TELECOMMUNICATIONS

Telecommunication market

Alexander Konakhov, the representative of the public movement "Pragma"

ALMATY, May, 30

(Specially for THE GLOBE)

The characteristics of the Kazakhstani communications are predetermined by the specific geographical location of the country. The density of the population is low (settlements in Kazakhstan are situated at great distances from each other). The long transit way (Russia� Asia � the Far East) goes through Kazakhstan. Consequently, the local communications are to be of a high transit capacity. The unique climate (a low level of precipitation) promotes the stability of communication, while the middle latitudes allow for the optimal slope angles of antennas. All of these factors are the most favourable premises for the development of the satellite communications.

If we watch the modern telecommunication market in Kazakhstan, it will be possible to mark out several key points:

� The mixture and coexistence of different technologies from the decade-step ATS (automatic telephone stations) to satellite communication channels is supposed to be a sign of a developing country

� A �War of standards� changes price competition to a competition of quality

� The �Centre of demand� is gradually shifting from corporate clients to the general population

In 1998 the total volume of the communication market in Kazakhstan, according to specialists, exceeded US$ 2.3 billion. The average annual growth rate is the same as in 1996, about 32-36%.

It is possible to predict the appearance of modern digital technology iDEN (integrated Digital Enhanced Network) in our market in the near future. This technology of American communicators allows a subscriber (the owner of a receiver) to use cellular (GSM-900 standard), tranking and paging communication, as well as to have an access to Internet and other data bases. If the new project is successfully realized, the business of tranking companies will be doomed. This market segment will simply be monopolised, and the cellular and paging operators wishing to survive in the competitive struggle will once again have to reduce their prices.

Possibly one of the GSM-900 operators will use their infrastructure, first of all the basic stations, to install Motorola equipment. In perspective that operator may become the iDEN cellular operator (GSM-900 and iDEN equipment are compatible with each other).

In fact, the Kazakhstan communication market differs a little from the world�s trends. When some years ago, it became obvious that the market for data transmission was growing faster than the market of voice communication, the Internet providers and producers of computer nets decided that it was their time. But they were mistaken, once serious money appeared in the market, telecommunication operators began gradually to capture the Internet-market, while the producers of communication equipment started to seize the data transmission segment. The motto of the modern telecommunications is laconic: �wide range, speed, capacity and mobility.� It means that all the producers try to work out equipment able to work in a wider range of frequencies, transmitting more information at a growing speed. The final user should be maximum mobile.

The popularity of the integrated transmission devices, combining e-mail, telephone, fax and paging communication is growing. The users begin to establish the multipurpose mailboxes, which eliminate differences between the communicational means.

Following these trends, in the near future the telecommunication network will be a combination of super-high-speed optical ground and satellite networks and wide-range mobile communication networks, providing a client with practically unlimited volume of information.

It is no secret that it only took a year or two for our operators to develop things which in the West had taken tens of years. Today there are practically all the new telecommunication technologies in Kazakhstan. Moreover, it is morally easier for our operators to dare to create the up-to-date communication networks. The West infrastructure is a more modern infrastructure, but it has already become obsolete. The infrastructure has not paid for itself, and this is why Western companies are as a rule, extremely cautious to the idea of total replacement of the networks.

In this sense, we have nothing to lose. In the regions the telephone networks of common use (TNC) have an obsolete and inflexible radial-joint structure, and access to Internet by TNC has its own (already obvious) limits and cannot develop as fast as they did earlier. Despite the great number of cellular networks today, less than 10% of the population use their services. According to the experts� estimations, the introduction level of modern digital telephone networks even in Moscow is less than 12%.

That means that there is a lot of work to be done. To introduce the new technologies, we will require investments. All the equipment is being imported from abroad, which demands significant expenses (certification, different permissions, etc. also requires money). To clarify where money may be received from and why we are short of money, we should consider the structure of our operating market. We should mention that product specialisation is practically rigid.

Internet-providers

The beginning of 1999 was marked by the introduction of the largest producer of telecommunication equipment, �Ascend Communications, Inc.� (USA) into the Kazakhstan market. Today this equipment is serving 28 out of the 30 world�s biggest Internet-providers. That principally means that the price competition is step by step replaced by the quality competition. On one hand, there is no reason why the number of providers should continue to be limited to 33. On the other hand, we recently had almost 500 banks, now we have only 76, and it is not a limit.

