Market Trends

Features of the Telecommunications Market

The telecommunications market in Kazakhstan generated a total revenue of KZT 598 billion in 2012. The most dynamic market sector is the market for mobile services; the number of subscribers in this market has increased by 84% over the past four years, from 11.8 million in 2009 to 21.9 million in 2012 (as evaluated by the Company based on the 1-month activity rule). The mobile voice communication penetration rate in Kazakhstan was 170% at the end of 2012.

The mobile market in Kazakhstan is predominantly pre-paid. On December 31, 2012, about 99% of subscribers used the Kcell pre-paid system and advance payment system. The most popular payment methods are payments through electronic payment terminals, pre-paid payment cards, payments via the Internet or in mobile operator stores.

The mobile market in Kazakhstan is primarily a voice services market. Despite a declining trend observed in recent years, the share of mobile voice traffic in the total revenue of the mobile communications market is still high, reaching 81% in 2012 (87%, 86% and 82% in 2009, 2010 and 2011, respectively).

Kazakhstan’s mobile revenue increased at a compound annual growth rate of 11% from 2009 to 2012, and reached KZT 331 billion in 2012 against KZT 242 billion in 2009 (according to reports published by mobile operators in Kazakhstan).

The average revenue per minute of use (ARMU) at Kcell was KZT 5.2 for the year 2012, while for the year 2009 it was KZT 14. This dynamics reflects the highly competitive operating environment.

Kcell has three main competitors in the mobile telecommunications market in Kazakhstan: VimpelCom, Tele2 (MTS) and Altel. Kcell maintains its leading position, accounting for 46.9% of the market in terms of subscribers in 2012.

Kcell’s average revenue per user (ARPU) for voice services in Kazakhstan was KZT 1,015 in 2012; it was KZT 1,298, KZT 1,363 and KZT 1,227 for 2009, 2010, and 2011, respectively.

Mobile broadband access (BBA) is currently not popular in Kazakhstan compared with other markets. In 2012, average monthly data traffic for the Company was about 77 MB per user, which is currently about 3 times lower than our estimates of the same indicator for mobile operators in Russia. However, compared with 2009, this figure increased for Kcell by a factor of more than 18 times. These figures, together with current active spread of smartphones and similar mobile devices, indicates excellent prospects in this market. This prognosis is also supported by the relatively low penetration rate of fixed broadband in Kazakhstan in 2012, which remained at less than 10% of the population and about 30% of households; constructing the necessary infrastructure for fixed broadband requires more significant monetary and time costs than developing the existing mobile data network. The Company’s average revenue per user (ARPU) in the data segment increased by 9.2% in comparison with 2011, reaching KZT 131 in 2012. This indicator grew by 36.5% relative to 2009.

Industry Regulation

The Ministry of Transport and Communications (MTC) and the Agency for Competition Protection (Competition Agency) are the primary regulators for the Kazakhstan mobile communications market.

In 2000, the Competition Agency included the Company in the State Register as a mobile service provider, as Kcell owned over 35% of the mobile services market for the country. The Company’s operations are therefore under the supervision of the Agency with respect to compliance with the Competition Act, and preventing abuse of its market dominant position.

In 2011, the MTC set maximum tariffs for in-network calls, and in February of 2012 set them for out-of-network calls and data services. Interconnection rates are currently determined between operators on a bilateral basis, while the regulatory authority reserves the right to make recommendations to operators. In addition, the MTC is examining the possibility of mobile number portability (MNP), which allows subscribers to retain their telephone number when changing operators.

Mobile virtual network operators (MVNOs) are not provided for under Kazakhstan law and, to the Company’s knowledge, no requests have been submitted to the MTC requesting the regulation of MVNOs.