UK telco Vodafone and Russia’s MTS have expanded their long-standing strategic partnership agreement. Here is a thought from Alla Shabelnikova , Senior Analyst, Europe, Ovum.

According to new terms, MTS will now offer mobile services in Ukraine under the Vodafone brand. The companies will cooperate on a 3G network rollout in Ukraine, and MTS will be able to benefit from the joint procurement of network equipment. This will reduce network deployment costs, which is particularly crucial for MTS considering the devaluation of the Ukrainian hryvnia. Vodafone will introduce a number of services in Ukraine that have already gained popularity across its European footprint. These include bundled tariffs, competitive long-distance international calls, and affordable roaming rates. MTS and Vodafone have been partners since 2008.

The Vodafone brand will help MTS regain past glories

The consumer perception of MTS in Ukraine has deteriorated recently, causing MTS to seek a rebrand. MTS’s subscriber market share started decreasing in 3Q14, when it was 38.1%, and continued to fall during the next three quarters, reaching 35.6% in 2Q15. At the same time, the market shares of its competitors increased: Kyivstar’s reached 45.7% in 2Q15 (up from 44.2% in 3Q14) and Astelit’s climbed from 17.8% to 18.6% over the same period.

For many in Ukraine, MTS is seen as a Russian brand. Historically, it was most popular in Eastern Ukraine, but the conflict in this region has caused anti-Russian sentiment to grow, with a negative impact on MTS’s performance. Kyivstar, MTS’s main rival, is owned by Russian-backed VimpelCom, but because VimpelCom is positioned as a Dutch company and Kyivstar was originally a Ukrainian operator, the Kyivstar name is still seen as Ukrainian by local consumers – particularly in the west of the country, where the operator is most popular.

MTS was the last operator in Ukraine to launch 3G services on its network –even though it obtained 3G spectrum at the same time as Kyivstar and Astelit at the auction in February 2015. MTS’s hesitation was mainly due to uncertainty about the mobile market, the devaluation of local currency, and economic crisis. As MTS delayed taking action, Turkish-backed challenger Astelit started rolling out 3G in the country, supported by an aggressive PR campaign. Astelit’s market share grew from 16.6% in 2Q14 to 18.6% in 2Q15.

Vodafone is known in Ukraine as a British telco group, hence switching to this brand will have a more positive impact on consumer perception of MTS. It will help MTS regain its market share and increase revenues. But Vodafone must offer Ukrainian subscribers its EuroTraveller and Data Traveller roaming options. VimpelCom and Turkcell do not have a vast presence in Europe and such roaming options will give Vodafone a crucial competitive advantage.