State-controlled Russian telecoms group Rostelecom may enter the lucrative Moscow mobile market with discounts of up to 20 percent, likely starting a price war that will hit the three big established operators' profit margins.

The former long-distance monopoly, transformed last year into a multi-service provider by merging with seven regional operators, wants to boost its share of mobile, broadband and pay-TV markets to offset a fall in its core fixed-line business.

While the company has not said what share of the market it was targeting, management told an analysts' briefing last week it planned to take up to 10 percent of the Moscow mobile market by 2015 and launch a 3G mobile network there by early next year.

That means challenging the big three telecoms operators - MTS, MegaFon and Vimpelcom - in a market which, by some estimates, accounted for up to a third of their combined Russian mobile revenues of $20 billion last year.

Analysts cited management as saying Rostelecom could offer a 20 percent discount to win Moscow subscribers.

"It will be negative for the market, for other operators (who) will likely have to take countermeasures to retain subscribers, which will reduce profitability," Otkritie analyst Alexander Vengranovich said.

"There have always been fears that Rostelecom will enter new markets as a discounter. But in the case of Moscow, where it has to invest heavily in network rollout and marketing, Rostelecom will itself suffer most," he said.

Mobile number portability, being considered by the telecoms regulator, would allow subscribers to keep their mobile phone number while changing carrier. That would support Rostelecom's plan, analysts said.

Rostelecom chief executive Alexander Provotorov would not comment on pricing on Thursday, saying it would offer mobile products in a package with pay-TV, fixed broadband and intrazone telephony where it has a stronger position.

"By combining these products we are planning to compete with existing operators," Provotorov told a news conference following the company's annual meeting.

UNEASY ROADMAP

Rostelecom, along with the other top three operators, is expected to be awarded a 4G license at an ongoing tender which would help secure it future cash flows from mobile broadband as growth in voice revenues is limited by high mobile penetration.

Analysts said many questions in Rostelecom's mobile strategy remain, including whether the company will be able to ensure comparable quality of its network and whether it will be successful marketing its products.

"It is a question whether it will be quality subscribers or users who often switch operators," said Anna Lepetukhina at Troika Dialog.

"If Rostelecom wins over those disloyal users, it does not yet mean that other operators will necessarily respond with price cuts - unless it poses a serious threat and wins over quality subscribers," she said.

Rating agency Fitch, which last month rated Rostelecom 'BBB-' with a stable outlook, said the company was only a niche player in the mobile market and its plans entailed "significant execution risks".

"Although the company has a reasonably large spectrum portfolio, the currently available and expected frequencies do not provide it with an easy roadmap to nationwide mobile coverage. Organic development is likely to be costly, and does not necessarily ensure a desired market share," Fitch said.

Low pricing may win the day.

New French mobile operator Iliad said on May 15 it had signed up 2.6 million customers to take 3.7 percent of the market since launching low-cost offers in mid-January.

The buzz around Iliad's 'Free Mobile' also allowed the group to recruit 191,000 broadband customers, 50 percent of all new additions in the sector in the first quarter.

Rostelecom also aims to grow its share of Russia's broadband market to 50 percent by 2015 from just under 40 percent, and is targeting 30 percent of the pay-TV market and 22 percent of the wireless broadband market in subscriber terms, up from 25 percent and 9 percent respectively.