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Potential Combinations in the Russian-American and Russian VOIP Startup Segment

  • ID: 44902
  • Report
  • February 2004
  • Region: Russia
  • 34 pages
  • Global Advertising Strategies
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VOIP service providers targeting Russian-Americans and Russians residing in the former Soviet Union are on the verge of mergers and acquisitions triggered by changing economic and competitive situation in both countries.

Carriers in the U.S. that dominate Russian-American telecom niche are mainly startups offering inexpensive connectivity to major cities in the former Soviet Union. These carriers have exhausted their cost sitting potential and as their customer care and acquisition costs are climbing have to look for new ways to lower their telecom costs, or which expanding network into regions where they terminate the most calls is one of the most obvious scenarios.

Carriers in the former Soviet Union and especially in the Russian Federation have arrived as a similar crossroads but via a differed path. Russian telecom industry is on the brink of deregulation, a function of Russian entry into WTO expected this year. While this process is a two way street it is expected to deliver Russia's largest long distance carrier, Rostelecom, into the VOIP market, in a fight to reclaim the long distance minutes it is losing to VOIP. This means that Russian carriers should do whatever possible to consolidate their position on major international routes, with acquisitions being a major strategy in achieving a competitive advantage.

The report includes profiles of major telecom players in the Russian-American market in the USA and top VOIP providers in Russia. The study develops several possible merger and acquisition scenarios, as well offers details on network architecture and contractual relationships between these players and their network providers. The study makes an estimate of the size of the VOIP traffic between Russian Federation and the USA.

The study describes this dynamic situation in the regulatory context and details little-known facts about Russian-American minority explaining the size of the U.S. opportunity. The report includes profiles of such players in the US telecom ethnic market as
-Master Call Communications (MCC
-World Discount Telecommunications (WDT)
-Primus Telecom
-StarTec

It also includes profiles of various players in Russia:

-Teleros
-Zebra Telecom
-West Call Ltd.

Four methods of data collection were used for each group in this study:
-Secondary Research
-Phone Questionnaire
-Internet Poll
-Personal Interview

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1. A CASE FOR VOIP MERGERS. SUMMARY
1.1 Russian Regulatory Environment

1.2 U.S. Regulatory Environment

1.3 RussianAmericans in the U.S. and VoIP Operators That Service Them
Graph 1. Market Share of Long Distance (LD) Providers
Graph 2. Frequency of International Calls
Graph 3. Average Length of International Calls
Graph 4. Average Monthly LD Bill
Graph 5. Factors Influencing RussianAmericans to Change Their LD Provider
Graph 6. Calling Destinations
Graph 7. Calls to One International Destination as a percentage of All International Calls

1.4 The Most Popular VoIP Operators in Russia
Table 1. Largest Russian VOIP operators

1.5 The Opportunity in Numbers

1.6 What Customers Want
Evaluation Charts of Major Players in the RussianAmerican Telecom Market
Graph 8. WDT (World Discount Telecom)
Graph 9. Econodial
Graph 10.World Link
Graph 11. AT&T
Graph 12. Startec
Graph 13. Primus
Graph 14. Master Call
Graph 15. Calling Cards

1.7 Customer Satisfaction Ratings
Table 2. RussianAmerican Ratings of LD Providers

2. MERGER AND ACQUISITION CRITERIA SUMMARY

2.1 Common VoIP Architectures

2.2 Profiles of Top Russian VoIP Carriers with Network Architectures Closest to U.S. Players
Astelnet
ComcorVIP (VoIP)
Intercall (OSS Corporation)
Infotel
Teleross (GlagolCard and Russia Online)

2.3 Top Russian Players Using Public Internet for VoIP Termination
Complex Internet Telephony (Comintel)
Rhinocerus Global Communications (RGC)
West Call Ltd.
Zebra Telecom

2.4 Profiles of Top U.S. RussianAmerican Operators
Econodial
Startec Global Communications Corporation
WorldLink Solutions
Primus Telecommunications
Master Call Communications (MCC)
World Discount Telecommunications (WDT)

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A CASE FOR VoIP MERGERS - SUMMARY

The final round of telecom deregulation in the U.S., the opening up of the Russian telecom market, and the advent of Voice Over IP technology changed the patterns of U.S.-Russian telecom traffic dramatically in the 1990s. A rash of new companies appears to be taking a significant market share from both American long distance providers and the Russian national carrier Rostelecom. In the U.S., Global Advertising Strategies (GAS) found, the top long distance players serving Russian-speaking customers are all ethnic-oriented startups, with the likes of MCI and AT&T lagging behind. In Russia, Rostelecom raised per minute prices for U.S.-bound calls, a reaction to its thinning call volume. A growing number of Russian VoIP carriers appear to be taking minutes from Rostelecom with either VoIP-based direct dial services or less expensive calling card alternatives. VoIP as a technology is believed to be behind this whiplash of telecom activity, as carriers find that even as startups they can seamlessly route calls over IP networks, including the public Internet, and in fact offer the same kind of end to end connectivity previously offered by only the world’s largest corporations that built and maintained international networks. Deregulation sweeping the shores of the Potomac and Moscow Rivers is also a factor.

