FOCUS: Low penetration creates opportunities in Uzbekistan

MOSCOW, Feb 9 (Prime-Tass) -- Growth in Uzbekistan’s mobile services segment has accelerated in recent years, but the country’s telecommunications market in general is still far from being comparable to developed countries’ markets in terms of penetration. Uzbek telecommunications companies are now focusing on introducing modern technologies in the sector, which analysts say has considerable potential for growth.

Telecommunications services in Uzbekistan have developed at a comparatively slow pace, and the country is lagging behind Russia in terms of development by about five years. A quarter of the country’s households lack any kind of telephone, and the number of households with Internet access is below 10%. The share of broadband Internet connections in Uzbekistan is negligible, according to a recent review of telecoms and IT development in Uzbekistan that was jointly conducted by the United Nations Development Program (UNDP) and the Uzbek government.

Among the reasons for such a modest level of telecommunications development is the fact that “foreign investors, especially from Western Europe, are apprehensive towards all those Asian countries whose names end with ‘stan,’ which might be associated with certain specific traditional features typical of the region,” said one analyst who preferred to remain anonymous.

Nevertheless, Uzbekistan is the third largest country in the Commonwealth of Independent States (CIS) in terms of population with 27.4 million people as of October 2008, and ranks higher than its neighbors Tajikistan and Kyrgyzstan in terms of gross domestic product (GDP) per capita, which totaled $2,344 as of 2007, according to International Monetary Fund data.

“There are no major barriers to the development of the Uzbek telecom market, which can be characterized by its strong potential. The country’s population density is comparatively high, so it is not that expensive to cover Uzbekistan with networks,” says Renat Salikhov, a project director from J'son & Partners, adding that “many investors are familiar with the country and are ready to work in it; they are aware of how to deal with the conditions and local partners.”

Most of the foreign companies that have already entered the Uzbek telecommunications market have preferred to focus on mobile services. This market segment has demonstrated the best results recently, as compared to the fixed-line and Internet access segments.

In 2008, the number of cell phone users in Uzbekistan more than doubled, reaching 12.65 million customers. This annual doubling of the subscriber base has been recorded every year since 2005, according to the review conducted by UNDP and the local government.

“This segment is the most developed in the country, with a considerable amount of foreign investments and a high level of competition,” said Karen Srapionov, a senior analyst at Avesta Investment Group. “The average cost of cellular services in Uzbekistan is among the cheapest in the world, which has supported surging subscriber bases in the last four years.”

But despite that strong growth pace, mobile penetration reached only 46.8% as of late 2008, which is much lower than in most other CIS countries. For example, adjacent Kazakhstan had cell phone penetration of almost 100% in late 2008, said Kuanyshbek Yesekeyev, head of the country’s IT and communications agency. Russian and Ukrainian penetration exceeded 120% as of December 2008, according to a report from Advanced Communications and Media (AC&M).

As of July 2008, Russia’s MTS and VimpelCom held the leading positions on the Uzbek mobile market, with 46% and 29% of the market in terms of customers, respectively. Coscom, a subsidiary of Nordic telecoms holding TeliaSonera, served 19.5% of the country’s mobile subscribers, while CDMA operators Rubicon Wireless Communications (RWC), an Uzbek-U.S.-U.K. joint venture, and Uzbektelecom Mobile, controlled by Uzbektelecom, had 4.7% and 0.3% market shares, respectively.

The rolling out of third generation (3G) mobile services is one of the highest priorities for Uzbekistan’s mobile operators. In 2008, MTS and VimpelCom started commercial operations of their 3G networks, mainly in the capital city of Tashkent. In January, MTS’ subsidiary expanded 3G to five other cities. At the same time, Coscom has also started testing its 3G network and plans to start commercial operations in February.

“We expect the rapid growth of Uzbekistan’s mobile services to continue both in terms of subscriber base and quality,” Srapionov said.

Compared with the cell services segment, Uzbekistan’s Internet access market has shown much more modest results in recent years. The number of Internet users amounted to over 2.2 million people as of July 1, 2008, or around 8% of the country’s population, up from slightly over 2 million people as of the beginning of the year.

Of the total, only around 15,000 individuals had broadband Internet access as of July 1, 2008, and more than half of them had channels with a throughput capacity below 128 kilobits per second.

Wireless broadband Internet in Uzbekistan is just beginning to grow. There were only 68 Wi-Fi spots in the country as of the beginning of last year. Of the total, 50 spots were operated by Sharq Telecom and 15 were owned by Uzbektelecom.

Uzbekistan also has WiMAX networks. In particular, operator Super iMax started providing wireless broadband access via mobile WiMAX in the capital city of Tashkent in September 2008 and plans to expand its network throughout the country by mid-2010, investing $10 million to $15 million annually. The number of WiMAX customers in Uzbekistan amounted to over 1,300 people as of the end of 2008, according to estimates of J’son & Partners Central Asia.

Internet development is hampered to some extent by a low level of fixed-line services penetration, analysts say. As of the beginning of 2008, only 1.806 million households were connected to fixed-line services.

Uzbektelecom, which is 94%-owned by the government, holds leading positions on the country’s fixed-line market, and development of the fixed-line business will mostly depend on whether an investor comes in to run the monopoly.

The government plans to sell 49% in the company to a strategic foreign investor, said Srapionov of Avesta Investment Group. “The sale is expected to stimulate active development of the operator, which serves around 97% of long-distance and local fixed-line communications,” he added.

Presently, Uzbektelecom has rather modest plans to invest U.S. $30.8 million in telecommunications network development in 2009, with most of the funds going to the IP backbone line and regional networks, a spokesperson with the company said earlier.

That compares with a $27 million investment in an upgrade of the next generation network (NGN) made in October 2008 by another Uzbek fixed-line operator, East Telecom, in which Uzbektelecom has 15%. East Telecom is controlled by Korea Telecom, and Japan's Sumitomo has a 34% stake. The Uzbektelecom rival is aiming to provide services to mobile companies launching 3G services in Uzbekistan, as well as IPTV service to residential users country-wide.