By Ben Aris of bne

Russian mobile phone operators just launched their first 4G networks and the biggest cities are due to be covered by the end of this year. The move to better technology has opened a new world of opportunity for Russian 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 telecoms. After leaving the British Army’s Welsh Guards he moved to St Petersburg where he was one of the founding partners in PeterStar, the first commercial fixed overlay network operator. PeterStar was set up in 1992 and blazed the trail for foreign investors into the new Russian market, and was eventually sold to Russian major mobile phone operator MegaFon in 2002.

Owen Edmunds set up Russian Towers in 2009 with his partner of many years, US entrepreneur Garth Self. Mobile phone companies need base stations to send out their signal, but once the competing networks all cover the same ground the rational for owning these towers changes: it makes more sense for rival firms to cut costs by sharing the towers than it does to add new networks where one already exists.

Putting up telecoms towers is capital-intensive with a long-term pay back – a difficult proposition in Russia. Before Russian 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 investor to promise the investment 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. Eventually Swedish telecoms company Tele2 (recently bought by VTB) broke the ice and agreed to a deal for 55 towers.

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

Russian Towers has grown fast and has since signed up all the dominant players – Megafon, Vimpelcom and MTS – in the Russian mobile phone market. It had a second round of fund raising in 2012. Macquarie, ADM Capital of Hong Kong and Japan’s Sumitomo, as well as UFG and EBRD put in another $100m.

“We are not reinventing the wheel here,” says Owen Edmunds. Most other 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 Edmunds. “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 also makes the companies finances easier to organise 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 publicly listed companies. Russian 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 ($1,548) per month instead.

Still, it is early days. By the end of this year Russian Towers will have some 800 towers up and running, compared to the 24,000 that mobile operators own and run themselves.

Although owning towers used to be seen a strategic, controllable asset in Russia, building and maintaining towers is a chore that doesn’t sit well with mobile phone operators as they transform 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 Russian 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. Russia has begun to invest heavily in building high-speed rail links between a dozen major cities ahead of hosting the FIFA’s World Cup in 2018, so demand for mobile coverage along rail routes has increased.

To date Russian Towers has concentrated on building out-of-town stand-alone towers as Russia’s big three operators did most of the inner city roof-top deals in the first stage of development. However, Russia’s first 4G licenses 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, such as lampposts,” says Owen Edmunds.

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 said at the end of May it would cover all districts in Moscow by the end of the year and will also launch 4G in 6 other Russian regions.

The remaining issue to be resolved is making more of the 800 MHz frequency, currently used by the military, to allow for full roll out of 4G in Russia. For Russian Towers, that’s just another opportunity waiting.

Related reading:
Tele2 sells Russian arm to VTB
, FT
Megafon: to buy or not to buy
, beyondbrics

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