Fitch: Russian LTE MVNO Advantages Likely to Be Short-Lived
Fitch Ratings says that the key rationale for providing a LTE service under MVNO terms is gaining timing advantage over competition, but this is likely to be short-lived and not worth the investment suggested by Skartel's-announced MVNO terms.
All of Russia's four largest telecoms operators (Rostelecom, MTS, MegaFon, Vimpelcom) received a large swath of LTE frequencies, including in the 800 MHz range which is cost efficient for covering areas with low population density. Skartel, a WiMAX/LTE start-up company, received LTE frequencies in the 2.5-2.7 MHz range in September 2011 without tender. 'Big Three' operators have long anticipated adding LTE connectivity. Their networks are predominantly LTE-ready, and rolling-out LTE service would require only modest equipment/software upgrades and can be organised fairly quickly.
The only problem is that the distributed LTE spectrum is not readily available for use. The speed of LTE coverage will be largely determined by how quickly LTE frequencies are vacated by the military, their current users. Although delays are highly likely, Fitch believes these are not critical until the mass arrival of LTE-enabled handsets, which is only expected in the medium-term.
Fitch believes the segment of LTE services will remain a niche market for the next two-three years. LTE-enabled handsets and tablets are virtually non-existent which limits the immediate LTE subscriber base to users of USB modems and routers. This market is currently dominated by 3G devices that can provide data downloads largely acceptable for the mass market. Initial LTE adopters are likely to be represented by high speed enthusiasts prepared to pay a significantly higher price compared with a 3G service.
Without handset support, potential LTE subscriber base is unlikely to be broad. The dongles market, although still retaining robust long-term potential, no longer exhibits strong sequential growth. Vimpelcom's mobile broadband subscriber base (USB modem users) contracted by 4.1% qoq to 2.5m in Q212 compared with 2.1% qoq growth in Q211. Broader use of LTE services is only likely when mass tariffs become comparable to current prices on 3G services. Due to the lack of handset subsidies in Russia, Fitch expects the adoption of LTE smartphones to be significantly lower than in Europe.
The MVNO business model may potentially be interesting for Tele2 Russia Holdings, the only large mobile operator in Russia without any 3G/4G spectrum. Gaining capacity to provide quality data services via MVNO arrangements may be an option to address this strategic disadvantage. However, the MVNO price asked by Skartel, the only LTE operator with reasonably wide coverage, does not seem to provide much commercial appeal.
Fitch estimates that LTE revenues are likely to be comparable to the network fee floor set by Skartel. Assuming an MVNO operator with 200,000 subscribers in 2013 and 300,000 subscribers in 2014 generating an average ARPU of RUB600, which is more than twice as much as the current average mobile broadband ARPU, revenues would amount to approximately USD116m for two years, well below the USD170m MVNO fee floor. The assumed subscriber base does not look underestimated when compared to the current LTE subscriber base and announced plans by key operators. Megafon is planning to sign up 100,000 LTE subscribers by end-2012. Skartel estimates its current LTE subscriber base at 600,000, of which approximately a half is in the city of Moscow.
The public offer's terms do not include any capex obligations on Skartel's part. Its current coverage is patchy while the announced MVNO terms do not commit the company to any concrete roll-out obligations. Other terms of cooperation are not clear and would require Skartel's full support for ironing out technical and organisational issues.
Skartel announced that it is ready to open its new LTE network for other mobile providers and published a public offer with key terms which has to be accepted by 07 September 2012. The company's network can potentially accommodate up to four operators. Given that it already hosts two operators, Skartel itself (it operates under Yota brand) and Megafon, there is capacity to add two more. Accepting operators have to guarantee a minimum payment of USD150m for using Skartel's network throughout Russia until end-2014, or USD20m for every macro-region in Russia (there are seven in total), with the exception of Central Federal District for which the floor fee is set at USD70m. The latter area includes a lucrative market in the capital city of Moscow.