UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
¨ | Registration Statement Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934 |
OR
x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2012 |
OR
¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
OR
¨ | Shell Company Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number: 1-34694
VIMPELCOM LTD.
(Exact name of registrant as specified in its charter)
Bermuda
(Jurisdiction of incorporation or organization)
Claude Debussylaan 88, 1082 MD, Amsterdam, the Netherlands
(Address of principal executive offices)
Jeffrey D. McGhie
Group General Counsel & Chief Corporate Affairs Officer
Claude Debussylaan 88, 1082 MD, Amsterdam, the Netherlands
Tel: +31 20 797 7200
Fax: +31 20 797 7201
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |||
American Depositary Shares, or ADSs, each |
New York Stock Exchange | |||
Common shares, US$ 0.001 nominal value |
New York Stock Exchange* |
* | Listed, not for trading or quotation purposes, but only in connection with the registration of ADSs pursuant to the requirements of the Securities and Exchange Commission. |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report:
1,628,199,135 common shares, US$ 0.001 nominal value.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ¨ International Financial Reporting Standards as issued by the International Accounting Standards Board x Other ¨
Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ¨ Item 18 x
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
ITEM 1. | 5 | |||||
ITEM 2. | 5 | |||||
ITEM 3. | 5 | |||||
ITEM 4. | 29 | |||||
ITEM 4A. | 96 | |||||
ITEM 5. | 96 | |||||
ITEM 6. | 130 | |||||
ITEM 7. | 138 | |||||
ITEM 8. | 143 | |||||
ITEM 9. | 144 | |||||
ITEM 10. | 145 | |||||
ITEM 11. | 156 | |||||
ITEM 12. | 157 | |||||
ITEM 13. | 159 | |||||
ITEM 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds |
159 | ||||
ITEM 15. | 159 | |||||
ITEM 16A. | 160 | |||||
ITEM 16B. | 160 | |||||
ITEM 16C. | 160 | |||||
ITEM 16D. | 161 | |||||
ITEM 16E. | Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
161 | ||||
ITEM 16F. | 161 | |||||
ITEM 16G. | 161 | |||||
ITEM 17. | 163 | |||||
ITEM 18. | 163 | |||||
ITEM 19. | 164 |
* | Omitted because the item is not required. |
** | We have responded to Item 18 in lieu of this item. |
i
EXPLANATORY NOTE
References in this Annual Report on Form 20-F to VimpelCom and the VimpelCom Group, as well as references to our company, the company, our group, we, us, our and similar pronouns, are references to VimpelCom Ltd., an exempted company limited by shares registered in Bermuda, and its consolidated subsidiaries. All section references appearing in this Annual Report on Form 20-F are to sections of this Annual Report on Form 20-F, unless otherwise indicated.
On April 15, 2011, we completed our acquisition of 100% of Wind Telecom S.p.A., or Wind Telecom (or together with its consolidated subsidiaries, the Wind Telecom Group) and its interests in Orascom Telecom Holding S.A.E, or OTH, and WIND Telecomunicazioni S.p.A., or WIND Italy. The Wind Telecom Group is an international provider of mobile and fixed-line telecommunications and Internet services with operations in Europe, North America, Africa and Asia. We refer to the acquisition of Wind Telecom in this Annual Report on Form 20-F as the Wind Telecom Transaction. As we did not consolidate Wind Telecom into our financial statements until the effective acquisition date, the historical financial and operating data of VimpelCom set forth in this Annual Report on Form 20-F do not reflect Wind Telecoms results prior to April 15, 2011, unless otherwise indicated.
In October 2009, Telenor ASA, the parent company of the Telenor Group, and Altimo Holdings & Investments Ltd., or Altimo Holdings (or together with its consolidated subsidiaries, Altimo), a member of the Alfa Group Consortium, or the Alfa Group, announced that they agreed to combine their ownership of OJSC Vimpel-Communications, or OJSC VimpelCom, and Private Joint Stock Company Kyivstar, or Kyivstar, under a new company called VimpelCom Ltd. We refer to the combination in this Annual Report on Form 20-F as the VimpelCom Ltd. Transaction. The VimpelCom Ltd. Transaction involved a series of transactions, including exchange offers by VimpelCom Ltd. to holders of OJSC VimpelCom shares, including shares represented by ADSs. On April 21, 2010, all conditions of the exchange offers were satisfied, and VimpelCom Ltd. acquired approximately 98.0% of OJSC VimpelComs outstanding shares, including shares represented by ADSs. Immediately following completion of the exchange offers, subsidiaries of Telenor and Altimo caused their direct and indirect interests in Kyivstar to be transferred to VimpelCom Holdings B.V., or VimpelCom Holdings. On May 14, 2010, OJSC VimpelComs ADSs were delisted from the NYSE, and on June 2, 2010, OJSC VimpelComs shares were excluded from the list of traded securities at the Open Joint Stock Company Russian Trading System Stock Exchange. On August 6, 2010, VimpelCom Ltd. completed the acquisition of all of OJSC VimpelComs shares, including those represented by ADSs, from OJSC VimpelComs remaining minority shareholders by way of a squeeze-out process under Russian law commenced on May 25, 2010.
This Annual Report on Form 20-F includes audited consolidated financial statements as of and for the years ended December 31, 2012, 2011 and 2010 prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB, and presented in U.S. dollars. The company adopted IFRS as of January 1, 2009. As a result of the VimpelCom Ltd. Transaction, VimpelCom Ltd. is as of April 21, 2010, the accounting successor to OJSC VimpelCom, and accordingly, accounting data and disclosure relating to the period prior to April 21, 2010 in VimpelCom Ltd.s IFRS financial statements represent accounting data and disclosure of OJSC VimpelCom except for equity, which was restated to reflect the capital structure of VimpelCom Ltd. The historical operating data for periods prior to April 21, 2010, the date on which the VimpelCom Ltd. Transaction was completed, represents the historical operating data of OJSC VimpelCom. See also Item 5Operating and Financial Review and ProspectsFactors Affecting Comparability of Prior Periods.
In this Annual Report on Form 20-F, references to , EUR, or Euro are to the lawful currency of the member states of the European Union that adopt the single currency in accordance with the Treaty of Rome which established the European Community, as amended, references to Russian rubles or rubles or RUB are to the lawful currency of the Russian Federation, references to US$ or $ or USD or U.S. dollars are to the lawful currency of the United States of America, references to dinars and DZD are to the lawful currency of Algeria and references to IQD are to the lawful currency of Iraq. References to LIBOR are to the London Interbank Offered Rate, references to MosPRIME are to the Moscow Prime Offered Rate, references to KIBOR are to the Karachi Interbank Offered Rate, references to AB SEK are to AB Svensk Exportkredit and references to Rendistato are to the weighted average yield on a basket of Italian government securities produced and published by Bank of Italy.
In addition, the discussion of our business and the telecommunications industry in this Annual Report on Form 20-F contains references to certain terms specific to our business, including numerous technical and industry terms. Such terms are defined below:
| References to ADSL are to asymmetric digital subscriber line. |
| References to ANOs are to alternative network operators. |
| References to ARPU are to the monthly average revenue per mobile subscriber. |
| References to BITS are to basic international telecommunications service, a type of license. |
| References to BU-LRIC are to bottom-up long-run incremental cost. |
| References to CAMEL are to a customized application for mobile network enhanced logic, an intranetwork prepaid roaming service. |
1
| References to CLECs are to competitive local exchange carriers. |
| References to DLD are to domestic long distance. |
| References to DWDM are to dense wavelength division multiplexing. |
| References to FTN are to a Federal Transit Network. |
| References to FTTB are to fiber to the building. |
| References to GSM are Global System for Mobile Communications standard. |
| References to GSM-900 are to networks that provide mobile telephone services using GSM in the 900MHz frequency range. |
| References to GSM-900/1800 are to dual band networks that provide mobile telephone services using the GSM standard in the 900 MHz and 1800 MHz frequency ranges. |
| References to GSM-1800 are to networks that provide mobile telephone services using GSM in the 1800 MHz frequency range. |
| References to HD are to high definition. |
| References to HSDPA are to High Speed Downlink Packet Accesses, which is a 3G mobile telephony communications protocol in the High-Speed Packet Access or HSPA family. |
| References to ILD are to international long distance. |
| References to ILEC are to incumbent local exchange carriers. |
| References to IP are to Internet Protocol. |
| References to IP VPN are to IP virtual private network. |
| References to ISDN are to integrated services digital network. |
| References to ISP are Internet service provider. |
| References to LAN are to local area network. |
| References to LLU are to local loop unbundling. In Italy, this is the regulatory process of allowing multiple telecommunications operators to use connections from Telecom Italias local exchanges to the customers premises. |
| References to LTE are to long term evolution, a mobile access technology. |
| References to MEN are to metropolitan Ethernet technology. |
| References to MMS are to multimedia messaging service. |
| References to mobile services are to our wireless voice and data transmission services but excluding WiFi. |
| References to MNP are to mobile number portability. |
| References to MOU are to the monthly average minutes of use per mobile subscriber. |
| References to MPLS are to multiprotocol label switching. |
| References to MVNOs are to mobile virtual network operators. |
| References to NGAN are to next generation access network. |
| References to PBX are to private branch exchange. |
| References to PSTN are to public switched telephone network. |
| References to REDs are to radio electronic devices. |
| References to RBT are to ringback tones, which are customized ringtones. |
| References to SaaS are to software as a service. |
| References to SLA are to service level agreement. |
| References to SDH are to synchronous digital hierarchy technology. |
| References to SMS are to short messaging service. |
| References to STBs are to set-top boxes. |
| References to TDM are to time division multiplexing. |
| References to TFO are to tandem free operation. |
| References to TrFO are to transcorder free operation. |
| References to UMTS are to Universal Mobile Telecommunications System. |
| References to USB are to Universal Serial Bus. |
2
| References to USO are to universal service obligations. |
| References to UTN are to telephone urban set. |
| References to VoIP are to voice over Internet protocol. |
| References to VPN are to virtual private network. |
| References to VSAT are to very small aperture terminal. |
| References to WAN are to wide area network. |
| References to WiMax are to the worldwide interoperability for microwave access communication standard. |
| References to WLL are to wireless local loop. |
| References to WLR are to wholesale line rental. |
| References to 3G technologies are to third generation mobile technologies, including UMTS. |
| References to 4G technologies are to fourth generation mobile technologies, including LTE and WiMax. |
Certain amounts and percentages that appear in this Annual Report on Form 20-F have been subject to rounding adjustments. As a result, certain numerical figures shown as totals, including in tables, may not be exact arithmetic aggregations of the figures that precede or follow them.
Non-GAAP Financial Measures
Adjusted EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP financial measures. VimpelCom calculates Adjusted EBITDA as profit for the year before depreciation, amortization, impairment loss, finance costs, income tax expense and the other line items reflected in the reconciliation table in Item 3Key InformationA. Selected Financial Data below. Our consolidated Adjusted EBITDA includes certain reconciliation adjustments necessary because our Russia Business Unit excludes certain expenses from its Adjusted EBITDA. As a result of reconciliations, our consolidated Adjusted EBITDA differs from the aggregation of Adjusted EBITDA of each of our business units. Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by total operating revenues. Adjusted EBITDA and Adjusted EBITDA Margin should not be considered in isolation or as a substitute for analyses of the results as reported under IFRS. Our management uses Adjusted EBITDA and Adjusted EBITDA margin as supplemental performance measures and believes that Adjusted EBITDA and Adjusted EBITDA Margin provide useful information to investors because they are indicators of the strength and performance of the companys business operations, including its ability to fund discretionary spending, such as capital expenditures, acquisitions and other investments, as well as indicating its ability to incur and service debt. In addition, the components of Adjusted EBITDA and Adjusted EBITDA Margin include the key revenue and expense items for which the companys operating managers are responsible and upon which their performance is evaluated. Adjusted EBITDA and Adjusted EBITDA Margin also assist management and investors by increasing the comparability of the companys performance against the performance of other telecommunications companies that provide EBITDA (earnings before interest, taxes, depreciation and amortization) or OIBDA (operating income before depreciation and amortization) information. This increased comparability is achieved by excluding the potentially inconsistent effects between periods or companies of depreciation, amortization and impairment losses, which items may significantly affect operating profit between periods. However, our Adjusted EBITDA results may not be directly comparable to other companies reported EBITDA or OIBDA results due to variances and adjustments in the components of EBITDA (including our calculation of Adjusted EBITDA) or calculation measures. Additionally, a limitation of EBITDAs or Adjusted EBITDAs use as a performance measure is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues or the need to replace capital equipment over time. Reconciliation of Adjusted EBITDA to profit for the year, the most directly comparable IFRS financial measure, is presented in Item 3Key InformationA. Selected Financial Data below.
3
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 20-F contains forward-looking statements, as this phrase is defined in Section 27A of the U.S. Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are not historical facts and can often be identified by the use of terms like estimates, projects, anticipates, expects, intends, believes, will, may, should or the negative of these terms. All forward-looking statements, including discussions of strategy, plans, objectives, goals and future events or performance, involve risks and uncertainties. Examples of forward-looking statements include:
| our strategy to generate sufficient net cash flow in order to meet our debt service obligations; |
| our plans to develop and provide integrated telecommunications services to our customers, increase fixed-line and mobile telephone use and expand our operations; |
| our ability to execute our Value Agenda and business strategy successfully and achieve the expected benefits from our existing and future acquisitions; |
| our ability to extract anticipated synergies or to integrate an acquired business, including Wind Telecom, into our group in a timely and cost-effective manner; |
| our expectations as to pricing for our products and services in the future, improving the total average monthly service revenues per subscriber and our future operating results; |
| our ability to meet our projected capital requirements; |
| our ability to meet license requirements and to obtain, maintain, renew or extend licenses, frequency allocations and frequency channels and obtain related regulatory approvals, as well as the development and roll-out of our networks for new standards such as a LTE in Russia; |
| our expectations regarding future developments in the markets in which we operate; |
| our ability to obtain and maintain interconnect agreements; and |
| other statements regarding matters that are not historical facts. |
While these statements are based on sources believed to be reliable and on our managements current knowledge and best belief, they are merely estimates or predictions and cannot be relied upon. We cannot assure you that future results will be achieved. The risks and uncertainties that may cause our actual results to differ materially from the results indicated, expressed or implied in the forward-looking statements used in this Annual Report on Form 20-F include:
| risks relating to changes in political, economic and social conditions in each of the countries in which we operate; |
| in each of the countries in which we operate, risks relating to legislation, regulation and taxation, including laws, regulations, decrees and decisions governing the telecommunications industry, currency and exchange controls and taxation legislation, and their official interpretation by governmental and other regulatory bodies and courts; |
| risks that various courts or regulatory agencies in which we are involved in legal challenges or appeals may not find in our favor; |
| risks relating to our company, including demand for and market acceptance of our products and services, regulatory uncertainty regarding our licenses, frequency allocations and numbering capacity, constraints on our spectrum capacity, availability of line capacity and competitive product and pricing pressures; |
| risks associated with discrepancies in subscriber numbers and penetration rates caused by differences in the churn policies of mobile operators; and |
| other risks and uncertainties. |
These factors and the other risk factors described in Item 3Key InformationD. Risk Factors are not necessarily all of the factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our future results. Under no circumstances should the inclusion of such forward-looking statements in this Annual Report on Form 20-F be regarded as a representation or warranty by us or any other person with respect to the achievement of results set out in such statements or that the underlying assumptions used will in fact be the case. The forward-looking statements included in this Annual Report on Form 20-F are made only as of the date of this Annual Report on Form 20-F. We cannot assure you that projected results or events will be achieved. Except to the extent required by law, we disclaim any obligation to update or revise any of these forward-looking statements, whether as a result of new information, future events or otherwise.
4
PART I
ITEM 1. | Identity of Directors, Senior Management and Advisers |
Not required.
ITEM 2. | Offer Statistics and Expected Timetable |
Not required.
ITEM 3. | Key Information |
A. Selected Financial Data
The following selected consolidated financial data for the three years ended December 31, 2012 are derived from our historical consolidated financial statements which have been audited by Ernst & Young Accountants LLP, an independent registered public accounting firm, for the years ended December 31, 2012, 2011 and 2010 and by Ernst & Young LLC, an independent registered public accounting firm, for the year ended December 31, 2009. The data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 20-F and the financial information in Item 5Operating and Financial Review and Prospects. We omit certain selected financial information for the earliest year of the five year period ended December 31, 2012 because we adopted IFRS in 2010 and accordingly have only four years of selected consolidated financial data prepared in accordance with IFRS as issued by the IASB. See also Explanatory Note above.
Years ended December 31, | ||||||||||||||||
2012 | 2011 | 2010 | 2009 | |||||||||||||
(In millions of US dollars, except per share amounts) |
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Service revenues |
22,122 | 19,579 | 10,291 | 8,691 | ||||||||||||
Sale of equipment and accessories |
677 | 516 | 194 | 110 | ||||||||||||
Other revenues |
262 | 167 | 37 | 12 | ||||||||||||
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Total operating revenues |
23,061 | 20,262 | 10,522 | 8,813 | ||||||||||||
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Operating expenses |
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Service costs |
5,439 | 4,962 | 2,251 | 1,895 | ||||||||||||
Cost of equipment and accessories |
693 | 663 | 217 | 111 | ||||||||||||
Selling, general and administrative expenses |
7,161 | 6,381 | 3,198 | 2,482 | ||||||||||||
Depreciation |
2,926 | 2,726 | 1,403 | 1,190 | ||||||||||||
Amortization |
2,080 | 2,059 | 610 | 440 | ||||||||||||
Impairment loss |
386 | 527 | | | ||||||||||||
Loss on disposals of non-current assets |
205 | 90 | 49 | 77 | ||||||||||||
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Total operating expenses |
18,890 | 17,408 | 7,728 | 6,195 | ||||||||||||
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Operating profit |
4,171 | 2,854 | 2,794 | 2,618 | ||||||||||||
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Finance costs |
2,029 | 1,587 | 536 | 603 | ||||||||||||
Finance income |
(154 | ) | (120 | ) | (69 | ) | (58 | ) | ||||||||
Revaluation of retained interest in Euroset |
(606 | ) | | | | |||||||||||
Other non-operating losses/(gains) |
75 | 308 | (35 | ) | 69 | |||||||||||
Shares of loss/(profit) of associates and joint ventures accounted for using the equity method |
9 | 35 | (90 | ) | (3 | ) | ||||||||||
Net foreign exchange (gain)/ loss |
(70 | ) | 190 | 5 | 404 | |||||||||||
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Profit before tax |
2,888 | 854 | 2,447 | 1,603 | ||||||||||||
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Income tax expense |
906 | 585 | 574 | 431 | ||||||||||||
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Profit for the year |
1,982 | 269 | 1,873 | 1,172 | ||||||||||||
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Attributable to: |
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The owners of the parent |
2,145 | 543 | 1,806 | 1,142 | ||||||||||||
Non-controlling interest |
(163 | ) | (274 | ) | 67 | 30 | ||||||||||
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1,982 | 269 | 1,873 | 1,172 | |||||||||||||
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Earnings per share |
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Basic, profit for the year attributable to ordinary equity holders of the parent |
$ | 1.33 | $ | 0.36 | $ | 1.50 | $ | 1.13 | ||||||||
Diluted, profit for the year attributable to ordinary equity holders of the parent |
$ | 1.32 | $ | 0.36 | $ | 1.50 | $ | 1.13 | ||||||||
Weighted average number of common shares (millions) |
1,618 | 1,524 | 1,207 | 1,013 | ||||||||||||
Dividends declared per share |
$ | 0.80 | $ | 0.80 | $ | 0.80 | $ | 0.30 |
5
At December 31, | ||||||||||||||||
2012 | 2011 | 2010 | 2009 | |||||||||||||
(In millions of US dollars) | ||||||||||||||||
Consolidated balance sheets data: |
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Cash and cash equivalents |
4,949 | 2,325 | 885 | 1,451 | ||||||||||||
Working capital (deficit)(1) |
(2,421 | ) | (3,074 | ) | (1,023 | ) | (562 | ) | ||||||||
Property and equipment, net |
15,666 | 15,165 | 7,299 | 5,861 | ||||||||||||
Intangible assets and goodwill |
27,565 | 28,601 | 9,217 | 4,843 | ||||||||||||
Total assets |
55,360 | 54,039 | 19,505 | 14,618 | ||||||||||||
Total liabilities |
39,988 | 39,137 | 9,093 | 10,416 | ||||||||||||
Total equity |
15,372 | 14,902 | 10,412 | 4,202 |
(1) | Working capital is calculated as current assets less current liabilities. |
Years ended December 31, | ||||||||||||||||
2012 | 2011 | 2010 | 2009 | |||||||||||||
(In millions of US dollars) | ||||||||||||||||
Other data: |
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Adjusted EBITDA * |
9,768 | 8,298 | 4,906 | 4,334 |
* | Adjusted EBITDA is a non-GAAP financial measure. Please see Explanatory NoteNon-GAAP Financial Measures for more information on how we calculate adjusted EBITDA. Reconciliation of adjusted EBITDA to profit for the year, the most directly comparable IFRS financial measure, is presented below. |
Reconciliation of Adjusted EBITDA to profit for the year
(Unaudited, in millions of US dollars)
Years ended December 31, | ||||||||||||||||
2012 | 2011 | 2010 | 2009 | |||||||||||||
Adjusted EBITDA |
9,768 | 8,298 | 4,906 | 4,334 | ||||||||||||
Reconciliation adjustments |
| (42 | ) | (50 | ) | (9 | ) | |||||||||
Depreciation |
(2,926 | ) | (2,726 | ) | (1,403 | ) | (1,190 | ) | ||||||||
Amortization |
(2,080 | ) | (2,059 | ) | (610 | ) | (440 | ) | ||||||||
Impairment loss |
(386 | ) | (527 | ) | | | ||||||||||
Loss on disposals of non-current assets |
(205 | ) | (90 | ) | (49 | ) | (77 | ) | ||||||||
Finance costs |
(2,029 | ) | (1,587 | ) | (536 | ) | (603 | ) | ||||||||
Finance income |
154 | 120 | 69 | 58 | ||||||||||||
Revaluation of retained interest in Euroset |
606 | | | | ||||||||||||
Other non-operating losses/(gains) |
(75 | ) | (308 | ) | 35 | (69 | ) | |||||||||
Shares of (loss)/profit of associates and joint ventures accounted for using the equity method |
(9 | ) | (35 | ) | 90 | 3 | ||||||||||
Net foreign exchange loss |
70 | (190 | ) | (5 | ) | (404 | ) | |||||||||
Income tax expense |
(906 | ) | (585 | ) | (574 | ) | (431 | ) | ||||||||
Profit for the year |
1,982 | 269 | 1,873 | 1,172 |
SELECTED OPERATING DATA
The following selected operating data as of and for the years ended December 31, 2012, 2011, 2010 and 2009 has been derived from internal company sources. The selected operating data set forth below should be read in conjunction with our consolidated financial statements and their related notes included elsewhere in this Annual Report on Form 20-F and the section of this Annual Report on Form 20-F entitled Item 5Operating and Financial Review and Prospects. See also Explanatory Note above.
6
As of December 31, | ||||||||||||||||
2012 | 2011 | 2010 | 2009 | |||||||||||||
Selected company operating data(1): |
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End of period mobile subscribers (in millions): |
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Russia |
56.1 | 57.2 | 52.0 | 50.9 | ||||||||||||
Europe & North America |
22.2 | 21.4 | | | ||||||||||||
Africa & Asia |
85.2 | 82.1 | 0.7 | 0.4 | ||||||||||||
Ukraine |
26.0 | 24.8 | 24.4 | 2.0 | ||||||||||||
CIS |
24.2 | 19.7 | 15.6 | 13.2 | ||||||||||||
Total mobile subscribers |
213.7 | 205.2 | 92.7 | 66.5 | ||||||||||||
Mobile MOU (2) |
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Russia |
276 | 243 | 219 | 211 | ||||||||||||
Europe & North America |
||||||||||||||||
Italy |
207 | 197 | | | ||||||||||||
Africa & Asia |
||||||||||||||||
Algeria |
262 | 286 | | | ||||||||||||
Pakistan |
214 | 206 | | | ||||||||||||
Bangladesh |
216 | 209 | | | ||||||||||||
CAR |
49 | 47 | | | ||||||||||||
Burundi |
37 | 37 | | | ||||||||||||
Cambodia |
545 | 419 | 331 | 78 | ||||||||||||
Laos |
97 | 233 | | | ||||||||||||
Ukraine |
493 | 467 | 378 | 209 | ||||||||||||
CIS |
||||||||||||||||
Kazakhstan |
213 | 148 | 120 | 93 | ||||||||||||
Tajikistan |
241 | 229 | 179 | 173 | ||||||||||||
Uzbekistan |
474 | 425 | 386 | 314 | ||||||||||||
Armenia |
269 | 257 | 294 | 238 | ||||||||||||
Georgia |
237 | 207 | 137 | 138 | ||||||||||||
Kyrgyzstan |
272 | 303 | 258 | 164 | ||||||||||||
Mobile ARPU (2) |
||||||||||||||||
Russia |
US$ | 10.8 | US$ | 11.0 | US$ | 10.8 | US$ | 10.1 | ||||||||
Europe & North America |
US$ | 18.5 | US$ | 21.7 | | | ||||||||||
Africa & Asia |
||||||||||||||||
Algeria |
US$ | 8.6 | US$ | 9.0 | | | ||||||||||
Pakistan |
US$ | 2.6 | US$ | 2.7 | | | ||||||||||
Bangladesh |
US$ | 1.8 | US$ | 1.8 | | | ||||||||||
CAR |
US$ | 5.9 | US$ | 6.4 | | | ||||||||||
Burundi |
US$ | 3.3 | US$ | 3.6 | | | ||||||||||
Cambodia |
US$ | 1.6 | US$ | 2.9 | | |
7
As of December 31, | ||||||||||||||||
2012 | 2011 | 2010 | 2009 | |||||||||||||
Laos |
US$ | 5.6 | US$ | 5.1 | | | ||||||||||
Ukraine |
US$ | 5.0 | US$ | 5.1 | US$ | 4.8 | US$ | 4.7 | ||||||||
CIS |
||||||||||||||||
Kazakhstan |
US$ | 7.6 | US$ | 8.3 | US$ | 9.2 | US$ | 8.1 | ||||||||
Tajikistan |
US$ | 8.6 | US$ | 8.8 | US$ | 6.5 | US$ | 7.1 | ||||||||
Uzbekistan |
US$ | 4.6 | US$ | 4.1 | US$ | 4.1 | US$ | 4.7 | ||||||||
Armenia |
US$ | 6.8 | US$ | 8.1 | US$ | 10.3 | US$ | 13.2 | ||||||||
Georgia |
US$ | 6.7 | US$ | 6.8 | US$ | 7.5 | US$ | 8.9 | ||||||||
Kyrgyzstan |
US$ | 5.5 | US$ | 5.5 | US$ | 5.3 | | |||||||||
Churn (as a percentage) (2) |
||||||||||||||||
Russia |
63.2 | 62.8 | 50.8 | 42.8 | ||||||||||||
Europe & North America |
||||||||||||||||
Italy |
35.2 | 28.3 | | | ||||||||||||
Africa & Asia |
||||||||||||||||
Algeria |
24.2 | 20.9 | | | ||||||||||||
Pakistan |
25.2 | 29.5 | | | ||||||||||||
Bangladesh |
25.2 | 18.5 | | | ||||||||||||
CAR |
60.0 | 102.0 | | | ||||||||||||
Burundi |
54.0 | 59.9 | | | ||||||||||||
Cambodia |
210.0 | 128.0 | 167.0 | | (3) | |||||||||||
Laos |
141.0 | 258.0 | | | ||||||||||||
Ukraine |
28.7 | 22.3 | 29.5 | 81.0 | ||||||||||||
CIS |
||||||||||||||||
Kazakhstan |
55.8 | 47.4 | 43.5 | 46.3 | ||||||||||||
Tajikistan |
72.7 | 67.4 | 82.8 | 52.9 | ||||||||||||
Uzbekistan |
55.1 | 59.7 | 54.2 | 63.7 | ||||||||||||
Armenia |
83.9 | 87.6 | 67.6 | 58.6 | ||||||||||||
Georgia |
79.1 | 70.1 | 94.1 | 46.6 | ||||||||||||
Kyrgyzstan |
66.1 | 52.3 | 61.9 | 60.5 | ||||||||||||
End of period broadband subscribers (in millions): |
||||||||||||||||
Russia |
5.0 | 4.6 | 3.3 | 2.1 | ||||||||||||
Europe & North America |
7.8 | 6.6 | | | ||||||||||||
Africa & Asia |
| | | | ||||||||||||
Ukraine |
0.6 | 0.4 | 0.2 | 0.1 | ||||||||||||
CIS (4) |
12.3 | 9.5 | 6.7 | 5.5 | ||||||||||||
Total broadband subscribers |
25.6 | 12.3 | 3.7 | 2.2 |
(1) | For information on how we calculate mobile subscriber data, mobile MOU, mobile ARPU, mobile churn rates and broadband subscriber data, please refer to the section of this Annual Report on Form 20-F entitled Item 5Operating and Financial Review and ProspectsCertain Performance Indicators. Please note that the data presented above for our Europe & North America segment relate only to our operations in Italy, except for mobile subscriber data, which include the subscribers of our equity associate in Canada (0.4 million for 2011 and 0.6 million for 2012). Operating data for Ukraine does not include figures associated with Kyivstars operations prior to April 21, 2010, when Kyivstars operations were integrated into the group. The number of mobile subscribers for Africa & Asia includes subscribers of Telecel Zimbabwe (1.5 million for 2011 and 2.6 million for 2012), in which we have an equity investment and is accounted at cost. |
(2) | For Wind Telecom Group companies acquired on April 15, 2011, mobile MOU, ARPU and churn are calculated based on the full year. |
(3) | Churn figures for Cambodia in 2009 are not provided due to partial year consolidation. |
(4) | CIS mobile broadband customers are those who have performed at least one mobile internet event in the three-month period prior to the measurement date, as well as fixed internet access using FTTB, xDSL and WiFi technologies. |
8
B. Capitalization and Indebtedness
Not required.
