Mobile voice communications remain the largest segment of MegaFon’s business; however, traditional voice services are generally becoming less popular due to customers using digital services and the increasing popularity of OTT services and bundled offers.
In 2016, the total number of MegaFon’s subscribers increased by 0.8% year-onyear to 77.4 million users and the number of subscribers in Russia grew by 1.1% year-onyear to 75.6 million. The slower growth of our subscriber base was due to the Company shifting its focus from gross additions to retention of the existing customer base and increasing subscribers’ life time value.
With the rapid advances in technology, the penetration of mobile services has now reached its saturation point (179% as at the end of 2016 (1) ). This is mostly due to the increased affordability of mobile services and devices in Russia, which resulted in tougher competition in the market.
In 2016, MegaFon ran a number of marketing campaigns to reinforce the loyalty of the existing customer base, increase the proportion of subscribers using “Vse vklyucheno” (“Everything included”) bundled tariffs and boost the volumes of voice traffic consumed on MegaFon’s own network (“lock in” traffic). In March 2016, we transformed the entire “Vse vklyucheno” line of tariff plans and tailored it to meet the specific needs of each individual branch according to the local consumption patterns for each service type and also ran a campaign to promote bundled tariff plans offering a 50% discount for the first month of usage. In September, we launched a phased roll-out of “Semiya” (“Family”) service for the “Vse vklyucheno” line of tariff plans, which enables a user to give other MegaFon subscribers the option to use the mobile data allowance available on his/her package. These campaigns enabled us to significantly increase the share of subscribers using “Vse vklyucheno” tariff plans, which became the most popular tariffs of 2016. Based on the share of users, they outpaced the “Perekhodi na 0” (“Switch to Zero”) tariff, the previous year’s leader, offering free on-net calls within the region in which the subscriber resided.
In December 2016, MegaFon restructured the “Vse vklyucheno” line of tariff plans, changing bundle composition and allowances to bring them in line with the market.
In late September 2016, MegaFon became the first among Russian mobile operators to commercially launch a fully-fledged VoLTE (Voice over LTE) network in Moscow. VoLTE technology offers markedly higher voice quality for calls and significantly faster call set-up times. The roll-out of this technology will enable us to migrate voice users onto the LTE network and reduce the load on our 2G and 3G networks. In 2017, we plan to launch this technology in other regions of Russia as well.
Mobile data is the key growth driver for our revenue and one of the most strategically important segments. The Company’s new strategy is focused on digital subscribers who consciously use mobile data services.
MegaFon is developing 4G and LTE-Advanced networks, stimulating mobile traffic consumption and continuously increasing mobile internet penetration rates. In 2016, the number of subscribers using mobile data services increased by 5.9% year-on-year to 31.7 million users, accounting for 41% of our total subscriber base. The number of data users in Russia grew by 5.8% year-on-year to 31.0 million customers.
To capture the traffic growth potential and monetise traffic, we rely on the development of new and value added services for subscribers, including content, financial services, and innovative products such as M2M and cloud solutions. In 2016, DSU (monthly average data service usage per user) in Russia increased by 30.4% year-on-year to 4,286 MB per month. This growth was mostly driven by our efforts to encourage subscribers to switch to dataenabled and data consuming devices: the share of such devices on MegaFon’s network was 57.2% as at 4Q 2016. DSU also grew due to an increase in the number of 4G-enabled devices on MegaFon’s network up to 10.2 million units (+30% year-on-year); upgrades of our tariff plans and internet options offering users more mobile traffic at better prices, which we made in March 2016; the launch of the "Bezlimitny Internet" ("Unlimited Internet") stand-alone option, which was previously available only for subscribers to the "Vse vklyucheno" tariff plan; the development of mobile infrastructure; and improved quality of connections. In 2016, the total volume of traffic carried by MegaFon’s network was driven mostly by traffic in our 4G network, which grew 56% year-on-year, accounting for approximately 43% of the total traffic.
As at the end of 2016, the service offerings for MegaFon subscribers using mobile data services were well-balanced and provided a wide choice of tariffs and options to best satisfy the needs of the most demanding customer. In February 2017, MegaFon decided to discontinue offering unlimited internet tariffs across the range of its products to pave the way for the future monetisation of traffic, and also because those tariffs comprised a niche offering primarily targeting active users of mobile data who are heavy consumers of traffic, mostly through online viewing of video content, and as such had low take-up rates. The mobile data needs of most MegaFon subscribers are well-met with the amounts of traffic available in bundled offers and options.
* DSU (monthly average data services usage per user) is calculated by dividing the total number of megabytes transferred by our network during a given period by the average number of data service users during such period and dividing the result by the number of months in that period.
Russian population as of the latest census in October 2010.
In 2016, ARPDU (average monthly revenue per data service user) declined by 1.3% year-on-year to RUB 230, as subscribers were increasingly opting for bundled tariffs with increased mobile data allowances. Overall, in 2016, our revenue from mobile data services was RUB 84.4bn (or 26.7% of total revenue), up 5.7% from 2015.
With the active development of 4G networks, subscribers are becoming more demanding of the quality of data transmission services. As services such as audio streaming, HD video, online games, and social media are gaining in popularity, and consequently boost the volumes of traffic flows, customers increasingly seek consistently high-speed data services and fast response times. Therefore, ensuring adequate network capacity heads the current agenda for operators.
To address this need, in 2016 MegaFon continued developing 4G networks in the regions where 4G services were already available and launched the network in five new regions. As at the end of 2016, MegaFon’s 4G services were available to 65% of the Russian population. MegaFon also continued to develop its 4G/LTE-Advanced network. It is currently the most advanced standard in mobile data services. At the end of 2016, LTE-Advanced services were available in 27 Russian cities and regions at speeds of 150–450 Mbit/s.
Further development of digital technologies and the evolving needs of digital subscribers place new demands on the speed and quality of the mobile internet. In 2016, MegaFon took some important steps towards the development of 5G, the next generation communication standard.
In July 2016, MegaFon and Nokia signed a memorandum on the joint development of 5G networks in Russia. The two companies agreed to explore the technological aspects of introduction and development of 5G, as well as to maintain dialogue with Russian regulators and international bodies concerning the requirements and parameters of its commercial launch.
In 2016, MegaFon also conducted two tests and demonstrated new superfast mobile internet speeds. Specifically, in September, MegaFon carried out a test, during which a 360-degree video with 8К Ultra HD (7,680×4,320 pixels) resolution was demonstrated and transmitted over a mobile network at a speed of 4.94 Gbit/s.
MegaFon provides its fixed-line services to corporate and retail customers through its wholly-owned subsidiary NetByNet Holding LLC (which operates under the NETBYNET brand), including broadband services, Pay-TV and telephony, operates in seven Russian federal districts covering the Central, Northwestern, North Caucasian, Southern, Volga, Ural, and Far Eastern Federal Districts.
In 2016, NETBYNET continued the implementation of its strategy of acquisitiondriven growth. The Company completed several acquisitions of assets owned by CJSC Startel, Atlant-Telecom and CJSC Startelecom-Centre, which provide fixed-line services in the Moscow region and Tver.
In 2016, the total number of services rendered in the fixed-line segment of NETBYNET and in the mobile segment, when NETBYNET provides mobile data services based on MegaFon’s infrastructure, totalled 930 thousand. In the reporting year, the trend of services bundling continued due to a high customer demand for bundled offerings, including from two to three services in one package.
In 2016, NETBYNET started the promotion and development of communications services and products under the new Wifire brand. The company’s flagship product, Wifire TV, was made available to customers on Apple TV, as well as on Sony, Samsung and Philips smart TV sets. As part of its service development, the Company launched a personalised recommendations feature for customers, significantly expanded TV content, improved user interface and the quality of content offered.
The Company continues growing in line with its strategy, launching new services for customers across its geography. In 2015, a mobile internet service based on MegaFon’s infrastructure was introduced in Moscow and the Moscow Region. In 2016, the service was launched in Orel, Lipetsk, Cheboksary, Belgorod and in some smaller regional towns, and in 2017, the Company plans to complete the service roll-out across all regions in which NETBYNET operates.
The IoT-driven development of the VAS market is a special priority for NETBYNET. In 2016, the Company launched Wifire Camera, an online video surveillance service for retail customers, which offers a video monitoring system with cloud storage of archived data.
NETBYNET continued to provide important strategic and social infrastructure for communications services in Russia’s capital: in 2016, the company built Russia’s largest Wi-Fi network as part of Moscow’s surface transport system, with 8,000 public transport vehicles equipped with internet access points. The company’s project received the Innovation Time award in the category of the Largest Wi-Fi Network for Russia’s Surface Transport System.
In 2016, NETBYNET focused on its subscriber base and the further optimisation of its sales and customer service processes. The Company launched a project to implement a unified CRM system. In 2016, our subsidiary also started serving customers via online chats and Telegram, an initiative widely appreciated by users.
In 2017, NETBYNET plans to develop and expand its service portfolio under the single brand of Wifire, which will offer a full-fledged convergent product combining mobile, fixedline and TV services.
To ensure further growth of business, MegaFon offers innovative VAS services and comprehensive products solutions for the B2B, B2G and B2O segments. We offer reliable and technological solutions that meet the requirements of our corporate and government clients, enabling us to meet their business needs and improve the quality of consumer experience. The company pays great attention to improving the quality of services and customer service, and the development of self-service channels, which are the key elements of our strategy to increase customer satisfaction. This approach enables us to consistently deliver stable and solid performance year after year.
In 2016, the number of B2X subscribers grew by 7% year-on-year to 297.7 thousand entities, while mobile users in the segment reached 10.3 million, up 25% year-on-year.
Revenue in the B2X segment was growing faster than MegaFon’s total revenue (up 8% year-on-year), while mobile revenue increased by 6% year-on-year. According to the Company’s estimates based on TMTConsulting data, in the mobile segment in 2016, MegaFon had a 33.3% share of the market by revenue.
B2X total revenue
B2X subscribers base
In 2016, MegaFon signed a number of
large contracts and delivered a number of
major projects in the corporate and public
sectors. In particular, MegaFon provided
telecommunication services and technical
support at two major events, the Russia –
ASEAN summit (May 2016, Sochi) and the
2017 FIFA Confederations Cup Official Draw
(November 2016, 12 venues in Moscow and
Kazan). In late 2016, the Company launched
a large-scale project to provide mobile and
broadband services to the Treasury of Russia
http://www.roskazna.ru/en/.
In April 2016, MegaFon signed a contract with the state-run navigation network operator GLONASS to provide access to certain elements of the Company’s network. The contract also provides for MegaFon to act as an eCall operator and a partner of GLONASS in developing and operating commercial services. The GLONASS nationwide project is based on the Full MVNO (Mobile Virtual Network Operator) model, which provides for certain network elements to be operated by MVNO, with MVNE infrastructure also used to handle different types of calls.
In June 2016, MegaFon and ROSSETI signed an agreement for MegaFon to fit out 300 thousand substations with intrusion detection and telemetry systems by 2020. Data transmission will be enabled with MegaFon’s M2M SIM cards (for more information see page 45).
