We recently met senior managers including CEO Dennis Sverdlov, to talk about its strategy, future plans, and its decision to shift from Wimax to LTE.
The strong backing that Yota has received from the Russian state and deep pocketed investors has helped it get to where it is today. Management has used the strong financial position well, with refreshing branding, smart positioning, and simple yet effective broadband services.
Going forward, things will become tougher for Yota. As it increases its scale domestically and internationally, its challenges will multiply, competition will become tougher, and management attention will be spread thinner.
The most successful Wimax deployment in emerging markets
Yota is the most successful Wimax operator in emerging markets by a wide margin. Having launched its Wimax network in Moscow in June 2009, it now has approximately 700,000 customers, placing it second only to Clearwire in the US, which has 2.9 million customers. It currently has an ARPU of $24 (€18.27), an overall EBITDA of 19% (the company has an EBITDA of 40% in established areas), and it is still adding 3,000 customers per day, which is approximately half of Russia’s mobile broadband net additions.
We believe that there are three key factors to Yota’s current success. Firstly, it has strong backing from the Russian state, which is an investor in the business. This counts for a lot in any country, but even more so in Russia. Few Wimax players have been given 70MHz of spectrum as Yota was, with most having had to lobby extensively and pay heavily for a much smaller portion of spectrum. Secondly, Yota has investors with deep pockets. The company has invested $600m in the business in the three years of existence, and it has plans to invest another $2bn over the next five years. Thirdly, Yota has used its strong financial position well. Yota has been excellent with its marketing, its branding is refreshing, and its positioning has differentiated it in the Russian broadband market. The company has developed simple and attractive broadband access services including no usage caps, no contracts, and two simple tariffs, which it has combined with complete city coverage.
Switch to LTE shatters the Wimax ecosystem
Yota’s pragmatism and technology neutral mindset is also refreshing. Its CEO was very open about its decision in May 2010 to switch to LTE for all new city deployments (for more information, see our opinion piece “Yota’s switch to LTE delivers a hammer blow to Wimax” (May 2010)). Yota calculated that the broader mobile operator support for LTE and its stronger equipment and device ecosystem would translate to lower costs in the medium term, making the decision to switch a simple one. So far, Yota has bought LTE equipment for five additional cities, and has issued a tender for another 15, despite current LTE dongle prices being double that of the Wimax equivalents. However, LTE is expected to quickly overtake Wimax in terms of both device pricing and breadth of choice. Yota’s large spectrum holdings means that in Moscow and St Petersburg it will be able to launch an LTE network alongside its existing Wimax network and run both in parallel until it gradually migrates Wimax customers to LTE services.
Yota’s shift to LTE, and the likely LTE rollouts by Indian operators in 2011, is set to be the final straws for the Wimax ecosystem. Wimax will still have a role to play in broadband access, but as we found in our report “Wimax in Emerging Markets: The Opportunity Assessed” (September 2009, OVUM051360) it will likely be a niche role, rather than as the dominant technology.
Bright prospects in Russia and global ambitions
So what’s next for Yota? There are two new areas that Yota is looking to target. Firstly, with no legacy voice business to worry about, Yota is examining mobile VoIP over LTE. Secondly, it is keen to expand internationally. So far, the company has expanded its operations to Belarus, Nicaragua, and Peru, where it has acquired spectrum and rolled out Wimax networks. However, it has found this approach to be too slow and cumbersome, and it is looking at “partnerships” (which we read as possible M&A opportunities) with existing players.
Going forward, there is little doubt that Yota will continue to excel in the Russian market, particularly after its shift to LTE, which will give it first-mover advantage. However, we expect that existing broadband competitors will make it much tougher for Yota going forward. Yota is set to be a disruptive presence in the mobile voice market, particularly with the availability of LTE phones and improving price points over the next 12–24 months. It is still too early to tell how Yota will do outside of Russia, where it can’t rely on the powerful sponsors it has in its home market.