Petro Chernyshov – We don’t know whether the country finds hard currency to invest in 3G

Kyivstar President Petro Chernyshov told Capital what guarantee Premier Arseniy Yatsenyuk gave him, what is the fair subscriber fee for 3G and on which terms the company is prepared to give back a part of its frequencies to the state.

- As I was preparing for the interview I saw a message in my mail; it was a copy of another letter from a people’s deputy to Premier Yatsenyuk. In the letter MP Ruslan Lukyanchuk points out that the controlling stake in Kyivstar and MTS is owned by residents of Russia, which initiated military aggression against our country. That is why he believes that only “representatives of exclusively democratic countries” should be allowed to participate in the tender. Yatsenyuk instructed the Head of the NCSRCI Oleksandr Zhyvotovskiy to look into this issue. Do you think you will not experience problems with participation in the 3G tender?

— 450 people’s deputies can have totally different views. Six weeks ago together with General Manager of VimpelCom Ltd. Jo Lunder we met personally with Yatsenyuk. We told him in detail about the company VimpelCom and showed him the structure of ownership. At the end of the meeting the premier said in perfect English that we won’t have any problems with admission to the 3G tender. The matter is that Russian structures do not control more than 47% of voting shares in VimpelCom; they only have more than 50% of economic interests in the holding, which means this is merely about the right to receive dividends. In the council of directors only three of the nine members are nominated by Letter One (affiliated with Alfa Group Consortium). And you should know that in any normal company the council of directors has the last word!

— So, that means they are hiding…

— It is difficult to comment on this. I will say one thing: I’ve been working with the company for five months and not once did I go to Russia. According to your logic, I should be called to go there and be given instructions.

— But you are a telecom company. Why travel, when you can hold a video conference…

— Ask our competitor how many times he went to Russia over this period…

About 3G expectations

— I recently spoke with General Director of MTS Ukraine Ivan Zolochevskiy. He says that the price of a 3G license is economically ungrounded.

— I totally agree with him. This price was taken off the top of the head; it is totally unsubstantiated. We made our own calculation by taking the indicators of the same six neighboring countries that the National Commission for the State Regulation of Communications and Informatization made. And we calculated that one license should cost from US $60 mn to US $90 mn in Ukraine. It is totally unexplainable why the price of UAH 2.7 bn (roughly US $170 mn) was announced.

— Will the new network see a return on investments in 3-5 years at such a high price for a license?

— It is totally impossible to predict anything. We do not know how fast people will switch to 3G. There is an interesting fact, though – at the moment 40% of those that use smart phones are not using the data transfer function at all. That is why we do not know whether they will want to use 3G. We also don’t know the prices for 3G that our competitors will offer. If the prices turn out to be very low, there will not be a return on investment in the foreseeable future.

— At what prices will investments be returned?

— At the moment, our ARPU is approximately UAH 36 per subscriber. 3G tariffs must be higher than the current ARPU. There will be several tariffs. We would want that the ARPU of 3G subscribers be at least 30% higher than of those clients who will not use the new service. The people who simply use the phone to speak should not suffer from us building a new network. Meanwhile, if you want a new technology, you will have to pay for it.

— How many people will be willing to pay? Do you have any preliminary calculations?

— Other countries started developing 3G technology a long time ago. Due to the fact that there is practically no 3G in Ukraine, Wi-Fi technology developed strongly in the country. In this sense, Ukraine is unique. Other countries do not have such coverage, because they started using 3G back in 2008-2009. Many Wi-Fi spots weren’t built and 3G replaced it. In Ukraine, there are Wi-Fi spots in every cafe and restaurant. Abroad, not every cafe offers Wi-Fi, but for Ukraine it is very important, because people will most likely choose a place that provides wireless Internet access than the one that does not. So, now our users can ask: why do I need 3G, when there is Wi-Fi almost everywhere? For this reason, it is difficult for us to make forecasts. There is one more factor that distinguishes us from other markets. In our network the penetration of smart phones is already 30%, while in other countries 3G was launched when this indicator was lower than 10%. So, it turns out that since we are so unique and outdated we cannot predict anything.

— How do you prove to the shareholders then that it is worth building a new network in Ukraine?

— I would say that this is our defensive reaction. We cannot afford to be without 3G if our competitors have it. There is no way we can strike a deal with them not to have 3G. I would like to stress, however, that we have not yet made a decision whether to participate in the 3G tender or not.

— You have not yet submitted a bid?

