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July 08, 2013

Russian Ministry Proposes Taking Back 4G LTE Spectrum from Mobile Operators

Auctions are set for radio frequencies around the world. Mobile service providers literally on every continent are fighting to gain access to more spectrum as current airwaves become congested and incapable of accommodating customer desires for increased speeds. Plus, thirsty new entrants and those in adjacent markets looking for a piece of the wireless pie await their chance to take a bite of the apple. 

In short, since like time, radio spectrum is one thing we cannot create more of but can only apportion differently based on competing commercial and government needs, the value of that spectrum is always a topic of interest. The market typically determines the value of any given piece of spectrum that becomes available, but this is not always the case. In fact, as reported today in The Moscow Times, the Russian government, in the form of the country’s Communications and Press Ministry, wants to take away the 4G LTE frequencies it granted to the country's four largest telecom operators last summer. The goal is to create a single, state-run operator to manage the services, Kommersant (Russia’s large nationally distributed newspaper) reported.

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What the Russian government gave away it now wants back

To summarize, here is what is at stake.

The four major private mobile operators—MTS, VimpelCom, MegaFon and Rostelecom— in July 2012 were awarded the licenses for 4G LTE in a tender conducted by the Federal Service for Supervision in Telecommunications, Information Technology and Mass Communications, or Roskomnadzor. As a result of being awarded the licenses, the four each had to start offering the services on June 1, 2013 with the expectation they would be fully operational in 2019. In addition, they each were required to spend at least 15 billion rubles ($480 million) per year to develop the 4G network.

This type of approach is rather routine around the world. What is rare, however, is how the Russian ministry has decided to recognize the passage of the June 1 operations deadline. Officials decided the companies were not moving fast enough and sent a proposal to the presidential administration to withdraw their privileges in favor of a single LTE operator. The primary concern cited according to the reports was concern that the operators, as could have been easily predicted, were developing the services primarily in large cities. The government was looking for LTE deployment as a means to help close the digital gap across the vast Russian regions, and rather than wait to see if and when the four operators got around to it want the government to take matters into its own hands.

The press reports state that the memo attached to the ministry's proposal asks the president to give a state-run operator frequency bands of 720-750 MHz and 761-862 MHz, as well as all the 390-470 MHz and 694-876 MHz frequencies that are available now or will become available later. The operators would be able to keep frequency bands of 2500-2700 MHz.

The memo emphasizes that numerous operators would be given access  to the single state LTE network, which is claimed to be a two-year project, involve the construction of at least 30,000 base stations and cost 60 billion rubles ($1.8 billion).

Breaking it down

Let’s just say the four operators are not pleased with all of this, and that experts on such matters are of the opinion that such a shift would have to be accomplished via a legal proceeding. 

Putting aside the politics and legalities (Russian courts, for example, might find it advantageous to agree with the ministry’s proposals if they find an enthusiastic audience with the president), the possible struggle here is certainly of interest. It is clear that in many, if not most, countries, universal access to communications is seen as important to economic development and vitality as having access to reliable electricity, potable water fuel for cooking, heating and air conditioning. Where countries throughout the history of communications have always had challenges is providing state-of-art (or in many cases any) connectivity to low-density and hard to reach places.  

Profit companies, despite incentives, will always focus on low-risk and high-return areas, even in the face of a very large stick being used if they do not comply. On the other hand, when governments try to substitute themselves into the market, the results can (to be polite) sub-optimal. Indeed, history is replete with examples where failing to operate efficiently and effectively, governments end up either subsidizing such activities and/or ultimately privatizing them because of the inability to provide the kinds of capabilities the commercial sector needs to keep pace in the global economy.

Obviously, since this is merely a proposal, it is way too early to tell what may or may not transpire in Russia. Plus, based on the press reports it appears the network being proposed is the communications equivalent of the interstate highway system in the U.S.  It seems the state-owned entity would provide the inter-regional network and possibly deeper, but the private operators would be the ones to provide the “last mile” or more. If true, 30,000 base stations may seem like a lot, but even at the macro-cellular level given the expanse of Russia, this literally is the tip of the iceberg. 

All of that said, if this is more theatrics than reality as a means to give the four operators a wake-up call they cannot ignore, it certainly is a good one. Stay tuned. This story is not just about Russia, but could serve as a model in many other places with significant intended and unintended consequences sure to emerge as major variables on determining winners and losers, including customers.

Edited by Rachel Ramsey

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