Финал integrity

Changellenge >> Cup Russia 2013 Final, April 29, 2013

DATA TRANSFORMATION: the Internet Leadership for MTS INTEGRITY Management Consultants Ageev Sergey Butakova Yulia Buzko Roman Syrunina Ekaterina INTEGRITY

INTEGRITY

TEAM

management consultants

OUR TEAM OF PROFESSIONALS Ekaterina Syrunina

Ageev Sergey

Dancing Queen of INTEGRITY

Burden of INTEGRITY

GSOM SPbU Master in International Business’14

SPbU, Faculty of Economics’ 11

ekaterina.syrunina@gmail.com +7 931 368 6992

sergey.ageev2@gmail.com +7 952 371 0277

Yulia Butakova Poker Face of INTEGRITY

Roman Buzko Humor of INTEGRITY

GSOM SPbU Master in Corporate Finance’14

Herzen State University Faculty of Law’13

july.butakova@gmail.com +7 911 744 7492

roman.buzko@gmail.com +7 911 007 6762

2

INTEGRITY

PROBLEM >>

management consultants

Mobile telecom companies should pay more attention to mobile internet, that is becoming major revenue stream The importance of VAS* in revenue structure is increasing over time, while mobile internet has become a significant component of revenues 30 26,3

26,0

25

5%

23,8 21,5

28%

20,5

20 15

14,3

27%

Internet revenues

10 5 14%

13%

15%

19%

24%

21%

40%

0 2006

2007

2008

Total revenues • •

VAS = value-added services AC&M Report

2009

2010

2011

VAS revenues

other

messaging

content

data transfer 3

INTEGRITY

PROBLEM >>

management consultants

MTS

MTS revenues has a potential to grow providing implementation of market average revenues structure MTS would receive 4% more revenues in 2011 if it’s sales structure was market average +4%

Growth due to increase of internet: core ratio

21.2

Mobile Internet

16.1

Messaging

5.1

5.1

100.0

100.0

2011, real structure

2011, industrry average structure

Core

4

INTEGRITY

PROBLEM >>

management consultants

MTS

Information flows from the content provider to the consumer reveal opportunities for additional revenues Intermediaries

+$

+$

+ Direct revenues from consumers

Indirect revenues from consumers

+

Content provider

MTS

Consumer

+$

Advertizers 5

INTEGRITY

OUTLINE

management consultants

MTS

MTS can increase profit from mobile internet through cutting costs or increasing revenues

=

Profit

Revenues

From information consumers Revenue per customer (ARPU) Pricing strategy Value-added services

x

+

N of customers  Promotion  Geographical expansion

-

Additional revenues

Costs Investments in technology (3G/4G) Maintenance costs

Contracts with:  Social networks  Search engines

Additional revenues

Costs (technology)

6

INTEGRITY

OUTLINE

management consultants

MTS

MTS can increase profit from mobile internet through cutting costs or increasing revenues

=

Profit

Revenues

From information consumers Revenue per customer (ARPU) Pricing strategy Value-added services

x

+

N of customers  Promotion  Geographical expansion

-

Additional revenues

Costs Investments in technology (3G/4G) Maintenance costs

Contracts with:  Social networks  Search engines

Additional revenues

Costs (technology)

7

INTEGRITY

REVENUES >> ARPU >> PRICING STRATEGY

management consultants

MTS

Although the most part of current consumers are young, the older segments are expected to grow faster in the near future Segments Children (under 17 years)

Youth (18-24 years)

Middle-class (adults. middle revenue)

Businessmen (adults, high revenue)

%

Growth

Interests

Payability Traffic

30%

*

Games, short videos

*

**

45%

**

Music, video, social networks, games

*

**

13%

**

News, videos, navigation, banks & insurance, social networks

**

**

12%

**

Business data, financial markets, news, banks & insurance

Source: J’son and Partners Consulting research, 2013. http://www.json.ru/

*

8

REVENUES >> ARPU >> PRICING STRATEGY

INTEGRITY management consultants

MTS

Differentiated pricing strategy for smartphones and tablets Tariff

Children, Middle-class Youth

Businessmen Tablet Laptops / PCs

Volume

Price RUR/Month

BIT

50 MB/Day

149

Super BIT

100 MB/Day

299

Smart

15 MB/Day

99

Comments *Option with Mobile TV (300)