In 2016, MegaFon concluded contracts with a number of large corporate and government clients, including United Shipbuilding Corporation, United Aircraft Corporation, SIBUR Group, Novolipetsk Steel, ENEL Russia, Linde Gas Rus, SAP, Siberian Generating Company Company, GC “T-Plus”.
In 2016, MegaFon focused its efforts on
expanding the product line for its customers
in B2B, B2G and B2O and on increasing the
level of user-friendliness, functionality and
reliability of services. MegaFon is aimed
at meeting the needs of its customers and
increasing the value of its proposals.
In 2016, MegaFon concentrated on the development of innovative products and additional services, through an expansion of traditional telecommunication offerings with the help of new solutions IoT, М2М and Big Data.
The Company also focused on developing and improving the most-demand services: 8 800, Virtual PBX, MultiFon (for more information see page 49) and Employee Monitoring (for more information see page 45) services. We launched MegaFon Target, a new targeted SMS and MMS messaging service designed primarily for small and medium businesses.
In 2016, MegaFon continued developing services that were first offered in 2015, among them Digital eSignature, Wi-Fi with Authorisation and a unique service for secure encryption of data transmitted over VPN networks.
The Wi-Fi with Authorisation service enables MegaFon’s partners to offer Wi-Fi access to their employees or customers, e.g. visitors to a café or a store. Customers are provided with user authorisation tools in full compliance with the statutory requirement for mandatory identification of users accessing public Wi-Fi hotspots. Several major corporate clients and the Constitutional Court of the Russian Federation have already taken up the service since its launch. In 2016, MegaFon implemented a number of projects, such as providing Wi-Fi coverage at VKFest in St Petersburg and the Baltic Artek youth forum in the Kaliningrad Region. Wi-Fi connection from MegaFon is now available in Samara public transport, Lukoil filling stations in the Central region of Russia, some branches of the Russian largest banks and retail outlets.
Throughout 2016, MegaFon focused on improving its online service offering for corporate customers. Now they have an opportunity to digitally sign contracts with the Company right from their home or office. In addition, SIM cards can now be delivered by courier, thus making the sign-up process even easier.
Customers who signed their contracts digitally now also benefit from receiving bills and invoices in a digital form. Online digital signing is already available for the most popular contracts – mobile communications and 8-800 services (Easy Start tariff plan). The Company will continue improving this new online customer service channel.
The Electronic Document Flow service enjoys a growing demand from MegaFon customers as it helps them accelerate administrative processes and slash costs. Customers can use this service to deploy e-invoicing and e-signature solutions enabling e-document exchange with other businesses using the service. Corporate users of the service also benefit from instant access to communications services invoices and bills.
Demand for our unique service for secure encryption of data transmitted over VPN is driven mostly by public and financial institutions, law-enforcement authorities and organisations focused on personal data processing. This service enables full protection of information transmitted over fixed channels against third-party interference or theft. To deploy this solution, an existing VPN network is equipped with a special tool which encrypts all data flows passing through it. The cryptographic service is provided in full compliance with the applicable Russian national standard, GOST 28147–89, and meets regulatory requirements, including those imposed by the Federal Security Service of the Russian Federation (FSB).
In 2016, MegaFon continued developing its M2M (machine-to-machine) offering, including geo-location services. The market for machineto- machine communications is growing rapidly as M2M solutions offer more opportunities to dramatically improve the efficiency of many business processes and drive business growth. According to AC&M, MegaFon is a key player of the Russian M2M communications market with over 3.9 million M2M SIM cards in operation (approximately 37% of the market).
The Company offers M2M services to corporate and public sector customers across all IoT applications. M2M services are used by one in six MegaFon corporate customers. According to the Company’s estimates, MegaFon’s growth in the M2M segment outperforms the market, driven, among other things, by winning business from large corporate customers, such as RT-Invest Transport Systems and ROSSETI .
In late 2016, MegaFon launched FMC Partner, a new converged service for the interconnection segment. Introducing a new agency business model, the service enables fixed line operators to provide their corporate customers with virtual PBX-based mobile services and speed dial functionality (short numbers for calls between mobile and fixed corporate numbers).
The service will help telecoms operators to expand their offerings and drive loyalty among corporate customers in 2017. It is provided through partnerships with MegaFon’s subsidiary NETBYNET (Wifire brand) and the company Mango Telecom.
B2O projects in the sphere of development of the backbone network connecting different Eurasian regions via Russia also remained on MegaFon’s agenda for 2016.
As part of the core project, construction of the DREAM backbone line connecting Europe and China, MegaFon built a cross-border passage between Russia and Mongolia and launched a DWDM-based backbone line going from the Russian-Mongolian border to Frankfurt. Another DWDM-based line was also completed in the reporting year to connect Moscow and Frankfurt via Belarus and a new cross-border gateway was built through partnership with the Belarusian alternative telecoms operator National Traffic Exchange Centre. Vladikavkaz– Moscow and Vladikavkaz–Frankfurt lines of the SWAN (South West Asian Network) project were upgraded to boost their capacity.
These measures created additional traffic routes and thus drove sales through acquisition of new customers, including Mongolian operators, who can now lease backbone telecommunication lines. In addition, MegaFon signed contracts with its existing customers China Telecom and China Unicom for 2017 to lease out new DWDM-based lines.
In 2016, MegaFon also continued developing its content delivery network (CDN) securing high-speed data transmission to the most remote Russian regions. In particular, CDN allows for HD quality streaming and stable connection even at peak loads. In 2016, the number of CDN nodes was increased to 18 by adding new nodes in Petropavlovsk- Kamchatsky and Tashkent. The CDN is used by major data providers, such as software vendors, online cinemas and TV channels. New large customers acquired by MegaFon in 2016 include the OTT provider TVZavr and retailers Sportmaster, Ulmart and Detsky Mir.
MegaFon’s subscribers can enjoy our mobile services in 220 countries worldwide. LTE roaming services are available in 88 countries through partnerships with 141 operators.
In 2016, MegaFon updated the range of products available when roaming outside Russia. For instance, in June we changed our base internet tariffs; now customers obtain internet packages of 10, 50 or 65 MB per day (depending on the country) when going online for the first time while travelling abroad, instead of paying on a per MB basis. Due to this approach, consumption of data traffic by subscribers increased 2.7 times.
In Italy, we piloted the “Bezlimitnaya Italia” (“Unlimited Italy”) roaming option offering unlimited mobile data in Italy, the Vatican City and in part of San Marino. The option launch was enabled by a successfully negotiated agreement with local operators, Telecom Italia and Vodafone Italia, which granted us a major volume discount for high traffic volume. Although priced at RUB 500 per day, the option nevertheless reached a penetration rate of 10% among subscribers using mobile internet in Italy. Based on the pilot results, we decided to extend the option to a number of other countries subject to agreements with local operators.
In 2016, the “Ves mir” (“Around the World”) tariff remained the most popular roaming option among our customers. Now the option offers 40 free incoming minutes per day compared to 30 minutes in 2015. The subscription fee for the option was also increased; nevertheless it is still the best roaming price on the Russian market at less than RUB 1.5 per incoming minute.
In 2016, external factors had a significant impact on the roaming services segment. The ban on travel to Egypt and Turkey, and the challenging macroeconomic environment in Russia led a 10% decline in the flow of outbound travellers. These factors put downward pressure on consumption of roaming services and drove up service costs on a per service unit basis, given the fixedrate payment provisions contained in our agreements with foreign operators.
This prompted the Company to revise international roaming charges for voice services, SMS and mobile internet in December 2016. The number of roaming zones was increased from 4 to 12, which enabled us to divide countries into groups based on service costs, contracted volumes and inbound travel flow forecasts, and adjust pricing for every roaming zone to secure a margin before changes in service costs and FX rates.
As MegaFon enters a new strategic development cycle of digital growth, the Company is focused on building a uniform, seamless digital environment. We are designing and introducing advanced solutions for digital subscribers to help them handle a multitude of daily tasks, whether business or personal, rapidly and effectively.
In 2016, MegaFon continued developing a variety of innovative and value added services (VAS) by leveraging available technology, accumulated expertise and partnerships with third-party researchers and product developers. Product design and development at MegaFon is concentrated in its subsidiary, MegaLabs JSC, which is focused on products that fuse telecom and other industries (MegaFon bank card, MegaFon.TV, Life Control smart home family, etc.), and in PJSC MegaFon’s New Services and Partnerships unit, focused on the development of classic value added (payment and partner) services. The Company’s Director for New Businesses and Partnerships acts as a single management centre that coordinates tasks and streamlines key processes.
In 2016, MegaFon continued developing MegaFon.TV, its key product offering OTT content. MegaFon.TV provides anytime access to an impressive content library, including 150 TV channels (30 HD channels), over 2,000 movies and over 300 TV series, from leading Russian and international content owners, such as Amedia, Discovery HD, HBO, Disney, Warner, Universal, Sony, Paramount and others.
MegaFon.TV can be accessed via a mobile app on iOS and Android mobile devices, PCs, Smart TVs and Samsung and LG TV sets. Subscribers pay for the content from their personal accounts with the operator. Special terms of use are offered to subscribers on the “Vse vklyucheno” (“Everything included”) tariff plans and packages that have access to 50 TV channels and up to four movies per month at no extra charge.
In 2016, the number of registered MegaFon.TV users grew to 1.6 million, and 70% of this number are subscribers to “Vse vklyucheno” tariff plans and options.
How did the MegaFon.TV project progress in 2016?
MegaFon.TV is one of the most impressive projects in the Russian OTT content market. It has already proved an important means of driving loyalty among existing MegaFon subscribers and as a channel to acquire new customers. The project has been evolving for over 1.5 years and has changed significantly since its launch. The content and functionality offered by the service have expanded as user demands have grown. As at the end of 2016, the MegaFon.TV audience comprised 1.6 million users, with 70% signed up to "Vse vklyucheno" tariff plans, benefiting from free access to 50 TV channels and up to four movies per month.
What is MegaFon.TV today?
MegaFon.TV is an ideal solution for those who want to have anytime access to a vast library of top-quality licensed content, including TV programmes, movies, TV series, sports broadcasting, and music concerts. MegaFon.TV is available on a wide range of devices, including smartphones, tablets and Smart TV sets. Individual recommendations based on ratings and subscribers’ preferences, deeply personalise this service. We keep improving the service to make it even faster, more convenient and more attractive for every subscriber.
The content catalogue is regularly expanded thanks to agreements with leading Russian and foreign content owners. In 2016, we offered our customers access to a new content by CTC Media, a Russian entertainment TV leader, before its official release on television. This offer had very high rate of uptake among our existing audience and helped attract new users. We will continue this practice in 2017.
As the user base and content volume grew rapidly throughout the year, MegaFon made it a priority to improve system stability, increase download speeds and enhance customer experience. In particular, MegaFon.TV’s functionality was expanded to include a content download option (for offline playback), editor’s choice features, a Try&Buy option and push messages (short notification pop-ups displayed on the screen of a mobile phone or a desktop PC to alert the user to important events or updates).
