BusinessWeek. In Moscow, Phone Wars Can Get Nasty (int'l edition)
A murder highlights the struggle to seize the cellular market
BUSINESSWEEK ONLINE : MAY 31, 1999 ISSUE
INTERNATIONAL -- EUROPEAN BUSINESS
In Moscow, Phone Wars Can Get Nasty (int'l edition)
A murder highlights the struggle to seize the cellular market
Three shots shattered the morning silence of a quiet Moscow neighborhood on
Mar. 25, killing one of Russia's most prominent telecom executives, Konstantin
S. Kuzovoi. The 52-year-old Kuzovoi made his fortune as co-founder of
cellular-phone operator VimpelCommunications, the first Russian company to be
listed on the New York Stock Exchange, in 1996. Just a few months before his
death, Kuzovoi had left the company to head Personal Communications, a rival
cell-phone company. Police don't know who killed him--and his partners and
rivals decline to discuss the killing.
What businesspeople fear, however, is that the murder may be connected to the
rising competition in Russia's lucrative $800 million cellular phone market. In the
rough-and-tumble world of Russian business, executives in the aluminum,
banking, and hotel industries have all been killed in what police believe are
contract hits over the last several years. Rivalries are fierce in the cell-phone
business, since it's one of the few expected to triple in the next five years despite
the country's economic collapse. VimpelCom, which reported $360 million in
sales last year, has stood out as one of Russia's most successful private
companies and dominated the cellular-phone market until recently. But now it's
facing pressure from tough rivals.
OFFSTAGE PLAYER. The strongest competition comes from companies
linked with Moscow Mayor Yuri M. Luzhkov. The mayor himself holds no
telecom stocks. But AFK Sistema, a holding company owned by staunch allies
of Luzhkov, has snapped up controlling stakes in some of VimpelCom's
cell-phone rivals and launched a price war to grab a big chunk of the growing
market. Sistema's founder is Vladimir Yevtushenkov, chairman of the Moscow
government's science and technology committee and a close friend of Luzhkov's.
The race took off last year. In May, 1998, Sistema upped its stake in Mobile
TeleSystems, a joint venture between Deutsche Telecom MobilNet and Moscow
City Telephone Network, the city phone company, to a controlling 47%. Last
summer, Sistema helped another one of its subsidiaries, the same Personal
Communications that Kuzovoi was heading, in rolling out a new cellular network
in Moscow. Then, while VimpelCom was busy regrouping from last August's
ruble devaluation, Mobile TeleSystems began cutting prices. It dropped the
connection fee from $2,000 to $100, waived the $200 monthly fee, and began
charging 46 cents a minute for calls.
The attack by Sistema, combined with Russia's financial crisis, took its toll on
VimpelCom. The company reported losses of $4.7 million for last year as its
market share slumped from 52% in 1997 to below 40% now. But VimpelCom is
fighting back. In response to Sistema's moves, it recently cut its rates to $99 for a
connection, and lowered its monthly fee to $19.
FINNISH HELP. Now, VimpelCom CEO Dmitri B. Zemin is moving quickly
to shore up the company's cash position and expand its network. On June 1,
VimpelCom will finalize an agreement to sell 25% of its shares to Norway's
state-owned telecom company, Telenor, for $160 million. VimpelCom also has
signed a multiyear contract with Nokia under which the Finnish company will
provide equipment for VimpelCom's planned regional cellular network. Zemin is
fighting hard to win customers outside Moscow before Sistema's Mobile
TeleSystems. VimpelCom is also hoping to gain new business by offering
marketing innovations such as prepaid phone cards. On the strength of this new
plan alone, VimpelCom lured 15,000 subscribers in April, its best month of sales
ever. ''We have turned the corner,'' says Zemin.
The rewards could be rich for whoever wins the phone war. Analysts believe cell
phones could capture 10% of the total telecom market within five years as
Russia's fixed-line phone system breaks down. The battle for market share is
bound to intensify. And other telecom companies--both foreign and local--may
try to muscle into the lucrative market. Even though no one is talking publicly
about Kuzovoi's murder, the business community still can't help wondering if it
was linked to the phone fight. In the hottest businesses, competition in Russia, it
seems, can get bloody.
By Margaret Coker in Moscow
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Copyright 1999, by The McGraw-Hill Companies Inc. All rights reserved.
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