AO VimpelCom History

Address:

10-12, ul. 8 Marta
125083 Moscow
Russia

Telephone: (7) 095-974-5888
Fax: (7) 095-721-0017

Public Company
Incorporated: 1992
Employees: 1,700
Sales:$274.1 million (2000)
Stock Exchanges: New York
Ticker Symbol: VIP
NAIC: 513322 Cellular and Other Wireless Telecommunications

Company Perspectives:

We strive to become the leading company in Russia providing mobile phone and other telecommunication services. We strive to operate efficiently and flexibly, working to anticipate the demands of tomorrow, attain the highest quality in the services we offer, and provide for growth in the value of the company. We strive to help people solve problems, experience the joy of personal interaction, and feel unrestrained by time and space. We strive to fuse all divisions of the company into a unified team that values competence, responsibility, and a willingness to give of oneself. We strive to maintain a company image that inspires trust and respect not only in our clients and business partners, but in society as a whole.

Key Dates:

1992:: AO VimpelCom is organized by Dmitri Zimin and Augie Fabela.
1994:: Commercial operations start under the Bee Line brand name.
1996:: VimpelCom becomes the first modern Russian company to list on the NYSE.
1998:: VimpelCom receives licenses to operate a dual-band GSM network; Telenor becomes partner.
2001:: The Alfa Group becomes a partner in the company's regional expansion effort.

Company History:

AO VimpelCom keeps people connected in Russia, providing cellular phone services under the BeeLine brand name on either a U.S. or a European standard. The company's network covers all of Moscow, where the large majority of its subscribers are located. VimpelCom also holds licenses for nearly 70 percent of the territory of Russia, including Siberia, the Volga, Southern Russia, Central Russia, and the North Caucasus. A small but growing number of subscribers come from the regions as a result of the company's efforts extend its network into less densely populated territory. More than 1.3 million people subscribe to VimpelCom's services, making it one of the top cellular phone companies in Russia. Subscribers can take advantage of technologically advanced features that allow the user to send instant messages, access the Internet, or send e-mail through a mobile phone. In a country that has little experience with the Western style of capitalism, VimpelCom has been recognized for its high standards of corporate governance and transparency. The firm's adherence to international business standards helped it become the first modern Russian company to be listed on the New York Stock Exchange in 1996.

Fast Growth in a Boom Market: 1992-96

Shortly after the demise of the Soviet Union in 1991, VimpelCom was organized by Dmitri Zimin, an entrepreneur with a background developing missile defense bases for a military radio institute in Moscow. Zimin's vision and determination won the confidence of Chicago businessman Augie Fabela. In mid-1992, the two set up a pilot cellular system in Moscow with a capacity of 200 subscribers. When that initial venture showed promise, AO VimpelCom was organized in September 1992. Zimin became president and CEO while Fabela served as board chairman.

Early in 1993, the company received a license to provide cellular services in Moscow on the AMPS (Advanced Mobile Phone Service) standard, which was widely used in North America. Using equipment acquired from the telecommunications equipment company Ericsson, VimpelCom built a new network capable of supporting 10,000 subscribers. In June 1994, commercial operations began under the Bee Line brand name.

A few months later, VimpelCom began modifying its network to a digital version of the American standard, known as D-AMPS. BeeLine 800 became the name for the service offered on this standard. The company also received licenses for regions of the Russian Federation that bordered Moscow, including Tver, Vladimir, and Ryazan. The company was now authorized to operate in an area that held about 24 million people, 16 percent of Russia's population. At the end of the first year of operation, VimpelCom had earned $27.97 million in sales revenue. With 5,358 subscribers, it had a 26 percent market share.

The cellular phone business was a boom market in the early 1990s. Mobile phones had been unknown under communism, and now the service provided an attractive alternative to often unreliable conventional telecommunications. VimpelCom courted customers with billboards all over Moscow and advertisements on television. The so-called "New Russians "- those who had profited most in the whirlwind transition to capitalism--made the new technology a status symbol. In the early years, they were willing to pay high prices for relatively ungainly handsets and even ordered phones decorated in diamonds and gold. Sales in 1995 nearly quadrupled from the year before. In addition to 22,553 subscribers in Moscow, VimpelCom had 435 subscribers in regions surrounding Russia's capital city.

After two years of profitable operation and sound accounting practices, VimpelCom was ready to enter the U.S. financial market. In November 1996, the company celebrated a successful entry into the New York Stock Exchange (NYSE), trading under the name "Open Joint Stock Company Vimpel-Communications." VimpelCom became the first Russian company to be traded on the Big Board since the shares of the Trans-Siberian Railway were listed before the 1917 revolution. The offering garnered $66 million for the development of VimpelCom's network. The company's rapid growth continued after its NYSE debut. Revenue reached $213 million in 1996, and market share peaked at 56 percent with 59,214 total subscribers. Shares went up about 75 percent in the first six months of trading.

