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With a current population of 144 Million the Russian ICT market is one of the world’s largest ICT markets but its potential is still untapped. In 2025 the total Population is estimated to reach 148 Million with 124 Million Internet Users and Russia’s Internet Economy (as measured by total ICT spending) is estimated to reach $208.8 billion in 2025 and account for 6.0% of the country’s GDP.

By 2025, every Russian will possess 3 connected devices and 79.0% of the total mobile connections will be smartphone connections. Russia will have the highest Internet penetration among the CIS and the BRICS nations with 500 Million Connected Devices, 274 Million Active Cellular Connections and 235 Million Active Smartphone Connections. By 2025, 90.0% of the total mobile connections will be broadband connections. Another significant data for the ICT market is that online retail in Russia will reach $29.2 billion in 2025 and account for 4.0% of the total retail sales.

Government and state are working together to create a fertile environment for ICT companies which generate over $10B per year. Government and state are the main customers and IT solutions orders exceed $5B a year. As an incentive for ICT companies in Russia the Social tax for IT companies is settled at 14% (vs 30% for other businesses). There are already 30 Science & Technology Parks established across Russia, including 8 IT Parks.

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IT Software

The software market consists of five segments: enterprise applications, enterprise mobility management, information management, security software and software infrastructure. Cloud technology, Big Data, the Internet of Everything, medical devices, transport and analytics applications have been the significant software trends in recent years.

In 2012 the Russian software market experienced double-digit growth and for the five-year period 2015-2020 the performance of the market is forecast to strong accelerate, with an anticipated CAGR of 7.6%, which is expected to drive the market to a value of $7.7bn by the end of 2020. Although growth has been strong in Russia, piracy is a considerable issue. According to the BSA, the rate of unlicensed PC software installations was 62% in 2013 (down from 73% in 2007). In addition, the conflict in Ukraine and subsequent sanctions has affected all parts of Russian industry, including the software market. Import substitution businesses are likely to see a rise in revenues if tensions continue.

The Russian software market had total revenues of $5.3bn in 2015, representing a compound annual growth rate (CAGR) of 6.1% between 2011 and 2015. The software infrastructure segment was the market's most lucrative in 2015, with total revenues of $2.9bn, equivalent to 55.2% of the market's overall value. The enterprise applications segment contributed revenues of $1.7bn in 2015, equating to 32% of the market's aggregate value.

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Competition within the software market is boosted by constant advances in technology, by the presence of large international incumbents and a regular supply of new entrants with alternative business models forcing players to operate increasingly competitive pricing strategies.

Switching costs can be high for industry-specific applications but some partnerships between players promote interoperability. Easy access to the Internet as a distribution channel appeals to new entrants. Open-source software is becoming an increasingly credible threat.

The software market has many buyers: individual consumers, businesses of all sizes, and government institutions. Business buyers come from a very wide range of industries, including banking, retail, logistics, telecommunications and healthcare.

Buyers may be reliant on particular players as software is often industry-specific and/or requires users to be trained to use it, and thus switching costs can be high. However, buyers are often large companies requiring multi-user licenses across their entire business, which provides them with stronger bargaining power. Smaller buyers still require software but have much less power in negotiating price and terms of use.

As a transition to open-source software can be a lower-cost alternative to conventional products, its presence may accentuate price sensitivity in the market, increasing buyer power, particularly as buyers are demanding less complexity and lower costs.

There is also a move to software-as-a-service (SaaS) where buyers pay through regular subscriptions or when they use the software. This software variant requires lower upfront costs and may be more accessible, thus also increasing buyer power. Major players are increasingly switching to SaaS business models due to the march towards cloud computing and open source software. Switching costs are lower in the B2C software segment, particularly with entertainment-based software.

Inputs such as hardware components are often purchased from sole suppliers; these tend to be large companies offering differentiated products, resulting in significant supplier power. Since software is wholly designed on computer hardware, this makes suppliers an irreplaceable part of the market which, combined with the diverse customers that suppliers have and the importance of quality to the industry, increases supplier power. Due to the need for hardware and software to work successfully together and with a widening labor market in computer programming, suppliers may look to forward integrate.

In recent years the software development and the uptake by end-users of broadband Internet access made the access to distribution channels easier. Internet users as a percentage of the total population stood at 70.6% in Russia in 2014, allowing for new entrants to exploit contemporary distribution channels.

There are few substitutes for software. From the perspective of the major players, substitutes in this market are open-source software products, free web-based applications, and pirated versions of existing products. In this case open-source companies receive revenues from services and maintenance. Open-source software is often a lower cost alternative and has been particularly successful in website and web application development. Advances in technology mean that products are continually being introduced to the market, enhancing rivalry and allowing new entrants the possibility of gaining market share. Incumbents are often a dominant force in a specific market and it brings to a strong rivalry.