C. Reasons for the Offer and Use of Proceeds
Not required.
D. Risk Factors
The risk factors below are associated with our company and our ADSs. Before purchasing our ADSs, you should carefully consider all of the information set forth in this Annual Report on Form 20-F and, in particular, the risks described below. If any of the following risks actually occur, our business, financial condition, results of operations or prospects could be harmed. In that case, the trading price of our ADSs could decline and you could lose all or part of your investment.
The risks and uncertainties below are not the only ones we face, but represent the risks that we believe are material. However, there may be additional risks that we currently consider not to be material or of which we are not currently aware and these risks could have the effects set forth above.
Risks Related to Our Business
Substantial leverage and debt service obligations may materially adversely affect our cash flow.
We have substantial amounts of indebtedness. As of December 31, 2012, the principal amount of our external debt for bank loans, bonds, equipment financing, and loans from others amounted to approximately US$27.0 billion.
In connection with the acquisition of Wind Telecom in April 2011, we incurred significant additional indebtedness to pay for the acquisition of Wind Telecom and to refinance debt of Wind Telecom entities that had to be refinanced because we acquired control. We refer to the acquisition of Wind Telecom in this Annual Report on Form 20-F as the Wind Telecom Transaction. For more information on the Wind Telecom Transaction, see Item 4Information on the CompanyHistory and Development. In addition to our debt existing before the Wind Telecom Transaction and debt we incurred in connection with the Wind Telecom Transaction, in acquiring Wind Telecom we acquired entities with substantial debt that we did not refinance. This debt remains outstanding and further increases the leverage of the VimpelCom Group.
Proceeds from debt obligations we have incurred or may incur that are loaned to our subsidiaries, including subsidiaries acquired in the Wind Telecom Transaction, may not be available to us, or repaid when needed, for support of our operations and payment of our debt service obligations. There can be no assurance that we will recover any amounts we lend to our subsidiaries. Furthermore, in the short to medium term we will not derive additional sources of cash flow or revenues from the Wind Telecom entities and will have to satisfy our debt service obligations from our operations in OJSC VimpelCom and Kyivstar. For more information regarding our outstanding indebtedness and the outstanding indebtedness of Wind Telecom entities, see Item 5Operating and Financial Review and ProspectsLiquidity and Capital ResourcesFinancing Activities.
Our substantial leverage, our lending to and refinancing of debt of our subsidiaries, including subsidiaries acquired in the Wind Telecom Transaction, and limits imposed by our debt obligations, including limits on subsidiaries we acquired in the Wind Telecom Transaction, could have significant negative consequences for our business. These factors could require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for dividends, working capital, capital expenditures, acquisitions, joint ventures and other purposes necessary for us to maintain our competitive position and placing us at a disadvantage in relation to competitors with less leverage and greater access to financial resources. These factors could also increase our vulnerability to, and limit our ability to respond to, general adverse economic and industry conditions, limit our ability to obtain additional financing, and increase the cost of such financing.
We must generate sufficient net cash flow in order to meet the substantial debt service obligations which we have following the Wind Telecom Transaction and may incur in the future, and we cannot assure you that we will be able to meet those obligations. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, we would be in default under the terms of our indebtedness, and the holders of our indebtedness would be able to accelerate the maturity of the indebtedness which in turn could cause defaults under our other indebtedness. This could also result in loss of any assets that secure this debt. If we do not generate sufficient cash flow from operations in attempting to meet our obligations, we may have to undertake alternative financing plans to alleviate liquidity constraints, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital expenditures or seeking additional capital. We cannot assure you that any refinancing or additional financing would be available on acceptable terms, or that assets could be sold, or if sold, that such sales would be on satisfactory terms, that the proceeds realized from those sales or refinancing would be sufficient to meet our obligations or that such sales or refinancing could be effected in time to alleviate financial constraints. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance debt on commercially reasonable terms, could materially adversely affect our business, financial condition, results of operations and prospects.
9
Covenants in our debt agreements could impair our liquidity and our ability to expand or finance our future operations.
Agreements under which we borrow funds (as set forth in further detail in Item 5Operating and Financial Review and ProspectsLiquidity and Capital ResourcesFinancing Activities) contain a number of different covenants that impose on us certain operating and financial restrictions. Some of these covenants relate to our financial performance, such as the level of earnings, debt and assets. Other covenants limit the ability of, and in some cases prohibit, among other things, us or certain of our subsidiaries from incurring additional indebtedness, creating liens on assets, entering into business combinations or engaging in certain activities with companies within our group. A failure to comply with these covenants would constitute a default under these relevant agreements and could trigger cross-payment default/cross-acceleration provisions under some or all of these agreements discussed above. This could also lead to secured creditors taking enforcement actions against pledged assets securing our debt. In the event of such a default, the debtors obligations under one or more of these agreements could, under certain circumstances, become immediately due and payable, which could have a material adverse effect on our business, financial condition, results of operations and prospects, and in particular on our liquidity and our shareholders equity.
We may not be able to raise additional capital.
We may need to raise additional capital in the future, including through debt financing. The actual amount of debt financing that we will need to raise will be influenced by the actual pace of subscriber growth and growth in usage over the period, the pace of technological development, capital expenditures, our acquisition plans and our ability to continue to generate sufficient amounts of revenue and ARPU growth. If we incur additional indebtedness, the related risks that we now face could increase. Specifically, we may not be able to generate enough cash to pay the principal, interest and other amounts due under our indebtedness. In addition, we may not be able to borrow money within the local or international capital markets on acceptable terms or at all. As a result, we may be unable to make desired capital expenditures, take advantage of investment opportunities, refinance existing indebtedness or meet unexpected financial requirements, and our growth strategy and liquidity may be negatively affected. This could cause us to be unable to repay indebtedness as it comes due, to delay or abandon anticipated expenditures and investments or otherwise limit operations, which could materially adversely affect our business, financial condition, results of operations and prospects.
We are exposed to foreign currency exchange loss and convertibility risks.
A significant amount of our costs, expenditures and liabilities are denominated in U.S. dollars and Euros, including capital expenditures and borrowings, while a significant amount of our revenues are in currencies other than the U.S. dollar and Euro. As a result, we are exposed to higher foreign currency exchange loss risks related to the varying exchange rates of our local currencies against the U.S. dollar or Euro. Unless effectively hedged, these risks could have a material adverse effect on our business, financial condition, results of operations and prospects. There can be no assurance that we will be able to effectively hedge currency fluctuations due to the cost or availability of hedging instruments. Also, the imposition of exchange controls or other similar restrictions on currency convertibility in our geographic areas of operation could limit our ability to convert currencies in a timely manner or at all, which could have a material adverse effect on our business, financial condition and results of operations and prospects. For more information about the market risks we are exposed to as a result of foreign currency exchange rate fluctuations, see Item 11Quantitative and Qualitative Disclosures About Market Risk and notes 5 and 17 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.
We may not realize the anticipated benefits from past, and any future, acquisitions and we may assume unexpected or unforeseen liabilities and obligations or incur greater than expected liabilities in connection with acquisitions.
The actual outcome of our past, and any future, acquisitions and their effect on our company and its subsidiaries and the results of our operations may differ materially from our expectations as a result of the following factors, among others:
| past and future compliance with the terms of the telecommunications licenses and permissions of the acquired companies, their ability to get additional frequencies and their past and future compliance with applicable laws, rules and regulations (including, without limitation, tax and customs legislation); |
| unexpected or unforeseen liabilities or obligations or greater than expected liabilities incurred prior to or after the acquisition, including tax, customs, indebtedness and other liabilities; |
| the acquired companys inability to comply with the terms of its debt and other contractual obligations; |
| the acquired companys ability to obtain or maintain favorable interconnect terms; |
| our inability to extract anticipated synergies or to integrate an acquired business into our group in a timely and cost-effective manner; |
| changes to the incumbent management personnel of our acquired companies or the possible deterioration of relationships with employees and customers as a result of integration; |
| exposure to foreign exchange risks that are difficult or expensive to hedge; |
| the acquired companys inability to protect its trademarks and intellectual property and to register trademarks and other intellectual property used by such company in the past; |
| developments in competition within each jurisdiction, including the entry of new competitors or an increase in aggressive competitive measures by our competitors; |
10
| governmental regulation of the telecommunications industry in each jurisdiction, ambiguity in regulation and changing treatment of certain license conditions; |
| political, economic, social, legal and regulatory developments and uncertainties in each jurisdiction; and |
| claims by third parties challenging our ownership or otherwise. |
For information about our acquisitions, please see Item 5Operating and Financial Review and ProspectsLiquidity and Capital ResourcesInvesting Activities.
Our rationale behind the Wind Telecom Transaction was based on certain beliefs and assumptions, among others, that the assets of the VimpelCom Group and Wind Telecom Group are complementary and that demand for mobile data services in its markets is set to grow significantly. If any of these fundamental beliefs or assumptions proves to be incorrect or if we are unable to effectively execute our strategy, the return on our substantial investment in Wind Telecom may not materialize and our business, financial condition, results of operations and prospects could be materially adversely affected.
We may continue to pursue a strategy that includes additional expansion. Any future acquisitions or investments could be significant and in any case could involve risks inherent in assessing the value, strengths and weaknesses of such opportunities, particularly if we are unable to conduct thorough due diligence prior to the acquisition. Such acquisitions or investments may divert our resources and management time. We cannot assure you that any acquisition or investment could be made in a timely manner or on terms and conditions acceptable to us, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
In addition, our strategy contemplates improving operational excellence and cost management and reducing the ratio of our capital expenditure to revenues over time. This strategy includes network outsourcing and sharing, centrally led procurement, and a systematic approach to managing working capital and optimizing our capital structure. However, there can be no assurance that the full extent of the anticipated benefits will be realized within the envisaged timeline.
VimpelCom is a holding company and depends on the performance of its subsidiaries and their ability to make distributions to it.
VimpelCom is a holding company and does not conduct any revenue-generating business operations of its own. Its principal assets are the equity interests it owns in its operating subsidiaries, either directly or indirectly. As a result, it is dependent upon cash dividends, distributions, loans or other transfers it receives from its subsidiaries in order to make dividend payments to its shareholders (including holders of ADSs), to repay any debt it may incur, and to meet its other obligations. In some instances, VimpelCom needs guarantees from its subsidiaries to incur debt.
The ability of VimpelComs subsidiaries to pay dividends and make payments or loans to VimpelCom, and to guarantee VimpelComs debt, will depend on their operating results and may be restricted by, among other things, applicable corporate, tax and other laws and regulations. These laws and regulations include restrictions on dividends or repatriation of earnings under applicable local law, monetary transfer restrictions and foreign currency exchange restrictions in the jurisdictions in which VimpelComs subsidiaries operate.
In addition, VimpelComs subsidiaries operating under WIND Italy are restricted from paying dividends or making certain other payments to VimpelCom by existing covenants of the Wind Telecom Group, including in the senior notes issued by Wind Acquisition Holdings Finance S.A., or WAHF SA, dated December 15, 2009, in original principal amounts of 325.0 million and US$625.0 million, which prohibit outright any dividend payment above WIND Acquisition Holding Finance S.p.A., the immediate holding company of WIND Italy, until January 2014, when those notes convert to cash pay (rather than payment in kind) instruments. After January 2014, the WAHF SA notes and WIND Italy financings will continue to restrict upstream dividends, payments or loans to amounts permitted under restricted payment tests set out in the documents and when leverage-to-earnings ratios reach specified levels. For more detail on the WIND Italy financings, see Item 5Operating and Financial Review and ProspectsLiquidity and Capital ResourcesFinancing Activities.
Furthermore, our subsidiary in Algeria, Orascom Telecom Algérie S.p.A., or OTA, has been unable to repatriate certain dividends to foreign investors, including its parent company, during the pendency of the tax assessment by the Algerian Directions des Grandes Entreprises (Tax Department for Large-Scale Companies, or DGE). In 2010, the Bank of Algeria effected an injunction that restricts all Algerian banks from engaging in foreign banking transactions on behalf of OTA, preventing OTA from transferring funds outside of Algeria, including by way of dividends or other distributions to OTH. For more information, see Legal and Regulatory RisksThe Algerian Government has made substantial tax and other claims against OTA which have harmed OTAs business, and the Algerian Government has announced its intention to unilaterally acquire OTA from OTH below.
VimpelComs subsidiaries are separate and distinct legal entities. Any right that VimpelCom has to receive any assets of or distributions from any subsidiary upon its bankruptcy, dissolution, liquidation or reorganization, or to realize proceeds from the sale of the assets of any subsidiary, will be junior to the claims of that subsidiarys creditors, including trade creditors.
11
We have a global strategy which is set by group leadership in our Amsterdam headquarters. For more information on our strategy, see Item 4Information on the CompanyStrategy. However, management at our local operations is responsible for executing many aspects of our strategy. This can be made more challenging given the broad geographic span of our operations and great cultural diversity among our local operations, which can make it more difficult to implement and maintain effective internal communication and reporting across the group. Local managements failure to execute our group strategy effectively could have a material adverse effect on our business, financial condition, results of operations and prospects.
Our majority stake in an Egyptian public company may expose us to legal, regulatory and political risk and reputational harm.
OTH, our subsidiary in Egypt, is a public company whose shares are listed on the Egyptian Stock Exchange and is therefore subject to Egyptian laws and regulation and enforcement actions by Egyptian authorities. Following the recent revolution and inauguration of a new government in Egypt, significant uncertainties remain about the future political, economic and regulatory environment in Egypt. As a result, we are exposed to the risk of unpredictable and adverse government action and severe delays in obtaining necessary approvals from government bodies. We may not be able to effectively challenge such actions through legal proceedings. Furthermore, Egyptian taxing authorities may impose unlawful or improper tax assessments against OTH, and Egyptian tax law could be changed significantly or become subject to new interpretation, which could expose OTH to increased tax liability. For more information on tax claims of the Egyptian authorities please see Item 4Information on the CompanyLegal ProceedingsLegal Proceedings Involving OTH and Its SubsidiariesOTH Tax Litigation. In addition, Egyptian officials and OTHs minority shareholders may bring claims against OTH or its officers and directors, some of whom are officers of VimpelCom. The risks relating to our majority stake in OTH could have a material adverse effect on our business, financial condition, results of operations and prospects.
If we are unable to maintain our favorable brand image, we may be unable to attract new subscribers and retain existing subscribers, leading to loss of market share and revenues.
We have expended significant time and resources building our Beeline, Kyivstar, djuice, Wind, Infostrada, Mobilink, Leo, banglalink, Telecel, and Djezzy brand images. Our ability to attract new subscribers and retain existing subscribers depends in part on our ability to maintain what we believe to be our favorable brand image. Negative rumors or other claims by governmental authorities, individual subscribers and third parties against us could materially adversely affect this brand image. In addition, consumer preferences change and our failure to anticipate, identify or react to these changes by providing attractive services at competitive prices could negatively affect our market share. We cannot assure you that we will continue to maintain a favorable brand image in the future. Any loss of market share resulting from any or all of these factors could negatively affect our business, financial condition, results of operations and prospects.
Our strategic partnerships and relationships to develop our business are accompanied by inherent business risks.
We are in, and may enter into additional, strategic partnerships and joint ventures with other companies to develop our business and expand our operations. We currently participate in strategic partnerships and joint ventures in a number of countries where we operate, including Russia (Euroset), Kazakhstan (KaR-Tel, TNS-Plus, 2Day Telecom, S&G, KAZEUROMOBILE LLP), Uzbekistan (Buzton), Kyrgyzstan (Sky Mobile, Terra), Georgia (Mobitel), Tajikistan (Tacom), Laos (Beeline), Zimbabwe (Telecel) and Cambodia (Sotelco).
Our participation in each of our subsidiaries and affiliated companies varies from market to market, and we do not always have a majority interest in our affiliated companies. Our business, financial condition, results of operations and prospects may be materially and adversely affected if disagreements develop with our partners.
Our ability to withdraw funds, including dividends, from our participation in, subsidiaries and investments may depend on the consent of partners. Further, failure to resolve any disputes with our partners in certain of our operating subsidiaries could restrict payments made by these operating subsidiaries to us and have an adverse effect on our business, financial condition, results of operations and prospects. In addition, agreements governing these arrangements contain, in some cases, change of control and similar provisions, which, if triggered under certain circumstances could give other participants in these investments the ability to purchase our interests or enact other penalties.
Emerging market strategic partnerships and joint ventures are often accompanied by risks, including in relation to:
| the possibility that a strategic or joint venture partner or partners will default in connection with their obligations; |
| the possibility that a strategic or joint venture partner will hinder development by blocking capital increases and other decisions if that partner runs out of money, disagrees with our views on developing the business, or loses interest in pursuing the partnership or joint projects; |
| risk inherent in the business of the partnership or joint venture itself, such as funding and liquidity; |
| diversion of resources and management time; |
| potential joint and several or secondary liability for transactions and liabilities of the partnership or joint venture entity; |
| the difficulty of maintaining uniform standards, controls, procedures and policies; and |
12
| the loss of a strategic or joint venture partner and the associated benefits, such as insight into operating a business in an economic, social and political environment that is unfamiliar to us. |
We may become subject to civil and criminal investigations, face liability and suffer reputational harm due to the activity of our local contractual counterparties.
Although we perform due diligence on our local counterparties and put in place contractual arrangements in an effort to secure that these counterparties comply with applicable law, we can nonetheless be subject to investigation, liability, and enforcement risk if they engage in conduct in violation of applicable law. At present, TeliaSonera, one of our competitors in various markets, has come under scrutiny in Sweden for its ongoing partnership with Takilant Ltd. relating to TeliaSoneras Uzbek operations. The Swedish press has reported that TeliaSonera and some of its senior officers are under investigation in Sweden for violating local anti-bribery laws due to TeliaSoneras transactions with Takilant. Takilant is also currently being investigated in Sweden and Switzerland on allegations that the company and persons associated with it have committed acts of bribery and money-laundering connected with activity in Uzbekistan. Takilant held a minority interest in our business in Uzbekistan from 2007 until 2009, and, in addition, we have worked with Takilant in the past to acquire frequency spectrum in Uzbekistan. Although we are not aware of any current investigations of our company in connection with our relationship with Takilant, there can be no assurance that we will not become subject to investigations, face liability or suffer reputational harm due to our relationship with Takilant.
For more information on the risks associated with anti-corruption laws, see Legal and Regulatory RisksWe are subject to anti-corruption laws in the jurisdictions in which we operate below.
Our strategic shareholders may pursue different development strategies from us and from one another in the regions in which we operate, and this may hinder our ability to expand and/or compete in such regions and may lead to a deterioration in the relationship among our strategic shareholders.
Our companys largest shareholders, Altimo (a member of the Alfa group) and Telenor, and their respective affiliates, beneficially own, in the aggregate, approximately 90.9% of our outstanding voting shares. As a result, these shareholders, if acting together, have the ability to determine the outcome of matters submitted to our shareholders for approval, including the acquisition of assets by us. In addition, our largest shareholders have sufficient voting rights to jointly elect a majority of our supervisory board, and they may in the future enter into a shareholders agreements or similar arrangements which may impact the composition of our board.
Under our groups corporate governance structure, significant corporate action on behalf of VimpelCom and/or its subsidiaries requires the prior approval of our supervisory board. Acting jointly, our largest shareholders can elect a majority of our supervisory board and as a result could cause us to take corporate actions or block corporate decisions by VimpelCom or its subsidiaries, including with respect to our capital structure, financings and acquisitions, which may not be in the best interest of our minority shareholders, or other security holders.
In the past, Telenor and Alfa Group have had different strategies from us and from one another in pursuing development in Ukraine and the CIS and other countries. For example, prior to the VimpelCom Ltd. Transaction, affiliates of Telenor and members of the Alfa Group of companies reportedly owned 56.5% and 43.5%, respectively, of Kyivstar. According to public reports, companies in the Telenor Group and the Alfa Group historically were involved in various disputes and litigations regarding their ownership of and control over Kyivstar. See also Litigation involving Altimo and Telenor, two of our largest shareholders, could lead to deterioration in their relationship and could have a material adverse effect on our business, financial condition, results of operations and prospects below. In addition, in Pakistan and Bangladesh our subsidiaries directly compete with subsidiaries of Telenor.
We cannot assure you that we, the Telenor Group and the Alfa Group will not choose to pursue different strategies, including in markets or countries where the Telenor Group and the Alfa Group have a presence. Furthermore, if and to the extent that our strategic shareholders have different expansion strategies, it could lead to deterioration of their relationship which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Litigation involving Altimo and Telenor, two of our largest shareholders, could lead to deterioration in their relationship and could have a material adverse effect on our business, financial condition, results of operations and prospects.
During the past seven years two of our largest shareholders, Altimo and Telenor, have been involved in various disputes and litigation regarding their ownership of and control over OJSC VimpelCom and Kyivstar. In October 2009, Telenor and Altimo entered into agreements under which, among other things, they agreed to dismiss or withdraw or to cause the dismissal or withdrawal of outstanding legal proceedings between, or involving, them and their respective affiliates, and reportedly they did so. In 2011 and 2012, Telenor and Altimo were again involved in litigation regarding their ownership of and control over our company. On January 28, 2011, Telenor commenced arbitration proceedings against each of Altimo Holdings, Altimo Coöperatief U.A. or Altimo Coöperatief (a subsidiary of Altimo Holdings), and VimpelCom Ltd. for the stated purpose of enforcing its alleged pre-emptive rights under the October 4, 2009 shareholders agreement among Altimo, Telenor and us in relation to our company (the VimpelCom Shareholders Agreement) with respect to VimpelCom shares issued in the Wind Telecom Transaction. In this Annual Report on Form 20-F, we refer to these proceedings as the Arbitration Proceedings.
13
On February 15, 2012 Telenor notified the tribunal in the Arbitration Proceedings that it was withdrawing all of its claims against Altimo Holdings, Altimo Coöperatief and us. According to Telenors February 15, 2012 press release, Telenor withdrew its claims because it purchased 234,000,000 of Weather IIs VimpelCom convertible preferred shares, thus raising Telenors share of VimpelComs outstanding voting shares at the time to 36.4%. On March 8, 2012, the tribunal dismissed all claims in the Arbitration Proceedings with prejudice. For more information on our largest shareholders, see Item 7Major Shareholders and Related Party TransactionsA. Major Shareholders.
In addition, as a result of Altimos sale of 123,600,000 convertible preferred shares in June 2011, which reduced its voting rights in our company at the time to below 25%, the VimpelCom Shareholders Agreement terminated on December 10, 2011. The termination of the VimpelCom Shareholders Agreement could result in further disputes between Telenor and Altimo.
Future legal proceedings between Altimo and Telenor and the termination of the VimpelCom Shareholders Agreement could cause the relationship between Altimo and Telenor to deteriorate. As a result of the disputes among two of our largest shareholders and claims made against us, we could suffer material adverse effects on our business, financial condition, results of operations and prospects.
A disposition by our strategic shareholders of their respective stakes in VimpelCom or a change in control of VimpelCom could harm our business.
Certain of our debt agreements have change of control provisions that may require us to make a prepayment if certain parties acquire beneficial or legal ownership of or control over more than 50.0% of our shares, which could occur if certain parties acquired more than 50.0% of our company. Generally, this change of control provision is not triggered as long as a combination of the Alfa Group or Telenor own more than 50.0% of our company. If a change of control is triggered and we fail to make any required prepayment, this could lead to an event of default, and could trigger cross default/cross acceleration provisions under certain of our other debt agreements. In such event, our obligations under one or more of these agreements could become immediately due and payable, which would have a material adverse effect on our business, financial condition and results of operations.
We derive benefits and resources from the participation of Telenor and Altimo in our company. If Telenor or Altimo were to dispose of its stake in our company, either voluntarily or involuntarily, we may be deprived of the benefits and resources that we derive from it which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Risks Related to Our Industry
Our business is highly capital intensive and requires substantial and ongoing expenditures of capital, which, in the future, we may not be able to obtain on favorable terms or at all.
Our industry is highly capital intensive, and our success depends to a significant degree on our ability to keep pace with new developments in technology, to develop and market innovative products and to update our facilities and process technology. All of our operations have extensive capital expenditure programs that require substantial outlays. We may require additional capital in the future to finance our future growth and development, implement further marketing and sales activities, fund our ongoing research and development activities, implement new technological advances and meet our general working capital needs. The amount and timing of our capital requirements will depend on many factors, including acceptance of and demand for our products and services, the extent to which we invest in new technology and research and development projects, and the status and timing of competitive developments. We may require greater capital investments in shorter time frames than we have anticipated, and we or our operations may not have the resources to make such investments. If we do not have the resources for necessary capital expenditures, we may be required to raise additional debt or equity financing, which may not be available when needed on terms favorable to us or at all. If we are unable to obtain adequate funds on acceptable terms, we may be unable to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures, which could adversely affect our business, financial condition, results of operations and prospects. For more information on future liquidity needs, see Item 5Operating and Financial Review and ProspectsLiquidity and Capital ResourcesFuture Liquidity and Capital Requirements.