Tablet

2 GB/Month

400

*Additional Mobile TV without limits

Mini, Maxi, Super, VIP

4 GB/Month/ 7GB/Month/ 12 GB/Month/ 25GB/Month/

500/ 700/ 1000/ 1400

*Additional online-movies, music, social networks, email

Source: MTS pricing strategy, team calculations

9

INTEGRITY

REVENUES >> ARPU >> PRICING STRATEGY

management consultants

MTS

With introduction of shared data plans, MTS will be able to increase its consumer base Results

One Shared Data Plan for All Devices • • •

Tariff

Shared data plan

Smart+

• •

simplifies billing enables seamless mobile access consolidates users with a single operator

Volume 20 GB/Month

•

happy user decreased churn rate increased ARPU

Price RUR/Month 500/ 1000

Comments *Additional online-movies, music, social networks, email

10

INTEGRITY

OUTLINE

management consultants

MTS

MTS can increase profit from mobile internet through cutting costs or increasing revenues

=

Profit

Revenues

From information consumers Revenue per customer (ARPU) Pricing strategy Value-added services

x

+

N of customers  Promotion  Geographical expansion

-

Additional revenues

Costs Investments in technology (3G/4G) Maintenance costs

Contracts with:  Social networks  Search engines

Additional revenues

Costs (technology)

11

INTEGRITY

REVENUES >> ARPU >> ADDITIONAL SERVICES

management consultants

MTS

Three roles that mobile operators can play in VAS/OTT segment Role

Utility players

Function

Internet access

Internet access

Enablers

+ Ecosystem (API, network)

Internet access

Digital Life Solutions Provider or Enabler+

+ Ecosystem (API, network)

+

Share in VAS/OTT profits

Results No VAS/OTT profits.

Margins in traditional revenue streams will fall down to 8-12% Limited role resulting in just a portion of VAS/OTT profits

An operator will fully reap the potential benefits from VAS/OTT revolution

End-to-end user solutions

Source: Operator’s Dilemma (and Opportunity): The 4th Wave, Chetan Sharma Consulting

12

INTEGRITY

REVENUES >> ARPU >> ADDITIONAL SERVICES

management consultants

MTS

MTS should expand beyond traditional revenue streams in the following areas New Competitors

Market Penetration Potential Growth

E-commerce

Ozon, eBay, Google, Groupon

Payments, remittance

Paypal, Facebook, Visa / MasterCard, Google

Apps (business)

Cisco, Apple, Microsoft

mHealth

Healthcare providers

Enhanced Communication

Skype, Facebook, Google, Cisco

Who Pays Customers, commerce partners

Growth

Customers, commerce partners

Growth

Customers, enterprise, partners

Growth

Insurance, hospitals, customers

Growth

Source: J’son and Partners consulting, team judgment

Customers

13

INTEGRITY

OUTLINE

management consultants

MTS

MTS can increase profit from mobile internet through cutting costs or increasing revenues

=

Profit

Revenues

From information consumers Revenue per customer (ARPU) Pricing strategy Value-added services

x

+

N of customers  Promotion  Geographical expansion

-

Additional revenues

Costs Investments in technology (3G/4G) Maintenance costs

Contracts with:  Social networks  Search engines

Additional revenues

Costs (technology)

14

REVENUES >> N OF CUSTOMERS >> PROMOTION

INTEGRITY management consultants

MTS

While being the leader in amount of subscribers, MTS still lags behind in terms of traffic. The company must “convert” its regular users into “data” ones

Trade-in

Connect your parents

+$

Targeted campaigns 15

INTEGRITY

OUTLINE

management consultants

MTS

MTS can increase profit from mobile internet through cutting costs or increasing revenues

=

Profit

Revenues

From information consumers Revenue per customer (ARPU) Pricing strategy Value-added services

x

+

N of customers  Promotion  Geographical expansion

-

Additional revenues

Costs Investments in technology (3G/4G) Maintenance costs

Contracts with:  Social networks  Search engines

Additional revenues

Costs (technology)

16

INTEGRITY

REVENUES >> ADDITIONAL REVENUES

management consultants

MTS

Search engines, e-mail, social networking are MTS possible info-suppliers Purposes of mobile internet usage in Russia, 2010 Search

