Russia's Big Three and Rostelecom Sign LTE Network-Construction Deal with Yota

Russia’s four leading telecoms players have agreed a deal on the provision of Long-Term Evolution (LTE) services in the country, which will see wireless broadband provider Scartel (which operates under the “Yota” brand) acting as their wholesale network provider. The “big three” of top-tier mobile operators—Mobile TeleSystems (MTS), VimpelCom, and MegaFon—as well as the state-owned, leading fixed-line long-distance operator Rostelecom, have signed a deal, witnessed by Prime Minister Vladimir Putin and Communications Minister Igor Shchegolev. The deal sees them agree to work with Scartel to offer its traffic on their networks, and lease its LTE facilities. Scartel has suggested that it will launch LTE services as early as this year and aims to achieve network coverage across 180 cities, with a combined population of over 70 million, by 2014.

The deal also gives each of the big three, plus Rostelecom, the option to buy a 20% stake in Scartel in 2014. Yota, only created three years ago, is currently 74.9%-owned by the Telconet Capital Limited Partnership fund, while the remaining 25.1% is held by state-owned Russian Technologies State Corporation. The former will sell its entire stake in 2014, while the latter will sell part of its sake.

Outlook and Implications

• Sudden Boost for LTE Progress in Russia: The announcement catapults Russia into the status of one of the headline-makers in global LTE development, when previous progress in the country had been slow. Planned statements of clarification on LTE frequency provision from the regulator were not delivered in August 2010, when they had been pledged. In late December 2010, the state commissioned the big three and Rostelecom to undertake joint research into LTE frequency provision, with their results to have been published by 1 July 2011 (see Russia: 29 December 2010: Rostelecom, Big Three Mobile Operators Commissioned to Study LTE Feasibility in Russia). However, the collaboration between key players now provides a major stimulant towards LTE development in Russia.
  
• Collaboration Rather Than Competition: In global terms, LTE development is fast gathering momentum, with the Nordic countries the most developed. Typically, however, progress has occurred through incidents of isolated roll-outs by individual operators. By securing collaboration of its operators rather than competition, Russia is giving itself a strong opportunity to progress faster in the LTE sphere than many countries. The collaborative approach is rare, with Tele2 and Telenor notably undertaking an LTE partnership in Sweden, and Centernet and Mobyland, as well as Orange and Play, agreeing similar pairings in Poland (see Sweden: 1 February 2011: Tele2 to Bid for Swedish Digital-Dividend Spectrum Through Net4Mobility Telenor Joint Venture, Poland: 8 September 2011: Centernet, Mobyland Agree on Joint Construction of Commercial LTE Network and Poland: 10 September 2011: Poland Gives Green Light to TP Orange/Play Joint LTE Roll-Out). However, given that LTE had been launched by 17 operators in 12 countries as at February 2012, with 128 operators across 52 countries committed to roll-outs, the incidents of collaboration are few—surprisingly so, given the potential for capital expenditure (capex) savings and speedier roll-outs (see World: 18 February 2011: LTE Global Landscape Update—February 2011).
  
• Triumphant PR Exercise for Russia: The fact that Prime Minister Vladimir Putin was present at the signing of the deal indicates that Russia is keen to publicise this as something of a triumph, at a time when operators throughout the world are scrambling for pieces of the LTE pie. Russia has been keen to promote itself as a growing global technological power, with high-profile plans in place for the creation of its own version of the United States’ Silicon Valley (see Russia: 18 November 2010: Nokia Joins Russian Silicon Valley, Intel on Horizon). The collaboration of such major rivals towards the common goal of LTE provision does, indeed, appear impressive. The achievement is emphasised, given that scepticism had been growing over the potential role within Russian LTE development of little-known operators owned by the Ministry of Defence, fuelling whispers of regulatory opaqueness—rumours that have now been addressed.
  
• Details Scarce: For all the fanfare, a degree of healthy cynicism is in order, for the deal is conspicuously light on details. In financial terms, Scartel had indicated that it will seek bank loans of up to USD2 billion to finance the roll-out, but it is not yet clear whether the other four operators will contribute financially to network development, nor what the financial arrangements of network leasing will be once the network is constructed. Another area requiring clarity is what will happen to the LTE frequencies gained last year in 38 of Russia’s 83 regions by Rostelecom (see Russia: 12 March 2010: More Success for Rostelecom at Fourth and Final Regional 4G Licence Tender). It is not clear whether these will be used and/or shared by Scartel and the other operators in the collaborative network roll-out.
  
• Blow for Tele2: MTS, VimpelCom, and MegaFon are comfortably the leading mobile players in Russia. Between them, they held subscriber market share of around 84% at the end of 2009, in a national market of over 200 million. They also feature prominently in the country’s mobile internet market as the only 3G licence-holders. Rostelecom is in the process of integrating its operations with those of national fixed-line holding Svyazinvest. It has also entered the mobile arena by acquiring CDMA operator SkyLink, a leading mobile-data provider in the country. However, the announcement of the LTE deal represents a blow for Tele2 Russia, the country’s fourth-largest mobile operator, with around 18.6 million subscribers at the end of January 2011.
  
  Tele2 had hoped to bolster its profile in the country, and to compete as something approaching an equal with the big three by participating in a study into LTE feasibility that the government had commissioned for MTS, VimpelCom, MegaFon, and Rostelecom to undertake (see Russia: 8 February 2011: Tele2 and SMARTS Plan Joint Study of LTE Feasibility in Russia). Instead, the collaborative deal now announced excludes Tele2, and also smaller GSM operator SMARTS, indicating that the divide between key players and also-rans in the Russian mobile market will continue to be effected within the exciting new segment of LTE technology. Tele2 is unlikely to be thrilled at this outcome, but has not yet given up hope of participating in some form in the agreed deal; Russian spokesman Alexander Bakhorin is quoted in the Moscow Times as saying that “we stick by our position to offer our technological expertise and to chip in for the investments”, adding that it was too early to draw any kind of conclusions. Tele2 certainly has strong experience in the LTE field, given its broader European operations (see Russia: 15 February 2011: Tele2's LTE Service—Case Study). However, IHS Global Insight considers that the big three and Rostelecom will be reluctant to dilute the partnership any more than is currently the case, particularly having received the state’s stamp of approval.