St. Petersburg State University
Graduate School of Management
Mid-term group essay.
Analysis of the Russian telecom industry and companies’ motives for internalization.
Kseniia Faustova
Elisa Tilley
Anastasiia Terekhova
St. Petersburg
2013
Introduction
The structure of telecommunication market has been affected by internalization processes. The proportion of mobile services to fixed-line ones is changing very fast. People even prefer to skip using fixed lines altogether in case of emerging markets. The global revenue of the industry is approximately US $2 trillion in 2008, with an 8% exceed of fixed lines operators over mobile operators. Mobiles operators revenue tend to grow faster than the fixed line ones. North America and Europe has the highest revenues within the telecoms industry, followed by emerging economies in Asia. The internationalization process has started a huge competition between the markets. The phenomenon of convergence resulted in some improvements of the market, and by the end of 2000s a few big players, AT&T, Deutsch Telecom and France Telecom, has formed alliances1.
The Russian technology and telecommunication market is growing rapidly due to several factors: strong grows of economic indicators and initially low level of technology penetration. The total telecom sector revenue in 2006 was US$27 billion and US$42.6 billion in 2008 (US$18.4 billion for the fixed line operators and US$24.2 billion for mobile operators). The telecommunications market in Russian is one of the biggest ones in the world and one of the most attractive ones for Russian and foreign investors.
One of the unique features of telecommunication industry in Russia is that any foreign company willing to enter the market is required a direct investment or a least a strategic alliance with incumbent companies, due to the fact that mobile services cannot be physically exported. Another feature of telecommunication companies in 2000 is that they tend to make alliances since in most of the time it was the only way to expand to a new region because it was really hard to get a license.
Of course the crises of 2008 had an impact on telecommunication companies’ performance, but at the same time the industry was a lot more resilient to the downturn in consumer expenditure than some other sectors2.
It is also worth to mention, that the trend of internationalization do exist. Most of the Russian telecom operators used to be nationally oriented and most of the examined companies do meet at least partial support from the government, biggest player are mostly supported or owned by the government. During the period of crisis some Russian companies were listed by government as firms that deserve support in case of emergency in the market.
Vimpelcom
OWNERSHIP
VimpelCom was the first Russian company to list its shared on the New York Stock Exchange in 1996, which helped to attract foreign investment. In 1998, the Norwegian communication company Telenor purchased 25 percent + 1 voting shares of VimpelCom for US$162 million. In 2010 VimpelCom Limited was established by a merger of OJSC VimpelCom and Kyivstar, listed on the New York Stock Exchange under the ticker symbol “VIP” previously held by OJSC VimpelCom. Today, Telenor East Holdings II AS with the SEC, Telenor East Holdings II AS is the beneficial owner 35,7% of economic rights and 43% of voting rights. Altimo Coöperatief with the SEC, Altimo Coöperatief is the beneficial owner of 52,7% of economic rights and 47,9% of voting rights. On December 24, 2012, Altimo Cooperatief delivered a notice to the Company that it intends to convert its 128,532,000 preferred shares into common shares at a ratio of one preferred share for one common share. The rest is distributed amongst minority shareholders.
VimpelCom provides voice and data services through a range of wireless, fixed, and broadband technologies under the "Beeline", "Kyivstar", "djuice", “Wind”, "Infostrada" “Mobilink”, “Leo”, “banglalink”, “Telecel”, and “Djezzy” brands. The company is listed as an ADS on the New York Stock Exchange under the symbol "VIP". The company operates in Russia, Ukraine, Kazakhstan, Uzbekistan, Tajikistan, Armenia, Georgia, Kyrgyzstan, Cambodia, Laos, Algeria, Bangladesh, Pakistan, Burundi, Zimbabwe, Central African Republic, Italy and Canada, with 214 million mobile subscribers worldwide.
INTERNATIONALIZATION
Country |
Russia, Kazahstan, Tajikistan, Ukraine, Uzbekistan, Armenia, Kyrgyzstan, Vietnam, Laos, Cambodia |
Year of entry |
1992, 2004/2008, 2005, 2005, 2006, 2006/2007, End of 2006, 2008, 2009, 2009 |
Industry/ business area |
telecommunication |
Entry mode |
VimpelCom was founded by the Russian scientist Dr. Dmitri B. Zimin and the American entreprenuer Augie K. Fabela II in 1992 in Moscow Kazahstan: Acquisition of the control shareholding of KaR-Tel, a wireless operator in Kazahstan. The price for this acquisition was US$350 million and the company also took over KaR-Tel’s debt of US$75 million.