Our revenues are often unpredictable and our revenue sources are short-term in nature.
Future revenues from our prepaid mobile subscribers, our primary source of revenues, and our contract mobile subscribers are unpredictable. We do not require our prepaid mobile subscribers to enter into long-term service contracts and cannot be certain that they will continue to use our services in the future. We require our contract mobile subscribers to enter into service contracts; however, many of these service contracts can be cancelled by the subscriber with limited advance notice and without significant penalty. Consumption of mobile telephone services is driven by the level of consumer discretionary income. Deterioration in the economic situation could cause subscribers to have less discretionary income, thus affecting their spending on our services. The loss of a larger number of subscribers than anticipated could result in a loss of a significant amount of expected revenues. Because we incur costs based on our expectations of future revenues, our failure to accurately predict revenues could adversely affect our business, financial condition, results of operations and prospects.
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We are in competitive industries and we may face greater competition as a result of market and regulatory developments.
The markets in which we operate are competitive in nature, and we expect that competition, especially in the least developed markets, will continue to increase. If we are unsuccessful in our marketing campaigns or the services we introduce are not well received by consumers, or in the event of any delays in developing our networks, we will not generate the revenue anticipated and our ARPU may decline, which may materially adversely affect our business, financial condition and results of operations. We cannot assure you that our revenue will grow in the future, as competition puts pressure on prices.
In addition, as the subscriber penetration rates increase and the markets in which we operate mature, mobile services providers, including us, may be forced to utilize more aggressive marketing schemes to retain existing subscribers and attract new ones. If this were to occur, we may choose to adopt lower tariffs, offer handset subsidies or increase dealer commissions, any or all of which could materially adversely affect our business, financial condition, results of operations and prospects.
Some of the markets in which we operate, including Russia and Italy, are already mature or approaching saturation and are characterized by high levels of competition. For more information on our markets and the competition we face, see Item 4Information on the CompanyDescription of Operations of the Russia Business Unit, Description of Operations of the Europe & North America Business Unit, Description of Operations of the Africa & Asia Business Unit, Description of Operations of the Ukraine Business Unit, and Description of Operations of the CIS Business Unit. In such mature markets, there are limits on the extent to which we can continue to grow our subscriber base. Competition for subscribers has in the past, and may in the future, create additional pricing pressure for operators, which could have a material adverse impact on our margins and profitability. In our mature markets, the continued growth in our business and results of operations will depend, in part, on our ability to extract greater revenue from our existing subscribers, in addition to attracting subscribers of other operators, including through expansion of data services and introduction of next generation technologies. We may fail to develop and offer data services or technologies that are attractive to our existing or future subscribers or for which our existing or future subscribers are not willing or able to pay. We also may not be able to develop other platforms, products and services to attract and retain subscribers, or make strategic acquisitions in order to expand our business. Even if successful in making such developments or acquisitions, they may not result in an increased customer base and greater profits for us. If we fail to extract additional revenues from our existing subscribers or continue to expand our subscriber base, our business, financial condition, results of operations and prospects will be materially adversely affected.
In addition, as we expand the scope of our services, such as fixed-line residential and commercial broadband services, we may encounter a greater number of competitors who provide similar services. In the event we fail to successfully address challenges from our competition in new services, our business financial condition, results of operations and prospects could be materially and adversely affected.
The liberalization of the regulations in areas in which we operate could also greatly increase competition and put pressure on our pricing. If competitors are able to operate telecommunications networks that are more cost effective than ours, then they may have competitive advantages over us, which could harm our business.
Providers of traditional fixed-line telephone services and mobile operators that have obtained fixed-line licenses may compete more effectively with us. Former state-controlled telecommunications service providers have dominated the fixed-line market in many of the countries in which we operate. These companies have some competitive advantages over our fixed-line operations, including:
| significant resources and greater market presence and network coverage; |
| brand name recognition, customer loyalty and goodwill; and |
| control over domestic transmission lines and over access to these lines by other participants. |
Our competitors, particularly former state-controlled telecommunications service providers, may receive preferential treatment from the regulatory authorities and benefit from the resources of their shareholders, potentially giving them a substantial competitive advantage over us. Additionally, current or future relationships among our competitors and third parties may restrict our access to critical systems and resources. New competitors or alliances among competitors could rapidly acquire significant market share. We cannot assure you that we will be able to forge similar relationships or successfully compete against them.
We could experience subscriber database piracy or other database security breaches, which may materially adversely affect our reputation, lead to subscriber lawsuits, loss of subscribers or hinder our ability to gain new subscribers and thereby materially adversely affect our business.
We may be exposed to database piracy or other database security breaches which could result in the leakage and unauthorized dissemination of information about our subscribers, including their names, addresses, home phone numbers, passport details and individual tax numbers. The breach of security of our database and illegal sale or other unauthorized release of our subscribers personal information could materially adversely impact our reputation, prompt lawsuits against us by individual and corporate subscribers, lead to violations of data protection laws and adverse actions by the telecommunications regulators and other authorities, lead to a loss in subscribers and hinder our ability to attract new subscribers. If severe customer data security breaches are detected, the regulatory authority can sanction our company, and such sanction can include suspension of operations for some time period. These factors, individually or in the aggregate, could have a material adverse effect on our business, financial condition, results of operations and prospects.
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Our failure to keep pace with technological changes and evolving industry standards could harm our competitive position and, in turn, materially adversely affect our business.
The telecommunications industry is characterized by rapidly changing technology and evolving industry standards. We experience new customer demand for more sophisticated telecommunications and Internet services in the markets in which we operate. Accordingly, our future success will depend on our ability to adapt to the changing technological landscape and the regulation of standards utilizing these technologies. In addition, market demand for new technologies in which we invest may not increase or may decrease over time, limiting our ability to recoup the costs of our investments in such new technologies. The rapid technological advances in the telecommunications industry make it difficult to predict the extent of future competition. It is possible that the technologies we utilize today will become obsolete or subject to competition from new technologies in the future for which we may be unable to obtain the appropriate license. We may not be able to meet all of these challenges in a timely and cost-effective manner. We operate third generation mobile technologies, or 3G, networks in some of our markets, and we will need to develop 3G networks in additional markets in which we operate. We are also exploring options for developing a 4G/LTE network for deploying 4G/LTE services in certain markets. New network development requires significant financial investments and there can be no assurance that we will be able to develop 3G or 4G/LTE networks on commercially reasonable terms, that we will not experience delays in developing our networks or that we will be able to meet all of the license terms and conditions or that we will be granted such licenses at all. In addition, penetration rates for 4G/LTE compatible devices may not currently support the cost of 4G/LTE development in certain markets, such as Russia, and such rates will need to increase to be commercially viable. Therefore, we may be unable to successfully compete in the future. If we experience substantial problems with our 3G or 4G/LTE services, or if we fail to introduce new services on a timely basis relative to our competitors, it may impair the success of such services, delay or decrease revenues and profits and therefore may hinder recovery of our significant capital investments in 3G or 4G/LTE services as well as our growth.
The next step in telecommunications in Ukraine is the deployment of 3G networks. In September 2009, the Ukrainian National Commission for Communications Regulation (which, following administrative reforms in 2011, was replaced by the National Commission for the State Regulation of Communication and Informatization (the NCCIR)) made a decision to issue four 3G licenses to Ukrainian telecommunications operators, in addition to the 3G license awarded to Ukrtelecom in 2005. On September 22, 2009, the NCCIR announced its decision to hold an auction for the first of these 3G licenses and, on September 29, 2009, approved the auction conditions. This tender was subsequently cancelled by government authorities, and no tender has been held yet. The only operator in Ukraine holding a 3G license is Limited Liability Company Trimob, a subsidiary of Ukrtelecom. If Kyivstar is unable to obtain a 3G license or if a 3G license is awarded to one of Kyivstars competitors, Kyivstar would face increased competition in the provision of mobile services in Ukraine. Similarly, if Kyivstar ultimately acquires a 3G license later than its competitors or is required to pay a significantly higher price to obtain a 3G license than its competitors, it could be at a significant competitive disadvantage and face increased costs in implementing its 3G network roll-out.
The next step in the development of telecommunications in Russia is the deployment of 4G/LTE networks. The cost of 4G/LTE network development and the quality of services (including data speed and quality of coverage) depend on the band and the width of frequency range given to an operator. In July 2012, OJSC VimpelCom was awarded one of four nationwide LTE licenses granted in Russia. The other three licenses were granted to MTS, Megafon and Rostelecom. The license allows OJSC VimpelCom to provide services using radio-electronic devices in Russia via networks that use the LTE standard within certain designated frequency bands. Our license is subject to several conditions, including that we begin providing service by June 1, 2013, and that we invest a certain amount in our network in each year in which it is being constructed. There can be no assurance that we will be able to obtain the technical permissions required to begin providing service by the June 1, 2013 deadline. For more information regarding the terms of our LTE license, please see the section of this Annual Report on Form 20-F entitled Item 4 Information on the CompanyDescription of Operations of the Russia Business UnitMobile business in RussiaMobile Telecommunications Licenses in Russia.
Additionally, the State Radio Frequencies Commission gave Scartel (Yota brand) two ranges of LTE frequencies, 30 MHz each, in the 2.5-2.7 GHz band for use in the whole territory of Russia in exchange for 4G frequencies held by Scartel for WiMax technology bandwidth of 70MHz (the exchange was completed on a non-auction basis). Initially it was planned that all operators would receive equal access to the Scartel infrastructure, which would allow each operator to reduce its 4G/LTE network development costs. In March 2011, we, MTS, MegaFon and Rostelecom signed a non-binding memorandum of understanding with Scartel, according to which we, MTS, MegaFon and Rostelecom were to receive access to Scartels 4G network infrastructure (which was to be built) and were to receive options to purchase shares in Scartel in 2014 at a price determined by an independent appraisal.
This memorandum was later abolished, and according to public reports, shareholders of Megafon and shareholders of Scartel established a joint venture, Garsdale Services Investment Ltd., through which shareholders of Megafon indirectly hold an 82% equity interest in Scartel. In addition, according to public reports, Megafon entered into a MVNO agreement with Scartel for the joint development and provision of 4G technology networks under the LTE standard in Russia. OJSC VimpelCom is in the process of negotiating with Scartel regarding potential implementation of the MVNO model for the joint development and provision of 4G technology networks under the LTE standard in Russia. In light of the fact that Megafon shareholders indirectly
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control Scartel, Megafon may obtain a significant competitive advantage both in terms of frequency resources and LTE network development costs using Scartels network. Furthermore, the limited number of available frequencies may prevent us from realizing the full benefits we expect to receive from the development of a 4G network, because our network capacity would be constrained and our ability to expand limited.
WIND Italy has made significant investments in obtaining its UMTS licenses-related frequencies and plans to make significant investments in its LTE network during the next several years. WIND Italys ability to recoup its LTE related and UMTS related expenditures will depend largely upon continued and increasing customer demand for LTE and UMTS based services. Although there have been signs of widespread demand for high speed data services through UMTS in Italy in recent years, the size of the market is still unknown and may fall short of industry expectations and LTE and UMTS technologies may not prove more attractive to subscribers than other existing technologies and services. If LTE based and UMTS based mobile services do not, or are slower than anticipated to, gain sufficiently broad commercial acceptance in Italy, or if WIND Italy derives a smaller percentage of its total revenues than expected from its LTE and UMTS related services, we may not be able to adequately recoup WIND Italys investment in its LTE frequencies and UMTS license and network or profit from such investment, which could have a material adverse effect on our business, financial condition and results of operations. Furthermore, if third party application service providers fail or are slow to develop services for LTE and UMTS based mobile services, or if WIND Italy cannot obtain reasonably priced LTE/UMTS handsets, technologically proven network equipment or software with sufficient functionality or speed, our ability to generate revenues from WIND Italys LTE/UMTS networks may also be adversely affected, which in turn could have a material adverse effect on our business, financial condition and results of operations.
In addition, WIND Italys ability to recoup LTE and HSDPA related expenditures will depend largely upon implementing a competitive pricing strategy that appeals to consumers while recouping an investment in LTE and high speed downlink packet accesses, or HSDPA, technology. Further, Europe is facing an economic slowdown, resulting in a general contraction in consumer spending, which could affect demand for VAS such as mobile Internet. If subscribers use mobile Internet services offered by WIND Italys competitors, reduce their usage of mobile Internet services offered by WIND Italy, or cease to use mobile Internet at all, WIND Italy may not be able to profit from its build out of LTE and HSDPA coverage at the levels it anticipates, or at all, which, in turn, could have a material adverse effect on our business, financial condition or results of operations.
On the fixed-line network in Italy, our competitor, Telecom Italia, announced a plan to introduce a progressive roll-out of a next generation network, a superior architectural telecommunications technology using fiber optic cables delivering a speed of up to 100MB. The next generation network, if introduced, would replace Telecom Italias legacy copper network with fiber. Although there is uncertainty around Telecom Italias strategy for implementing the roll-out of such next generation network, including the timing, and despite the fact that much will depend on the political and legislative framework as well as the regulatory infrastructure for such next generation network in Italy, it is possible that as Telecom Italia upgrades its network, the local exchanges WIND Italy uses to provide LLU services could be closed over time. As a result, WIND Italy may be forced to co-locate at a different location where the cost of unbundling is likely to be more expensive and space for co-location is likely to be more limited, or adopt a different approach to its business or build its own fiber network at a material cost, which could have a material adverse effect on WIND Italys business or results of operations. LLU, which stands for local loop unbundling, is the regulatory process of allowing multiple telecommunications operators to use connections from Telecom Italias local exchanges to the customers premises.
Our ability to provide telecommunications services would be severely hampered if our access to local and long distance line capacity were limited or if the commercial terms of our interconnect agreements were significantly altered.
Our ability to secure and maintain interconnect agreements with other wireless and local, domestic and international fixed-line operators on cost-effective terms is critical to the economic viability of our operations. Interconnection is required to complete calls that originate on our respective networks but terminate outside of our respective networks, or that originate from outside our networks and terminate on our respective networks. A significant increase in our interconnection costs as a result of new regulations, commercial decisions by other fixed-line operators, increased inflation rates in the countries in which we operate or a lack of available line capacity for interconnection could have a material adverse effect on our ability to provide services, which could in turn have a material adverse effect on our business, financial condition, results of operations and prospects.
Our existing equipment, technological and management systems may be subject to disruption and failure, which could cause us to lose customers, limit our growth and violate our licenses.
The successful build-out and operation of our networks depends heavily on obtaining adequate supplies of switching equipment, base stations and other equipment on a timely basis. We currently purchase our equipment from a small number of suppliers, principally Alcatel-Lucent, Cisco Systems, Comverse, Ericsson, Huawei and Nokia-Siemens Networks, although some of the equipment that we use is available from other suppliers. From time to time, we have experienced delays receiving equipment. Our business could be materially adversely affected if we are unable to obtain adequate supplies or equipment from our suppliers in a timely manner and on reasonable terms.
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Our business depends on providing customers with reliability, capacity and security. As telecommunications increases in technological capacity, it may become increasingly subject to computer viruses and other disruptions. We cannot be sure that our network system will not be the target of a virus or, if it is, that we will be able to maintain the integrity of the data of our corporate customers or of that in individual handsets of our mobile subscribers or that a virus will not overload our network, causing significant harm to our operations. In addition to computer viruses, the services we provide may be subject to disruptions resulting from numerous other factors, including human error, security breaches, equipment defects, and natural disasters, which could have a material adverse effect on our business.
Our technological infrastructure is vulnerable to damage or disruptions from numerous events, including fire, flood, windstorms or other natural disasters, power outages, terrorist acts, government shutdown orders, equipment or system failures, human errors or intentional wrongdoings, including breaches of our network or information technology security. Problems with our backbone, switches, controllers, fiber optic network or network nodes at one or more of our base stations, whether or not within our control, could result in service interruptions or significant damage to our networks. All of our equipment for provision of mobile services in Moscow is located primarily in two buildings in Moscow. Disruption to the operation of these buildings, or buildings where our equipment is held in other jurisdictions where we operate, such as from electricity outages or damage to these buildings could result in disruption of our mobile services in those jurisdictions.
Although we have back-up capacity for our network management operations and maintenance systems, automatic transfer to our back-up capacity may not be seamless, and may cause network service interruptions. In recent years, we have experienced network service interruptions, which occur from time to time during installations of new software. Interruptions of services could harm our business reputation and reduce the confidence of our subscribers and consequently impair our ability to obtain and retain subscribers and could lead to a violation of the terms of our licenses, each of which could materially adversely affect our business. In some of the markets in which we operate, we do not carry business interruption insurance to prevent against network disruptions.
Our ability to manage our business successfully is contingent upon our ability to implement sufficient operational resources systems and processes to support our rapid growth. We may face risks in connection with the correct use of the newly introduced systems and processes in the regions where our group operates or integrating new technologies into existing systems. For example, if our billing systems develop unexpected limitations or problems, subscriber bills may not be generated promptly and/or correctly. This could materially adversely impact our business since we would not be able to collect promptly on subscriber balances.
We depend on third parties for certain services and products important to our business.
There is inherent risk in relying on third parties for services and products important for our operations. For example, we may outsource our networks in certain markets in which we operate, and our networks are important to our business. To the extent that the third parties on which we rely fail to provide the required services or products, it could have a materially adverse impact on our business, financial condition, results of operations and prospects.
We expect that the sales of handsets, including iPhones, will contribute to our subscriber growth, and such sales are therefore critical for our overall growth strategy. In the event we are unable to extend our existing agreements with, or fail to agree on acceptable terms or lose exclusivity in our agreements with, handset providers, we could experience a negative impact on our ARPU and our churn rate, which could have a material adverse effect on our business, financial condition and results of operations.
Many of our mobile products and services are sold to customers through retail channels. The third party retailers and dealers that we use to distribute and sell products are not under our control and may stop distributing or selling our products at any time. Should this occur with particularly important retailers or dealers, we may face difficulty in finding new retailers or sales dealers that can generate the same level of revenues. In addition, retailers and dealers that also distribute or sell competing products and services may more actively promote the products and services of our competitors. Such developments with our third party retailers and dealers could materially adversely affect our business, financial condition, results of operation and prospects.
Furthermore, WIND Italy no longer owns the internet portal spun off as part of the acquisition of Wind Telecom, and has entered into a service agreement with Libero S.r.l. to continue to utilize the Libero internet portal. If this agreement were to terminate for any reason, WIND Italy would need to establish alternative distribution channels for its broadband services, which may result in significant costs and/or may not be successful. If WIND Italy fails to maintain or expand its direct and indirect distribution presence, its ability to retain or further grow its market share in the Italian mobile and fixed-line telecommunications markets, including the broadband market, could be adversely affected, which in turn could have a material adverse effect on our business, financial condition, results of operations and prospects.
Allegations of health risks related to the use of mobile telephones could have a material adverse effect on us.
There have been allegations that the use of certain portable mobile devices may cause serious health risks. The actual or perceived health risks of mobile devices could diminish subscriber growth, reduce network usage per subscriber, spark product liability lawsuits or limit available financing. Each of these possibilities has the potential to cause material adverse consequences for us and for the entire mobile industry.
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Our intellectual property rights are costly and difficult to protect, and we cannot guarantee that the steps we have taken to protect our intellectual property rights will be adequate.
We regard our copyrights, trademarks, trade dress, trade secrets and similar intellectual property, including our rights to certain domain names, as important to our continued success. We rely upon trademark and copyright law, trade secret protection and confidentiality or license agreements with our employees, customers, partners and others to protect our proprietary rights. However, intellectual property rights are especially difficult to protect in the markets in which we operate. In these markets, the regulatory agencies charged to protect intellectual property rights are inadequately funded, legislation is underdeveloped, piracy is commonplace and enforcement of court decisions is difficult.
In addition, litigation may be necessary to enforce our intellectual property rights, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement. As the number of convergent product offerings and overlapping product functions increase, the possibility of intellectual property infringement claims against us may increase. Any such litigation may result in substantial costs and diversion of resources, and, if decided unfavorably to us, could have a material adverse effect on our business, financial condition or results of operations. We also may incur substantial acquisition or settlement costs where doing so would strengthen or expand our intellectual property rights or limit our exposure to intellectual property claims of third parties. While we have successfully enforced our intellectual property rights in courts in the past, we cannot assure you that we will be able to successfully protect our property rights in the future.
Legal and Regulatory Risks
We operate in a highly regulated industry and are subject to a large variety of laws and extensive regulatory requirements.
As a multinational telecommunications company that operates in regulated markets, we are subject to different laws and regulations in each of the jurisdictions in which we provide services. Mobile, Internet, fixed-line, voice and data markets are all generally subject to extensive regulatory requirements, including strict licensing regimes, as well as anti-monopoly and consumer protection regulations, in the countries in which we operate. Regulations may be especially strict in the markets of those countries in which we are considered to hold a significant or dominant market position. Furthermore, regulations could require us to reduce roaming prices and termination rates in mobile and/or fixed-line networks, require us to offer access to our network to other operators, and result in the imposition of fines if we fail to fulfill our service commitments. Such regulations and regulatory actions could place significant competitive and pricing pressure on our operations and could have a material adverse effect on our business, financial condition, results of operations and cash flow. For more information on the regulatory environment in which we operate, see Item 4Information on the CompanyRegulation of Telecommunications.
Anti-monopoly regulations in the countries in which we operate may require us to obtain anti-monopoly approvals for certain acquisitions, reorganizations or other transactions as may be provided for in applicable law. The applicable rules are generally subject to different interpretations and the competent authorities may challenge the positions that we take. We may also be unable to comply with anti-monopoly approvals due to administrative delays in the review process or for other reasons. Failure to obtain such approvals or the activities of the relevant anti-monopoly bodies may impede or adversely affect our business and ability to expand our operations.
Anti-monopoly and consumer protection regulators in countries where we operate have oversight over consumer affairs and advertising and are authorized to regulate companies deemed to be a dominant force in, or a monopolist of, a market. In some countries in which we operate, including Russia, Italy, Ukraine, Kazakhstan, Tajikistan, Armenia and Pakistan, we have been identified by the regulators as having a significant or dominant market position. In such markets, regulations could require us to reduce roaming prices, retail mobile prices and/or termination rates in mobile and/or fixed networks, require us to grant access to our network to other operators and result in the imposition of fines if we fail to fulfill our service commitments. In addition, because of our identification as holding a dominant or significant market position, we are subject to stricter controls on our operations and higher scrutiny in achieving anti-monopoly approvals in such markets, potentially making us less flexible in terms of pricing our services and causing us to incur additional obligations when completing acquisitions.
Regulatory measures taken in response to competition violations may include inter alia the requirement to discontinue certain activities, the imposition of fines, confiscation of revenue derived from monopolistic activities, restrictions on increase of tariffs on acquisitions or on other activities, such as contractual obligations. Any successful challenge by an anti-monopoly regulator or other competent authority may expose us or certain of our officers, directors, or shareholders to fines or penalties and may result in the invalidation of certain agreements or arrangements. This may materially adversely affect the manner in which we manage and operate certain aspects of our business. In addition, the potential fines imposed on us by a regulatory authority in relation to competition violations may be substantial and could have a material adverse effect on our business, financial condition or results of operations.
In connection with the approval of the Russian Federal Anti-Monopoly Service, or FAS, of our acquisition of an additional 0.1% stake in Euroset Holding N.V., or Euroset, in December 2012 (which increased our stake to 50.0%), the FAS issued orders that prohibit us from setting discriminatory terms while selling our services through Euroset and require that we instruct those entities controlled by us with regard to the orders. Since Euroset is 50.0% owned by us and 50.0% by Lefbord, our company does not control Euroset and we cannot assure you that we will be able to comply with the FAS orders. If we fail to comply with the FAS orders, the FAS may impose a fine on us and may apply to a court to invalidate the acquisition of our entire stake in Euroset.
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For more information about the competition proceedings in which our subsidiaries are involved, see Item 4Information on the CompanyLegal Proceedings.
New or proposed changes to law in Russia, Italy and other markets in which we operate may adversely affect our business.
In December 2012, the law containing amendments to the Federal Law No. 126-FZ On Communications dated July 7, 2003, was adopted, which will permit mobile subscribers to use the mobile number portability service, or MNP, for a fee determined by the operator (which must not exceed 100 roubles) from December 1, 2013. MNP will initially be implemented only at the regional level, allowing subscribers to retain their mobile phone numbers only after switching their mobile operator within the same region without obtaining the approval of the Federal Communications Agency as was previously required. In addition, the Ministry of Communications plans to set up a number database for subscribers who have taken advantage of MNP. We estimate that our expenses associated with the MNP launch may be approximately US$40.0 million, if implemented. The implementation of MNP may also result in changes to the current market shares of the Russian telecommunications operators. Accordingly, these or similar regulations in other markets in which we operate could have a material adverse effect on our business, financial condition, results of operations and prospects.
In 2011, the Italian Telecommunication Authority decreased the porting time for MNP to one day, and established that the operators should implement these changes in April 2012. Accordingly, these or similar regulations in other markets in which we operate could have a material adverse effect on our business, financial condition, results of operations and prospects.
In Bangladesh, the new regulations set by the local regulator, the Bangladesh Telecommunications Regulatory Commission, or BTRC, regarding VoIP usage forced our subsidiary in Bangladesh to disconnect suspected VoIP users with high ARPU. This negatively affected revenue and is expected to have a significant negative impact during 2013. According to media reports, on March 20, 2013 BTRC issued a notice that it will start issuing VoIP licenses from March 25, 2013, and it is difficult to predict how this will impact VoIP usage, our operations and results. These or similar regulations in other markets in which we operate could adversely affect our business, financial condition, results of operations and prospects.
In 2010 and 2011, the Russian government announced its intent to monitor the pricing of roaming services and international roaming retail services. Following an investigation FAS found that we, MTS and MegaFon violated antimonopoly laws relating to our pricing for roaming services and imposed significant fines. In addition certain draft laws are under discussion and, if adopted as currently drafted, our revenues from the provision of roaming services and international roaming retail services could decline. This and other potential regulatory changes that may be enacted in the future, could have a material adverse effect on our business, financial condition, results of operations and prospects.
FAS has repeatedly expressed its intention to require mobile operators to base all their tariffs on per-second billing for domestic calls, or at least to decrease the maximum possible billing interval, which is currently minute-based. As a result, the current draft of the rules on rendering mobile communication services, or the Draft Rules, which is being developed by the Ministry of Communications, contains a provision which requires mobile operators to establish at least one tariff with per-second billing and at least one tariff with a 10-second billing interval in roaming in each Russian micro-region. In addition, the Draft Rules also contain certain provisions concerning an operators obligations to alert subscribers about changes in the terms of certain services provided, including a change in tariffs, availability of roaming services and services not included in certain packages. Although the Draft Rules are yet to be adopted, the proposed changes, once effective, may lead to additional expenses, including those for expansion of our billing and information systems, which may adversely affect our revenues and results of operations.
Our licenses may be suspended or revoked and we may be fined or penalized for alleged violations of law or regulations.