In 2016, the number of registered MegaFon.TV users grew to 1.6 million, and 70% of this number are subscribers to "Vse vklyucheno" tariff plans and options.
Android and iOS based mobile apps accounted for the largest proportion of MegaFon.TV traffic in 2016. To provide an even better user experience for the product, MegaFon added new devices to the range of those supporting the MegaFon.TV service. Now service users can use Google Chromecast, a digital multimedia player, to stream content from the phone straight to the TV screen.
In 2017, MegaFon will continue focusing on product quality and new tools and functions to enhance user comfort. Plans include integrating MegaFon.TV into the Client Account and introducing promo codes giving access to content. In 2017, the MegaFon.TV service will become available on Androidbased TV sets and apps will be launched for Philips, Sharp and Sony Smart TVs.
The Video-on-Demand (VOD) library offered by MegaFon.TV was further expanded in 2016 with additions of new movies to the catalogue, both free and pay-per-view (on the "Vse vklyucheno" tariff plans). MegaFon also successfully negotiated a more than fivefold reduction in the cost of one content unit with the major content owners.
In May–June 2016, MegaFon ran a campaign (including advertising on TV) offering the new season of Game of Thrones to “Vse vklyucheno” tariff plan subscribers for free. Designed to enhance the promotion of tariff plans and grow the user base, the campaign demonstrated the strength of MegaFon’s content-driven model of promoting tariff plans and opened up new opportunities for their differentiation. As a result of the campaign, the number of subscribers to the AMEDIATEKA TV series package increased to 180 thousand.
In 2016, MegaFon launched the Russian Series, a new MegaFon.TV package that offers over 150 TV series produced in Russia. In October–November 2016, MegaFon ran a unique campaign giving free access to a new season of the Molodyezhka series, seven days before it was first aired by CTC Media, a Russian entertainment TV leader. The campaign acquired 40 thousand new subscribers to the Molodyezhka series package.
The number of paying subscribers to MegaFon.TV more than doubled in 2016, driven mostly by promotion campaigns and special offers, particularly for TV series packages. According to in-house estimates, MegaFon.TV has a 9% share of the paid OTT content market. The Russian OTT market is still in its infancy, with the pool of key players still taking shape and commercially viable scenarios yet to emerge in the market. There are a number of barriers to the development of the OTT market. First, consumers are not used to buying paid legal content; second, many consume illegal (often free) content; third, some of the largest content owners are inflexible in negotiating on the periods of time during which content is made available, as well as the fees as a percentage of the sale price. Emerging market players, however, are gradually changing the paradigm. By expanding MegaFon.TV’s top-quality content library and providing special terms of use and offers, MegaFon is growing the number of paying users and giving content owners an opportunity to expand their distribution channels, by leveraging MegaFon’s unique capabilities in promoting TV services and capturing new revenue streams as a result.
A survey of over 500 MegaFon.TV users is run every month to investigate the product’s quality with a view to enhancing it and measuring the customer satisfaction index (CSI). In 2016, the CSI grew from 60% in 2015 to 79%. A SWOT analysis undertaken in late 2016 showed that the net promoter score (NPS) stood at +31%, i.e. promoters prevailed over detractors.
M2M SIM cards in operation
substations with telemetry sensors will be installed according to the agreement with ROSSETI
In 2016, MegaFon continued developing
its M2M (machine-to-machine) products,
including geo-location services. The market
for machine-to-machine communications
is growing rapidly as M2M solutions offer
more opportunities to dramatically improve
the efficiency of many business processes.
According to AC&M, MegaFon is a key player
of 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 to corporate and public sector customers across all IoT applications. M2M services are used by one in six MegaFon corporate customers. According to the Company’s estimates, MegaFon’s growth in the M2M segment outperforms the market, driven, among other things, by winning business from large corporate customers, such as RT-Invest Transport Systems and ROSSETI.
MegaFon has competitive advantages by developing comprehensive ecosystems of solutions relating to IoT and has a wide range of services for its customers, its own research and development centre, where we can test our own technological developments, mobile applications and devices. By providing “smart” services to customers from diverse industries, MegaFon contributes to the overall digitalisation of the national economy. MegaFon’s most in-demand services include M2M Monitoring, Employee Monitoring and Car Fleet Monitoring.
In 2016, MegaFon continued to develop its M2M Monitoring platform designed to enable remote online monitoring and management of a pool of SIM cards in organisations with five to up to several thousand employees. M2M Monitoring enables tracking the location of SIM cards, checking their activity and network connection, controlling changes of device IMEI numbers, setting up spending and traffic limits, and generating analytic reports. The platform can be adapted to any industry and provides flexible functionality and a user-friendly interface to meet the SIM card management needs of this business segment.
The product has been available in all MegaFon branches since 2015. In 2016, MegaFon continued to further develop the product. In particular, a unique geolocation feature was incorporated into the M2M Monitoring platform; the range of limit and reporting settings was expanded and is now wider vs competitors. Enhanced API capabilities were also introduced to make it more convenient for our customers to integrate the M2M Monitoring platform into their data landscape. As at the end of 2016, 1.7 million SIM cards were signed up to the M2M Monitoring service.
In 2015, MegaFon signed a contract with
RT-Invest Transport Systems for the provision
of М2М services, which will be used in the
Platon system to collect road tolls collected
for road repairs on federal highways. In 2016,
we supplied over 500 thousand SIM cards for
in-vehicle devices installed on trucks weighing
over 12 tonnes.
The Employee Monitoring service enables
organisations to improve the quality and
efficiency of staff management. Our customers
can use the solution to pinpoint employees’
locations through interactive maps in the
service interface. The service can be used
to track employees’ movements, monitor
when they visit particular areas on the map
(offices, rooms), and exchange messages with
employees directly from the interface. In 2016,
MegaFon focused mostly on improving
customer experience of using the service.
In particular, the interface was enhanced
with various features, such as viewing metro
stations nearest to a customer’s location,
days until demo expires, and daily subscription
charges.
The Car Fleet Monitoring service enables
MegaFon’s corporate customers to
monitor and track their vehicle fleets in
real time, monitor mileage, idle time, and
fuel consumption. The service enables our
customers to significantly optimise their
activities and cut costs by up to 30% by
reducing the probability of vehicle misuse.
During 2016, the Car Fleet Monitoring product
was enhanced with the addition of a new,
convenient interface, and an option enabling
online map-based monitoring.
MegaFon was the first in the Russian
market to demonstrate the capabilities of
an integrated solution based on the Narrow
Band IoT (NB-IoT), a communication standard
developed for IoT devices.
The NB-IoT technology dramatically reduces power consumption by terminal devices, improves signal penetration, increases the maximum number of possible network connections, and reduces radio module costs, thereby facilitating the growth of the Internet of Things. In particular, NB-IoT enables connecting up to 50 thousand devices to a single base station cell, which is dozens of times more than the number supported by the existing mobile communication standards.
In March 2017, MegaFon demonstrated its first integrated NB-IoT-based solution through a partnership project with Huawei and the company “Bolshaya troika” (manufacturer of meters), and with the participation of the Ministry of Construction, Housing and Utilities of the Russian Federation. The product will enable utilities and management companies to gather real-time data on resource consumption, automatically control costs, instantly view the balances, and prevent payment gaps. Residents using the new solution will no longer have to record and submit meter readings manually.
Moreover, they will be able to track electricity, water, and gas consumption using a convenient application and download statistics for any given period. MegaFon is now preparing to run its first commercial NB-IoT pilots.
In June 2016, MegaFon signed an agreement
with ROSSETI to equip around 300 thousand
substations with telemetry sensors and
surveillance systems by 2020.
MegaFon has developed for ROSSETI an integrated solution comprising the MegaBox equipment set (sensors, video cameras, control system) and a control centre service based on MegaFon’s Global Network Operational Centre (GNOC). The monitoring and analysis process is as follows: a substation is equipped with sensors which collect and process data from equipment and video cameras and transmit these data to MegaFon’s analytical centre, where operators analyse it in real time. All this enables operators to make fast decisions in case of equipment malfunction and take corrective actions before the problem escalates into an incident, while a live video feed will alert them to any unauthorised access to the substation, allowing them to prevent emergencies. MegaFon assigned a dedicated dispatcher to the project, who monitors the situation and informs ROSSETI in line with the approved regulations.
The new IoT solution will enable ROSSETI to cut operating expenses for substation maintenance by 20%, streamline the resource management process, and improve the monitoring and emergency response processes.
In December 2016, MegaFon launched sales
of its Life Control integrated family of
branded, easy-to-connect smart products
grouped into the Smart Home, Fitness and
Geolocation categories.
Life Control is a proprietary system designed specifically for MegaFon and offering a variety of remote home control and safety capabilities. The system is controlled via the Lifecontrol.ru web portal or a mobile app on the user’s smartphone or tablet. Alerts of important events are sent in real time to the owner as push messages or emails. A Smart Home Centre is the only thing needed to make the system fully operational. The Centre supports all modern communications protocols and accumulates sensor data. It is controlled via a SIM card transmitting mobile data and hence can be used in any remote site where there is mobile coverage, for example, in homes in the country. Other devices are selected depending on the user’s specific needs and home layout. The Smart Home service is available in 2G, 3G and 4G networks and supports all types of network connections, including Wi-Fi and Ethernet. Built-in or Wi-Fi cameras can broadcast video signal or upload video to a storage cloud.
At present, the Life Control family includes a smart socket, leak detector, motion sensor, smart lamp, open/close sensor, smoke detector, Wi-Fi camera, and fitness tracker. Sales of the system were launched across MegaFon stores in December 2016. In early 2017, the family is expected to expand with the addition of a SIM-enabled GPS tracker, an air quality monitor and a plant sensor.
The Radar service enables subscribers to
locate mobile devices in real time based on
GPS technology and is popular among families
with children as an extra safety system.
In 2016, the Radar website was updated and
made mobile-friendly. With location options
expanded to include Tele2 subscribers, it is
now possible to locate subscribers of any of
the “Big Four” operators.
In 2016, MegaFon remained active in developing and delivering Big Data solutions both to improve its own performance and to drive its service offering for corporate and government customers in the finance, retail, services, and other customer-facing industries. The Company uses all the latest technologies in Big Data storage, processing and application. As of today, MegaFon offers its clients the broadest range of Big Data solutions.
The MegaFon Big Data platform delivers highly accurate results by using geo-mapping to exponentially improve the quality of geolocation, achieving an accuracy of up to 350 meters in an urban environment.
The use of Big Data in our activities reduces investment costs, increases revenue from our existing customer base and enables smart subscriber acquisition mechanisms. In particular, machine learning algorithms in personalised subscriber communications and an omni-channel subscriber strategy increased the share of Big Data services in MegaFon’s B2C revenue from 1.7% to 1.9% in 2016.
Financial analytics and geo-recommendations are key Big Data services offered by MegaFon to corporate customers.
We have been active in developing financial
analytics services using machine learning
methods. Machine learning based on
MegaFon’s data enables financial institutions
to improve borrower management, mitigate
credit risks and enhance anti-fraud
performance.
