WiMAX in Russia - Perspectives from a Leading Service Provider

One of the cornerstone tenants of the WiMAX is to bring modern communications to emerging markets like China, India, and Russia. Quite simply, in countries where the wire-line infrastructure is obsolete and antiquated, it would make good economic sense that Internet and telephony be delivered by modern, low-cost, wireless technology. The prospect of people across all of Russia using WiMAX to help harness their growing free-market economy has excited both broadband operators and the investment community alike.

In an effort to capture that excitement 'GlobeTel' announced in early 2006 a $600 million nationwide Russian WiMAX project that would provide coverage to 30 of the largest cities. Though GlobeTel was a virtual unknown with no experience in Russia, investor interest in the project was so keen that the price of GlobeTel shares increased 75% the month following their announcement. GlobeTel's Russian foray soon ended, reportedly over disputes with their Russian partner.

Episodes such as Globetel's have not discouraged interest in Russian WiMAX. Many Russian operators have subsequently announced their intentions to enter the WiMAX arena. Last October 'Comstar' (part of the powerful 'Sistema Group' that also owns cellular operator 'MTS') announced intentions to build WiMAX networks in 16 regions throughout Russia using 2.5 to 2.7 GHz spectrum. Also last October, 'Golden Telecom' (NASDAQ), the largest alternative operator in Russia, announced the start of a WIMAX trial in Moscow and additionally applied for a nationwide license in the 2.5 to 2.7 GHz band. All three of Russia's national cellular operators have likewise stated their interest in WiMAX - even though they also recently received 3G licenses.

As you would expect, a cadre of fast-moving 'start-ups' were first to acquire the requisite spectrum to offer WiMAX services. Start-up companies including Synterra, Summa Telecom, New Telecommunications, Start Telecom, MetroMAX, Infoseti, ART Communications, Quantum, Stelt, and Enforta quickly staked their claims to various spectrum bands. Though there is no 'license free' spectrum for wireless operators as in the US, there are over 300 operators for multipoint data communications registered with the Russian Ministry of Communications. Some of these operators have begun operations in earnest, while others bear a striking resemblance to 'GlobeTel'. Clearly, many are just speculating on the growing value of WiMAX spectrum.

The catalyst for this spectral 'feeding frenzy' is the enormous potential that WiMAX technology holds in today's Russia.

First and foremost, despite concerns in the 'west' over Russian's political direction, nobody can dispute that Russia's economy is red hot. In terms of growth, Russia's petro-fueled economy has outpaced most other emerging economies with both foreign direct investment and GDP growth at near record highs. Most encouraging is that when the nation's energy wealth is deducted from the equation, it's economic engine still shows signs of 'firing on all cylinders'. With its Soviet Era debt to the 'Paris Club' nations now repaid, Russia is fast becoming the world's newest creditor nation.

Secondly, the Soviet legacy has left modern Russia with an extraordinarily well educated population that craves the content and information found on the Internet. With near 100% literacy, Russia's 'non-petro' economy is largely 'knowledge-based' resulting in the country ranking 11th globally in terms of Internet users. See http://www.internetworldstats.com/top20.htm Graduates of Russia's universities (70% of whom study business and engineering) prioritize a PC amongst their first major purchases. Hence Russia is ranked amongst the top 10 countries in PC sales.

Thirdly, the telecom sector has not enjoyed the same level of investment as other sectors. This is especially true in the so called 'regions' (areas outside of Moscow and St Petersburg) where the state owned incumbent operator ('Svyazinvest') still manages local wire-line telephony. In the regions, the existing copper infrastructure is so old that it barely supports voice much less DSL. So while the university graduate can afford to buy a new PC, there's no broadband to connect it to. Interestingly, in 2006 there were 27M Internet users in Russia, but only 2.4M broadband lines in service - half of these being in Moscow.

Lastly, while broadband is certain to boom in Russia, the expected subscriber densities during the next 5 years will remain modest compared to developed economies. This is particularly true in Russia's regions where annual household income remains below $4000. Given the relative cost and projected broadband subscriber densities, it is difficult to economically justify a 'truck roll' to extend or upgrade traditional wire-line infrastructure. The economics of WiMAX, including better synchronization of capital investment with subscriber revenues, gives it an economic advantage over other broadband technologies with these lower densities.

For those WiMAX operators dreaming of broadband megabucks, there are few markets with such a fertile combination of economics, demographics, and social trends as found in Russia today.

An early leader amongst the Russian WiMAX start-ups is 'Enforta' who this week announced the inauguration of their 25th city as well as a development project with Alvarion.

Enforta was founded In October 2003 by a group of telecommunication industry executives headed by Lee Sparkman (President) and Victor Ratnikov (General Director). Sparkman and Ratnikov are not neophytes to emerging market telecoms. They, like many members of their management team, have worked together in various global telecom start-ups. They spearheaded the development of Sprint Russia (the subsidiary of the US operator and amongst the Soviet Union's first alternative operators) as well as TransTeleCom (the nation's second fiber backbone operator).

According to Victor Ratnikov, "For many years at 'Sprint' we did the best we could for our Russian customers, but there was no competition in procurement of the backbone network so services were relatively expensive. Then having constructed and operated the largest SDH fiber network in Russia at 'TransTeleCom', we saw that we could deliver high quality backbone services including Internet, but the last-mile remained a 'weak link' - problematic and expensive. Addressing the last-mile issue was the logical next step, and that's what we intended to do with 'Enforta'."