We are required to meet certain terms and conditions under our licenses, including meeting certain conditions established by the legislation regulating the communications industry. For more information on our licenses and their related requirements, please see the sections of this Annual Report on Form 20-F entitled Item 4Information on the CompanyDescription of Operations of the Russia Business Unit, Description of Operations of the Europe & North America Business Unit, Description of Operations of the Africa & Asia Business Unit, Description of Operations of the Ukraine Business Unit, and Description of Operations of the CIS Business Unit. If we fail to comply with the conditions of our licenses or with the requirements established by the legislation regulating the communications industry, or if we do not obtain permits for the operation of our equipment, use of frequencies or additional licenses for broadcasting directly or through agreements with broadcasting companies, we anticipate that we would have an opportunity to cure any non-compliance. However, we cannot assure you that we will receive a grace period, and we cannot assure you that any grace period afforded to us would be sufficient to allow us to cure any remaining non-compliance. In the event that we do not cure any remaining non-compliance, the applicable regulator could decide to suspend and seek termination of the license. The occurrence of any of these events could materially adversely affect our ability to build out our networks in accordance with our plans and could harm our reputation.
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We may from time to time receive notices with respect to violations of our licenses. To the extent possible, we take measures to comply with the requirements of the notices. However, to the extent the alleged violations in these notices are not resolved within the required period, including due to delay of the authorities, we may suffer significant interruptions to our operations, which could have a material adverse effect on our business, financial condition or results of operations.
If we fail to fulfill the specific terms of any of our licenses, frequency permissions or other governmental permissions or if we provide services in a manner that violates applicable legislation, government regulators may levy fines, suspend or terminate our licenses, frequency permissions, or other governmental permissions or refuse to renew licenses that are up for renewal. A suspension and the subsequent termination of licenses or refusal to renew our licenses could materially adversely affect our business, financial condition and results of operations.
Our licenses are granted for specified periods and they may not be extended or replaced upon expiration.
Most of our licenses are granted for specified terms, and we can give you no assurance that any license will be renewed upon expiration. If renewed, our licenses may contain additional obligations, including payment obligations (which may involve a substantial renewal or extension fee), or may cover reduced service areas or scope of service.
As a rule, the expiration date of frequency permissions for most of our mobile communications and radio-relay line base stations exceeds the validity period of communications service licenses. We cannot predict whether we will be able to obtain extensions of our frequency permissions and whether these extensions will be formalized and granted by the regulatory agency in a timely manner and without any significant additional costs. It is possible that upon expiration of frequency permissions the frequency bands currently in use by us will be wholly or partly reallocated in favor of other communications technologies or other communications operators, requiring that we coordinate the use of our frequencies with the other license holders or experience a loss of quality in our network.
If our licenses for provision of telecommunications services or frequency allocations are not renewed, our business could be materially adversely affected. For more information our licenses, please see the section of this Annual Report on Form 20-F entitled Item 4Information on the CompanyDescription of Our Business.
We face uncertainty regarding our frequency allocations, equipment permits and network registration, and we may experience limited spectrum capacity for providing wireless services.
To establish and commercially launch a mobile telecommunications network, we are required to receive, among other things, frequency allocations for bandwidths within the frequency spectrums in the regions in which we operate. There is a limited number of frequencies available for mobile operators in each of the regions in which we operate or hold licenses to operate. We are dependent on access to adequate frequency allocation in each such market in order to maintain and expand our subscriber base. If frequencies are not allocated to us in the future in the quantities, with the geographic span and for time periods that would allow us to provide mobile services on a commercially feasible basis throughout all of our license areas, our business, financial condition, results of operations and prospects may be materially adversely affected. In addition, a failure to make payments for frequency allocations could result in the suspension or revocation of our frequency allocations. A loss of allocated frequency that is not replaced by other adequate allocations also could have a substantial adverse impact on our network capacity and our ability to provide mobile services. In addition, frequency allocations may be issued for periods that are shorter than the terms of our licenses, and such allocations may not be renewed in a timely manner or at all. We have in the past been unable to obtain frequency allocations necessary to test or expand our networks in Russia. If our frequencies are revoked or we are unable to renew our frequency allocations, or obtain additional ones, our network capacity and our ability to provide mobile services would be constrained and our ability to expand would be limited, which could have a material adverse effect on our business, financial conditions, results of operations and prospects.
In addition, 3G and advanced spectrum auctions are expected to be held in a number of jurisdictions in which we operate, including Algeria, Bangladesh and Pakistan during 2013 and 2014 and failure to obtain sufficient spectrum at acceptable prices in these markets, or other markets in which 3G and advanced spectrum are introduced, may materially adversely affect our business, financial performance and results of operations.
We may encounter difficulties in building our networks, and we may face other factors beyond our control that could affect our ability to operate our networks, decrease the quality of our services, increase the cost of construction or operation of our networks or delay the introduction of services. As a result, we could experience difficulty in increasing our subscriber base or could fail to meet license requirements, either of which may have a material adverse effect on our business.
In addition, we could face significant increased costs if the laws or authorities in the countries in which we operate change the requirements for our equipment or networks. This or similar measures in other jurisdictions in which we operate could result in a material adverse effect on our business, financial condition or results of operations.
The laws of the countries in which we operate generally prohibit the operation of telecommunications equipment without a relevant permit from the appropriate regulatory body. Due to complex regulatory procedures, it is frequently not possible for us to procure in a timely manner the permissions and registrations required for our base stations, including registration of our title to land plots underlying our base stations and construction permits, or other aspects of our network before we put the base stations into operation or to amend or maintain the permissions in a timely manner when it is necessary to change the location or technical specifications of our base stations. At times, there can be a number of base stations or other communications facilities and other aspects of our networks for which we are awaiting final permission to operate for indeterminate periods. This problem may be exacerbated if there are delays in issuing necessary permits.
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We also regularly receive notices from regulatory authorities in countries in which we operate warning us that we are not in compliance with aspects of our licenses and permits and requiring us to cure the violations within a certain time period. We have closed base stations on several occasions in order to comply with regulations and notices from regulatory authorities. Any failure by our company to cure such violations could result in the applicable license being suspended and subsequently revoked through court action. Although we generally take all necessary steps to comply with any license violations within the stated time periods by switching off base stations that do not have all necessary permits until such permits are obtained, we cannot assure you that our licenses will not be suspended and not subsequently be revoked in the future. If we are found to operate telecommunications equipment without an applicable permit, we could experience a significant disruption in our service or network operation and this would have a material adverse effect on our business, financial condition, results of operations and prospects.
We may be subject to increases in payments for frequency allocations under the terms of some of our licenses.
Legislation in many countries in which we operate, including Russia, require that we make payments for frequency spectrum usage. As a whole, the fees for all available frequency assignments have been significant. Any significant increase in the fees payable for the frequencies that we use or for additional frequencies that we need could have a negative effect on our financial results. We cannot assure you that the fees we pay for radio-frequency spectrum use will not increase, and such an increase could have a material adverse effect on our business, financial condition and results of operations. For more information on the payment requirements relating to frequency allocation, see Item 4Information on the CompanyRegulation of Telecommunications.
We are involved in disputes and litigation with regulators, competitors and third parties.
We are party to lawsuits and other legal, regulatory and antitrust proceedings, the final outcome of which is uncertain. Litigation and regulatory proceedings are inherently unpredictable. For more information on these disputes, see Item 4Information on the CompanyLegal Proceedings. An adverse outcome in, or any settlement of, these or other proceedings (including any that may be asserted in the future) may have a material adverse effect on our business, financial condition, results of operations and prospects.
We could be subject to tax claims that could have a material adverse effect on our business.
Tax audits in the countries in which we operate are conducted regularly. We have been subject to substantial claims by tax authorities in Russia, Italy, Algeria, Egypt, Pakistan, Bangladesh, Ukraine, Kazakhstan, Uzbekistan and Tajikistan. These claims have resulted in additional payments, including fines and penalties, to the tax authorities. For more information regarding tax claims and their effects on our financial statements, see the sections of entitled Item 4Information on the CompanyLegal Proceedings and note 27 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. Risks relating to tax claims of the Algerian tax authorities are described in greater detail below in The Algerian Government has made substantial tax and other claims against OTA which have harmed OTAs business, and the Algerian Government has announced its intention to unilaterally acquire OTA from OTH.
Although we are permitted to challenge in court the decisions of tax inspectorates, there can be no assurance that we will prevail in our litigation with tax inspectorates. In addition, there can be no assurance that the tax authorities will not claim on the basis of the same asserted tax principles they have claimed against us for prior tax years or different tax principles that additional taxes are owed by us for prior or future tax years or that the relevant governmental authorities will not decide to initiate a criminal investigation in connection with claims by tax inspectorates for prior tax years. The adverse resolution of these or other tax matters that may arise could have a material adverse effect on our business, financial condition and results of operations.
The Algerian Government has made substantial tax and other claims against OTA which have harmed OTAs business, and the Algerian Government has announced its intention to unilaterally acquire OTA from OTH.
OTHs subsidiary OTA accounts for a significant proportion of OTHs consolidated revenues. For the past several years, OTA has suffered from various ongoing measures taken by the Algerian Government and its various regulatory agencies. The Algerian tax authority has made substantial tax claims against OTA. OTA continues to challenge these claims but has prepaid claimed amounts and penalties totaling approximately DZD 71.9 billion (equal to approximately US$955 million using the average annual exchange rates according to the years in which amounts were prepaid) during the pendency of its legal challenges. See Item 4Information on the CompanyLegal ProceedingsProceedings Involving OTH and Its Subsidiaries. There can be no assurance that the Algerian tax authority will not make further tax assessments against OTA or other OTH companies in the future or that we would be successful in challenging any assessment or successful in recovering amounts that we have prepaid against these claims. Payment of, or lack of recovery of, claimed tax amounts may have an adverse effect on OTHs business, prospects, financial condition and results of operations.
On April 15, 2010, an injunction by the Bank of Algeria came into effect that restricts all Algerian banks from engaging in foreign banking transactions on behalf of OTA. OTA has challenged this injunction in the Algerian courts but the case is still pending. As a result of the injunction OTA is prevented from importing equipment from foreign suppliers and is prevented from
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transferring funds outside of Algeria. The Algerian authorities alleged breaches of foreign exchange regulations by OTA and a member of its senior management. On March 28, 2012, the Algerian Court of First Instance handed down a judgment against OTA and a member of OTAs senior executive team. The judgment consists of fines of DZD 99.0 billion (approximately US$1.3 billion at the exchange rate as of March 28, 2012) including a criminal sentence against a member of OTAs senior executive team. On April 5, 2012, OTA and its senior executive appealed the Criminal Courts judgment and on May 27, 2012, the Algerian Criminal Court of Appeal handed down judgment on the day of the hearing, confirming the judgment against OTA, suspending the criminal custodial sentence previously ordered against OTAs senior executive and transferring the burden of payment of the DZD 6 billion fine ordered against the senior executive to OTA. On May 31, 2012, OTA lodged a final appeal against the May 27, 2012 judgment before the Algerian Supreme Court, which is still pending.
OTA maintains that it has, and its senior executive has, acted in compliance with the law. However, there is no guarantee that OTA will not become liable to pay some or all of the fines and become liable to further penalties and levies. This case may also interfere with the ability of members of the senior management of OTA to perform their functions and manage the company.
On April 12, 2012, OTH submitted a formal Notice of Arbitration against the Algeria government in respect of actions taken by the Algerian government against OTA. The claim in the Notice of Arbitration is being made under the arbitration rules of the United Nations Commission on International Trade Law. In its Notice of Arbitration, OTH asserts that since 2008 its rights under the Agreement on the Promotion and Reciprocal Protection of Investments between Egypt and Algeria have been violated by actions taken by the Algerian government against OTA, including the Algerian Court of First Instances March 28, 2012 judgment against OTA and a member of its senior executive team and the Tax Reassessments. VimpelCom is currently engaged in productive negotiations with the Algerian government to sell a 51% stake in OTA to the Algerian government. The negotiations contemplate that VimpelCom would retain governance and management control of OTA and would continue to consolidate the results of OTA. The negotiations are ongoing and there can be no assurances that an agreement will be reached.
OTHs ability to repatriate profits from Algeria in the future and to continue to own and control its operations in Algeria may be impacted by the ongoing court cases, arbitration and disputes. In addition, a number of laws have been enacted in Algeria which have an impact on OTA and OTHs investments in Algeria, and there can be no assurance that there will not be further new laws and changes to existing laws that will have a negative impact on OTA and OTH. These and other measures taken by the Algerian Government and its agencies against OTA have adversely impacted the business, financial condition and results of operations of OTA and may continue into the future. The tax and other regulatory laws and regulations in Algeria, are subject to change or interpretation by the local authorities, including changes or interpretations that may subject OTA to material penalties, both monetary and statutory, which could adversely affect the conduct of its business. See also the risks described below in Unpredictable tax systems give rise to significant uncertainties and risks that could complicate our tax planning and business decisions.
Furthermore, the Algerian Government has announced its intention to unilaterally purchase OTA, alleging that it has the right to do so under the pre-emption right contained in the 2009 Finance Act and the 2010 Supplemental Finance Act. For more information, see Item 4Information on the CompanyLegal ProceedingsProceedings Involving OTH and Its Subsidiaries. The 2010 Supplement Finance Act also introduced a new penalty for failing to identify SIM card users and a future tax on certain profit, each of which could result in additional costs to the company.
Unpredictable tax systems give rise to significant uncertainties and risks that could complicate our tax planning and business decisions.
The tax systems in the markets in which we operate may be unpredictable and give rise to significant uncertainties, which could complicate our tax planning and business decisions, especially in emerging markets in which we operate. Tax laws in many of the emerging markets in which we operate have been in force for a relatively short period of time as compared to tax laws in more developed markets. Tax authorities in our markets are often arbitrary in their interpretation of tax laws, as well as in their enforcement and tax collection activities which may increase the likelihood that tax authorities will impose arbitrary or onerous taxes and penalties in the future or require us to resort to court proceedings to defend our position against the tax authorities Any additional tax liability imposed on us by tax authorities in this manner, as well as any unforeseen changes in applicable tax laws or changes in the tax authorities interpretations of the respective double tax treaties in effect could have a material adverse effect on our future results of operations, cash flows or the amounts of dividends available for distribution to shareholders in a particular period. We may be required to accrue substantial amounts for contingent tax liabilities and the amounts accrued for tax contingencies may not be sufficient to meet any liability we may ultimately face. From time to time, we may also identify tax contingencies for which we have not recorded an accrual. Such unaccrued tax contingencies could materialize and require us to pay additional amounts of tax.
Introduction of the new tax laws or the amendment of existing tax laws, including, but not limited to those relating to transfer pricing rules or the deduction of interest expenses in the markets in which we operate may increase the risk of adjustments being made by the tax authorities and, as a result, could have a material impact on our business, financial performance and results of operations.
In respect of Russia, the Ministry of Finance in its Main Directions of Russian tax policy for 2013 and the planning period 2014 and 2015 has proposed the introduction into domestic tax law of a concept of tax residency for legal entities. According to the proposals, a company would be deemed a Russian tax resident based on the place of its effective management
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and control and/or based on the residence of its shareholders. No assurance can be currently given as to whether and when these amendments will be enacted, their exact nature, their potential interpretation by the tax authorities and the possible impact on our business. It cannot be ruled out that, as a result of the introduction of these changes to Russian tax legislation, our non-Russian companies might be deemed to become Russian tax residents, subject to all applicable Russian taxes with a possible impact on our business, financial condition, results of operations and prospects.
For more information on risks relating to the Italian tax system, see Italian CFC legislation has been extended to EU companies.. For more information on risks relating to Algerian tax claims, see The Algerian Government has made substantial tax and other claims against OTA which have harmed OTAs business, and the Algerian Government has announced its intention to unilaterally acquire OTA from OTH. above.
Repeated tax audits and extension of liability beyond the limitation period may result in additional tax assessments.
Tax declarations together with related documentation are subject to review and investigation by a number of authorities, which are empowered to impose fines and penalties on taxpayers.
In Russia, for example, tax returns remain open and subject to inspection by tax and/or customs authorities for three calendar years immediately preceding the year in which the decision to conduct an audit is taken. However, the fact that a particular year has been reviewed by tax authorities does not preclude that year from further review or audit during the eligible three-year limitation period by a superior tax authority. On July 14, 2005, the Russian Constitutional Court issued a decision allowing the statute of limitations for tax liabilities to be extended beyond the three-year term set forth in the tax laws if a court determines that the taxpayer has obstructed or hindered a tax inspection. Moreover, amendments to the first part of the Russian Tax Code, effective January 1, 2007, provide for the extension of the three-year statute of limitations if the actions of the taxpayer created insurmountable obstacles for the tax audit. Because none of the relevant terms is defined, tax authorities may have broad discretion to argue that a taxpayer has obstructed, hindered or created insurmountable obstacles in respect of an inspection and to ultimately seek review and possibly apply penalties beyond the three-year term, and there is no guarantee that the tax authorities will not review our compliance with applicable tax law beyond the three-year limitation period. Therefore, the statute of limitation is not entirely effective. Other jurisdictions in which we operate provide, or in the future may provide, similar powers to their taxing authorities.
Tax audits may result in additional costs to our group if the relevant tax authorities conclude that entities of the group did not satisfy their tax obligations in any given year. Such audits may also impose additional burdens on our group by diverting the attention of management resources. The outcome of these audits could have a material adverse effect on our business, financial condition, results of operations and prospects. Under such review the relevant tax authorities may conclude that we had significantly underpaid taxes relating to earlier periods, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
In addition, in recent years, the Russian tax authorities have aggressively brought tax evasion claims relating to Russian companies use of tax-optimization schemes, and press reports have speculated that these enforcement actions have been selective and politically motivated.
Italian CFC legislation has been extended to EU companies.
As a result of Italian legislation enacted in 2009 and 2010, which provides for taxation of foreign companies located in certain countries and territories with a privileged tax regime that are directly or indirectly controlled by Italian resident individuals, companies and entities, certain WIND Italy group companies located within the EU, may be subject to additional taxation. However, there is still significant uncertainty regarding the application of these new rules. Accordingly, WIND Italy continues to analyze the possible application developments and interpretations of this legislation.
WIND Italy may be subject to a deferral or to a limitation of the deduction of interest expenses in Italy.
For taxpayers like WIND Italy, Article 96 of Decree No. 917, as amended and restated, provides for the Italian regime of interest expenses deduction, aimed at rationalizing and simplifying the interest expenses deduction for Italian corporate income tax, or IRES, purposes. Specifically, the rules allow for the full tax deductibility of interest expense incurred by a company in each fiscal year up to the amount of the interest income of the same fiscal year, as evidenced by the relevant annual financial statements. A further deduction of interest expense in excess of this amount is allowed up to a threshold of 30% of the EBITDA of a company (i.e., risultato operativo lordo della gestione caratteristica, or ROL calculated as the difference between (i) the value of production -item A of the profit and loss account scheme contained in Article 2425 of Italian Civil Code- and (ii) the costs of production -item B of the profit and loss accounts scheme contained in Article 2425 of Italian Civil Code-, excluding depreciation, amortization and financial leasing installments relating to business assets) as recorded in such companys profit net loss account. The law provides that the amount of ROL (i) produced as from the third fiscal year following the fiscal year 2007 (i.e., 2010) and (ii) not used for the deduction of the amount of interest expense that exceeds interest income, can be carried forward, increasing the amount of ROL for the following fiscal years. Interest expense not deducted in a relevant fiscal year can be carried forward to the following fiscal years, provided that, in such fiscal years, the amount of interest expense that exceeds interest income is lower than 30% of ROL. Special rules apply to companies participating in the same tax group, allowing, to a certain extent and with certain limitations, to offset the excess interest expenses incurred by an Italian company in the tax group with 30% of ROL of other
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companies in the same tax group. Subject to certain limitation the 30% of the foreign controlled entities ROL may be used to offset any excess interest expenses of Italian companies participating to the tax group. Based on the above rules, WIND Italy currently is not able to deduct all of its interest expenses, though it is able to carry forward accrued and unused deductions to future fiscal years. Furthermore, any future changes in current Italian tax laws or in their interpretation and/or any future limitation on the use of the foreign controlled entities ROL may have an adverse impact on the deductibility of interest expenses for Wind Italy which, in turn, could adversely affect VimpelComs and WIND Italys financial condition and results of operations.
We operate in an uncertain regulatory environment, which could cause compliance to become more complicated, burdensome and expensive and could result in our operating without all of the required permissions.
The application of the laws of any particular country is not always clear or consistent. This is particularly true in many of the emerging market countries in which we operate where legislative drafting has not always kept pace with the demands of the marketplace. For more information on the risks associated with emerging markets, see Risks Related to Our MarketsInvestors in emerging markets, where most of our operations are located, are subject to greater risks than investors in more developed markets, including significant political, legal and economic risks and risks related to fluctuations in the global economy below. As a result, it is often difficult to ensure that we are in compliance with changing legal requirements. As example, authorities in the Russian Federation are discussing the possible introduction of substantial fines for violation of the laws relating to subscribers personal data processing. The amount of a fine might run up to US$23.3 for each violation. In addition, in 2010, the Algerian government issued a new finance law, where in case of failure to identify the SIM card user, a penalty amounting to DZD 100,000 (equivalent to US$1,267) for each unidentified SIM is paid for the first year and increase to DZD 150 thousand (equivalent to US$1,901) for the second year. If we are found to be involved in practices that do not comply with local laws or regulations, we may be exposed, among other things, to significant fines, the risk of prosecution or the suspension or loss of our licenses, frequency allocations, authorizations or various permissions, any of which could have a material adverse effect on our business, financial condition and results of operations.
The regulators responsible for the control and supervision of communications services in each country in which we operate frequently check our compliance with the requirements of the applicable legislation and our telecommunications licenses. We intend to make all necessary efforts to comply with all such requirements. However, we cannot assure you that in the course of future inspections, we will not be found to be in violation of the applicable legislation. Any such finding could have a material adverse effect on our operations.
In addition, it may be difficult and prohibitively expensive for us to comply with applicable telecommunications regulations related to state surveillance of communications traffic. Full compliance with regulations that allow the state to monitor voice and data traffic may be overly burdensome, expensive and lead to a drop in quality of service. Non-compliance with such regulations may lead to the imposition of fines or penalties on us, or the revocation of our operating licenses. Further, some subscribers may refuse to utilize the services of a telecommunications operator whose networks facilitate state surveillance of communications traffic.
As a result of the uncertainty in the regulatory environment we have experienced and could experience in the future:
| restrictions or delays in obtaining additional numbering capacity, receiving new licenses and frequencies, receiving regulatory approvals for rolling out our networks in the regions for which we have licenses, receiving regulatory approvals for changing our frequency plans and importing and certifying our equipment; |
| difficulty in complying with applicable legislation and the terms of any notices or warnings received from the regulatory authorities in a timely manner; |
| significant additional costs; |
| delays in implementing our operating or business plans; and |
| a more competitive operating environment. |
Arbitrary action by the authorities may have a material adverse effect on our business.
In countries where we operate, governmental, regulatory and tax authorities have a high degree of discretion and at times exercise their discretion arbitrarily, without a hearing or prior notice, and sometimes in a manner that is contrary to law. Arbitrary, inconsistent or unlawful actions by authorities could have a material adverse effect on our business, financial condition and results of operations.
Developing legal systems in the countries in which we operate create a number of uncertainties for our business.
Many aspects of the legal systems in our countries of operation create uncertainties with respect to many of the legal and business decisions that we make, many of which do not exist in countries with more developed legal systems. The uncertainties we face include, among others, potential for negative changes in laws, gaps and inconsistencies between the laws and regulatory structure, difficulties in enforcement and inconsistency in the judicial interpretation of legislation in similar cases due to an underdeveloped judicial system.
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Lack of independence and experience of the judiciary, difficulty of enforcing court decisions, the unpredictable acknowledgement and enforcement of foreign court judgments or arbitral awards in a number of the countries in which we operate and governmental discretion in enforcing claims give rise to significant uncertainties.
In a number of the countries in which we operate, the independence of the judicial system and its immunity from political, economic and nationalistic influences remains largely untested. Additional factors, such as lack of formal binding effect of judicial precedents, poor availability and organization of legislation and court decisions, slow pace of judicial processes and difficultly in enforcement of court orders, make judicial decisions in many of the countries in which we operate difficult to predict and make effective redress uncertain. Additionally, court claims are often used in furtherance of political aims. We may be subject to such claims and may not be able to receive a fair hearing. Additionally, court orders are not always enforced or followed by law enforcement agencies.
In addition, many of the countries in which we operate are not parties to any multilateral or bilateral treaties with most Western jurisdictions, including the United States and the United Kingdom, for the mutual enforcement of judgments of state courts. Consequently, should a judgment be obtained from a court in any of such jurisdictions, it is highly unlikely to be given direct effect in the courts of such countries. There is also a risk that new legislation in such countries will introduce further grounds for preventing foreign court judgments and arbitral awards from being recognized and enforced.
Laws restricting foreign investment could materially adversely affect our business.
We could be materially adversely affected by existing laws restricting foreign investment or the adoption of new laws or regulations restricting foreign investment, including foreign investment in the telecommunications industry in Russia or other markets in which we operate.
The Russian Law No. 57-FZ On the Procedure for Making Foreign Investments in Business Enterprises Having Strategic Importance to Secure Defense and Security of the State dated April 29, 2008 (the Russian Foreign Investment Law) limits foreign investment in companies that are deemed to be strategic. Under the Russian Foreign Investment Law, a company operating in the telecommunications sector may be deemed strategic if it holds a dominant position in the Russian communications market (except for the Internet services market) or, in the case of fixed-line telecommunications, if the particular companys market covers five or more Russian regions or covers Russian cities of federal importance. In connection with the adoption of the Russian Foreign Investment Law, amendments were adopted to certain provisions of the Russian Communications Law which provide that with respect to mobile telecommunications, a company will be deemed to have a dominant position for purposes of application of the Russian Foreign Investment Law if its share of the Russian mobile telecommunications market exceeds 25.0%. The FAS has previously determined that a group of persons consisting of OJSC VimpelCom and two of its Russian subsidiaries, one of which subsequently merged with and into OJSC VimpelCom, has a dominant position, because their share of the Russian mobile telecommunications market exceeds 25.0%. As a result, OJSC VimpelCom is deemed to be a strategic enterprise and, among other things, any acquisition by a foreign investor of direct or indirect control over more than 50.0% of its voting shares, or 25.0% in the case of a company controlled by a foreign government, requires the prior approval of the Russian authorities pursuant to the Russian Foreign Investment Law. In the event any future transactions in our shares or shares of VimpelCom Ltd. result in the acquisition by a foreign investor of direct or indirect control over OJSC VimpelCom, such a transaction will require prior approval in accordance with the Russian Foreign Investment Law. Additionally, companies controlled by foreign governments are prohibited from acquiring control over strategic enterprises. For example, the FAS claim filed in April 2012 sought to invalidate acquisitions by Telenor of VimpelCom Ltd. shares on grounds that Telenor is majority owned by the Norwegian government, a foreign government and such acquisitions were in violation of the Foreign Investment Law. The FAS claim was terminated without a determination on this issue. For more information regarding the FAS claim, see Item 4- Information on the CompanyLegal Proceedings. As a result, our ability to obtain financing from foreign investors may be limited, should prior approval be refused, delayed or require foreign investors to comply with certain conditions imposed by the Government Commission on Control of Foreign Investments in the Russian Federation or the FAS, which could materially and adversely affect our business, financial condition, results of operations and prospects.
We are subject to anti-corruption laws in the jurisdictions in which we operate.
