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    Analysis & Opinion

    Sport news Aug 2, 2010 at 03:23
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    President Dmitry Medvedev’s high-profile drive to cut corruption and create a level playing field for technological development and modernization may face its first test later this month when the government announces the names of the lucky winners of the new Long Term Evolution technology licenses (LTE), better know as Fourth Generation or 4G licenses.

    Over the past several months, the country’s three biggest mobile operators – Mobile TeleSystems, VimpelCom and MegaFon – are at daggers drawn with the Defense and Communications Ministries to prevent well-connected telecom start-ups from obtaining licenses for the construction of 4G networks without auction or tenders.

    But despite protests and appeals from the “Big Three,” Osnova Telecom, minority-owned by Voentelekom, the Defense Ministry’s telecom arm, and RusEnergoTelekom (RET), a joint venture between state-controlled Rostelecom and Gregory Berezkina’s UST Group, are set to receive frequencies for the construction of a federal 4G network by mid-August without competition, auction or tender, the Kommersant daily reported last week.

    LTE is the latest standard in the mobile network technology which is expected to provide an extremely high performance radio-access technology that offers faster mobility. Its backward compatibility with both the 3G and 2G systems as well as its scalable bandwidth will enable operators to easily migrate their networks and users to LTE over time.

    There is strong enthusiasm for LTE deployment in Russia and all of the country’s leading operators have expressed interest in plans to create five test zones for LTE across the country. Last week, MTS announced the deployment of a 4G network in the central part of Tashkent, the capital of Uzbekistan, the first in the CIS. The technology will, theoretically, enable MTS subscribers to enjoy data transfer rates of up to 100 Mbps using LTE-enabled modems. ?leg Raspopov, MTS vice president and head of Business Unit, said the introduction of LTE in Uzbekistan will “allow MTS to gain valuable insight from this unique experience and eventually apply it to other markets of operation in the future.”

    However, unlike in developed countries where most frequencies belong to private companies, in Russia the Defense Ministry has controlled the bulk of the country’s frequencies since the Soviet times. In recent weeks, various media outlets have reported that the Defense Ministry is lobbying for the Long Term Evolution frequencies covering the whole of Russia to be awarded to a company jointly owned by it and a private businessman without a tender. In a letter to president Medvedev in late May, Defense Minister Anatoly Serdyukov asked the president to support a project to create a 4G network across Russia with Osnova Telekom. Medvedev has so far ordered him to “take all essential measures jointly with the Ministry of Telecommunications according to the established procedures,” Vedomosti business daily reported.

    Osnova Telekom, which was registered on June 3, 2010, is majority-owned by Aykominvest with the Defense Ministry controlling the remaining 25.1 percent stake through Voentelekom, its telecom arm. According to company records, Aykominvest is majority-owned by businessman Vitaly Yusufov, a 28-year-old former Gazprom and Nordstream executive, who is also the son of Igor Yusufov, a former deputy industry minister who headed the State Reserves Committee before becoming Russia’s energy minister from 2001 to 2004. Yusufov has been on the Gazprom board of directors since 2003 and has acted on occasions as president Medvedev’s special envoy for international energy cooperation.

    Last month, the chairmen of the Big Three mobile operators sent a letter to Prime Minister Vladimir Putin asking him to guarantee transparency in the allocation of frequencies for the development of the fourth generation networks, RIA Novosti reported. The mobile operators said they were worried by reports about plans to allocate frequencies to some newly created companies, adding that awarding the licenses to start-ups would have “negative consequences for the vast majority of the population of Russia, our companies and the state as a whole.”

    Earlier, the three mobile phone operators dispatched a similar letter to Communications and Press Minister Igor Shchyogolev asking him to block efforts by the military to gain frequencies for fourth generation services without a tender and urged for “a precise and transparent solution” to LTE frequencies allocation. The signatories also suggested that the Defense Ministry may not have the funds to develop a 4G network and may instead seek to sell any license it gets to a third party. The telecom executives said for the start-up Osnova would need at least five years and over $5 billion to build a 4G network from scratch, while the Big Three could do it in half the time and at a fraction of a cost by bolting the new technology onto their existing GSM and 3G networks.