Recognizing the potential for wireless broadband to service both business and consumers, Sparkman and Ratnikov began writing the Enforta business plan and applying for spectrum permits in October 2003. It took 10 months from the time of submitting the applications to obtain the initial spectrum permits. "The first year was very uncomfortable", said Sparkman. "There was a limited window of time before other competitors would also apply for spectrum. We made the decision to initially apply for spectrum in 5.2 GHz. At the time this was a risk since there is no formally adopted WiMAX profile at 5.2 GHz. Fortunately, several vendors familiar with the Russian and CIS markets had already ported their equipment to 5.2 GHz". Enforta ultimately received its initial spectrum permits in 26 cities at 5.2 GHz.

"Our first priority was to service the business sector", commented Ratnikov. "We knew that with 802.16d Enforta could dramatically improve on Internet price-performance for the business sector. Further, we knew that the initially high price for WiMAX CPE would be prohibitive for most Russian consumers".

Early in its development, Enforta was fortunate to attract a strong investor group. Sumitomo Corporation, one of Japan's largest trading houses and infrastructure investor in emerging markets, became Enforta's anchor investor. Sumitomo was later joined by Baring Vostok Capital Partners - amongst the largest and respected private equity firms in the Russia/CIS region. This past December, the European Bank for Reconstruction and Development (EBRD) joined the shareholder group. "It's unusual to have attracted such a strong shareholder group to an early stage company, but you could not ask for a better group to work with", comments Sparkman. "They all understand the Russian market as a result of having significant national investments, but more importantly they all have Russian telecom experience and thus can contribute much more than funding to Enforta's future."

With scalable investors backing them, Enforta embarked on a program to construct and operate networks in the 30 largest cities with populations exceeding 500,000. The development program included both 'green-field' build-outs as well as acquisition of smaller operators. "Often it was just timelier and more cost effective to acquire small operators", explained Victor Ratnikov. "Assuming that you already have a spectrum permit, organically developing a new city can take anywhere from 5-9 months depending on how hard it is to obtain regulatory approvals for the radio engineering plan."

During the last two years Enforta has made five acquisitions including 'Evgenia' in Novosibirsk, 'Netprovodov' in Ekaterinburg and Chelyabinsk, 'Sky Telecom' in Rostov, and 'MIR TV' in Ufa. The largest acquisition occurred this past November when Enforta purchased a 51% stake in 'ART Communications'. ART is one of the oldest and largest of the Russian wireless broadband operators with a presence in Moscow, Moscow Region, and St Petersburg - combined population of over 20 million people. "We had not initially planned to move into the two capital cities so quickly", comments Sparkman, "but once we got started in the regions our business subscribers wanted us to provide services to their affiliates in the capitals. There was no spectrum available in those cities, so acquisition was the only way to proceed."

Complementing these acquisitions, Enforta initiated operations in 19 cities on a green-field basis. "Designing and building the network is relatively straight-forward with WiMAX technology", comments Sparkman. "The real challenge in launching is to find and training the key people in each city on how to run a WiMAX business. Even after launch it takes several months for the staff in each city to reach full productivity. The competency of the HR staff and training programs are critical to success. "

Earlier this year Enforta was granted a spectrum permit at 3.5 GHz in over 60 cities. "This was great news for us, but as 3.5GHz has shared use in Russia, there is not enough spectrum for Enforta or any operator to adequately service both the business and consumer sectors long term", comments Ratnikov. "Due to its good path-loss characteristics as well as abundance, we plan to continue using the 5.2 GHz spectrum for our business subscribers. Because of its better propagation characteristics, Enforta will use the 3.5 GHz for SOHO and consumers with self-installable and NLOS CPE."

Commenting on their vendor selection Ratnikov explained, "We decided very early that we did not want to sole source with a single vendor at this phase in WiMAX's evolution. Rather we selected two vendors. We selected 'Alvarion' who supplies Enforta with both 'BreezeMax 3500' and 'VL' equipment. Alvarion will also be supplying 'BreezeMax 5200' equipment during Q3 which is essentially the BreezeMax 3500 product operating at 5.2 GHz. Additionally we use the 'Infinet Wireless Revolution 5000' pre-WiMAX equipment which is extraordinarily efficient in price-performance."

Speaking about the unique issues faced by Russian WiMAX operators Sparkman mentioned, "Every market has its challenges and Russia is no different. We live with several peculiarities. For example VoIP as we know it in the 'west' is a regulated service in Russia. Enforta offers our subscribers both local phone numbers and 'packetized voice' service, but these services must be terminated with a licensed operator at very limited margins. Another peculiarity is that Russia's regulatory environment does not yet permit mobile WiMAX (802.16e). I am certain over time these will change."

The Russian wireless broadband market clearly remains in its infancy. According to most industry experts, with 25 cities in operation, Enforta now has both the largest physical network footprint as well as the largest market share in subscribers at 12-14%. The company plans to deploy services in another 8 cities during the second half of 2007 which should further add to their market share.

"A lot of our future competitors are waiting for mobile WiMAX, but given the organizational learning curve in sales, marketing, and support, we made the right decision to get started early", says Sparkman. "You can't be small and hope to survive in the broadband business."

Enforta's management speaks with both optimism and caution about the future of WiMAX in Russia. Given their 'first-to-market' experience and singular focus on broadband, they likely are to remain amongst the top competitors as the Russian market develops.


Enforta's Co-Founders: Lee Sparkman and Victor Ratnikov