by Chris Forrester
Russia’s information technology and communications’ business is already valued at 42 billion euros, an increase of 25.4 percent over 2006, and likely to top 50 billion euros in value by the end of this year. At every level, there’s impressive growth. Some examples drawn from Russia’s 49 million households (149 million people): computer ownership rising by 35 percent annually; Internet users up 40 percent annually; and, most importantly for us, the number of cable TV subs up 35 percent last year, and taking penetration beyond the main cities to 27.6 percent of the population.
Our data emerges from a major study of the Russian market that includes the European Audio Visual Observatory (EAVO), and data gathered and edited by Russia’s Groteck Co. Ltd., published in March 2008. The report reveals the growth in the average Russian’s income, and the amount of disposable spending that now is directed into TV and communications. The sum typically totals 39.96 euros, of which the amount spent on TV is a miniscule (4.36 euros).
Having selected the European standard for DTV, Russian market regulators now have to take into account the time constraints concerning Europe’s transfer to digital broadcasting, and also European approaches to the organization of digital broadcasting. Russian operators have, so far, been mainly interested in the American model of television signal delivery to the population, as is apparent in the prevalence of satellite and cable television as the main modes of distribution of television channels. With such an approach, the players are following the opinion of leading experts such as former Head of State Radio Institute and Academic Y. Zubarev, regarding the Russian TV market,. They believe that terrestrial TV is only a necessity for a maximum of 10 to 15 percent of Russian households. All other households can be covered by satellite television (in particular when new players providing “economic” services emerge) and cable television, says the study.
In addition to planning for digital broadcasting, Russia’s economic growth is, more or less, in place. Russia’s GDP, when measured in U.S. dollars, has increased five-fold in the last seven years, while the number of homes that can now be measured as ‘middle class’ has expanded to 20 percent of the population. A recent visit to Moscow and its suburbs revealed an significant rise in the quality of cars on the road, advertising hoardings, and billboards promoting high-end ‘Western’ merchandise, and an obvious increase in disposable income.
The total investment in transitioning Russia from an analogue broadcasting model to digital transmission is put at 10 billion euros during the period 2008 to 2015. Investment in digital cable TV is outside, and in addition to, this figure, and will focus on the usual ‘triple play’ benefits of TV, telephony, and broadband and exploiting Data Over Cable Service Internet Specification (DOCSIS), Asymmetric Digital Subscriber Line (ADSL) (and ADSL-2+) and Ethernet technologies.
Assessments of the market penetration of DTV in Russia differ. The Ministry of Information Technologies and Communications believes that DTV does not exist, in a practical sense, in today’s Russia. According to the study, the exceptions are several pilot zones where trials have been conducted introducing terrestrial television using the DVB-T standard. At the end of last year, some 2.5 million subscribers were viewing DTH satellite signals from the three main operators (of which there will be more later). Regarding cable TV networks (as of April 1, 2007), a minimum of one million subscribers viewed digital channels, which is 7.4 percent of the total number of cable TV subscribers. The Moscow subscribers of STREAM TV, who receive TV channels over ADSL with the use of IPTV technology, are included in this number.
According to expert estimations, as of December 31, 2007 the number of DTV subscribers within the cable networks had doubled to two million. fue to the aggressive policy pursued by such market players as The Central Telegraph, AKADO and Corbina Telecom, in connecting subscribers to DTV.
More than 200,000 mobile TV subscribers (the largest operator is MegaFon), and those receiving TV using MMDS technology (the largest operator is Cosmos TV) also obtain TV channels in the digital format. In addition, there are about 100,000 DTV subscribers in the pilot zones where the introduction of the terrestrial DTV (DVB-T standard) was tested.
This, everyone accepts, is a modest number and reveals how much more progress for the transition still has to be made in regard to cable (or satellite) TV. Terrestrial transmitters need replacing and almost every cable system has work to do in converting their infrastructure.
Terrestrial TV, other than the mentioned trials, has a huge task remaining, while cable TV is said to have a penetration base of 17 million, of which only two million are digitized. Satellite’s 2.5 million subscribers are 100 percent digital, but progress is being made.
According to the EAVO report, “Telecommunication operators, who have entered the cable TV market, are the main accelerators of digital cable TV introduction in Russia. The share of digital broadcasting in cable television networks in Russia could reach 50 percent of all Russian households in 2008. IPTV technology is rapidly conquering the Russian pay TV market, despite the lack of consensus in the professional environment concerning the application of this technology in Russia. J’son & Partners forecast that over 1.1m Russian households (over 2 percent) will receive their TV-signals via this technology by 2010.”
Further IPTV progress can be made, continues the study, provided the modernization of Russia’s antique telephony network proceeds as promised. Added to this is the current deployment of fiber-optic technology by firms such as Golden Telecom and TransTeleCom.
One of the challenges the Russian economy has to face is the lack of reliable data. The report states bluntly that Russian government officials still use data drawn from 2001, and this doesn’t help measure actual trends in the marketplace as far as telecommunications and broadcasting is concerned. The domination of free to air terrestrial channels, with high quality content, is a unique feature of Russia, while terrestrial broadcasting remained the only method for delivering TV signals to people to the end of 1991. The cost of access to terrestrial broadcasts for households amounted to not more than 0.08percent of the general average household costs (from 0.16 to 0.56 euros per month), according to the report.
