HomeInsightsRussia's LTE market - who gets what, and pays for what

    Russia’s LTE market – who gets what, and pays for what


    Costs of armed service refarming holds key to Russian LTE market

    Roskomnadzor (Russia’s telecommunications  regulator) has announced the results of the 4G tender held on 12 July. MTS, VimpelCom, Rostelecom and MegaFon each received 4X7.5MHz frequencies in the 700-800MHz range and 2X10MHz in the 2500-2700 MHz range. The winners got the slots for free, but agreed to pay for the refarming of  armed forces services which currently occupy the frequencies. The costs for each operator should differ slot by slot and are not known yet – making an analysis of operator investment difficult.

    Under the terms and conditions of the tender, each recipient of a license is obligated to fully deploy the LTE networks within seven years, starting from 1 January 2013. Each recipient is committed to delivering LTE services in each population center with over 50,000 inhabitants in Russia by 2019. Likewise, each operator is obligated to invest at least €375 billon annually toward the LTE roll-out until the network is fully deployed.

    Orkitie Capital said in a research note, sent to Mobile Europe: "The announced results are expected. The “Big Four” operators won the tender for nationwide LTE licenses. Each of the winners got a respective slot in the low range of the spectrum, which automatically means the allocation of other corresponding slots in low and high ranges."

    But refarming costs could differ among the slots. Okritie said that the total refarming cost for all four winners could be in the range of RUB50-100bn (€1.25-2.5 billion) according to different estimates. The actual conversion price could differ materially by slots, depending on their load. The information as to which frequencies are used by the armed forces now is a state secret. Former Roskomnadzor Chief Oleg Ivanov previously claimed that the most busy slot is “number 1” (Rostelecom) while the most easy is “number 3” (MegaFon). If we take this assumption it seems that rollout intensity is related to the cost of the slot refarming. Refarming costs will be spread over time, and depend on the speed of the network rollout, so in case the difference between the slots is minimal we see the tender results as equal for all the winners.

    Following the tender, MegaFonhas secured the best position in the Moscow market. Megafon has an LTE license for the 2570-2595 MHz range and already provides LTE services using Skartel 2500-2530 and 2600-2650 ranges as an MVNO. In addition to the auctioned frequencies, MTS has a license to run LTE on the 2575-2620 MHz range in Moscow, Rostelecom is ready for 4G rollout in Moscow in September 2012, while VimpelCom will be scrambling to start from scratch in Moscow and all the rest of the regions.

    MVNO and technological neutrality – few chances left to for smaller operators.
    TELE2, TTK and Summa Telecom lost the tender and the only opportunity for them to provide 4G services is to either wait for the adoption of technological neutrality, which should enable them to use the frequencies they have, or to start working as MVNO providers on the winners’ networks. According to the tender conditions each winner should provide this opportunity for five operators. The current view of Telecommunications Ministry on adoption of technological neutrality is rather cautious; therefore, Okritie thinks the probability of adoption is rather low.

    The analyst said that annual capex should not increase as a result of 4G rollout. Required annual investment in 4G of RUB15bn by each operator is already included in the companies’ budgets. Most of the investments will be allocated for the development of backbone infrastructure, which should also help to develop 3G and fixed-line broadband services

    Okritie said it thinks that operators will try to price 4G services at a premium to 3G. Price differentiation should be used as a tool to shift “heavy-data” users to 4G and at the same time offload 3G, which should improve customer satisfaction for both services. MegaFon plans to announce new tariffs by mid-August 2012. But Okritie does not expect 4G to be a significant ARPU and profitability increase driver, instead seeing 4G is just a tool to ensure stable revenues in the future.

    At present, MegaFon offers only two devices that support 4G: a USB- modem (price RUB2,990) and the Samsung Galaxy tab 8.9 (price RUB29,900). Both devices work on 2G/3G/4G networks. MegaFon plans to introduce new modems in 3Q12 (including a wireless router that will provide 4G-speed access for all WiFi devices in range). Smartphones that will support 4G should appear on the Russian market in 4Q12.