The crisis did not bring significant changes to the corporate telecommunications market in Russia. Over the past two years, major telecom players have become more powerful. The key issue today is not an exclusive basis for entering this or that building, but rather more diversified services offered to successfully compete with other operators. The crisis often leads to the migration of tenants. This trend has become a real headache for many developers, but helped telecom companies find something to do until new construction starts.
Migrating to survive
While the whole real estate market experienced a catastrophe, national telecom operators' revenues fell by no more than 10%. Moreover, such fluctuations had occurred in the pre-crisis years (i.e. typical seasonable difference in revenues in November-December and low-income January and May). Evgeny Sandomirsky, commercial director of Mastertel is sure that only a slight recession took place in the telecom market. "Pre-crisis, volumes of communication services rose 22% per year, on average. Last year the growth was 19%, which is not bad at all during the crisis period." "The global financial crisis did not affect telecom operators. As of July 2010, many companies have better financial results than in pre-crisis August-September of 2008," says Kirill Proskurin, managing director of Multiline. According to market participants, the number of telecommunication premises did not change. The only thing that has charged is the amount of consumed services. "Previously we were involved in large-scale projects. Now, we are involved in many smaller ones. Therefore, our sales volumes are nearly the same as they were before the crisis," says Victoria Kachanova, head of real estate at VimpelCom. However, the profits of many telecom operators remained the same not because of new projects, but because of migration of tenants. To reduce costs, many companies change offices, some of them want to save on leased premises while others, on the contrary, prefer to move to business centers of higher classes. Generally, rental rates in the office real estate plummeted remarkably. The first wave of tenant migration occurred in the fall of 2008. "Many of the tenants were leaving their offices because property owners who used to have $1,500-2,000/sqm/year simply had no idea how low the rental rates should fall" explains Evgeny Oleynik, director of development at Gars Telecom. The second wave of migration surprisingly started in March 2009 and ended up in early 2010. The third wave of migration is on the way now. It happens because companies are beginning to plan their business expansion and therefore move to higher-class offices. Initially, telecom operators were target¬ing exclusive contracts (the only operator would serve the entire building). Then their clients started moving in and out because of the crisis. In 2008, changing office space meant changing telecom operators. "We were offering our clients assistance in organizing the transfer of communication services when moving. We had a number of modern office buildings that Comstar-UTS and our subsidiary MGTS were servicing. In other words, we were offering our clients realtor services and we really functioned like that" assumes Roman Akatov, commercial director on corporate markets, Comstar-UTS. In this case, the main goal was to maintain the volume of services provided.
No exclusive wanted
However, operators were not in panic. To be of interest to tenants, property owners had to part with the so-called "exclusive" contracts. "Pre-crisis, 95% of property owners were focusing solely on their own business needs. Now they turned to their tenants. The owners often offer tenants alternative telecom operators in order to keep the tenant from moving to a new location," comment Victoria Kachanova, head of real estate a VimpelCom. It was a positive market change for many telecom operators as they have an opportunity to come to many office buildings that were not accessible previously. In many buildings, property owners often contracted their own 'pocket' telecom operators. After that the situation on the market and the nature of competition completed changed. In the old days, telecom operators were fighting to access the building (the lucky ones managed to conclude exclusive contracts with property owners). Now they compete with each other inside the buildings. "The current competition is aggressive enough. We have the largest coverage, so we understand that new competitors come to the buildings that we initially served," says Roman Akatov. He also believes that the changes on the market helped his company expand its presence in the segment of the commercial real estate. By the end of 2009, Comstar-UTS expanded its coverage of the commercial real estate by 61% (in comparison with 2008) to 6.8 million sqm. "The new rules are not of the same importance to all telecom operators. Mid-sized and large operators are the first to benefit from the changing market trends," believes Evgeny Solomatin, director of business development at Cominfo Consulting. Those operators typically have extensive networks of access points, so they can easily connect clients in a new building or steal them from smaller operators with no resources to enter the building.
