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1

Development of BBA Market in Moscow

Alexander GorbunovVice-President for Strategy & Development, Comstar-UTSConference «The Future of Fixed Communications» 24 May 2007, Moscow, Marriott Grand Hotel

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Regions + International

Comstar: General Information

Revenue: $47M Alternative operators

in 5 RF regions Foreign companies

(Ukraine, Armenia, Greece)

Revenue: $236 M Alternative operator Major player on corporate

market

Corporate Elite apartment

houses

Revenue: $802 M Traditional operator 4,3 M lines

Operators Corporate Individuals

Revenue: $153 M Dial up access ADSL #1 in BBA

SMEs Individuals

Moscow and Moscow region

Comstar is a universal operator generating the revenue of more than $1 blnand having a strong position in the Moscow market

25% A holding with controlling stock in 7 IRCs and Rostelecom

LSE: CMSTFree float 35%capitalization:

3bln.+

51%

67% 52%

Mobile

DLD/ILD

53%

50%

3

Comstar: Main Elements of the Strategy

1

2

3

45

6

7

Restructuring

Integration

BBA

MGTS Modernization

Regional expansion

Convergence

Svyazinvest

Making installation, setting up and maintenance procedures more simple

Bundled offers with tariffs for voice services

Enhancement of Public DN core

Pilot solutions in respect of combined network for voice and data

Development of ADSL

Combined offer (IP-TV)

Use of wireless technologies to develop BBA solutions for corporate customers and high-end individuals

Getting a synergy effect from ADSL development projects in Moscow and regions

Development of unique market offerings based on ADSL

Optimization of sales andmaintenance channels

BBA is a strategic priority of Comstar development and concernsmost of strategic initiatives

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Comstar: Position on the Moscow Market

other(>500 companies)

Golden Telecom

RTC

other(> 200 companies)

RTC

Corporate Operators

$0,86 $2,16 $1,18

Moscow market of fixed communications (Y2006) - $4,2 bln

0%

20%

40%

60%

80%

100%

Individuals

MG

TS

• Three tariffs• BBA growth• DLD/ILD market liberalization

• Growth in SME segment• Increased effectiveness

• New regulatory rules • Tariffs

Comstar50%

other

RTC

Comstar Group of companies is the leader on a fast growing market of services for individuals

Corporate

Operators

Individuals• MGTS: 3,8 M lines• Insignificant share of

DLD/ILD• Comstar-Direct: >400K

ADSL lines• New tariff structure

(possibilities for bundled offers)

• Merger of 3 leading alternative operators

• Comstar-Direct: ADSL for small businesses

• Comstar and MGTS services are regulated

• Growth together with market growth

Comstar:27% 22% 7%Growth 2006

Comstar30%Comstar

19%

Data source: Direct INFO

18%

5

2003 2004 2005 2006 2007 2008 2009 2010

3,8 3,8 3,9 3,9 3,9 3,9 4,0 4,0

0

1

2

3

4

5

Households (mln)

Actual Forecast

2003 2006 2010E

PCs penetration

Internet connections (% PC)

BBA (% Internet)

41% 69% 75-80%

66% 68% 78-83%

11% 60% 92-97%

~1,0 M

2,6 M

2007 is the year of the most significant growth in the number of BBA users CAGR 2006-10 (19%)

Growth drivers:• PCs penetration• Internet connection• Replacement of dial-up access• Internet-content development

- without PC- PC without Internet-Dial Up- BBA

BBA Market in Moscow

BBA market in Moscow goes through tremendous upgrowth on the wave ofincreasing number of PCs and technologies

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BBA: Main Questions for the Operator

2007 2008 2009

1. How to increase market share?

3. What will happen to price and speed?

2. How to develop TV?

4. How to develop wireless BBA?

5. What supplementary services can increase ARPU?

6. How to improve subscriber loyalty?

BBA market evolution puts a number of key strategic questions beforean operator

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1: How to Increase Market Share?

2007 2008 2009

1. How to increase market share?

3. What will happen to price and

speed?

2. How to develop TV?

4. How to develop wireless BBA?

5. What supplementary services can increase

ARPU?

6. How to improve subscriber loyalty?

• What determines a market share?• What is the market share dynamics indicative of ?• How to estimate the market share correctly?

