MEGAFON Annual Report 2016

Industry Overview and the Company’s Market Position


The global mobile market continued to grow rapidly during 2016. According to the GSMA, the number of unique mobile subscribers grew to 4.8 billion, while the global mobile penetration rate was 65%, with the largest growth recorded in India and China. As the mobile market becomes increasingly saturated, subscriber base growth rates will slow down going forward, and by 2020 the total number of unique subscribers will reach 5.7 billion, with a mobile penetration rate of 73%.

While the voice market appears sluggish, mobile data has remained the key growth driver for mobile operators across the globe. According to GSMA, in 2016 global mobile Internet penetration rate was growing strongly, at 48% vs 44% a year before, on the back of widespread deployment of 3G and 4G and increasing smartphone penetration rates, which hit 65% in developed and 47% in emerging markets.

In 2016, users continued to migrate to mobile broadband, a trend bolstered by the rapid expansion of 4G/LTE networks. In recent years, the world has been actively adopting new generation networks. According to GSMA, while back in 2011 2G networks accounted for over 80% of global mobile connections and 3G accounted for the remaining 20%, in 2016 2G only accounted for 45% of total connections, while the combined share of 3G and 4G was 55%. Notably, 2G, 3G and 4G are expected to have equal shares by 2020.

According to Ericsson, total global mobile traffic grew 60% year-on-year from 5.3 EB per month in 2015 to 8.5 EB per month in 2016. The Company forecasts that by 2022 traffic will grow to 69 EB per month at an average annual growth rate of 45%. In 2016, the monthly mobile traffic on smartphones rose 36% to 1.9 GB per device. The largest growth came from tablets, for which traffic grew by 40% to 3.5 GB per month per device.

Other global trends of recent years in the telecoms industry include the widespread adoption of converged services, which led to a number of major M&A transactions in the market.

According to the GMSA, a quarter of mergers in the telecoms industry over the last five years were takeovers of cable or satellite TV players by mobile operators (or their syndicates). The most vivid examples include Vodafone’s acquisition of cable companies in Germany (2013) and Spain (2014) and AT&T’s acquisition of DirecTV (2014).

Russian Telecoms Market in 2016

2016 was a challenging year for the Russian telecoms industry. The overall economic recession and stronger market competition resulted in all-time record lows for the cost of mobile services. At the same time, operating and capital expenditures of telecom operators kept rising. The era of massive gross customer additions is over, and, on the back of a high mobile penetration rate of 179%(1), mobile operators refocused on subscriber loyalty and the retention of existing customers.

According to TMT Consulting, in 2016 the Russian telecoms market totalled RUB 1,597bn, while the combined revenue growth rates of operators was 0.6%, slightly lower than the previous year’s figure of 0.8%.

Mobile Business

Mobile services still account for more than half of revenues in the Russian telecoms industry, although their share of total revenue continues to show steady declines. According to TMT Consulting, in 2016 the share of mobile services was down to 55%. Overall, the mobile services market in Russia came to RUB 885.5bn(2). MegaFon’s market share stood at 29.2%(2), and the Company’s revenue performance was in line with the general industry trend. The subscriber base kept growing, with the number of users up 1.5% year-on-year to 256 million, according to AC&M.

The market shows signs of saturation and slowdown, while subscriber base growth is mostly driven by mobile Internet and M2M subscribers. This trend is typical for both Russian and global mobile markets, as stagnation in the mobile voice segment is offset by growing revenue from mobile data.

Mobile voice

Traditional voice services remain the largest segment in the mobile market despite the growth of 3G and 4G, and the stronger adoption of digital voice services and OTT content. However, the voice segment is stagnant, while mobile data is growing.


RUB 885.5bn

Source: Company estimates based on AC&M Consulting and public filings of Rusian moblile operators.


mobile service penetration in Russia in 2016

As all “Big Three” operators seek to bolster demand for voice services, they came up with special rates to boost the volume of voice traffic within their own networks. MegaFon’s range of tariffs includes the "Perekhodi na 0" ("Switch to Zero") tariff which provides free minutes for on-net calls within the region in which the subscriber resides.

