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The Central Asian market of Kazakhstan is highly competitive. Price competition was boosted by the entrance of Tele2 in early 2011 - an aggressive player targeting a long-term market share of 30 per cent. Fellow Scandinavian carrier TeliaSonera has a holding in market leader Kcell, which it increased last year. Telecoms.com recently spoke to Kcell CEO Vasel Aral, who steered the company through a successful IPO in late 2012.
February 13, 2013
The Central Asian market of Kazakhstan is highly competitive. Price competition was boosted by the entrance of Tele2 in early 2011 – an aggressive player targeting a long-term market share of 30 per cent. Fellow Scandinavian carrier TeliaSonera, already present through its investment in Kcell (GSM Kazakhstan), increased that holding last year. Now the market’s four operators are all focusing on reducing churn and seeking ways to increase usage and data traffic.
Penetration is high, expected to hit 166 per cent this year, with carriers continuing to roll out their 3G networks after launching them at the end of 2010. Strong network development has helped the operators increase their data revenues and continuing network expansion is a key focus of all the operators, with competition in the data market becoming more critical.
Telecoms.com recently spoke to Kcell CEO Vasel Aral, who steered the company through a successful IPO in late 2012 accounting for 25 per cent of the company’s share capital. He acknowledges that the company overperformed in its latest financials because it was too focused on using that solid financial performance as a sales point, so as to be able to give a dividend.
The move was successful and 100 per cent of net income from 2H12 is to be paid out as a special dividend to shareholders. However things don’t always run so smoothly when a company’s attention is diverted.
When Tele2 entered Kazakhstan in April 2011, after acquiring the spectrum of Neo Telecom and relaunching under the Tele2 brand, it came in with aggressive price cuts and an aim of 30 per cent market share. In response, Kcell sent a commercial team to a neighbouring Russian oblast next to Kazakhstan to see what Tele2 were doing and how they could counter with their own strategy.
“Unfortunately we were a little late in executing on our strategy because of some technical difficulties in the billing system,” Aral says. “The billing system we owned was not convergent, so postpaid and prepaid subscribers were being charged in two different systems. We needed a convergent billing platform that would allow us to move any subscribers around without changing their number or moving them to a different tariff plan.”
So Kcell installed a convergent billing system, but the supplier had to introduce a temporary freeze on the system as part of the install which prevented the operator from making any tariff changes. “It was a freeze that went on longer than expected,” Aral says.
Operational risk ranked second overall in terms of major challenges to the introduction of centralised or standardised BSS strategies for network operators, according to data from the Telecoms.com Intelligence Industry Survey 2013. Over 51 per cent of respondents rated operational risk as severe to very severe in terms of risk, and Aral’s experience goes to show why.
The first thing the company did when the convergent billing system was in place, was to introduce a ‘sticky’ tariff plan for subscribers who were price sensitive, allowing Kcell to lock them into its network for an extended period of time and stabilise its market share.
“So once we began to execute our strategy to protect our market share in September 2011, then Tele2 only began to grow at the expense of [the other two players] Beeline and Altel. This allowed us to solidify our market share,” he says.
As of end-2012, Kcell has a market share of 50 per cent, followed by Beeline (Kar-Tel) with 32 per cent, Tele2 at 12 per cent and Altel at five per cent.
“Market share is an important competitive dynamic in the industry. There is a tendency to believe that if you start losing market share from low revenue subscribers then your ARPU is going to get healthier, but it doesn’t work like this because call dynamics are changing and your cost base is changing. Ultimately it’s not a good strategy to let competitors come and steal from your customer base,” Aral says.
Kcell keeps a tight grip on its customer base. As well as eschewing handset subsidies the company sells SIMs to its retailers for $1.30, who then sell them on to consumers for $2.60. These retailers are part of the operator group however – Kcell doesn’t want third parties chipping into the value chain – so it retains control of the full retail network, including more than 9,000 nationwide distribution points.
Smartphone penetration in Kazakhstan is still low, at around 12 per cent. “So as long as you don’t boost smartphone usage, data should remain at a relatively low level, but consequently doesn’t give you high data ARPU,” Aral says. “Right now we have a data ARPU of $1, but in Russia (which Kazakhstan typically follows) it is about $2.5. And usage is also very low, so we are looking to increase from 20MB per user per month in 2011 to 77MB by end 2012. In Russia usage is in excess of 600MB already, so we have a long way to go.”
Kcell aims to continue investing in 3G to catch the growth in data and establish a high quality network.The company started its 3G deployment in January 2011 shortly after licences were awarded. It recently completed second phase deployments and around 45 per cent of its 5,300 cell sites are now 3G enabled. Eventually it plans to achieve 65 per cent 3G co-location at its cell sites.
“So firstly the network should be available, then secondly, terminals should be available and affordable,” Aral says. “What we expect is that the Chinese will come into the picture this year or very soon with sub$100 smartphones and that will change the course of data adoption.
“Already the Chinese have devices comparable to the iPhone 3GS at about $120. But once we hit sub-$100 that will change the game.”
With the main focus on 3G, due to its maturity, LTE is very much a future technology, despite the Ministry of Communication and Information of Kazakhstan saying that the country would be ready for the launch of LTE in 2012. Still, Kcell does plan to set up a test LTE network in the near future. But Aral believes that spectrum shortages will mean that the aggregation capabilities of LTE-Advanced will be required for launch in order to add disparate swathes of spectrum together.
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