BD_CLR2014_MTS_Sublime

Cup Russia 2013

Data Transformation: Internet Leadership for a Mobile Network Operator

Alexander Kravchenko Alexander Ovsepyan George Nichkov Dan Lifshits

Executive summary 1

Tariff innovations • We introduce two new payment grids: one for smartphones and one for tablets/USB modems • There would be 8 new tariffs in total

2

Marketing solutions New tariffs invented should be complemented by a smart marketing campaign to: • inform our clients about new solutions • attract new clients

3

Infrastructure investments To support the introduction of the new tariffs we should increase technological covering of the network: • expansion of 4G • Maintenance of 3G

Financial results, BN RUB (in 5 years) 91 13

Increase CAPEX in income

78

Net change

Source: Sublime analysis

2

Mobile network market in Russia is mature: market growth rate is small and 3 big players occupy more than 80% of the market There are three major players in the market, sharing ~85% of market in total

Market is growing slowly Mobile network market dynamics, BN RUB

Players’ market shares, %, 2012 Others

1000

Tele2

7%

7%

800

MTS 30%

600

28%

400

200

Vympelcom 0 2011

12E

Optimistic

13F

14F

15F

Conservative

16F

2017F

28% Megafon

Pessimistic

Source: Rostelecom research «The development of mobile business», Ovum research «Mobile revenues to grow», case data, Sublime analysis

3

Among 3 product segments in the market mobile internet should be our focus due to fastest growth rate and big potential capacity Mobile internet sales will grow faster than other segments’ sales Mobile network sales in Russia by segments, BN RUB

649

668

681

694

79

114

143

167

46

47

48

49

525

508

490

479

707

721

734 CAGR, %

191

216

242

50

467

50

454

51

441

20%

Russian mobile internet market has huge potential for growth Amount of mobile internet traffic by region dynamics, Gb per capita +58%

North America

0,5

Western Europe

0,5

Penetration, % 2012 81% 4,0

2% 75% 3,4

-3%

0,3

55% 1,8 +130%

2011

12E

13F

14F

15F

16F

17F

Mobile internet Messages

2012E 2017F

Voice Source: Cisco research, J’son & Partners research, Sublime analysis

4

Mobile internet is accessed through 4 types of technical equipment, but the market volume of only three of them will increase in the upcoming 5 years

Tablet

# of units sold, M, 2011

Mobile internet traffic, Mb/s, 2012

ARPU per month, RUB, 2012

USB modem

Mobile phone

1.14

32%

13

450

80%

3165

3%

50

0%

303

200

9%

350

5%

35

1%

85

2%

32.4

Smartphone

8%

7.6

23%

150%

7%

Attractiveness

1.14

32%

CAGR for 5 years, except growth rate compared to previous year for mobile internet traffic

Source: Case materials, Sublime analysis, J’son & Partners research

5

Thus, increase of revenue from smartphone, tablet and USB wireless modem users is the key issue for MTS

Revenue from mobile internet

Revenue from current clients

Customer base Attract new clients

1

2

Gents

Yuppies

3 The Middle

4 5 YoungWanters sters

Main questions:

Main questions:

•

Which clients should we attract?

•

What do they need?

•

What do they need?

•

What should we offer?

•

What should we offer?

•

How do we sell our services?

•

How much should we invest?

Source: Sublime analysis

6

There is a possibility to attract new clients only in tablet and USB wireless modem segments

USB modem

Mobile phone

Smartphone

• People who are searching for a cheap smartphone and even ready to switch between operators

• Costs of switching for the other operator highly outweigh savings gained from cheaper internet tariff

Description of a category

Opportunity to attract

Tablet

• Customers who has just bought a new tablet/notebook • They just search for the most appropriate internet connection (price/speed, quantity, coverage, availability of 4G) • It doesn’t depend whether a person is a user of MTS for his mobile connection

Source: Sublime analysis

7

However, to attract them, special offers for wireless connection and cheap smartphones should be made Tariffs for wireless connection should be reconsidered dramatically

Also, we should think about a campaign targeting potential phone buyers

1

•

1 tariff

4 tariffs

Quite cheap Unlimited speed

One of them is cheaper Speed is close

4 tariffs

7 tariffs

Rather expensive Unlimited speed

There exist a tariff that is faster and cheaper

+ Discount of 50%

• We should broaden our tariff grid and include cheap tariffs with differentiated quantity and speed to attract new clients

•

Contract to buy the internet package Upload the money on balance simultaneously

Megafon has a campaign offering to buy a cheap smartphone and to subscribe for the internet use

1—

Megafon has the same tariff grid for tablets and UBS modems Source: company data

8

In the structure of current users 5 different groups with focus on different needs were pointed out 5 groups of clients could be defined…

