Market overview

Broadband B2C

Market size in 2014 = RUB 116 billion

Market share dynamics
+0.8 pp by subscribers
+0.7 pp by revenues

Broadband B2B

Market size in 2014 = RUB 59 billion

Market share dynamics
-0.2 pp by subscribers
+1.0 pp by revenues

Pay TV

Market size in 2014 = RUB 60 billion

Market share dynamics
-0.2 pp by subscribers
+1.9 pp by revenues

IPTV (as a part of Pay TV)

Market size in 2014 = RUB 10 billion

Market share dynamics
+0.8 pp by subscribers
+5.8 pp by revenues

Fixed Telephony

Market size in 2014 = RUB 180 billion

Market share dynamics
-1.3 pp by subscribers
-0.7 pp by revenues

   

Source: iKS-Consulting. Subscribers’ data at the end of 2014, revenue data for the full year of 2014.

Rostelecom is the absolute leader in most Russian telecom segments and our strategy is to maintain our leading position by increasing our market share in the key fixed-line telecommunication markets (broadband, pay TV) and expand in new markets (VPN, data centres, various VAS). Since July 2014 Rostelecom has been the sole provider of universal communication services in Russia, i.e. broadband Internet access and payphone services.

Broadband

Broadband penetration by market in 2014, %


Source: TMT-Consulting

Broadband Internet is one of the fastest growing segments of the Russian telecommunication market. In 2014, the number of consumer broadband subscribers increased by 4% leading to 29 million households having broadband access [1] . The number of subscribers in the business segment increased by 3% while market volume rose by 7%.

In 2014, broadband penetration reached 51%. The broadband market in Russia is reaching maturity and while penetration levels are already relatively high, they remain lower than in Europe and America, demonstrating that there is a room for further growth. Analysts expect the broadband market in Russia to grow at a rate of 2-3% over the next 3 years [2] .

2014 was a year of important milestones for Rostelecom in the broadband sector. By the end of 2014, Rostelecom covered an additional 6.6 million households, resulting in total coverage of 25 million households the fibre optic network. In 2014, Rostelecom became the second largest Internet provider in Moscow with a 19% market share [3] .

Fixed-line telecommunications market (RUB billion)


Source: iKS-Consulting

The Company signed a contract with the Federal Communications Agency to provide Internet access for over 13,800 settlements containing a population of 250-500 people across Russia (The “Bridging the Digital Divide” project). This project will not only connect remote settlements but also result in increased broadband coverage in small Russian cities surrounding these settlements, which are expected to be the key growth drivers in the broadband sector over the next few years as the larger cities reach saturation.

Pay TV

The pay TV market includes subscription based cable, satellite and IPTV. In 2014, the pay TV subscriber base reached 37 million after growing 7% year-on-year (the market grew by 12% year-on-year). IPTV is the fastest growing segment in the industry: in 2014, its subscriber base increased by 22% year-on-year while market volume rose by 37% year-on-year. The accelerated development of high-speed broadband supports the growth of the IPTV market. In addition, the Video-on-Demand (VoD) and multiscreen services continue to attract more customers.

Though the penetration of pay TV services in Russia is already relatively high at 68% [4] , experts forecast further sustainable growth in this sector [5] . We also see potential for a significant lift in ARPU with subscription fees currently being relatively low due to limited content offerings and growing demand for premium pay TV services, including VoD.

Fixed telephony

Over recent years, demand for traditional fixed-line telephony has declined due to migration to mobile and Voice-over-IP (VoIP) telephony. This is an international trend and the Russian fixed-line market decreased by 6% in 2014.

Rostelecom is the leading player in this sector with a market share of over 60%. Although the market is stagnating, the Company continues to take measures to retain its customer base, including increasing the tariffs attractiveness and introducing bundling offers.

Mobile

The Russian mobile market continued to expand in 2014 growing 3% year-on-year largely as a result of an increase in data. In 2014, Rostelecom transferred its mobile assets to a JV with Tele2 Russia and currently participates in the mobile market through a 45% equity stake in this JV. Read more about JV with Tele2 Russia.

Key trends in Russian telecommunications market

Over the coming years, consumption of digital services will continue to rise, with users consuming more traffic and VAS. The growing demand for higher network capacity will be also driven by the increasing spectrum of devices used and the development of cloud services. This requires modernization of the broadband networks to fibre.

The rapidly developing OTT and IPTV segments along with HDTV-ready and Smart TVs becoming cheaper to purchase will continue to fuel the development of interactive HD TV services.

Analysts forecast that the trend towards offering bundled packages that include mobile, fixed-line and TV services to continue. Developing ‘triple play’ and ‘quadro play’ packages provide a range of benefits for the user including simplicity, flexibility and cost savings.

As the traditional telecommunications markets are reaching maturity, companies are branching out into new adjacent markets to deliver future growth opportunities.

Macro view. Looking forward to 2015

2014 was a year of many challenges. Political instability in Ukraine led to macroeconomic pressures in Russia, increased uncertainty and rouble volatility. Further effects could be seen in 2015. The management team realises the potential challenges that lie ahead and has developed a contingency plan to be able to handle them effectively.

The Company’s revenue may come under some pressure in 2015 due to budget cuts from B2B/B2G clients. However, the consumer segment is expected to remain resilient to macro pressures, since telecommunication services are now considered to be essential services that many clients are not prepared to give up. Moreover, telecommunications represents a relatively low proportion of a household’s budget, meaning it is not a priority for households to cut. Government and business segments are more volatile in the current period of macroeconomic instability. The key measure to offset these effects will be retaining our customer base through offering them a variety of bundling and wholesale discounts. More clients tend to use only one provider for their telecoms services to benefit from more favourable pricing, thus creating an opportunity for the Company to increase revenue.

Higher inflation and foreign exchange rates might put operational expenses and capital expenditures under pressure, though the portion of FX expenses is relatively low. Measures we implement to counteract these effects include import substitution, the operational efficiency improvement programme and procurement optimisation.

Although the Company’s leverage was at a reasonable level at the end of 2014, the Company is constantly working to reduce its debt and optimise its debt portfolio. The Company reduces its exposure to interest rate risk by borrowing mainly at fixed rates. Moreover, the interest rate risk is expected to decrease throughout the year as market interest rates stabilise.

Experts do not expect macroeconomic turbulence to have a significant impact on the telecommunications sector, mainly due to the relatively low elasticity of demand.


[1] The industry data in this section is sourced from iKS-Consulting unless stated otherwise.
[2] Both J’son and Partners Consulting and TMT-Consulting.
[3] TMT-Consulting.
[4] As at the end of 2014
[5] TMT-Consulting.

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