72%

E-mail

 Google

68%

Social networking

59%

Maps

46%

World&Local News

34%

Entertainment

68%  VK

74%  Odnoklassniki

29%

Business News

24% 14%

69%

 Yandex

37%

Instant messenger

Sport News

Possible partners:

 Facebook

49% 30%

% of mobile internet users Source: On device research, J’son and Partners consulting

17

INTEGRITY

REVENUES >> ADDITIONAL REVENUES

management consultants

MTS

Additional revenues from info-suppliers will amount to 9.7% of initial revenues 1. Tariff ÂŤContactÂť

Scheme of possible partnership

MTS Partners

Base tariff = 350 RUR/Month - Up to 50% of fee

user

2. Revenues from advertising in social networks

Social network Increased intensity of use

Vk.com, odnoklassniki.ru

user

Social network

70% of paid services

30% of paid services

Increase in revenues by 2.7% from initial revenue

Advertisers Increase in revenues by 7% 18

INTEGRITY

OUTLINE

management consultants

MTS

MTS can increase profit from mobile internet through cutting costs or increasing revenues

=

Profit

Revenues

From information consumers Revenue per customer (ARPU) Pricing strategy Value-added services

x

+

N of customers  Promotion  Geographical expansion

-

Additional revenues

Costs Investments in technology (3G/4G) Maintenance costs

Contracts with:  Social networks  Search engines

Additional revenues

Costs (technology)

19

INTEGRITY

COSTS

management consultants

MTS

Technology strategy: use 3G where coverage is sufficient; construct new LTE base stations advantages

disadvantages

3G

 Efficient area coverage  Access from the most devices

 Occasional net overload

4G

 Low maintenance costs  Larger volume of data available  Higher speed

 Huge investments (to convert base stations)  Deference of effect in time

CAPEX

19% (as of Revenues)

Source: J’son and Partners consulting, team judgement

20

INTEGRITY

STRATEGY

MTS

management consultants

The strategy for 2014-2018 is in line with MTS overall 3i strategy

Internet

Integration

Innovation

Slight differentiation of the Internet access tariffs

Integration of supplementary VAS

Innovation of additional revenue streams through partnerships with social networks

R e v e n u e

I N C R E A S E

21

INTEGRITY

FINANCIAL RESULT

management consultants

MTS

Resulting percentile increase in revenues and costs

=

Profit

Revenues

From information consumers Revenue per customer (ARPU)

+ 5.7%

x

+

N of customers

-

Additional revenues

+ 9.7% (from basic revenues)

+ 3.2%

Costs

+ 10.2% (from basic costs)

INTEGRITY

FINANCIAL RESULT

MTS

management consultants

MTS mobile internet strategy will result in increase in profits by 86% 336.9 27.5

+19% 283.6

25.8

253.4

27.4

56.1 +86% 30.2

Revenues 0

+ Core revenues

+ Additional Revenues 1 revenues

- cost 0

- cost

NI 1

NI 0

INTEGRITY management consultants

MTS

THANK YOU FOR YOUR ATTENTION! 24

INTEGRITY

APPENDICES

MTS

management consultants

Back-up 1. Russia has great upward potential in increase of volumes of data transfer, following the world pattern of development In your view, which of the following are the three most critical challenges facing mobile operators over next few years?

Mobile internet penetration in Russia and other countries, 2012, % 100%

85% 85% 83% 81%

80%

77% 75%

65% 64%

60% 40%

Developing new pricing models

55% 35%

23%

19% 16%

20%

6%

0%

48%

Containing the cost of nextgeneration network developments

44%

Ensuring adequate backbone capacity for future traffic loads

37%

Expanding the variety of content and services available to users

Volume of data transfer in Russia, PB 3160 3000

2338 1621

2000 1013 1000 75

247

2010

2011

35%

Obtaining additional spectrum

22%

Identifying new ways of working with content providers

21%

Determining how to treat voiceover-IP (VoIP) providers

20%

Devising meansd of capitilising on social networking

550

0

17%

Other 2012E

2013E

2014E

2015E

5%

2016E 0%

Sources: J’son & Partners Consulting, Accenture. Mobile Web Watch 2012 (survey N = 12, 485)

