UKRAINIAN MOBILE TELECOM SECTOR AT A GLANCE

UNCLAS SECTION 01 OF 03 KYIV 000241

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON ECPS ETRD EINV UP
SUBJECT: UKRAINIAN MOBILE TELECOM SECTOR AT A GLANCE

REF: 09 MOSCOW 02629

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SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET DISTRIBUTION


1. (SBU) Summary: The Ukrainian mobile telecom sector is divided
among three major service providers - Kyivstar, MTS-Ukraine, and
Life - which control more than 90 percent of the market. Kyivstar,
the market leader, is jointly owned by Norwegian Telenor and Russian
Alfa Group. MTS-Ukraine, the second largest provider, is a
subsidiary of MTS-Russia, Russia's largest mobile phone company.
Life, owned by Turkish Turkcell and Ukrainian System Capital
Management (SCM),is a relative newcomer but has quickly emerged as
a viable third option. Despite difficult economic conditions, the
Ukrainian mobile telecom sector fared well in 2009, as the companies
focused on cost-cutting and streamlining of operations. Although
Russian firms are heavily invested in the sector, both Kyivstar and
MTS-Ukraine maintain that their interests lie only in the realm of
business and this precludes any involvement in politics. End
Summary.

KYIVSTAR
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2. (U) Kyivstar is the largest and most profitable mobile telecom
company in Ukraine. With about 22.2 million users, its subscriber
market share is around 40% while its revenue market share is almost
50%. Kyivstar uses a Global System for Mobile communications (GSM)
standard and has upgraded most of their systems to use Enhanced Data
Rates for GSM Evolution (EDGE) technology. In addition to its voice
services, Kyivstar offers messaging, voicemail, a wide range of
multimedia operations, and mobile internet through its EDGE
technology. Kyivstar started its operations in 1997 and has grown
into one of the most recognizable name brands in Ukraine. In
addition to its Kyivstar name, the company has developed the DJUICE
brand targeting the youth. DJUICE currently has about 6 million
subscribers.

KYIVSTAR OWNERSHIP ISSUES
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3. (SBU) Norway's Telenor owns 56.5% of Kyivstar while Altimo, the
telecommunications arm of Russia's Alfa Group, controls the
remaining 43.5%. The ownership structure, however, is likely to
change as the two companies have agreed to resolve a long-running
conflict over their Russian and Ukrainian assets (reftel).
According to a preliminary agreement, Telenor and Altimo will merge
their Russian and Ukrainian assets and form a new company called
Vimpelcom Ltd, jointly owned by the two partners. [Note: Russia's
Altimo is the majority shareholder in Vimpelcom, with Telenor being
the minority shareholder. End Note.] The new entity will also
absorb Beeline and Golden Telecom, Vimpelcom's Ukrainian
subsidiaries which together account for about 4% of the market. The
merger is awaiting a ruling by Ukrainian and Russian regulators and
an approval of an Extraordinary General Meeting of Shareholders
(EGMS) of Kyivstar and Vimpelcom.

MTS-UKRAINE
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5. (SBU) MTS-Ukraine or Ukrainian Mobile Communications (UMC) is the
second-largest mobile provider in Ukraine with about 17.75 million
GSM subscribers and 36% market share. MTS-Ukraine is a wholly-owned
subsidiary of Mobile Telesystems (MTS),the largest mobile operator
in Russia and the CIS. Through contractual agreements, it is the
only Blackberry service provider in Ukraine. MTS-Ukraine is
Ukraine's most active telecom company in Corporate Social
Responsibility (CSR) and is a member of the U.N. Global Compact
platform.

LIFE
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6. (U) Life is the third-largest Ukrainian mobile telecom company,
providing service to about 10.7 million subscribers. Turkcell,
Turkey's largest mobile phone operator, owns 54.2% of the company
and Ukrainian SCM Holdings, controlled by billionaire businessman
Rinat Akhmetov, owns the remaining 45.8%. Launched in January 2005,
Life was the first provider to introduce EDGE technology. Today, it
has the largest EDGE coverage in the country. On February 16, Life
signed a four-year multimillion dollar contract with U.S.-based
company Telenity which will further enhance Life's ability to
compete and expand in Ukraine. While Life holds only 18% of the
market share, it has quickly established itself as a viable
alternative to the two leading operators and, according to the
research group Wireless Intelligence, became the fastest growing
operator in the world in terms of subscriptions.

