For some weeks now, I've been puzzling over a "fact" cited by news agency Bloomberg in a story on Google's (NASDAQ:GOOG) recent tie-up with Russia's No. 2 mobile phone provider, VimpelCom (NYSE:VIP).
In a May column reviewing the news, you may recall that I quoted Bloomberg as stating: "There are 134.7 million wireless subscribers in Russia, compared with a population of 143 million." In other words, 94 out of every 100 Russians owns and uses a mobile phone.
That figure is patently ridiculous on its face, as a little third-grade math can quickly demonstrate.
First, suspend disbelief for a moment and assume that every single able-bodied man, woman, child, and infant in Russia does indeed have a phone. Give that demographic 100% saturation. Assume that the only people who don't yet own phones were born under either the reign of Lenin, or Stalin, or earlier.
According to Russia's State Statistics Committee, such pensioners comprise 21% of the country's total population -- roughly 30 million persons. Subtract from this figure the 8.3 million persons Bloomberg says do not own phones. That still leaves 21.7 million Russian babushki and dedushki milling about the open-air markets, haggling over the price of a kilogram of potatoes, or whiling away the summer days sitting on courtyard benches -- yapping into their Motorolas all the while. It's a mental picture that anyone who has ever been to Russia will assure you is absurd.
For one thing, with the exception of those in cash-rich Moscow, domain of bread-and-circuses Mayor Luzhkov, pensioners in vast swaths of Russia are scraping by on a monthly pension that averages $50. For this segment of the market, spending one to four months' salary to buy a cell phone is simply out of the question -- leaving aside the cost of the service itself. Working-age Russians are a bit better off, but still short of affluent, with the average salary in the country (again, with the exception of Moscow) hovering in the neighborhood of $150 per month.
So who are these 134.7 million subscribers?
That's the question I've been pondering. First, I've reached out to my contacts living in or recently returned from Russia. Second, I've been poring over the facts and figures contained on the go-to website for all things mobile in Russia, sotovik.ru. Here's what I've dug up.
The people speak
I asked several of my contacts for a ballpark estimate on what percentages of the population they perceived as using cellphones both in Moscow and in the Russian regions. The answers were diverse. Unsurprisingly, young, upwardly mobile Muscovites were inclined to believe the Bloomberg figures, averring that essentially everyone they knew in the city, in their age group at least, owned a cell phone.
The provinces were a different story. Estimates ranged from as high as 70% penetration to as low as 5%, with most people guesstimating that just less than half the provincial market had been penetrated. Let's assume that the most optimistic number is correct, and that 70% of Russia's population outside the twin capitals of Moscow and St. Petersburg does indeed own cellphones. With 90% of the population living outside these two cities, that still gives us:
143.5 million x 0.9 x 0.7 = 90.4 million cell phone users.
Add to that the entire 15 million-person populations of Moscow and St. Pete, and we've got potentially 105 million cell phone users.
The experts' view
Then again, if you believe the cell phone providers, that number is still too low. While stopping short of the bloated Bloomberg number, the major cell phone providers do claim 127 million customers nationwide. The big three providers, Mobile TeleSystems (NYSE:MBT), VimpelCom, and Megafon, say they control 112 million of these; and smaller players such as SMARTS and TELE2 claim another 15 million.
Of course, these numbers would still put cellphones in the arthritic grasp of 14 million penniless pensioners, so they appear suspect. What we really need is an unbiased view. So we turn to Sotovik for some answers. There we learn that Russia currently has 91.6 million "active users" -- about 63% of the Russian population. This figure (which I still think a bit high) suggests that far from being nearly saturated, as Bloomberg suggests, there is still plenty of room left for further organic growth in the Russian market -- future growth in consumers' disposable income permitting.
The footnote
But if real market penetration is only 63%, where did Bloomberg get the idea that it's 94%, and where do the cell phone providers get off claiming 89%? The answer lies in a footnote to the numbers cited by Sotovik, where the agency defines the term "active user" thusly: an active user is a cell phone owner who "used cellular services at least one time in the last month." Sotovik further clarifies that "regardless of how many SIM-cards a user possesses . one user of several SIM-cards is counted as a single 'active user'."
Therein lies the answer to our dilemma. If Sotovik feels it must differentiate its method of counting cell phone users from the methods used by others, then those other data providers may be producing misleading numbers:
- Counting a single person who owns both a work phone and a personal phone as two cell phone users.
- Counting a single person who owns two SIM cards as two separate customers.
- Counting someone who switched from VimpelCom to MTS as a customer of each.
- Not striking inactive customers from the customer rolls.
The Foolish takeaway
What does all of the above mean to the individual investor who's contemplating investing in Russian telecom? I've got four suggestions for such a Fool -- two general:
- Although it's hardly an original thought, the dueling sets of numbers described above drive home the need not to believe everything you read. Just because "Bloomberg said it" doesn't necessarily make it true.
- And another well-worn truism: Follow the money. When a company with a direct financial interest in making itself look successful gives you a fudgeable number, assume it's been fudged until you've been convinced to the contrary.
And two actionable:
- Don't assume the Russian telecom market is saturated. Even the 63% market penetration suggested by Sotovik looks high to me. I suspect there's room for more growth.
- That said, if MTS and VimpelCom are again reporting 50%-60% subscriber growth at this time next year -- as they did at the end of last year -- don't take those statements at face value. Focus on less fudgeable numbers such as free cash flow instead.
In closing, let me expand upon Disraeli's famed observation. There are four kinds of lies: lies, damned lies, statistics, and Russian statistics. Take them all with increasingly large grains of salt.
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Fool contributor Rich Smith owns 0% of the companies named above. And you can take that to the bank.