Mobile data

Mobile data remains the most rapidly growing mobile services segment and a key growth driver of revenue for mobile operators. In 2016, traffic consumption growth was mainly driven by more affordable data-enabled devices, operators’ campaigns to promote such devices, and more affordable mobile data offerings. According to Ericsson, about 75% of Internet users in Russia aged from 15 to 69 use online services on a daily basis, while one in every three users access more than seven online services a day. The most popular services, including messengers such as Viber, WhatsApp, and Facebook Messenger, gradually lead to streaming media like YouTube, which results in higher traffic. Over the last two years, video streaming was integrated into various user-generated content applications such as Facebook. Although users still mostly prefer using WiFi to access these services, the share of traffic on mobile networks keeps growing.

According to Cisco, Russian mobile traffic grew 60% in 2016 to 365.1 PB per month. In 2016, average traffic per data-enabled device was 1,489 MB per month, up 59% year-on-year.

Further growth in the traffic and revenue of telecom operators is also linked to the future growth of the emerging OTT market. The market is so immature that its collection of participants is still taking shape, while truly commercially viable projects are yet to emerge. Various sources estimate the size of the Russian OTT content market at RUB 6bn in 2016.

There are a number of barriers to the development of the OTT market. They include the lack of tradition of purchasing paid legal content; piracy and the inflexibility of some major content owners in negotiating periods during which content is made available, as well as fees as a percentage of the sale price. There is no doubt that the market will gradually overcome these barriers, including through the active involvement of the government and newly emerging players such as MegaFon.TV, which are positioned to grow as the market matures.

Value Added Services (VAS)

Apart from standard VAS services offered by every mobile operator, high-potential areas such as M2M/IoT (Machine-to-Machine and the Internet of Things) solutions are growing rapidly. A survey by AC&M Consulting suggests that major mobile operators unanimously agree that the Russian M2M market will continue to post strong growth over the next two to three years.

J’son & Partners Consulting estimates that at the end of 2015 there were a total of 193 million consumer IoT control devices in Russia and that by 2020 this will reach 290 million devices.

According to AC&M Consulting, in late Q3 2016, over 10 million M2M devices were registered on Russian mobile networks, up 30% year-on-year. According to a consensus forecast from experts surveyed by AC&M Consulting, in 2017 the number of M2M devices in operation will increase by more than 40%.

According to AC&M, MegaFon is one of the key players in the Russian M2M communication market with over 3.9 million M2M SIM cards in operation (approximately 37% of the market). The Company offers M2M services in all areas while placing a special focus on the needs of customers in the corporate and public segments.

Broken down by industry, transport and retail are currently the largest buyers of services in the M2M market. The most popular M2M devices include wireless tap-to-pay validators, cash collection machines and ATMs. These devices are also widely used by utilities. For example, in June 2016, MegaFon and ROSSETI signed an agreement for MegaFon to fit out 300 thousand substations with M2M SIM card based intrusion detection and telemetry systems by 2020.

Most players in the M2M market believe that the structure of demand for M2M solutions will rapidly change over time as potential target audience expands. For instance, the Connected Cars segment will become one of the biggest growth stories for M2M technology applications in the medium term.

Telcos are increasingly seeking to monetise their expertise in Big Data analytics through VAS services, and their efforts are already bringing commercial benefits across a number of categories. 451 Research estimates that the global market for these services will grow to US$ 80bn by 2020, driven mostly by mobile ads, marketing and geolocation services.

According to IDC’s estimates, the size of the Russian Big Data market was US$ 340m in 2014, and was growing 40% faster than the global market. However, Russia can still only boast of relatively few successful projects in this segment, while customers that exhibit most interest in these services are predominantly comprised of organisations operating in highly competitive markets such as retail, telecoms and banking.


Just as in previous periods, revenues continued to decline across all segments of fixed services in 2016, due to traffic migration to mobile networks and OTT services. According to TMT Consulting, over the year, the number of fixed-line telephony users shrank by almost 1.7 million people. Although traditional telephony no longer appeals to the mass market, it will not go away completely: according to TMT Consulting, its penetration rate will reduce from 42% in 2016 to 33% in 2021.

In 2016, MegaFon continued actively developing its B2B and B2G fixed-line segments by offering a broad range of services and options. Wireline revenue grew 9.5%, from RUB 23.4bn in 2015 to RUB 25.7bn in 2016.

Broadband Internet access

According to TMT Consulting, by the end of 2016, the number of retail broadband subscribers in Russia had grown 4.7% to 31.3 million as compared to 30.0 million in 2015. In 2016, the broadband penetration rate among households was 56%. In 2016, the top five Internet providers accounted for 68% of the B2C broadband subscriber base in Russia. Internet providers’ revenues rose 2.9% year-on-year to RUB 125.6bn in 2016.