…and these groups have different needs

>50 20-50 <20

Income, K RUB/month

Customers segmentation

Yuppies

Youngsters

Group

Gents

The Middle

1

2

Yuppies

3

The Middle

Wanting <30

30-40

>40

Gents

4

Youngsters

Share

2,9%

- Are not the groups of interest because of low potential of income increase

5

Wanting

• Latest technologies • Unlimited speed

3,7%

• Latest technologies • Unlimited volume, speed

12%

• Best offer for reasonable price • Status features

7,5%

• High volume for reasonable price • New devices

18%

• Cheap smartphone to get internet connection

Age Extra factors considered: which devices do they use and it’s average price, how regularly and for what purpose, the speed demanded, technical awareness

Needs

Source: Rosstat, Sublime analysis

9

We match each of the highlighted groups with suggested monetization schemes from the best practices Options after allowance

Name

I. Linear pricing

Variable fee per usage (on daily basis or traffic basis)

Quantity traffic cap

A

Speed variation

Suitable customer segments

1



3

B

Gents

3 II. Throttling after allowance

A

No options, no charge



4

Additional steps of allowance

B

A



1

Youngsters

Wanting

2

B

Gents

• • • •

5

 The Middle

III. Add-on buckets

The Middle

Yuppies

Segments can be targeted with several monetization schemes Capped speed is the best fit for the masses as well as for MTS to prevent the network from overloading Tariffs should cover all Russia Low quantity cap is suitable for older customers

Source: case data, Sublime analysis

10

The following tariff grids for smartphones and tablets/UBS modems are proposed to satisfy the needs of client groups

Proposed tariffs for tablets/PCâ&#x20AC;&#x2122;s

>50

>50

Proposed tariffs for smartphones

I.A

III.A

III.B

III.A

20-50

Income

II.A

<20

20-50

II.A

<20

Income

Extra buckets

<30

30-40

- Tariffs suggested

Age

>40

<30 - Tariffs suggested

30-40

>40

Age

New tariffs should be supported by smart marketing campaign and technological modernization of the network Source: case data, Sublime analysis

11

These initiatives should be complemented with a smart marketing campaignâ&#x20AC;Ś Secondary measures

Primary measures 1

Sales of discounted smartphones

5

Our branded smartphones are used in popular Russian TV shows and series

We combine them with predefined Internet plans for a longer period

2

First-time benefits

6

New devices and new clients are granted with favorable conditions

3

Commercials

7

Contracts with computer stores Computer stores-partners include our free USB-modem with purchases

Source: case data, Sublime analysis

Advertising showrooms Installed in our retail outlets, they target younger customers

They feature two sides of smartphones: they are easy to buy and ease of use

4

Product placement

Smartphone lotteries While showing lotteries advantages of smartphones are demonstrated

8

Flightnet Internet provision in long-haul, busy routes in business class

Measures with positive external effect on the whole industry

12

â&#x20AC;Ś and by introducing technological innovation Plan for building 4G MTS stations in the Russian Federation till 2015 4G

Current

Strategic choice

Suggested

3G

Maximum coverage

4G

Gradual expansion

MVNO* model

RUB 1.6 BN

l

Our own station

2H2013

3G coverage

Tyumen

How to expand?

Moscow

A

On our own (CAPEX)

B

Rent networks already in place (MVNO)

C

Buy others (M&A)

Network upkeep Flexible traffic management

RUB 2.19 BN 0

750 km

1H2013

0

Yekaterinburg

Source: MTS annual report, public resources, case data * MVNO â&#x20AC;&#x201C; Mobile Virtual Network Operator

Restructuring, shift the workload to night

RUB 1.45 BN 1H2014 Krasnoyarsk

Station equipment Scalable and simple to use hardware

13

The measures proposed would require RUB 13.1 BN of investments within 5 years and will result in net increase of revenue by RUB 77.8 BN TOTAL EFFECT TARIFF INNOVATIONS New tariff grid for smartphones and unified for tablets / USB-modems

43.6

RUB 77.8 BN

MARKETING SOLUTIONS

1

8

Cumulative effect for 5 years from all measures taking into account capital expenditures amounts to

net increase in revenue

47.3 ADDITIONAL REVENUES

INFRASTRUCTURE INVESTMENTS CAPEX into the expansion of 4G network, maintenance of 3G

13.1

VOICE & SMS RETAIL CHAIN

Source: case data, Sublime analysis

14

We envisaged the following implementation plan of our project to succeed

Initiatives

2013

2014

2015

New Payment Plans

2016

2017

2018

New tariff grid for smartphones Unified tariff grids for tablets/USB modems Sales of discounted smartphones First-time benefits Commercials

Marketing solutions

Contracts with computer stores Product placement Advertising showrooms

Primary measures Secondary measures

Infrastructure investments

Smartphone lotteries Flightnet

CAPEX into the expansion of 4G Maintenance of 3G

Source: Sublime analysis

15

Executive summary 1

Tariff innovations • We introduce two new payment grids: one for smartphones and one for tablets/USB modems • There would be 8 new tariffs in total

2

Marketing solutions New tariffs invented should be complemented by a smart marketing campaign to: • inform our clients about new solutions • attract new clients

3

Infrastructure investments To support the introduction of the new tariffs we should increase technological covering of the network: • expansion of 4G • Maintenance of 3G

Financial results, BN RUB (in 5 years) 91 13

Increase CAPEX in income

78

Net change

Source: Sublime analysis

16

Questions?

