Time proved that expert forecasts about Armenian telecom industry were true.
Mr. Fanyan, back in 2014 Ameria Advisory conducted Armenian telecom market research and highlighted a number of interesting findings and forecasts. About 3 years have passed since then, please tell us briefly what major developments would you outline?
That would be rather difficult, to squeeze 3 years’ worth of developments in Armenian telecom market into a few words. Anyway, I will try to draw parallels between our research findings and the current developments and to outline the general trends and events. First of all I would like to remind you that in 2014 research we had pointed out two key markets having definite growth potential: these are pay television (namely cable) and internet providers. Today the actual data show that our forecasts were realistic: by 2016 cable television market had grown by 1.7 times in monetary value and internet services market had reported 8.4% growth vs 2013. Secondly, profitability of this sector has taken a path of continuous decline since 2014. As a result, in 2016 sector revenue fell by around 17.7% vs 2013. Thirdly, we do have to consider the fact of acquisition of Orange Armenia by Ucom. Fourthly, LTE network was widely launched in Armenia. Currently the three major operators have rather ambitious initiatives in this field.
As to acquisition of Orange Armenia by Ucom, did you expect it to happen?
When in 2013 Ucom paid AMD 6.225 bln to acquire a mobile operator license, we thought that the best option for Ucom was to cooperate with an international MVNO (Mobile Virtual Network Operator). That would have been a “win-win” deal, since Ucom would have gained an established infrastructure while MVNO would have promoted market share and sales. But then, perhaps due to technical and/or financial reasons, the company preferred to enter the mobile operators market segment by acquisition of Orange Armenia rather than by building its own mobile network. So that was really surprising for us, since the sum of AMD 6.225 bln for acquisition of license turned out to have been paid in vain. By the way, we still think that Ucom can benefit a lot from partnering with an international MVNO for retail network development.
You pointed out that wire and mobile communication markets and telecom sector revenue shrank during the recent three years. Could you please bring more details of that.
Dynamics of telecom sector revenue for the last 10 years show that, on the whole, from 2006 till 2013 revenues in this sector were growing, while in 2014 they started to decline dramatically – by 6.3% annually. With regard to slump in wire and mobile communication market we should note that the main factor responsible for this is substitution effect, i.e. when people substitute costly wire and mobile communication channels with significantly cheaper VoIP services, and SMS messaging – with instant messaging. In other words, traditional market players give way to OTT (over-the-top) players – Skype, Viber, Facetime, Messenger, WhatsApp, Snapchat, etc. This results in the decline of the market share of wire and mobile communication channels and growth of the market share of internet services. For the sake of comparison let’s note that in the recent past, back in 2013 revenue from mobile communication services was over AMD 111 bln with 64% share in the structure of total sector revenue, while in 2016 the revenue was AMD 81 bln and the market share declined to 57%. In other words, in as much as 3 years the revenue of mobile operators market shrank by 27% or AMD 30 bln while the revenue from internet access services increased only by 8.4% or AMD 2.5 bln. So the decline in the overall sector revenue and structural changes are due to these trends.
You noted that traditional telecommunication channels are giving way to OTT services. The other day the director of one of our leading operators announced that Skype, Viber and similar applications are using operators’ infrastructures without generating any profit for the state or operator, and thus are causing revenues to fall drastically and investments to decline, too. Could you please comment on this.
I see which statement you mean. 2016 indeed was a bad year for telecommunication sector. One fact to note only: in 2016 this sector reported the lowest revenue (AMD 143 bln) in the last 10 years. I have already pointed out the reasons. But these trends, I mean expansion of ОТТ services and decline in the revenue from wire and mobile communication, have acquired global character. Armenia is not the only country facing them. Today operators all over the world are confronted with disruptive competition, when market players or newcomers introduce new tools based on new business models and technologies. Moreover, this is true not only for telecom sector. Other sectors worldwide, such as hotel industry, taxi services and even the financial sector face this problem. Let’s take, for instance, Airbnb competing with Marriott and Radisson, or ggtaxi and Yandex taxi competing with other taxi services and even minibuses. So both worldwide and in our country telecommunication operators have to consider new ways of development, adopt new business models and update their marketing strategies. And they are actually beginning to do that in Armenia, too.