We are subject to a number of anti-corruption laws, including the U.S. Foreign Corrupt Practices Act (FCPA) and various other anti-corruption laws. Our failure to comply with anti-corruption laws applicable to us could result in penalties which could harm our reputation and have a material adverse effect on our business, financial condition, results of operations and prospects. The FCPA generally prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business and/or other benefits. Although we regularly review and update our policies and procedures designed to ensure that we, our employees, distributors and other intermediaries comply with the anti-corruption laws to which we are subject, there can be no assurance that such policies or procedures will work effectively at all times or protect us against liability under these or other laws for actions taken by our employees, distributors and other intermediaries with respect to our business or any businesses that we may acquire. If we are not in compliance with anti-corruption laws and other laws governing the conduct of business with government entities (including local laws), we may be subject to criminal and civil penalties and other remedial measures, which could have an adverse impact on our business, financial condition, results of operations and prospects. Any investigation of any actual or alleged violations of such laws could also have an adverse impact on our business, financial condition, results of operations and prospects.
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Risks Related to Our Markets
The international economic environment could have a material adverse effect on our business.
In late 2008 and 2009, the economies in our markets were adversely affected by the international economic crisis, and economies in market in which we operate continue to suffer. Among other things, the crisis led to a slowdown in gross domestic product growth, devaluations of the currencies in Russia and the other markets in which we operate and a decrease in commodity prices. Although in certain markets in which we operate economic conditions have been improving, the timing of a return to sustained economic growth and consistently positive economic trends is difficult to predict. The recessionary effects, debt crisis and Euro crisis in Europe continue to pose potentially significant macroeconomic risks to our group. The economic climate is further strained by high energy costs, in large part due to conflicts or social unrest in the Middle East and Northern Africa, which can increase various costs including some of our operations costs, while at the same time discouraging spending by subscribers. In addition, because Russia and Kazakhstan, currently two of our larger markets, produce and export large amounts of oil, their economies are particularly vulnerable to fluctuations in the price of oil on the world market and those fluctuations can adversely affect such economies and those of other markets in which we operate. The current difficult economic environment and any future downturns in the economies of markets in which we operate or may operate in the future could diminish demand for our services, increase our costs, constrain our ability to retain existing subscribers and collect payments from them and prevent us from executing our growth strategy. Adverse economic conditions could also hurt our liquidity and prevent us from obtaining financing needed to fund our development strategy, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
When we purchase a company, we record the difference between the sum of the purchase price plus the fair value of non-controlling interest and the fair value of the net assets acquired as goodwill. On at least an annual basis, we perform an impairment test per cash generating unit. A deterioration in macroeconomic conditions in the countries in which we operate and/or a significant difference between the performance of an acquired company and the business case assumed at the time of acquisition could require us to further write down the value of the goodwill. A write down in goodwill could impact any covenants under our debt agreements and could lead to a material adverse effect on our business, financial condition, results of operations and prospects.
Investors in emerging markets, where most of our operations are located, are subject to greater risks than investors in more developed markets, including significant political, legal and economic risks and risks related to fluctuations in the global economy.
Most of our operations are in emerging markets. Investors in emerging markets should be aware that these markets are subject to greater risks than more developed markets, including in some cases significant political, legal and economic risks. Emerging market governments and judiciaries often exercise broad, unchecked discretion and are susceptible to abuse and corruption and rapid reversal of political and economic policies on which we depend. Political and economic relations among the countries in which we operate are often complex and have in the past resulted in, and may in the future result in conflicts, which may materially adversely affect our business, financial condition and results of operation. In addition, emerging economies are subject to rapid change and the information set out in this Annual Report on Form 20-F may become outdated relatively quickly. The economies of emerging markets are vulnerable to market downturns and economic slowdowns elsewhere in the world. As has happened in the past, financial problems or an increase in the perceived risks associated with investing in emerging economies could dampen foreign investment in these markets and materially adversely affect their economies. These developments could severely limit our access to capital and could materially adversely affect the purchasing power of our subscribers and, consequently, our business.
Some of the jurisdictions in which we operate have experienced significant social unrest. For example, OTH is an Egyptian company listed on the Egyptian Stock Exchange. In 2011 and 2012, there were widespread protests against the government, resulting in a negative impact on the share prices of companies listed on the Egyptian Stock Exchange and resulted in extensive disruption and damage throughout the country to public and private property and infrastructure. Mobile networks and services were also temporarily suspended by government order. The protests resulted in the resignation of Egypts long-time president and in significant political reforms. In addition, in 2012 there was significant social unrest in Bangladesh and Pakistan. These events and similar events in other jurisdictions where we operate could adversely affect our business, prospects, financial condition and results of operations. In addition, a number of the jurisdictions in which we operate may present security risks to our local businesses, management and employees, and this may make it more difficult to attract and retain effective management personnel.
In case of significant social unrest in some of the countries which we operate the local authorities may order our subsidiaries to temporarily shut down their entire network. For example, during 2012 our subsidiary in Pakistan was ordered to shut down parts of its mobile network and services on 24 occasions. Forced shutdowns in the countries where we have operations could materially adversely affect our business, financial condition, results of operations and prospects.
Generally, investment in emerging markets is only suitable for sophisticated investors who fully appreciate the significance of the risks involved and investors are urged to consult with their own legal, financial and tax advisors.
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Sustained periods of high inflation may materially adversely affect our business.
The countries in which we operate have experienced periods of high levels of inflation, including certain cases of hyperinflation.
Our profit margins could be adversely affected if we are unable to sufficiently increase our prices to offset any significant future increase in the inflation rate, which may become more difficult as we attract more mass market subscribers and our subscriber base becomes more price sensitive. Inflationary pressure in the countries where we have operations could materially adversely affect our business, financial condition, results of operations and prospects.
Social instability in the countries where we operate could lead to increased support for centralized authority and a rise in nationalism, which could harm our business.
Social instability in the countries in which we operate, coupled with difficult economic conditions, could lead to increased support for centralized authority and a rise in nationalism. These sentiments could lead to restrictions on foreign ownership of companies in the telecommunications industry or large-scale nationalization or expropriation of foreign-owned assets or businesses. In most of the countries in which we operate, there is relatively little experience in enforcing legislation enacted to protect private property against nationalization or expropriation. As a result, we may not be able to obtain proper redress in the courts, and we may not receive adequate compensation if in the future the governments decide to nationalize or expropriate some or all of our assets. If this occurs, our business could be harmed.
In addition, ethnic, religious, historical and other divisions have, on occasion, given rise to tensions and, in certain cases, military conflict. The spread of violence, or its intensification, could have significant political consequences, including the imposition of a state of emergency, which could materially adversely affect the investment environment in the countries in which we operate.
The physical infrastructure in many countries in which we operate is in poor condition and further deterioration in the physical infrastructure could have a material adverse effect on our business.
In many countries in which we operate, the physical infrastructure, including transportation networks, power generation and transmission and communications systems, is in poor condition. In some of the countries in which we operate, including Russia, the public switched telephone networks have reached capacity limits and need modernization, which may inconvenience our subscribers and will require us to make additional capital expenditures. In addition, continued growth in local, long-distance and international traffic, including that generated by our subscribers, and development in the types of services provided may require substantial investment in public switched telephone networks. Any efforts to modernize infrastructure may result in increased charges and tariffs, potentially adding costs to our business. The deterioration of the physical infrastructure harms the economies of these countries, disrupts the transportation of goods and supplies, adds costs to doing business and can interrupt business operations. Further deterioration in the physical infrastructure in many of the countries in which we operate could have a material adverse effect on our business.
The banking systems in many countries in which we operate remain underdeveloped, there are a limited number of creditworthy banks in these countries with which our company can conduct business and currency control requirements restrict activities in certain markets in which we operation.
The banking and other financial systems in many countries in which we operate are not well developed or regulated, and laws relating to banks and bank accounts are subject to varying interpretations and inconsistent applications. We have attempted to mitigate our banking risk by receiving and holding funds with the most creditworthy banks available in each country. However, in the event of a banking crisis in any of these countries or the bankruptcy or insolvency of the banks from which we receive, or with which we hold, our funds could result in the loss of our deposits or negatively affect our ability to complete banking transactions in these countries, which could have a material adverse effect on our business, financial conditions and results of operations.
In addition, central banks and governments in the markets in which we operate may restrict or prevent international transfers or impose (foreign) currency restrictions which could prevent us from making payments, including the repatriation of dividends. This could result in a material adverse effect on the business condition of our local operations.
Risks Related to the Ownership of our ADSs
The issuance of a significant number of our shares in the Wind Telecom Transaction and a resulting market overhang could adversely affect the market price of our ADSs.
There are currently 433,532,000 VimpelCom convertible preferred shares outstanding which may be converted into VimpelCom common shares at the option of the shareholder any time between 2.5 years and 5 years after their issuance at a price based on the
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NYSE price of VimpelCom ADSs, subject to certain limitations under U.S. securities laws. As described on Schedule 13D, Amendment No. 10, filed on December 26, 2012 by Altimo Coöperatief, on December 21, 2012, Altimo Coöperatief issued notice to VimpelCom Ltd. pursuant to Section 4.3(d) of its bye-laws, stating its present intention to convert 128,532,000 convertible preferred shares to common shares at the ratio of one convertible preferred share to one common share and setting forth a conversion date of April 16, 2013. The conversion premium to be paid by Altimo upon conversion is US$10.835 per convertible preferred share. Based on this conversion premium, VimpelCom would receive approximately US$1.4 billion from Altimo for the conversion. Altimos voting percentage would remain 47.9%, while its economic interest in VimpelCom would increase from 52.7% to 56.2%. If the convertible preferred shares are converted into common shares they will also become available for trading in the public market. The sale of any of the VimpelCom shares on the public markets or the perception that such sales may occur (commonly referred to as market overhang), may adversely affect the market for, and the market price of, VimpelComs ADSs.
Various factors may hinder the declaration and payment of dividends.
The payment of dividends is subject to the discretion of VimpelComs supervisory board and VimpelComs assets consist primarily of investments in its operating subsidiaries. Various factors may cause the supervisory board to determine not to pay dividends. Such factors include VimpelComs financial condition, its earnings and cash flows, its capital requirements, contractual restrictions, legal proceedings and such other factors as VimpelComs supervisory board may consider relevant.
VimpelCom is a Bermuda company governed by Bermuda law, which may affect your rights as a shareholder or holder of ADSs.
VimpelCom is a Bermuda exempted company. As a result, the rights of VimpelComs shareholders are governed by Bermuda law and by VimpelComs bye-laws. The rights of shareholders under Bermuda law may differ from the rights of shareholders of companies incorporated in other jurisdictions. In addition, holders of ADSs do not have the same rights under Bermuda law and VimpelComs bye-laws as registered holders of VimpelComs shares. Substantially all of our assets are located outside the United States. It may be difficult for investors to enforce in the United States judgments obtained in U.S. courts against VimpelCom or its directors and executive officers based on civil liability provisions of the U.S. securities laws. Uncertainty exists as to whether courts in Bermuda will enforce judgments obtained in other jurisdictions, including the United States, under the securities laws of those jurisdictions, or entertain actions in Bermuda under the securities laws of other jurisdictions.
We are not subject to corporate governance requirements under the NYSE rules.
Our ADSs are listed on the NYSE; however, as a Bermuda company, we are not subject to the corporate governance provisions under the NYSE listing rules that are applicable to a U.S. company. The primary difference between our corporate governance practice and the NYSE rules relates to section 303A.01 of the NYSE rules, which provides that each U.S. company listed on the NYSE must have a majority of independent directors, as defined in the NYSE rules. Bermuda corporate law does not require that we have a majority of independent directors. We do not have a majority of independent directors. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all of the NYSE corporate governance requirements. For more information on the significant corporate governance differences between our corporate governance practices and those followed by U.S. companies under NYSE listing standards, see the section of this Annual Report on Form 20-F entitled Item 16GCorporate Governance.
ITEM 4. | Information on the Company |
Overview
VimpelCom is one of the worlds largest telecommunications service operators, providing voice and data services through a range of traditional and broadband mobile and fixed-line technologies. The VimpelCom Group includes companies operating in Russia, Italy, Ukraine, Kazakhstan, Uzbekistan, Tajikistan, Armenia, Georgia, Kyrgyzstan, Cambodia, Laos, Algeria, Bangladesh, Pakistan, Burundi and the Central African Republic. We also hold equity shareholdings in companies operating in Canada and Zimbabwe. The operations of these companies cover a territory with a total population of approximately 767 million as of December 31, 2012. We provide services under the Beeline, Kyivstar, djuice, banglalink, Mobilink, Telecel, Leo, Djezzy, Wind and Infostrada brands. As of December 31, 2012, we had 214 million mobile subscribers. For a breakdown of total revenues by category of activity and geographic segments for each of the last three financial years, see Item 5Operating and Financial Review and Prospects.
VimpelCom Ltd. is an exempted company limited by shares registered under the Companies Act 1981 of Bermuda on June 5, 2009, and our registered office is located at Victoria Place, 31 Victoria Street, Hamilton HM 10, Bermuda. The VimpelCom Groups headquarters are located at Claude Debussylaan 88, 1082 MD, Amsterdam, the Netherlands. Our telephone number is +31 20 797 7200. VimpelCom Ltd. is registered with the Dutch Trade Register (registration number 34374835) as a company formally registered abroad (formeel buitenlandse kapitaalvennootschap), as this term is referred to in the Dutch Companies Formally Registered Abroad Act (Wet op de formeel buitenlandse vennootschappen), which means that we are deemed a Dutch resident company for tax purposes in accordance with applicable Dutch tax regulations.
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History and Development
Our predecessor OJSC VimpelCom was founded in 1992. Our rich history includes our development and expansion throughout Russia and the CIS, then into Asia, Europe, Africa and North America through a combination of organic growth and acquisitions.
The most significant events in the development of our business include the following:
| In November 1996, our predecessor OJSC VimpelCom became the first Russian company since 1903 to list shares on the NYSE. |
| Telenor, Norways leading telecommunications company became a strategic partner in OJSC VimpelCom in December 1998 and the Alfa Group acquired strategic ownership interests in 2001. |
| VimpelCom began its expansion into the CIS by acquiring local operators or entering into joint ventures with local partners in Kazakhstan (2004), Ukraine (2005), Tajikistan (2005), Uzbekistan (2005 and 2006), Georgia and Armenia (2006). The Southeast Asian markets followed with Cambodia (2008) and the Lao PDR (2011). |
| In 2009 and 2010, Telenor ASA, the parent company of the Telenor Group, and Altimo Holdings, a member of the Alfa Group, combined their ownership of OJSC VimpelCom and Ukrainian mobile operator Kyivstar under a new company called VimpelCom Ltd. This transaction involved a series of transactions which included, among others, the delisting of OJCS VimpelCom shares on the Moscow stock exchange, the delisting of OJSC VimpelCom ADSs on the NYSE and the listing of VimpelCom Ltd. shares on the NYSE. |
| In 2011, VimpelCom completed the acquisition of Wind Telecom S.p.A., an international provider of mobile and fixed-line telecommunications and Internet services with operations in Algeria, Bangladesh, Pakistan, Burundi, Central African Republic, Italy and equity shareholdings in Canadian and Zimbabwean operations. |
For more information on our acquisitions, see Item 5Operating and Financial Review and ProspectsLiquidity and Capital ResourcesInvesting Activities below.
Our capital expenditures include purchases of licenses, new equipment, new construction, upgrades, software, other long-lived assets and related reasonable costs incurred prior to intended use of the non-current assets, accounted at the earliest event of advance payment or delivery. Long-lived assets acquired in business combinations are not included in capital expenditures. For more information on our principal capital investments and investing activities, including acquisitions and divestitures of interests in other companies, and method of financing, see the sections entitled Item 5Operating and Financial Review and ProspectsLiquidity and Capital ResourcesInvesting Activities and Item 5Operating and Financial Review and ProspectsLiquidity and Capital ResourcesFuture Liquidity and Capital Requirements.
Organizational Structure
VimpelCom Ltd. is the holding company for a number of operating subsidiaries and holding companies in various jurisdictions. Our reporting structure in 2012 is divided into the five following business units, all of which report to our headquarters in Amsterdam:
| the Russia Business Unit; |
| the Europe & North America Business Unit; |
| the Africa & Asia Business Unit; |
| the Ukraine Business Unit; and |
| the Commonwealth of Independent States (or CIS) Business Unit. |
The table below sets forth our operating companies and significant subsidiaries, including those subsidiaries that hold our principal telecommunications licenses, and our percentage ownership interest, direct and indirect, in each subsidiary as of March 15, 2013. Our percentage ownership interest is identical to our voting power in each of the subsidiaries.
Subsidiary |
Country of Incorporation |
Percentage Ownership Interest (Direct and Indirect) | ||
VimpelCom Amsterdam BV |
Netherlands | 100% | ||
Wind Telecom S.p.A. |
Italy | 100% | ||
WIND Acquisition Holdings Finance S.p.A. |
Italy | 100 %(1) | ||
WIND Retail S.r.l. |
Italy | 100% | ||
WIND Telecomunicazioni S.p.A. |
Italy | 100% | ||
VimpelCom Holdings BV |
Netherlands | 100% | ||
OJSC VimpelCom |
Russia | 100% | ||
Kyivstar PJSC |
Ukraine | 100 %(2) |
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Subsidiary |
Country of Incorporation |
Percentage Ownership Interest (Direct and Indirect) | ||
Limnotex Developments Limited |
Cyprus | 71.5%(3) | ||
LLP KaR-Tel |
Kazakhstan | 71.5.%(4) | ||
LLP TNS-Plus |
Kazakhstan | 49%(5) | ||
LLC Tacom |
Tajikistan | 98.0%(6) | ||
PJSC Ukrainian RadioSystems |
Ukraine | 100%(7) | ||
LLC Golden Telecom |
Ukraine | 100%(8) | ||
LLC Unitel |
Uzbekistan | 100%(9) | ||
LLC Mobitel |
Georgia | 80.0%(10) | ||
CJSC ArmenTel |
Armenia | 100% | ||
Sotelco Ltd. |
Cambodia | 90.0%(11) | ||
LLC Sky Mobile |
Kyrgyzstan | 71.5%(12) | ||
VimpelCom Lao Co. Ltd. |
Lao PDR | 78.0%(13) | ||
Weather Capital S.à r.l. |
Luxembourg | 100% | ||
Weather Capital Special Purpose 1 S.A. |
Luxembourg | 100% | ||
Orascom Telecom Holding S.A.E. |
Egypt | 51.9%(14) | ||
Orascom Telecom Algérie S.p.A. |
Algeria | 50.3%(15) | ||
Pakistan Mobile Communications Limited |
Pakistan | 51.9%(16) | ||
Orascom Telecom Bangladesh Limited |
Bangladesh | 51.9%(17) | ||
U-com Burundi S.A |
Burundi | 51.9%(18) | ||
Telecel Centrafrique S.A. |
C.A.R. | 51.9%(19) |
(1) | 0.0025% is owned by managers of WIND Telecomunicazioni SpA. |
(2) | VimpelCom Ltd. hold 99.9961% in Kyivstar, through its direct ownership of 0.0039% and indirect ownership of 73.8038%. Kyivstar holds 26.1922% of its own shares as a result of its merger with its former shareholder Storm LLC, with Kyivstar as the surviving company. Although the shares in Kyivstar held by Kyivstar are accounted for in the calculation of the aggregate ownership percentage by the Ukrainian securities depositary, these shares are not taken into account for the purposes of paying dividends and determining quorum or voting at Kyivstar shareholders meetings. By law, Kyivstar is required to either sell or cancel its shares that it owns. As of the date of this Annual Report on Form 20-F, Kyivstar has not yet made a decision whether it will sell or cancel such shares, because certain regulatory procedures related to cancellation of shares acquired by issuers in corporate reorganizations have not been adopted. There are no financial penalties or explicit liability associated with Kyivstars failure to sell or cancel the shares. |
(3) | OJSC VimpelCom holds 71.5% indirectly through a wholly owned Dutch holding company. |
(4) | Limnotex Developments Limited holds 100% directly. |
(5) | OJSC VimpelCom holds 49% indirectly through wholly owned Dutch, BVI and Kazakh holding companies. |
(6) | VimpelCom Holdings BV holds 98.0% indirectly through a wholly owned BVI holding company. |
(7) | Kyivstar holds 100% directly. |
(8) | OJSC VimpelCom holds 100% indirectly through a number of its wholly owned subsidiaries. |
(9) | OJSC VimpelCom holds 100% indirectly through wholly owned Dutch and BVI holding companies. |
(10) | OJSC VimpelCom holds 80.0% indirectly through a wholly owned BVI holding company. |
(11) | OJSC VimpelCom holds 90.0% through a wholly owned Cypriot holding company and a 90.0% owned BVI holding company. Note that we account for Sotelco Ltd. as an asset held for sale. |
(12) | Limnotex Developments Limited holds 100% through its wholly owned Cypriot subsidiary. |
(13) | OJSC VimpelCom holds 78.0% indirectly through two wholly owned Dutch holding companies. |
(14) | Weather Capital S.à r.l. holds 1.92% directly and Weather Capital Special Purpose 1 S.A. holds 50.00% plus one share directly. |
(15) | OTH holds 57.5% directly and 39.3% indirectly through two wholly owned Maltese subsidiaries. |
(16) | OTH holds 100% indirectly through two wholly owned Maltese subsidiaries. |
(17) | OTH holds 99.9% indirectly through a Maltese subsidiary. |
(18) | OTH holds 100% indirectly through a Maltese subsidiary. |
(19) | OTH holds 100% indirectly through a Maltese subsidiary. |
Description of Our Business
Our Mobile Telecommunications Business
We generally offer the following mobile telecommunications services to our subscribers:
| mobile telecommunications services under contract and prepaid plans for both corporate and consumer segments; |
| value added and call completion services; |
| our value added services include messaging services, content/infotainment services, data access services, financial value added services (which help customers manage their credit balances), location based services (which monitor subscriber locations), media, content delivery channels and mobile financial services (such as mobile bill payment); |
| access to both national and international roaming services which allow our subscribers and subscribers of other mobile operators to receive and make international, local and long distance calls while outside of their home network; |
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| wireless Internet access; and |
| other services. |
Our Fixed-line Telecommunications and Our Fixed-line Internet Business
We offer voice, data and Internet services to corporations, operators and consumers using a metropolitan overlay network in major cities throughout Russia, Italy, Ukraine and the CIS. In Italy, we also use LLU, which allows us to use connections from Telecom Italias local exchanges to the customers premises.
In our fixed-line/mobile integrated business structure in Russia, Ukraine and the CIS, fixed-line telecommunications use inter-city fiber optic and satellite-based networks. Our fixed-line business in Russia, Ukraine and the CIS is organized into three categories:
| Business and Corporate Services, providing a wide range of telecommunications and information technology and data center services to companies and high-end residential buildings; |
| Carrier and Operator Services, which provide consolidated management of our relationship with other carriers and operators. The two main areas of focus in this line of business are: |
| generating revenue by provisioning a specific range of telecommunications services to other mobile and fixed-line operators and ISPs in Russia and worldwide; and |
| optimizing costs and ensuring the quality of our long distance voice, Internet and data services to and from subscribers of other telecommunications operators and service providers worldwide by means of interconnection agreements; and |
| Consumer Internet Services, which provide fixed-line telephony, Internet access and home phone services (on a VoIP and copper wire basis) to customers in Russia, Ukraine, Uzbekistan, Armenia and Kazakhstan. |
In Italy, our fixed-line business uses an integrated network infrastructure with over 21,600 kilometers of fiber optic cable backbone and over 1.450 LLU sites for direct subscriber connections. Our fixed-line business in Italy is organized by the following services:
| Consumer Voice Offerings; |
| Corporate Voice Offerings, which provide fixed-line voice services, data services, value added services and connectivity services to corporate subscribers, including large corporate subscribers, SMEs and SOHOs; and |
| Internet and Data Services, which provide Internet and data transmission services to both consumer and corporate subscribers; |
For a description of our operations in each of our five business units, see the sections entitled Description of Operations of the Russia Business Unit, Description of Operations of the Europe & North America Business Unit, Description of Operations of the Africa & Asia Business Unit, Description of Operations of the Ukraine Business Unit and Description of Operations of the CIS Business Unit.
Strategy
VimpelComs strategy focuses on increased cash flows, and our businesses combine mature, strong cash-generating companies with emerging growth opportunities in a number of regions. We combine strong and growing positions in mobile businesses with a selective presence in fixed-line, which we expect will further support our growth strategy as mobile and services continue to expand across our markets.
We have a fundamental belief in a decentralized business model. We seek to capture profitable growth in mobile data, fixed-line data and mobile voice, by tailoring our strategy in each individual market according to its local characteristics.
We believe that subscribers will increasingly rely on mobile broadband as the primary means of accessing the Internet and other data services and, in the medium term, the principal technology for such access will be LTE. As such, our strategy is primarily mobile-based and we seek to prioritize resources and investment allocation to mobile capacity and coverage. In particular, our focus will be on capturing growth in mobile data services by moving away from unlimited plans to tiered pricing, rationally managing traffic and differentiating our services through more sophisticated offerings.
This broader view of the business provides the basis for our strategy, or Value Agenda. Our Value Agenda is based on local empowerment and starts with the companys 214 million customers as of December 31, 2012. Our focus remains on delivering excellence to our customers. We have implemented a passionate, performance oriented culture with a key focus on operations and execution at the business unit level. At the Group level, we remain a lean organization focused on value creation through performance management, portfolio management, financial structure optimization, and shared services such as roaming and procurement.
Our Value Agenda, which is focused on increasing Net Cash from Operating Activities, has the following four key pillars supported by clear operational strategies executed within each of our business units.