The number of households that use CATV networks to receive TV channels (both terrestrial and non-terrestrial) was estimated, by the end of 2006, to have doubled from 11.5 to 25 percent.
According to an iKS-Consulting report, the number of CATV subscribers in Russia reached 13.51 million (or 27.5percent of the Russian households), as of April 1, 2007. The CATV Association believes that 70percent of households in the large cities of Russia currently have access to the CATV networks. According to data of the largest CATV operator of the country, Mostelecom, the number of subscribers exceeded three million (i.e. 100 percent of Moscow households receive terrestrial TV channels via the CATV system).
When correlating the data cited by analytical services, the largest CATV market players and the CATV Association of Russia one could estimate that the number of users (combined number of pay-TV subscribers and users of free of charge delivery of terrestrial TV channels through CATV networks) of CATV systems as a mode of delivery of TV channels in Russia amounted to 28 percent of households in 2007 (about 14 million households). According to a preliminary estimation of AKTR, the total number of satellite TV subscribers reached 2.5 million in 2007 (now exceeding 5percent of the total number of households in Russia).
Pay vs. Free
Three models of TV broadcasting operate in Russia:
- Government TV consists of the Federal State Unitary Enterprise comprised of ; All- Government State TV and Radio Broadcasting Company (FGUP VGTRK) with Russia, Culture and Sport channels;
- Free to air TV: free for the general public terrestrial channels, funded by advertising. There are 15 all-Federation channels operating in Russia, and also regional and local channels;
- Pay TV: CATV and satellite TV consisting of more than 600 market players
The VGTRK has 86 regional stations (subsidiaries owned 100 percent by VGTRK which, prior to 2000, were independent broadcasting companies) that transmit via terrestrial more than three hours of information channels. It means that the VGTRK produces more than 250 hours per day exclusively regional information broadcasts. The main paradox of the Russian Government TV is that the operation of the main state TV channel, the Russia TV channel, according to the Company is not financed from the budget funds, but from advertising revenues.
Ren TV is currently owned by a supporter of the Kremlin, the head of Severstal, A. Mordashov; the head of Surgutneftegaz, S. Bogdanchikov; and IK Abros, a subsidiary of the St. Petersburg Bank Russia (the owner of the latter is Yu Kovaltchuk); together with the well-known media group, RTL Group. The same triumvirate of Russian businessmen owns a new all-Federation TV Company Channel 5, the establishment of which is currently in progress, according to the report.
This Channel 5 (otherwise known as TRK St. Petersburg) won the tender for 29 frequencies under the strategy for Nationwide Channel of Russian Regions on November 30, 2006. This enabled the Company to become one the largest federal networks broadcasting in 75 cities, including St. Petersburg and Moscow.
Thus, as far as the free-to-air TV sector is concerned, these terrestrial channels are shareware (people pay 0,7 euros for so-called common antenna, and people who use an individual antenna pay nothing at all). Additionally, the government controls TV channels either directly (Channel First, TVTs, Zvezda), or through loyal business structures (NTV, Ren-TV, STS, etc.).
The free-to-air TV sector constitutes the core of the government’s television policy, and receives funds from the federal budget to broadcast signals to urban and rural areas. Total revenues of the free-to-air TV sector (advertising revenues of federal and regional terrestrial channels) amounted to just over 1.8 billion euros out of total TV advertising revenues of 2.1 billion euros.
Pay TV’s State of the Market
Russia’s Pay TV market has passed through several stages of development. At first, it was controlled by the satellite TV operators, who controlled 100percent of the paid subscribers. The major operator, NV+, was established by the former media tycoon, Vladimir Gusinsky as a business project.
The core of the business consisted of premium-class services: provision of access to exclusive (not broadcast free-to-air) content for the well-to-do audience. Primarily, this included cinema and TV films and sport programs. An additional motivation for connection to the NV+ involved the opportunity to receive a complete package of all Federation-wide channels in areas outside the cities. The number of paid subscribers of NTV+ is presently approaching 600,000. The Company has the highest ARPU (Average Revenue Per User) among all the payTV operators, about 25.2 euros.
In parallel to NTV+ expansion, those cable systems in the city, district, and in-house cable TV networks also began to develop. At first, entrepreneurs provided free access to cinema films, and afterwards they introduced payment. Finally, they began to offer subscribers packages of all Federation-wide channels.
The turning point for the cable TV market occurred in 2005, with a large amount of powerful investments entering the sector. The process of acquiring regional companies and establishing large Russia-wide holdings has also started. As of April 1, 2007, six large cable TV operators controlled more than 60 percent of the total subscriber base in Russia:
The principal market players fail to share the optimism of JP and iKS with regard to degree of penetration of cable TV into Russian households. For example, representatives of the National Cable Networks (belonging to the largest cable TV holding Nafta) believe that, by 2010, the pay TV penetration in Russia shall reach 10-15 percent. This implies that between 4.9 and 7.35 million Russian households will use the pay TV services.
