Head Tele2 — RBC: “the Telecom Industry as such would cease to exist”

“The risk of cannibalization we have the lowest”

You came into T2 RTK holding (Tele2) in February. Previously worked in energy, engineering, aviation, telecommunications so for you new field. How was the dive?

In the industry I do so the entry is quite complicated. As it turned out, it is a very dynamic industry in which many things happen: one product replaces another — much like the white nights in St. Petersburg are replaced. We didn’t have time to get used to 3G, as there was 4G, and 5G. Soon will the tsunami wave with the Internet of things. Energy technology 1950-60, still largely competitive: people achieve success in a leaner business processes, more carefully planned cost. And telecommunications everything we say won’t happen in 10-15 years, and is already happening right now. And you have to be constantly on the alert.

— What tasks were put before your shareholders?

— When I came, the company only withdrew from the Association [with the mobile assets of “Rostelecom” — RBC] to restart the last region [Samara] under the Tele2 brand. In fact, just last year we formed a new company from a fairly heterogeneous asset: large and successful, is smaller and not very successful, something to be assets of Tele2, something- “Rostelecom” and so on.

Today the challenge is all to splice, so we stopped to divide the company into regions and become one single monolithic company with a single strategy, a single positioning in the market, one brand. In the current difficult conditions — in low ARPU and dynamically changing market, our core product has changed. The main goal is to find their uniqueness without losing the old DNA, and transformed, as required by the new time.

The model of vertically integrated operators, I think sooner or later will leave in the past. We get rid of the maximum amount of assets that are not key to understanding the client and communicating with him.

— Like what?

— The database for Analytics customers, and so on. It will probably be the most important thing. Brand, of course, we will leave. The market will become more segmented by functionality, some companies will provide services in the B2B segment, someone will work with private clients. I think soon the industry of Telecom, as such, would cease to exist: this is a wide field at the junction of Internet infrastructure, mobile applications, retail. And we will launch more and more partnership projects.

— At the end of 2015, the company division was created for the launch of virtual operators (MVNO). With this structure?

It works. Soon we plan to launch a large MVNO project with Rostelecom, which is planning to offer 4Play. (single package consisting of fixed and mobile telephony, broadband Internet access and pay — per- RBC). Are in active negotiations with Sberbank. This year, one virtual operator launched “er-Telecom” in pilot mode in the Kirov region. Not far off is the launch of the second pilot with them in St. Petersburg.

That is, this topic went nowhere. While we focusareas on a large “pieces” of the market, but I want to look at smaller players who also want to keep their customer base, including through the provision of mobile Internet services and communication.

— On what terms you negotiate with partners: the income in half or a subscription service? And aren’t you afraid that creating for large companies, virtual operators, you in fact will produce competitors for themselves?

— With the major players is the revenue sharing [sharing of revenues among operators — RBC], but there are nuances — that partners want to leave your side, what set of services they want to receive from us. As for fear… We expect to acquire base of new customers thanks to the cooperation gains can be measured in the millions. We are the smallest and fastest-growing operator, so the risk of cannibalization we have the lowest. So we are not afraid, but rather actively moving in this direction.

On the other hand, undoubtedly, the introduction of the MVNO model will lead to redistribution of shares between the traditional operators. But fear not, because the market has seriously evolved, and even revolutionized due to the emergence of discount stores these in the form of WhatsApp, Viber, etc. it makes No sense to be afraid of a little segmentation on a particular piece of the market, when passing you on a huge avalanche.

— Representatives of the companies-competitors often say that messengers is a threat for the market? And for you?

— We perceive this as reality. When it rains on the street is a threat, an opportunity? It’s already happened. And you can sell lots of umbrellas. In a sense, the operators already earn on instant messengers, because every service has to have something to work [referring to mobile Internet — RBC]. Speed and price [the Internet] has already become so that Wi-Fi will soon be just irrelevant. Usually to the Wi-Fi connect those who have problems with either the service plan or statement in General.

In addition, we are already doing messenger. Launch is planned in the third quarter. The idea is simple: suppose you went somewhere in the village, there is LTE-450, there is a distribution of Wi-Fi, use the Internet, but to call you can’t. With the help of our messenger, the call first passes through voice channels, then finds you via Wi-Fi network and, accordingly, in a normal room you will see that you are calling and who is calling. Target audience is those of our customers who have gone out of range. Another potential niche use — in the basements of houses in large cities, complex corners of large buildings, where there is wifi, but no network. And of course, the service will be secure — no worse than any other messenger.