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In 2008, VimpelCom acquired a 24.9% share of the Cyprian offshore company Limnotex Developments Limited, which owned 100% of KaR-Tel. Thus, VimpelCom has increased its share in the Kazakh subsidiary to 74.9%. The rest 25.1% belongs to the Kazakh ATFBank. Tajikistan: Acquisition of 60% of LLC Tacom shares for US$12 million. In 2006, VimpelCom increased their stake in Tacom to 80%. Ukraine: Acquisition of URS Uzbekistan: VimpelCom acquired 100% shares of Bakri Uzbekistan Telecom for US$60 million and UniTel (also Uzbekistan) for US$200 million. UniTel was the second-biggest mobile operator in the market. Both acquired companies were integrated under the Beeline brand, making it a very strong market player. Georgia: VimpelCom acquired 51% of Mobitel (Georgia) for US$12.6 million. Kyrgyzstan: VimpelCom further pruchased Sky Mobile, one of the largest mobile operators in Kyrgyzstan for between US$400 -US$500 million. Armenia: Acquisition 90% of ArmenTel (Armenia) from the Greek telecom company Hellenic Telecommunications Company for about €341.9 million. In 2007, VimpelComs stake in Armentel was increased to 100% and an agreement on GTI acquisition was reached, including a 3G license. In 2008, OJSC VimpelCom completed a merger with the Russian brand Golden Telecom by acquiring EDN Sovintel, a leading facilities-based provider of integrated telecommunications and Internet services in Russia and the CIS, which provided VimpelCom with access to a large fixed-line market in Russia. In the same year the company acquired a 49.9% stake in Euroset, the largest mobile retailer in Russia and the CIS. Moreover, VimpelCom established a joint venture GTEL-Mobile in Vietnam in which it had 40% stake. It also acquired a 90% stake in Sotelco in Cambodia and launched commercial operations there in 2009. Laos: VimpelCom entered Laos mobile market by buying 78% stake in Milicom’s mobile operator for the price of US$66 million. The remaining 22% were owned by the Laos government. |
Motives |
Just like VimpelComs competitors, the company saw chances in expanding to the CIS countries. Market penetration of mobile communication services was very low in those areas. They chose growth by acquisition, because it is an easy way to enter new markets without having troubles with licenses. In case of Tajikistan, VimpelCom didn’t want to rank behind other Russian providers which had already entered the market. The reason for entering the Laos market was, according to Boris Nemsic (CEO of that time), that Laos provided a complement to VimpelCom's existing operations in Vietnam and Cambodia and fitted into the company's strategy of building a solid Southeast Asian cluster1. Additionally, Laos then had a mobile penetration of 23%, which offered great opportunities. |
Firm specific advantages used on the foreign market |
Beeline was one of the main mobile operators in Russia and therefore had a good reputation. It worked with modern technologies in providing people with mobile telecommunication and other services. In case of Tajikistan, demand was very high in the 2000s and Beeline was one amongst the first preferences. Its reputation was excellent and it already had been successful in another CIS country: Kazahstan. VimpelCom was able to raise foreign funds via stocks traded on the New York Stock Exchange. |
First mover or follower |
In 1993, VimpelCom launched its first commercial network, a five base station system in Moscow, limiting sales to only 1,000 mobile phones in order to ensure quality of service. In the mobile communications industry, VimpelCom thus operated as a first mover in Russia. The brand “Beeline”, which was intended to differentiate the company as a youthful and fun company, rather than a technical company, was introduced in late 1993. VimpelCom was the first Russian company to list its shared on the New York Stock Exchange in 1996. Amongst Russian telecommunication operators VimpelCom was the first to enter the market of Kazahstan. Nevertheless, Megafon and MTS had already expanded to other countries, like Ukraine and Tajikistan. In this case, VimpelCom was a follower in terms of expanding to CIS countries. In case of Tajikistan, VimpelCom followed Megafon, which already had expanded to Tajikistan in 2001 by acquiring TT-Mobile. In Ukraine, VimpelCom followed MTS, which already had expanded to the Ukraine in 2003 by acquiring UMC. |
Type of state involvement in the process of internationalization |
Kazahstan at that time had economic problems. For the Kazakh government, foreign direct investment was therefore desirable. In Armenia, 10% of ArmenTel were owned by the Armenian government after the transaction. It therefore still had a stake in the company after acquistion. In 2007, VimpelComs stake in Armentel was increased to 100%. 22% of the acquired company Milicom’s mobile operator were owned by the Laos government. |
Evaluation of the success of the internationalization |
Demand in Russia for mobile telecommunication services exploded in the 2000s. While only 1% of the Russian population owned a mobile telephone in 1999, penetration has exceeded 100% in 2006. The boom can be explained by consequent economic growth and the emergence of a middle class, combined with the difficulty of obtaining fixed-line services. The mobile telecommunications market was highly competitive back then. VimpelCom was one of the leading players, next MTS (Mobile TeleSystems) and Megafon. Both three companies are still strong in the Russian market. VimpelComs main competitor is MTS, which pursues a very similar strategy of acquisitions and joint ventures. Both of them entered the CIS countries in the 2000s, which were perceived to have a relatively low mobile market penetration, by direct investments. VimpelComs acquisition strategy was the only way to become a leading company in the mobile communications sector. Through acquisition, it not only successfully entered foreign markets but also strengthened its |
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current market position. Today, it is listed as Russia’s largest company in the telecommunications industry by sales volume (March 2013). In Russia, market penetration of the services VimpelCom provides, has already reached 136 percent. Today, VimpelCom Ltd.’s reporting structure is divided into five business units – Europe and North America, Russia, Ukraine, the Commonwealth of Independent States (CIS), and Africa and Asia, all of which report to the Company’s headquarters in Amsterdam. |
1http://www.telecompaper.com/news/vimpelcom-buys-78-millicom-stake-enters-laos-mobile-market--691824