Kazakhstan’s largest mobile operator Kcell is trialling its 4G networks in the country’s major cities as it enters a “life-changing” period. The company now has to fight to maintain its leading position in the Kazakh market at a time when it must adapt to a free-floating currency, as well as undergo changes in its shareholder structure.
On February 29 Kcell launched the trial of its LTE/4G networks in the most popular shopping malls in the country’s largest cities of Almaty, Astana, Shymkent and Aktobe in order to collect feedback from its clients on the use of mobile internet via LTE and to launch the new network commercially “with the highest quality possible”.
The trial of the LTE networks coincided with Turkey’s largest mobile operator Turkcell’s February 26 binding offer for a 58.55% stake in Kcell’s largest shareholder Fintur, which is currently held by the Nordic telecom giant TeliaSonera, as well as the latter’s 24% direct stake in Kcell. Fintur currently holds a 51% stake in Kcell; 25% of the shares of the Kazakh operator are freely traded. Turkcell’s binding offer followed its non-binding bid made in November 2015. If accepted, Turkcell would own a 75% stake in Kcell.
In September 2015 TeliaSonera announced that it would exit Eurasia – comprising its operations in Nepal, Kazakhstan, Uzbekistan, Azerbaijan, Georgia, Moldova and Tajikistan – after the company became embroiled in a series of corruption scandals in the region.
Worst is over
Turkcell’s announcement pushed the price of Kcell shares up by nearly 4% to KZT1,500 (€3.95) at the opening of trading on the Kazakhstan Stock Exchange on February 29, a much-needed boost for the company's stock, which had touched historical lows of KZT1,043 at the end of January as a result of the weakening tenge and growing competition.
Kcell’s net sales fell by 10.2% to KZT168.4bn, as revenue from voice services decreased by 20.6% to KZT105.4bn in 2015, despite voice traffic remaining flat at 23.54bn minutes (23.54bn minutes in 2014). At the same time, revenue from data services increased by 18.6% to KZT39.3bn, as data traffic jumped by 88.8% to 59.6mn GB. Revenue from additional services, such as SMS, slumped by 23.6% to KZT12.65bn, while other revenue, such as sales of mobile phones, skyrocketed by 115% to KZT11.2bn. As a result, the company’s net profits fell by 20% to KZT46.6bn in 2015.
Askar Akhmedov, a telecom analyst at the Almaty-based investment bank Halyk Finance, considers 2016 will be a “life-changing moment” for Kcell, as it will have to adapt its tariff plans to market factors since the cost of mobile services has stopped encouraging the outflow of customers and the tenge has finally switched to a “genuinely” free-floating exchange regime. “We believe the worst that could happen to Kcell happened last year,” Akhmedov says in an analysis of Kcell’s performance last year. “2015 inflicted a great blow to Kcell on all fronts: a weak tenge has made capital investment more expensive and has decreased the affordability of smartphones for the population, while competition and the company’s delayed reaction have resulted in the loss of 2mn subscribers.”
According to company reports, Kcell lost 835,000 subscribers in 2015: the total number of users of its Kcell and Activ brands stood at 10.4mn at the beginning of 2016. A further 1.3mn subscribers were “lost” in 2014 after the company started counting only “active” users – those who have used the service in the past three months – as subscribers.
Under enormous pressure from the falling oil and other commodity prices and the weak currency of Russia, Kazakhstan’s largest trading partner, Kazakh authorities adopted a free-floating exchange regime for the tenge in August 2015. The decision resulted in a nearly 50% depreciation of the Kazakh currency in 2015. The slowdown in the economy and double-digit inflation started to depress the real incomes of the population in the fourth quarter: real incomes fell by 2.2% year on year (y/y) in October, 5% y/y in November and 7.8% y/y in December 2015.
Crisis hits mobile sector
“The company has adapted to new market conditions and we don’t expect the further outflow of customers: the cost of tariff plans generally corresponds to a more premium mobile brand, while the acquisition of 4G licences levels the only non-price competitive disadvantage. In addition, the company is rapidly developing the b2b [business-to-business] segment, which we expect to result in a slight growth in clientele in 2017,” Halyk Finance’s Akhmedov says.
The economic crisis has severely hit both the country and the telecom sector, but it has also forced market players to adapt to the new conditions, Arti Ots, Kcell’s chief executive officer, tells bne IntelliNews in an interview. “It’s very difficult for the country and for the sector. There is hyper-competition,” he complains. “Everything happened in a way at the same time.”
