Service-Telecom: A towering ambition

Russia has huge untapped potential for tower infrastructure – it has millions of mobile subscribers that are consuming data on platforms like WhatsApp, Facebook and Skype at an increasingly rapid pace. Nikolay Berdin, CEO of independent telecom tower infrastructure company Service-Telecom, explains why the company is seeking to expand its operations from Moscow into the whole of Russia. He also outlines the reasons why MNOs are partnering with towercos and transferring ownership of their  assets to third parties, and talks about how the Russian government is supporting the development of the towerco industry.

TowerXchange: Please introduce Service-Telecom and how the company has evolved.

We started operations in 2015 with the specific aim of becoming one of the leading national independent telecom tower infrastructure companies in Russia. We started from scratch with a structured business model, looked at international markets for reference, and came to the conclusion it was time to start with a BTS model in Russia. All four MNOs in Russia work with independent towercos to develop their networks.

The top three Russian bank came on board as a strategic partner, and once we were fully funded, we started construction. We secured contracts with Megafon and Tele2, and then started on construction at the end 2015. Just over one year, we have built 350 sites plus we have more than 100 in the pipeline under consruction, and we expect to expand our portfolio via M&A. As the results, we aim to have approximately 1,000 towers in place by the end of 1Q 2017.

We referred to international experience, and we agree that there are two ways for us to develop - organic growth through build to suit and inorganic growth through M&A. In the company’s early days, we explored M&A options in the Russian market and potential tower sales from VimpelCom, Tele2 and Megafon.

As you know, Russia is a huge country, with over 20 million people in the Moscow area alone. Moscow is our home region, but from the first year of our existence we embarked on an ambitious regional expansion. We are talking about Russia from St Petersburg to the Urals, focusing now on the hottest markets, which include St Petersburg, Sochi and Krasnodar, the Volga region and the Urals. But we are under no illusion that this will be easy – other Russian tower companies and local incumbents are active in these regions. Our strategy is to grow into a national player and develop a strong reputation in our market.

In spite of this, we are very pleased with the progress we have made this year. At the start of 2017, the MNOs started to announce their annual plans and place more orders with us compared to last year.

In terms of organic growth, we have earned credibility with MNOs in the Moscow region. At the same time, we are looking at additional opportunities on the markets like M&As and JVs and everything which can help us to grow further.

TowerXchange: Are you only focused on Russia?

We’ve only just started so it is way too early to say. We are definitely interested in serving the Commonwealth of Independent States (CIS), but our focus for now is on Russia and we see it as a very interesting market.

TowerXchange: Can you summarise your opinion of the current tower market in Russia? For example, the split between MNO-owned, MNO carve outs and independent towercos. How do these players all relate to one another currently?

We believe that the Russian market has huge potential for tower infrastructure; it may be one of the biggest markets for tower infrastructure in Europe. The country has more than 250  million subscribers and at present people are migrating to data at a huge pace – everyone uses Skype, WhatsApp and Facebook. Russia has a lot of big cities with populations of over a million people, each creating high levels of traffic and high requirements for data.

In the quest to keep pace in the past MNOs wanted to do everything themselves, concerned about keeping their market share, they have however now started to consider independent towercos.  Now, in a challenging economic environment they still need to invest funds into network expansion. An opportunity to fund the CAPEX with the help from independent towercos  became a valid option to have.

There are four MNOs in the Russian market. Tele2, is aggressively growing and successfully entered the Moscow region a year ago. Vertical and Russian Towers helped them to grow and establish a network in Moscow – a good example of how the company successfully launched in the hottest city and largest market in the country. There is the same level of demand from other large cities all over the country. This was one of the reasons why St Petersburg was our first priority after Moscow, and we plan to grow from there with MNOs constructing their network.

In the case of MNO-owned towercos, these companies usually accumulate assets and don’t play an active role in the tower segment. For example, Megafon has very different ambitions to VimpelCom. VimpelCom set up a towerco for a carve-out; rumours say that they’re quite close to the end of the process. Megafon is more conservative, looking at market opportunities, and  itis still not very active in terms of selling their towers. They are probably preparing for a carve-out or JV or something else. I expect  they’ll be ready close to the middle of the year.

TowerXchange: In our conversations with Western European towercos, small cells and 5G rollout is a really hot topic. Can you give us any insight as to how close Russia is to 5G rollout and what the small cells/densification needs will be in Russia over the next few years?

I believe that all MNOs are deeply involved. Megafon and MTS have already announced trials with Huawei and Ericsson. Next year we have the World Cup and the trials will be introduced during the championship. In terms of network coverage, we don’t see much activity associated with this; it’s far too early for Russia. We asked several questions to technical heads, they have pilot projects, but are still in testing mode.

We do believe that there is a lot of potential in LTE, and MNOs continue to build these networks. They have started to introduce LTE Advanced in Moscow and a number of cities across the country, which allows consumers to browse the Internet at a speed from 150 to 450 Megabytes per second.

Small cells became a hot topic two years ago with Moscow having become the place where were trialled. There is still a demand for macro sites of 40m plus, but in towns it’s switched to small cells and steel poles 15m to 30m high. MNOs are also testing indoor technologies and with independent towercos it’s developing more rapidly.

As a company, our focus mainly on small cells. We are putting in street poles 20 to 30m high which can share two to three small cell tenants and providing different solutions around that.

TowerXchange: What can you tell us about government initiatives in terms of Russian telecoms infrastructure? Is there anything in particular which is driving or inhibiting growth?

Certain initiatives are likely to lead to the growth of the towerco market, one of the most important one’s being the removal of the requirement to obtain a building permit for  certain types of telecom towers. This has been introduced in a number of regions, including Moscow and St. Petersburg and regionand as such, you can now construct a tower in those areas with fewer bureaucratic procedures. This really helped to develop the market in the Moscow region. It’s not the case for every region in Russia though, some regions are trying to do the same and others are lagging behind - we have also heard of instances where MNOs have struggling with the speed of network development.