Main principles of phone sales in Russia

Myth about operator subventions

In Russia as against the majority of European countries, has formed an original market of mobile terminals, frequently western analytics and managers don't understand interrelations in it. The first and, perhaps, the main distinction is that operators of mobile communication in our country practically don't sell phones, in sale offices it is only possible to find small assortment. Operators explain the fact, that the trade of phones is not their profile business, they only provide communication. The rare exceptions are every possible actions when phones are bought from manufacturers by very low prices and are sold in complete with prepaid-contracts. The most appreciable similar event became the occurrence of Bee + boxes in due time, sometimes the device's part of the price was even paid by the operator. But subsidizing of devices on recognition of the majority of players was a vicious way as the cost of unblocking of such phone was much lower, than its price, and there is a mass of opportunities for granting other's passports. Impossibility to check sales and also to keep the subscriber in network by grant phone, have excluded this way of development in Russia.

In protection of the fact, that in Russia operators subsidize sales of low-end models, is given an example of MTS Company and inexpensive phones intended only for work in its network. In reality the low price of devices is caused by the fact, that they are SIM-blocked, and the manufacturer delivers them by low price, the operator does not subsidize them.

Cumulative terminal sales through GSM-operators are comparable on volumes with not the biggest distributor. Thus operators demand special attitude to them from manufacturers, better conditions of deliveries. There are many reasons for that, starting with that all new models of devices are tested in their networks and final certification depends from these results.

At the first stage of development of mobile communication in Russia operators have been compelled to sell terminals, as for that moment suppliers did not exist, the market was in index point. Today the market of terminals is generated, and operators play by no means the first violin on it. They have no influence on the whole terminals market, but only on low-price segment and only regarding one-two models.

At the same time CDMA-operators have been put in a little bit other conditions, officially mobile CDMA-terminals are not subjected to certification; they are outside of the law. Nevertheless, CDMA-operators successfully sell such devices, otherwise, how they would involve subscribers in absence of phones? Volumes of the CDMA-equipment market are very insignificant, it is formed of two components. On the one hand, it is the market of terminals replacement, but here plays a role not so much moral, but technical obsolescence of phone, in most cases its breakage. The other factor is allocation of number capacities for CDMA-networks, as a rule, their size is known for 2-3 months that allows operators forming purchasing policy. As a whole CDMA market is in embryo, its development needs non-technical, but the political decision on the part of the state authorities. If only CDMA-networks start to develop in our country without the state control, formation of the free CDMA-terminals market will become possible, now it is rather closed, and its volume is limited. Here the first places occupy operators and афилированные companies.

Distribution

So, we defined that operators do not subsidize phones sales, and in the market of terminals do not show practically any activity. The primary contribution to sales of devices is brought by distributors. The biggest distributors-companies have the official status and work directly with manufacturers, more precisely, with its representative offices in Russia. Within the limits of this material the questions of pricing, manufacturers’ encouragement of official distributors do not interest us, we tell only about the system of the distribution market.

So, big companies buy phones directly from manufacturers and receive minimal prices on them. But the cooperation is mutually advantageous, so, distributor-companies not only receive phones by low prices, but also undertake to choose their certain number for maintenance of the manufacturer's sales. Different manufacturers variously concern to questions of distribution, someone aspires to work with one-two companies, unloading the office from registration of the greater number of small transactions, someone, on the contrary, involves number of the companies, reducing for them the general rod of necessary sales. In any case, all these companies are distributors of the first order, they have the minimal price level on phones. Until recently only SonyEricsson company could make exception, working directly only with Dixis. Certainly, it is a big retailer, but the monopoly position has allowed it dictating the prices for official devices to the companies of the following echelons and in result to the whole market. The followed expansion of the list of official Sony Ericsson distributors in Russia at the end of 2002, the beginning of 2003, has instantly affected the market situation, the average price of devices in retail networks has fallen up to a comprehensible level. The resulted example is not typical, but it has taken place in the history.

Manufacturers do not aspire to expand the list of their distributors at any price as it cannot affect the general sales radically, and the increase of partners number sharply increases the front of works. It is possible to assert with confidence, that for the companies from the top five the list of distributors by and large is generated, changes are possible in case of leaving the market by some players or occurrence of atypical situations (for example, the strong retail player in all regions that is not real now).

The companies pretending to distribution, as a rule, are sent by the manufacturer to one of its partners, thus a low price level is guaranteed for it, lower than if it would directly address to this partner. Some companies applied this dodge several years ago, I do not presume to judge how effective it is today.

