INTERVIEW: A towering bsuiness in Russia

By bne IntelliNews July 19, 2013

Ben Aris in Moscow -

Russian mobile phone operators just launched their first 4G networks and the biggest cities should be covered by the end of this year. The change-up to better technology has opened a new world of opportunity for Russia Towers, the country's first, and to date only, independent company leasing out mobile phone base stations to what are now the biggest operators in Europe.

Peter Owen Edmunds is one of the pioneers of Russian telecommunications. After leaving the British Army's Welsh Guards he moved to St Petersburg, where he was one of founding partners in PeterStar, the first commercial fixed overlay network operator set up in 1992 , which blazed the trail for foreign investors into the new Russian market.

Those were the days of wildcat banking and "breakfast bombs", but PeterStar was a success and eventually sold to Russian major mobile phone operator MegaFon in 2002. Owen even got to know Russian President Vladimir Putin well, who was the deputy mayor of St Petersburg at the time.

At a loose end, Owen dreamed up the idea of Russia Towers with his partner of many years, US entrepreneur Garth Self, and set the company up in 2009. Mobile phone companies need base stations to send out their signals. But once the competing networks all cover the same ground, the rationale for owning these towers changes: it makes more sense for rival firms to cut costs by sharing towers than it does to add new networks where one already exists.

Putting up telecom towers is capital intensive with a long-term pay back - a difficult proposition in Russia, which is plagued by crises and the lack of long-term money. Before Russia Towers could go into operation, the two men had to first get the mobile phone operators to agree to lease them and at the same time get investors to promise the millions it would take to build the towers. "It was all a bit crazy, as the operators didn't want to sign off on the leasing contracts until the money was in place, but the investors weren't keen to promise the money until leasing agreements were in place," says Owen Edmunds, whose bearing still betrays his military background.

Swedish telecom operator Tele2, which was recently bought by VTB, broke the ice and agreed to a deal for 55 towers that released investment. On its way to becoming Russia's fourth big mobile phone operator, Tele2 also had the least developed tower network and the company was keen to defray its operating costs by leasing towers rather than building them itself.

Leading Russian fund UFG Asset Managers was the driving force behind raising the $40m in the first round of financing and helped persuade institutional investors like the European Bank for Reconstruction and Development (EBRD) and some private individuals to commit to the project.

Russia Towers has grown fast and has since signed up all the dominant players - Megafon, Vimpelcom and MTS - on the Russian mobile phone market. It had a second round of fund raising in 2012 where Macquarie, ADM Capital out of Hong Kong and Japan's Sumitomo, as well as UFG and EBRD again, put in another $100m. "We are not reinventing the wheel here," says Owen, referring to the fact that most developed markets have seen tower operators appear after the initial networks have been put in place.

"People here are starting to understand that they don't need their own towers," says Owen. "Today the mobile phone companies are no longer competing in terms of coverage as they were in the early days, but in terms of services and data. Russia is already as covered [by mobile phone networks] as it needs to be."

Leasing towers helps mobile operators' balance sheets, as the cost of building and maintaining towers is transformed from a capital expenditure item that needs to be financed to an operating cost that can be paid out of revenues, which is attractive for publically listed companies. Russia Towers offers a deal that effectively finances the towers over 15 years, so that instead of paying RUB6m ($194,000) to put up a tower, the customer can choose to lease a tower for RUB48,000 ($1548) per month instead.

Still, it is early days for the business. By the end of this year, Owen Edmunds says Russia Towers will have some 800 towers up and running, against the 24,000 that the mobile operators own and run for themselves. At some point it will make sense for Russian Towers to buy all these towers, and Owen says that just how far this process goes varies from country to country. "Owning towers used to be seen a strategic asset in Russia and usually the operators were reluctant to give up control over all their towers. It depends on where you are. However, at the moment all the operators are thinking about it," says Owen Edmunds.

Building and maintaining towers is a chore that doesn't sit well with mobile phone operators as they transform themselves into pure service companies. It involves buying thousands of tiny plots of land in the countryside or renting rooftop space with the owners of buildings in a city - both of which are tedious and laborious tasks in Russia.

One of Russia Towers competitive advantages is its tie-up with Russian Railways that gives it access to land right across the country, and mobile phone services along rail tracks is in high demand, because there are lots of people that want to use their phones on trains. And as Russia has begun to invest heavily in building high-speed rail links between a dozen major cities ahead of hosting the World Cup in 2018, demand for mobile coverage along rail routes has increased. "We can get the land, access to electricity, install our monitoring system and manage these sites better than the mobile phone companies," says Owen. "Russian Railways likes it too as they only have to deal with one customer which makes the process of organising the towers simpler."

Currently, Russia Towers has concentrated on building out-of-town standalone towers, as Russia's big three operators did most of the inner city roof-top deals in the first stage of development. However, Russia is just starting to issue its first 4G licenses. Which means even the inner city mobile networks will have to be completely rebuilt. "The 4G technology needs new base stations that are much more densely packed in a city. But they don't need to be as high, so you can make use of things like street furniture like lampposts," says Owen.

Under the terms of the licenses all three of the big operators, as well as fixed-line operator Rostelecom, met the deadline to launch 4G networks by June 1. Both MTS and Vimpelcom, which operates under the Beeline brand, launched their first 4G networks in the centre of Moscow, while MegaFon launched its network in Yekaterinburg and Rostelecom in Sochi. Vimpelcom's Vice President Igor Parfyonov said at the end of May it would cover another all districts in Moscow by the end of the year and will also launch 4G in six other Russian regions highlighting the central role Russia's regions play for the mobile operators.

The remaining issue to be resolved is making more of the 800 MHz frequency available, currently used by the military, to allow for full rollout of 4G in Russia, but the changeover has already created a new opportunity for a company like Russia Towers to expand rapidly and move into all of Russia's main cities.

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