EFFECTS OF THE GLOBAL ECONOMIC CRISIS
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7. (SBU) While the economic crisis has not spared the mobile
telecom industry, Ukraine's three leading companies have weathered
the storm in good shape. All three companies have coverage of
nearly 100% of Ukraine's territory, and roaming agreements with
international providers allow users world-wide coverage. Kyivstar
and MTS-Ukraine representatives acknowledged that revenue suffered
slightly, as corporate clients like banks dropped expensive packages
and individual users cut down on their usage of minutes. At the
same time, the number of actual users stayed similar to previous
levels. [Note: Ukraine's cell phone usage penetration was well in
excess of 100% prior to the crisis since users had multiple SIM
cards from different providers. Our contacts indicated that the
decreased number of subscribers was a result of users dropping their
secondary accounts. End Note.] Both Kyivstar and MTS-Ukraine
credited timely cost cutting and streamlining measures as well as
effective marketing campaigns for their ability to successfully
withstand the economic downturn.

SUBSCRIBER BASE
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8. (SBU) Despite a high penetration rate, most subscription sales
in Ukraine come from pre-paid accounts instead of long-term
contracts. [Note: Subscriber numbers are based on usage within a
given period of time; most companies regard a user who used his
account at least once in the past six months a subscriber. End
Note.] Long-term contracts make up less than 10% of the overall
subscriber numbers and are almost exclusively restricted to larger
corporate customers. The unwillingness of users to sign long-term
commitment contracts results from various factors, Kyivstar's
Product Management and Development Director Vitalii Vorozhbyt
opined, including unstable incomes, "shadow income," and lack of
credit history. Vorozhbyt said that, despite best efforts of mobile
telecom providers to boost long-term subscriptions, the number has
hit a plateau and is unlikely to climb higher in the near future.


LICENSES
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9. (SBU) All three major providers own GSM 900 MHz and GSM 1800 MHz
licenses. MTS-Ukraine, in addition, owns a CDMA-450 MHz license.
Utel, the mobile telecom subsidiary of the state-owned giant
Ukrtelecom, is the only Ukrainian provider with a 3G license.
According to Vasyl Latsanych, Marketing Director of MTS-Ukraine,
Utel's 3G license is likely no more than a ploy by the Ukrainian
government to attract a buyer for Ukrtelecom. [Note: Rumors that
the GOU will privatize Ukrtelecom have circulated for several years.
End Note.] On September 29, 2009 the Ukrainian National Commission
for Communications Regulation (NCCR) published tender conditions for
the auction of additional 3G licenses. The auction was originally
scheduled for the end of November 2009. However, President
Yushchenko blocked the tender because the Cabinet of Ministers did
not plan on compensating the Ministry of Defense (MoD),which
currently has the rights to the frequencies, for its losses. The
Cabinet of Ministers later reached an agreement with the MoD that
the Ministry would receive UAH 2.5 billion ($313 million) for the
four 3G frequencies which were to be sold. However, on November 27,
2009 the NCCR suspended the tender and stated it would not go
forward until the MoD, Ministry of Transportation and
Communications, and Prosecutor General's Office had finalized the
conversion of the frequencies as required by Ukrainian legislation.
According to Kyivstar's Head of Products Development and Management
Alexey Kireev, the military's unwillingness to part with the
spectrum casts doubt on development and potential investment into
mobile telecom in Ukraine.

COMMENT: Should Russia Be a Concern?
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10. (SBU) Compared with the state-owned telecommunications behemoth
Ukrtelekom, Ukraine's major mobile services providers are modern,
well-managed enterprises focused on the bottom line. Despite
occasional frustrations with the governmental bureaucracy, our
contacts have expressed strong optimism for the future. Profit
margins in Ukraine remain among the highest in the world, making the
market as attractive as ever.


11. (SBU) Representatives of both Kyivstar and MTS-Ukraine were
predictably supportive of their Russian parent companies and stated
that they did not involve themselves in local politics but were
simply interested in growing their respective businesses. Neither
have Ukrainian authorities expressed concern to us about the market
dominance of Russian mobile phone providers. Nonetheless, it is
worth noting that Russian interests will have a virtual stranglehold
on the market and could at least temporarily halt services to 76% of
mobile phone users -- of course such a move would not be without
business ramifications as users would quickly switch services. End

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