Cablegate: Ukraine: Ukrtelecom Launches 3g Mobile Phone Service

VZCZCXRO5450
RR RUEHDBU RUEHIK RUEHLN RUEHPOD RUEHVK RUEHYG
DE RUEHKV #2889 3301200
ZNR UUUUU ZZH
R 261200Z NOV 07
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 4405
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE

UNCLAS KYIV 002889

SIPDIS

SIPDIS
SENSITIVE

DEPT FOR EUR/UMB, EUR/NCE, EUR/ERA
DEPT FOR EEB/CIP, EEB/CIP/BA/MSELINGER
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK

E.O. 12958: N/A
TAGS: ECPS BEXP EINT UP
SUBJECT: UKRAINE: UKRTELECOM LAUNCHES 3G MOBILE PHONE SERVICE
PROGRAM

REF: A) KYIV 1595, B) KYIV 4386

Sensitive But Unclassified. Not for Internet Distribution.

1. (SBU) On November 14 EconOffs met with representatives of state
fixed-line monopoly Ukrtelecom to discuss the November 1 roll out of
its 3G (third generation) communication services in six major cities
under the U'tel trademark. Igor Syrotenko, Ukrtelecom's Deputy
Chairman for Marketing and Sales, acknowledged launching the project
was expensive, but stated his company cut costs by building the new
network using the existing Ukrtelecom infrastructure. According to
press reporting, Ukrtelecom already has invested about USD 150
million in the network and plans to invest an additional USD 146
million next year. Costs mainly have been driven by the 600 base
stations Ukrtelecom plans to put in place across Ukraine's regions
by the end of this year. The large number of base stations is
needed because the technology's high frequency covers only a small
area.

2. (SBU) When asked about the current subscriber base for 3G
services, Syrotenko admitted that only about 500 customers had
signed up since the network was launched two weeks ago. According
to public statements made by Ukrtelecom Chairman Georgiy Dzekon,
Ukrtelecom hopes to add 500,000 new customers within the next two
years. Availability of appropriate handsets is a major challenge,
since only 16 to 20 percent of the handsets for sale in Ukraine can
use 3G technology. In addition, Ukrtelecom must get approval from
the Cabinet of Ministers for its marketing budget, which has been
difficult to obtain because the Cabinet remains distracted by the
recent pre-term parliamentary elections (ref A). An educational
campaign is planned and Syrotenko said the marketing budget would be
in the tens of millions of hryvnias (1 USD equals 5.05 hryvnias).

3. (SBU) Despite these problems, Ukrtelecom enjoys a monopoly as
sole provider of 3G services in Ukraine. (Note: In 2005 the
National Communications Regulatory Commission granted Ukrtelecom
Ukraine's first nationwide 3G license for USD 30 million. It has
subsequently denied licenses to Ukrtelecom's competitors - ref B.
End Note). Syrotenko told us that Ukrtelecom is in favor of
competition because it makes the company stronger. Ukretelecom
believes that 3G can also compete against existing mobile
competitors using older standards, since 3G uses the UMTS/WCDMA
standard, which provides higher quality service, such as fewer
dropped calls and clearer reception. According to Syrotenko,
U'tel's market share could reach 1.5 percent of the entire market.

4. (SBU) Lena Minich, U'tel's Director of Marketing and Consumer
Services, told EconOffs that U'tel is focusing nearly all of its
marketing efforts on Ukrtelecom's current customer base. According
to Minich, U'tel will attract its current fixed line and Internet
customers by offering bundled services or one-stop shopping. For
example, current Ukrtelecom customers who subscribe to U'tel will
receive special pricing and access to packages such as family and
friend calling programs and combined services billing. Minich
asserted that potential new 3G competitors would not be able to
compete with Ukrtelecom because they will not have direct access to
such an enormous customer base.

5. (SBU) Comment: It strikes us as a little far-fetched that
Ukrtelecom hopes to win 3G customers from its existing fixed-line
customer base, many of whom have never owned a mobile phone, rather
than target existing cell phone users, the logical first candidates
to switch to the more expensive and complicated 3G network. In any
case Ukrtelecom hopes to use 3G to re-capture a slice of Ukraine's
UAH 40 billion (USD 8 billion) mobile phone market, and to offset
losses from its fixed-line business. Ukrtelecom left the market
after its mobile subsidiary, UMC, was sold to Russian interests in a
murky deal under former President Kuchma. The monopoly desperately
needs to improve both its image and its profitability if it is to
finally be privatized, a goal that has eluded the GOU for nearly a
decade. Giving Ukrtelecom a 3G monopoly may have been a direct ploy
to prepare Ukrtelecom for privatization. Alternatively, the GOU
might spin off and sell only the 3G subsidiary if it acquires a
significant market presence. End comment.

TAYLOR

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