RUB 125.6bn

Source: TMT Consulting


29.6% MegaFon

Source: AC&M Consulting

In 2016, stiffer competition in the market prompted operators to abandon the policy of aggressively building their subscriber bases through short-lived promotions, in favour of increasing customer retention and placing a greater focus on customer service excellence and customer loyalty. To this end, they adopted multi-service strategies, developing digital communication channels, introducing bundled offers, putting together co-branded tariff plans, and offering subscribers more advanced broadband equipment and online-based VAS services such as smart homes, video surveillance and alarm systems.

J’son & Partners Consulting estimates that in cities with a population over 100k, about 44% of households use bundled offers and their share will only grow going forward, driven by the high proportion of bundled tariffs in operators’ new sales.


In 2016, Pay-TV services remained one of the few segments in the Russian telecoms market to exhibit steady growth. Although sign-up rates kept declining, they still remained relatively high. According to iKS-Consulting, the number of Pay-TV subscribers reached 41.2 million (up 4.9% year-on-year), with a penetration rate of almost 73%.

According to iKS-Consulting, the Pay-TV market grew 8.7%, from RUB 73.2bn in 2015. Revenue growth was supported by a tariff increase that took place in 2015 and by stronger consumption of additional digital TV services like video-on-demand, multi-screen, interactive services, and the uptake of extra TV channel bundles.

According to TMT Consulting, in late 2016, the share of cable TV in the total subscriber base declined by 2.2 p.p. to 44% (46% in 2015); the share of satellite TV by 1 p.p. to 39% (40% in 2015); while the share of IPTV grew 3 p.p. to 17% (14% in 2015). IPTV accounted for 70% of new additions, while satellite TV growth rates showed a significant decline.

The market continued to consolidate in 2016. As a result, the share of the top five Russian operators grew to 73%(1) by subscriber base.



The Russian smartphone market has been growing faster than the global market. According to J’son & Partners Consulting, in 2016 smartphone sales in the Russian market grew 4.4% year-on-year to 26.4 million devices, driven by improved consumer sentiment on the back of macroeconomic recovery and stronger rouble.

Consumer started to increasingly favour smartphones over regular handsets. According to J’son & Partners Consulting, in 2016 the share of smartphones in total handset sales grew 5 p.p. to 71% as compared to 67% a year before.

In 2016, sales of LTE-enabled devices were the key growth driver for smartphone sales. According to J’son & Partners Consulting, almost half of all devices sold in 2016 were LTE-enabled, a more than two-fold increase from a year before. Key growth drivers in the market included a wider choice of LTEenabled devices, their lower average price, and higher demand for devices in the medium and premium price segments.

In 2016, the average retail price for smartphones grew 22% year-on-year to RUB 12,100. This is the highest average retail price for smartphonews since 2009. The year-onyear price increase was driven by the growing demand for devices priced above RUB 15,000, which, in turn, was supported by higher sales of devices purchased on credit.


As large-screen smartphones gained traction, tablets are becoming less popular, and sales in this segment declined for a third consecutive year.

According to IDC, in 2016 the Russian tablet market shrank 22.9% year-on-year to 4.71 million devices. The market was down 27.8% in monetary terms. Since tablets are not a basic necessity, many consumers keep postponing their purchase waiting for prices to drop.


Phablets (smartphones with screens of 5.5 inch plus on the diagonal or more) continued to enjoy increased demand in 2016. According to a research by retailer Svyaznoy, over 12 million phablets were sold in Russia in 2016 for a total of about RUB 165bn. Sales of these devices grew 60% over the year both in unit and in rouble terms. The share of devices with a screen between 5 and 5.5 inches grew 13 p.p. in the Russian market, from 26% in 2015 to 39% in 2016. In 2016, devices with screens of 5 inch plus accounted for 50% of the smartphone sales revenues of Russian retailers.

IDC’s analysts believe that phablets will become the main growth driver in the market due to a wide choice of functionally rich models both in the premium and low price segments.


MegaFon’s key competitors include:

  • MTS: founded in 1993, the largest mobile operator in Russia;
  • VimpelCom: founded in 1992, the third largest mobile operator in Russia;
  • Tele2: founded in 2003, the fourth largest mobile operator in Russia.

(1) According to AC&M.
(2) The Company’s estimates based on AC&M Consulting estimates and public filings of Russian mobile operators.