MegaFon’s analytical services are purchased by many of the Top-100 banks and multiple microfinance institutions. In 2016, a number of several nationwide Russian banks became clients of MegaFon’s analytics service.
According to experts, the use of MegaFon’s analytics in existing bank scoring models increases the Gini index (a key measure of analytical model quality) by 5% to 10%, which in turn improves the overall credit risk management by 7% to 8%.
The geo-recommender is an online tool
that analyses data flows and generates
recommendations in real time. Geospatial
analysis provides accurate, real-time insights
into the life of a district, a town/city or
the entire country. This service supports
faster, informed decision-making on CAPEX
allocation, growth opportunities, retail network
optimisation and new product launches.
In 2016, the geo-recommender service was relaunched as an open platform with an accuracy seven times higher for data analysis than the previous version. In 2016, MegaFon continued undertaking its contract with the Government of Moscow to provide geo-recommender services. Analysis of people flows based on base station loads provides more accurate insights into city life and enables better management decisions.
With the goal of providing safe and easy-to-use data storage, MegaFon continued enhancing its MegaDisk service in the reporting period. MegaDisk synchronises data on a user’s PC, Mac, Android or iOS based smartphones with the storage cloud.
In 2016, the number of service users increased by 55% to over 88 thousand people.
The Company maintained its focus on the service throughout the year to improve user experience and expand user functionality. One of the added new functions is an option to upload pictures from the memory card of a user device. The MegaDisk website was also updated, with the user interface improved.
MegaFon’s mobile financial services and products enable our subscribers to conduct a wide range of banking and payment transactions using mobile phones and tablets.
Why does MegaFon need a bank card?
The MegaFon bank card, a unique product on the market, was launched through a partnership with MasterCard and Round Bank, to best meet the growing demand from our customers for simple and convenient services that offer effective solutions to a variety of routine daily tasks. This new financial product is in fact a debit card fully integrated with the user’s mobile account. The card can be issued in a few minutes at any MegaFon store and is available to all MegaFon subscribers.
The project enables us to begin transitioning to a business model that combines mobile and financial services, while minimising risks for our core business. This product is completely unique in the world and given that the Russian financial services market is in the early stages of development, we see great potential for further growth and expect MegaFon bank card to become widely popular.
What are the benefits offered by MegaFon bank card?
With this bank card MegaFon subscribers can use their phones as a wallet, making payments everywhere where MasterCard is accepted, making money transfers to friends and relatives in Russia, and withdraw cash from ATMs. The account balance accrues interest of 8% per annum (*) . Card holders receive cashback of up to 50% for online and offline retail purchases. Subscribers can install the MegaFon Bank free mobile app, available for all operating systems, or use bank.megafon.ru. The mobile app helps users keep track of their spending and accruals, make money transfers, pay for products and services, and do many more things.
The bank card project was launched in 2016. What results have been achieved so far?
During the first few months since the launch we have seen that the product is in high demand. The card was piloted in August 2016 in two cities, and in October 2016 it was made available to customers across the Company’s geography. By the end of 2016, customers had already been issued nearly 400,000 bank cards, while the total transaction volume for the last four months of the year was almost RUB 2bn. MegaFon expects to issue several million bank cards over the next three years.
I am pleased to note that our card project was praised by the panel of experts judging the Innovation Time annual awards, given under the auspices of the Russian Ministry of Economic Development.
(*) If certain conditions are met.
In 2016, MegaFon launched a new product,
which is still totally unique in the market –
a debit card linked to the user’s mobile phone
account. The project is a partnership with
MasterCard and the Moscow-based Round
bank. The launch of the bank card signals
MegaFon’s transition to a business model
that combines mobile and financial services.
The card offers subscribers new options, including using a mobile phone account to make purchases and free money transfers. The card is easy to obtain and top up, and card holders can receive up to 50% (depending on specific arrangements) cash back from MegaFon’s partners. In addition, under the Company’s own loyalty program, an 8% p.a. interest is paid on the account balance, if certain conditions are met.
In August 2016, the bank card was piloted in Moscow and St Petersburg and quickly rolled out nationwide in October 2016. As at the year end, MegaFon had issued nearly 400 thousand cards. About a quarter of the card holders are active users (i.e. making regular transactions on the card on a monthly basis), comprising the core of the card holder base. The total spending on the cards reached RUB 2bn, with the monthly spending per card averaging ca. RUB 11,000.
To manage card transactions, MegaFon has developed a fully functional mobile app and introduced a web interface for subscribers. The Company plans to continue developing the project into 2017, focusing mostly on Apple Pay, Samsung Pay and MegaFon Pay services and integrating the card into the Wallet app by CardsMobile. Other plans are to expand the range of value added products. The Company is also working on the launch of partner lending products and the development of the loyalty programme, while maintaining a relentless focus on customer service excellence, including the streamlining of customer-facing processes and procedures.
MegaFon issued as at the year end 2016
In 2016, MegaFon focused on optimising its
existing financial services and launching
new, easy-to-use financial and payment
tools for its subscribers. The Company
introduced the option of money transfers
using the #Amount command and payments
to the Apple Store from a mobile phone
account, and improved the MegaFon Money
transfer data mart service. The number of unique users of MegaFon’s
standard payment solutions exceeded
10 million subscribers as at the end of 2016,
and kept growing across certain categories.
For example, parking payments from mobile
accounts increased by 23% year-on-year,
while unique users of this service grew
by 21% for the same period.
In 2016, the total number of mobile payment transactions in our system declined by 5%, but at the same time the revenue in the segment remained flat year-on-year.
Since 2015, MegaFon has been developing
the Mobile Ticket service in conjunction
with the Moscow Government’s Transport
Department and the Moscow Metro. Users of
the service can pay for public transportation
by simply tapping their device on a ticket
gate validator. As at the end of December
2016, the Company issued 26,560 SIM cards
with the Mobile Ticket functionality, which
was active on almost 7,000 devices.
The plan for 2017 is to update the transportation payment application to version 2.0 and integrate the Mobile Ticket into our Mobile Bank Card product.
The Company took a number of measures in
2016 to further expand its payment terminal
network. These efforts increase subscriber
and non-subscriber traffic to MegaFon
Retail stores and improve the use of human
resources by freeing up time for other tasks.
Payment terminals are also used to promote
MegaFon’s other services and partner
products. During the last year, new services
were integrated into the terminals, including:
As at the end of 2016, payment terminals totalled 1,747 units. The Company did not increase the number of terminals during 2016, but optimised their locations, with some terminals relocated to stores with higher footfall. The volume of payments increased by 53% to more than RUB 16bn for the year.
In 2016, the Mobile Advertising and Mobile Notification services were enhanced with new functions. The possibilities for targeted SMS messaging were expanded to enable more effective advertising campaigns. Targeting was improved, with new targeting options added.
In August, MegaFon launched Mobile Notification Light (a new service renamed MegaFon Target in February 2017) offering targeted SMS and MMS messaging. The service helps alert customers to promotion campaigns, special offers and new products via the web interface at reklama.megafon.ru. Targets can be set across a variety of parameters, including gender, age, phone operating system and location. The service can significantly improve the effectiveness of advertising campaigns. At present, it is available in some of MegaFon’s branches only.
In December, MegaFon successfully tested MegaBanner, a new product to be launched commercially in the second quarter of 2017. MegaBanner is designed to run targeted advertising campaigns through the mobile internet.
Convergent (FMC) services facilitating the management of voice calls are in demand in every Russian region. The FMC service offering comprises 8 800 free call numbers (including Hotline), Virtual PBX, MultiFon, and quick dial codes (FMC). Demand for these value added services from corporate customers was growing throughout 2016.
In developing its 8 800 free call service
in 2016, MegaFon focused on making its
purchase process more straightforward.
For this purpose, a new option was added to
the website interface enabling customers to
select and book the 8 800 number they like,
for 10 days. The service can be purchased
online if the corporate customer has
an electronic signature.
MegaFon keeps expanding the functionality
of its Virtual PBX solution and improving
customer experience of the service.
The service can be easily integrated
with popular complementary systems,
including CRM and call tracking systems.
Major improvements introduced to the service
in 2016 include dynamic queuing, ‘return call
from queue’, ‘SMS business card’ and ‘last
chance’ options, 8 800 automatic dialling in
outgoing calls, and an option of connecting
subscribers on any tariff plan to the service.
MultiFon is a cost-saving, fast-to-deploy office
telephony solution. The service enables users
to receive and make calls over the internet.
The service has no subscription fee, with only
outgoing calls billed. In 2016, the Company
focused on improving the quality and
reliability of the service and enhancing its
functionality.
Controlled distribution channels are MegaFon’s valuable assets used to acquire new and retain existing customers through sales of services, products and devices. We also view them as an important customer service channel.
In 2016, MegaFon continued improving the efficiency of its own retail network, increasing service levels and promoting MegaFon-branded stores against the backdrop of intense competition in the distribution segment and macroeconomic instability.
MegaFon develops its own sales network through a dedicated subsidiary, MegaFon Retail, and controlled sales channels, including MegaFon-branded franchised stores and Euroset nationwide retail chain (50% interest acquired in 2012).
As at the end of 2016, MegaFon’s controlled sales network comprised over 4,000 points of sale, including 2,057 MegaFon Retail stores and 2,002 MegaFon-branded franchised stores, and about 4,000 Euroset stores.
In 2016, the controlled distribution network accounted for 67% of all new subscriber additions (both B2C and B2B), with approximately 38% of new additions coming from our own distribution channels.
The share of franchised (branded retail) stores in the total number of new subscriber additions (both B2C and B2B) in 2016 was 18%, while Euroset stores accounted for 11%.
As at the end of 2016, the number of mobile sales outlets in the Russian market clearly exceeds demand. Customers tend to make more purchases online and add new options or services via their Online Client Accounts. With this in mind, MegaFon plans to gradually optimise the retail network while at the same time developing online sales channels and enhancing self-service systems.
In 2016, MegaFon made it a priority to improve the efficiency of its own retail network by optimising customer-facing processes and relocating stores to increase their commercial efficiency. Other priorities were to increase revenue from sales of mobile equipment, increase customer satisfaction and develop financial services and new products.
In 2016, MegaFon launched a number of initiatives in an effort to improve customer service across its own retail network. In particular, the Company introduced a video check list, a new approach to remote monitoring of employee activities, which resulted in better employee performance and reduced customer churn by half. Best practice examples of customer service were distributed in all stores, which were aimed at time saving and minimisation of employee mistakes in dealing with customers.
In addition, the Company developed sales and service quality standards, which enabled a uniform approach to servicing customers across the country and almost doubled the level of cross-functional offerings.
In 2016, purchasing power and demand for more expensive devices, smartphones and tablets increased. As a result, MegaFon Retail’s marketing activities in 2016 were refocused onto vendor equipment campaigns to grow smartphone sales, attract new customers and increase mobile data traffic. According to the Company’s estimates, the average monthly revenue per user (“ARPU”) for subscribers with more expensive smartphones is notably higher than ARPU for subscribers with cheaper smartphones (due to more active consumption of telecommunications services). In 2016, total sales of vendor smartphones through MegaFon Retail stores grew by 4% year-on-year in unit terms and made up 56% of total smartphone, handset and tablet sales. The best-selling vendor smartphone models in 2016 were ZTE, Micromax, Lenovo, Asus and Prestigio.