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| Profitable Growth. We aim to drive revenue growth that leads to higher profitability by focusing on gaining share in mobile data revenues and capitalizing on areas such as mobile financial services and partnerships with over-the-top players, while limiting cost of traffic. We seek to increase mobile data revenues by driving smartphone and tablet penetration through strong local distribution. We will also continue to introduce value-based commissioning, promoting tiered pricing for speed and time of data, partnering with internet players and improving network quality. We believe effective deployment of integrated bundles will allow us to monetize the strong growth in mobile data. |
| Customer Excellence. We are committed to creating a superior customer experience, optimizing distribution and developing superior pricing capabilities. We undertake a systematic effort involving dedicated analytics and research to continuously optimize the customer experience and drive superior pricing through integrated mobile bundles that combine traditional voice with SMS and, most importantly, data. This will provide value to the customer while at the same time protecting our revenue stream from cannibalization among various services, such as SMS and instant messaging (IM). In order to optimize our distribution, we focus on the most efficient channels in each market. We expect these actions to reduce churn and limit our retention and commercial costs. |
| Operational Excellence. Operational excellence and cost management represents a company-wide strategy, and we seek to implement this strategy at all levels of the organization by taking a holistic approach at both our group and business unit levels and implementing a continuous improvement culture across our businesses. |
| Capital Efficiency. Our goal is to ultimately reduce the ratio of our capital expenditure to revenues over time by deploying capital more efficiently through increased network sharing, continued business portfolio optimization and capital structure optimization. An important element of this strategy is network outsourcing and sharing in order to improve network utilization and quality. We also have a centrally led procurement model that provides advantages both at the group and local level. As part of our finance function, we have implemented a systematic approach to managing working capital and optimizing our capital structure. |
Our business largely comprises broadly three types of businesses grouped according to their stages of development:
| In our larger and more mature markets, Italy and Russia, we are focused on increasing profit and cash flow generation. These markets are highly penetrated, but have strong potential for broadband growth both in fixed-line and in mobile. Here, we will remain focused on reinforcing our solid market positions and sustained cash flow generation. |
| We consider as our growth engine developing markets in Ukraine, CIS, Bangladesh, Pakistan and Algeria. These markets each have a large potential customer base, high revenue growth from relatively low penetration and significant growth potential for mobile data. In these markets, we will seek to leverage our knowledge and experience in Russia and Italy to capture this growth. |
| Finally, we have early stage operations, such as in Canada and some Asian and African markets, which would require further investment to reach their full potential. We are performing a strategic contribution analysis of these operations. |
Within our groups priorities, we pursue the following specific objectives:
| Drive value in the mature voice business in our core markets. |
| We recognize that in our industry prices of the traditional products and services that we provide are generally falling over time, despite price elasticity being significantly below one. In contrast, the costs of delivering these products and services experience significant inflationary pressure. To address this imbalance, we continuously focus on cost efficiency, especially on optimizing business support costs. We also strive to design our go-to-market actions thoughtfully, with the dual ambition of ensuring that we remain a highly attractive choice for consumers at all times, while at the same time promoting responsible industry conduct. |
| We also see that the telecommunications market is highly heterogeneous, consisting of a significant number of sub-segments with partially unique needs. Therefore, we selectively seek to capture opportunities in the B2C (consumer) and B2B (business) sub-segments, especially in those areas where we can leverage the fact that we have both fixed-line and mobile assets, or where our international footprint can be a source of competitive advantage. |
| We believe that the shift away from the traditional mobile voice- and SMS-centric world and towards a data-centric world is fundamental. We therefore carefully scrutinize any investment in legacy infrastructure that does not also support our data business, while ensuring that we remain able to deliver a set of core traditional telephone services that fully meet customer expectations. |
| Emerge as leader from the transition to a mobile data-centric world. |
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| We believe that the move towards a data-centric world is the single biggest industry change that our core mobile business has experienced so far. We also see that a key success factor over the coming few years for any telecommunications operator with a significant mobile business will be to manage pricing of mobile data well and to be able to monetize the growth in mobile data traffic. We therefore spend considerable time and effort to ensure that we offer a proactive and customer-centric transition from legacy voice pricing to data-centric pricing with bundled tariff plans, with the ambition to retain and ultimately grow ARPU. |
| We see that mobile data offerings are already becoming a significant operator decision parameter for certain customer segments, and we expect this trend to broaden further. To ensure that we are the natural consumer choice in the data-centric world we aim to provide the best value-for-money data product portfolio while staying highly price-competitive at all times. |
| We recognize that a mobile data network is more complex to manage than a voice network and that the optimization potential in a data network is significant. We therefore pursue cost efficiency in technology investments, including traffic management and offloading of traffic as well as content compression. |
Competitive Strengths
We believe that we are well positioned to capitalize on opportunities in all of our traditional and broadband mobile and fixed-line telecommunications markets. We seek to differentiate ourselves from our competitors by innovative products and high-quality service offerings, specialized customer care and strong and recognized brand names.
| Recognized local brand names. We market our mobile services under local brand names in each of our markets. Our Beeline brand name is very well established in a number of countries, including Russia (where we introduced the brand in 1993), Kazakhstan, Uzbekistan, Armenia, Tajikistan, Georgia, Kyrgyzstan and Cambodia. Primarily as a result of our innovative marketing and brand licensing efforts, our Beeline brand name is among the most recognized brand names in Russia and the CIS. In Ukraine, we market our mobile services primarily under the Kyivstar, Kyivstar Business and djuice brands. In Italy, our WIND brand is well established and most recognized. We also have powerful brands for our operations in Africa & Asia, including Djezzy, banglalink, Mobilink, Telecel, and Leo. Our brands are generally very well known in the local markets and enjoy top of mind brand awareness. |
| Product and service innovation. In our mobile business, we continue to seek out new products and services to provide our subscribers with faster access and easier usage to be competitive in the markets in which we operate. We continue to develop services for our prepaid consumer segment. |
| Pricing. Acknowledging differences in competitive situations and consumer behavior across markets, we undertake a systematic effort involving dedicated analytics and research to develop an optimal pricing structure. This pricing approach ensures that we maximize value from all segments and lets us offer different tariffs and solutions to all market segments and types of companies, including special tariff options and mobile bundles for voice, messaging and data services. |
| Data services. We believe mobile data services are driving market growth, and we are focusing our efforts at winning this segment. We are actively developing data services in all markets as part of our prepaid and postpaid tariff proposals. We focus our efforts on small and medium screens. |
We offer a broad portfolio of competitive services in both the fixed-line and mobile corporate data markets that are designed to match the needs of our customers. For our business and corporate clients, we offer a wide range of data services, including wireless office internet solutions and high bandwidth corporate Internet access.
| Specialized customer care. We provide specialized customer service to our different subscriber segments. We believe that our ability to provide specialized customer service has helped us maintain a high level of subscriber satisfaction with our products and services and control churn. We also believe that we have provided particularly strong customer service to our corporate subscribers. |
| Broad distribution network. We have large distribution networks for mobile and fixed-line services in markets of our operations. The network is used both for sale purpose as well as for the purpose of customer care, thus providing higher standards of customer service. Our network consists of our own branded shops as well as franchise network, simple retail agreements with local retail players and networks of our strategic retail partners. Proper mix of these channels secures our position in the market at proper costs. |
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Description of Operations of the Russia Business Unit
Mobile Business in Russia
Description of Mobile Services in Russia
In Russia, we primarily offer our mobile telecommunications services to our subscribers under two types of payment plans: postpaid plans and prepaid plans. As of December 31, 2012, approximately 7.0 % of our subscribers in Russia were on postpaid plans and approximately 93.0% of our subscribers in Russia were on prepaid plans.
Voice Services
We provide all of our customers voice services that include airtime charges from mobile postpaid and prepaid subscribers, including monthly contract fees for predefined number of voice traffic and roaming fees for airtime charges when customers travel abroad. Among others the other voice services include a group of services Possibilities with zero, which allow us to increase voice traffic and revenue without causing average price per minute to decrease. Our Possibilities with zero group of services helps our prepaid subscribers stay connected even in the event that they have a zero balance in their account with services that include, among others, Receiving Party Pays, Call Me Back and Fill Up My Balance.
Roaming
As of December 31, 2012, our operations in Russia had active roaming agreements with 574 GSM networks in 213 countries, respectively, in Europe, Asia, North America, South America, Australia and Africa. In addition, as of December 31, 2012, we provided to our Russian subscribers GPRS roaming with 430 networks, in 171 countries. Roaming agreements for our operations in Russia now cover all major roaming destinations, and we continue developing roaming services for our Russian subscribers.
Generally, each agreement with roaming partners provides that the operator hosting the roaming call sends us a bill for the roaming services used by our subscriber while on the hosts network. We pay the host operator for the roaming services and then bill the amount due for the provision of roaming services on our subscribers monthly bill.
In 2003, OJSC VimpelCom became the first Russian mobile company to launch a customized application for mobile network enhanced logic (CAMEL), an intranetwork prepaid roaming service. This service allows prepaid subscribers to automatically receive access to roaming services provided they have a positive account balance. The CAMEL service allows us to implement real time cost control, provide more dynamic service to our clients and reduce the number of delinquent subscriber accounts caused by roaming. As of December 31, 2012, we provided our Russian subscribers CAMEL roaming through 226 operators in 127 countries.
As of December 31, 2012, we also had domestic roaming agreements with 5 regional GSM providers in Russia, which provide roaming for subscribers in more than 9 cities across Russia.
Value Added Services including Data Revenue
Our value added services include messaging services, content/infotainment services, data access services (on GPRS and 3G basis), financial value added services (which help customers manage their credit balances), location based services (which monitor subscriber locations) media and content delivery channels.
Valued Added Service
We provide all of our customers with a variety of VAS services mainly included in Basic VAS package. Our Basic VAS services include, among others, caller-ID, voicemail, call forwarding, conference calling, call blocking and call waiting.
Our messaging portfolio includes SMS, MMS (which allows subscribers to send pictures, audio and video to mobile phones and to e-mail), voice messaging and mobile instant messaging. Different price offers for messaging services are offered to different segments of our customers.
We offer our subscribers various types of content/infotainment services, including:
| SMS services (including information services such as news, weather, entertainment chats and friend finder); |
| voice services (including referral services); |
| Content downloadable to telephone (including music, pictures, games and video) and |
| RBT (customized ringtones). |
Wireless Internet Access
We provide our customers with wireless Internet access through GPRS/EDGE and 3G/HSPA (high-speed packet access). We launched 3G Internet services commercially in September 2008 in Russia. We currently offer Internet access through USB modems in every region of Russia, and our subscribers benefit from 3G speeds in every region in Russia as of December 31, 2012. We offer special wireless Plug&Play-USB modems, which provide our customers with a convenient tool for Internet access.
Our data access services are offered on a GPRS and 3G basis and include access to the Internet. In partnership with Opera Software ASA, we offer unlimited Internet browsing through the Opera Mini and Opera Turbo web browsers.
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Our media and content delivery channels include the following:
| RBT, Chameleon (service based on CellBroadcast technology providing free information content such as news, weather and sports), dating services and location-based services (such as the ability to locate subscribers or nearby facilities), information and content services (such as weather forecasts or horoscopes), mobile television and video streaming. Google Play Carrier Billing (offering certain Google products and payment through a subscribers mobile account), unstructured supplementary services data (USSD) menu (a self-help and entertainment portal), Dynamic SIM Toolkit (DSTK) portal (a self-help and entertainment portal), Interactive Voice Response (IVR) portal (information and content services portal), SMS services, Bee Number requests (information and content services provider) and mobile portal (browsing, entertainment and information services provider); and |
| SMS, voice and USSD technology through which third party content is provided. |
Other Data Services
For our business and corporate clients, we offer a wide range of data services, including wireless office Internet solutions and high bandwidth corporate Internet access. The following examples describe some of the services that we provide:
M2M. Machine-to-machine, or M2M, refers to technologies that allow both wireless and wired systems to communicate with other devices of the same ability and includes technologies that allow data transmission between remote equipment. M2M technologies are used in areas such as consumer electronics, banking, metering, security and others. The M2M market in Russia is in the early stages of development with penetration rate of M2M SIM cards at less than 3.0%. Experts estimate the annual Russian market growth potential for M2M will be between 25.0 and 30.0% until 2015. We have launched, M2M Control Center, together with Jasper Wireless Inc. This product is unique to the Russian market and its launch made us the first to provide this service for corporate clients in Russia. While our competitors are active and aggressive in the Russian M2M market providing various M2M solutions to their customers, we believe our M2M Control Center, gives us a strong competitive advantage among all Russian operators. M2M Control Center allows on-line self-management of a clients SIM cards, including real-time monitoring, usage statistics, on-line diagnostics, and on-line notification. We believe M2M Control Center can be easily integrated with our customers other IT systems and platforms through an open application programming interface. We also launched M2M Complex Solutions which will give us an opportunity to provide turn-key solutions for all segments, including fleet management, security, smart metering and others.
In July 2012 VIP announced M2M World Alliance with Telefonica, KPN, NTT DoCoMo, Rogers, Singtel and Telstra. This alliance will discuss technological cooperation in developing and enabling a global solution for the provision of M2M communications to multinational customers and cooperate with the aim of further development of the M2M market and improvement of customer convenience.
Corporate SMS services We provide direct connections for SMS centers of large companies and aggregators. We also provide our product Business SMS to SME.
Mobile VPN. We offer secure remote access to corporate information, databases and corporate applications. In 2012 the service experienced significant growth Mobile VPN became a basis for remote corporate access solutions and tied up B2B-clients to us as a service provider.
Fixed Mobile Convergence. Based on our fixed and mobile networks, Beeline Business offers fixed-mobile convergence services to corporate clients providing use of their mobile phone as an extension of their private branch exchange, or PBX. During 2012 we continued the expansion of our fixed mobile convergence services into 7 new cities in Russia, including Tomsk, Orenburg and Naberezhnye Chelny increasing the total number of cities in which we provide these services to 74. In February 2013 we plan to provide these services to an additional 19 cities.
Mobile cloud solutions. In December 2012 we initiated an MDM (Mobile Device Management) project as a part of the BYOD (bring you own device) concept.
Interconnect Revenues
We have several interconnection agreements with mobile and fixed line operators in Russia under which we provide traffic termination services. These services represent termination of incoming voice and data traffic from network of our competitors when their customers call or send data to our customers.
Revenues from Sales of Equipment and Accessories and Other Revenues
Handset offerings. We offer to our customers a broad selection of handsets and Internet devices, which we source from a number of suppliers, including Nokia, Samsung, RIM, Sony Ericsson, LG, Huawei and Alcatel. We do not play a significant role on the retail hand set market which is quite dispersed and run by independent retail stores. In order to promote our brandname we have launched water- and shock- proof mobile phones which have become popular. However, Apple products constitute the main part of sales of equipment and accessories.
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Specialized customer care. We provide specialized customer service to our different subscriber segments. We believe that our ability to provide specialized customer service has helped us maintain a high level of subscriber satisfaction with our products and services and control churn.
Mobile Telecommunications Licenses in Russia
GSM Licenses
We hold super-regional GSM licenses for seven out of the eight Russian super-regions. In total, our super-regional GSM licenses cover approximately 96.0% of Russias population and permit us to operate a unified dual band GSM-900/1800 network. The following tables summarize the principal terms of our GSM licenses, including the license areas and expiration dates. We have filed or will file applications for renewal for all of our licenses. See also Item 3 Key Information D. Risk FactorsLegal and Regulatory RisksOur licenses are granted for specified periods and they may not be extended or replaced upon expiration.
Expiration Date | ||
Moscow |
April 28, 2018 | |
Central and Central Black Earth |
April 28, 2018 | |
North Caucasus |
April 28, 2018 | |
North-West(1) |
September 12, 2017 | |
Siberian |
April 28, 2018 | |
Ural(2) |
November 14, 2017 | |
Volga |
April 28, 2018 |
(1) | Our GSM license for the North-West super-region stipulates which GSM standard applies to the territories covered by the license. The GSM-900/1800 standard applies to the following territories: the city of Saint Petersburg and Leningrad region. The GSM-1800 standard applies to the following territories: Kareliya Republic, Nenetskiy Autonomous Region, Arkhangelsk region, Vologda region, Kaliningrad region, Murmansk region, Novgorod region and Pskov region. |
(2) | Our GSM license for the Ural super-region stipulates which GSM standard applies to the territories covered by the license. The GSM-900/1800 standard applies to the following territories: Komi Republic, Udmurtskaya Republic, Kirov region, Kurgan region, Sverdlovsk region, Yamal Nenets autonomous district, the city of Kudymkar, Kudymkar metropolitan region, Yusvinsky metropolitan region, Yurlinsky metropolitan region, Kochevsky metropolitan region, Kossinsky metropolitan region and Gaynsky metropolitan region of Permskiy Krai. The GSM-1800 standard applies to the following territories: Orenburg region, Tyumen region, Chelyabinsk region, Hanty-Mansiysky autonomous districtYugra and Permskiy Krai (not including the city of Kudymkar, Kudymkar metropolitan region, Yusvinsky metropolitan region, Yurlinsky metropolitan region, Kochevsky metropolitan region, Kossinsky metropolitan region and Gaynsky metropolitan region). |
We do not currently hold a GSM super-regional license for the Far East super-region of Russia. We currently hold GSM licenses in the following regions of the Far East super-region: Amur region (GSM-900/1800), Kamchatka Krai (excluding Koryakskiy Autonomous Region) (GSM-1800), Khabarovsk Krai (GSM-1800), Sakhalin region (GSM-1800), Irkutsk region (GSM-900/1800) (excluding Ust-Ordynskiy Buryatskiy autonomous region, an administrative-territorial unit of special status), Koryakskiy Okrug of Kamchatka Krai (GSM-1800), Chukotskiy autonomous region (GSM-1800), Ust-Ordynskiy Okrug of Irkutsk region (GSM-900/1800), Evreyskaya autonomous region (GSM-900/1800), Sakha Republic-Yakutiya (GSM-1800), Magadan region (GSM-1800), Primorskiy Krai (GSM-900/1800) and Zabaykalskiy Krai (GSM-900). These licenses expire on various dates between 2016 and 2021 and we plan to file applications for renewal of all of our licenses prior to expiration.
In addition to the seven super-regional GSM licenses, we hold GSM licenses for the Kaliningrad region, which is located within the North-West super-region, and the Orenburg region, which is located within the Ural super-region.
3G Licenses
On April 20, 2007, the Federal Communications Agency announced that OJSC VimpelCom was awarded one of three UMTS licenses in Russia. The license was issued on May 21, 2007. We have met the license condition for installing at least 6,096 3G base stations throughout Russia by the end of the fifth year from the date of issuance of the license. The license expires on May 21, 2017.
For additional information relating to the risks relating to the 3G license award, see Item 3Key InformationD. Risk FactorsRisks Related to Our IndustryOur failure to keep pace with technological changes and evolving industry standards could harm our competitive position and, in turn, materially adversely affect our business.
LTE License
In July 2012, OJSC VimpelCom was awarded a mobile license, a data transmission license, a voice transmission license and a telematic license for the provision of LTE services in Russia. For information regarding the other operators holding LTE licenses with whom we compete, see Description of Operations of the Russia Business UnitMobile Business in Russia. LTE is the next step in wireless technology and is expected to be the mobile broadband platform for new services and innovation for the future, which in practice will provide subscribers with significantly faster data rates for both uploading and downloading content, a greater number of mobile TV channels and better image quality. These licenses will allow OJSC VimpelCom to provide services using radio-electronic devices in Russia via networks that use LTE standard equipment within any of the following frequency bands: 735-742.5/776-783.5 MHz; 813.5-821/854.5-862 MHz; 2550-2560/2670-2680 MHz. The three channels (one channel (10
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MHz) in frequency duplex in 2500-2690 MHz and two channels (7.5 MHz) in frequency duplex for 720-862 MHz), allocated to us in accordance with the licenses, have restrictions in use. To remove restrictions we have to perform certain organizational technical measures including, among others, radio frequency bands releasing spectrum conversion, refarming and reallocation between operators. We expect that the roll-out of the LTE network will occur using a phased approach based on a pre-defined schedule pursuant to the requirements of the license. Under the phased approach, OJSC VimpelCom is required to launch LTE services by June 1, 2013. OJSC VimpelCom is then required to extend services to six regions in Russia by the end of 2013 and a specified number of additional regions in each year until December 1, 2019 when services must cover all of Russia. OJSC VimpelCom is required to comply with the following conditions among others under the terms of the license: (i) invest at least RUB 15 billion in each calendar year (including the period from July 12, 2012 to December 1, 2013) in the construction of its federal LTE network until the network is completed, which must occur before December 1, 2019; (ii) provide certain data transmission services in all secondary and higher educational institutions in specified areas; and (iii) provide interconnection capability to telecommunications operators that provide mobile services using virtual networks in any five regions in Russia not later than July 25, 2016.
CompetitionMobile Business in Russia
The Russian mobile telecommunications industry has grown rapidly over the past decade as a result of increased demand by individuals and newly created private businesses. Increased demand for mobile telecommunications services is largely due to the expansion of the Russian economy and a corresponding increase in disposable income; declining tariffs and costs of handsets and accessories, which have made mobile telecommunications services more affordable to the mass market subscriber segment; advertising, marketing and distribution activities, which have led to increased public awareness of, and access to, the mobile telecommunications market; and improved service quality and coverage.
The table below indicates the estimated number of mobile subscribers, mobile penetration rates and annual subscriber growth rates in Russia.
Period |
Subscribers (in millions) |
Penetration Rate |
Annual Subscriber Growth |
|||||||||
As of December 31, 2012 |
234.2 | 164.1 | % | 2.1 | % | |||||||
As of December 31, 2011 |
229.5 | 160.7 | % | 4.2 | % | |||||||
As of December 31, 2010 |
220.4 | 157.3 | % | 5.3 | % | |||||||
As of December 31, 2009 |
209.0 | 148.3 | % | 11.0 | % |
(1) | Growth rate as compared to year end 2011. |
Source: For subscribers, subscriber growth and penetration rates, Informa Telecoms & Media. © 2013 Informa Telecoms & Media. All rights reserved.
The Russian mobile telecommunications market is highly competitive. Informa Telecoms & Media estimates that the top three mobile operators, MTS, MegaFon and OJSC VimpelCom, collectively held approximately 81.1% of the mobile market in Russia as of December 31, 2012. As a result of competition, mobile providers are utilizing new marketing efforts, including price promotions, to retain existing subscribers and attract new ones. Competition for subscribers in Russia is intense as a result of greater market penetration, consolidation in the industry, the growth of current operators and new technologies, products and services.
Prior to July 2012, LTE services had been launched in Russia using USB modems only because LTE technology in the frequencies offered in Russia was not supported by smartphones. Scartel was granted a license to provide LTE services in the 2.5 to 2.7 MHz range, the same frequencies in which it had provided WiMax services before. As of December 31, 2012, Scartel provided such services in 18 regions of Russia. MTS had also launched LTE services using frequencies from previously provided WiMax services and TDD technology. Megafon had launched services on Scartels LTE network under an MVNO agreement.
As described above under Mobile Telecommunications Licenses in RussiaLTE License, in July 2012, the Russian government issued new LTE licenses to operators, including OJSC VimpelCom and MTS, Megafon and Rostelecom, with which OJSC VimpelCom competes. These and other operators are developing LTE networks to provide services using 4G technology, which can be utilized on smartphones and other mobile devices.
We compete with at least one other mobile operator in each of our license areas, and in many license areas we compete with two or more mobile operators. Competition is based primarily on local pricing plans, network coverage, quality of service, the level of customer service provided, brand identity and the range of value-added and other subscriber services offered.
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The following table shows our and our primary mobile competitors respective subscriber numbers in Russia as of December 31, 2012:
Operator |
Subscribers in Russia (in millions) |
|||
MTS |
71.2 | |||
MegaFon |
62.6 | |||
VimpelCom |
56.1 | |||
Tele2 |
22.7 |
Source: For all companies except OJSC VimpelCom, Informa Telecoms & Media. © 2013 Informa Telecoms & Media. All rights reserved.
MTS. One of our primary competitors in Russia is MTS. According to Informa Telecoms & Media, as of December 31, 2012, MTS had approximately 71.23 million subscribers in Russia, representing a market share of 30.4%. It has a greater share of the high value subscriber market and more frequency allocations than we do, which provides MTS with a potential advantage in the quality of its GSM, UMTS and HSPA services. MTS reports that it holds licenses to operate mobile networks in almost all of the regions in Russia. MTS holds a LTE FDD license identical to ours, which it received after a beauty contest in July 2012. In addition, MTS holds an LTE TDD license for Moscow region which provides MTS with a potential advantage in quality of its LTE services in Moscow region.
MegaFon. In addition to MTS, we also compete with MegaFon, the second largest mobile operator in Russia in terms of the number of subscribers. In 2012, Altimo sold its entire 25.1% stake in MegaFon to a private investor. According to Informa Telecoms & Media, as of December 31, 2012, MegaFon had approximately 62.6 million subscribers, representing a market share of 26.7%. MegaFon holds GSM-900/1800, UMTS licenses to operate in all regions of Russia. Megafon holds an LTE FDD license identical to ours which it received after a beauty contest in July 2012. In addition, MegaFon has an LTE TDD license for the Moscow region which provides Megafon with a potential advantage in quality of its LTE services in Moscow region. Furthermore, MegaFon has the same controlling shareholder as Scartel. Scartel holds an LTE FDD license for the entire Russian Federation with more frequency allocations than we have obtained. MegaFon operates on Scartels network using an MVNO model which gives it a potential advantage in the quality of its LTE services.
Tele2. Tele2 has been operating in Russia since 2003 and is now considered to be a significant player in the Russian telecommunications market. According to Informa Telecoms & Media, as of December 31, 2012, Tele2 had approximately 22.7 million subscribers in Russia, representing a market share of 9.7%. It currently provides GSM mobile services in 39 regions of Russia, including St. Petersburg, Arkhangelsk, Belgorod, Bryansk, Vladimir, Vologda, Voronezh, Kaliningrad, Kaluga, Kemerovo, Kirov, Kostroma, Kursk, Lipetsk, Murmansk, Nizhny Novgorod, Novgorod, Novosibirsk, Omsk, Orel, Pskov, Rostov, Ryazan, Smolensk, Tambov, Tver, Tomsk, Tula, and Chelyabinsk, as well as the Krasnodar Territory and the republics of Adygei, Komi, Udmurtia, Karelia, Sakhalin, Evreyskaya AO, Kamchatka and Magadan. At the moment Tele2 does not have a LTE license.
Rostelecom. In 2011, the Russian government completed the first phase of the reorganization of the state-controlled telecommunications companies Svyazinvest and Rostelecom, by transferring to Rostelecom the fixed-line subsidiaries of Svyazinvest. These subsidiaries include, among others, Uralsvyazinform, Volgatelecom and Sibirtelecom. In July 2012, Rostelecom completed the acquisition of 100% of Sky Link, a mobile data and voice operator from Syazinvest. As a result of these transactions, Rostelecom is currently the largest fixed-line operator and fifth largest mobile operator in Russia. According to public reports, during the second phase of the reorganization, which is expected to be completed in 2013, several regional state-controlled operators will be consolidated under Svyazinvest, which will be merged into Rostelecom. We compete with Rostelecom in all regions where it provides services. Rostelecom holds an LTE FDD license identical to ours which it received after a beauty contest in July 2012. In addition, it has LTE TDD license in approximately 40 regions in Russia which gives Rostelecom a potential advantage in quality of its LTE services in these regions.
Other Competitors in Russia. In addition to MTS and MegaFon, which operate in all of the regions in which we operate, and Tele2 and Rostelecom, we compete with a number of local telecommunications companies. We also compete with Closed Joint Stock Company Middle Volga Interregional Association of Radio and Telecommunication Systems, a company that holds licenses, either directly or indirectly through joint ventures, for GSM-900 or GSM-1800 networks in the Volga License area and with telecommunications group MOTIV in the Ural super-region.
Marketing and DistributionMobile Business in Russia
In Russia, we offer our subscribers several national prepaid and contract tariff plans, each offering a different benefit and targeting a certain type of subscriber.
We divide our primary target subscribers in Russia into four groups:
| key/national accounts, for which monthly revenue from mobile and fixed-line services exceeds US$20,000; |
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| large accounts, for which monthly revenue from mobile and fixed-line services exceeds US$2,000 or companies having high revenue potential; |
| SME subscribers, for which monthly revenue from mobile and fixed-line services is less than US$2,000; and |
| mass market subscribers. |
We also offer core telco and specific value added services and tariff plans with discounts and special pricing for our key/national accounts, which include all multiregional companies and government institutions. The typical corporate subscriber pays on a contract basis for our fixed-line and mobile services. We provide our corporate subscribers with a range of additional value added services, including specialized customer service, tailored pricing arrangements and access to sophisticated technological options, such as individual corporate wireless networks.
For USB modem customers, we offer special tariffs that were developed for Internet users, which do not include voice services. Tariffs differ by subscriber needs. In regions in which we use a 3G network, subscribers benefit from lower tariffs and higher speeds. We also offer several unlimited tariffs, primarily to USB modem users, and tariffs with discounted initial payments to all data services subscribers.
