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“Telecommunications in Russia: A Huge Economic Advantage”

Article provided by:"Diplomat" magazine"Diplomat" magazine

1 September 2003
“Telecommunications in Russia: A Huge Economic Advantage”

Interview with David Lee, deputy general director of Comstar Telecommunications. Interviewed by Sergey Palatov

The western IT-market has been declining for three years in a row while Russia is enjoying an inflow of investments. The pillars of the European telecommunications sector---Deutsche Telekom, Vivendi Universal and France Telecom---have reported huge losses; the American corporation AOL Time Warner lost around 90 percent of its shares' cost during 2001-2003; WorldCom went bust. Last year such areas as Internet, e-commerce and mobile telephony suffered an unprecedented sag in development in most parts of the world while the Russian telecom-market is on the rise. David Lee, deputy general director of Comstar Telecommunications, explains such a paradox and presents his view on the development of the Russian market to the readers of Diplomat.

If you look around the world and try to get an idea of how the country lives on, you will analyze GDP and infrastructure, the number of businesses, the number of hotels, etc. It is almost exactly the same with the thing that really powers the economic activity, that is availability of telephone, Internet access and data networks at a reasonable price. Thus, it is interesting to watch what happens in Russia. There's been a technological revolution---people in the West have stopped investing while in Russia, particularly in Moscow, companies like ours are able to start investing now. Russia bypassed a 20-year gap when other nations were developing new Internet services which are out of date now, and new technologies are coming to Moscow faster than anywhere else in the world except maybe for some places in the Far East like the Republic of Korea.

Services in Moscow will soon be better and cheaper than in London or in New York. That will be a huge economic advantage because in general the costs of telecommunications now are a significant proportion of total cost to all businesses and a source of competitive advantage--everybody is doing business on-line, people are sending a huge amount of data, they are connecting their branches not just for e-mails but also for financial, distribution and sales systems. If you can get those costs down, it is like building cheaply good roads, airports and great ports. Moscow today is in a very interesting position. It started late as Russia matched up to the technical revolution which had already taken place, while the Western companies got on to the telecommunications market too soon and too high and wasted billions of dollars.

          Being a bit slower to catch on, probably because of the 98' crash in Russia, we are now investing millions of dollars in a Next Generation Network (NGN). Comstar's NGN network will not only be twice as fast as the traditional data networks, it will be a hundred times as fast. Dialing to the Web is already out of date and too slow, where we now put in 2-megabit connections we will be putting in 100-megabit or gigabit connections. That will happen in London as well but British companies do not want to invest into a new system immediately because they invested millions of dollars into the old systems. They don't want to "cannibalize" these systems, they want to make a return. Russia does not have that problem.

Another area, which is very interesting, is in the mobile part of the business. In the West, they put all the mobile companies to tender, to a license and spent billions of dollars buying licenses, yet the technology does not work as they expected. They cannot make a return but they already wasted money. That did not happen in Russia, however, so it's a very interesting time for the Russian communications sphere---the market is booming and they have not made stupid mistakes. Comstar has started in the time when the development of, particularly, data networks hasn't just increased a little bit, it has increased logarithmically. So the ability to invest now will be a huge advantage, in three-year time I do expect the market in Moscow, particularly for businesses, to be more competitive and to have better services than you would have typically in downtown London or New York.

The cause of the collapse on the Western market was overinvestment in the nearing data and Internet services. Too many companies got too much money from the stock exchange. People thought that it was essential to invest now and invest very fast. It was like building ten railway lines between every city. They built huge networks using data systems, they laid huge amounts of fiber optical cable but it was much more than the market could possibly cope with. It will take years and years before all the equipment can reasonably be used. The market is in a kind of stagnation whereas Moscow has been much steadier and wasn't involved in that kind of "bubble" business. That will be a huge advantage in the next few years, particularly in Moscow where you've got three large companies, all investing heavily.

Here in Moscow all investments are going directly into the equipment---we are not wasting huge amounts of money just getting the license. Moscow is the only market where the revenue that comes from alternative operators is larger than or equal to the revenue that comes from the state telecom company. For example, in England or in Germany BT and Deutsche Telekom are massively bigger - 90 percent of the fixed market is theirs in central cities and there are few small companies you actually never heard of. In Moscow, you've not only got MGTS, central provider, but you've got three huge companies: Comstar, Combellga and Golden Telecom, making as much money and more than the central company does itself. So there is a real competition in Moscow, particularly for business, you've got a lot of choices here.

The Comstar strategy is to concentrate primarily on the Moscow market and to offer the latest Ethernet connectivity. Because we were late into the data-game, we can use the latest data and the latest data is Ethernet, which is not just an improvement of what was before. It's a massive increase---instead of a 2-megabit connection as maximum we are looking at a 100-megabit or gigabit connection. The four major services that we now offer are Metro-Ethernet, ADSL, Broadband and voice over IP (VoIP). We are not catching up---Moscow is taking a jump ahead. The market in Moscow is probably the most competitive in the world because the central provider MGTS is not totally dominant. Business customers have a choice between several operators.

Moscow took its time, it hasn't been going through the whole process and there won't be many cities in the world where you can get the services Comstar is offering this year in Moscow.




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