Russia is expected to see a doubling of Internet connections during the next four years. And unlike most of the Western world, the majority of those will be businesses, according to a leading industry analyst, who also says that contrary to most of the rest of the world where Nokia is king of the mobile phone mountain, in Russia, it's Siemens that leads the pack in the $560 million mobile-phone market.
"The key factor is where computers are used," said Simon Baker, research analyst for the Russian office of international technology consultancy IDC, a specialist in e-business strategies, telecommunications and mobile and wireless. "The number of computers in use in the home is low compared to that in more wealthy countries. IDC measures computer sales and our projections on Internet use are made in close relation to our forecasts of PC sales and what proportion of PCs will be in use in the home," he told United Press International.
Baker does, however, forecast faster take-up of the Internet by consumers during the next four years. "Growth in the consumer market is, however, even faster. The number of consumer connections will expand at an average of 30 percent per year to 2005."
Although it's not been studied, Baker believes the Siemens mobile-phone lead is due to "the generally good image of German technology in Russia, and in particular the status of German cars as the most desirable. Siemens' sales as a percentage of the market are noticeably higher in Moscow than in St. Petersburg and the regions, where the position of Nokia, which already had a strong position in the Russian mobile market before Siemens became very active here."
There are two major mobile operating standards, GSM (Global System for Mobile Communications) and CDMA (Code Division Multiple Access). GSM, which originated in Europe, accounts for approximately 70 percent of the total digital wireless market today. Hence it offers the largest selection of handsets. CDMA is primarily used in the USA. Baker says the Russian market is predominantly GSM.
He notes that while CDMA is licensed for use in Russia, "the Russian government has restricted its use to fixed wireless applications (in which mode it is used by Sonet here in Moscow)."
What this means is that third generation (3G) mobile services will be slowed in Russia because "these applications need lots of bandwidth and hence will be launched in many countries under newly licensed frequencies, which were often auctioned (the 3G auctions which accounted for so much hype in 2000)."
"However, they could be launched using existing bandwidth allocations in Russia if there were not many users," Baker added.
Baker believes it's very much up in the air as to when 3G will come to Russia "in the forms to be used in Western Europe, as these 3G technologies are CDMA-based, and note the current licensing restriction in Russia. The Russian government has so far made no official pronouncement on how it may license 3G here."
The key factor in the growth of the consumer market, he says, "is sale of PCs. With Russia's economic recovery from the 1998 crisis, and in particular continuing internal inflation which is producing an increase in real incomes in dollar terms, PCs are becoming affordable for more households." And in the regions outside Moscow and St. Petersburg, falling costs of Internet access will contribute greatly to this growth. "In Moscow and St. Petersburg tariffs are lower than in the regions and will fall more slowly."
Broadband connectivity, a major issue in the telecom industry in both the United States and the UK, where its rollout is exceedingly slow in comparison to user demand, will likewise be very slow in Russia during the next few years, especially for consumers, though businesses will see a higher and faster take-up, he says. "In Russia Internet access will continue to be dominated by conventional dial-up access for several years. Broadband will be a small business here for a long time in the consumer market. In the business market we expect leased line and DSL broadband service to have a substitution effect on dial-up."
So who are the winners?
Baker says with regard to the Internet, "there is only one ISP with a national brand name, Golden Telecom, and then it does not offer service in many areas. Scale matters, but a preferential link to the city phone network can be a more important factor in success. Overlay networks such as Comstar, Peterstar, Sovintel and Combellga also have advantages as they can bundle Internet access with voice and other data services to their business customers, and it is this business Internet market in which most of the profit lies."
And with regard to mobile phone services, he notes, "The advantage in mobile is clearly with large GSM operators with a well-known brand name, a presence in major markets and access to capital at reasonable cost (i.e. MTS, Vimpelcom and Megafon/North West GSM). They will increasingly dominate the business."
The mobile business in Russia, he concludes, is growing fast and "will continue to do so for several years, and in the longer term will catch up with markets in Central Europe." In the Internet business, low PC ownership will stymie rapid growth. "A key difference," he adds, "in both markets from the international norm is that in neither is the former state telecoms monopoly the dominant player."