• It is very difficult to determine the exact market share, estimates of different analysts differ considerably• Different subscriber accounting policy (in respect of accounting of non-paying subscribers) makes the direct comparison of operators’ announced data approximate, all operators have a natural tendency to maximize their indicators • The share of “double counting” increases, the share of users who use several providers grows (many users use dial-up access and Wi-Fi as a back-up Internet access)

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~400

~350~200

~200~100

4,5

4,4 2,9 3,6

1,4 2,62,3

2,0

2,8

4,2

Subscriber Migration Dynamics

Akado, Corbina,CenTelHome networks

Abandoned

New Internet users

Dial-Up

Subscriber migration dynamics, thous. (March 2007, estimated figures)

In-housemigration

At present the main drivers for subscriber base growth areconnection of new subscribers and conversion of dial-up access subscribers, the mains factors influencing the choice of provider are price and convenience

Source: Polling ofsubscribers in sales offices (April 2006)

Reasons for choosing a provider (Comstar-Direct)

1

2

3

4

5

6

Price

Convenience

Speed

No other provider

Availability of «double-play»

Recommendations

9

Know by name Consider to be a leader

Have experience of use

Use now

92

85

39

65

33

9

44

21

9

34

17

9

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100% Comstar-Direct

Corbina

Akado

Centel

Golden Telecom (WiFi)

Mostelecom

Perception of Operators

Source: Polling of BBA subscribers (April 2007 )

Competition grows. Comstar-Direct maintains the leading positions. From among competitors Corbina is definitely perceived as player №2

Share of existing BBA users

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Attraction and Retention (Comstar-Direct)

As a market leader, Comstar-Direct can target different segments in order to increase the number of subscriber connections and reduce churn

Attraction Retention

• Automatic increase of speed

• More mild policy in respect of subscriber disconnections

• Programs of more active work with debtors

• Development of supplementary services

• Analysis of reasons for churn and development of actions to eliminate them

• Programs, motivating transfer from Dial-Up

• Programs with large retail networks and PC manufacturers

• Direct mail and direct calling

• Promo-actions with companies of the group

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2: How To Develop TV?

2007 2008 2009

1. How to increase market share?

3. What will happen to price and speed?

2. How to develop TV?

4. How to develop wireless BBA?

5. What supplementary services can increase

ARPU?

6. How to improve subscriber loyalty?

• What is Internet+TV service potential?• How to form pricing for TV services correctly? • What are an IPTV project economies?

• Income level in Moscow allows the majority of BBA users to connect pay TV services; however, this does happen because of reasonably great supply of open channels, numerous alternative leisure opportunities are complex/costly connection technologies. IPTV is not the best technology to provide traditional TV (without Internet) and is in low demand among consumers• IPTV gives consumers more interactive TV novel to user

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Existing Potential Expensive TV Inexpensive TV

33%34%

30%

35%

0%

10%

20%

30%

40%

07/06 10/06 01/07 04/070

100

200

300

400

BBA Users

0%

10%

20%

30%

40%

Pricing Scenario

31%

34%

32%

29%

Subscriber Base Structure At Month End

Availability/Interest inPay TV

Available at home

Intend toconnect

Internet + TVPackage Selection

Trends in SubscriberBase

Archived plans

Internet

Internet + TV

Double-Play Potential Among Comstar-Direct Subscribers

Statistics and polls show 30-35% of subscribers interested in Internet + TV package, this share not varying noticeably

with the price for TV package

13

Current TariffPlans

Archived Tariff Plans

Internet +TV

1.6%1.2%

5.6%

2.5%

0%

2%

4%

6%

Internet +TV

-30%

-55%

Churn (April 2007)

Double-Play Economics

Provision of double-play Internet+TV service changes insignificantly subscriber marginal yield, but improves noticeably its loyalty to operator and generates

potential for VoD growth

Economics

• Additional ARPU comparable to license fee payable to content copyright holders

• Leased STB installation on soft terms

• Additional dealer’s fee

If Loyalty and Growth PotentialExcluded, VOD Economics Lose

to Pure Internet Economics

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3: What Will Happen to Price and Speed?

2007 2008 2009

1. How to increase market share?

3. What will happen to price and

speed?

2. How to develop TV?

4. How to develop wireless

BBA?

5. What supplementary services can increase

ARPU?

6. How to improve subscriber loyalty?

• What speed level subscribers regard as acceptable/optimum?• Are subscribers willing to pay for speed?• Is there a business case for speed increase?

• Vigorous growth of BBA market has already led to an increase in average speed up to 1 Mbps, the level currently regarded as sufficient to the majority of subscribers• Massive investments made by operators in the solutions allowing to offer higher speeds. At the moment, the majority of households have several providers to choose from.• The number of operators that can co-exist profitably on the market and ensure ROI depends on competitive pattern.

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Factors Determining Consumer Behavior

100Мбм

3-10Mbps

1-3Mbps

512kbps

<512kbps

Do notknow

100Mbps

1-3Mbps

512kbps

<512kbps

Do notknow

Existing BBA

Users

0%

20%

40%

60%

80%

100%

<500

500-700

700-1000

1000+

<500

500-700

700-1000

1000+0%

20%

40%

60%

80%

100%

Potential BBA

Users

What speed meets your currentneeds?