The EAVO study says the actual number of Russian payTV subscribers can be estimated at about six million. This figure is based upon the following J’son & Partners data: as of the beginning of 2007, the paid subscribers of satellite TV reached 9 percent of the pay TV subscriber base. If it is assumed that the number of the NTV+ subscribers (about 500 thousand at the beginning of 2007) and Cosmos TV (about 50 thousand at the beginning of 2007) is the aggregate figure of the paid satellite TV subscribers, one may state with more confidence that the six million who are subscribers to pay TV at the end of 2006 proves would be a correct figure. Furthermore, the main market players agree on the estimated share of the subscribers of the satellite pay TV within the total subscriber base of the pay TV.
The market players also agree that the cable TV operators service about 90 percent of subscribers, and less than 1 percent fall into other types of pay TV services. Groteck company analysts estimate that the turnover of the Russian pay TV market in 2006 was 365 to 373 million euros.
Our estimations, says the EAVO study, concur with the opinions of the senior management of the main cable TV holdings that the pay TV market size will reach US$650 in 2007 and increase by 40percent compared to 2006 (in particular, the head of ER-Telecom Holding, A. Semerikov, announced such a forecast at a MultiPlay Forum of Operators organized by Groteck.
Plans for the future
In spite of the intentions of many influential market players (in particular, FGUP RTRS) to obtain budget funds for the modernization of on-land infrastructure used to distribute TV signals, the Government of the Russian Federation chose the way of a government-private partnership in the Concept of development of TV and radio broadcasting in Russian Federation in 2008-2015 approved on November 29, 2007. (If the Russian government wishes to finance any project, they first of all create and confirm a “Concept”, then create and confirm a Federal program and then request financing), relates the EAVO report.
The “expansion of the manufacture of TV and radio broadcasting equipment, the creation of new production capacity and involvement of excess capacity, the creation of additional employment positions, including those in research and engineering activity” were declared as being some of the targets of DTV implementation in Russia within the Concept.
This could mean that the government may allocate substantial amounts out of the Investment Fund to invigorate the production of Russian TV equipment. Experts consider that the Russian Technologies Corporation will be one of the front-runners for investments. The Corporation was founded at the end of 2007 to design, produce and export high-technology products.
To implement the Concept it is necessary to carry out a conversion of the radio-frequency spectrum in Russia. According to the Comnews analytical agency, about 35 percent of the spectrum ranging from 174—230 and 470—862 MHz assigned for digital broadcasting are presently occupied by radio-electronic means (REM) for military purposes. A further 30 percent of these bands are jointly used by both REM and radio-electronic means for civil purposes.
The Government Spectrum Commission terminated the allocation of bands for TV Broadcasting on December 17, 2007, until a new plan of spectrum allocation is developed. The Plan is scheduled for approval in the first half of 2008. The issue of licenses for digital broadcasting may start at the beginning of 2009, says EAVO.
There’s also scope for private investment, and the Ministry of IT & Communications is looking to attract at least $3.8 billion of private investment in digital, terrestrial TV. However, and as far as this report is concerned, the declared plans contain no reference to investments of the largest players of the telecommunication and cable TV markets in the development of terrestrial digital broadcasting. The private investors focus on other methods of delivering the TV signal to viewers.
Satellite TV
The rapid growth of the number of satellite TV subscribers in Russia leads to optimism for the Pay-TV market players as, according to the results of 2007 (estimates of the Russian Cable TV Association), the number of satellite TV subscribers exceeded 5 percent of Russian households and reached 2.5 million. The growth of the subscriber base of NTV+ reached up to 700 thousand people (preliminary estimates) and shows that solvent demand for content of a premium class, which costs more than 21.8 euros per month, constantly increases.
On the other hand, the unprecedented growth of the subscriber base of new operators of satellite TV (Tricolor TV and Orion-express), which provided a cheaper variant of satellite television at the price of 14,6 euros, where number of subscribers reached 1,8 million within the first year of the work of these operators, is an indicator of great demand for services of first-hand satellite broadcasting and a quite high potential for its development.
Experts, says the EAVO study, indicate that satellite operators have already exceeded the threshold of 1 to 2 percent of households utilizing satellite television, which was estimated by the Ministry of Information Technologies and communications. They will continue to expand their subscriber base.
The main factors, which will promote an expansion of the subscriber base of satellite operators (first of all, operators, which provide “economical” services), include the development of an economical model for equipment renting (with monthly payments, which do not exceed 1,42 euros), according to experts. In this case accessibility of satellite television in Russia will expand significantly. At present experts cite the high price (over 182 euros) for equipment to receive satellite television as being the main obstacle to the business development of operators, which provide “economical” (cheaper) services.
Satellite television, which broadcasts in digital format and has started experiments in the provision of services on broadcasting of TV channels of high definition (by NTV+), is one of the main stimulators of DTV development in Russia.
*We acknowledge, with thanks, the extensive use of the European Audio Visual Observatory’s study on Russia and its DTV forecasts.
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