In 2016, MegaFon Retail ran eleven device marketing campaigns to acquire new customers, including seven nationwide campaigns with major vendors (ZTE, Micromax, Sony, Asus and Apple). Seven PayBack for Smartphones offerings were available throughout the year, providing for RUB 300 to RUB 7,000 out of the purchase price to be paid back as compensation towards communications spend. Smartphone sales triggered by marketing campaigns accounted for 30% of total smartphone sales through MegaFon Retail stores in 2016 (including customised devices).
The budget category (under RUB 3,500) accounted for 32% of vendor smartphone sales in MegaFon’s retail network (2) , while in 2015 this share was 44%. The share of A-brands (devices by first-tier manufacturers) in total smartphone sales increased from 15.9% in 2015 to 16.5% in 2016. The average price of vendor smartphones grew by 40% to RUB 7,400 in 2016.
As the development and roll-out of 4G/LTE networks continued in 2016, MegaFon Retail expanded the range of 4G-enabled devices to approx. 350 models (including different colour options), which is 1.5x more than in the previous year. Sales of 4G-enabled smartphones and tablets grew 3.2 times in unit terms (approximately 1 million devices) and made up 32% of aggregate smartphone and tablet sales (+22 p.p. year-on-year). In 2016, the share of 4G smartphones in total smartphone sales via MegaFon Retail stores grew by 34% in unit terms (+24 p.p. year-on-year).
MegaFon’s efforts in 2017 will target digital subscribers and a larger share of informed consumption with a focus on new financial services (MegaFon Bank Card), content services (MegaFon.TV), media services (MegaFon Books, Music and Games), IoT and partner products offered jointly with leading players in related and other markets.
With competition growing, MegaFon also concentrated its efforts on improving the performance of franchised stores. Special attention was paid to making the stores more attractive, staff training, and developing employee skills. In order to improve customer service, the Company expanded its mystery shopping target programme to include more franchised stores. Following the mystery shopping survey, franchising terms and conditions were amended accordingly. The Company introduced monthly tests for the network salesforce and measures to control the exterior and interior of franchised stores.
In 2016, MegaFon remained active in developing its online sales channels and online shop offering a wide range of retail services, including the sale of devices and accessories. The aggregate audience of megafon.ru (MegaFon’s commercial website) in 2016 approached 8 million users per month, up 6% year-on-year. The e-commerce website was notably redesigned to feature a new banner system for the site and the shop, a new product catalogue and an online survey and usability testing system.
In 2016, the online sales channel fulfilled 260 thousand orders and signed up over 190 thousand new subscribers both in the B2C and B2B segments. MegaFon sold 138.5 thousand smartphones, handsets and tablets, including customised devices. The total sales of MegaFon’s online shop were RUB 1.4bn (3) .
Along with controlled points of sale, MegaFon sells its products and services through a network of third-party retailers. In 2016, the independent dealer network comprised over 50 thousand points of sale, including Svyaznoy nationwide retail chain (about 2,700 stores), multi-brand electronics retail stores, Russian Post outlets, and agents.
In 2016, MegaFon focused on improving partner relationship management. The share of independent dealers in total new additions (both in B2C an B2B) increased from 29% in 2015 to 33% in 2016, mostly due to the implementation of the Company’s plans to grow new additions via Svyaznoy stores (a nationwide network with relatively high ARPU customers), and stronger positions in major retail chains, including electronics retailers, and the Russian Post.
Please tell us about the Retail reengineering project. Why did the company need it and what goals did you set?
When we launched the project, we sought to standardise key processes between MegaFon Retail and MegaFon, automating industry-specific processes used in MegaFon Retail, such as planning, forecasting, product mix and inventory management, and driving sales as a result.
We believe that the project will cut distribution costs, streamline key processes and make our information systems more transparent.
What areas did the project cover?
The project is unparalleled in the entire mobile retail industry. It provides for the automation of MegaFon Retail business processes, above all those related to inventory management, promo activities, demand forecasting and procurement planning. We developed a system of unique, tailored product offerings and stock levels for each store.
How has the project progressed and who has taken part in the project?
The system was launched on 1 July 2016 after more than a year of hard but exciting team effort by MegaFon Retail and MegaFon employees. I am sure that over the course of the project everyone involved improved their professional competencies and basic personal qualities such as team spirit, mutual support and drive for a common goal. The project has shaped a new, enhanced environment for effective team work, enabling us to complete the roll-out of automated solutions. Over time, the system will enable us to evaluate related efficiency gains.
Along with controlled points of sale, MegaFon sells its products and services through a network of third-party retailers. In 2016, the independent dealer network comprised over 50 thousand points of sale, including Svyaznoy nationwide retail chain (about 2,700 stores), multi-brand electronics retail stores, Russian Post outlets, and agents.
In 2016, MegaFon focused on improving partner relationship management. The share of independent dealers in total new additions (both in B2C an B2B) increased from 29% in 2015 to 33% in 2016, mostly due to the implementation of the Company’s plans to grow new additions via Svyaznoy stores (a nationwide network with relatively high ARPU customers), and stronger positions in major retail chains, including electronics retailers, and the Russian Post.
In 2016, MegaFon continued strengthening
its market position. The Company’s brand
is based on our commitment to improving
communication quality day by day so that
people all across Russia could feel at any
time that they are close to their loved ones.
This positioning underpins all our brandrelated
external communications. Although
our new slogan, Truly with You, appeared
not long ago, it is already well-known to
consumers.
As part of its repositioning exercise, MegaFon continued using a short movie format to promote its products and services. In summer 2016, the format evolved into a mini-series showing real-life situations illustrating how mobile communications brought people closer together. Thanks to the new approach to imagery in the videos, brand awareness grew 10% as compared to 2015, while other key indicators, such as brand recognition and comprehension, remained as high as they were after sky-rocketing in 2015.
According to a survey among the Company’s subscribers, all the key attributes of the MegaFon brand, both emotional and rational, were clearly expressed in the imagery.
In 2016, MegaFon ran the second MegaFon
Live, a major music festival to support its new
market positioning. The idea of the festival
was to show what it meant to be ‘truly with
you’ and how communications could bring
people and cities closer together. The event
offered a totally new experience for Russia,
with performances running simultaneously in
different cities linked up live using MegaFon’s
high-speed mobile internet service. The 2016
MegaFon Live festival was watched by
200 thousand people in eight cities and
nearly 580 thousand viewers online. While
the event was on air, users downloaded
1.4 TB of data, posted nearly 5.6 million
pictures to Instagram and added 19 thousand
#megafonlive hashtags. The festival repeated
its 2015 success and, as a unique music event,
brought together the most remote parts of
the country, including the Far Eastern cities of
Khabarovsk and Vladivostok.
In 2016, MegaFon retained its leading position
in social media in terms of the audience
and its engagement. In spring 2016,
MegaFon as a sponsor of the Ice Hockey
World Championship launched the Guys,
We Are with You campaign that united
Russian fans in a campaign to support
the national ice hockey team and delivered
fan messages to the team players in
an interactive show format. The campaign
clearly demonstrated the quality of MegaFon
communications services and won national
coverage. Its hashtag #ребятамырядом
(#guyswearewithyou) was on the top
position in VKontakte, outperforming even
the Eurovision Song Contest held in those
same days. The campaign was the first in
Russia to incorporate the SMM TV approach
to social media promotion. It was also praised
by advertising market professionals and won
the Best Project 2016 title in the nomination
“Sponsorship in Sports” at the Russian
Sponsorship Awards.
In summer 2016, the Company took part
in the VKontakte festival and presented
the Meme Museum, an integrated project
that brought the meme phenomenon offline
to reach its audience through several
advertising channels both on the internet and
at the festival. Posts made by users and guest
bloggers had a large amount of views.
A series of MegaFon Experiments advertising
projects was run in the autumn to
demonstrate the quality of our mobile internet
in a number of daring tests. For instance, we
tested the data transfer speed and quality
of a video watched by a user in a racing car
travelling at 300 kilometres per hour.
On New Year’s Eve, MegaFon subscribers received a seasonal greeting from Steven Seagal. The video was supplemented with an interactive option we called ‘Seagalogramme’. Using the option, users could write their New Year greetings to their friends and have them ‘spoken’ by Steven Seagal with the help of a text-tospeech engine. The resulting videos could be shared on all social media and internet messengers or sent as a web link via a text message or email.
Along with the MegaFon brand, we are
actively promoting the Yota brand, which
primarily targets active users of the mobile
internet. According to a user survey, the Yota
brand is continuing on a positive trend
and consolidating its position across such
attributes as ‘innovative operator, operator of
the future’ and ‘developing new technologies’.
MegaFon plans to capitalise on these strengths and its previous experience to achieve its strategic objectives for 2017, while further cementing its leadership across the key brand attributes.
Could you please tell us about the Unified Billing project? What are its goals and objectives?
MegaFon launched the Unified Billing project in 2015 in partnership with PETERSERVICE, one of Russia’s largest IT companies specialising in the development, integration and maintenance of OSS/BSS systems. Unified Billing will reduce the time required to market and modify new and existing products, centralise the launch procedure for new business initiatives and functionalities to differentiate from competitors, and improve customer experience.
What are the benefits of Unified Billing for MegaFon customers?
As part of this project, we will unify the Company’s product portfolio, including tariff plans, services and offers, across all branches. This will give our subscribers access to all products and services in any region, regardless of where the SIM card was bought. In general, every subscriber will benefit from the Unified Billing project thanks to more efficient business processes, better customer service and enhanced customer experience.
What is the project progress and what are the 2016 results?
In 2016, we piloted subscriber migration from the legacy billing systems to Greenfield, and launched the project in pilot mode. Since August 2016, MegaFon has been launching new sales, based on the Unified Billing platform, on a step-by-step basis. By the year-end, the project already covered over 10 thousand B2B fixed-line customers and 20 thousand B2C customers, with over 200 stores across Russia involved in the sales launches.
The Company continuously improves its service levels and pays special attention to the speed and quality of responding to subscriber requests and wishes. Making significant investments in communication quality, customer services and customer experience is a vital part of our approach to improving customer satisfaction.
In 2016, MegaFon continued developing call centres offering comprehensive information and technical support to its subscribers. We also continued working on the project to create a call centre operations management hub. As part of the billing solution integration process, the Company is developing a distributed single customer service queue, which will expand simultaneously with the growth of our subscriber base. By the end of 2016, the option of servicing GreenField subscribers was provided on four sites within a single queue. The process of bringing call centres into a single queue will be completed in 2018.
In 2016, MegaFon optimised call centre headcount by 5%, while handling 1.5% more calls from a year before. The automation level in call centres reached 55%. The average cost per minute of call centre service has not changed since 2015 and remained at RUB 7.
