Mobile communication operators eager to introduce latest 3G technology in Ukraine, but limited licenses and the state’s privatization plans hold up the tender
Mobile communications operators are eager to introduce the industry’s latest technology in Ukraine, but licenses are limited and the state’s privatization plans have hijacked the tender process.
The demand for so-called 3G, or Third Generation technology, which allows mobile phone users to transfer larger than ever amounts of information from computer databases and hold effective teleconferences from their handsets, is expected to continue growing regionally and globally.
However, in Ukraine, state-owned Ukrtelecom, a fixed-line operator earmarked for privatization, is the only company that currently has a license to use the new technology.
Ukraine’s Telecommunications Commission plans to announce tenders for the issuance of up to three more 3G licenses within a year or so, Commission head Oleh Hayduk told a round table in Kyiv on April 12.
The problem is that these licenses entail the allocation of radio frequencies, which are currently being used by Ukraine’s military, he added.
“If we can come to a proper agreement to work together with the Ministry of Defense, then we can put up all three licenses,” Hayduk said.
Conversion of the frequencies for commercial use could cost up to Hr 256 million (around $50 million), which, according to commission spokesman Andriy Bobrovitsky, is not covered by Ukraine’s state budget.
Ukrtelecom, which boasts 11 million fixed-line subscribers, but none of the country’s 33 million mobile users, received its license in December 2005 without having to take part in a tender. Leading mobile communications operators have criticized the Commission’s licensing decision.
Yaryna Klyuchkovska, press secretary for Ukrainian Mobile Communications, which controls about 45 percent of Ukraine’s mobile communications market, called the commission’s decision “politically motivated” and meant to increase the value of Ukrtelecom ahead of its planned privatization.
The government of Prime Minister Yuriy Yekhanurov, which could be replaced as a result of last month’s parliamentary elections, has stepped up efforts to sell Ukrtelecom to ‘a strategic investor’.
“Ukrtelecom has a fixed-line network, but they will have to build a radio network from scratch,” said Klyuchkovska. Even for companies that already have a mobile communications infrastructure, the switch to 3G is “significantly expensive,” she added.
According to Klyuchkovska, UMC has invested $1.7 billion over the last 12 years into its network. Ukrtelecom used to own UMC, until Russia’s Mobile Telesystems bought out the mobile communications provider in 2003.
No one seems to deny that the commission acted in favor of Ukrtelecom by issuing it a license over UMC and other operators, the tacit argument being that privatization revenues take precedence over fair licensing practices.
“The decision to forgo a tender “was a direct resolution from the Cabinet of Ministers,” said Bobrovitsky.
According to Andriy Dmytrenko, a telecommunications analyst for Dragon Capital investment firm, the state could sell Ukrtelecom without the license, but would probably get less for it.
Ukrtelecom’s license is for 15 years and cost the state-owned telecommunications giant $30 million.
Dragon called the price paid by Ukrtelecom comparable to that paid by operators, who received similar licenses in Romania ($35 million in 2004), adding that prices for 3G licenses have dropped significantly in Europe over the past several years, as operators realized that the high-tech services on offer aren’t as popular as they are in Asia.
“People [in Europe] have to get used to the technology first,” said Dmytrenko.
In Russia, the state has yet to issue any 3G licenses at all.
But for mobile operators always on the lookout for new services to offer their customers, there is no doubt that there is a demand for the technology.
“There is a market for 3G in Ukraine, especially the corporate market,” said Klyuchkovska, adding that UMC controls 70 percent of the corporate market in Ukraine.
Many Ukrainians and other European mobile phone users are currently making the best of GPRS, the second generation of mobile communications technology, particularly EDGE (Enhanced Data rates for GSM Evolution), which handles some of the services of 3G, only more slowly and with smaller volumes of data.
Ukraine boasted 3.8 million users of GPRS technology in 2005, said Klyuchkovska, citing Russia’s iKS-Consulting, a telecommunication market research and analysis firm. This figure equates to around 10 percent of Ukraine’s total mobile communications market.
According to Strategy Analytics, a global research and consulting firm, as of the end of last year, there were 72 million 3G subscribers worldwide, 15 million of which signed on in the last quarter of 2005. The company’s analysts predicted that the 100-million mark would be reached by the second quarter of this year.
“With 3G you can get the full spectrum of telecom services that exist,” said Bobrovitsky.
“At first, most clients will be corporate until the network develops, just the way it happened with GPRS,” he added.
This makes a 3G license in a dynamic mobile communications market like Ukraine attractive, and not only to domestic operators, Bobrovitsky said.
“If a foreign company with money enters the tender, it will mean uncompromising competition among the top three Ukrainian companies,” he said.
The tender rules have not been publicized yet, but according to Bobrovitsky, “the tender commission would be interested in getting the maximum amount of participants,” including well-heeled foreign investors.
Currently, Ukraine’s top operators are UMC and Kyivstar, which control about 90 percent of the market combined, with newcomer Astelit, owned by Turkey’s Turkcell and Ukrainian tycoon Rinat Akhmetov, coming in a distant third.
Bobrovitsky said any company that enters the 3G market will lose money, at first, due to high startup costs. In addition to the license fee, operators will have to induce customers to buy new phones (with new numbers) and develop or redevelop their networks.
As a fixed-line operator, Ukrtelecom would incur particularly high costs, unless those costs are passed on to the company that buys Ukrtelecom in a privatization deal.
According to the conditions of the license it received in December, Ukrtelecom must have some kind of 3G operations in place by the end of this year, but the operations can be small and relatively low-cost.
But with a new government to be appointed following the March 26 elections, and coalition bickering likely to make it unstable, it remains unclear whether Ukrtelecom will go on the block any time soon.
Klyuchkovska doubts that the 3G license will help the privatization process along. “It’s a big question as to whether the sale of the license will actually increase the value of Ukrtelecom,” said Klyuchkovska.