Reorientation to the GSM Standard: 1997-99

Despite rapid growth in the early years of business, technological concerns threatened to weaken VimpelCom's ability to compete in the long term. The company's network operated on a U.S. standard, the D-AMPS system, which was gradually becoming outdated. VimpelCom's primary competitor, Mobile Telesystems (MTS) operated on the European GSM (Global Standard for Mobile) standard, having received the first GSM license granted by the Russian government. As a result, MTS was able to win customers away from VimpelCom with better quality, more advanced services, and wider reach when traveling outside Russia. VimpelCom would have to develop a GSM capability if it wanted to remain in the mobile phone market.

Since 1995, VimpelCom subsidiary AO KB Impuls had been investigating the possibility of implementing a GSM standard at an 1800 MHz frequency. MTS, in contrast, operated on a 900 MHz format. Impuls won a license to test the higher frequency, and soon VimpelCom began construction of a new GSM network. In a $135 million contract, equipment from Alcatel was used to construct 160 base stations on the GSM-1800 standard, enough to cover all of Moscow. The network became operational in June 1997, when VimpelCom introduced the "BeeLine 1800" service package.

VimpelCom more than doubled its subscriber base in 1997, and net profit was $61.1 million with total revenues reaching $305.9 million. VimpelCom's primary task now was to build a reputation as a GSM service provider, breaking the near-monopoly that its competitor had on the technologically advanced standard. With the acquisition of additional licenses in 1998, VimpelCom expanded its GSM capability. A license granted in April of that year allowed the company to use the GSM-1800 standard in vast regions of the Russian Federation outside Moscow. A further breakthrough came in August, when the Ministry of Communications granted the necessary licenses to convert to a dual band system, which offered better quality and greater flexibility by using both the 900 and 1800 MHz frequencies.

Unfortunately, implementation of the new network was delayed by the August 1998 economic crisis, when the ruble was severely devalued and the Russian government defaulted on its debts. VimpelCom's shares fell more than 80 percent in New York and the company lost $43.9 million in the third quarter. Still, the company moved ahead in October with the construction of its GSM-900 network. That fall VimpelCom also introduced a form of payment that was new to Moscow: GSM subscribers were able to buy time on pre-paid phone cards. The option was extended to D-AMPS subscribers a few months later.

Despite the financial crisis, VimpelCom was able to continue expanding its network because of a new partnership with a foreign investor. In December 1998, the Norwegian telecommunications company Telenor received a 25 percent stake in VimpelCom in exchange for $160 million in cash. The funds supported a significant widening of the zone of coverage, bringing the number of base stations to 500. VimpelCom also began working on providing its subscribers with automatic roaming services. An agreement with an operator in Krasnodar was the first step toward automatic national roaming.

Net loss for 1998 was $4.72 million, but VimpelCom nevertheless pushed ahead with the expansion of its GSM infrastructure. In May 1999, the company bought $10 million in equipment from the Finnish company Nokia. Nokia planned to assist VimpelCom with an expansion program called "Big Beeline." The program would extend VimpelCom's reach, allowing GSM customers to call in an expanded area without incurring roaming charges. By July, construction had progressed far enough to begin operation of the dual-band GSM-900/1800 network. Roaming services were also expanding: customers were able to use their Moscow phone number in 50 countries in Europe, North America, Southeast Asia, the Near East, and Africa.

Courting the Mass Market: 1999-2000

Despite energetic development efforts, VimpelCom still lagged behind MTS in the range of advanced services it offered. After the 1998 crisis, many users had switched to MTS's GSM-900 network, lured by price cuts at the competitor company. VimpelCom's market share in 1998 and 1999 was falling toward 40 percent. Telenor advised focusing on volume. In an aggressive move to capture the mass market, VimpelCom announced its "phone in a box" package in October 1999. For only $49, the consumer received a mobile telephone and a $10 calling card. The campaign was aimed at young people or those frustrated with the options available for fixed-line telephone installation: either pay high prices for a private company or endure a long wait before getting installation through the city. VimpelCom was actually selling its cell phones for less than they were worth, and ordinary Russians jumped at the offer. The initial production of 10,000 handsets sold out within days. In November, 50,000 new subscribers were drawn in. MTS joined the price war when it lowered its prices in December.

By the end of 1999, VimpelCom had 372,300 subscribers, which amounted to 47 percent of the mobile phone market. The combination of aggressive marketing and a lingering financial crisis took its toll on financial results, however. Total revenue in 1999 was $238.6 million, down $120 million from the year before, while net loss totaled $39.6 million. The company had spent $60 million on the development of its GSM network alone in 1999. The number of subscribers continued to grow into 2000, but stock price fell as investors became impatient with the strategy of sacrificing profit for market share.

