Russia and the red pill: internet penetration soars to 84mn

Russia and the red pill: internet penetration soars to 84mn
Russia takes the red pill for internet Wonderland.
By Ben Aris in Moscow February 11, 2016

Russia took the red pill. Over the last five years, the internet has been snaking through the country like the mirrored glass that covered Neo when he first re-entered the Matrix.

Internet penetration had doubled to 84mn users (70.4% of the population) by the end of 2015, according to a report by East-West Digital News (EWDN). That's greater than the population of Germany, Europe's most populous country. Smartphone use is up three-fold and tablet use is up five-fold, from an admittedly low base.

Because Russia is so huge, Russians who live in the far-flung regions value the internet highly as a way of bring the rest of the world to them. Typically buying access to the net comes after only petrol and cigarettes in the list of essential purchases (you can always grow you own potatoes and brew your own vodka if you are really poor).

"You take the blue pill, the story ends. You wake up in your bed and believe whatever you want to believe. You take the red pill, you stay in Wonderland, and I show you how deep the rabbit hole goes," Morpheus tells Neo in the movie (a huge hit in Russia too), reflecting also the country's stampede for access to the outside world after the 1991 Soviet collapse.

Putin's unsung feat

The first thing President Vladimir Putin did on taking office in 2000 was completely remake the telecoms sector. In what is one of his most successful reforms, and almost entirely unsung successes, the sector is today probably the only fully formed, Western standard sectors of the economy.

From a standing start, mobile phones only appeared in 1993 with the launch of VimpelCom that operates under the Beeline brand, a partnership between Russian rocket scientist Dmitry Zimin and American entrepreneur Augie K. Fabela II that started the gold rush off. Today the company has 59mn customers mobile customers and 2.2mn broadband subscribers, according to its website.

But the sector quickly became competitive as several other operators entered the market, including Moscow TeleSystems (MTS) and most recently Megafon. These companies have been instrumental in rolling out broadband at the start of the new millennium, but it has only been since the start of the last decade that the internet has really come into its own, especially once the fixed-line operators entered the game.

Russia lagged far behind most other European countries in terms of internet penetration, with only a 37% penetration rate in 2010. But that topped 70.4% as of the end of 2015, according to a survey by pollster GfK, adding 4mn users in 2015 alone.

Hot for the smartphone

The deepening penetration was initially driven by the spread of broadband. However, now the growth is largely due to the increasingly ubiquitous smartphone. Sales of smartphones took off in about 2013, when "dumb phone" sales began to decline for the first time, while smartphone sales started to grow by 50% a year.

By the end of 2015, 37.5% of users aged 16 and above went online by way of their phone and 19.5% from tablets. In 2014, the same research found that 17.6% of users were connecting on mobile phones and 8.4% by tablets, displaying a major climb from 2014 to the end of 2015, reports EWDN.  

"Today in Russia there are approximately 50mn users accessing the Internet from mobile devices, which is 42% of the adult population in Russia. The older population drove a strong portion of the Internet growth because 97% of younger users were already online. The younger users (16-29) drove more of the mobile activity. 70% of this age group goes online through their phones and and 35% on tablets." EWDN said in its report.

And like with most services, the telecoms companies concentrated on rolling out services in the so-called millionki, or 11 cities in Russia with populations of over 1mn people (Moscow officially has just above 10mn inhabitants and St Petersburg 5mn). Consequently, the big cities are still ahead of the smaller ones in terms of penetration and time spent online. However, while broadband penetration in Moscow is almost saturated, in the regions access via mobile phones is rising fastest, due to the less complete infrastructure.

And like in other countries, the advent of smartphones with fast internet connections (Russia has just started rolling out 4G, or LTE, connections in the biggest cities) has changed the nature of the business. The widespread use of VOIP technology has hurt the traditional voice traffic revenues and in 2015 AFK Sistema, the owner of MTS, reported that its income from data overtook that from voice for the first time. Still, of all the conglomerate's business lines, telephony still accounts for 60% of its revenues.

Drive, smoke, surf

The crisis has also put the brakes on the development of the sector. Sales of mobile phones were down sharply over the first half of last year, declining by 14% y/y, with sales of smartphones also falling, albeit by a more modest 6% over the same period. However, the penetration of smartphones continues to rise and accounted for 65% of all phones sold in the first half of 2015, up from 60% over the same period a year earlier. (The split was 91% and 88% in terms of the value of mobile phone sales.)

Smartphones seemed to be holding their place among the essentials after petrol and cigarettes, but tablets remain a luxury, with sales tanking by 41% to 3mn units in the first half of last year. If you have a smartphone why do you also need a tablet, even if it is cooler, seems to be the thinking.  

The increasing connectivity has been fuelling a boom in e-commerce and is especially relevant in a country as geographically huge as Russia as it negates the need to build physical shops across 11 time zones.

According to the National Association of Distance Trade Data Insight, the market for e-commerce in Russia in 2015 amounted to $10.5bn, while the cross-border segment grew to $3.4bn, of which 80% of the goods by value were sourced from Chinese online stores.