10% 20% 30% 40% 50% 60%

INTEGRITY

APPENDICES

management consultants

MTS

Back-up 2. Additional data on smartphones

Smartphones development in Russia, 2010-2012 Sales, RUR bn

Operating system used in smartphones in Russia

Average price, ths RUR

40

16

80%

35

14

70%

30

12

60%

25

10

50%

20

8

40%

15

6

30%

10

4

20%

5

2

10%

0

0

0%

67,20%

8,00%

Android

Sources: case materials

Bada (Samsung)

7,70%

6,90%

Asha

IOS (Apple)

5,90%

3,60%

MS Symbian Windows (Nokia)

INTEGRITY

APPENDICES

MTS

management consultants

Back-up 3. Consumer analysis Most important criteria in the choice of a network provider for mobile Internet access Very important Quality of network Coverage Connection speed

Extremely important 31%

64%

28% 26%

Quality of customer service

29%

The device subsidy

58%

24%

Cost of data connections

Past experience with the provider

Devices used in the past 12 months to access the Internet

57%

69% of users have used mobile devices for internet access

61%

Netbook

37%

Tablet

22%

55% 41%

30% 24%

Smartphone

34%

Computer/ Laptop

92%

TV

94% of users have used stationary devices for internet access

38%

29% Gaming console

Devices on offer from the network providers

26%

Content available from the network provider

24%

27%

Special offers

24%

27%

29%

26% 0%

Sources: Accenture. Mobile Web Watch 2012 (survey N = 12, 485)

20%

40%

60%

80%

100%

INTEGRITY

APPENDICES

management consultants

MTS

Back-up 4. Pricing of the mobile internet access How many times did you access the internet yesterday?

(October, 2012) several times a day

Volume 46%

2-3 times a day

20%

1 time a day

19%

none

14%

don't know

2% 0%

10%

20%

30%

40%

1 2%

13%

20 MB

200 MB

40%

2 GB

5 GB

15%

MB per day

1 MB

2%

0,03

20 MB

13%

0,67

200 MB

40%

6,67

2 GB

15%

66,67

5 GB

5%

166,67

Other

25%

-

50%

Structure of mobile consumers in terms of used traffic, 2012 1 MB

% of users

Differentiation of tariffs (for smartphones & tablets): Introduction of smaller-volume tariff (15 MB per day)

5%

Sources: Accenture. Mobile Web Watch 2012 (survey N = 12, 485), team calculations

55% of users consume less than 50 MB daily

INTEGRITY

APPENDICES

management consultants

MTS

Back-up 5. Pricing of mobile internet for competitors Tariff

Price (RUR)

Megafon Internet XS Internet S Internet M

Volume (Gb/ per month)

Speed (Mb/s)

Price (RUR)

Volume (Gb/ per

Speed (Mb/s)

month)

Smartphone

Tablet

190

1.5

no restriction

390

3

3

690

6

5

Internet S Internet M Internet L Internet XL

390

3

3

690

6

6

990

9

10

1290

20

20

150+13 (per day)

no restriction

no restriction

600

no restriction

no restriction

Beeline «Prolong speed»

100

«Internet without limit»

150+13(per day)

1

no restriction

«Internet no restriction no restriction without limit»

19(per day)

«Internet for a day»

Sources:

Internet + Wi-Fi

no restriction

no restriction

INTEGRITY

APPENDICES

management consultants

MTS

Back-up 6. Technologies Usage of different technologies to access Internet in Russia, 2012, % Fixed and wireless Only fixed Only fireless

Development of 2G, 3G and 4G in the world, mln

Mainly fixed Mainly wireless

8% 4% 45%

17%

3G and 4G will be key technologies in 2017 worldwide 2-2.5G

3-3.5G

4G

14% 45%

26%

76% 51% 10% 2012

Sources: J’son & Partners Consulting,

4% 2017

INTEGRITY

APPENDICES

management consultants

MTS

Back-up 7. Technologies for internet access Type

Advantages

Disadvantages

Wireless - 2G

 Voice transferred

 Low speed of data transfer  High maintenance costs

- 3G

   

 Occasional net overload

- LTE

 High speed of data transfer  Low maintenance costs  Larger volume of data available

 Huge investments (to convert base stations)  Deference of effect in time  Voice not transferred (VoLTE)

- WiMAX

Easy to implement in vertically integrated systems (transport, safety systems, M2M, smart grits etc.)