The U.S. Telecom Act of 1996 helped create a climate of telecom investment when a high degree of market specialization came to be expected out of telecom companies. Russia’s ascension to the WTO created a climate where VoIP has not been ruled illegal as in some other countries, resulting in the emergence of a large number of startups exploring uses of the Internet in “RUNet,” Russia’s Internet. Upcoming deregulation of foreign ownership of telecom companies, facilities-based long distance service, and local telephony are all good signs the Russian telecom market is going to become more, not less, competitive over the next five years. Given the significant business opportunities that American-based companies see in servicing the Russian immigrant community in the U.S. and Russian companies find in routing calls to the U.S., the situation appears ripe for consolidation, with new telecom firms appearing that would combine Russian-American and Russian international businesses into one.

Yet many market participants are hesitant to initiate such a step even though it would likely enable even lower prices and premium services. The rationale is part business, part telecom economics. For the business part, the reasons are rooted precisely in the nature of companies that are able to implement the latest technologies and business models enabled by the latest regulatory changes. In a word, these companies are startups. They need to have a laser-sharp focus prescribed by their tight budgets and skeleton crews of 30 people or so. Yet expanding into new markets entails registering ownership of a new company overseas, adequately staffing it with local talent, overcoming regulatory hurdles, and so forth. A telecom startup would also need to make a hard dollar investment in setting up network facilities that would enable it to do business. And to attract any customers, a significant investment would have to go into marketing and advertising, two very expensive endeavors that require lots of market insight. The bottom line is that for some telecom leaders to pull off a trans-Atlantic business model, they would have to combine a successful American and Russian telecom operation in order for the overall enterprise to be sustainable.

Thus, while startup telecom carriers both in Russia and in the U.S. are pondering where to go next, Russianspeaking Americans use U.S. companies to call destinations in the former Soviet Union, and Russians callin the U.S. likewise turn to local operators. This status quo can’t and won’t last. The main competitive differentiator among U.S. ethnic-specific telcos - international destination pricing - has been depleted with per minute pricing plunging into pennies. Yet operating costs are growing significantly as market leaders have to start investing in customer service and technical support, as well as expand beyond “plain vanilla” long distance into other telecom services. At the same time Russian operators are bracing for more competition from regional and long distance telcos that are undergoing privatization and in some cases are in the midst of launching alternative operator spinoffs established with the sole purpose of taking back the minutes they are losing to competition. Thus operators in the U.S. can’t proceed with business as usual and expect to be successful.

Meanwhile, operators in Russia are getting ready to fight for their survival as some of the largest telecom players in the country are getting ready to reclaim their position in the international long distance market, maybe as early as in 2004, if certain deregulation and privatization processes continue as planned. At the same time, both Russian-speaking Americans and Russians calling overseas are spoiled by the extremely low rates they are getting from local operators and are expected to have a low degree of tolerance for higher telecom prices. The event that will likely bring this situation to an uncomfortable climax is the Russian government’s sale of its controlling share in Svyazinvest, a Russian equivalent of AT&T. As the government unloads its 51 percent stake in the national carrier (which in turn owns 51 percent of Rostelecom, the nation’s long distance monopolist), it is expected to set up a tariff-based system of access to Svyazinvest’s (and Rostelecom’s) infrastructure for licensed telcos of both Russian and foreign ownership. A major step in Russian telecom deregulation and a significant WTO ascension requirement, this would enable a range of non-facilitiesbased CLECs to operate in Russia. The government’s sale of its stake in Svyazinvest may happen as early as late 2004.

While technically this kind of deregulation would enable Russian VoIP carriers to develop into larger telecom operators, in practice this deregulation would enable well-funded ventures like Svyazinvest and Rostelecom to put up a good fight for migrating VoIP minutes by setting up VoIP subsidiaries. Also, these two entities are likely to tap foreign markets as participants seeking to service Russian-speaking customers abroad, much in the way the likes of Deutsche Telekom and SwissCom go after German- and Frenchspeaking customers living in the U.S.
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