In Russia, capitalism often follows its own twists and turns. Witness VimpelCom (VIP
). In 1999, as the world telecom market was soaring, VimpelCom hit the skids. Its network was out of date, its quality of service was low, and it was losing Moscow subscribers by the truckload to Mobile TeleSystems, Russia's No. 1 service provider. Meanwhile, fallout from a 1998 ruble devaluation made it even more difficult to keep cash-strapped customers. Result: VimpelCom reported losses of $39 million that year, and skittish investors sold down its stock.
What a difference three years can make. Now, as most global telecoms face their own make-or-break crises, VimpelCom is resurgent. Consumer demand for mobile phones has recovered along with the Russian economy. And through aggressive marketing and improvement of its services and networks, VimpelCom, which is 25% owned by Norwegian operator Telenor (TELN
), has fought back, grabbing a 53% share of the lucrative Moscow market.
While it still trails far behind Mobile Telesystems in sales across most of Mother Russia, VimpelCom is telecom czar of the nation's capital. And it clocks in at No. 6 on BusinessWeek's list of the Top 100 IT companies.
"UNTAPPED MARKET." Its financial picture has turned around, too. Last year, VimpelCom reported profits of $47 million on sales of $423 million. This year, its subscriber base has soared 120%. Moscow brokerage Troika Dialog predicts that its year-over-year profits will surge more than 100%, to $95 million, on forecast sales of $750 million.
With an injection of funds from Russia's Alfa financial industrial group, which bought a 25% stake in May, 2001, VimpelCom is now looking to the Russian hinterlands as its next frontier. The opportunities are vast. With mobile-phone penetration at just 10% nationwide and a huge population holding middle-class aspirations, "Russia is one of the last untapped markets for mobile-phone growth," says telecom analyst Tom Adshead of Troika Dialog.
Investors have certainly noticed. VimpelCom's stock is trading in the $30 range, up almost 15% since June, 2002. Now they're watching to see how well VimpelCom can confront its biggest challenge: balancing sales growth in Moscow against spending on costly regional expansions elsewhere in Russia.
GOING IT ALONE. The plan is to invest some $250 million this year, mainly in building new networks to serve the vast population outside the Kremlin city. These rollouts would give the VimpelCom coverage in 40 of Russia's 89 phone-service regions by yearend. VimpelCom Vice-President for International Relations Valery Goldin says the goal is simple: Vimpelcom expects to break even in any given region 30 months after the startup date. But, he admits: "We do not know for sure the potential for growth in all the regions."
Therein lies the biggest risk. Unlike its rivals, which have expanded through buyouts and acquisitions, VimpelCom is starting up its own networks and services. This has helped it avoid the pitfalls of growth through acquisitions, such as disputes with minority shareholders and problems with integrating old networks. But analysts warn that the regional-growth strategy might still keep it behind the competition.
Rival MTS, which is backed by Deutsche Telekom (DT
), has embraced the growth-through-buyout strategy, which has given it immediate market share and access to rich customer bases. That has helped keep MTS's revenues almost double those of VimpelCom at a forecast $1.2 billion this year. MTS now has 2.2 million subscribers outside of Moscow, compared to VimpelCom's 1.4 million, which is also behind No. 3 operator Megafon, which has gained 2.2 million subscribers outside Moscow.
PLENTY FOR EVERYBODY. Both MTS and Megafon began their regional expansion drives well before Vimpelcom. "There's a danger VimpelCom could be late in dividing up the pie," says Iouli Matevossov, Deutsche Bank's telecom analyst in Moscow.
With three major operators emerging in the Russian market and little chance of newcomers moving in, however, chances are everybody has plenty of opportunity, analysts figure. Even if the Russian economy is hit by a global downturn in oil prices, leading to a slump in consumer-spending power, mobile penetration in Russia is so low, "there's always going to be room for growth," says Troika Dialog's Adshead. That's an assumption that VimpelCom will be putting to the test.
Edited by Douglas Harbrecht
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