 Limited usage in niches (smart grids, M2M)  Absence of rouming service  Lack of invested funds

Fixed (broadband)

 High speed  Unlimited capacity

 Necessity to construct infrastructure

High speed of data transfer Voice transferred Efficient area coverage Access from most devices

Sources: J’son & Partners Consulting, team judgment

To be used – yes/no

  

INTEGRITY

APPENDICES

management consultants

MTS

Back-up 8. 3G and LTE geographical coverage

LTE base stations: - Own in Moscow - Rented from Yota in Kazan

> 10 th people per base station 7-10 th people per base station 4 - 7 th people per base station 32

INTEGRITY

APPENDICES

MTS

management consultants

Back-up 10. VAS – Apps Accessing internet at work

1. Applications Volume of mobile apps, mln USD

Smartphone

Volume of mobile apps, mln USD 1500 1000 500

1300 CAGR = 69%

no 26%

160

0 2012

2016E

yes 74%

Which of th following types of apps have you downloaded from the Internet on your smartphone/ tablet?

Information apps

Tablet

72%

Entertainment apps

70%

Apps for arranging leisure activities

53%

Educational apps

46%

Organisational apps

no 35%

43%

Apps that help manage your money

33%

Fitness and health apps

32% 0% 10% 20% 30% 40% 50% 60% 70% 80%

Sources: J’son & Partners Consulting

yes 65%

B U S I N E S S

A P P L I C A T I O N S

INTEGRITY

APPENDICES

management consultants

MTS

Back-up 11. VAS – Payments & Cloud services 2. Payments Are you using mobile payments on your smartphones/ tablets?

Buying tickets for events (concerts, cinema, theater)

Do not use/not interesting in using

46%

39% 16%

55%

Buying train, fight tickets

46%

Buying clothes or shoes

Interested or planning to use

Buying other consumer goods

Currently using

Buying food or groceries

Usage

39% 37% 22%

0% 10% 20% 30% 40% 50% 60%

3. Payments

Russian IaaS market, sales in bln RUR

Cloud computing is expanding worldwide Mobile non-cloud traffic

Mobile cloud traffic

3

2,6

2,5 74%

76%

Increase spectrum of MTS Money activities

78%

2,2

2 80%

82%

84%

2,8

1,6

1,5

1

1 0,5

26%

24%

22%

20%

18%

16%

2012

2013

2014

2015

2016

2017

Sources: J’son & Partners Consulting

0,15

0,38

0 2010

2011

2012

2013

2014

2015

2016

 Storage of medical records for EMR (mHealth)

INTEGRITY

APPENDICES

management consultants

MTS

Back-up 12. MTS retail stores

MTS retail stores

5000 4500

own stores

4000

franchise stores 1573

3500

1686

3000 2500

MTS retail stores increase smartphone penetration rate

1196 1250

2000 1500 1000

2010

2327

2461

2889

35,00% 30,00% 25,00% 20,00% 15,00% 10,00% 5,00% 0,00% 2010

500 0

2011

2012

sales of smartphones through MTS retail stores, % of total handsets

2009

2010

2011

2012 smartphones penetration, % of all registered mobile phones on MTS network

Sources: MTS annual report, 2012

INTEGRITY

APPENDICES

management consultants

MTS

Back-up 13. Risks evaluation Risk

MTS risks evaluation matrix

Risk impact

Higher

Mobile number portability

Regulatory& policy framework Macroeconom ic

Technology evolution

LTE deployment, development of wireless technology

MTS scale & competitors

Competitive pricing and marketing strategy

Technology evolution MTS scale & competitors

Regulatory & policy framework

Interest rate & currency exchange Unpredictable consumer demand

Risk likelihood

More

Long-term contracts, government lobby

Mobile Number Portability

Retain Loyalty of Consumers

Interest & currency exchange

Hedging strategy

Unpredictable consumer demand

Short-term marketing campaigns

Macroeconomic Sources: MTS annual report, 2012, team evaluation

Evaluation Recommendation

Reserves and alowances 36