Russia’s telecoms sector was the very first to be reformed after president Vladimir Putin took over in 2000 and it went so smoothly that no one talks about it. The once crackly phone lines and hours it took to send a fax have been relegated to the dustbin of history and today’s Russian telecom companies and services are world class.
The supporting infrastructure has matured and the sector is about to enter a new phase with the imminent advent of 5G technology. Russia Towers celebrates its tenth year on the market this year as the leading privately owned mobile phone infrastructure provider.
It's a classic b2b business: in the early days mobile phone companies rushed to roll out the towers which broadcast their signal in a race to capture market share. But now the whole country is completely covered it makes more sense for competing mobile phone companies to share the tower infrastructure and cut costs.
“Russian Towers is the veteran of the market and you can associate the company with the development of the telecoms business in general as we have contributed to forming this market,” Alexander Chub, the CEO of Russia Towers, told bne IntelliNews in an exclusive interview.
Today Russia has some 74,000 towers in total (according to AC&M report Russian Tower Market 2017-2018). The majority still belong to the main mobile phone operators and service the 2G and 3G, 4G networks. However, of the total there are some 10,000 that are independently owned and operated of which Russian Towers owns 4,500 in June, or around 45% of all the independent towers in the country.
While it would makes sense to sell their towers and concentrate on their core businesses, the attitudes to tower ownership varies amongst Russia’s four biggest mobile phone companies.
“None of the mobile players have sold their towers yet although two of them have tried to sell,” says Chub. “Vimpelcom (that operates under the Beeline brand) has carved out their towers into a separate company but they haven’t managed to find a way how to monetize it yet.”
“Megafon didn't announce any process of divestment but it has also moved all its towers into a separate legal entity and now wondering what to do with it,” says Chub. “And MTS is the most conservative and believes that it needs to keep control of their own towers.”
Russian Towers continues to build its own towers and has so far invested RUB11bn (the amount in rubles is difficult to estimate due to the difference in exchange rates for 10 years) into the infrastructure, which it then leases to the mobile phone companies on long-term contracts.
The money was raised partly from the shareholders that have contributed to the capital of the company and partly by bank credits.
“Partially money was given to the company as a shareholder investment from our investors which include the European Bank for Reconstruction and Development (EBRD), UFG Private Equity, Macquarie, ADM Capital (currently CEECAT Capital), the IFC and Sumitomo,” says Chub. “But we also borrowed money from the local banks.”
Getting ready for 5G
The big change in the mobile phone industry will be the advent of 5G technology that will take data transmission up to a new level and bring with it a sea change in the kinds of services that can be offered. It will also shift the focus of the business away from mobile operators and towards the owners of the towers that provide this platform as the traditional emphasis on calling people on the phone becomes an increasingly small part of the business. Indeed, in Russia the mobile phone companies have been earning more from data transmission than from voice calls for several years already.
“There will be a lot of changes, but the main one is the density of the transmission towers will increase dramatically: there will be ten times more base stations,” says Chub. “And the topology will be very different. And the equipment will be very different. And it is going to cost big money.”
To cope with the radical increase in the amount of data flying through the air, the base stations have to be closer together. But at the same time they can be smaller. Chub says a traditional 2G or 3G tower is usually up to 70m tall and festooned with microwave emitting gadgets to get its signal out. The 5G “towers” are actually slender poles with an antenna on top, but it is hooked up to a much more sophisticated network that includes fibre optic cable connects, data centres run by powerful computers instead of relying on microwaves and electrical supplies become a bigger issue.
“It means each site will be smaller but a more complex solution,” says Chub. “It means that a lot of elements that are currently under the control of different players – the towers, the computers, the fibre optics, the power – could be all brought together into a single unified operating company.”
As for the cost of the investment, no one is really sure. Chub says the industry estimates are on the order of RUB400bn-RUB700bn ($6.4bn-$11.1bn), but adds those are just guesses.
“With 5G all the investments could be not just ten times more but a multiple of even that increase, because being a unified infrastructure provider you have to think about and invest in a number of new elements,” says Chub.
The cost will partly depend on how 5G is rolled out. Chub says that if it is going to be for “everyone, everywhere” than even the RUB700bn is too low. But if 5G initially targets the heaviest users it can be implemented relatively cheaply and quickly.
“You have to ask yourself, what is 5G? 5G is about high speed and high data transmission with low latency. Who needs that network?” asks Chub. “If it is done in stages and those done cover particular functional needs like industrial territories, design centre or offices then the investment would not be not that dramatic. But we are still talking about large money – its not just about building some new towers.”
Who’s in charge?
It is still not clear who will play this role of single unified provider, or even if that is the solution that is adopted in the end. One or several of the incumbent mobile phone operators could play this role. But then so could Russian Towers and providing the fast platform starts to be of paramount importance in the new world of super-fast connectivity, rather than the add on services like voice calls and SMS. Another possibility is the is the state could come in and play this role if it decides the 5G platform is a piece of basic infrastructure like the railway system or road network and runs it as a natural monopoly.
5G is on the way, but it won’t be possible for at least another year. Another one of the issues that needs to be settled is assigning frequencies and there is a vigorous discussion in the Kremlin over how that should be done. Chub says that this debate will take at least six months to settle and then there will be another six months to pass all the supporting regulations.
Back in 2017, Russia's state commission for radio frequencies allowed 5G testing with a use of frequencies in the range of 3.4 GHz to 3.8 GHz and separately, Megafon was allowed to do testing using the 26 GHz range. However, requests for further tests were denied following after the Federal Security Service (FSB) intervened, which is concerned about running strategically important services on foreign-made equipment. This year the FSB submitted a proposal that it take on the role as operator of the network that includes a domestic manufacturer for all the equipment.
“It is a huge task that can’t be completed by one single player – be it government or one large player – there will be requests from a number of people. And Russian Towers will be one of those players,” says Chub, who adds that once the strategic questions are answered testing in the big cities can be rapidly rolled out.
The roll out of 5G will present a huge opportunity for investors as the capital needs will be large. Chub says one possibility would be an IPO to raise investment capital.
“The idea of an IPO would be welcomed by all our shareholders,” says Chub. “But it depends on the macro situation and the state of the market. But I believe the horizon for an IPO could be two or three years from now.”
And the market could see some more consolidation before its entirely ripe for the changes that will come with 5G. Russian Towers has already bought out some of the smaller companies and added 300 towers to its collection last year by acquisition. It has plans to acquire a similar number this year.
“We are still interested in acquiring the towers from the established players but as time passes and as we improve our own footprint on the market the less is the interest in acquiring infrastructure that was built for 2G and 3G,” says Chub.
The big mobile phone operators risk getting left behind on as the tower business continues to mature. While none have sold their towers, Chub says that if they hang onto them for a few more years Russian Towers interest in them may fall to zero as the technology they hold becomes increasingly obsolete.
“The prospects for telecom are great. In the next stage with this new infrastructure the nature of our business will change as it opens up the possibility for the infrastructure-owner to provide services and these services could be anything,” says Chub.
“We will provide more than just the real estate and eventually we will be entrusted by mobile operators with more and more functional responsibly like shared antennae, fiber backhaul, etc. Our vision is that Russian Towers will be seen as a truly ‘neutral host’ helping its key customers to get maximum efficiencies and serving the needs of society at large.”