Customer Loyalty Programs
We recognize the need to continuously build and increase the loyalty of our customers. In 2012, we expanded our Customer Experience Program, which covers all main elements of our customers interaction with us. We implemented long-term and short-term initiatives that focus on improving the quality of our main products and services and increasing customer satisfaction. We continuously invest in network optimization, the roll-out of our own branded stores, competence of our staff and motivation to deliver the best customer experience for customers. We also develop product offerings tailored to different customer needs based on the comprehensive analysis of our customer segments that we completed last year. We actively use targeted marketing to increase customer loyalty and ARPU in all segments of mobile and FTTB mass marketing services. We apply data mining analysis to predict the propensity of churn for each subscriber, which allows us to increase the efficiency of our churn reduction programs by means of targeted marketing campaigns.
In Russia, our loyalty programs are designed to retain our existing subscribers, thereby reducing churn, and increasing customer spending, both in B2C and B2B.
Fixed-line Business in Russia
Description of Fixed-line Services in Russia
Business Operations in Russia
In Russia, we provide a wide range of telecommunication and information technology and data center services, such as network access and hardware and software solutions, including configuration and maintenance, software as a service (SaaS) and an integrated managed service. We operate a number of competitive local exchange carriers (CLECs) that own and operate fully digital overlay networks in a number of major Russian cities. Our services cover all major population centers in Russia.
Our customers range from large multinational and Russian corporate groups to Russian small and medium enterprises and high-end residential buildings in major cities throughout Russia.
Local Access Services. We provide business customers with local access services by connecting the customers premises to its fiber network, which interconnects to the local public switched telephone network (PSTN) in major metropolitan areas in Russia.
International and Domestic Long Distance Services. We offer international long distance (ILD) services to our customers via our Federal Transit Network (FTN), which covers the entire territory of Russia and also includes eight international communications transit nodes across Russia.
We provide domestic long distance (DLD) services primarily through our FTN, proprietary and leased capacity between major Russian cities and through interconnection with zonal networks and incumbent networks. We also offer very small aperture terminal (VSAT) satellite services to customers located in remote areas.
Dedicated Internet and Data Services. We provide our business customers with dedicated access to the Internet through our access and backbone networks. We also offer traditional and high-speed data communications services to business customers who require wide area networks (WANs) to link geographically dispersed computer networks. In addition, our company provides private line channels that can be used for both voice and data applications. We offer an IP virtual private network (IP VPN) service (based on multiprotocol label switching (MPLS) which is one of the most popular data services on the corporate market. We also offer customers the ability to enter into service level agreements, which ensure the quality of our service.
Leased Channels. We provide corporate clients with the ability to rent channels with different high speed capacities. These leased channels are dedicated lines of data transmission.
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Value Added Services. We offer an increasing range of value added services, including data center services, such as co-location, web hosting, audio conference, service level agreement (SLA) and toll free (800) numbers, domain registration and corporate mail services. We also offer access to a variety of financial information services, including access to S.W.I.F.T., Reuters, Bloomberg and all Russian stock exchanges.
Fixed-line Mobile Convergence. Based on our fixed and mobile networks, we offer fixed-mobile convergence services to corporate clients providing the use of their mobile phone as an extension of their PBX. In 2010, we also signed a contract with Open Joint Stock Company Russian Railways, Russias national railway corporation for fixed mobile technological network (FMTN) services. During 2012, we continued the expansion of our fixed-mobile convergence services into seven new cities in Russia, including Tomsk, Orenburg and Naberezhnye Chelny, increasing the total number of cities in which we provide these services to 74.
Corporate Services. We also offer to our corporate customers IPTV services, certain Microsoft Office packages (including SaaS), videoconferencing services and sale, rental and technical support for telecommunications equipment.
Managed Services. We offer our corporate clients packages of integrated services that include fixed-line telephony and Internet access, along with the additional services such as virtual PBX, and security services, such as firewall, distributed denial of service protection and local area network. This product allows customers to access their systems from various locations.
Equipment Sales. We offer and sell equipment manufactured by Cisco Systems, Alcatel-Lucent, Avaya, Panasonic, Nokia, Motorola, Apple, BlackBerry and other manufacturers. As part of our turnkey approach, we also offer custom solutions and services for the life cycle of the equipment, including its design, configuration, installation, consulting and maintenance.
Mobile VPN. We offer to our corporate clients secure remote access to corporate information, databases and corporate applications. Remote access is available from different mobile devices, including USB modems, tablets and smartphones. In 2012, mobile VPN usage grew due to increased employee mobilization.
IP Addresses. We provide to our corporate customers IP address services, which help to identify devices connected to mobile Internet or corporate network.
Wholesale Operations in Russia
Our carrier and operator services division in Russia provides a range of carrier and operator services, including voice, Internet and data transmission over our own networks.
In an effort to create a single unified transport network for our mobile and fixed-line telecommunications services, we transferred the majority of our international and domestic long distance voice traffic to our own backbone from other Russian long distance carriers in 2008. This allowed us to reduce long distance voice traffic termination cost rate.
Historically, we have provided high volumes of international and domestic voice call termination for Russian telecommunications operators. After the demonopolization of the long distance telephony market in Russia in 2006, we received a new type of license for international and national communications services and built an FTN of 11 new international and domestic long distance voice switches to meet regulatory requirements for the activation of the new license. By the end of 2008, our FTN had expanded, consisting of eight international and 21 domestic long distance switches. This allowed us to improve our status on the international and domestic long distance markets in Russia by providing services that are competitive with those offered by leading telecommunications providers in Russia. This infrastructure has allowed us to achieve significant traffic growth.
Regulatory changes in 2006 introduced new models of inter-operator tariffs to the Russian voice traffic transmission market. There are three types of fixed-line voice services operators (local, zonal and long distance), which are determined in accordance with licenses held by an operator. According to regulations, every long distance voice call originating from a fixed-line subscriber in Russia and/or terminating with a fixed-line subscriber in Russia should be transmitted via all three levels of voice network. Every long distance call that originates or terminates with a mobile user must be transmitted on at least two levels of voice network. As a universal carrier and service provider, we combine all three levels of licenses and voice networks within Russia. We have a number of our own zonal networks and our own local networks in the most populated regions of Russia.
Our carrier and operator services division also provides domestic and international IP transit services to ISPs in Russia, Ukraine, the CIS and Baltic states. A smaller ISP can connect to our IP backbone and then use its network to access the Internet. Our IP backbone is an IP/MPLS network with 220 Gbps infrastructure and more than 130 access points in Russia. Top Russian content providers such as Mail.ru and Odnoklassniki.ru have facilities which are located in our data centers and have Internet access via our IP backbone. More than 450 ISPs have an IP exchange with our network as full IP transit customers. We have global traffic exchange points in London, Frankfurt, Amsterdam, Stockholm and New York. These factors allow us to provide ISPs with high-level bandwidth and connectivity to both Russian and global Internet segments.
Our carrier and operator services customers include foreign and Russian telecommunications operators and carriers.
Voice Services. For international operators, including traditional incumbents, mobile and VoIP operators, we provide call termination to fixed-line and mobile destinations in Russia, Ukraine, and the CIS and Baltic states. For Ukrainian and CIS operators, we provide call termination to Russian and international fixed-line and mobile destinations. For Russian operators we provide international, domestic, zonal and local voice call transmission services.
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Internet Services. Our carrier and operator services division provides IP transit service to operators throughout the world International operators require connectivity to the Russian Internet segment. In addition, our carrier and operator services division provides data center services to content providers.
Data Services. We offer three types of data services: private networks, local access, and domestic and international channels.
We have our own local network nodes in the majority of business and trade centers in the largest cities of Russia. Other operators access those business and trade centers by ordering from our local channels that connect to their network nodes.
We have interconnection agreements with international global data network operators who provide one-stop shopping for worldwide data network services for multinational companies. Under these interconnection agreements we provide MPLS-based IP VPN, local, domestic and international private lines, equipment and equipment maintenance in Russia.
We also provide high-speed domestic and international channels to international and Russian operators to sell excess backbone network capacity.
Residential and FTTB Operations in Russia. In Russia, we offer fixed-line broadband and wireless Internet access. One of our strategic goals is to develop broadband services based on the most up-to-date engineering solutions.
Additional FTTB Services
FTTB IPTV. We launched the FTTB IPTV service in Russia in January 2009. In May 2009, we enhanced and relaunched the product under the Beeline TV brand. Currently the Beeline TV product is run in 36 regions. In 106 cities of the 36 regions, we provide IPTV service. As of December 31, 2012, we had approximately 875,341 IPTV subscribers. Our service has two unique market features: first, all set-top boxes (STBs) are high definition (HD) technology compatible which allows us to broadcast HD content to every one of our customers. Second, we provide STBs with digital video recorder (DVR) functions, which allow users to watch TV content on-demand and to pause and rewind live television.
Wireless Broadband Internet Access. On March 1, 2007, Golden Telecom launched commercial operation of its WiFi network, offering prepaid Internet access to the mass market under the Golden WiFi brand. Since September 22, 2008, the service has been provided under the Beeline WiFi brand. According to iKS Consulting, Beeline WiFi is the worlds largest metropolitan wireless network and includes the greater part of Moscows city center and many other areas of the city. As of December 31, 2012, our company had installed more than 12,000 WiFi access nodes in Moscow. Our most recognized partners in providing WiFi services are Domodedovo and Sheremetyevo Airports, McDonalds, Starbucks, Coffee-House, MEGA and IKEA trade centers.
Licenses for Fixed-line Business in Russia
The table below sets forth the principal terms of the fixed-line, data and long distance licenses which are important to our fixed business in Russia. We have filed or will file applications for renewal for all of our licenses that expire in 2013.
License Type |
Region |
Expiration Dates (Earliest/Latest) | ||
Local Communications Services excluding local communications services using payphones and multiple access facilities |
Moscow St. Petersburg Ekaterinburg Nizhny Novgorod Khabarovsk Novosibirsk Rostov-on-Don Krasnodar |
August 30, 2016/March 9, 2017 May 23, 2013 / March 9, 2017 February 16, 2016 March 9, 2017 October 31, 2015 March 9, 2017 March 9, 2017 December 31, 2014/March 9, 2017 | ||
Local Communications Services using multiple access facilities |
Moscow St. Petersburg Novosibirsk Nizhny Novgorod Khabarovsk Ekaterinburg |
September 21, 2016 September 21, 2016 March 9, 2017 March 9, 2017 March 9, 2017 July 20, 2015 | ||
Rostov-on-Don | March 26, 2018 | |||
Krasnodar | April 18, 2013/April 28, 2016 |
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License Type |
Region |
Expiration Dates (Earliest/Latest) | ||
Leased Communications Circuits | ||||
Services | Moscow | August 28, 2013 November 9, 2016 | ||
St. Petersburg | June 8, 2015/October 4, 2017 / | |||
Novosibirsk | November 12, 2013/July 5, 2016 | |||
Nizhny Novgorod | November 12, 2013/July 5, 2016 | |||
Rostov-on-Don | November 12, 2013/July 5, 2016 | |||
Khabarovsk | August 25, 2015/July 5, 2016 | |||
Ekaterinburg | November 12, 2013 | |||
Krasnodar | April 17, 2013/July 5, 2016 | |||
Voice Communications Services in Data Transmission Networks |
Moscow |
March 15, 2016/May 25, 2016 | ||
St. Petersburg | August 1, 2017 | |||
Novosibirsk | August 1, 2017 | |||
Ekaterinburg | September 5, 2013 | |||
Nizhny Novgorod | August 1, 2017 | |||
Rostov-on-Don | August 1, 2017 | |||
Khabarovsk | April 18, 2018 | |||
Krasnodar | April 18, 2013/August 1, 2017 | |||
International and National Communications Services Telematic Services |
Russian Federation |
December 13, 2019 | ||
Moscow | November 21, 2015/July 5, 2016 | |||
St. Petersburg | November 21, 2015/August 1, 2017 | |||
Novosibirsk | August 1, 2017 | |||
Nizhny Novgorod | August 1, 2017 | |||
Rostov-on-Don | August 1, 2017 | |||
Khabarovsk | June 26, 2017 | |||
Ekaterinburg | September 5, 2013 | |||
Krasnodar | September 14, 2015/August 1, 2017 | |||
Intra-zonal Communications Services | ||||
Moscow | October 24, 2016 | |||
St. Petersburg | October 24, 2016 | |||
Novosibirsk | February 16, 2016 | |||
Ekaterinburg | February 16, 2016 | |||
Rostov-on-Don | February 16, 2016 | |||
Khabarovsk | February 16, 2016 | |||
Krasnodar | December 12, 2015/ February 16, 2016 | |||
Data Transmission Services | ||||
Moscow | July 5, 2016/April 17, 2014 | |||
St. Petersburg | August 1, 2017 / April 17, 2014 | |||
Ekaterinburg | September 5, 2013 | |||
Novosibirsk | August 1, 2017 | |||
Nizhny Novgorod | August 1, 2017 | |||
Rostov-on-Don | August 1, 2017 | |||
Khabarovsk | September 14, 2015 | |||
Krasnodar | April 17, 2013 / August 1, 2017 | |||
Communications Services for the Purposes of Cable Broadcasting |
Moscow |
December 6, 2017 | ||
St. Petersburg | December 6, 2017 | |||
Novosibirsk | December 6, 2017 | |||
Ekaterinburg | December 6, 2017 | |||
Nizhny Novgorod | December 6, 2017 | |||
Rostov-on-Don | December 6, 2017 | |||
Khabarovsk | December 6, 2017 | |||
Krasnodar | August 27, 2017/December 6, 2017 | |||
Communications Services for the Purposes of TV Broadcasting |
Krasnodar |
September 14, 2016 |
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CompetitionFixed-Line Business in Russia
Business Operations
Our fixed-line telecommunications business marketed as Beeline Business competes principally on the basis of unique convergent services and bundles, installation time, network quality, geographical network reach, customer service, range of services offered and price. We face significant competition from other service providers, including:
| Rostelecom, a subsidiary of Svyazinvest, the state-controlled telecommunications company, for services in St. Petersburg and all of Russian regional cities; |
| MTS, for services to corporate customers and the SME market; |
| TransTelecom, owned by the Russian Railways, for corporate data networking services across Russia; |
| Orange Business for corporate data network services, convergent mobile and fixes services. |
| Megafon, which provides convergent mobile and fixed-line services; |
Wholesale Operations
For voice services, our main competitors are long distance carriers Rostelecom, TransTelecom and OJSC Multiregional TransitTelecom. For IP transit and capacity services, our main competitors are Rostelecom, TransTelecom and MegaFon. In wholesale data networking we also compete with Orange.
Residential and FTTB Operations
In terms of end-user Internet penetration, the consumer Internet access business in Russia is already saturated and end-user Internet penetration is high.
The basic technologies of Internet access in Russia include: fixed-line broadband Internet access (comprising asymmetric digital subscriber line (ADSL), Ethernet, FTTB/FTTH, GPON/EPON, Docsis and other regional home networks) and wireless broadband Internet access (including WiFi, WiMax, 3G, CDMA).
Competition for subscribers in Russia is intense and we expect it to increase in the future as a result of wider market penetration, consolidation of the industry, the growth of current operators and appearance of new technologies, products and services. As a result of increasing competition, Internet providers are utilizing new marketing efforts (for example, aggressive price promotions) in order to retain existing subscribers and attract new ones.
Our main competitors in the fixed-line broadband market in Russia are Rostelecom, MTS and its subsidiaries, Acado, Er-Telecom and various local home network providers. Competition is based primarily on network coverage, local pricing plans, Internet connection speed, services quality, customer service level, brand identity and a range of value added and other subscriber services offered.
Marketing and DistributionFixed-Line Business in Russia
Business Operations
We utilize a direct sales force in Moscow, operating both with fixed-line and mobile corporate customers and supported by specialists in technical sales support, marketing, customer service and end-user training. In addition, we employ a team of regional sales managers and a dedicated sales force in each of our regional branch offices, in addition to having sales incentive plans with our regional partners.
We train our employees to provide a high level of customer service. We typically aim to offer our services at competitive prices in comparison with incumbent local and national operators and other alternative operators in the market. We base our pricing on research results, market price level, competition in all regions and customer expectations learned through direct feedback from our new and existing clients. Additionally, we monitor price levels for similar services in other countries around the world. Our large customers may be eligible for volume discounts at defined revenue thresholds. We also apply a discount policy within cross-sales (selling convergent fixed-line and mobile services to the same client).
While pricing competition remains a factor, especially for voice and Internet access services, many corporate data networking customers place more value on network coverage, reliability and the ability to design, install and maintain LANs and WANs. These customers often require integrated solutions, including connections to offices located in different cities. To meet these requests, we currently offer a range of services aimed at providing installation and maintenance of customers equipment and local networks in Moscow and other regions. We currently provide full network support for a number of key clients, and we are actively working on new products, which we believe will allow us to provide a whole range of managed services, including
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managed IP VPN, managed PBX, managed customer premises equipment, managed security, cloud services (including IaaS (infrastructure as a service), SaaS (software as a service), PaaS (platform as a service), virtual machines, dedicated servers, disaster recovery and virtual data center services) and virtual desktop infrastructure (a type of managed workplace), managed storage and other value added services.
Residential and FTTB Operations
Fixed-line Broadband Internet Access. We offer a wide range of FTTB services tariffs targeted to different customer segments. There are four unlimited tariff plans with monthly fees but different speeds for active Internet users. There is also a special tariff for mobile customers with certain preferences. We also provide a range of value added services such as static IP address, trusted payment, antiviruses (Kaspersky and Dr.WEB) and WiFi routers.
FTTB IPTV. TV service is provided on a monthly fee basis. STBs can be rented or bought by customers. We have launched the following value added services for TV: Video on Demand (with a library of more than 3,000 items), web-on-TV (together with Yandex, which is the largest Russian web portal), Facebook, Rutube and other services, such as a recommendation engine (a STB reminds a customer about the start of a customers regularly viewed TV shows). STB can also record TV shows that may be interesting for the customer based on their viewing history.
xDSL Services. For xDSL services, our company offers an unlimited tariff plan and tariff plans that depend on traffic volume and connection speed.
Wireless Broadband Internet Access. We offer WiFi tariff plans that include unlimited usage plans and plans that charge by usage. We also offer special prices for mobile and FTTB users.
Pay TV (cable TV) Services. We offer two tariff plans: Social for customers who need basic TV channels, which includes 10-12 TV channels and Commercial, which includes 45-55 TV channels. As of December 31, 2012, we had approximately 102,000 cable TV subscribers.
Fixed-line Telephony. We offer two telephony services for residential users: traditional time division multiplexing (also referred to as TDM) access in 39 Russian cities and VoIP-based services through FTTB technology in six Russian cities. All services offer fixed numbering and have competitive prices for local, zonal, international long distance and domestic long distance calls. As of December 31, 2012, we had approximately 195,000 fixed-line telephony subscribers.
Description of Operations of the Europe & North America Business Unit
Our Europe & North America Business Unit consists primarily of our operations in Italy under our wholly owned subsidiary WIND Italy. The Europe & North America Business Unit also includes our equity investment in Globalive Investment Holding Corp., which owns a GSM operator in Canada, which we refer to in the Annual Report on Form 20-F as WIND Canada, and a wholesale fixed line operator referred to in the Annual Report on Form 20-F as Globalive Communications. Italy and Canada are the only countries in Europe & North America in which we have operations.
Mobile Business in Europe & North America
Description of Mobile Services in Europe & North America
Mobile Telecommunications Services
In Europe & North America, we primarily offer our mobile telecommunications services under two types of payment plans: postpaid plans and prepaid plans. As of December 31, 2012, approximately 9.5% of our subscribers in Italy were on postpaid plans and approximately 90.5% were on prepaid plans. As of December 31, 2012, approximately 49.2% of WIND Canadas subscribers were on postpaid plans and 50.8% were on prepaid plans.
Consumer Voice Offerings. In Italy, we provide a variety of consumer voice offerings tailored to specific market segments. Our voice offerings can be upgraded with a variety of option plans and value added services. Prepaid consumer subscribers can choose from tariff plans in which their prepaid credit is deducted on a per second basis at a billing rate per minute, or on a monthly basis at a flat rate per month choosing amongst one of the several available options. In addition to tariff plans similar to those offered to prepaid subscribers, we offer a number of all-inclusive flat rate monthly tariff plans to contract and prepaid consumer subscribers that include a set amount of calling minutes, SMSs and gigabytes of mobile Internet access for a fixed monthly fee.
In Canada, WIND Canada offers a simple variety of voice services including variable pay per use for prepaid customers as well as basic and feature-rich monthly recurring plans for prepaid and postpaid customers. Monthly recurring plans target Value Plus customers and typically have an unlimited voice component. A number of add-ons are available including voicemail, international calling, roaming, etc. Simplicity and transparency are the key hallmarks of WIND Canadas value proposition and it is known as a value priced operator.
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Corporate Voice Offerings. In Italy, we provide corporate voice services to large corporate subscribers, small and medium enterprises, or SMEs, and small office/home offices, or SOHOs, with our corporate voice offerings. For large corporate customers, who often solicit tenders for their mobile telephone requirements on a competitive basis, we offer customized services tailored to their specific requirements. For SME and SOHO subscribers, we offer more standardized products, such as all-inclusive tariff plans that offer customers a set amount of calling minutes, SMSs and gigabytes of mobile Internet access for a fixed monthly fee. We also offer a variety of add-on options to its standard corporate voice offerings.
In Canada, WIND Canada has not yet targeted the corporate market as the operation is still at an early growth stage. The core focus of WIND Canada is on the consumer market with related targeting of consumer-like business markets including small office/home office (SOHO) markets. WIND Canada recently launched a SOHO plan that includes international calling and roaming features.
Consumer and Corporate Data and Value Added Service Offerings. In Italy, we provide a variety of mobile data services and value added services for telephone and computer to our consumer and corporate subscribers. The majority of our data and value added service offerings are available over our GSM and UMTS networks, WIND Italy has continued its growth in the Mobile Internet services due to an increase in the number of smartphones and improvements of its own offerings plans with bundle options, suited for both prepaid and postpaid customers, which include minutes of voice traffic, SMS, and mobile Internet browsing for a fixed weekly or monthly fee.
In Italy, we offer the following data services and value added services:
| Mobile Internet. Our mobile subscribers can connect their mobile phones to the Internet using GSM, GPRS or UMTS technologies. |
| PC Mobile Internet. Our mobile subscribers can connect their mobile phones to a computer to be used as a modem to browse the Internet using GSM, GPRS or UMTS technologies. In addition, our customers can directly connect their PC to the Internet utilizing a dongle with a Wind SIM card. |
| BlackBerry. We offer our BlackBerry services to corporate, SME and consumer subscribers. |
| SMS and MMS. SMS offerings provide users with information such as news, sports, weather forecasts, horoscopes, finance and TV programming information, as well as a selection of games, ringtones, a chat service for subscribers as well as services specifically targeted to students. MMS provides multimedia (photo, video and sound) content, such as sports events, news, gossip, music and a chat service. |
| Additional Content Options: We offer a number of options that allow users to download content. In 2012 we introduced specific services aimed at simplifying the customer management process through the development of self-care features. We are also developing new services and revenue streams such as mobile payments using the mobile handset with a WIND SIM as a payment instrument. |
In Canada, WIND Canada offers a variety of data products and value added services ranging from mobile internet, mobile broadband USB modems, BlackBerry and social media add-ons. Value added services include text, multimedia messaging, web portal, voice mail and call control features, and premium apps through various content providers.
International Roaming. Our mobile subscribers in Italy can use our mobile services, including SMS, MMS and data services (on GPRS, EDGE, 3G, HSDPA networks) where available, while roaming in other countries. Roaming coverage outside Italy is provided through our roaming agreements with approximately 467 international operators in 205 countries.
WIND Canadas subscribers can also use its services while roaming in other countries through its roaming arrangements with approximately 113 direct roaming agreements in 76 countries; via dual international mobile subscriber identification, or IMSI, we have 641 networks in 213 countries available through Telecom Italia Sparkle; and 458 networks available in 204 countries through WIND Italy.
Handset Offerings. We offer our subscribers in Italy a broad selection of handsets and Internet devices, which we source from a number of suppliers, including Nokia, Samsung, RIM, Sony Ericsson, LG, Huawei and Alcatel. The Italian market is a predominantly prepaid market and, as a result, mobile operators generally have provided limited handset subsidies, generally only to higher value subscribers.
WIND Canada offers subsidized handsets to qualifying customers under the TAB and TAB+ handset program along with amortizing loyalty credits. WIND Canada offers a large range of handsets including Android, BlackBerry and Windows 7 smartphones. During 2012, WIND Canada was a launch partner with Samsung for the Galaxy SIII, Google Nexus and Galaxy Note II.
Mobile Telecommunications Licenses in Europe & North America
WIND Italy has a license to provide mobile telephone services in Italy using digital GSM 1800 and GSM 900 technology. This license expires in 2018 and thereafter may be renewed by the relevant authorities considering the technological evolution from GSM to UMTS. WIND Italy acquired a UMTS license in 2001. WIND Italys UMTS license was expected to expire on December 31, 2021, but during September 2009, WIND Italy obtained an eight-year extension, and accordingly its UMTS license is now expected to expire in 2029, and thereafter may be renewed for an additional seven years by the relevant authorities. Pursuant to the terms of the UMTS license, WIND Italy has coverage in all Italian regional capitals.
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In March 2009, the Italian Ministry for Economic Development announced a tender for the assignment of rights of use for the frequencies in the 2100 MHz band, divided into three 5 MHz bandwidth blocks. WIND Italy participated in this tender and was awarded a 5 MHz block of UMTS spectrum for approximately 89.0 million in June 2009 for a term corresponding to the term of the original UMTS license. In September 2009, the Italian Ministry of Economic Development formally assigned the right of use for such frequencies.
In 2011, the Italian Ministry for Economic Development announced a tender for the assignment of rights of use for the frequencies in 800, 1800, 2000 and 2600 MHz band. All of Italys four main telecom operators Telecom Italia, Vodafone, Wind Italy and H3G won frequencies. WIND Italy obtained 2 blocks at 800 MHz and 4 blocks at the 2600 MHz band.
Recently the National Regulatory Authority (Autorità per le Garanzie nelle Comunicazioni, or AGCOM) started a public consultation on the guidelines to assign the 700 MHz frequencies to the television services. Part of the frequencies under evaluation will be assigned for five years, in order to be freed by 2018 for broadband services in accordance with the evolution of the European and ITU framework. A final decision has not yet been issued by AGCOM.
AGCOM also started public consultation on the use of 3.6-3.8 GHz frequencies in order to understand the interest of the market on future assignment thereof as this range of frequencies could be suitable for international mobile telecommunication services. Additionally, AGCOM started a public consultation on 26-28 GHz frequencies (suitable for wireless local loop and fixed wireless access services) in order to update the applicable assignment rules.
WIND Canada holds 26 separate spectrum licenses in the AWS band in Canada covering a population of approximately 23 million Canadians. These licenses cover all of Canada except the Province of Quebec. The bandwidth of such spectrum is 10MHz across most of Canada, with 20MHz in Southern Ontario and the Yukon, North West Territories and Nunavut. These licenses were obtained on March 13, 2009, and expire on March 12, 2019 (with a high expectation of renewal).
CompetitionMobile Business in Europe & North America
The mobile telecommunication market in Italy in which WIND Italy operates is characterized by high levels of competition among service providers. WIND Italy expects this market to remain competitive in the near term, and competition may be exacerbated by further consolidation and globalization of the telecommunications industry.
