Ukraine Telecommunications Report Q3 2009

In our Q309 report on Ukraine’s telecommunications market we have expanded our market data analysis section for the fixed-line and broadband markets, while leaving the mobile market data analysis section unchanged, to be updated in full in the subsequent quarter. We have also updated our mobile, fixed-line and broadband forecasts for the period through to 2013.

Ukraine’s fixed-line sector is dominated by the incumbent Ukrtelecom which had over 10mn fixed lines in service at the end of 2008. However, competition is growing from the likes of Vega and as the networks are being expanded, particularly by Ukrtelecom, the fixed-line sector has been growing.

However, growth has been tempered by fixed-to-mobile substitution and the growing popularity of VoIP services and we believe 2009 will be the last year of fixed-line growth in Ukraine before it enters a period of decline. The country’s severe economic downturn is resulting in reduced consumer spending which we expect to result in fewer customers taking up new fixed-line subscriptions. This is being exacerbated by the fixed-line operators’ financial situations which are expected to result in capital expenditure being scaled back. As the fixed-line operators place increased emphasis on diversifying their revenue streams away from fixed line and into broadband, VoIP and IPTV services, an even greater proportion of funds will be channelled away from fixed-line services.

In contrast to Ukraine’s slowing fixed-line sector, the broadband market almost doubled during 2008 and penetration still only reached 3.9%. The sector has suffered from years of underinvestment from incumbent Ukrtelecom which has resulted in the incumbent having less than 30% market share at the end of 2008. Competition is growing from alternative operators such as VimpelCom’s Golden Telecom, Vega, Comstar Ukraine and Volia Cable. Competition is also increasing between alternative technologies such as cable, ADSL, WiMAX and CDMA as operators look to exploit the huge potential of a country with such low broadband penetration and a population in excess of 45mn. Network deployments are still being concentrated on major urban centres such as Kiev and Odessa, with the rural areas being largely neglected and this is expected to continue in the near future given the under-developed nature of broadband in the country. A number of advanced service such as high-speed broadband over ADSL2+ networks and IPTV have been launched and demand for high-value services is expected to grow, although it will be held back, owing to the country’s economic situation.

The mobile sector stagnated in 2008, with growth coming in at just 0.3%. This was largely due to MTS Ukraine which discounted close to 1.9mn inactive SIMs from its subscriber base, although market leader Kyivstar also reported a net loss of 73,000 subscribers. Meanwhile, the smallest of the country’s four major operators, VimpelCom saw just 87,000 net additions after shedding 376,000 inactive SIMs in the final quarter of the year. However, sterling performance from Astelit, which saw 2.38mn net additions, helped to bring the market out of negative growth territory. However, Astelit’s concentration on the prepaid sector leads us to believe that its subscriber base also contains a large number of inactive SIMs, which when discounted will have a significant impact on the mobile market’s growth.

With a lack of W-CDMA 3G services, owing to the regulator having only awarded a licence to incumbent Ukrtelecom, Ukraine’s value-added services (VAS) market is not as advanced as it could be. VAS based on SMS such as the mobile parking service launched by Astelit, and other basic VAS like the operators’ WAP portals are likely to remain the key driver of VAS revenues for the time being. That said, more advanced services such as location based services (LBS) launched by Kyivstar and MTS and a mobile payment service launched by MTS will help to drive up revenues.

Meanwhile, after growing speculation that the privatisation of Ukrtelecom could be launched in March 2009, the buzz seems to have died out. The privatisation keeps being delayed amid political infighting with Prime Minster Tymoshenko keen to push it through and President Yushchenko allegedly attempting to stall the move. Presidential elections are due to be held in January 2010, and current opinion polls suggest Yushchenko will be forced out, which could pave the way for this very protracted privatisation to finally take place.

Ukraine continues to sit near the bottom of our regional Business Environment Rankings table, down in 14th place. The country scores poorly across the board and has the lowest Country Risk rating out of all 17 countries in the region. Policy continuity is threatened by political infighting and exacerbating the problem is Ukraine’s deepening economic recession, which BMI forecasts will be the worst in the world.