MTS, Russia's biggest telco, has had to contend with an array of economic challenges in the last year. Despite the devaluation of the Russian ruble, political unrest in Ukraine -- its second-biggest market -- and a slump at home, the operator reported sales growth in its July-to-September quarter and claims to be coping much better with the present-day telecom realities than peers in Western Europe.
Digital transformation is now at the heart of Mobile TeleSystems OJSC (MTS) (NYSE: MBT)'s growth strategy, and the operator has already delivered a boost to online sales through investments in this area. Marketing Vice President and MTS Board Member Vasyl Latsanych met with Telco Transformation at this year's Mobile World Congress to explain how a more open, collaborative approach to over-the-top players and traditional rivals is now paying dividends.
Telco Transformation: You've managed to continue growing sales despite various economic challenges. Has that surprised you?
Vasyl Latsanych: We're definitely not surprised. It is rather disappointing that we couldn't do better under such economic pressure. This is something we face when we talk to our investors in London and New York and they say we love what you do, we like your results, but it got devalued by two and half times because of the ruble, because of the economy, because of the oil price. They see our managerial and operational performance is solid and countering most of the challenges that Western Europeans have difficulties with, but unfortunately we can't turn it into straight bottom-line profits because of the surrounding economy, which we have no power over.
TT: As you say, though, the performance is much better than among Western European operators and Russia's telecom market is becoming very developed. What is driving sales growth in particular?
VL: The Russian market is very competitive and that competitiveness drives sales in rubles. The bigger challenge is to have a healthy bottom line and to have a healthy churn line. Russia sells about 100m SIM cards every year with a population of 140 million -- that is ridiculous. The challenge is how to get the minimum churn out of that. The fact we've been sustaining churn at a very low level of less than 10% per quarter consistently shows that we have found the best balance so far between aggressiveness and retention of customers and revenues.
TT: You mention bottom-line pressure and your operating income declined last quarter. What is causing that and do you expect this to continue?
VL: There are really two factors. One is the currency exchange rate, which means that international services we buy are depressing the bottom line. The other is to do with handsets. We are not selling at zero margin on average but there are a lot of handsets we do sell at zero margin, and that means we have to turn over much more to make OIBDA [operating income before depreciation and amortization] healthy.
TT: Is this handset strategy about driving smartphone sales?
VL: It's about driving smartphone sales and customers into stores. We've had to create extra attractiveness in our own shops to better engage customers and monetize them on services, not handsets. As a first step we've taken the difficult decision to minimize earnings in order to attract customers. These are the most important factors in terms of the OIBDA situation. The first -- ruble volatility -- is out of our hands. If it happens again there will be more difficulty but I don't think we'll face the same kind of devaluation again. With smartphone sales, that's purely our initiative and that is set to continue in 2016. It generates a lot of traffic and a healthy bottom line from services.
Next page: Digital transformation
TT: What impact is your digital transformation strategy having on your online sales?
VL: This is something we are very keen on and which gives us hope. The results so far have been something like a tenfold increase in online sales. We seem to be having success in getting customers engaged with us and I hope we'll be showing even better results in the future.
TT: You've previously told me that MTS has set up a specific department to guide the digital transformation process. What prompted this move?
VL: The biggest driver was the notion that the legacy business of telecom is not going up in the near future. Basic services like voice or even data have slowed down or declined. But telecom goes in waves. There used to be a fixed-line voice business. Then there was dial-up Internet, and lots people engaged with that. Then that faded and mobile telecom came into play and created a huge boom. When that was finally over the mobile data business appeared.
This is very unlike the car industry where after the development of the engine everything goes into refining. There is always something next. So we embarked on a search for the next waves. We cannot create this out of nothing and were browsing for potential interest points, and there is this talk about digital transformation and big data. We realized there is so much knowledge and technology in telecom that is not effectively exploited. The idea is to leverage available information to enhance the current operation and find new products, although not necessarily from within telecom. But we have to be ready when something comes along and it will probably be in the digital environment.
TT: Has big data helped you to boost online sales?
VL: That's less to do with big data and more about exploiting the knowledge of other professionals. We partnered with Ozon, Russia's largest online supermarket, and actually became a shareholder in that company to learn about their online business. We learned a lot about their sales processes and online management. We've adopted these and it's proved to be very successful.
TT: Is it getting easier to work with OTT players?
VL: I wouldn't say it's getting easier but a couple of years ago we had no idea how to approach the social networks, the advertising networks, and now we think we have a better understanding of what we could do together. That was not the case a couple of years ago, when it really was a cold war and no one was interested in talking to each other but just in ensuring the other side was losing.
TT: What's changed?
VL: The cultural side of the telcos has changed but these guys also understand they need us. They have entered into a certain maturity phase and started to look at their businesses differently.
TT: You recently announced a partnership effort with a number of other international operators called the Partnering Operator Alliance. Is that mainly about sharing best practices on working with OTT players?
VL: This is a knowledge-sharing alliance and does not involve equity or participation fees. We are there to get access to the knowledge of others and the others are there for the same reason. Because we are not competing directly with each other, we are ready to show them how we do business and they are ready to share as well. We've been doing this already but in the past it involved one-on-one arrangements and meetings. We were going to Seattle to talk to T-Mobile about the Un-carrier initiative to see if we could do something like that. We went to South Korea to talk to SK Telecom about mobile commerce. This alliance gives us a relatively open garden to exchange knowledge and practices. We hope it will bring us more insights into how others do business and at the same time there is virtually no cost.
— Iain Morris, , News Editor, Light Reading, Editor-in-Chief, Telco Transformation