Internet of things. "Undoubtedly, all of these devices will connect the wireless way," predicts Mr. Alekseev. Thus, the increase of traffic in networks, the number of connected devices is a powerful driver for the operators.
This being said, the managing partner of ACM Consulting sees no easy easy way towards this transformation: “For the Kazakhstani operators it will be a very painful process. If earlier the competition was focused on price and quality of services, now it will move into the realm of IT. Who has the best practices and expertise, is ahead".
And the next major source of income for the operators, according to the expert, ironically, would no longer be directly linked to the telecommunications services. "It can be mobile payments, Big Data or something else... I am sure that Kazakhstan is on the brink of a large-scale investment in the operator infrastructure," – he summarised. It is difficult to add something to this.
Alexander Galiyev