Modest business
Telecom operators have become more modest. Now it does not matter how many competitors are present in the same building. "Until recently, we thought that we could not possibly be the second operator in a building. We were aiming to become the first and the only one. Now the situation is different - all we target is increased revenues. It works very welt tenants keep moving to cheaper buildings while most of them want to maintain services, telephone numbers, and their operator," says head of property at VimpelCom. Now major operators are ready to go to buildings of different classes, even those located outside the Third Transport Ring. Generally, profitability of telecom operators is not directly dependent on the quality of build¬ing and its class. "Large companies who lease premises in Class A buildings often demand significant discounts, while tenants of Class C business centers in general consume less communication services, they do not have any special requirements, and never demand discounts. This generates the same profits for our company," says Victoria Kachanova. Previously, the market leaders did not pay attention to lower class real estate properties. However, the tenants themselves have become much more modest. Before the crisis, many operators were developing a premium segment in the corporate sector, providing higher quality services for higher prices. As of today, these services have ceased to be in demand. According to statistics at Gars Telecom, 5% of the companies whose monthly bills before the crisis exceeded $5,000 are now closed, 78% of telecom companies have reduced their staff by 13-25%, and 92% of clients have revised the tariffs for basic services while 66% of them decided to reduce the total volumes of services. In addition, ARPU fell by 28%, on average. Many telecom operators feel the impact of the crisis, as customers keep moving to Wi-Max operators, such as Scartel (YOTA). However, according to Kirill Proskurin, many of them are now coming back again because of better quality communication services that operators offer as wired connection (in particular, this concerns stability and speed of connection. On the other hand, fixed telecom operators are competing with mobile operators. They often reduce tariffs; adjust them to YOTA while preserving the same technical characteristics. According to Gars Telecom, the tariffs fell by 20-40% in the first year of the crisis. "Tenants ask us about the most effective way to save. Nobody is ashamed of this today," says Victoria Kachanova. One of the most common ways to save is to stop using traditional telephone services and start using IP-telephony instead. According to Multiline, average international telephone traffic has been steadily declining by 3-4% per month. Long-distance traffic remains more or less stable, while local calls are 1-2% less intensive on a monthly basis. At the same time, online traffic has been growing by 5-6% per month. This is due to popular unlimited tariffs to access Internet. "The main reason for the increase of traffic, of course, is the VoIP technology (voice data transmission via Internet protocol)," says Kirill Proskurin. All you need is an unlimited Internet access at the speed of 256 kbps. Customers, saving on communications services, have helped operators save as well. This meant that suppliers of communications did not need to expand, since the decrease in volume of contracts helped them easily cope with the traffic in existing networks. According to experts, this year telecom operators considerably (by 50-80%) reduced the costs of upgrading and expanding existing infrastructure, while trying to get maximum revenue from the already functional networks.
Beneficial associations
One of the main trends in the telecom market today is consolidation of mobile operators and fixed operators, who have their own infrastructure. Fixed network operators need traffic. Mobile operators, in turn, need cable networks of their own to maintain competitive advantages and tariffs. "The most successful telecom operators are those who have their own digital fiber-optic communications network and a loyal customer base," says managing director of MultiLine. "Major market participants are now engaged in structural reforms. Sovintel has integrated into Beeline, MTS merged with Comstar. Operators are becoming universal," believes Evgeny Oleynik. Because of stiffening competition, the market of communication services will inevitably move from traditional monopoly to oligopoly of large holding companies. "The process of consolidation has started after the introduction of more stringent rules and regulations and an overall decline in profitabili¬ty of traditionaltelecom operators," explains commercial director of Mastertel. According to Victoria Kachanova, the key trend among the operators is to integrate in order to offer both fixed and mobile telephony to their clients as a one-stop service. This approach helps operators keep their clients even if a property owner decides to change the concept. "There are several examples where instead of building an office center, the owners decided to build a hotel or an apartment house. In such cases, we were able to quickly start rendering a complete set of integrated telecommunication services," says sales manager at Comstar-UTS. For the same reasons, integrated operators usually work comfortably in multi-purpose centers.
New technologies
Consolidation of global communications networks has led to a large-scale consolidation of the biggest suppliers of telecom¬munications equipment. Siemens and Nokia (Nokia Siemens Networks) have merged their networks. Alcatel and Lucent did the same. According to a representative of Mastertel, the shrinking market forced many manufacturers to realize the need to improve profitability margins by reducing costs, especially in the field of research and development. Some of them consolidated efforts to develop new products, such as 4G. According to experts, there is an active development of a 4G standard nowadays. The competitive advantage of this new technology makes it possible to provide wireless access at a speed of over 100 Mbps. However, 3G has an opportunity to develop as well. "Of course it would be better to introduce 4G as a more innovative standard. By the time Russia goes through restructuring of 3G networks, this standard will be in use for quite a long time," says Evgeny Sandomirsky. According to experts, many companies are in no hurry to adopt new technologies, as they fear to lose profitability.
No room
The market experts say that by the end of the year, the migration of tenants would stop, and telecom operators would have more chances to find new customers. Starting from mid-2010, telecom market players are having an increasing number of requests coming from developers of the commercial real estate. The crisis has strengthened positions of the market leaders. Today, all major operators have access to commercial buildings and can offer their customers the most complete package of services. Middle-tier companies, experts say, can survive, as alternative operators in the buildings. What the telecom market operators do not generally expect is to see new market players. If they do appear offering completely new services, they would unlikely find a market niche to operate in Russia since the market positions of the leaders appear very strong and immutable.