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We have a lot of laws that unfortunately don’t work

MegaFon CEO Sergey Soldatenkov on the relationship between business and government

07.07.2016

The draft law obliging mobile operators to collect and store recordings of their subscribers’ calls, messages and all user content has been criticized by major mobile operators and internet companies. This initiative comes as a challenge for SERGEY SOLDATENKOV, who recently returned to the post of CEO at MegaFon. In an interview with Kommersant, he advocates the introduction of an additional tax for operators of roughly 1% of annual revenue so that the government itself could use this money to create storage facilities for user data.

— The anti-terrorism package of laws initiated by MP Irina Yarovaya and Senator Viktor Ozerov has been approved by the lower and upper houses of parliament (the State Duma and Federation Council). The initiative obliges operators to store information about calls and the transfer of information for three years and also, something that was previously not permitted, to store recordings of calls and messages for six months. What do you think, will the president go ahead and sign this law?

— It’s very possible he will. We think it’s strange that the government has decided to pass over parts of its security functions to private companies. In May, when the draft was only being considered by the State Duma, [MTS President] Andrey Dubrovsky and I met with Irina Yarovaya and explained the consequences to her. Unfortunately our position was not heard. In its current form this law will destroy the telecommunications sector financially. We can’t implement it without passing on part of the costs to our subscribers, everyone knows and fully understands that. I hope the government will issue a decree with explanations setting more realistic data storage timeframes that MegaFon would itself be able to achieve without passing on the costs to clients and shareholders.

— Some believe that, if passed, this law could be softened in future by the new Duma or through a government order. Do you think that’s realistic?

— I’m hoping for that. With the law in its current form, we need to spend more than 200 billion rubles. For comparison, our annual net profit is 50 billion rubles.

— A number of politicians have mentioned that some of the requirements in this law exist and are implemented on western markets. So is the reaction from operators more emotional or are there genuinely critical risks for business?

— There aren’t such requirements in other countries. Some governments store data partially, but not operators. In our meeting Andrey Dubrovsky and I suggested to Irina Yarovaya the creation of a new tax for mobile operators. We already have a universal services fund into which we pay 1.2% of revenue. We suggested making an additional tax so that the government itself could use this money to create centers for processing and storing the data it needs. It’s not our role, not a function for us to perform.

— What amount of money could you allot for these aims?

— Any tax should make economic sense for the government and operators. An additional 1% tax on revenue would not influence the sector at all, everyone would cope. But if it’s 20%, that’s a whole other story. Today, with the law in its current form, we can’t implement it.

— But if it’s signed, you’ll have to?

— We have a lot of laws that unfortunately don’t work. And in this form, it seems to me that Yarovaya and Ozerov’s law won’t work either.

— Has the management or shareholders of MegaFon or other operators reached out to the president?

— I am not aware of that. I think we did everything possible to inform members of parliament, the Federation Council and the government that it’s impossible to pass the law in its current form. We don’t think operators should reach out to the president. It could be that operators’ shareholders will send a joint letter to the president, but that’s up to them.

— Last week MegaFon shareholders approved your appointment as company CEO. How long ago were you invited to again head MegaFon and how involved are you in the company’s operations?

— The invitation came this year and in April the board decided to appoint me acting CEO. Many are saying I’ve returned to the company. But actually I didn’t go anywhere; I’ve always been close by as chairman of the board.

— Did you have any concerns about returning to operations?

— Of course it’s not an easy step. On the one hand it’s always difficult to step into the same position twice and handling operations is hard work. On the other hand, fours years of being away from daily management of the company allowed me to understand that I still have the energy, desire and capability to work, to create value for society, our clients and people. Now my colleagues and I are working on a new MegaFon strategy.

— Under you MegaFon became the number two nationwide operator by number of subscribers and mobile revenue. How, in your view, has the telecommunications business changed since you left the post of MegaFon CEO? What are the main trends today?

— An important change is that there are now a huge number of OTT services on the market (online services like WhatsApp, Skype, Telegram and others — ed.) that operate using our networks and are not legally regulated but are popular with our clients. We see opportunities for different partnerships and are always open to collaboration. Creating convenient services and moving subscribers into a comfortable digital environment and ensuring that these services are available everywhere is the main goal towards which we are moving.

— Which services, apart from your own recently announced communications product eMotion, are you planning to promote with your data subscribers?

— We have an extensive product range. For example there are more than 1 million subscribers for the MegaFon TV app alone. We also operate on the financial services market and are working on several new products; soon we will issue bank cards. I can’t speak in detail about that now, but the market will soon find out about them.