The price for phones in Russia is formed by enough simple way. The manufacturer appoints the prices on which devices are bought by retailers. As the practice shows, the suggested prices are comparable with European or are lower, by such way influence of the grey market is compensated as much as possible. The game with prices begins during the following stage, when the companies try generating the adequate offer corresponding to the market realities. As the number of official retailers is insignificant, also the difference in the prices cannot be striking, in general it is possible to explain it a time log between deliveries and various discounts at purchase. Official distributors can have and do not have its own retail networks, at their presence the part of devices is realized in them, bringing the biggest income from all possible in the market as the margin turns out maximal.

The greatest part of price games and in any measure wars falls already on the share of secondary retailers as for them the margin sinks and begins the fine tuning of the prices under the amount of available phones, under their market prospects and etc. The maximal number of the companies is concentrated in this part of the market, they also besides wholesale can be engaged in retail. From the amount of the companies submitted in this segment, it is possible to draw a conclusion that the competition is high here, and it is really so. That factor affects also, that pressure upon the companies of the second echelon and their pricing exert both retail, and wholesalers.

For regions it is possible to note the existence of one more layer, wholesalers of the third echelon. In large cities where there is a strong retail, they are absent.

Actually now it remains to tell about retail. The companies which have "communication offices" for mobile phones sales define the prices for sold devices, proceeding from the price of purchase and their own appetites. In most cases, the average price of the offer is comparable with the prices in competing retail points. Those, who have higher prices, overestimate them specially as do not expect new deliveries in the near future, or earn money by something else.

Appears the picture of relations in the market. The retail sells devices of all manufacturers, buying them from distributors of the second or third echelon. In their turn these companies accumulate in themselves deliveries of official distributors from various manufacturers. So it has developed, that now official distributors work on average with two, three manufacturers, they cannot capture all. It affects on assortment, they are compelled to gather it additionally from the colleagues on the market, in exchange for phones of "their" manufacturer. The second way is the wholesale purchases which are not providing an exchange under the favourable prices. Both variants have the right to exist.

At exchange of phones the companies go on it for formation of assortment in retail sale points, on phones of the "another's" manufacturer is put the smaller extra as result, the final price all the same looks attractive to final buyers. To generate due to exchange the offer for wholesalers, i.e. the second echelon is difficult and unnecessary. It is reached by purchases of the big parties (in concepts of the companies of the second echelon, but smaller in comparison with the first) as it is possible to receive the price on them, close to that have official distributors . Close, but not comparable at all, and in fact some manufacturers realizes a policy of encouragements, plus in part finances the advertising companies that cannot receive the company of the second echelon. So, it turns out, that formation of assortment plays a role for the companies of all echelons, for the first it is not expressed so obviously, they presume themselves to concentrate on the most running marks.

The role of distributors of the second echelon also consists in that they accumulate deliveries from different companies, plus frequently due to the greater competition carry out more flexible policy. Sometimes it is poured out as grey purchases, around of official representations. So, in the country gets the equipment by attractive prices, but intended for other countries. The companies of the second echelon risk their money, working with such phones, in any measure it gives them a side benefit in competitive fight and consequently the risk looks justified.

In Russia as against all other markets there are besides the companies a lot of people which deliver phones and sell them, so to say privately. To explain this phenomenon it is possible by the lack of the offer in regions and the high prices, absence of rare models. To consider seriously such kind of sellers is not worthy, at normalization of the market situation they will disappear, this is time phenomenon. Such sellers work not only in territory of Russia, but in part form also the grey market, delivering in suitcases devices from United Arab Emirates and other countries.

Conclusions

Channels of distribution in Russia are organized the classical way, there are no any differences from world practice, except for absence of operator grants for phones. The high cost of phones for the end user is not perceived as nonsense, people have got used to such state of affairs. For some manufacturers there are problems in wholesale channels, they follow from the organization of work, price policy, but in no way the structure of the market. I hope, that this material has told a little what occurs in the market and why. I admit fairly, that did not set as the purpose to describe maximum fully the processes proceeding in the market, it's only rough and approximate mould, but it is made so, that you could understand how the market works. Consider the resulted model as conscious simplification.

Eldar Murtazin (eldar@mobile-review.com)
Translated by Andreas Von Horn (andreas@mobile-review.com)

Published — 29 April 2003

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