The Kazakh government estimates the economy grew by 1.2% in 2015 and expects GDP growth at 0.5% in 2016 if the price of oil stays around $30 per barrel. Mobile services decreased by 12.7% y/y to KZT249.4bn in 2015, with services to individual clients falling by 13.4% to KZT213.9bn.
At the same time, mobile companies cannot just compensate for falling revenue, especially in dollar terms, by simply shifting the burden onto customers by increasing charges, Ots explains. “It is impossible because people just don’t have money and it is not fair to compensate it that way,” he says, explaining that the mobile company is coping with the problem by finding new, more efficient technical solutions which provide better capacity and better service for less money.
As Kazakh businesses are also bearing the brunt of the crisis and trying to cut costs, including by using mobile technologies, business-to-business customers are becoming an increasingly important area for growth. Kcell’s b2b segment grew by over 10% in 2015, increasing its share from 5-6% to 7-8% of the company’s total revenue.
LTE offers hope
“The crisis offers an opportunity so we can reconsider what we do and become more customer-oriented,” Ots says, “because when the market goes down and there are a number of reasons why it is happening it is good for consumers.” At the same time, competition is good for the customer up until a certain point: ever-falling prices of services limit operators’ ability to invest and force them to increase the workload on the network, pushing it almost to the limit. “And suddenly we have a poor service but a very good price.”
Ots didn’t disclose the company’s investment plans after the devaluation of the tenge, but Halyk Finance estimates Kcell’s investment will total KZT56bn in 2016, of which KZT26bn will be spent on acquiring 4G frequencies and KZT30bn on maintaining and modernising the existing infrastructure, followed by KZT30bn a year in the next few years.
Another reason for the falling revenue is the fact that the market is changing its structure, so the deployment of LTE networks will come in handy as Kcell’s customers are increasingly switching from voice services to data services. The share of the former decreased to 63.5% of total revenue in 2015 from 70.9% from a year earlier, while that of the latter increased to 24.7% from 16.5%.
“At Kcell, as the market leader, we are more and more moving towards focusing on the existing customer base and you see more of our focus on new services that we have launched recently: TV service, music service, book service as well as on the retail experience,” Ots says of the company’s strategy of adding new services to its customers. “So we see that customers want to buy more of all these things together: to have the phone, the plan, the new content from one place at one time. So that all creates this new universe.”
Ots explains that about 40% of Kcell’s customers use smartphones supporting 3G and around half of these smartphones also support LTE or 4G functions. The penetration is higher in large cities, hence the launch of the networks in a test mode in the capitals of Almaty and Astana, Shymkent, the country’s second largest city, and the western oil city of Aktobe. By the end of March, Kcell plans to extend the pilot scheme to about 40 shopping malls in a further eight cities in the country. By the end of the year, the company expects to build LTE networks in cities and towns accounting for 30-35% of the total population. This share will grow by another 15 percentage points to over 50% within two years.
In addition to Kcell, there are three other mobile operators in Kazakhstan – KaR-Tel (owned by Amsterdam-based VimpelCom) with the Beeline brand, Mobile Telecom-Service (owned by Stockholm-based Tele2) with the Tele2 brand, and Altel (a mobile subsidiary of the national company Kazakhtelecom) with the Altel brand. Altel was the only LTE/4G operator in Kazakhstan launching the service in 2012.
In November Kazakhtelecom and Tele2 agreed to create a joint venture to combine their mobile businesses in Kazakhstan, with Tele2 owning a 51% stake and Kazakhtelecom a 49% interest in the new joint venture. The merger of Tele2 and Altel, respectively the third and fourth largest mobile operators, was seen as an outcome of the fierce competition on the Kazakh market and a price war waged by the four operators.
With a combined market share of 20-25%, the merger is a “welcome” move, Ots says, as “this is basically the market share” for a telecom company to become profitable in a market like Kazakhstan with 17.6mn people. Kcell’s CEO explains that generally in a market with four players, when the fourth player enters the market when the third has not yet become profitable, the market becomes unprofitable and requires consolidation. Following the announcement of the merger, Russia’s Sberbank hailed the move, suggesting that “theoretically, the merger should lead to competition easing somewhat on the market”.
With the price war seemingly a thing of the past, Ots describes the current prices of Kcell’s plans as “realistic”. The operators will now start differentiating their plans according to consumers’ ability to pay for services they want, he suggests. “The ones who want to use more high-quality services will have a higher price… You cannot just put everything in one and say ‘this one [size] fits all’,” Kcell CEO Arti Ots concludes.