Because of Russia’s lack of wireline infrastructure and its booming demand for Internet, it is often referenced by industry analysts as one of the most promising market
Because of Russia’s lack of wireline infrastructure and its booming demand for Internet, it is often referenced by industry analysts as one of the most promising markets for wireless broadband. Indeed, WiMAX enjoyed early successes in Russia as companies like Enforta, Quantum and Tascom began to deploy fixed 802.16d solutions to the enterprise market sector. More recently, new WBA entrants such as Comstar and Yota have likewise extended the success of WiMAX to the consumer sector. However, in the last year WiMAX’s progress in Russia has been mixed as result of economic, regulatory and political issues.
Economics
The global economic crisis has had a profound impact on the deployment of wireless broadband, and perhaps no country was more impacted than Russia. Russia suffered heavily in the crisis with a decline in GDP of 7.9% from 2008 to 2009. Unemployment in some regions of the country exceeded 25% as the demand for Russia’s mineral wealth crashed in the wake of global recession. Perhaps more devastating to WiMAX, during the same period the Russian Ruble declined in value from 22 Rubles per dollar to 33 Rubles per dollar. This 50% collapse in currency value made the purchase of foreign manufactured telecom equipment extraordinarily expensive. Early in the year some of the larger operators like MTS and Beeline announced 60%+ reductions in their capital programs. Comstar entirely suspended their WiMAX program outside of Moscow early in 2009.
Smaller greenfield WiMAX operators who were relying on stable equity markets and new equity infusions to fund their capital programs faced and even more difficult challenge. Those start-ups that were EBITDA positive still had access to the equity markets and were fortunate enough to raise sufficient funding to survive. Those WiMAX start-ups that were not EBITDA positive either closed or went on sale. It is rumored today that three of the top five largest fixed WIMAX operators in Russia are indeed still for sale.
Regulatory
Russia’s regulatory regime suffers from lack of transparency, conflict of interest and sluggishness. Though the regulator has formally stated that both 2.3 and 2.5GHz will be tendered transparently, there are continued battles between the regulator, the Ministry of Defense, and other state agencies that have hampered tenders. In the midst of such battles Yota was one of the early winners who somehow managed to acquire companies whose sole asset was their 2.5GHz spectrum permits. Just this month the regulator announced that they plan to revoke much of Yota’s spectrum since it was issued under dubious circumstances. Yota has already sited that it will defend its spectrum position in court.
Another black mark on the regulator’s reputation occurred early in 2010 when the Minister of Communications (Igor Shchegolev) was nominated as chairman of state telecom holding company Svyazinvest just before awarding an affiliate of that company (Rostelecom) with 2.3GHz spectrum in an official Ministry managed state contest.
Tactically, the regulator has been slow to address other day-to-day problems faced by wireless broadband operators, e.g. the 3.5GHz band has proven practically unusable in Russia because of limited allocation (only 50 MHz in total), co-location in the band with legacy applications, as well as partitioning of the band into 3MHz FDD channels. Several operators have been trying to convert their 3.5GHz spectrum for TDD to make more efficient use of the spectrum and expand the effective channelization, but in the interim there are no serious WiMAX deployments in 3.5GHz. Freshtel, Enforta, and others are all working to resolve this.
Yota, Rostelecom, and Russia’s 3G operators have all announced their interest and intent to deploy LTE networks in the near future. However, unlike other countries where spectrum use is application and technology agnostic, this is not the case in Russia. The conversion of spectrum for other technologies or applications requires regulatory approval. While it is fully expected that the regulator will ultimately allow some operators to convert their 3G or WiMAX spectrum to LTE technology, many experts believe that this will be a prolonged negotiation which may require some operators to give up some of their licensed assets and additionally require that operators work only with Russian equipment vendors (as was a condition of the earlier 2.3GHz tender won by Svyazinvest). This may be the nature of the game seemingly being played now between the regulator and Yota.
Political
The Russian state has clearly announced its intention to sell its controlling share in Svyazinvest (the state telecom holding company) by IPO during 2011. As part of the ‘window dressing’ for the IPO, the regulator is looking to puff Svyazinvest’s portfolio of licenses as witnessed by the 2.3GHz award in early 2010. It is also widely expected that Svyazinvest will make several strategic acquisitions to better posture the company for IPO. However this ‘window dressing’ will largely consume Svyazinvest’s financial resources. Outside of conducting some LTE pilot trials it is unlikely that pre-IPO Svyazinvest or its affiliates will have the financial resources to develop the 2.3GHz spectrum. Hence the reports this month that perhaps Svyazinvest could partner with a Kremlin-friendly oligarch Gregory Berezkina to develop the LTE network – an action which itself would violate the conditions of the original 2.3GHz tender contest.
As the biggest industry stakeholders, Russia’s ‘Big 3’ cellular operators (MTS, Beeline, and MegaFon) have openly complained in the press and directly to the President about the political and regulatory morass, indicating their own desire to obtain 2.3 and 2.5Ghz spectrum and to convert their 3G spectrum for deployment of 4G networks based on LTE. While their grievances are understandable, it is unlikely the ‘Big 3’ will have much success. Firstly, all three received their 3G spectrum (in 1.9-2.1GHz) as result of a beauty contest held in 2007, with a condition of the award being a build obligation as opposed to heavy monetary payments. Because of the expected regulatory issues in clearing the designated 3G spectrum, the 3G build-out is now very late. This opens the question about the legitimacy of their rights to exclusively use the 3G spectrum awarded to them.
Secondly, providing the Big 3 with additional spectrum would appear anti-competitive, prohibiting new entrants that might be more focused on deploying wireless broadband. Lastly, but never publically expressed, before the Svyazinvest IPO the state would likely prefer that there not be a dominant wireless broadband operator. In the current economic crises, the Big 3 are likely the only candidates who really have the financial resources to be a threat to Svyazinvest’s LTE ambitions.
In conclusion, while wireless broadband unquestionably holds great promise in Russia, the underlying political and regulatory environment will delay additional issuance of 2.3 and 2.5 GHz spectrum until mid/late 2011. Further, the current economic climate will not allow greenfield start-up operators to generate sufficient funding to mount any significant mobile deployments. Several early WiMAX start-ups are expected to continue to do well with their fixed and nomadic WiMAX deployments, and rationalization of operators within this segment is only natural as the industry becomes more competitive.
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MARAVEDIS is a leading analyst firm focusing on disruptive technologies including smart networks using WiMAX, IEEE, and 3GPP/LTE. Maravedis works with system and service providers, vendors, regulators, and institutional investors. Learn more at www.maravedis-bwa.com.
Author: By A Well Informed Maravedis Source in Russia