The striking regional inequality of the providers� distribution (the 9 biggest providers are situated in Almaty, 5 in Astana, Semipalatinsk and Pavlodar each have 4 providers, 3 � in both Karaganda and Ust-Kamenogorsk, Petropavlovsk and Kostanai each have 2 providers, and Taraz, Temirtau, Kokshetau and Aktyubinsk each have 1 provider), does not mean a strict division of the market into sectors. For example, the gradual smooth shift from payment for time on the Net to a fixed monthly payment will categorize potential clients according to their purpose.

At present there is not a single world class Internet provider in the Kazakhstan market. Most probably, the existing providers will have to face only the strengthened competitiveness between the ground and satellite transmissions of a signal to corporate clients, but they will face the limits of communication through dial-up in many towns in Kazakhstan. According to the prognosis, it is expected that the competitiveness of the main providers in the capital will grow, as they through expansion to Kazakhstan towns will strive to improve the quality and variety of the services. Their clients will have a choice, and the provincial providers will have to raise the level of their services. The advantage in the competitive struggle will be based upon the quality of the rendered services. One of the important premises of this advantage is the availability of a multi-purpose billing system. Offering a range of services and high-quality servicing, the operators of communication can �gather all the ripe cherries� in the market, attracting the most profitable clients. After some time when their turnover increases and their losses fall, they will widen the number of their clients attracting those who prefer cheaper services.

One of the interesting trends of the development of the Kazakhstan market of ground communication is the reaction to the growth of the competitive struggle between the local providers of the former monopolists working under the privileged conditions. Usually, the local providers do not have experience in using up-to-day technologies, unlike the new global competitors who offer at once a complete complex of the communication services along with the high quality of their services. Many local communication operators are slow in investing in the development of the infrastructure of the informational technologies. As a result, they fall behind in their servicing quality and have to constantly decrease their prices under conditions of rigid competitiveness. This in turn significantly reduces their profits and require larger future investments.

As far as the satellite data transmission is concerned, of course, the efforts to create the internal net for the Customs departments (the project of the corporation �Accept�), as well as the sputnik line to any point in Kazakhstan, implemented under the project of the company �THC-Plus�, are noteworthy.

The main problems that the providers try to settle are as follows:

� to decrease the effect of �the revolving door� (the passing of the clients from one operator to another);

� to control the processes of money inflow;

� to minimise the risk of big debts;

� to offer the most profitable types of services and conditions of payments

Nevertheless, the rate of growth of the access to Internet cannot keep up with the spread of computer literacy. Whatever hopeful signal the development of Internet seems, according to many indices, Kazakhstan falls behind from many countries. First of all, as far as the development of electronic commerce (the sale of the products and services in Internet) is concerned. The development of Internet in Kazakhstan is obviously connected to the possibility to overcome the structural economic crisis. The world�s trends of the development of the Internet market are the following:

According to the prognosis of Nicolas Lippis, an analyst of the company �Gartner Group� in 2003 the world Internet traffic will absorb 90% of the capacity of the Net. In addition, according to Lippis, 30% of the USA GNP in the amount of US$ 1.5 trillion will be gained with the help of Internet by 2002. According to the analyst, in the near future there will be significant changes in the telecommunication industry. In 2001 high-speed cable modems will become the main means of access to Internet. The virtual private networks will compose 60% of the private rented lines. In 2005 almost half of the market of cellular phones will be filled by the communication services based upon IP and personal informational devices.

Cellular communication

As of the beginning of May 1999 we may see the following situation in the cellular communication market, which is one of the fastest developing market not only in Kazakhstan but all over the world. In the beginning of 1999 the experts of the markets evaluated the capacity of the cellular market to be only 40000 subscribers. We should make it clear that information about quantity of the clients of a cellular operator is even more restricted than the real circulation of the advertisement newspapers. But the number of subscribers of this type of communication is expected, by the beginning of September 1999 to reach 45000, and in December it is supposed to exceed 55000. About 200 000 000 people use mobile phones all over the world: we have something to strive for.

