DFN: I’m sure my math is rusty, but, if it cost $200M to build the network and you get $70M in annual revenue, you really haven’t broken even. The break-even in the article below has to be from an operating prospective (ie, ignoring build out costs), so maybe theres $65M in annual costs, then it ‘breakeven’. However, at $5M net per year, it will take awhile to payoff the original investment. Nonetheless, its an interesting example of how to build up a ‘huge’ revenue stream quickly.
Yota: A Model WiMax Startup?
November 9, 2009 | Ray Le Maistre | Post a comment
Russian operator Yota believes it has cracked the code for turning a quick buck from WiMax services. The company announced today that it has reached "operational breakeven" only five months after it launched commercial services in Moscow and St. Petersburg. (See Yota Reaches Breakeven.)
"Our business experience may be used as a reference point for other mobile WiMax operators. It demonstrates that 4G broadband services business can be quite profitable," states the company’s general director Denis Sverdlov in today’s press release.
But while there’s no doubt the Yota team has made a number of critical decisions that have worked in its favor, it’s questionable whether many other WiMax startups will boast the same level of financial backing, operate in a similar competitive environment, and have the cojones to match Yota’s decisions on vendor partners, backhaul investments, and subscriber growth strategy.
Yota does, though, provide an interesting case study of how a competitive service provider can build a growth strategy around pent-up demand for online video services.
And the company will have a chance to prove its early success in Russia is not just down to luck, as it’s already building out WiMax networks in Belarus, Nicaragua, and Peru.
Yota’s success factors
1. Financial backing, sign-up strategy
Yota is the brand name of Scartel LLC, which announced the launch of its mobile WiMax services, across the 2.5-2.7 GHz band, in Moscow and St. Petersburg in September 2008. (See Scartel Launches WiMax.)
However, existing regulations at that time meant commercial services were not allowed using that spectrum. So, to build its customer base quickly to achieve economies of scale, and to compete with incumbent DSL broadband service providers, Yota’s service was offered for free until the end of May 2009, with users having to pay only for their access devices (dual-mode GSM/WiMax handsets, laptops with inbuilt 802.16e access capabilities, dongles etc). (See Russia’s WiMax Phone.)
The company could afford this strategy, as well as fund the rollout of its own network (core, fiber-based backhaul transport, and hundreds of WiMax base stations) in the two major Russian cities because of its significant financial backing. Scartel’s parent company, WiMax Holding, is 74.9 percent owned by private investment company Telconet Capital Limited Partnership, which has made $300 million available for initial investment. (The other 25.1 percent is owned by Russian state-owned company Rostechnologii.)
By mid 2009, the operator had invested $200 million, about 80 percent of which was sunk into its fixed backhaul and core transport network. Ultimately, the company believes its total rollout investment for Russia during the next three to four years could reach $1 billion.
2. Vendor strategy
Yota built its core and fixed backhaul network using technology from a single supplier, Cisco Systems Inc. (Nasdaq: CSCO), which provided DWDM transport equipment, IP routers, and data center gear. The carrier says it has built out 3,000 kilometers of its own fiber, which has a maximum transport capacity of 180 Gbit/s.
All of Yota’s base stations in dense urban areas (it now has around 500) are connected with fiber, and each has a backhaul link capacity of 200 Mbit/s. In less dense areas, where Yota is now expanding its coverage, microwave backhaul equipment from DragonWave Inc. (AIM/Toronto: DWI) is being deployed. (See Cisco Chalks Up WiMax Wins and DragonWave Backhauls Yota’s WiMax.)
Yota also decided on a single source for its Wimax access equipment, with Samsung Electronics Co. Ltd. (Korea: SEC) the supplier of choice. Samsung is now working with Yota on trials of next-generation 802.16m WiMax equipment. (See Yota Trials WiMax 2.0 and WiMax vs. LTE: The Rematch.)
At the recent ITU Telecom World event in Geneva, Yota told Unstrung that "having a single vendor for mobile WiMax access has saved us a lot of time and effort. Samsung’s technology may be more expensive than some others’, such as the Chinese vendors’, but it has given us a very fast time to market." (See ITU Day 2: WiMax Brings It.)
3. Data usage strategy: ‘All you can eat’
A change in the regulations allowed Yota to start charging for its services in early June 2009, by which time it had built a subscriber base of nearly 80,000 users. The company says about 75 percent of those users (about 60,000) converted into paying subscribers on a monthly tariff equivalent to about US$28.
That’s significantly more than the average cost of a DSL line in Russia, which can be secured for about $13 per month, albeit with a limit on data download volumes.
Yota, though, gambled on users wanting an "all you can eat" data offer, with no restrictions on the amount of video that could be streamed and/or downloaded in a month. And it was able to make that offer because of its significant backhaul capacity.
The service provider claims some users are taking full advantage of its unlimited data offer, with the average monthly download reaching 10.3 gigabytes over wireless access connections of up to 10 Mbit/s. To highlight its offer, Yota says one heavy video user downloaded 1.82 terabytes of data in April alone. (That’s the kind of statistic that gives the Hollywood studios the collywobbles…)
That strategy — a higher price but a video-friendly usage package — appears to have paid off, though it’s possible that some of its success is due to improving macro conditions in the Russian telecom services market. By October Yota had 200,000 customers and was signing up 2,300 new customers each day. (See Russia on the Rebound?.)
The company says there are now more than 60 different notebook models in Russian stores that have embedded 802.16e capabilities.
4. Ongoing domestic and international rollout
Yota launched its commercial services in the Russian city of Ufa on October 12, and plans to launch in about 15 more Russian markets in 2010, and a further 40-plus in the coming years.
With its Russian rollout now well under way, Yota is now set to launch in three overseas markets — in Russian neighbor Belarus (launched planned for April 2010), and in the Latin American markets of Nicaragua and Peru, where service launches are imminent.
The operator intends to use the vendors it has deployed in Russia as much as possible in its overseas markets, giving it further economies of scale and speed to market, as it shouldn’t encounter any operational or infrastructure management surprises.
The road to profitability, and competition
Yota doesn’t talk about revenues, but (using its early October figures) 200,000 customers at $28 per month (based on our back-of-the-envelope calculations) would give Yota monthly revenues of $5.6 million per month, equivalent to $67.2 million a year. That appears to be the company’s operational breakeven number for its Russian business, so with continued subscriber base growth, Yota should have achieved operational profitability by now.
In terms of the overall Russian broadband market, though, Yota is still a minnow. In 2008 the fixed broadband services market in Russia was worth about $1.5 billion and growing, according to Pyramid Research , while one of its main rivals in Moscow is Comstar United Telesystems JSC (London: CMST), which has more than 800,000 DSL customers in the Russian capital. (See Comstar Reports Q2.)
And the DSL market is set for significant growth too in the coming years, according to the Pyramid Research analysts. (See DSL Drives Russia’s Fixed-Line Growth.)
Competition for broadband Internet access isn’t confined to the fixed-line players, as Yota isn’t alone in spotting the near-term potential for Wimax growth in Russia — it will soon have competition from newcomer Freshtel, which will have initial access to $300 million of capital. (See Huawei Seals Russian WiMax Deal.)
— Ray Le Maistre, International News Editor, Light Reading