Throughout 2016, MegaFon’s call centres confidently retained their leading position among the “Big Three” operators on all measures of the Customer Satisfaction Index. Performance on speed of response improved from 32% to 35%, while the competence score grew to 74% vs. the peers’ highest of 69%. These improvements were driven by a major initiative to reduce repeat calls and a global initiative to develop call centre scripts. We also benefited from the inclusion of the FCR (first call resolution) indicator into the employee motivation system. As a result, the FCR rate increased from 80.8% in Q4 2015 to 82.4% in Q4 2016.
Other projects implemented by MegaFon in 2016 were the expansion of telemarketing functions, situational sales at call centres, employee development, and improvement of sales processes. The situational sales project diverted nearly 7% of service traffic into the sales channel; the number of telemarketing sales in 2016 increased by 0.9 million year-on-year to 6.4 million, while the number of calls handled grew by 3.5 million to 22.8 million and the call-to-sales conversion rate came to 28%.
Notably, the key sales driver in 2015 was the "Pay When You Can" service, while the 2016 driver was the "Vse vklyucheno" (“Everything included”) tariff line. The average number of calls per employee in 2016 increased by 15% to 2,850 per month.
MegaFon pays great attention to the development of online service and selfservice channels and provides customers with the most innovative services, such as the ELENA 24/7 virtual service and the selfservice platform of our Online Client Account.
In 2016, MegaFon won the Customer Rights and Quality of Service award for the third time. The Company was recognised in the Multichannel Approach sub-category within the Retail Services category.
ELENA virtual assistant won the Project of the Year 2016 award as the best IT project in the Innovative Call Centre Technologies category. The awards are hosted by Global CIO, a web portal for Russian CIOs.
The first version of the ELENA virtual
assistant was launched in summer 2014.
It uses speech recognition technology to
solve customer problems bypassing a keypad
menu. Its key purposes are to improve
automation at call centres, increase customer
satisfaction (CSI), make voice-controlled
self-service systems more convenient, and
boost transactions in self-service channels.
At present, ELENA is a continuously improving
system with a high automation level (52% of
calls are processed by the virtual assistant)
and excellent speech recognition capabilities
(80%). The system handles 70 thousand calls
daily. Our user surveys show that ELENA
helped 62% of MegaFon customers to find
a solution they needed to a greater or lesser
extent.
New options and enhancements, including proactive themed features, were added to the ELENA virtual assistant system in 2016 to improve the customer experience. When a call comes in, ELENA scans the customer’s account balance, traffic allowances and other profile details and engages the callers even before they state their problem by offering help in solving their most likely problems. In addition, the system is now able to support roaming customers, prompting them to learn roaming tariffs and activate options reducing roaming expenses. The speech recognition technology was upgraded, so that the system is now capable of recognising 80% of topics. The speech synthesis engine was also upgraded to make ELENA’s voice sound more natural.
MegaFon’s Online Client Account service
is available for customers in every
Russian region. As at the beginning of 2017,
the Client Account app for Android, iOS and
Windows Phone devices had 7.8 million
downloads in a growing trend driven by high
usability. The service is used on a daily basis
by over 700 thousand subscribers, with nearly
500 thousand accessing it on mobile devices.
In 2016, MegaFon carried out a major Client Account optimisation initiative, which resulted in significant gains in the app’s speed and stability. This effort will be continued into 2017 to add new features and further improve quality and stability of the existing functions.
Since 2016, the Client Account app has been available on all popular platforms (Web, iPhone, Android smartphones, iPad, Android tablets, Apple watch, and Android wear). The web version of the Client Account was redesigned to significantly increase its actual and perceived performance and display personalised offers. It was also supplemented with interfaces to manage the Internet Without Problems, Multi-SIM and Automatic Top-Up options.
Social media remain an essential, but mostly image-building, tool to support customers and promote the Company’s products and services. MegaFon contacts customers via a monitoring system covering the VKontakte and Twitter social networking sites, MegaFon’s official communities on Facebook, LiveJournal and other blogs. As at the end of 2016, MegaFon’s communities on social media had more than 2.2 million registered users. Over the year, the Company serviced 310 thousand unique customers, focusing on faster response times.
MegaFon pays serious attention to customer security and protection from unsolicited and suspicious messages. The fight against spammers and fraudsters was made more efficient after the Federal Law On Communications was amended in October 2014 to enable operators to block any unwanted mass messaging.
MegaFon introduced a set of SMS mass messaging requirements protecting subscribers from unwanted information. The Anti-Spam nationwide system enables SMS spam to be blocked.
MegaFon blocked 337 million spam text messages from more than 1.5 million phone numbers in 2016
had the Client Account app as at the beginning of 2017
In 2016, it blocked 337 million text messages from more than 1.5 million phone numbers. The Company also uses a uniform system to collection and handle subscribers’ complaints on SMS spam (free short number 1911). In 2016, the system handled over 52 thousand subscriber reports.
MegaFon also has a system in place to alert subscribers to a potential threat when they attempt to access internet resources containing malware. In 2016, the Company identified approximately 16 thousand botnets and websites containing malware. These internet resources were flagged in a dedicated system to display a warning sign every time a user tries to access a malware site. During 2016, the Company handled over 5 thousand subscriber complaints against malware, and sent 159 thousand text messages with information about potential viruses on mobile devices.
Subscribers can report suspected fraud on the dedicated "Safe Communication" portal (www.stopfraud.megafon.ru), where they can also find information about the latest fraudulent schemes and ways to protect themselves against them, as well as download and install anti-virus software. In 2016, the Company handled nearly 24 thousand complaints from subscribers against third-party fraud. More than 2 thousand numbers were blocked to protect our subscribers against fraud, and almost 11 thousand fraudulent phone links to social media accounts were cancelled.
MegaFon endeavours to maximise the speed and stability of connections, maintain excellent communications quality and provide high speed mobile internet for its customers; all of which is only achievable by developing first rate infrastructure.
MegaFon has established the advanced large-scale infrastructure and we continue to set ourselves ambitious goals as we aim to achieve the highest possible level of 4G services penetration and coverage, while maintaining high network quality, engage in the development of the next generation communication standard, and continue the improvement of our backbone infrastructure, supporting further roll-out of the Company’s mobile network.
The acquisition of Scartel/Yota in 2013 brought MegaFon a fourfold advantage at the top of the LTE 2,600 MHz frequency band. Following the recently adopted spectrum sharing law, in 2016, MegaFon was permitted by Roskomnadzor to combine the two companies’ 2x20 MHz bands in the LTE 2,600 MHz spectrum and started sharing the spectrum and active infrastructure to provide better services to subscribers.
In early 2016, MegaFon was awarded additional spectrum worth RUB 1.9bn through an open public auction in the LTE 2,570 MHz – LTE 2,620 MHz bands in a total of 40 Russian regions. Acquiring these frequencies will enable the Company to consolidate its competitive edge in certain regions, improve the quality of its services by increasing the network capacity and data transfer speeds, and roll out 4G/LTE networks at a lower cost.
In February 2017, MegaFon completed the acquisition of a 100% interest in three entities in Ulyanovsk, Saransk and Penza from Russian regional mobile operator JSC SMARTS. Each of the entities owns 14.8 MHz of spectrum in the 1,800 MHz band. The acquisition will strengthen MegaFon’s position in the 1,800 MHz spectrum band in the Volga region and will provide for a more efficient, faster and more cost-effective 4G roll-out in the region.
MegaFon currently holds the top position among Russian mobile operators by number of base stations – in 2016, the Company increased their number by 9% to reach 143.7 thousand, with 4G infrastructure comprising 21% of the total base stations. According to Roskomnadzor, in 2016, MegaFon ranked number one among Russian mobile operators by the number of base stations across all communication standards.
MegaFon has entered a new strategic development cycle – a cycle of digital growth, centred around a digital subscriber. What goals has MegaFon set for this new strategy?
The primary goal of the new strategy is to provide fully vertical integrated services for our digital clients and ensure a high level of customer satisfaction with the quality of our network, by maintaining and strengthening our technological leadership.
In 2016, we reviewed our approach to business organisation and initiated a digital transformation process. Digital transformation requires, above all, the development of IT competencies to the same level as the world’s leading IT companies, and a major transformation of infrastructure. It means that we are moving away from viewing IT as an infrastructure support function and are concentrating on the development of digital IT competencies. These will enable us to understand and satisfy customer needs, manage the quality of our services, and develop new digital products and services. This shift in our focus will meet internal requirements, improving the efficiency of internal processes and will help to build a completely unique digital ecosystem where our customers will be able to find a readily available product to meet any of their needs.
The acquisition of Mail.Ru is an important step towards developing the relevant competencies. As an absolute leader in digital coverage in Russia, Mail.Ru has the expertise and knowledge of digital customers and their needs. We will work together to build a unique digital ecosystem of services, enhanced by partnerships with other digital players.
In addition to building a digital ecosystem of products and services, we continue to prioritise our technological leadership. We want to lead the market in perceived quality of service for digital clients. MegaFon has already built the country’s best telecom infrastructure, both by the number of base stations and by spectrum. However, we are not going to rest on our laurels and we will continue consistently investing in promising technologies (5G and IoT) and in the development of advanced competencies.
We follow key global trends in network development and are already devoting considerable effort to network virtualisation, with a focus on network functions visualisation (NFV). This is set to reduce capex on network roll-out, cut platform operating costs, increase tolerance to faults, accelerate timeto- market and launches of new services, and optimise equipment capacity utilisation. In 2016, MegaFon launched a number of initiatives to virtualise the core data network and the 4G (VoLTE) voice platform. Our plan for the future is to virtualise all key components of our network infrastructure, including radio access and backhaul networks.
In 2016, MegaFon continued to invest heavily in improving 4G coverage across the network’s geography, as well as in upgrading 3G and 2G networks. Total CAPEX for the year amounted to RUB 65.6bn, i.e. was down 6.5% yearon- year. MegaFon successfully completed its construction and network development projects due to clearer investment project prioritisation and the optimisation of technical solutions.
Data for 2015 and further are calculated in accordance with the new methodology to calculate number of logic base stations that function in various frequency spectrum bands. Number of base stations for 2014 was calculated based on the previous methodology.
In 2016, MegaFon mainly focused on improving coverage quality, including through improved penetration into residential and office buildings, and on increasing the accessibility of LTE services by implementing LTE 1,800 as an additional layer. Other layers were developed based on identified customer capacity requirements. As at the end of 2016, MegaFon brought 4G to more than 1,000 cities and towns in 82 federal regions, expanding coverage to 65.4% of the Russian population. At year-end, the number of 4G base stations had grown 31% year-on-year to 30,192 units.
MegaFon continued the roll-out of its LTE-Advanced network enabled by the existing 4G infrastructure, which helped deliver LTE-Advanced 4G high-speed internet services providing speeds of 150–450 Mbit/s to 27 Russian cities and regions.