The main trend of the market is considered to be the gradual replacement of the NAMPS standard by the GSM standard. The latter is a digital one and now is widely used in Europe and in other countries in the world. By the middle of last year the JV �Biset International�, whose trademark �Altel� was the synonym of cellular communication for a long time, practically dominated the Kazakhstan market. The influence of the other operator �Tolkyn�, which is today called �Zharshy�, is still insignificant. The situation fundamentally changed after the appearance into the market of two joint ventures with participation of the Turkish communication operators. Now despite practically equal prices, the number of clients of the operators of NAMPS standard is not increasing much. If at the initial phases of the development, the operators working in different standards, differed from each other by the range of their services, quality of communication and covered area, at present the technical specifics of the standards influence less the consumer characteristics of the services. Under the current conditions, a high quality of marketing measures, including advertisements by the company-operator has become an indispensable condition of success.

During the period of its existence in our country, the cellular telephone has been getting cheaper and has practically lost �the elite� touch. It has transformed from an �elite� luxury to a thing comfortable and necessary for many people. If this type of communication becomes cheaper (in the West the monthly cellular charge is US$ 50), the number of people wishing to feel themselves free (as the mobile communications is associated with this word) will greatly increase. Due to the competitiveness, the operators have to reduce their prices, introduce some privileges, improve servicing and support all their innovations with serious advertising campaigns. Without serious advertising, there would not be the rapid �career� of cellular communication.

Today, newspapers are the most available and mass means to advertise cellular communication. Every cellular company uses newspapers from the very beginning to conduct the advertising activity. It is obvious that the growth in the number of subscribers is mainly determined by how a company conducts its advertising campaign in the press. That is why you should not be surprised with continuous advertisements on the pages of the popular editions. The main indices of advertisements in the press are the quantity of published advertisements, their area and expenses towards advertisement. The first of these indices indicates the intensity of an advertisement campaign, while the second and the third ones demonstrate its capacity.

The world�s development of the cellular communication is also characterised by the continuous �war of standards�. The company �Micrologic Research� published the results of its recent survey of the cellular communication market. The obtained results were not a surprise: GSM standard is still the indisputable leader as far as the number of subscribers is concerned, and is supposed to keep its leadership until 2003. At the same time, the demand for telephones of cdmaOne standard is growing faster than the demand for GSM telephones. According to the prognosis, in the period from 1999 to 2003 the world�s market of GMP networks will increase from US$ 15.5 to 24.5 billion, an average annual growth of 12.1%. At the same time the market of cdmaOne networks is expected to increase from US$ 3.5 to 20.4 billion, i.e. will annually increase by 55.9%. The market of the IS-136 standard (American TDMA), which is the third one of the competing standards will increase at a slower rate: from US$ 1.4 billion in 1999 to 3.5 billion in 2003.

Despite the economic crisis, the authors of the survey predict the beginning of a third generation cellular network, though this process will be not too wide. This is supposed to happen in 2001 in Japan and Europe, and in 2002 in Northern America. By the end of 2005, the number of subscribers to these networks may come to 16.9 million in Europe, 12.5 million in the Northern America, and 10.6 million in South America. It is possible that the producers will not manage to come to a single standard, and there will be at least two standards. Europe is supposed to accept W-CDMA/TD-CDMA standard, Latin America � cdma2000, Northern America and some Asian countries, including Japan will use both types of the networks.

Paging sector

As of the beginning of May, 1999, twenty-two paging operators worked in the republic. Practically all of the former regional centres are covered by �servicing zones�. At the same time, this sector faces some difficulties. The main problem in this sector is the continuous passing of one operator� clients to another operator.

The process of the clients� passing from one paging operator to another, especially during the intensive price wars, is known in the telecommunication industry as �the revolving door� effect. It is one of the main sources of trouble of the Kazakhstan communication operators at the current phase of development of the market. According to one specialist of the paging company, up to 30% of the clients of paging companies are constantly looking for more profitable conditions.

It is obvious that if a client has any questions regarding any services of a paging company, he will hardly like going through many trials to get an answer to his questions in different departments.

The delays in activation of the access or in agreed services after a client�s phone is unblocked, cause �the revolving door� effect. Besides, the monthly pager charge and the charge of the cheapest cellular phones have practically equalled, forcing paging companies to look for new ways to attract clients.