Photo: Ekaterina Kuzmina/RBC

“>

Photo: Ekaterina Kuzmina/RBC

— Are you planning as the new leader, changes within the company — from human resources to the structural? Are you going to lead your team or to optimize the state?

Undoubtedly, some changes will be. Is life and in change there is nothing to worry. On the other hand, I do not belong to the leaders who bring revolutionary changes massively all fired EN masse and collect new people. I believe that all changes should be evolutionary, albeit quickly. I have a separate people with whom I worked somewhere. But given that I’m a man in Telecom, a new, team-related industry on a global scale, I have clearly not.

“Sorry, first grow, and then earn”

— In early July, the President signed the so-called “law of Spring”. The implications of the document for industry experts estimated 2.2 trillion rubles In turn, the representatives of the operators have already announced that rates could rise to two to three times. Have you evaluated your own expenses? If we have the understanding of how to implement new legislation and how it will affect clients?

— We do not exclude that due to additional costs incurred by operators, prices of cell phones for all subscribers can grow at least two to three times.

In addition, expenses in tens times exceeds the volume of the large-scale investment program for the construction and extension of networks, which leads Tele2, and will slow down or even stop the development of infrastructure. So we will use all opportunities to engage in dialogue with the government on this law.

— Active construction company increasing its losses. In the first quarter of 2016 — RUB 4.2 billion on revenue of 24.3 billion rubles, by the end of 2015, you recorded a net loss of 7.8 billion rubles. the Volume of investments in IT infrastructure and technological network development (CAPEX) grew last year by 214%, to 39 billion roubles, the ratio to revenues was 41.2%…

— It’s natural, we are catching up. We were not in Moscow, as in some regions, so we are far behind in the [infrastructure] 3G and 4G. By the end of this year we will complete the process of unification and harmonization of networks in all the regions will have one vendor and the most modern equipment. In subsequent years, will increase capacity, expand 3G coverage and 4G where we still considered it economically unreasonable.

— When the company should go in the operating zero, according to the plan?

— EBITDA (profit before taxes — RBC) in any case we make money. It is clear that the EBITDA margin (EBITDA — RBC) at Tele2 is not as pretty as the competition. At the end of this year it will be somewhere in the region of 25% — this does not allow us to earn net profit, but I think it is a question of one year or two years. Now we are in a period of rapid growth, the investment period. I would like to grow and earn, but unfortunately, first rising and then earn.

— On the one hand you are actively investing in infrastructure, on the other — are you going to sell it. How to cohabit with these ideas?

We build your towers, and are actively working with operators tower infrastructure. So if it is possible to obtain a tower from someone, other things being equal, we never are. However, we have accumulated a large tower assets, which makes sense to get rid of. But we need to understand to get rid of — it is not an end in itself. This strategically tower companies have nothing to do in the mobile operator must come or appear professionals that deal with infrastructure.

— How do you plan to obtain for an asset? Now how many applicants and who? Earlier you called the company “Russian towers”, the Russian direct investment Fund (RDIF), VTB Capital”.

Is the amount more or less we understand. But I’m not going to specify, because we are connected to a large number of NDA (non-disclosure agreement; confidentiality agreement — RBC) with all market participants. Among the contenders there is a profile that is non-core players. We can safely say about the five participants who are interested in and actively talking with us. So I hope that in the foreseeable future, we close this topic.

Up to the end of the year will be closed?

— It’s real, but we do not put such purpose. The goal is to get it right and not just quickly. So it’s better this process will be delayed, but we are certain that we received the economic benefit. On the other hand, important predictable relationship with our partner is because we will continue to use tower infrastructure, we will rent these towers — we have not gone.

The bargaining goes on?

— There is a tender. These are two inseparable parts: how we get money, and how much we will pay for the tower in the next at least five or six years.

VTB, your shareholder, in the spring of 2015 opened the company a credit line of RUB 16 billion How much money is spent and on what?

— No, we spent not all. Of the 16 billion rubles spent 9 billion rubles these funds were allocated specifically for infrastructure construction in the Moscow region. The line was allocated for 5 years period has not yet ended, the reserves we still have left.

— By the end of 2015, the company’s revenue grew by 8% to almost 95 billion rubles. For how long do you plan to grow this year and why?