— There has long been talk about the need to consolidate the Russian mobile market. What do you think about that?

— Today we have four major mobile operators on the market. In some regions there are local players as well. Probably for the current market, four operators is certainly enough. Although while it’s ok for big cities, perhaps it’s excessive for smaller towns. But it’s hard for me to say who will consolidate with who. Currently we are not planning to consolidate with any existing players on the market.

— But in your view a merging process would be logical?

— If it so happens that, of the four operators, three remain, that would not be negative for the market; there would still be competition. It would just mean that the market is moving in the right direction. In countries in Europe such processes are underway, with major operators merging. Whether this will happen in Russia depends on the companies’ owners. Excessive competition destroys operators’ costs and it becomes much harder for them to invest in building next generation networks. 5G is not far off and increased competition could simply block the creation of new technological products that will be rolled out in other countries.

— Recently Tele2 finally entered the Moscow market, which it hadn’t been able to do for many years. As such, Russia gained a fourth national operator, T2 RTK Holding. Is MegaFon experiencing any pressure from this market player?

— Tele2 has been on the market for a long time but has moved from being a voice-only operator to begin offering universal and mobile data services. Of course we are feeling certain pressure and a rise in competition. But we don’t see a real threat and don’t think this operator could destroy our value or dramatically change the market. I don’t think that will happen.

— Tele2 positions itself as low-cost. And in a crisis, also given the possibility to switch to a different operator and keep the same number, have you seen a rise in clients leaving?

— I won’t be original here: most likely my colleagues on the market are seeing the same situation in Moscow. Of course we are seeing a rise in Tele2’s subscriber base. But we are also seeing that the company is beginning to increase its rates because at the existing prices it’s impossible for Tele2 to recoup the investment it made to enter the Moscow market. I think Tele2 will move away from the low-cost image but soon subscribers will realize how much its services, and the volume of services included in their tariff plans, differ from other operators. We do not have a big outflow of subscribers. MegaFon’s subscriber base in the Moscow (Stolichny) region rose 2.4% year-on-year in Q1 2016.

— Analysts at Renaissance Capital recently released a report, after a meeting with the management of MTS and MegaFon, that discussed the possibility, albeit theoretical, of a full or partial acquisition of T2 RTK Holding. Are there any grounds for such a deal and is MegaFon interested?

— MegaFon hasn’t received any proposals about buying Tele2. My personal opinion is that MegaFon doesn’t need to buy any of the players on the telecom market. I could presume that Tele2 will likely eventually be sold to Rostelecom, which would be logical. We don’t see any threat for us in that. Rostelecom is now the biggest operator on the fixed line market but we also have assets in that area. We also successfully compete with Rostelecom in terms of government services, where we have a market share of roughly 30%.

— Is MegaFon considering the possibility of M&A deals?

— We closed a number of fixed line deals in 2014-2015. In terms of mobile operators, we bought part of the SMARTS group, largely because of the frequencies it has. We are working to expand our “bank” of frequencies for the future because that’s what limits to what extent a mobile operator can offer faster internet. In June at the St Petersburg International Economic Forum we demonstrated the capability of next generation data transfer at speeds of more than 1 GB/s (5G —ed.). Today only we can demonstrate such speeds thanks to the fact we have a really good frequency bank. This is why we are more interested in taking part in the frequency tenders and auctions that the government runs and not in acquiring any operators.

— At the end of December we wrote that MegaFon and the company Scartel (Yota brand), which it controls, applied to [Russian communications oversight body] Roskomnadzor for joint use of frequencies in the 2500-2690 MHz band using the LTE standard in 14 regions. Were the applications successful?

— I can’t say exactly. I think that issue has already been resolved.

— In today’s realities, should operators be focusing on their own retail capabilities like MTS is or should they be handing sales over to third-party retailers?

— We’ve always found a combination of these approaches comfortable. We use third-party retailers to attract subscribers and our own stores — of which there are more than 2,000 and a further 2,000 under franchise — work to sell additional services to our subscribers. The fact that MTS has a large retail network, as Andrey Dubrovsky said, is a response to competitors, i.e. us. And I still think that with time operators will work with independent retailers and cut back their own stores. Currently there are too many mobile stores on the market. And a lot of money is spent on developing this retail network, which puts pressure on the business margin.

— Tell us about work on the new MegaFon strategy. What will be the main differences from the existing strategy?

