Kazakhstan operator Kcell is planning to go to the market to look for alternative providers of nationwide long-distance fibre networks.
The business, in which Sweden’s Telia Company has a 61.9% stake, wants to compare alternative providers with the current service it receives from Kazakhtelecom, according to Kcell’s CEO, Arti Ots.
“There are three nationwide networks, including Kazakhtelecom,” says Ots. The others are Beeline, controlled by Veon, formerly VimpelCom, which already has a mobile network-sharing deal with Kcell, and Transtelecom, an offshoot of the country’s rail network (unrelated to the similarly named Russian company).
“We could also build a fibre network ourselves, but that’s unreasonable because there are already three nationwide fibre networks,” says Ots. His preference is for Kcell to lease fibre provided by one of the three networks.
Kcell, whose shares are quoted on stock exchanges in Kazakhstan and the UK, wants a new fibre deal because of the rapid growth in data, says Ots, who has been CEO since early 2015. He was giving this interview in London in advance of presenting to UK-based analysts and investors.
“Data is growing exponentially and our own fibre network is the only way to carry this traffic. Without our own, we would get into a situation where we didn’t have enough capacity. There might be a bottleneck. Our own network would give us flexibility.”
Kcell sees data volumes tripling in three years from existing customers, and it is adding new 4G customers, “so if you add the new customers it will go up six times. Netflix and YouTube are using the highest capacity”.
One of the major uncertainties hovering over Kcell is the relationship with its biggest shareholder, Telia. The Swedish group decided in September 2015 that it was to focus on its operations in Europe and to sell up elsewhere, including Nepal, Uzbekistan, Azerbaijan, Georgia, Moldova and Tajikstan as well as Kazakhstan.
The decision came after the company was exposed to a deeply uncomfortably scandal in Uzbekistan, linked to Gulnara Karimova, the businesswoman who is daughter of the late president of the country. Telenor’s associate company VimpelCom – now Veon – was also mixed up with Karimova, and senior executives of both Scandinavian operators resigned or were fired. There were heavy fines. Kazakhstan wasn’t involved, but Telia decided that enough was enough – even though it had taken two years to improve corporate governance. “We now have better and more well-managed companies which we believe others can successfully develop further,” group CEO Johan Dennelind said in September 2015.
Businesses in Tajikistan and Nepal have been offloaded, to the Aga Khan Fund for Economic Development and Axiata respectively. Turkcell, which is a partner is some of the investments, is believed to be interested in others. In January this year Dennelind said he was confident that all the remaining operations would be sold by the end of 2017, but there have been no announcements so far.
Jan Rudberg, an independent director who chairs Kcell’s board, says the company has changed since Telia first encountered problems in Uzbekistan, which lies just to the south of Kazakhstan. “We have made management changes. We have a team that is well motivated and keep an eye on the ball,” he says. “It is a totally new company in the way that we operate.”
I remember when one of my children was getting ready to move to a new school asking a headteacher whether there was any sort of bullying problem. “Not any more. We’re past that,” she said. Rudberg, sitting alongside CEO Ots, reminded me a little of that school principal.
He’s chairman of the audit committee at Kcell. “The environment in that part of the world is different from other countries. We have been going through 2,000 contracts.”
What did he find? “We have to be absolutely certain we follow best practice. We have cancelled contracts if they don’t really comply.” Why were contracts cancelled? “You find people maybe related to people,” says Rudberg. “Vendors have to commit to high standards, and risk management is high on his scale of priorities. “I’m more confident, more comfortable.”
Part of the culture
At the same time Kcell has done an “enormous amount of work in education and training”, he adds: “We have to make it part of the culture. It’s really developing.”
Kcell is “a company in constant change”, says Rudberg. “We are sharpening our commercial ability, [making] good, good progress.” There is political instability in the region: he points to the Russia/Ukraine dispute over Crimea. “We’ve had regulatory challenges and commercial challenges.”
But “everything seems more stable now”, in Kazakhstan and the capital, Astana, he says. “Kazakhstan is opening up. The government is trying to divest state-owned assets. Kazakhstan is the most important economy in that area.”