— This year we will grow by more than 10% faster than the growth of competitors. The stagnant market is a dynamic growth because we understand that new subscribers today in fact — with the exception of a number of lagging regions and of the Internet of things, which still remains at a very low base of development.

A significant increase will show for subscribers. The capital region last year gave about half of it, but we are growing at the expense of other regions. In recent years we have lagged behind in the 3G and 4G networks. Now naverstam lost, came out to our customers, which we went over it, and said, we came back, we have unified the updated network, we have 3G and 4G, so that our quality of service is no worse, and often better, because we offer you new modern equipment. The number of base stations we almost caught up with VimpelCom — despite the fact that he works in 83 regions, and we were in 65.

— When you wanna move “Vympelcom” from the third position?

— No comment, not to offend anyone. But in the plans it remains.

Tele2

Swedish mobile operator Tele2 entered the Russian market in 2003. The company began its expansion to the regions and has positioned itself as a discounter. In 2013, the Swedish group has sold its Russian “daughter” VTB Bank for $2.4 billion, which assumed $1.15 billion of net debt of the operator. Tele2 Russia remained the shareholders. After a few months, VTB has found co-investors – 50% Tele2 bought a consortium with the participation of the Bank “Russia” and structures of the owner “Severstal” Alexey Mordashov.

In 2014, Tele2 and the state Telecom company Rostelecom has announced the creation of a joint venture. Rostelecom transferred in the joint venture their mobile assets and received 45% of the company, the remaining 55% remained at the previous investors. In March 2016, the operator announced the completion of the process of integration of mobile assets of “Rostelecom” in the new structure. A month before the company’s CEO Mikhail Noskov, who headed it after creating the SP, resigned. His place was taken by Sergey Emdin.

Tele2 operates in 65 regions of Russia. In October 2015 it launched its network in Moscow. In the capital of Tele2 have about 2.5 million subscribers, all it serves to 38.4 million subscribers. In the first quarter of 2016, the revenue of the operator grew by 5.4% to 24.3 billion rubles. the company is a non-profit, over the same period, the loss amounted to 4.2 billion rubles – twice more than in the same period of 2015.

— There’s been a lot of talk about a potential merger with Tele2 VimpelCom. Or takeover of one company to another. What are rumors and what is true?

— Do rumors, we also hear and discuss over coffee. It is clear where these rumors come from. Investment bankers shape the market of mergers and acquisitions, it is profitable. Plus there are the expectations of the market, and they often give rise to such rumours. The second version — I heard the bell and did not know where he is. Indeed, we have many joint ideas and projects, there is a joint working group in which we discuss various topics of cost reduction, on cooperation in specific regions. That is all possible, but on the operational merge of the companies of the question and no it is not discussed.

Theoretically you would be interested in operating Association with one of the big players?

— It is more a question for the shareholders, and not to me. Of course, in the larger Telecom players traditionally earn more money. Although the model Tele2 allowed in previous years to provide a decent income for shareholders in smaller sizes.

— You said that there is a working group in which you discuss possible cost reduction. On what projects it?

— I will not disclose because they are in a competitive market are purely confidential character. In addition, all projects still in phase of discussion, it is pointless to talk about it. Moreover, we all market participants communicate. But for some reason focus on our relationship with VimpelCom.

“We came for fast mobile Internet”

It’s been six months since the launch in the capital region. The results are consistent with the original plans?

— We have 2.5 million subscribers, the growth continues. We are ahead of plan in terms of subscribers, with a small gap on ARPU. The second indicator is affected by stiff competition, including in Moscow. This is probably the least price sensitive market, but, nevertheless, in the capital prices are falling.

Recently we showed a slide in Russia for 10 years, prices for mobile communications has fallen 10 times. And the bread, subway, and utility services increased by five to ten times. This unique market situation, it is necessary to be proud of. This is the case when you don’t languish, but always ahead of progress, produce new products and earn more money or less normal. The market prices are reduced, and your base growing. An example of perfect competition. Although it should be understood that the prices of mobile services in Russia, one of the lowest in the world, and it is already starting to affect the investment opportunities of the industry.

— For subscribers of 10% of the capital market when do you plan to overcome?

— I think either the end of this year or first or high second quarter of next year. That is very soon.

A large proportion of customers come to us via the mobile number portability (switching the caller to another operator preserving number — RBC), that is, high-quality subscribers with the existing room.

— How the share of “defectors” a lot of capital number of your subscribers?