— In the last three-four years we have focused on operational and overall business efficiency. Now we see that the market is ready for the creation of more and more opportunities for digital subscribers. This digital environment means all the services we provide, all the technological advantages, including the data transfer speeds, that make it convenient for subscribers to consume any type of service or content they want. We are counting on our strategy allowing us to increase our subscriber base not so much in quantity but quality, by increasing the amount of data traffic, which will bring us additional revenue.

— Do you have plans to increase market share in any specific sectors, for example in the state sector?

— We feel comfortable on this market and plan to continue developing there. The consumption of M2M services is growing very quickly right now globally. Very recently we announced we are ready to work with Rosseti to equip some 300,000 power stations with our SIM cards. That is an area that we see as promising.

— The M2M concept is closely linked with development of the Internet of Things (IoT). Do you see a new niche for yourself with IoT?

— It’s still difficult to say how big the IoT market will be but in the near future of course any devices that can be tailored to collect information will be connected to the internet. It’s a potentially huge market and we will be involved in its development.

— In the 2008-2010 crisis, MegaFon invested more actively than its competitors in developing its network and 3G technology, which gave the company and head start. Competitors have now made up for lost time, while MegaFon, on the contrary, has slowed down. What should we expect now? Will the company increase capex?

— We want to achieve a certain balance between necessary investments and the rise in traffic. We have essentially finished building a 3G network and have a big 4G one. There are of course still some bottlenecks and we are working to ensure that mobile coverage is available everywhere and quality is high. This requires certain investments but it’s not the amount that was needed before. The dollar exchange rate in recent years has more than doubled and we operate using Western equipment, so in terms of volume we are now buying less. We are keeping capex at an acceptable level, some 20% of revenue, and are not planning any significant fluctuations.

— In your view, how justified was MegaFon’s acquisition of Scartel?

— It was a justified purchase because we bought a unique frequency spectrum. In future we will be able to offer the data speeds that will be required on this market. The acquisition of Scartel is a continuation of our existing business and the fact that the Yota brand under which the company operates is actively developing is indicative of the fact that we did everything correctly. Any telecom investment is made looking at a period of five-seven years and so acquisitions can only be evaluated after that time.

— Yota doesn’t have domestic roaming at all. Is that a justifiable business model and might MegaFon and other operators switch to it in future?

— Scartel is profitable now and is making money on expansion of its subscriber base. We found the right economic model. Probably other operators could repeat it with time.

— Your competitors are setting the goal of making voice services free in future. What do you think about that?

— I’m more conservative and think that in the coming three-five years such a business model won’t emerge that could ensure free mobile services thanks to some innovation or advertising. In the short term, definitely not; maybe in ten years or so. It’s another thing if subscribers buy a bundle of services where some of them are free. For example, when buying a certain amount of data, voice services could probably be offered for free. Such models exist but it’s not possible for everything to be free.

— Do you have any ideas for synergy with the media and internet assets of Alisher Usmanov, MegaFon’s main owner?

— We are of course thinking about that. We have ideas about creating additional services with Mail.Ru Group and particularly Vkontakte.

— Earlier MegaFon announced the possible sale of its tower infrastructure, which comprises 14,000 telecom towers, and at the end of last year set up a subsidiary — the First Tower Company. What stage is this process at now? Do you have any preliminary agreements with buyers?

— The company has been set up and assets are being transferred. There are three possible scenarios: better management of these assets through the tower company, renting them out or selling them. We are considering all options. We analyzed who could be interested in buying the towers. Various funds are prepared to invest in this company but there are no concrete agreements yet.

— MTS announced plans to roll our test 5G zones at the 2018 World Cup in Russia. When do you think we can speak about the impending commercial launch of 5G?

— The standard will only be announced in 2018. There won’t be any real steps towards rolling out 5G until manufacturers start making smartphones that could operate in that network. We are currently talking with Huawei about using their communications equipment for 5G and Qualcomm is working on a chipset that would be the basis for 5G mobile terminals.

— After the imposition of the sanctions and the shift to focus on import substitution, the relevant ministries have spoken a lot about the need for operators to switch to domestic telecommunications equipment. Do you use any Russian devices for your networks?

— There is Rostec, which is handling the creation of Russian equipment, although it’s hard for me to say how successfully. The main part of our network is built on foreign equipment; we buy cables and fiber optics in Russia. If domestic versions of the telecommunication equipment we need appear on the market, then we would only welcome that, but we need to look how competitive they are.

Source: Kommersant