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Is Vimpelcom Racing To The Bottom? (Int'l Edition)


International -- European Business: Russia

Is Vimpelcom Racing to the Bottom? (int'l edition)

Investors may flee as it slashes prices--and profits

Dmitry B. Zimin, 67, a prize-winning engineer, has always lived on his smarts. Ten years ago, he was a key developer of Russia's anti-missile defense technology. Since 1992, he has been putting his knowledge to use as the founder and chief executive of Moscow-based Vimpelcommunications, the country's fastest-growing cellular-phone company and the first Russian company to be listed on the New York Stock Exchange. Starting out far behind the competition, he has survived like a good chess player--by plotting several moves ahead of his opponents. "Brains are everything," he says.

Maybe, but profits count too, and at the moment Zimin doesn't have any. That's his problem: His nimble company is being clobbered in a war of attrition with a better-connected rival. Vimpelcom's biggest competitor, Mobile TeleSystems Inc. (MTS), has deep ties with the Moscow city government. The rivalry is reaching a point that could decide Vimpelcom's future. It badly needs money for expansion, but investors may not be willing to go along.

Zimin, a true survivor, may yet bounce back. He founded Vimpelcom with colleagues from a renowned Moscow institute that developed missile defense bases. Soon after, a rival group that became MTS won Moscow's first GSM license, the European mobile-phone standard most suited for Russian use. Vimpelcom's founders gambled on the American standard, which soon became outdated, and MTS scooped up most of Moscow's lucrative business clients.

Vimpelcom kept fighting. In 1997 and 1998, it won two GSM licenses of its own. A new strategy targeting nonbusiness users, coupled with aggressive price cuts, has helped Vimpelcom lure clients. It nearly tripled its Moscow subscribers last year, to 305,500. By Apr. 14, the roster had grown to 500,000, matching MTS's. That's small by world standards, but the two companies are Russia's biggest mobile operators.

Vimpelcom's new customers came at the cost of profits. The company reported a bigger-than-expected 1999 loss of $39 million on sales of $226 million. As a private company, MTS does not report its sales and earnings. But Moscow-based consulting company J'son & Partners estimates that MTS had sales of about $300 million in 1999. Profits are about $50 million.CHEAPER RATES. In Russia, business and political connections are everything--and MTS has plenty. It is majority-owned by Systema, a holding company linked to the Moscow city government. Systema also controls 54% of the local fixed-line phone company, Moscow City Telephone. Analysts say MTS gets cheaper rates for hookups to the local phone network, making it difficult for Vimpelcom to compete on cost. Zimin denies that Vimpelcom pays higher rates. "Vimpelcom doesn't want to say they pay more because it means they can never win on price competition," says Vyacheslav Nikolaev, an analyst at Renaissance Capital brokerage in Moscow.

Meanwhile, investors are getting impatient with Vimpelcom's strategy of sacrificing profits for market share: The stock is down 38% since Mar. 24. "They are burning cash on getting new subscribers with incredible speed," said Anton Inshutin, an analyst at Morgan Stanley Dean Witter & Co. in London. "Instead of reducing prices, they should focus on technology."

Indeed, in Russia the race for mobile Internet technology--the next big market--has already begun. In May, Vimpelcom will begin offering services using Ericsson's Wireless Access Protocol (WAP) technology for accessing the Net. Vimplecom also has a strong ally in Norway's national phone company, Telenor, which bought 25% of Vimplecom in 1999 and is a leader in mobile Internet technology.

Maybe subscribers will switch to Vimpelcom's hot new wireless Net service. But the trouble is, MTS, which is 44% owned by Deutsche Telekom, also plans to offer WAP services in May. Give Zimin credit: He has made a bold attempt to create a viable business. But another year of losses could sour investors. Zimin needs to move fast to avoid checkmate.By Sabrina Tavernise in MoscowReturn to top


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