— No, we also don’t have the decision of the council of directors on this matter. It should be made sometime in January. VimpelCom operates in 14 countries. The markets of Bangladesh, Pakistan and Algeria are similar to ours in terms of conditions of operation. So, a shareholder asks why it is so expensive here.

— Do you have the money on accounts?

— We have sufficient funds on the accounts to participate in the tender. And we have a possibility to borrow, if we don’t have enough. We do have another problem here: even if we obtain the license we will have to purchase hardware abroad. Meanwhile, the companies are currently lining up at banks as they are unable to purchase hard currency even for small payments. So, the big question is whether we are able to find hard currency in the country in order to invest in 3G. And, honestly, we don’t know the answer.

— Do you see other potential bidders for 3G besides the three largest mobile operators?

— I don’t see any more realistic and economically logical bidders.

On the results of operation

— What is the reason for the decrease in the main operational indicators in Q3?

— Last year we had Crimea and this year we don’t. The second reason is also quite evident: people are trying to save on everything, including mobile communications. Nonetheless, they use more minutes, despite the stiff competition.

— In October you had a special offer of minus 33% on the cost of services. Did this affect the company’s profitability?

— This is a new subscription plan. It contains the prices for services, including all taxes. It is possible to obtain this discount provided that the subscriber pays the fee a month in advance. If a person pays by the day, it means that there will be days when they will not use the service and we will not profit from it. In fact, there are many such days over one month.

— Did many people transfer to this subscription plan?

— In fact, many did and it was quite unexpected. I think that over a million people already switched to this plan.

— What about other marketing actions that you are conducting or planning to introduce?

— We are offering people to send a request and get two-three times more minutes for the same money. This is a New Year’s offer. We are hoping that the subscribers will use more time to communicate in our network than in the networks of competitors.

— The load on your network may increase. Is it ready to operate on a higher load?

— It is ready. We will also have investments for the new 3G network, where we will transfer not only data traffic, but also voice traffic.

— How much are you planning to invest into the 3G network?

— We cannot disclose this information. Speaking about all six years during which we will have to cover all populated areas with a population of over 10,000 with our network, it will definitely be much higher than the cost of the license.

About excess radio frequencies

— You pay a lot for the use of frequencies and if you obtain the 3G license the payments will increase. Would it not be expedient to get rid of some of the frequencies?

— We want to use them, but we can’t. Kyivstar cannot give them to other operators. We can only return them to the state and we would have done so on several conditions. Firstly, frequency refarming must be performed. I would say that frequencies within the ranges of 900 and 1800 are distributed without much sense. Secondly, the presence of the military in the 900 range is still high, but they don’t use them. They should be conveyed to other operators that lack the resource. The third condition is that technological neutrality must be observed. By this I mean that the government should allow introduction of any standard of communication within these ranges. On these conditions we would be ready to give back over 10% of the frequencies to the government. Although there are attempts to confiscate frequencies we emphasize that we have been paying big money for them for many years. We are hoping that after the NCSRCI issues 3G licenses, it will try to sort out this issue.

— Which networks would you like to develop on the old frequencies?

— If there is refarming, GSM-1800 is suitable for LTE-1800, although it is difficult to speak about the introduction of this standard. The range 900, however, can also be used for the construction of 3G networks, which would greatly save us and consumers money.

— As far as I understand 3G will never reach small villages?

— If the permission for a 900 range is not issued it is very difficult to speak about their coverage. It will be expensive to build the network within the range of 2GHz, where the frequencies will be allocated. We hope that the government understands this, after all. Due to this factor along with hryvnia devaluation and the high cost of the license it will be years before the villages of Ukraine see fast Internet access, and not only villages, but also towns with populations of less than 50,000.

— Where will 3G appear first, if you have the license?

— Most likely it will be Kyiv around six months after the license is issued.

About the influence of the crisis on Kyivstar

— How are you coping with rolling blackouts?

— The problem with rolling blackouts in Ukraine is that they are unpredictable. We do not receive any warnings, though we should. We have a number of diesel power generators. If we were told where and when the lights would be turned off, we could have delivered them. But because of this situation the quality of communication may often deteriorate.

— How many facilities are not operational as a result of the military conflict in the east of the country?

— In total, 10% in the Donetsk oblast and 20% in the Luhansk oblast.

— What did you do with the network in Crimea?

— We turned it off and wrote it off. In our last report, we specified that we wrote off US $13 mn.

— Was it impossible to sell it?

— We did not even try.

— Will the market grow in monetary terms next year?

— Without access to new technologies it will decline, but not significantly. We are hoping, however, that with 3G it will slightly grow. Everything depends on the issue of the 3G license.