Andrey Kuzyaev, ER-Telecom President, on network neutrality andsmart pipes
The state continues to increase regulatory pressure on telecommunications operators: following the requirement to store the subscribers’ data according to the «Yarovaya Law», the «Sovereign Runet Law», providing for the installation of traffic filtration in the equipment networks, will come into force in November. Andrei Kuziaev, the President and key owner of Russia’s second largest internet provider ER-Telecom (Dom.ru brand), describes how the market players use this pressure to their benefit.
— In February, the founder of Baring Vostok Michael Calvey was arrested. Baring Vostok is one of ER-Telecom shareholders. How has the situation affected the company?
— To tell the truth, I was glad to read that Michael was finally released as a result of varying the preventive measure (on April 11 Michael Calvery was transferred from the detention facility to house arrest. — Kommersant). Baring Vostok became our shareholder in the year 2010, but I had known Michael long before that. At first, I didn’t quite understand this wording, but I do now: Baring Vostok means smart money. They have contributed to our business not just money but also their knowledge of business, and have a huge impact on ER-Telecom despite a rather small share in the capital.
Another thing that I would like to say is that the situation with Baring Vostok has evidently had no effect on ER-Telecom, but it is having an adverse effect on the investment climate in general. I hope that this harmful trend of dealing with business matters through criminal proceedings will come to an end.
— What is the current shareholding of Baring Vostok in ER-Telecom?
— About 15%.
— When was it increased? It was about 10%.
— In 2016, we acquired Enforta (a wireless operator.— Kommersant) through the exchange of shares. We issued additional shares and exchanged a part of them.
— Do you consider buying out the shareholding of Baring Vostok because of the situation with Mr. Calvey?
— This decision shall be taken by Baring Vostok, we have no considerations in this regard.
— In the last four years ER-Telecom has demonstrated double-digit revenue growth, but at the same time, you have quite high leverage, which was further increased in 2018 What is the current Debt/EBITDA ratio?
— In 2015, we adopted a strategy declaring that we will double our business in five years. We made it in four years: this year the revenue will be RUB 45 billion, and by EBITDA we will have a two-fold growth of about RUB 16 billion. At the moment, when we made a decision about the two-fold growth, the Debt/EBITDA ratio was 1.8, and now it is 3.2. It is evident that the two-fold business growth was driven by the investments’ growth.
The market of cable operators has its standards and proportions of development. If we take any cable operator in the world, the average debt to EBITDA ratio will be around 3.5 — 4.5. We have to keep investing because we need to maintain the network at the highest competitive level and high-tech state. 20% of the revenue is used, as a rule, for network development and connection of new subscribers, in exchange for high marginality shown by business. This allows sustaining a much higher leverage than that of the conventional telecom operators.
In the upcoming years, we aim to reach EBITDA margin over 40%. In the past years, the indicator amounted to 32%, this year it will be around 34-35%. In the next five years, we plan to double the revenue and create a large independent telecom and IT player with the revenue of RUB 80-100 billion. As we do not intend to dilute the capital, we need a very high leverage to achieve the goal. The results of the last four years have proven our capability to work according to exactly this kind of model.
— The market of fixed broadband internet in Russia is in stagnation. How do you expect to grow?
— First of all, we plan to additionally roll out the network for 5.6 millions of households. The second source of growth is in b2c, meaning intercom systems, which can yield another 5% of growth. We are not talking here about the conventional intercoms, but about «smart intercoms» connected to the network that are equipped with a video surveillance camera and a large set of services. In the cities of our presence, we aim to achieve the penetration of 30-50% in the intercom market and become a leader in this sector in the next four to five years.
There are from five to seven regions in which we are not satisfied with the market position, and we will continue to grow there, but this growth will not be sufficient to achieve our average indicator of about 15% per year by revenue, so we have decided to go into new regions.
From now on, we are going to be the company which leaves big cities to be working in both agglomerations and the rural areas.
We see solvent demand there in b2c segment, confirmed by Tricolor success. Following the paid TV, internet has to enter the rural areas. We will roll out optical fibre networks in the regions with low penetration of broadband internet. If this coincides with a possible participation in the program of digital inequality elimination, it’s good, if not — we will move towards rural internet anyway.
