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Mobile TeleSystems' (MBT) management opines in a conference call with analysts on why they're spending more to acquire customers as the average revenue per subscriber is dropping:

Q - Sergei Arsenyey, Goldman Sachs

Hi good afternoon, this is Arsenyey from Goldman Sachs. Can I just follow-up on the question on the subscriber acquisition cost (SAC) in Russia? You are reporting an increase year-on-year, yet the ARPU is going down, went down on the year-on-year basis by 35%. Do you believe, I mean normally in the situations like this when your ARPU is going down by so much, subscriber acquisition cost go down as well alongside it. Do you believe its worth paying – continue to pay that much money for a subscriber essentially much lower quality subscriber and is this the trend that we’ll see, or continue seeing in 2006?

A - Grzegorz Esz, Chief Marketing Officer

SAC year-on-year has declined from $21 to $18.8 in Russia. The question whether it's worthwhile to invest in lowering ARPU customers, such amount of SAC? Obviously yes. And SAC, the return on investment in customers is in single months, so from my experience from other markets, this is within benchmarks. The main driver of decrease in 2004 to 2005 is actually reduction on dealer commissions, and marketing part, which is advertising cost of subscriber acquisition cost has increase from $7.1 in 2004 to $7.5 in 2005. The situation here in Russia is the following that there is high demand on for advertising with a very low supply, there are very few TV channels, therefore, there is inflation of media, which happens in 2005. I hope it answers your question.

Q - Sergei Arsenyey, Goldman Sachs

Well, if you look, I mean I take the point about the year-on-year subscriber acquisition cost, but if you look in the fourth quarter, your fourth quarter 2004 subscriber had an ARPU of over $11, and you had SAC of $19.4, if you look at the fourth quarter of ’05 you are reporting $7.3 and $19.8, again the return part is deteriorating quite rapidly over the last 4, 5 quarters.

The question is, is this going to continue going forward, especially when you guide towards $6, $7 ARPU? I think what we have seen in the market is that when ARPUs go down to $6 to $7, we’ll see a substantial decline in subscriber acquisition cost, mainly the trend that MTS is trying is very, very different.

A - Vassily Sidorov, President and Chief Executive Officer

Let me alert you to the fact that in Q4 a year ago, on the back of the heavy promotional campaigns, the quality of our subscriber intake was quite different from what it was at the end of last year, okay, and this needs to be taken into account when you look at the figures and look at the potential quality of these incremental subs that we added at the end of last year in 2004.

I think generally we will see stability in SAC and we should not see unreasonable dynamics, that being said, I think it would be not completely comparing oranges to oranges when we referred to Q4 of ‘04 and ‘05.

Source: Mobile TeleSystems Tries To Explain High Subscriber Acquisition Costs (MBT)