IT Services

The IT services industry is valued as the combination of the business process outsourcing (BPO) services market, the application services market, and the infrastructure services market.
The Russian IT services industry has historically been posting good growth for a number of years; however, there has recently been a marked slowdown and contraction in 2015. In the forecast period an acceleration is expected in this industry. The Russian IT services industry had total revenues of $3.8bn in 2016, representing a compound annual growth rate (CAGR) of 2.5% between 2012 and 2016.

The infrastructure services segment was the industry's most lucrative in 2016, with total revenues of $1.6bn, equivalent to 42% of the industry's overall value. The application services segment contributed revenues of $1.5bn in 2016, equating to 38.3% of the industry's aggregate value.

Cloud computing systems are expected to achieve dynamic growth over the next few years as buyers expand the use of data centers and advanced analytics in order to manage the vast amounts of data being produced in the connected world. The performance of the industry is forecast to accelerate, with an anticipated CAGR of 3.7% for the five year period 2016-2021, which is expected to drive the industry to a value of $4.6bn by the end of 2021.

Buyers range in size from small businesses to multinational companies and government agencies. The main verticals that invest in IT services in Russia are the government and financial, telecommunications and media industries. Larger buyers, with greater financial muscle, exert more buyer power.

Inputs such as hardware components are often purchased from sole suppliers which are often large companies.

Entry on a small scale is achievable in the IT consultancy market; smaller players have experienced increased growth as both government and commercial institutions increasingly turn to third parties to provide specialized IT support. Similarly, buyers seek to cut costs wherever possible and data processing and other business processes have increasingly been outsourced to specialists, allowing clients to focus on core activities. Large companies in this industry have significant economies of scale in processing and can offer more services; smaller companies can compete by specializing in particular verticals, and offering customized services. Newly developing niche markets will offer opportunities for smaller players in areas such as green IT and the 'Internet of Things'. Equally, industry specialists operating in key markets such as administration and finance have significant opportunities. Nevertheless, new entrants may have more opportunities as brand recognition is not as strong in the domestic Russian market.

Distribution is often limited by technological infrastructure meaning new entrants to developing markets will find difficulties in expanding. In its 2016 Global Information Technology Report, the World Economic Forum ranks Russia 41st out of 139 countries in terms of network readiness, which suggests that the market has room for development in terms of IT infrastructure in comparison to other European nations.

Heathcare IT

Russia will focus on the optimisation of its public healthcaresystem and will look to remove gaps in regional capacities and engagemore private providers. The Russian healthcare system is dominated by public providers; private companies are most active in the outpatient services segment. Starting 2015, all state-funded healthcare services will be funded only from the Obligatory Medical Insurance (OMS) Fund. The private segment will register growing demand as patient awareness increases and as they look for higher quality. Public private partnership schemes will be mutually beneficial as the government cuts spending on infrastructure while private businesses get additional patient flow and funding from the OMS fund.

In particular, the private healthcare services market with a 15-20% annual growth rate over the last 5 years will grow by 17.0% in 2019 and reach $7.2 billion. This market is highly fragmented infact the top 25 participants account for less than a 20.0% share; stomatology and diagnostics services are the 2 major segments with shares of 50% and 20%. By 2018, Russia will adopt all key IT healthcare services, including EMR and telemedicine.

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Cyber security

The CS market has a strong growth trend and the current CS market is USD 1’399 M/year.

The market is ruled by domestic Certifying Centers (CC) and there are around 200 authorized CC in the country. The 41% of the Russian CS market is covered by domestic solutions and western solutions keep a small share.

SIEM- Systems are moving forward, becoming a necessary IT tool for belt enterprises. Recently the market was filled with all-in-one systems, with one box for collecting, storing, searching, normalizing and correlating information.

Another sector that could be interesting in Russia is the Banking IT, infact over the next decade, Russia will see the transformation from SMS banking to mobile banking. The mobile banking segment will reach $3.8 billion in 2025 and account for 39.0% of the mobile payment turnover.

Banking IT

Till 2010 Russian banks remained committed to antiquated bureaucratic procedures and practices. From 2008-2010, banks and banking software vendors started to improve their online banking solutions and services.

The goal of these Fintech companies is to rise the living standars and quality of life of the Russian Population through the use of financial market instruments by the improvement of financial inclusion for household and small and medium-sized business, the improvement of tools ensuring financial market stability and developing financial consumer protection and financial literacy. Another goal is to facilitate economic growth through the competitive access of Russian economic agents to debt and equity financing and risk hedging instruments discouraging malpractice in the financial market, enhancing investor appeal for the equity financing of public companies via improved corporate governance and developing the bond market and syndicated lending market in addition to creating conditions for financial sector growth.

Strategia & Sviluppo Consultants