We also see great opportunities in the market of Moscow, including the region, in b2b-segment. In the market of Moscow we would like to bring the revenue of RUB 10 billion in the next five years. Our b2b segment grows organically by 22% on the annual basis. We are going to increase the share of b2g in the revenue, which is currently around 3%. We plan to bring it to 10%. The second priority region is the south of Russia, Rostov-na-Donu and Krasnodar.
— Do you plan to grow organically or through M & A?
— Our strategy provides for the combination of organic growth and M & A. We have proved, first of all, to ourselves, that we are able to earn on acquisitions.
The third most important element is the network upgrade. We have fundamentally revised our relation to the internet service, and all the talks about the telecom company being just a «pipe» are not quite true.
It is too early to turn telecom companies into water utilities — these are «smart pipes», platforms.
We were the first in the country to start rolling out the federal network on optical fibre lines for 100 Mbps, while everyone was saying that nobody needs 100 Mbps. At the moment, we plan to roll out and upgrade the networks and have already started doing it. 1 Gbps, 10 Gbps are our goals for the next three to five years.
— What budget is allocated to M & A?
— Last year we invested only RUB 6 billion out of the planned amount of RUB 17 billion. In total, we planned to invest RUB 30-33 billion into M & A and invested RUB 15 — 17 billion. Approximately 45% of our growth was organic, and 55% — driven by M & A.
I am not talking about future transactions, but they will take place as it’s a part of operating activity. The fact is, when we talk about the digital transformation of the telecom industry, we have to understand that one of the key drivers of the process is consolidation. Small companies cannot be growth drivers.
— Recently, it has become known that Transtelecom may sell its b2c business. Is it an asset of interest to you?
— If they come to the market, we will consider this opportunity, as always. We are not speculators, we try to be professional and when we buy assets, we have to clearly understand how to make two EBITDA out of one, i.e. improve business efficiency. This is the reason why instead of investing RUB 33 billion, we have so far invested just RUB 17 billion. We just don’t find the assets which secure the required growth quality.
— Why is it necessary to increase the network speed?
— We plan that new digital services will account for 15-20% of the revenue and we will continue to be primarily an infrastructural company, but we feel the changes in the industry. Each year the traffic grows by 35-40%, and our network is now ranking second after Rostelecom by the number of homes passed. A lot of new services are introduced in the market, which require additional traffic and network quality. Besides, the upgrade of our network will require from three to five years, and if today we think that 1 Gbps is excessive capacity, in five years’ time it will be a must.
Another problem today is that 90% of our customers; routers do not meet the standards for delivering quality internet. Therefore, it’s a complex task — we have to develop not only the network, but also the subscriber devices, explain to people, why quality internet has fundamentally new parameters and creates new consumption effects.
— What is your opinion on the idea of abandoning the principle of network neutrality?
— From legal perspective, we do not have network neutrality in our country, or any arrangements between the operators, what we have is anti-monopoly regulation. Internet is a very young market that is still developing, and the state is actively developing the regulations, especially as concerns security.
My position regarding network neutrality is the following: I have invested into the rollout of these networks, they belong to my company, and I will do everything that benefits my customers and myself. If the customers benefit from a certain plan or service and if I benefit from creating exclusive conditions for my customer, I will do it. I am guided by the interests of the customer and the shareholder, while content producers, service providers ride the roads which we have built with private money, and therefore they should follow our rules.
— There are concerns that the Sovereign Runet law may affect the quality of internet services. Do you agree?
— We are not worried about these processes. It’s natural that as a private businessman I give a start every time when I hear about a new law on internet regulation. At the same time, I understand only some of the matters, because the government has a much broader outlook and other goals. Our main point is that there should be dialogue, a balance between the progress and security so that the regulation does not disrupt the market core. And in this area there is significant progress.
In the past, during the discussions concerning the Yarovaya Law, nobody would talk to us at all. But as regards the Sovereign Runet Law, I can frankly say that about 75 percent of our proposals were heard.
