Comments made by Igor Kungurov, lawyer of S&K Vertikal in an article titled “Mobile operators are willing to subsidize loyal customers”

9 December 2011

TelecomDaily questioned mobile operators, vendors and lawyers, and the question was formulated something like this: “Are there in Russia any preconditions to market cellphones using the phone subsidy model? The topic has been in the air for years, while competition in the market is getting increasingly tougher, which makes domestic cellphone market look similar to Western markets.

Cellphone subsidies is a common practice in USA and the European countries, where buyers paying symbolical amounts for the cellphone as such undertake to use the SIM-card of specific mobile operator during a specific period of time. Such subscriber is charged monthly fees not below the level specified by their mobile operator. In Russia this sales model is hindered by lack of statutory instruments, which makes buyers pay the full price of the cellphone, and by operators discrediting economic validity of such model in the context of domestic market.

Russian mobile operators made first attempts to sell subsidized cellphones already in the early 2000s, when MTS (within the contract with Sitroniks company) tried to start making and selling cellphones of domestic manufacture with under operator's brand. However, the initiative failed, while “Vympelkom” and “Megafon” did not even attempted to repeat competitor’s experience. Operator branded cellphones offered at dumping prices reappeared in Russia almost ten years later. For instance, this March “Vympelkom” launched their branded cellphone “Beeline А100” priced at 99 roubles. This telephone was initially priced at 850 roubles, however, in the context of promotional offer, the price was cut down to 699 roubles, and 600 of which were credited to subscriber's account.

However, first of all, when it comes to cellphone subsidies in Russia, we are facing legal uncertainty regarding the issue. According to Yegor Svechnikov, a lawyer in the law firm “Yust”, seemingly, one may conclude that in this case the antitrust law is violated by pressing goods (i. e. a cellphone) on a buyer, which the latter has no interest in. At the same time, “Competition Law” (paragraph 3, part 1, article 10) stipulates that cellphones may be sold to customers as part of subsidization contract, if there is a technological or economical justification of the transaction, for instance, if the said rate is not applicable for cellphones other than those offered by mobile operator.

Igor Kungurov, a lawyer of S&K Vertikal pointed out that “Consumer protection law” (from paragraph 2, article 16) prohibits to link purchasing of any goods to compulsory purchasing of some other goods. The lawyer believes that “Sales of cellphones carried out by a mobile operator exclusively as part of subsidization contract can be regarded as infringement of the above legal provisions.”

On the other hand, according to Kungurov, there are no direct statutory restrictions for telephone subsidies, if they are implemented optionally. “The issue of lack of subsidising practice lies not in the existence of prohibition, but in operators’s need to heavily finance purchasing of cellphones, as well as to ensure that cellphones shall be returned by subscribers,” noted the lawyer. According to him, should a telephone be sold on credit, any risk of nonpayment shall be incurred by bank, rather than by mobile operator, however, telephone subsidies imply that any risks and charges shall be incurred by the operator. So, Kungurov concluded that development of cellphone subsidies practice in Russia is contingent upon economical and organizational factors.

Mobile operators differ in their estimates of prospects of cellphone subsidies, however, they pointed out that this model can make sense for branded cell phones. Vendors, in turn, are rather skeptical about prospects for development of this model in Russia

Yulia Dorokhina, press-secretary of “Megafon” noted that “In 2012 subsidising shall become popular with mobile operators. Operators it is profitable to subsidize their customized cellphones, because they were primarily meant for loyal customers, consequently, there are less risks, and the amounts of subsidies in each separate case shall be calculated separately.” Dorokhina pointed out that “Megafon” currently analyses the market and investigates international experience, while their own cellphone subsidies project is now underway.

Aleksandr Bakhorin, Head of federal communications department of “Tele2 Rossiya” group noted that the mobile operator does not practice of subsidizing cellphones in Russia: “An extensive range of cellphones, including the low-end ones is displayed in our monobrand salesrooms. However, user equipment is marketed by dealers – our partners involved in expansion of retail stores.”

Arkady Markaryan, Business Development Director of Huawei believes that in Russia no subsidizing of cellphones is possible in years to come, since the state cannot guarantee customer’s peg to operator and telephone. He commented that “In Europe, there is co-branding of operators and vendors, and vendors hold such co-branding as a very interesting and important model, as it assist them to sell phones.”

“The profitability of subsidizing cellphones for manufacturers themselves shall depend on particular terms of agreements between vendors and operators,” said Aleksei Dorofeev, director of the portable equipment department of Samsung in Russia. “It should be noted that such model shall primarily stimulate sales of smartphones at the middle and bonus market segment. On a physically limited market area, for instance, Russian market, any increase in purchase price will be the key growth driver, and, of course, subsidizing can facilitate this,” he added.

Natalya Ryzhkova


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