In September 2016, MegaFon commercially launched voice transmission via LTE (VoLTE) in Moscow and the Moscow Region and became the first Russian operator to launch a fully-fledged VoLTE (Voice-over-LTE) network. Subscribers now can enjoy high quality voice transmission, rapid call set-up and continuity of Internet sessions while calling via LTE. As at the end of 2016, customers in the Moscow region were able to access HD voice on 4G, irrespective of their tariff plans or payment options.
In January 2016, MegaFon and VimpelCom signed an agreement on the joint development and operation of LTE 1,800 in 10 Russian regions. According to the terms of this agreement, MegaFon started roll-out of new base stations with 4G support and completed a major portion of the project. Expenditures on the development and use of the base stations are shared by the two operators. The implementation of a joint RANsharing project with VimpelCom will allow us to harmoniously enhance our infrastructure in the 1,800 MHz band. Going forward, this cooperation may grow into a spectrum sharing project.
In 2016, MegaFon continued the extensive development of its 3G networks, as this mobile data transfer technology remains the most popular among Russian users. During the year, the Company focused on local optimisation tasks in this segment and enhanced local capacity in areas where 3G networks are still relevant. We also took measures to maintain high 3G network quality for our customers.
At year-end, the number of 3G base stations grew by 8% year-on-year to 45,717 units. The new base stations have brought the benefits of even more stable connections across our coverage area and acceptable data transfer speeds, irrespective of the load on the network.
MegaFon develops its 2G infrastructure to meet business and customer needs. In 2016, the Company addressed local initiatives to expand its 2G coverage, including in remote and hard-to-reach areas. We also rolled out this network at remote oil and gas deposits for a number of Russian majors.
In 2016, MegaFon continued to participate in national projects designed to extend 2G mobile coverage to remote regions of the country and along federal highways. Under these projects, we further rolled out our networks in Arctic areas, far-off regions such as the Yamal- Nenets Autonomous Area, the Komi Republic, and the Nenets Autonomous Area.
In 2016, the number of 2G base stations grew by 3% year-on-year to 67,754 units. MegaFon’s 2G services cover 83 Russian regions.
| 4G/LTE | Improved coverage and network accessibility through implementation
of the LTE 1,800 additional layer Continued roll-out of the LTE-Advanced network Expanded the geography of LTE, including by rolling out the network in cooperation with other major players |
| 3G | Extensively developed 3G networks |
| 2G | Expanded 2G coverage, including in remote and hard-to-reach areas Participated in the federal programme to overcome the digital divide |
MegaFon seeks to provide the best perceptible communication quality for customers through implementing innovations and new technologies ahead of the market. To achieve this edge, the Company took a number of important steps to develop and deploy the next generation communication standard, to be known as 5G.
MegaFon is actively engaging in formation of the new 5G standard, together with two leading global producers of telecommunications equipment – Huawei and Nokia. In July 2016, MegaFon and Nokia signed a memorandum on the joint development of 5G networks in Russia. The two companies agreed to explore the technological aspects of 5G introduction and development, as well as to maintain dialogue with Russian regulators and international bodies concerning the requirements and parameters of its commercial launch.
In 2016, MegaFon conducted two tests, demonstrating new superfast mobile internet speeds. In June, MegaFon conducted a test of mobile data transfer at a speed exceeding 1 Gbit/s. This success was further consolidated by another test, carried out in September: a 360-degree video with 8К Ultra HD (7680×4320 pixels) resolution was demonstrated and transmitted over a mobile network at a speed of 4.94 Gbit/s.
How will customers benefit from 5G?
MegaFon already offers its customers the fastest mobile data services in Russia, but 5G is a new standard with the potential to open up new opportunities for business growth. At present, MegaFon is exploring the technical aspects of the adoption and development of the new standard, and is discussing the requirements and parameters of its commercial launch with Russian regulators and international bodies. All leading experts agree that 5G will enable the transfer of large amounts of data from a host of devices and provide entirely new opportunities for digital interaction. 5G will certainly open up vast opportunities to develop the Internet of Things (IoT) and will also, in our view, trigger explosive growth in connected device ecosystems in people’s daily life. 5G capabilities will enable IoT solutions with optimum energy and cost efficiency.
MegaFon signed a memorandum of partnership and joint development of 5G networks in Russia with Huawei and Nokia. Does MegaFon partner with global 5G research associations and development centres?
We work closely with leading technology vendors, such as Nokia and Huawei, and contribute to discussions about new technology within research and development associations. We see standardisation as a particularly important issue. In the near future, MegaFon intends to participate in 5G development within the GSM Association (GSMA). I believe our expertise will enable us to be a fully-engaged and valuable contributor to the process.
What changes need to be made to the infrastructure to enable the launch of 5G?
There is, as yet, no detailed definition of the 5G standard, so it is too early to talk about any specific plans to upgrade infrastructure. It is obvious, however, that the new technology will not exist independently of existing infrastructure but will supplement the 4G networks now in use.
As a Russian leader in frequency spectrum and an active investor in LTE and LTE-Advanced, MegaFon is already working hard to keep our customers connected even in the most remote parts of the country. It is clear that demand for network capacity will grow as technology advances and 5G adoption will require a capacity boost, but given MegaFon’s existing backbone and backhaul network, I do not think the growth will be dramatic, at least not in the first few years following the launch of 5G.
At the same time, we are preparing for changes in technology and are set to retain our leadership in this area. In particular, MegaFon is developing a project to build 5G trial zones in Moscow, Saint Petersburg, Kazan and Sochi for the period of the 2018 FIFA World Cup.
In 2015, MegaFon made the decision to spin off its tower infrastructure into a separate company. MegaFon’s extraordinary General Meeting of Shareholders, held in September 2016, approved reorganisation of MegaFon through a spin-off of Joint-Stock Company First Tower Company.
The First Tower Company is based on contributions from Russia’s largest tower portfolio. The portfolio of towers and infrastructure to be transmitted to the first tower company will include over
MegaFon expects First Tower Company to become a centre of competencies focused on tower portfolio management. This spinoff will allow MegaFon to apply a servicebased approach to tower infrastructure management; to improve performance by introducing best practices in management, servicing, and savings through partnerships; to increase CAPEX margin, and to benefit from active involvement in the fast-growing tower leasing market.
| 2017 | 2018 | 2019 |
|---|---|---|
| 1 STAGE Spin-off of tower and related assets to FTC (07/2017) |
2 STAGE Competence centre for infrastructure management |
3 STAGE Monetization of share in First Tower Company |
|
|
|
Why did MegaFon decide to establish the First Tower Company? What advantages will it bring to the Company?
For a long time, tower infrastructure
has been a source of competitive advantage
for MegaFon. But times are changing fast and
the competition between mobile operators is
shifting towards the quality of service and new
products and technologies. Today, our tower
infrastructure is becoming a platform for
cooperation, providing operational benefits.
The creation of the First Tower Company is
an important step aimed at transforming
the Company’s tower infrastructure, which
traditionally served the business, into
an active market instrument. We have
an ambitious target to establish new
competences for the additional monetisation
of the tower infrastructure and to implement
a transformational approach to tower asset
management.
The First Tower Company was created on a platform comprising Russia’s largest tower portfolio, consisting of over 15,000 towers, auxiliary equipment, related land plots, and associated assets and liabilities.
As expected, the First Tower Company will become a centre of competencies focused on tower infrastructure management. Spinning-off of these tower assets will allow MegaFon to apply a service-based approach to tower infrastructure management, improve operational efficiency via the introduction of the best practices in management and servicing, deliver savings through partnerships, and make sure the Company benefits from active involvement in the fastgrowing tower lease market.
What is the current status of the First Tower Company project?
MegaFon’s extraordinary General Meeting of Shareholders, held in September 2016, approved the reorganisation of MegaFon through a spin-off of Joint-Stock Company First Tower Company. In the same year, we implemented a series of key measures to establish the First Tower Company, including the required legal procedures. We drafted and approved the Company’s development strategy and, to took steps to ensure the spin-off process go smoothly, minimising its impact on MegaFon’s business processes, by establishing a project management office that brought together representatives of infrastructure, IT, HR, organisational development, finance and accounting functions.
At this stage, we are focused on forming First Tower Company’s organisational structure, establishing its IT systems, taking technical inventory for asset transfer purposes, and tuning business processes and accounting procedures. We expect to finish the reorganisation and First Tower Company’s spin-off in the middle of 2017.
In 2016, the Company implemented a series of key measures to establish First Tower Company, including legal procedures required to organise JSC First Tower Company. For these purposes we specifically created a project management office to update the list of towers and related contracts and obligations, conduct revaluation of assets, and estimate the costs and the overall financial impact of establishing a standalone business. We also developed and approved the FTC strategy. At present, we have the tasks of establishing an organisational structure, introducing information systems, taking technical inventory to transfer assets in 2017, and streamlining business and reporting processes.
Further development and roll-out of our backbone fibre-optic communications line (FOCL) is a key element of MegaFon’s infrastructure development strategy. The extension of and enhancements to the quality of our FOCL helps to improve communication, increase our mobile network capacity, and improve data speeds across 4G, 3G and fixed broadband technologies.
MegaFon has one of the largest FOCL infrastructure among Russian mobile operators. By the end of 2016, the total length of our backbone FOCL amounted to 130.6 thousand km – a 4% increase year-on-year – achieved through our own construction efforts, the implementation of joint construction projects and fibreoptic line exchange programmes, as well as long-term leases. The percentage of leased backbone (including international) channels increased by about 15% due to higher traffic and customer connections. The share of urban base stations interconnected through FOCL was at 65% at the end of 2016.
In 2016, MegaFon continued the development of its backbone network under a 100 Gbit/s DWDM-based transit trunk line project designed to minimise technical and commercial traffic latency and optimise the cost of enhancing transit route channels. The Company actively developed key transit routes with a focus on eastern regions (Ural, Siberia, the Far East). In 2016, we launched a new MegaHighway route: Nizhny Novgorod – Ekaterinburg.
In 2016, we also continued our evolutionary migration from 10G-level capacity to 100G nodes in the bundled backbone network, mainly on traffic-intensive routes, as well as migration to 100G within the bundled IP/ MPLS backbone network.
In 2016, MegaFon implemented several projects under the fibre-optic line exchange programme together with VimpelCom and MTS. In particular, we closed a contract for the purchase of the Khabarovsk – Komsomolsk-on-Amur backbone FOCL, and integrated this operational asset, as well as signing two new exchange agreements. In 2016, the Company completed a number of joint trunk line projects: the construction of a Far East trunk line along the Tayshet – Khabarovsk route of the Trans-Siberian Railway, and an Arkhangelsk – Belomorsk trunk line project.
By the end of 2016, the total length of our backhaul network exceeded 62 thousand km (+6% year-on-year). Our backhaul network priorities in 2016 mainly focused on active connections of Far East regions via terrestrial capacities, including the launch of a terrestrial link to Magadan, the launch of a back-up backbone 4x10G channel from Khabarovsk to Krasnoyarsk, as well as terrestrial links to Mirny and Lensk.
Core network upgrades are a key driver for improving the quality of voice services under MegaFon’s infrastructure strategy.