— I’m not going to pinpoint a figure. Less than half, but tens of percent. Most interesting is that the lack of GSM frequencies, [2G] is not a problem. Moscow is already so advanced the market that it is not necessary to anybody. Mobile devices we sell are without profit, because our position is to saturate your base with quality smartphones that people used to use mobile Internet.

We see that you came to us primarily for fast mobile Internet and not for voice. A significant proportion of our database — people who were hardly talking, they consume data, including instant messengers, social networks and so on. The average volume of consumed traffic has grown from 60 terabytes in March up to 100 terabytes in may. This is a very serious speaker.

Photo: Ekaterina Kuzmina/RBC

“>

Photo: Ekaterina Kuzmina/RBC

— From what you say, that you again refused to launch 2G in Moscow?

— We do not have such frequencies. Us no one’s asking for reasonable money on their frequency. Therefore, with high probability they have not appear. But again, the further we move, the less we need the 2G technology. So this is definitely not a priority for us. If tomorrow someone will come to us and for some absolutely ridiculous money on offer and perhaps we can discuss and think on this topic. But we don’t have any suggestions, no for its part the desire to keep active.

— You said you sell devices at no profit. So behave for almost all operators. Unleashed a price war and you participate in it?

— There are two themes. First — the struggle for the Federal retail network, we in these games do not play. We have our network — our dealers. We also develop a presence at all the major players in the market.

The second theme is a branded phone. We think the big three have already saturated their base and this especially is not engaged: they had similar projects, but now they are not. We continue to be strategically important to eliminate the lag in the penetration of smartphones in our network, the number of active users packet data.

It is important that a potential subscriber could purchase a branded phone with our pre-installed applications, but we guarantee that it really is a quality phone at a low price. And we, as a large purchaser can provide. It is important for us to make money and to saturate the network (at the end of April, the first branded smartphone Mini Tele2 entered the top ten most sold in Russia ahead of the device from all other operators in Russia — RBC).

— Absence of own network, like your competitors, and work in retail through dealers, this is your advantage or disadvantage?

Is a philosophical question. But I think, more advantage, because it allows us to be more flexible, not to possess unnecessary assets.

— So you they also belong to the conditionally non-core assets for the Telecom operator?

— We attribute this to the sphere, which can be done with partners. Moreover, partners do better than us. I think we have the potential of developing relations with dealers, we will introduce common standards not only appearance, but also the range of goods and services that are not directly related to mobile communication financial, insurance, credit and other. That is, we will work together to increase traffic in our stores.

— Objectives to increase the network under their own brand don’t you?

— I think within the next year we will finish to build it, because it will saturate all the regions of presence. In 2015, we’ve doubled our network. Now we have 3.3 thousand of single brands, the goal is 3.7-3.8 thousand, We believe that longer needed, and gradually the focus will shift to Internet sales.

Sales via the Internet will engage you or partners? It’s your job or partner?

— Sale of SIM cards- is uniquely ours. Selling our SIM cards with the device through partners. While we’re talking about trade via our website but has plans, and sales of SIM cards through online shopping. Accordingly, when a person buys a phone at a particular online store, he immediately has the opportunity to join us as operator, received a SIM card.

— How much your plans will have on sale online? In the future two years.

— It is difficult to predict how quickly it will fly. Think tens of percent. Now the growth at times, but from a very low base. I think we will not give up offline, as did some European mobile operators, because there is some lag. In addition, mobile operators that live solely online, are still a niche character. They can’t afford to have a base of tens of millions of subscribers. Nevertheless, we want to develop online channel: on the one hand, this is what our customers need, on the other — to communicate with the consumer through this channel banal cheaper.

Sergei Emdin

Sergei Emdin was born in 1971 in Leningrad. He studied at St. Petersburg state University and Kansas state University, Harvard business school, and the Irkutsk state technical University.

Over the past 14 years Emden has led teams in three different industries. After two years in senior positions in “Severstal” in 2002, Emden became Executive Director of “Irkutskenergo”, and then for five years he headed the company – with a small break in 2008-2009 when he was the General Director “EvroSibEnergo”. In 2010, Emden was appointed head of the company “Northern capital gateway” (VVSS), which manages the Pulkovo airport.

CEO Tele2 Emden was in February 2016. Its nominee on this post has suggested VTB, a shareholder Tele2 and SCD, told RBC a source close to the owners of the cellular operator.