We are all for safe internet and the protection of the country’s interests, but we want to be heard as to how this can be done without damage to the future. Today, the dialogue with the authorities is at a very high level. While previously the government assigned all the security-related costs to the telecom companies, in respect of this law, it took charge of them itself. This is a definitive progress. In my opinion, the law can achieve its goals without impeding our development. Besides, I see that the government is rather careful in its approaches to regulating internet and telecommunications industry on the understanding that it will drive the development of digital economy, to which over RUB 1 trillion is allocated. And over RUB 100 billion of this number will be allocated for the purpose of eliminating digital inequality. This is an impetus that we see and that inspires us a lot.
— ER-Telecom wants to participate in the program of eliminating digital inequality for socially significant facilities. What does it include?
— This program contemplates the connection to internet of about 100 thousand socially significant and government facilities, including: schools, medical and obstetric rural stations, local authorities. However, the ideology of the program does not include merely the connection. The state has announced that 70% of the population are already connected to broadband internet, while 30% don’t because it is not feasible for the company to provide services to them in their locations. It’s not feasible due to the lack of infrastructure. Therefore, this program shall be regarded as an opportunity to compensate a part of the operator’s investments into the infrastructure by connecting social facilities. After that, the operators will be able to make it profitable by capturing those markets. We talk about 30 million people, who don’t use internet today. We can expect that 30-40% of them will pay for internet connection and monthly fees.
— Do you develop service plans for the social facilities? When will they appear?
— These matters are dealt with by the Ministry for Digital Development, Communications and Mass Media, we participate only in consultation mode. Today there is no certainty as to how it will happen. I hope that the necessary decisions will be taken, and they need to be taken quickly because we are running out of time. The goals of the digital economy are huge: in three years’ time everything has to be completed, but we are already a half-year through.
There is another critical point: the infrastructure will be built at the government’s expense, and it is important to state on the legislative level that the connection to it shall be non-discriminatory so that any telecom operator will have this opportunity. So far, this matter is not resolved. It cannot be allowed that in some regions there is a monopoly of a certain operator, we need an open platform guided by market laws.
But in general, I have a positive attitude to these state initiatives. This is a huge opportunity for the telecom industry and this translates into hundreds of thousands of workplaces. They require construction, cable laying. These are new orders, in particular, for Russian equipment. This is also an important chance for the cable industry to grow in the next five years and materially increase cable production.
— In 2018, the Yarovaya Law came into effect. You estimated your costs associated with it as RUB 36 billion for five years. Have your estimates changed?
— RUB 36 billion were the first estimates, now they are more moderate and further declining. Today, the main issue is what equipment will allow doing this. In general, our company spends about RUB 1 billion per year on all the matters related to the state security and internet security laws. This amount has a tendency to grow, but at the same time we see a clear line of conduct on behalf of the controlling bodies: when they see that there is an action plan, they accept it and we can work on its implementation. But it’s also evident that RUB 1 billion is a huge amount for us, almost 10-15% of investments into organic growth.
— Who is your contractor supplying the solutions for the Yarovaya Law and the Law Enforcement Support System (SORM)?
— We use the services of all the companies under the tenders. Besides, we have our own developments. For over eight years we have been developing the DPI-related project, and now we are probably the only telecommunication network in the country that has a 100-percent traffic control with DPI. This solution was developed in Russia. Using it as a basis, we deal with a part of SORM-3 tasks (collection and long-term storage of information from all types of telecommunication. — «Kommersant») and we hope that we will be able to prove that it can be used in the new law, at least, in our networks. This will allow reducing the costs.
— Will you have to install the DPI equipment selected by the Federal Service for Supervision in the Sphere of Telecom, Information Technologies and Mass Communications (Roscomnadzor)?
— Yes, we will have to install the equipment, but we would like to install a part of the solutions using in-house technologies and not the ones by the external contractors. Evidently, we will require storage systems, and as we are not the equipment manufacturers, we will have to buy them. But in the area of traffic management and filtration we have quite high experience.
— ER-Telecom remains the largest Wi-Fi operator in the country. How do you plan to use this network?
I have always understood that we do not have a direct opportunity to own a mobile business, therefore, WiFi is our dream of mobility so that we could provide services to our customers outside their homes. Today, our network includes about 20 thousand hotspots. We have two tasks as regards the development of this area. The first is the upgrade of all these routers, because they get out of date, and the second is the development of fundamentally new services on the basis of WiFi, for example, related to security.