Megafon introduces the first high-end LTE smartphone but challenges in leading LTE market remain

At end- 4Q12 Megafon announced the launch of high-end Samsung GALAXY S III LTE- smartphone priced at RUB 29,990 (US$989). This was a predictable and well planned move suggesting that the operator wants to maintain its first mover position in the LTE segment, helping to increase its brand equity and improve market share.

Megafon has tried to differentiate itself from the rest of Big3 by being the first and most aggressive operator to roll out its LTE network before its rivals. The operator was the first to have launched 4G network in Moscow, where high demand for fast data transfer speeds prevails and introduced LTE in 22 cities by the end of 2012. In its previous branding messages Megafon was also focusing on being the country’s innovative leader that introduces the most advanced technology across Russia. The operator was the first in Russia to launch a GSM 900/1800 network. It then became the first operator in the country to launch its 3G network for commercial use. Clearly, so far, Megafon is using LTE as a marketing tool to cement its image as innovation leader in the country.

MegaFon must reconsider its LTE pricing and device strategy

Before the introduction of Russia’s first LTE smartphone, Megafon was mostly focusing on increasing its number of mobile broadband users in order to generate data revenues. MegaFon has priced its 4G services at a premium to 3G, establishing a monthly tariff of RUB1,590 (US$52) for 30GB of data and by giving unlimited download speeds for 4G, against RUB390 for a basic 3G package that includes 3GB of data and a maximum download speed of 3Mbps.

The operator has used price differentiation as a way to shift heavy data users to 4G and at the same time offload the strain in terms of data traffic that its 3G network is has taken on. The operator also increased 3G prices by 10% to encourage customers to migrate to 4G tariffs.

But as the evidence from other European markets shows, the majority of consumers are not prepared to pay the premium for LTE services. In fact, the operators that have charged no premium for access to LTE over 4G, promoting enhanced experience for the user, have succeeded in attracting more LTE users than operators that charged a considerable premium.

MegaFon’s challenge is therefore to make LTE tariffs more affordable, to attract users with different income levels to get more advantages from the mobile Internet. Megafon should also consider offering LTE device subsidies, as the high price of LTE devices might discourage customers from moving to LTE.

MegaFon should focus on introducing more affordable LTE smartphones

The lack of availability of smartphones was posing a big threat on Megafon’s LTE development strategy. According to the data from US market, LTE-capable smartphones can help bring about an increase in average monthly mobile data usage, thereby offering the opportunity to increase data revenues. By introducing its first LTE smartphone Megafon is trying to make a headstart on attracting heavy data users to its network, and subsequently increase its data revenues. However, because there are no handset subsidies in Russia, LTE smartphone adoption would not be as high as it is elsewhere in Europe. High-end LTE smartphones are beyond the financial reach of most of Russia’s population, and Megafon must work on introducing more reasonably priced devices to the mass market and should also consider offering cheaper own branded LTE handsets. Alternatively, the operator must work on finding ways to subsidise or provide leasing schemes for expensive LTE smartphones.

Megafon should beware of competitor activities on the LTE front

Another threat for Megafon could appear from wholesale LTE operator Scartel working under Yota brand which recently announced its plans to launch own branded smartphone in 1Q13. So far Scartel was only focusing on providing LTE mobile broadband services and had around 700,000 customers at end 3Q12, most of which were migrated from WiMAX. Although Megafon has an MVNO partnership with Scartel, sharing its LTE infrastructure, the fact that operator is planning to launch a smartphone device, could change the competitive dynamics and will give Scartel an opportunity to enter the wireless market. The fact that Scartel already has around 700,000 LTE broadband subscribers will allow the operator to use the existing customer base to offer LTE smartphone subscriptions or provide joint offers combining LTE data and voice.

So far, the leading mobile operator in Russia, MTS has not revealed any plans to launch LTE enabled smartphone but this will likely to happen rather soon, as the operator closely monitors competitor activities in the LTE arena.

MegaFon should increase customer awareness of the LTE technology

MegaFon needs to put considerable effort into increasing customer awareness of LTE and continue its marketing and advertising efforts to promote LTE offers. The operator has already spent a significant amount on promotion and will have to spend considerably more to raise awareness of the technology among its customers.