    Analysts said the complaints by the executives are genuine, adding that building a 4G network from scratch requires heavy capital outlay and technological resources. “There is no way the newly-created Osnova could develop a 4G network from scratch without cooperation with at least one of the existing 3G license owners,” Nadezhda Golubeva, a telecom analyst at UniCredit Aton said. “It is most likely that new players are contemplating partnering with big players like MTS or VimpelCom.”

    Russia’s telecom market is Europe’s largest and fastest growing, built mainly by the country’s three biggest mobile operators. Each of the Big Three operators already possess licenses to deploy 3G networks around the country and have invested heavily on the 3G rollout which is now functional in many places except Moscow, where the system is currently being deployed, analysts said. However, Communications Minister Shchyogolev expressed concern last month over worsening cell phone reception in Moscow, which mobile operators attribute to the introduction of third generation networks as the old 2G networks, which run GSM, are being replaced with new 2G/3G equipment. He said mobile operators were removing base stations, resulting in coverage gaps, or that increased data streams were cutting into voice traffic.

    The mobile handset reception problems could also be used by the Big Three to argue for their being issued with licenses for dedicated frequencies, experts said. In what could provide some glimmers of hope to the operators, Shchyogolev also suggested last month that mobile operators that obtain 4G Long Term Evolution frequencies should hand back the GSM frequencies they use for the provision of 2G services in return. Shchyogolev said it would be unfair if the country’s leading operators, which already own frequencies for the provision of 3G services, additionally gain frequencies for 4G services, while smaller operators have neither 3G nor 4G frequencies, according to IHS Global Insight.

    At present only Mobile TeleSystems (MTS), VimpelCom, and MegaFon own 3G frequencies, and each of these has sought 4G frequencies, as has the country’s fourth largest operator, Tele2. State-run Rostelecom, the country’s dominant long-distance call operator, gained a strong platform in the 4G market earlier this year when it was awarded frequencies for the provision of 4G in 38 of 40 regions in which tenders were held. However, the mobile operators estimated that a nationwide LTE network would require between five million to seven billion dollars, and could take from five to seven years to build, which would make it unaffordable for small start-ups.

    Many analysts have said that the scramble for frequencies both by the oligarchs and vested interests in government circles is indicative of their desire to invest in what could eventually become a lucrative business rather than the provision of high-tech services. “Taking into account that 3G networks have not been fully developed in Russia, the fight over 4G is nothing more than speculative attempts by some players to grab licenses for later resale when the market is ripe,” Konstantin Belov, a telecom analyst at Uralsib, said. “However, the Big Three have reasons to be afraid of potential loss of high-tech market share if they lose out on the fight to obtain 4G frequencies. They are all thinking in perspectives because they have already invested in a huge client base, a good distributive network and billing system. They have much to lose if they fail to secure 4G frequencies.”

    The Russian State Radio Spectrum Committee had planned to consider setting up LTE test zones on July 2, but failed to do so because of differences of opinion regarding the allocation of frequencies between the Defense and the Telecommunications Ministries. The Committee and the Ministry of Telecommunications are responsible for allocating the bandwidth and licenses, and the Big Three fear the state agencies will follow the advice of the military, which controls all the country’s radio frequencies that are allocated to civilian use. The committee has also postponed discussing the granting of 4G licenses three times since May, but Shchyogolev said it will come up with a solution by the end of August.

    Whether or not Osnova or other telecom start-ups end up with the licenses, experts said it would be impossible to imagine the Big Three going away completely empty-handed. “We are speaking about big companies with huge financial resources and lobby-power at their disposal,” Golubeva said. “There is a high possibility of some tie-ups, especially as far as MegaFon and Rostelecom are concerned, because it is pretty certain that one way or another Rostelecom will emerge with 4G frequencies. The likely scenario for MTS and VimpelCom would be to either buy or share frequencies or partner with other companies with licenses to develop 4G networks,” said Golubeva.

    Industry executives said the LTE allocation issue may be a litmus test for president Medvedev’s campaign to modernize Russia and root out corruption. “As asset grabs go, this one is pretty blatant,” Eugen Iladi, a Brussels-based Communications expert, wrote in BusinessNewEurope (BNE) on Friday. “If Osnova is awarded a 4G license, then the president’s entire campaign will be shown up as empty rhetoric.”