Yota risks losing Russia 4G deal

OvumThe recent confirmation by Vimpelcom and MTS of a plan to collaborate on the building of an LTE network in Russia…raises serious doubts about the future of the planned wholesale LTE network to be led, built, and operated by Yota that was announced in March 2011.
 
Vimpelcom and MTS, two of the “big three” operators involved in the original Yota plan, confirmed their intentions by signing a memorandum of understanding (MoU) to invest approximately $2 billion (€1.4 billion) by the end of 2012. Given recent developments in the spectrum landscape in Russia and objections to the valuation of Yota, this latest development creates more confusion and uncertainty, and will ultimately delay the rollout of LTE in Russia.
 
Although there is as yet no official line on the future of the Yota-led consortium, this announcement is significant as it begins to tear apart the underlying framework of the March 2011 deal. At that time, the “big three” (MTS, Vimpelcom, and Megafon), along with state-owned Rostelecom, signed an MoU with Yota, a Russian WiMAX-turned-LTE player. The MoU called for Yota to build a wholesale, nationwide LTE network that would be shared by all the partners as service providers, with Yota acting as the sole LTE network operator in Russia.
 
In addition to receiving assured access to Yota’s proposed LTE network, the four operators would also have had the option of a future stake of 20% in Yota. Such an arrangement, though depriving the individual mobile operators of control, would have brought the benefit of nationwide LTE access without the difficulties of raising investment or future debt servicing in an economically challenging environment.
 
Despite the prospect of Yota rolling out a single LTE network, the spectrum landscape in Russia is far from clear. The Yota-led consortium was supposed to have used Rostelecom’s spectrum. However, in July 2010 Yota’s parent company, Scartel, reportedly received regulatory approval from the Russian telecoms regulator, Roskomnadzor, to re-use its WiMAX spectrum for LTE; an approval the regulator had previously declined to give.
 
 
Further reports suggest that the State Radio Frequency Commission may allow MTS and Megafon to swap their existing spectrum for spectrum in LTE-suitable bands.
 
The main uncertainty concerns the tentative spectrum tender in 4Q11 for LTE-suitable spectrum, even though some of the required spectrum bands have not been freed up by the Russian military. Should Russia’s “big three” get access to LTE-suitable spectrum, the decision to roll out their own independent LTE networks becomes easier to make. This would end the collectivist rationale behind Yota’s proposed network.
 
An outcome where Yota proceeds to build its wholesale LTE network while MTS and Vimpelcom build another LTE network will shatter Yota’s existing plan. Building a wholesale network without a guaranteed customer base is a clear risk, while building one to compete with entrenched service providers is a similarly thankless task, as can be seen in the case of LightSquared’s wholesale network in the US.
 
The March 2011 agreement was viewed as a boost to Yota’s ambitions of becoming a serious 4G player in Russia and internationally. Since then, however, the MoU has not been cemented with a binding agreement. The major sticking point seems to have been the $1 billion valuation of Yota’s LTE network, which was publicly deemed unrealistic by MTS. While it is conceivable that the price may be negotiated downwards, disputes over the value of the LTE network raise concerns that all parties to the original deal were not in full agreement.
 
From a public policy viewpoint, a joint venture remains a pragmatic way to provide the swift rollout of a nationwide LTE network in Russia. Such an approach bypasses the challenges of spectrum licensing and the inevitable delay between licensing and network rollout. However, it is an approach that relies on political pressure, as was evident from the endorsement by Russian government officials of the original Yota deal.
 
As the Kenyan government has found out with its own plan to build a single LTE network, making the rollout of high speed broadband access public policy does not always sit well with the competitive instincts of existing market players. As concerns about over-valuation undermine the credibility of the original proposal, it is not surprising that MTS and Vimpelcom are seeking alternatives.

Original article: Is Russia’s national wholesale LTE network unraveling? 

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