The growing number of connected smartphones drives the traffic consumption profile, e.g. signalling traffic volumes (4) . In 2016, MegaFon launched a voice network project (CS Core) to upgrade all main switching centres across the Company’s branches. Adequate replacement of core voice network equipment will increase signalling traffic throughput and prepare the infrastructure for launching new services, such as voice transmission via LTE and via WiFi – VoLTE/VoWiFi (Voice over LTE / Voice over WiFi).
The current state of the market requires transformation of the core network architecture, with the key development focus on building core network elements using virtual network technology. In 2016, MegaFon actively engaged in a number of initiatives to virtualise the core data network and the 4G (VoLTE) voice platform. These initiatives are set to reduce platform operating costs, increase tolerance to faults, accelerate timeto- market and launches of new services, and optimise the use of equipment.
MegaFon has a strong focus on the continuous improvement of its connections and service quality. Our advanced and developed infrastructure, combined with our significant spectrum advantage, help us ensure both fast data transmission and high communication quality.
In 2016, MegaFon introduced a key network quality indicator – an integral performance index to monitor network performance and assess connection quality against customer expectations, identified through their requests to call centres and customer satisfaction surveys.
MegaFon continued to improve quality of service (QoS) by introducing new functionalities, optimising the set-up of network sections to improve the end-toend quality metrics for our services, and worked to reduce cut-off and missed calls at specific locations and eliminate local network congestion.
| 4G | 3G | 2G | |
|---|---|---|---|
| Call set-up success rate | ▲ 99.49% | ▲ 99.61% | ▲ 99.21% |
| Drop call rate | ▼ 0.21% | ▼ 0.27% | ▼ 0.64% |
In 2016, following the implementation of the QoS system in radio access networks, MegaFon implemented the statistical management of traffic based on resource allocation technology. This system enables the Company to improve distribution of 3G and 4G network resources among subscribers and services depending on the type of product (service). In addition, the Company is introducing dynamic management of traffic.
In 2016, MegaFon continued to implement LTE 1,800 MHz as an additional layer to support further roll-out and improve coverage of 4G/LTE. MegaFon and Yota also combined their 2x20 MHz bands in LTE 2,600 MHz spectrum and started sharing the spectrum and active infrastructure to provide better services to subscribers
Global Network Operational Centre (GNOC) performs round-the-clock monitoring of MegaFon’s network status across Russia and also manages over 350 thousand active network elements, including voice and packet switching equipment, network equipment, service platforms, etc. This is one of the largest and most advanced hubs both in Russia and globally. The Centre’s functions are spread across two sites, in St Petersburg and in Samara. In case of an emergency, network operation can be fully consolidated at one site within 15 minutes. The GNOC is based on umbrella management and monitoring systems.
Development of GNOC services in 2016 was mainly focused on enhancing performance and delivering higher quality and reliability of its services. In 2016, MegaFon launched GNOC services for external customers – under agreement with PJSC Rosseti, MegaFon will install special equipment allowing to monitor cases of intrusion and collect telemetric data on 300 thousand substations by 2020.
In 2016, MegaFon was working to improve customer perceptions of new and sophisticated services by establishing a team of consultants helping users to embrace VAS services, and to improve customer experience by implementing a single interface to handle SMS and USSD requests. In addition, the Company is focused on further improvements to the quality and efficiency of its processes.
In particular, MegaFon made over 100 upgrades to its Trouble Ticketing (problem and incident management system), introduced GNOC Performance Management for near-real-time registration of utilisation and quality metrics of provided services, refined its Network Resource Inventory, ensured prompt monitoring for Unified Billing subsystems, and implemented a number of network management landscape upgrades.
Throughout 2016, the GNOC processed on average more than 10 million notifications and messages and solved around 8,000 defects a day. The number of notifications and messages declined yearon- year due to optimised routing of fault alerts through enhancement of correlation, filtering and other intelligent tools used in umbrella systems. During the year, the GNOC handled 283 thousand requests from mobile subscribers and 75 thousand requests from fixed-line customers. In 2016, the Company resolved a total of over 1.3 million incidents and performed 198.5 thousand scheduled network repairs.
In 2016, the GNOC provided technical support to a number of high-profile events, such as the 2018 FIFA World Cup draw, MegaFon Live and Close People.
For 2017, we plan to implement a series of initiatives to improve the GNOC’s performance through enhancing automation, implementing additional correlation scenarios, and introducing automated workstations. In 2017–2018, the GNOC will provide monitoring and service management for the Confederations Cup and the FIFA World Cup.
In 2016, MegaFon continued to implement the Unified Billing project which will enable an modernization of the billing architecture to transform it into a unified solution for subscribers of all branches, and ensure the delivery of high quality products and services. Unified Billing aims to:
In the reporting year, the Company piloted customer migration from legacy billing systems to Greenfield. From August 2016, MegaFon started rolling out new sales into the Unified Billing system on a step-by-step basis. By the year-end, this project covered over 10 thousand B2B fixed-line customers and 20 thousand B2C customers, with over 200 stores across Russia involved in the sales roll-out.
In 2016, the project was enhanced with a new IT organisational structure and an updated incentive system to boost team morale and result-oriented performance. In order to improve the quality and speed of IT delivery, IT BSS and business signed new service level agreements (SLAs) and MegaFon and CJSC PETER-SERVICE concluded operating level agreements (OLAs).
| 2015 | 2016 | 2017 | 2018 |
|---|---|---|---|
| Launch of operational testing 15.12.2015 г. |
Pilot project | Sales Rollout Q3 2017 |
Migration |
The new digital age presents challenges but also offers opportunities for the Company. MegaFon has a cutting-edge IT function, which leverages its best-in-class capabilities to implement most complex infrastructure projects. In addition to ensuring digital “parity” between major mobile players, IT’s purpose is to fully tap into the competitive potential of the Company. To address new challenges, MegaFon uses the best global practices: adapts Agile and Scrum methods, implements DevOps.
In 2016, the Company launched the development of its IT strategy with the following baseline priorities:
In 2016, the Company federalised its business systems: eight standalone business development and operation units were rearranged into four federal domains (Sales and Service, Products and Services, Integrated Platforms and Customer Settlements). The federalisation of business systems aims to ensure seamless migration from legacy billing solutions to Unified Billing, and establish a proactive approach to managing business units. A new Business Partners unit was added to the federal HR structure, to function as the Infrastructure’s single window for corporate customers. This unit helped to rapidly implement projects such as MegaFon Bank Card, ER-Telecom (fixed mobile convergence).
In 2016, the Company launched a project to change the requirements management process in order to reduce Т2М (6) . The upgraded process facilitates closer integration of IT with both business and PETER-SERVICE and supports migration to Agile methodology.
In 2016, we introduced a Content Management System (CMS) tool, based on the ELENA system, using speech synthesis and recognition technology. This tool helps users self-navigate the ELENA IVR system through a graphical user interface. This led to a significant reduction in man-hours required for system set-up and enabled the Company to increase the number of calls handled by ELENA in 2016, from 22 thousand to 70 thousand per day, while maintaining the required service quality.
In 2016, the IT infrastructure team played a significant role in launching our own Shared Services Centre by preparing all operational infrastructure, introducing employee workstations, upgrading the MegaHelp portal, and installing all necessary software on schedule. The team also tested, purchased and installed equipment for 400 universal workstations. The Company carried out its first commercial launch of the new VDI architecture, made over 50 upgrades to its HP Service Manager request acceptance and processing system, which enhanced user experience for both employees and Shared Services Centre users, and made the first commercial launch of Skype telephony, etc.
In 2014, we started developing a Unified Accounting Report Library based on our Corporate Data Warehouse (CDW). In 2016, this project was fully completed, with the Company’s management, financial, and analytical reports are being prepared based on the CDW data as well starting from December 2016. The completion of this project dramatically improved the speed of obtaining data generated using branch-wide uniform methods and algorithms. The CDW consolidates data on all subscriber activities, including monetary events, registered requests, registered cases of the use of certain services, etc. This set of Big Data enables data mining activity, including processes based on machine learning algorithms (BigData/Data Mining).
In 2016, we completed the Retail re-engineering project designed primarily to automate MegaFon Retail processes, with a focus on product mix and inventory management, as well as to unify common retail processes. This project resulted in MegaFon Retail and MegaFon sharing the MegaDoc legal document flow and in MegaFon Retail exchanging e-signed legal documents with counterparties. For our industry-related processes, we automated key retail functionality including product mix planning by cluster / product group, supply chain management, automated demand forecasts, product needs estimates, automated order creation and product distribution across the chain.
In 2016, we also introduced our SAP re-engineering project, focused on re-engineering of MegaFon’s business processes and migrating from the existing SAP ERP to a new generation S/4 HANA platform. Its key goals are to dramatically streamline and optimise internal business processes, as well as to structure them in the most efficient way. The project will have a primary focus on network development and construction business processes, equipment maintenance and repairs, as well as end-toend project reporting – from project planning to post-analysis.
In late September 2016, MegaFon launched a digital business transformation project to migrate to the innovative SAP S4/HANA platform. Why does the company need it? What are the project goals and objectives?
The current business environment is very demanding, requiring rapid and highly accurate management decisions. There is increasingly less time to spend on lengthy searches for information, digging deep inside various data systems and data sets. For a company to remain efficient and agile in evolving markets, you need to have data at your fingertips. This is the main reason why we launched the SAP re-engineering project, our ambitious transformation project that will change the way we collect, process and use our data and make our key business processes simpler and faster.
The technical pivot of every process is a centralised ERP system, linking all of the company’s business units, suppliers and customers. We have been using a SAP solution for over 14 years; however, as the scale of our business is now many times larger, we need to rethink this system, dramatically accelerating and streamlining all of its processes, and integrating them deeply with other IT systems used across the company. It is time to make a new technological leap forward.
When taking on a project as ambitious as this one, we were fully aware that we had to brace ourselves for dramatic change. The good news is that the project already has an innovative enabling technology on board to provide an entirely new way of handling old and new tasks. MegaFon was one of the first companies in the Russian market to start using SAP S4/HANA, a flagship product in terms of both performance and customer experience. Since the project was designed for a time horizon of 10 to 15 years, we had to select the latest product available in the market to ensure we create a future-proof solution.
As a nationwide SAP re-engineering project, it covers eight branches and subsidiaries of the company and involves 300 experts from MegaFon and SAP. The upgraded system will be used by over 7,000 employees on a daily basis. We are not just adopting a new system, we are revising our business processes with a view to operating faster and with less complexity. We will continue to gain new advantages over competitors by pushing the envelope on technology.
In three years, when the project is completed, users of the system will be able to work 20% to 30% faster. Employees will spend 20% less time preparing new reports and have more time for analytical tasks. This will cut costs and significantly improve overall performance. It is our hope that “going digital” will quickly turn from a buzzword into an everyday reality of our corporate life.
(1) According to AC&M.
(2) Net of internet and wholesale sales.
(3) Including VAT.
(4) Signalling traffic is control and management data exchanged between network(s) elements as signalling messages transmitted to authorise, establish and change a communication session.
(5) TCO – Total Cost of Ownership.
(6) T2M - time to market.