Activities in 2000 centered on expanding the capabilities of cell phone service. Short messaging service (SMS), a capability that had been introduced in 1999, allowed subscribers to exchange short text messages through their handsets. SMS was promoted throughout 2000 until, by the end of the year, one million SMS messages were being transmitted daily. Another new technology was Wireless Application Protocol, or WAP, a standard for the wireless transmission of Web pages. VimpelCom introduced WAP services in mid-2000, allowing subscribers to access Internet sites that were specially adapted for small screens. At the new BeeOnline Internet portal, customers could tap into over 200 channels of news, entertainment, and financial information. An even newer technology, the Global Package Radio System (GPRS), offered the capability of transmitting large volumes of data to cell phones. Early in 2000, VimpelCom made an agreement under which Nokia would eventually provide GPRS to the BeeLine network. A security offering in July 2000 raised $225.4 million to finance the technological advances.

In the fall of 2000, a government move fueled worries about the stability of Russia's business environment. The Communications Ministry announced that it was taking back certain frequencies that had been granted to VimpelCom and its competitor MTS. The frequencies had originally been granted free of charge; the cell phone companies protested that regulatory policy needed to become more transparent and standardized. Observers suggested that the government would grant the frequencies to Sonic Duo, a new cell phone company that was majority owned by a state holding company. VimpelCom stock fell in reaction to the government's action.

A more positive development came in October, when VimpelCom acquired the Moscow cell phone dealer network MCC-Start, which operated under the Mobile-Center brand name. The acquisition would give VimpelCom more control over the retail end of the mobile phone sector, even as the company continued to use independent dealers.

Looking Toward the Regions Under New Leadership: 2000 and Beyond

Near the end of 2000, a new president took over duties from founder Dmitri Zimin, who stayed on as CEO. Jo Lunder, a Norwegian national, had worked for VimpelCom's partner Telenor before becoming the Russian company's chief operating officer in fall of 1999. Now president of VimpelCom, he outlined his vision for the company in a December 2000 interview with The Russia Journal. "What we're trying to do now is reposition VimpelCom to be seen as a GSM company," Lunder said. He noted that the company's GSM network had caught up with the competition in terms of quality and coverage after steady expansion in 2000. Over half of the company's subscribers now operated on the GSM standard, up from 35 percent at the beginning of 2000. With a reliable GSM infrastructure, Lunder expected to attract heavy mobile phone users in the corporate segment, while still offering services appropriate for the mass market.

Profitability was a sensitive issue at the end of 2000 as the company reported its third consecutive net loss, at $77.8 million higher than the two previous years. The subscriber base had doubled over the past year to 780,100, but VimpelCom's market share was at a modest 39 percent. Lunder hoped that sound business practices would eventually bring the company back to profitability. "What is important for VimpelCom is that we build a strong, healthy company with high quality services and loyal subscribers and customers," he said.

Lunder believed that a key to long-term survival was expansion into Russia's regions outside of Moscow. These regions posed a particular challenge because of low population density and a more dismal economic situation than was found in the capital. Establishing a presence there would require a considerable investment that would only pay off after several years. VimpelCom began searching for a partner in the regional enterprise. In May 2001, an agreement was signed with Eco Telecom Ltd., part of the respected Alfa Group of companies in Russia. In a complicated arrangement, separately-managed subsidiary AO VimpelCom-Region would raise up to $337 million for regional expansion in contributions from Alfa, Telenor, and parent company VimpelCom. Telenor planned to purchase a package of treasury shares in order to maintain its 25 percent stake in VimpelCom; Alfa's $103 million contribution would gain it a 25 percent stake. VimpelCom founder Dmitri Zimin and his affiliates retained just over 10 percent. Zimin expressed satisfaction with the deal, saying, "Combining Telenor's expertise in telecommunications and Alfa's knowledge of, and infrastructure in, the Russian regions, we have assembled an extremely powerful team that will lead VimpelCom to become Russia's premier national operator."

The first tranche of the deal was concluded in November 2001. In the preceding months, VimpelCom-Region had launched five affiliates in Tver, Vladimir, Ryazan, Kaluga, and Lipetsk. Meanwhile, VimpelCom introduced its latest package for Moscow subscribers. The BeePlus GSM package offered automatic roaming, WAP Internet capabilities, and automatic caller ID. VimpelCom now had roaming agreements in over 100 countries, more than its competitor MTS.

Late in 2001, a new cell phone carrier, Sonic Duo, began operations. The new competitor's prices were similar to VimpelCom and MTS, and it offered coverage only in the Moscow area. Analysts noted that the Russian mobile phone market was close to saturation and suggested the new company might win a 15 percent market share. VimpelCom did not feel significantly threatened by the new entrant into the cell phone market. The company hoped to meet the challenges of competition, price wars, and regional expansion with a particular focus on customer service. Third quarter 2001 results showed a net income of $13.9 million, rasing hopes that VimpelCom was back in a period of profitability.

Principal Subsidiaries: AO KB Impuls; ZAO BeeOnLine-Portal; ZAO VimpelCom-Region.

Principal Competitors: Mobile Telesystems (MTS), Sonic Duo.

AO VimpelCom History

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