What amount you spend/willing to spendon BBA (rubles/month)?

Existing BBA

Users

Potential BBA

Users

85% of consumers are satisfied with speed up to 3 Mbps, at that the majority of users are ready to spend 20-30$/month, yet would like to reduce these payment if

possible

16

5

10

20

50

100

0.1 0.2 0.5 1 2 5 10 20 50 1005

10

20

50

100

0.1 0.2 0.5 1 2 5 10 20 50 100

Consumer Choice and How Price/Speed Influences It

Choice among existing market offers

«Too expensive»

«Tooslow»

«Too expensive»

«Tooslow»»

Choice among market offers with reduced prices

Downstream Speed

Planprice ($/month)

Downstream Speed

Plan price ($/month)

• Irrespective of tariffs speeds up to 1 Mbps are considered to be

too slow

• With tariffs reduction ~50% prefer to reduce charge and maintain the speed• 30% reduction of price results in 20% reduction of ARPU

The most salable product - 1Мbps, further reduction of price has a negative impact on ARPU

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?

Market Evolution Scenarios, Moscow

Increase of speedPrice reduction

Competition due to supplementary services and customer care.

«Price war»• Encouraging connections while maintaining ARPU• Transfer from low speeds (up to 1 Mbps) to optimal ones (1-2 Mbps)

• Competition due to supplementary services, convergence/bundled offers

• Aggressive price offers at high speeds from aggressive emerging competitors• Forced reduction of prices for 1-2 Mbps by Comstar-Direct

Fast market growth(subscribers,revenues)

Maintenance of revenue growthModerate growth of subscriber base

Fast growth of subscriber baseStabilization/fall in revenues

Market evolution scenarios will depend on rationality of emerging competitors’ pricing policy

2005-2007

18

10% 20% 30% 40% 50% 0

5

10

15

20

25

30

10% 20% 30% 40% 50%

Comstar-Direct

Comstar-Direct

Subscribers- % of flats in a house (new entrants)

Абоненты - % квартир в доме(new entrants)

RatioCapex/monthly ARPU (times)

RatioCapex/ monthly ARPU (times)

Market evolution scenarios, Moscow

With a current ARPU level, the operators investing in FTT should connect 25%-30% of households in a building, to recoup theirs investments.

• Payback of new entrants projects largely depends on achievable penetration

• «Unsound» price competition afflicts economically all operators, but is most painful for those with low penetration rates.

Competition through additional offerings and customer care «Pricing war»

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ADSL penetration into homes.

As for FTT investment, Comstar-Direct has an advantage of selective approach to houses with a large number of ADSL subscribers

2,1 3,2 6,2 7,4 4,6 2,4

24.5%

17.2%

12.2%

8.0%

4.6%

1.7%

0%

5%

10%

15%

20%

25%

30%

Quantity of houses with 50 to 500 MGTS numbers (‘000)

Current penetration ADSL (%)

ADSL FTTx

• 100-150 $ per subscriber• Individual access • Speed up to 6 mbps for 90% of users• Scaleable CAPEX

• 40-50 $ per household regardless of penetration• Speed up to 30-50 mbps• HDTV option

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4: How to develop the wireless broadband access?

2007 2008 2009

1. How to increase market share?

3. What will happen to price and speed?

2. How to develop TV?

4. How to develop wireless BBA?

5. What supplementary services can increase

ARPU?

6. How to improve subscriber loyalty?

• Who will be the key players on the wireless broadband market?• Which technologies best suit to different segments (WiMax, WiFi, 3G)?

• Cellular operators obtained licenses for 3G services and intend to actively deploy their networks as early as this year 2007.• Mobile WiMax is expected to appear in 2008-2009, likely to become a new breakthrough access technology

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16-20 21-25 26-30 31-35 36-40 41-45 46-50 <600 600-1000 >1000

39%

25%

32%

22%

16%19%

8%

22%

17%

34%

0%

20%

40%

60%

80%

25% 16% 24% 16% 23% 19% 5% 21% 9% 23%

Laptop

PC+Laptop

For BBA users

Awareness of WiFi technology

Age Revenue ($/person)Interest in mobile access from notebook (% of owners)

Surveys show:wired&wireless Internet access is a hit package demanded from integrated operator.

Basis for BBA growth

High penetration of notebooks breeds interest in having a wireless access as well, seen by many as a matter-of- fact extension to wired access.