It’s also a big country physically. A population of 18 million is spread thinly over an area equivalent to the distance between Madrid to Helsinki, points out Ots. “It’s three hours to fly east to west. That gives Ots, who’s worked in the Telia group and with its members since 2001, challenges when it comes to building out the network: hence the interest in network sharing for both radio and fibre. “It’s a question of strategy and flexibility, because the data is going up exponentially and our own fibre network is the only way to carry this traffic,” he says. He doesn’t want the lack of fibre to lead to a bottleneck: Kcell needs the flexibility that owning – or at least controlling – its own fibre network will give.
He’s wary about forecasting by how much demand will rise. Kcell tried to make forecasts before, “but demand grew twice as quickly as we expected”. But tripling in two to three years is a cautious estimate, and he’s careful to point out that this applies to existing customers – and the market is increasing.
Geography makes Kazakhstan a challenge to cover. “People live fairly spread out,” says Ots. “We cover the roads and the populated places.” Average density, of about six people per square kilometre, is low. That’s why, six decades ago, the old Soviet Union picked an area in the south of Kazakhstan as home for its ballistic missile programme and then its space programme. That reduced the risk to life when there were accidents and meant fewer foreigners to see.
Even today, a huge area around the cosmodrome in Baikonur is leased out to the Russians. Every person going up to the International Space Station is launched from Baikonur, which is run as Russian territory, with Russian operators such as MTS.
Back in the vast expanses of Kazakhstan, Ots and his colleagues are pursuing network sharing opportunities. This started with 4G, when Kcell and Beeline decided to split the country. “This has been a big success,” he says. It is active sharing. “We host one, and we are the guest on the other. It’s not that clear a geographical split. One company has Almaty [the former capital], the other Astana. The cooperation is at the highest level. We aim to share the costs where it is feasible.”
It is also flexible, so if Kcell wants more capacity in Astana, where it is the guest network, it is able to build. “It’s a very modern way,” he says.
Kcell has close to 40% population coverage for 4G, and in 4G-provided areas half of the usage is on 4G services. “Network sharing allows us to cover the territory quickly.”
He compares the arrangement to those in the UK, the Netherlands, Finland and Sweden. “There are a lot of similarities,” he adds.
The two operators make their own technology choices. Beeline uses Huawei kit for the radio network while Kcell uses Ericsson, but has a Huawei core network.
But despite the success of the 4G rollout, “2G remains important”, says Ots. “Half of our customers use feature phones which are primarily 2G.”
He would like to develop the network sharing idea, he adds. “We would like to pool spectrum, and this is work we are doing at the moment.” In some cases the two would “just run one network”, he says. That increases the risk of outages, “but in the long-run there is no need for parallel networks”.
Rudberg chips in, adding that the whole network-sharing idea in Kazakhstan could be expanded. “We started with 4G and that helped us be quick into the market.” There’s a possibility, he hints, that there could be 2G and 3G sharing, and fibre network sharing. “I’m not saying we have taken any decisions. It could work well.” There is a 2G and 3G pilot, he adds, with 120 base stations in two cities. “It’s a pilot, a new step.”
Ots summarises: in the long term, “there should be cooperation at the infrastructure level”, he suggests. Rutberg adds that today “we have a three-player market and the [4G] network-sharing agreement is just the first step”. The old ways are gone, he says. “We have to think in different ways. We should share resources that are not part of the competition.”
At the same time, Kcell is going through a re-branding exercise, he adds. The logo still remains similar to Telia’s – and most of Telia’s existing or former subsidiaries in the region have similar names: Kcell, Tcell, Ucell and so on.
“We are building a more urban style,” says Ots. Shops on the high street, selling combined subscriptions, will play part of it. Already 40% of business comes from bundles rather than pay-as-you-go. “This type of strategy is going very well,” he says. “Kazakhstan people find it a very interesting concept. It’s how we’d like to do business. It creates a more solid relationship with customers.”