Russia Goes on a High-Fiber Diet

October 8, 2009

In our recent Europe Insider, Fiber Buildouts in Europe: A Competitive Necessity for Telcos, we looked at several Central and Eastern European (CEE) markets in terms of FTTH and FTTB adoption. Interestingly, Russia, which has always lagged in terms of broadband adoption because of slow DSL rollouts, is now at the forefront of access fiber adoption in CEE.

As of 2009, Russia contributed 64% to the total number of FTTH and FTTB broadband access lines in CEE — more than any other market in the region (see Exhibit 1). In Pyramid Research’s Q3 2009 Fixed Communications Forecasts for the CEE region, we projected that by 2014, there will be more than 5.7m FTTH and FTTB connections in Russia, compared with 2.9m in 2008.

Exhibit 1: FTTB+FTTH broadband access lines, CEE, 2008-2014

Source: Pyramid Research, Q3 2009 Fixed Communications Forecasts, Central and Eastern Europe

Three factors are behind this growth: Low broadband penetration, the economic attractiveness of FTTB and commitment from several large market players. Broadband penetration remains low in Russia; we estimate that it was 5.5% at the end of 2008 and will reach 7.3% at the end of 2009. Incumbent Svyazinvest’s operator subsidiaries are working hard to roll out DSL in the Russian regions, but this is a mammoth task considering the geography and the fact that Svyazinvest’s network digitalization level is about 72-73%. In any case, alternative operators cannot rely on Svyazinvest, as there is no local loop unbundling.

This is where FTTB steps in. Since a large proportion of the urban population — around 24m — lives in Soviet-style apartment blocks closely located to each other, it is very quick and easy to roll out FTTB. Most operators lay the main fiber over the rooftops of the buildings to simplify the rollout and to avoid having to wait for ground building permission. This potentially saves more than 50% on capex. In fact, operators say that it’s now cheaper to roll out FTTB than copper.

With soaring demand for broadband, FTTB became the technology of choice for VimpelCom, Comstar and ER-Telecom. At the end of Q2 2009, ER-Telecom, the FTTB operator working in Russia’s Volga, Urals and Siberian federal districts, had more than 3m installed and 1.6m active FTTB lines. Comstar enabled FTTB/FTTC for 600,000 households and plans to selectively enable FTTB/FTTC for 80% of the 4m households it passes by 2011. VimpelCom has covered 60 cities and has around 900,000 FTTB subscribers. It is planning to cover 80 cities by the end of 2009 and more than 300 cities by 2011 (see Exhibit 2).

Exhibit 2: VimpelCom’s FTTB rollout plans, 2009-2011

Source: VimpelCom

As Russia comes out of the recession, we believe that FTTB will become very big in Moscow and even more so in the Russian regions lacking competition where extremely high broadband prices ensure its profitability.

— Bakhyt Weeks, Analyst, EMEA

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