What does international experience show? How do telecom operators worldwide withstand such competition? Does Ameria have relevant offers for domestic operators?
The toolkit is rich enough, from implementation of qualitatively new services in tandem with other sectors to selection of new development directions. For instance, Orange launched a new service in France which enables doctors to monitor patients’ vitals and provide medical advice in distant mode. This is an example of IoT (Internet of things). Perhaps the experience of Kenyan operator Safaricom will best illustrate how new directions for business development can change things. Supported by Vodafone, they have been successfully operating M-Pesa money transfer system and servicing millions of unbankable people (people who do not have access to banking services) for about 10 years. In this regard we should note that our domestic operators are taking various steps, too. For instance, recently ArmenTel has announced about business model transformation in Armenia, shifting from traditional voice and data transfer services to digital platform, i.e. provision of television, financial and similar services via mobile internet platform. Before that MobiDram (Viva Cell-MTS subsidiary) had announced about cooperation with SEF International in microfinancing and Ucom had introduced its Upay virtual wallet.
As to our offers, they can be both strategic and tactical. For instance, on the strategic level we see an opportunity to launch multi-brand sales and service network enabling telecom operators to better manage rent and employee remuneration costs. This network can function as public services operator and ensure additional revenue. Besides, we offer to consider establishment of unified technical infrastructure enabling to considerably cut investment costs especially now, when all operators are actively investing in development of new generation networks. On the tactical level we would offer to review the logic of marketing strategy and first of all to consider ОТТs as competitor, to take steps for implementing and enhancing the so-called self-care services, automate back office functions, implement data processing based on machine learning, etc.
Are these measures enough to forestall sector revenue decline and ensure profitability for companies?
You know, in order to measure the feasibility of the options I mentioned in Armenia we need to scrutinize closely subscribers’ behavior, preferences, structure of operators’ costs, develop relevant financial models and align the findings with technological developments in this sector. But I would like to draw your attention to the following two circumstances: firstly, today boundaries between various industries of economy are conventional, for instance, companies of telecom sector enter the financial sector and vice versa. Yes, yes, vice versa. Let’s take, for instance, Sberbank’s announcement last autumn about establishing an MVNO. So, in my opinion we must take revenue/profit dynamics not on sector, but on company level. In the end, the thing that matters to business entities is how much revenue/profit they get irrespective of where they get it from. Secondly, when we compare the profitability ratios of domestic operators with those of international operators, it becomes clear that the ratios of domestic operators are higher. This has, of course, objective reasons, yet we should not expect it to last long especially considering that since 2010 EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) worldwide has been decreasing by an average of 6% every year. For instance, EBITDA margin of T-mobile for 2014-2015 was 18% and 22% respectively, that of MTS – 44% and 40% respectively, that of Vodafone – 29% and 28% respectively, that of Vimpelcom – 40% and 39% respectively, that of Verizon – 35% and 34% respectively and that of Viva Cell-MTS – about 46% and 45% respectively. In our opinion, on the whole, telecom operators in Armenia should focus on cost-cutting to retain the high level of profitability.
And what is the Government’s role here?
State can intervene in the competition of “traditional operators-OTT players” in two ways: there were cases when the state as a regulator supported traditional operators and in some cases the state promulgated a so-called network neutrality. For instance, in 2012 the South Korean regulator allowed local operators to block VoIP applications such as Skype, Google Voice, etc. or charge extra fees. But we should note that during the recent years network neutrality has become more common. The point is that both internet providers and the state regulator should treat internet traffic equally, demonstrate bias-free approach and not charge extra fees whatever the subscriber, content, web-site, application, platform, device or communication channel. The first steps towards implementing this principle were made in the Netherlands in 2012, when charging of extra fees by domestic operators for VoIP services was banned by the government. Later this issue became a subject matter of legislative regulation in various countries and was even studied by the EC (European Commission) which published a voluminous report on it in 2015. Taking into account that previously due to the short-sighted policy of the state in this sector (I mean the known license granted to Armentel) our country found itself in an unfortunate position, we think that this time the state should avoid “surgical” intervention and let the market processes rule, i.e. should follow European approach. Besides, given that over 2/3 of the population of Armenia have a family member or a close relative (father, mother, sister, etc.) living aboard, charging of extra fees for OTT services will give rise to social grievances. This will also negatively affect Armenia’s international rating.