Just raise your hand!

Sublime: an experienced team of professionals with diverse backgrounds who enjoy solving problems for you

Alexander Ovsepyan

George Nichkov

Alexander Kravchenko

Dan Lifshits

hovsepyan.hse@gmail.com +7 916 637 8910

george.nichkov@gmail.com +7 903 976 6643

alexandre.kravchenko@gmail.com +7 916 383 0415

lifshitsdan@gmail.com +7 916 262 5583

HSE’14/LSE’14 BSc Economics

Financial University’13 / UCL’13, Finance and Credit

LSE’14, BSc Politics and Philosophy

HSE’14/LSE’14 BSc Economics

• Finalist of the business case game BNP Paribas Ace Manager 4, 2012 • Holder of the President of the Russian Federation scholarship

• President of the Russian Society at the LSE • Finalist, Oliver Wyman Case Study Competition’12

• Semi-finalist, McKinsey Business diving’13 • Participant , KPMG K-Practika’12 • Holder of Alpha-chance scholarship

• Winner of Russian stage of Unilever Championship’13 • 2nd place in Changellenge CupMoscow’11 • Participated in exchange program with Tilburg University, the Netherlands

18

Cup Russia 2013

Appendix

Alexander Kravchenko Alexander Ovsepyan George Nichkov Dan Lifshits

Initiatives evaluation Years 2009A MTS business Revenue in Russia, BN RUB Subscribers base, M Share of MTS subscribers who use Mobile internet MTS subscribers who use Mobile internet, M Revenue from mobile data transfer, RUB BN Growth of mobile data transfer business Share of MTS total mobile business revenue ARPU (MTS) ARPU, RUB VAS ARPU, RUB Mobile internet ARPU, RUB Smartphone ARPU, RUB Tablet ARPU, RUB USB-modem, RUB Simple phones, RUB MOU, min Shares of main devices types used by our active Internet subscribers Smartphones Tablets USB-modem Simple phones Industry data Mobile business sales, RUB BN Mobile internet revenues, RUB BN Growth of mobile internet revenues MTS market share Average ARPU Subscribers, total, M

2010A

2011A

2012E 337 71 37% 26.3 33.1 34% 12%

2013F

77 44% 33.7 44.9

2014F

82 51% 41.3 58.2

2015F

2016F

85 56% 47.8 69.5

2017F

88 62% 54.4 81.4

90 68% 60.8 93.7

Current situation

53

76.4 44%

297 81 105 85 200 350 35

111.02 92.66 228.02 385.04 35.35

117.42 99.63 253.15 412.06 35.70

121.25 105.13 270.92 424.51 36.06

124.64 110.41 287.26 433.13 36.42

128.47 115.99 304.63 442.01 36.79

29% 3% 15% 52%

30% 3% 15% 52%

31% 3% 15% 51%

33% 3% 14% 50%

36% 2% 14% 47%

40% 2% 13% 45%

94.24 24% 35% 326.33 230.00

111.20 18%

127.88 15%

143.23 12%

158.98 11%

174.88 10%

Source: Sublime analysis

20

Initiatives evaluation ASSUMPTIONS • The traffic of mobile data transfer will grow fourfold on account of decreasing cost of sending 1 Mb • By 2015 smartphones will constitute half of all sold mobile phones in Russia • USB-modems will remain the biggest contributor to the tota ltraffi of mobile data transfer by 2015. However their sales are going to decline • MNO are interested in pushing internet sccess via smartphone forward because smartphones complement USB-modems instead of replacing them Years Traffic Aggregate traffic of mobile data transfer via USBmodems, PB Aggregate traffic of mobile data transfer (excl. USBmodems), PB Total aggregate traffic of mobile data transfer, PB Share of USB-modem in total traffic Sales Sales of smartphones, M Growth of sales Sales of simple phones Share of smartphones in total mobile phone sales Sales of USB-modems, M Sales of tablets, M Subscribers # of active subscriders using Mobile internet, in SIMcards, M Growth of # Costs Average cost of 1 Mb (via smartphone), RUB Average cost of 1 Mb (via USB-modem), RUB

2009A

2010A

2011A

2012E

2013F

2014F

2015F

2016F

65

216

452

812

1,276

2,338

3,160

10 75 87%

31 247 87%

98 550 82%

201 1,013 80%

345 1,621 79%

2,338

3,160

3.9 105% 31.6 11%

8.1 108% 32.4 20%

0.2

34

7.1

5

1.9

6%

Current 12.7 16.4 situation 19.8 22.2

1.1

57% 28.9 31% 13.0 2.5

29% 26.8 38% 12.7 3.5

21% 24.2 45% 12.5 4.7

12% 22.2 50% 12.2 5.8

39 15%

49.4 27%

65.5 33%

79.1 21%

90.8 15%

101.1 11%

4.2

1.8

0.7 0.17

0.4

0.3

24.4 10% 20.8 54% 12.0 6.8

2017F

26.6 9% 19.3 58% 11.8 7.9

Source: Sublime analysis

21