Mobile handset market shrinks
2007-02-22
Following a rise in prices and a slowdown in new subscriptions, volume sales of mobile handsets in Russia fell last year. In 2007 the market is likely to further decrease.
Volume sales dropped
The mobile handset market in Russia is facing a downturn. Following impressive growth rates in the 2003-2004 period and a slowdown in 2005, last year's sales of mobile handsets were, for the first time, lower than the previous year. According to preliminary estimates by Russia’s biggest handset retailer Euroset, volume sales of new mobile handsets in 2006 dropped by 14% year on year and amounted to 29.3 million.
There are several reasons for the decrease. The most evident being smaller growth, especially in the real mobile subscriber base. According to data from AC&M Consulting, the increase, of 26 million, in the number of SIM cards in Russia in 2006 was twice lower than in 2005. What is more, in reality, a substantial number of those SIM cards have already become inactive, and some mobile users have more than one card with a single handset.
Secondly, the present market situation has been severely affected by campaigns against illegal phone imports instigated by the Federal Customs Service in August 2005, when the police seized several large batches of illegally imported handsets. Since then most Russian retailers have switched to direct imports instead of using intermediaries and the share of illegally imported mobile handsets has dropped. In December 2006 Ratek, the domestic association of trading companies and manufacturers of consumer electronics and computer equipment, even declared that the share of illegally imported handsets has plummeted from as much as 90% in 2005 to 10-20% a year later, however initial estimates by the customs authorities give a slightly different picture. According to them, legal imports of phones in Russia in 2006 have doubled in comparison with a year earlier to 31.17 million. This indicates that the 90% share had been overestimated. What is more, comparing this number with the sales figure announced by Euroset it would seem that illegal imports of handsets to Russia have practically disappeared, which is not yet the case. Value still higher
To help with the fight against illegal channels of imports, customs offices have received official price lists from most handset manufacturers. This has considerably reduced the number of handsets imported below market prices. It has also has resulted in higher prices on the market – according to Euroset, the average handset price has gone up by around 18% to $193. According to retailer’s estimates, handsets costing $130-230 accounted for 40% of sales in 2006, whereas the cheapest (under $70) and the most expensive (over $400) accounted for 11% and 7% respectively.
As a result of higher prices, the mobile market expanded in value terms in 2006. According to data from Euroset, last year the combined value of mobile handset sales was 3% higher compared with 2005. This is, however, much smaller than in 2005 when the market expanded by 28% and a year earlier, when the growth rate was 30%. Biggest retailers strengthen their positions
One of the major tendencies seen on the market last year was consolidation followed by a growth in the strength of handset retailers. In late 2006 the five biggest players – Euroset, Svyaznoy, Dixis, Cifrograd and Betalink – controlled 78% of the market, compared with 56% at the beginning of 2006. Consequently, their competitive position against producers, already seen as quite strong, has strengthened. The biggest of them are even able to influence the sales results of particular producers.
Euroset has demonstrated this twice. First with Samsung, then later with Nokia, Russia's largest mobile retailer, in an internal memo, in which it ordered its employees not to recommend the manufacturers' telephones to clients and to cut bonuses for sales on their products. According to the local press, the situation in which the distributor takes advantage of its market dominance in order to receive better commercial terms and conditions from the producers is simply part of Euroset's strategy.
Recently Nokia’s representatives were quoted in the local press as saying that Euroset was actively promoting Samsung products in 2006 while Nokia products were neglected. According to local market observers, if Euroset continues in its policy of pushing Samsung sales, the latter will soon move into a leading position in the handset market in Russia.
Meanwhile, according to data from Euroset, the most prominent supplier in 2006, with a 25.4% market share, was Nokia. Samsung followed closely with nearly 23% of the market. Motorola, Siemens and Sony Ericsson took the trailing positions in the market.
2007 outlook
We expect the trend of lower mobile phone sales to continue in 2007 along with a reduced demand for new SIM cards and an increase in the average length of handset usage. A decrease in sales volume will, however, be less significant than in 2006. Rising disposable incomes of Russian households, as well as the broader availability of consumer loans, may have a positive influence on the market. The share of replacement sales, already estimated at three quarters of the total, will increase as well.
We foresee further consolidation among handset retailers. The biggest market players will continue to strengthen their positions, which may further increase their competitive position against handset producers.
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