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10 MB

100 MB

1 GB

10 GB

100 GB

10 20 50 100 200 500 1 2 5 10 20 50 100

Average traffic per active user (end of 2006)

Downstream speedkbps mbps

Dial-Up

EVDO-CDMA

GPRS

ADSL (unlimited)

ADSL (traffic)

20$ (0,2c/MB)

10$ (0,5c/MB)

20$ (7c/MB)

5$ (20c/MB)

New level (wired)

Wireless level

Current offerings: wired and wireless access

The take-up is driven by speed and price, and in both theses aspects the wired technologies are lagging seriously.

Experience learns: - Consumers tend to use all inclusive minutes - Fixed tariffs became «unlimited», price difference is more than 10х

Source : Comstar assesments

Old level (wired)

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ADSL Wi-Fi Wi-Max

Wired Nomadic Wireless

Access еconomics:

Wireless access technologies in Comstar

Different technologies vary a lot in terms of access cost and will coexist as complementary. WiMaх will potentially surpass 3G in the field of wireless

access for laptops

• 100-150 $ per subscriber • Individual side• Speed up to 6 mbps for 90% of users •Scaleable CAPEX access • Cost of access ~0,05 c/MB

• 500-600 $ per hot spot• Shared access (multiple users)• Speed of 1-2 mbps for users• Effective when connected via ADSL • Cost of access ~0,5 c/MB

• 70-150K $ на BTS• Shared access • Speed up to 0,5-1 mbps for most users• Scaleable access СAPEX• Cost of access ~5 c/MB

Cost-effective for:

•Typical Internet user with •average income level

• Public places(HoReCa)

• Access anywhere as«premium» service.• Alternative access

WiMax vs. 3G: - Comparable economics in the network part- Constraints in roaming and mobility + Integration in onechip with WiFi+ High level of penetration intolaptops (in longer run)

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0,01 c

0,1 c

1 c

10 cWiMax

WiFi

10 GB1 GB100 MB

15$

5$

5$2$

3$

Monthly usage

Cost of access (per MB)

Wireless extension to ADSL

Express cards to pay for access on a by-session basis.

ADSL

Future access models

25$

FTTx

Viewed by typical user all three technologies should coexist (due to a strong difference in cost of access)

«Common» subscriber :• WiMax outdoors• WiFi (where possible) as cheaper option

«Easy» subscriber :• By-session access• No need for special equipment

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Typical user of Comstar (2010)

Comstar-Direct brings freedom, the Internet and direct access to new avenues.

Home WiFi modem

ADSL

WiFi network in public places

Comstar WiMax city-wide network

~15$/month

~5c/MB

~1$/hour

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Investment story of Comstar in Moscow

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

1

2 3 4 5 6 7 8 9

2003 2004 2005 2006 2007 2008 2009 2010 2011

Voice

ADSL

Revenues from residential (as illustration)

2003 2006 2011 2003 2006 2011

2003 2006 2011 2003 2006 2011

2003 2006 2011 2003 2006 2011

3,8 7,4

0,36

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Subscribers (M) ARPU ($)

• 2%/ up per year • Steadying

• Higher bit rate and service activation

• Penetration up

• Equipment penetration

• Growing use

Voice

ADSL

WiFi/WiMax

х

х

х

• WiFi (and WiMax) has low entry barriers, allowing an explosive growth in users and usage volumes.

New services

Wireless access opens new potentialities, enabling further growth in total revenues from residential users.

WiFi/WiMax

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5-6: Questions for mature market

2007 2008 2009

1. How to increase the market share?

3. What will happen to price and speed?

2. How to develop TV?

4. How to develop BBA?

5. What supplementary services can increase

ARPU?

6. How to improve subscriber loyalty?

• More revenues and loyalty are produced by services “tied to operator” and not existing on their own in the Internet.• There is no one “catch-all” service, different subscribers use different services.• Most services have impact on loyalty and sign-up rates at the same time.

Operators with largest customer base will evidently benefit the most fromdevelopment of additional services.

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MAIN CONCLUSIONS

• The market share presently depends on subscriber acquisition efficiency in broadband and conversion of dialup subscribers along with efficiency of retention program. Data showing market share are altered by different accounting policy and double counting.

• IPTV is an additional service for a third of subscribers, significantly strengthening their loyalty.

• A mass BBA consumer is wiling to pay up to 20$ for bit rates beyond1 Mbps, and further price-cutting is most likely to bring down ARPU and deteriorate economic conditions for all operators present on the market, affecting most the FTT operators x

• The BBA market will generate a new growth wave. ADSL, WiFi and WiMax are complementary, enabling operators to offer the best ratio price/quality to subscribers

• Operators with the biggest customer base will have a vital competitive edge in development of additional services when the market comes to maturity.