In the Italian mobile telecommunications market, Telecom Italia, operating under the TIM brand name, Vodafone Italy, operating under the Vodafone brand name, and Hutchison 3G, operating under the 3 brand name, are currently our principal competitors. Telecom Italia and Vodafone have well established positions in the Italian mobile market and each has a greater market share than we do. Hutchison 3G has been aggressively seeking new customers through the use of handset subsidies, which are not customarily offered in the Italian market.
Telecom Italia, as the incumbent in the market, has the advantage of longstanding relationships with Italian customers. Vodafone is well positioned in the market and is perceived as having a technologically advanced and reliable network in the market. Certain of our competitors also benefit from greater levels of global advertising.
According to Informa Telecoms&Media 2013, the four network operators in Italy offer mobile telecommunications services to approximately 94.5 million registered subscribers as of December 31, 2012, representing a penetration rate of approximately 155% of the Italian population. As of December 31, 2012 there were 19 MVNO/ESPs providing services in the Italian market, with an aggregate market share of approximately 5.0%. Penetration is distorted by the widespread use of multiple SIM cards by individual users. The market is mostly prepaid.
As of December 31, 2012, excluding MVNOs, Telecom Italia had a market share of 34.7%, followed by Vodafone with 31.7%, WIND Italy with 23.3% and Hutchison 3G with 10.3% based on our internal estimates.
Telecom Italias commercial strategy in 2012 focused on market share recovery through a new aggressive pricing strategy, strong advertising investments and restructuring of its sale channels. Vodafone in 2012 focused on fixed-line to mobile substitution, repositioning itself on prepaid segment. Due to its international network and brand recognition, Vodafone also has a large share of the corporate subscriber market. In 2012, Hutchison 3G continued to implement an aggressive commercial strategy based on low pricing and handset subsidies, particularly in the market for contract subscribers, and focused on cost savings measures.
The Canadian market is dominated by Rogers, Bell and Telus, which together hold over 91.5% of wireless market share (including their respective flanker brandsFido, Chatr, Virgin and Koodo). The Canadian market consists of over 83.0% contract customers due to the dominant presence of three-year contracts that include large subsidies on handsets.
Marketing and DistributionMobile Business in Europe & North America
In Italy, we market our mobile, Internet, fixed-line voice and data offerings by employing a multibrand strategy of the WIND and Infostrada brands in their respective markets. Each of the WIND and Infostrada brand logos incorporates the distinctive W WIND logo, enabling cross-product brand identification. We also advertise our mobile, fixed-line and Internet products to consumers as the Smart Fun choice, emphasizing the quality, convenience and price of our products. We have recently decided to advertise our fixed-line and mobile
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offerings with one single testimonial, including a campaign featuring well-known Italian showman Fiorello. This testimonial emphasizes our group identity as one single great company offering combined solutions for mobile and fixed-line services. On occasion, we also sponsor concerts, television programs and sporting events. WIND Italy is the main sponsor of the AS Roma football club, providing sponsorship for all games until June 30, 2013.
In Italy, we utilize a wide range of media to advertise our consumer mobile and consumer fixed-line services. In advertising consumer mobile services, we use television, billboards, radio, print media (including newspapers and magazines) and third party websites (including Google and web affiliation programs). We market our broadband services using television, telemarketing and over the Internet. In advertising consumer fixed-line voice services, we focus on television, telemarketing and local press, and also advertise on the radio and other third party websites.
For our corporate subscribers in Italy, we use different marketing strategies depending on the nature and size of a customers business. For large corporate subscribers and SMEs, our marketing efforts are more customized and institutional in nature, and include one-on-one meetings and presentations, local presentations and presentations at exhibitions. We also advertise in the media. For the SOHO market, we advertise in the professional and general press and use airport billboards. For all corporate subscribers, we emphasize an integrated approach focusing on all three of our mobile, fixed-line voice and broadband capabilities. Starting in 2010, we launched the WIND Business offer to target professionals and small businesses.
In Italy, we sell consumer mobile products and services, including SIM cards, scratch cards, WIND branded and unbranded handsets through a significant number of points of sale. As of December 31, 2012, in Italy we had 166 WIND owned stores and approximately 480 exclusive franchised outlets operating under the WIND name. WIND Italy also utilizes 1,463 non-exclusive points of sale, 913 electronic chain store outlets and approximately 5,172 other points of sale in smaller towns throughout Italy managed by SPAL S.p.A., our largest distributor in Italy in terms of points of sale. We also sell a portion of our consumer services online through WIND Italys www.155.it website.
Sales to large corporate subscribers in Italy are made by a dedicated in-house corporate sales team, whereas sales to SMEs and SOHOs are undertaken by agents. In addition, we recently launched an online store aimed at business customers for the direct sale of mobile products and services known as WIND Business Shop on the WIND Italy website.
In Canada, WIND Canada offers prepaid and postpaid plans targeting Value Plus customers typically with an unlimited voice component. WIND Canada has increasingly focused on postpaid customers by offering subsidized handsets. These customers typically represent higher ARPU, lower churn, higher lifetime value with less competitive intensity than the prepaid segment where other new entrant activity is concentrated. As of December 31, 2012, WIND Canada had 291 WIND Canada-branded locations of which are 193 exclusive dealer partnerships and a total of 44 points of sale through various mass market retail arrangements.
Fixed-line Business in Europe & North America
Description of Fixed-line Services in Europe & North America
In Italy, we offer a wide range of fixed-line voice and Internet broadband services. We offer these services to both consumer and corporate subscribers.
Our fixed-line voice customer base in Italy consisted of approximately 3.1 million subscribers as of December 31, 2012. Our direct subscribers mainly comprise LLU subscribers.
WIND Italy offers voice and broadband Internet services to direct customers, renting from Telecom Italia the last mile of the access network, which is disconnected from Telecom Italia equipment and connected to the WIND equipment in telephone exchanges. In the areas where WIND Italy does not have direct access to the network via LLU, customers can request wholesale services, though WIND Italy no longer actively markets such wholesale services.
In Canada, Globalive Communications operates fixed-line businesses under numerous brands. As of December 31, 2012, Globalive Communications had approximately the following numbers of fixed-line customers: 385,000 casual call customers; 78,000 long distance subscribers; 3,000 hotels, hospitals and universities; and 3,600 small and medium businesses. Globalive Communications fixed-line services include long distance, operator services, billing clearinghouse services, reservation-less conferencing and VoIP to small and medium-sized businesses.
Internet and Data Services
In the broadband access market in Italy, we mainly offer our products directly through LLU. We offer broadband to both direct and indirect subscribers, so long as the line is ADSL or ADSL 2+ capable. In the second half of 2012, we focused our strategy on direct subscribers in order to increase the margin of our fixed-line business.
We also offer fixed-line voice and broadband services in Italy through bundled offerings such as All Inclusive and Absolute ADSL packages which, for a fixed monthly fee, provide subscribers with a fixed-line voice service and unlimited connectivity to broadband. In addition, we offer All Inclusive, a bundled offering with a fixed-line voice service, unlimited connectivity to broadband and a mobile postpaid SIM with All Inclusive Smart.
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Consumer Voice Offerings
Throughout Italy, we provide traditional analog voice telephone service, or PSTN access, digital fixed-line telephone service, or ISDN access, and value added services, such as caller ID, voicemail, conference calls, call restriction, information services and call forwarding. However, an increasing number of our subscribers in Italy subscribe to bundled fixed-line voice and Internet broadband offerings.
Corporate Voice Offerings
In Italy, we provide PSTN, ISDN and VoIP fixed-line voice services, data services, value added services and connectivity services to corporate subscribers, including large corporate subscribers, SMEs and SOHOs.
For larger corporate subscribers in Italy, we typically tailor our offerings to the needs of the subscriber and, where applicable, to competitive bidding requirements. We offer our large corporate subscribers direct access to our network through microwave links, direct fiber optic connections or, where we do not offer direct access, via LLU, dedicated lines leased from Telecom Italia. We also offer large corporate subscribers national toll free and shared toll. We typically offer its SME and SOHO off the shelf plans rather than bespoke offerings.
In Italy, our offerings tailored to SME and SOHO subscribers include One Company providing three to eight voice lines with ADSL internet access and WIND Impresa providing six to 60 voice lines with SHDSL internet access. The WIND Impresa offering provides a combined service for renting, running and maintaining telephone switchboards. In addition, the WIND Business One Office offering was launched in February 2011 targeting businesses that are registered for VAT and having one or two fixed-lines (analog or ADSL) and at least one SIM card. In June 2011, we extended the WIND Business One Office offering to also include five new tariff plans. We also offer a complete range of value added services such as Static IP, Dominion Level II and the Evolved Email and Messaging services.
LicensesFixed-line Business in Europe & North America
In Italy, our fixed-line services are provided pursuant to a 20-year license obtained from the Italian Ministry of Economic Development in 1998. This license expires in 2018.
In Canada, WIND Canada has a basic international telecommunications service, or BITS, license, which expires on June 30, 2019, with no cost for renewal.
CompetitionFixed-line Business in Europe & North America
In the Italian fixed-line voice market, the incumbent, Telecom Italia, maintains a dominant market position. Telecom Italia benefits from cost efficiencies inherent in its existing telecommunications infrastructure over which it provides its fixed-line coverage. As the main Italian telecommunications provider, Telecom Italia also benefits from corporate and public sector customers, coupled with recognition and familiarity. Swisscom and Vodafone have entered the fixed-line Internet, voice and data markets by buying out Fastweb S.p.A. and the Italian business of the Swedish carrier Tele2 (successively rebranded TeleTu), respectively. We expect that the fixed-line telecommunications market will remain competitive as a result of the presence of international competitors, the introduction and growth of new technologies, products and services, the declining number of fixed-line subscribers due to continued fixed-line to mobile substitution, continued migration from narrowband (dial-up) to broadband usage and regulatory changes (for example, in relation to LLU tariffs) in the Italian market, all of which may exert downward pressure on prices or otherwise cause our fixed-line subscriber base in Italy to contract, thereby impacting our revenues and profitability.
Four service providers, Telecom Italia, WIND Italy (with its brand Infostrada), Vodafone/TeleTu and Fastweb accounted for approximately 94% of the total broadband services actually accessed in the Italian market as of December 31, 2012.
As of December 31, 2012, Telecom Italia had approximately 7.0 million broadband subscribers in Italy, representing a market share of approximately 52.0% of broadband retail connections, followed by WIND Italy with approximately 2.2 million broadband subscribers, representing a market share of approximately 16.0% of broadband retail connections and by Vodafone/TeleTu, with approximately 1.7 million broadband subscribers representing a market share of approximately 13% of broadband retail connections. Fastweb had approximately 1.8 million active broadband subscribers, representing a market share of approximately 13.0% of broadband retail connections. All other operators had in the aggregate approximately 0.8 million broadband subscribers, representing a market share of approximately 6.0% of broadband retail connections.
The Canadian fixed-line telecom market was approximately $23.6 billion in revenue in 2011 and is dominated by five incumbent local exchange carriers, or ILECs, and five incumbent cable companies. The ILECs provide a full range of fixed-line services including local access, long distance, data and private line and service the full range of customer segments including consumer, small and medium business, enterprise and wholesale. The cable companies typically provide home phone and high speed internet services to consumers. Total market share of telecommunications revenues (fixed-line and wireless) of the ten largest companies is in excess of 94.0%. The remainder of the market is comprised of smaller telecommunications service providers including WIND Canada.
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Marketing and DistributionFixed-line Business in Europe & North America
In Italy, we market our fixed-line voice, broadband and data services primarily through WIND Italys Infostrada brand.
The main sales channels for fixed-line voice and broadband services are represented by the shops and the toll-free number 159. In the Internet access market for consumer customers, the Infostrada web portal is an important and growing distribution channel. In Italy, we utilize sales agencies, WIND Italys call centers and a direct sales force to target sales of fixed-line voice and Internet services to corporate subscribers. However, in future, we will increasingly adopt pull sales channels which are more effective and efficient.
We also offer bundled services in Italy that combine our mobile, Internet, fixed-line voice and data services with an integrated infrastructure and network coverage.
In Canada, WIND Canadas consumer fixed-line services are sold direct to consumers through marketing and call centers. WIND Canadas business and wholesale fixed-line services are primarily sold through a direct sales force and secondarily through a small number of sales agents.
Description of Operations of the Africa & Asia Business Unit
Our Africa & Asia Business Unit covers our operations in Algeria, Burundi, Central African Republic, Pakistan, Bangladesh, Cambodia and Laos and in Zimbabwe through our equity investment in Telecel Zimbabwe. As of December 31, 2012, Sotelco was classified in our consolidated financial statements as held for sale. As a result, Sotelcos assets and associated liabilities were listed as held for sale in our condensed financial position as of December 31, 2012.
Mobile Business in Africa & Asia
Description of Mobile Services in Africa & Asia
In Africa & Asia, we generally offer our subscribers mobile telecommunications services under contract and prepaid plans. In Algeria, we also offer hybrid plans. As of December 31, 2012, we had the following percentages of contract and prepaid subscribers:
| In Pakistan, approximately 1.6% of our subscribers were on postpaid plans and approximately 98.4% were on prepaid plans. |
| In Bangladesh, approximately 5.0% of our subscribers were on postpaid plans and approximately 95.0% were on prepaid plans. |
| In Cambodia, all of our subscribers were on prepaid plans. |
| In Laos, approximately 1.1% of our subscribers were on postpaid plans and approximately 98.9% were on prepaid plans. |
| In Algeria, approximately 2.5% of our subscribers were on postpaid plans, approximately 1.5% were on hybrid plans and approximately 96.0% were on prepaid plans. |
| In Burundi, approximately 0.1% of our subscribers were on postpaid plans and approximately 99.9% were on prepaid plans. |
| In the Central African Republic, approximately 0.2% of our subscribers were on postpaid plans and approximately 99.8% were on prepaid plans. |
| In Zimbabwe, approximately 0.2% of our subscribers were on postpaid plans and approximately 99.8% were on prepaid plans. |
Call Completion Services and Value Added Services
In Africa & Asia, we provide all of our customers voice services that include airtime charges from mobile postpaid and prepaid subscribers, including monthly contract fees for predefined number of voice traffic and roaming fees for airtime charges when customers travel abroad.
In Africa & Asia, we generally provide our customers a variety of value added services, including the following:
| basic value added services, including caller-ID, voicemail, call forwarding, conference calling, call blocking and call waiting; |
| messaging services, including SMS, MMS (which allows subscribers to send pictures, audio and video to mobile phones and to e-mail) and mobile instant messaging; |
| content/chat/infotainment services, which vary depending the country of the subscriber; |
| data access services (on GPRS and EDGE, and in certain countries, 3G); and |
| RBT. |
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Roaming
In Africa & Asia, our operations generally have active roaming agreements covering a number of countries in Europe, Asia, North America, South America, Australia and Africa. Our roaming arrangements vary according to the countries in which we operate, but generally cover all major roaming destinations.
| In Pakistan, as of December 31, 2012 we had active roaming agreements with 284 GSM networks in 145 countries. In addition, as of December 31, 2012 we provided GPRS roaming with 167 networks in 95 countries. As of December 31, 2012, we provided our subscribers with CAMEL roaming through 45 operators in 39 countries. |
| In Bangladesh, as of December 31, 2012 we had active roaming agreements with 352 GSM networks in 123 countries. In addition, as of December 31, 2012 we had GPRS roaming facility in 249 networks in 123 countries. We provide our subscribers in Bangladesh with CAMEL roaming through 72 operators in 27 countries as of December 31, 2012. We also offer in-flight and maritime roaming with Emirates Airlines and Malaysian Airlines. |
| In Cambodia, as of December 31, 2012 we had active roaming agreements with 164 GSM networks in 117 countries. We also have active roaming agreements with 117 GPRS networks in 83 countries and CAMEL roaming with 53 operators in 40 countries as of December 31, 2012. |
| In Laos, as of December 31, 2012 we had active roaming agreements with 196 networks in 120 countries. We provide data roaming cover to 87 networks in 53 countries as of December 31, 2012. Inbound roaming has played a key role among our roaming operation in Laos. As of December 31, 2012, we had roaming agreements with 269 roaming partners, accommodating roamers from 130 countries with data roaming. |
| In Algeria, as of December 31, 2012 we had active roaming agreements with 409 GSM networks in 150 countries and GPRS roaming with 163 networks in 85 countries. We also provided our subscribers in Algeria with CAMEL roaming through 119 operators in 72 countries as of December 31, 2012. |
| In Burundi, as of December 31, 2012 we had roaming agreements with 206 networks in 106 countries. We provide our subscribers in Burundi CAMEL roaming through five operators in five countries as of December 31, 2012. |
| In the Central African Republic, as of December 31, 2012 we had active roaming agreements with 287 GSM networks in 147 countries. As of December 31, 2012, we provided our Central African subscribers with CAMEL roaming through three operators in three countries. We also had a national roaming agreement with Moov, which provided roaming for subscribers in three cities in the Central African Republic as of December 31, 2012. |
| In Zimbabwe, as of December 31, 2012 we had active roaming agreements with 180 networks in 123 countries. We also had 99 agreements with Telecel as the VPMN via the Link 2 One hub and VRS hub and 23 agreements with Telecel as the HPMN via the Link 2 One hub and VRS hub. We opened up CAMEL unilaterally to our inbound roamers and we currently have four unilateral partners in Botswana, Egypt, India and Zambia. |
Generally, each agreement with roaming partners provides that the operator hosting the roaming call sends us a bill for the roaming services used by our subscriber while on the hosts network. We pay the host operator for the roaming services and then bill the amount due for the provision of roaming services on our subscribers monthly bill.
Interconnect Revenues
We have several interconnection agreements with mobile and fixed line operators in Africa and Asia under which we provide traffic termination services. These services represent termination of incoming voice and data traffic from network of our competitors when their customers call or send data to our customers.
Revenues from Sales of Equipment and Accessories and Other Revenues
Handset offerings. We offer to our customers a broad selection of handsets and Internet devices, which we source from a number of suppliers.
USB Modems. In Africa & Asia, we generally offer our customers wireless Internet access through GPRS/EDGE networks using special Plug&Play-USB modems. In Burundi, Laos and Zimbabwe we offer 3G services. In addition to providing Internet access, USB modems generally provide other functionalities such as balance top-up, tariff changing and easy management of other services in USB modem interfaces. Our businesses in Pakistan do not offer USB modem services.
Mobile Telecommunications Licenses in Africa & Asia
In Africa & Asia, our mobile telecommunications services are provided pursuant to licenses in the countries in which we operate. The following is a summary of the key terms of our licenses in Africa & Asia:
| In Pakistan, we hold 2G, WLL, Long Distance and International licenses for the entire territory of Pakistan and for Azad Jammu Kashmir & Gilgit Baltastan. The 2G licenses will expire in 2022. |
| In Bangladesh, we hold a 2G license for the entire territory of Bangladesh. The license will expire in 2026. |
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| In Cambodia, we hold 2G, WLL, ISP and VoIP licenses for the entire territory of Cambodia. Each of these licenses will expire in 2042. |
| In Laos, we hold 2G, 3G, WLL, ISP, WIMAX and IGW licenses for the entire territory of Laos. The 2G license will expire in 2022, while the 3G license was issued in September 2011 and is renewed on annual basis. |
| In Algeria, we hold 2G, ISP and VSAT licenses for the entire territory of Algeria. The 2G license will expire in 2016. |
| In Burundi, we hold 2G, 3G, WLL and WIMAX licenses for the entire territory of Burundi. The 2G and 3G licenses will expire in 2014. |
| In the Central African Republic, we hold 2G, 3G, WLL, ISP and VoIP licenses for the entire territory of the Central African Republic. The 2G and 3G licenses will expire in 2038. |
| In Zimbabwe, we hold 2G, 3G, International Gateway and Long Distance carrier licenses for the entire territory of Zimbabwe. |
CompetitionMobile Business in Africa & Asia
Pakistan
The Pakistani telecommunications sector experienced exponential growth over the past ten years due to a variety of reasons. The advent of several new operators to the market has increased the level of competition and resulted in an overall drop in prices making it more affordable for consumers to own mobile phones. Additionally, the continuous investment in network expansion carried on by operators provided a higher percentage of the Pakistani population with access to mobile services as compared to before. The availability, affordability and ease of use of handsets also contributed to the growth of the overall mobile industry.
According to the Pakistan Telecommunications Authority, there were approximately 123.6 million subscribers in Pakistan as of December 31, 2012, representing a penetration rate of approximately 69.8%.
The Pakistani mobile telecommunications market has five main operators: Mobilink, Telenor Pakistan, Ufone, Warid and Zong. Telenor Pakistan is a member Telenor Group and has been operating commercially in the market since 2005. Ufone is a member of the Etisalat Group and started operations in 2001. Warid is a joint venture between Abu Dhabi Group and SingTel Group and started its operations in 2004. Zong is fully owned by China Mobile and is the fastest growing mobile telecommunications provider in Pakistan.
The below table shows the number of subscribers per operator as of December 31, 2012:
Operator |
Subscribers in Pakistan (in millions) |
|||
Mobilink (VimpelCom) |
36.1 | |||
Telenor Pakistan |
30.6 | |||
Ufone |
23.8 | |||
Warid |
12.7 | |||
Zong |
18.7 |
Source: The Pakistan Telecommunications Authority
Bangladesh
The mobile telecommunications industry has been introduced late in Bangladesh. Since GrameenPhone (GP) hit the market with its GSM technology in 1997, the industry has grown rapidly. In the last decade the penetration increased from 0.8% (in 2002) to 64% in 2012. Increased demand for mobile telecommunications services is largely due to the expansion of the economy of Bangladesh and a corresponding increase in disposable income; declining tariffs which have made mobile telecommunications services more affordable to the mass market subscriber segment; advertising, marketing and distribution activities, which have led to increased public awareness of, and access to, the mobile telecommunications market; and improved service quality and coverage.
According to the Bangladesh Telecommunications Regulatory Commission, there were approximately 97.2 million subscribers in Bangladesh as of December 31, 2012, representing a penetration rate of approximately 64.0%.
The mobile telecommunications market in Bangladesh is highly competitive. The top three mobile operators, Grameenphone, Banglalink and Robi, collectively held approximately 89% of the mobile market in Bangladesh as of December 31, 2012 (according to the Bangladesh Telecommunications Regulatory Commission). In addition to Grameenphone and Robi, we also compete with Airtel, Citycell and Teletalk. Grameenphone is a public limited company listed on the Dhaka and Chittagong Stock Exchanges. Grameenphone has two main shareholders, namely Telenor Mobile Communications AS (55.80%) and Grameen Telecom (34.20%). Robi Axiata Limited is a joint venture company between Axiata Group Berhad, Malaysia and NTT DOCOMO Inc, Japan. Airtel Bangladesh Ltd. launched commercial operations in 2007. Warid Telecom International LLC, an Abu Dhabi based consortium, sold a majority 70.0% stake in the company to
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Indias Bharti Airtel Limited In January 2010. Citycell (Pacific Bangladesh Telecom Limited) was the first mobile communications company of Bangladesh and is the only CDMA network operator in the country. Citycell is currently owned by Singtel with a 45.0% stake and the rest is 55.0% owned by Pacific Group and Far East Telecom. Teletalk Bangladesh Limited is a Public Limited Company of Bangladesh Government, the state-owned telephone operator, which launched its operations in 2004.
The following table shows our and our primary mobile competitors respective subscriber numbers in Bangladesh as of December 31, 2012:
Operator |
Subscribers in Bangladesh (in millions) |
|||
Grameenphone |
40.0 | |||
Banglalink (VimpelCom) |
25.9 | |||
Robi |
21.0 | |||
Airtel |
7.1 | |||
Citycell |
1.5 | |||
Teletalk |
1.7 |
Source: The Bangladesh Telecommunications Regulatory Commission.
Cambodia
Despite the presence of eight mobile operators in Cambodia, the market has low mobile penetration. The market is characterized by fierce competition, low per-minute prices and multiple SIMs subscribers. Demand for mobile phones services has been high due to growth in subscribers year after year as low tariffs and low-cost of handsets dominate the market.
According to management estimates, there were approximately 20.5 million subscribers in Cambodia as of December 31, 2012, representing a penetration rate of approximately 90.35%.
In the Cambodian telecommunications market, we compete mainly with Viettel Cambodia, Cam GSM, Latelz Smart and Hello Axiata Cambodia. Latelz Smart and Hello Axiata Cambodia announced their intention to merge in November, 2012.
The following table shows our and our primary mobile competitors respective market shares in Cambodia as of December 31, 2012:
Operator |
Market Share | |||
Viettel Cambodia |
45.13 | % | ||
Latelz Smart |
20.26 | % | ||
CamGSM |
15.42 | % | ||
Hello Axiata Cambodia |
11.05 | % | ||
Sotelco (VimpelCom) |
5.64 | % | ||
Mfone |
1.81 | % | ||
Cadcomms |
0.48 | % | ||
GT-Tell |
0.20 | % |
Source: Management estimates.
Laos
The Lao telecommunications market is very competitive, with aggressive promotions, low per-minute prices rotational churn. With a penetration rate less than 80.0% as of December 31, 2012, the market is still rapidly expanding, as evidenced by the growth in subscribers year after year as tariffs decline and handsets become more affordable.
According management estimates, there were approximately five million subscribers in Laos as of December 31, 2012, representing a penetration rate of approximately 80.0%.
The Lao mobile telecommunications market has four operators: Unitel; VimpelCom, operating through our subsidiary VimpelCom Lao Co.; Lao Telecom; and ETL. Unitel is a joint venture between Viettel Global Joint Stock Company (Viettel Global) and Lao Asia Telecom (LAT). Lao Telecom (LTC) is jointly owned by the Lao Government (51.0%) and Shinawatra International Public Company Limited (49.0%). ETL is 100% controlled by the Lao Government (via the Ministry of Communication, Transport, Post and Construction).
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The following table shows our and our primary mobile competitors respective market shares in Laos as of December 31, 2012:
Operator |
Market Share | |||
Unitel |
36.37 | % | ||
LTC |
30.49 | % | ||
VimpelCom Lao Co. (VimpelCom) |
20.94 | % | ||
ETL |
12.21 | % |
Source: Informa Telecoms & Media. © 2013 Informa Telecoms & Media. All rights reserved
Algeria
The mobile industry in Algeria has grown rapidly over the past ten years as a result of increased demand by individuals and newly created private businesses. Demand for mobile services is largely due to the expansion of the Algerian economy. Innovative services and declining tariffs have made mobile services more appealing to the mass-market-subscriber segment, while advertising, marketing and distribution activities, and improved service quality and coverage have led to increased public awareness of, and access to, the mobile telecommunications market.
According to management estimates, there were approximately 32.33 million subscribers in Algeria as of December 31, 2012, representing a penetration rate of approximately 86.5%.
In Algeria, there are three mobile operators: Djezzy, operating through our subsidiary OTA; Mobilis, a subsidiary of Algerias incumbent operator, Algérie Télécom; and Nedjma, a subsidiary of Qtel-owned Wataniya. Algérie Télécom launched its Mobilis GSM network in April 1998 and was the only operator until the second GSM license was awarded to OTA in July 2001, for a period of 15 years. OTA launched under the Djezzy brand in February 2002. Wataniya Telecom Algeria was awarded the third GSM license in December 2003. Competition is based primarily on local and international tariff prices, network coverage, quality of service, the level of customer service provided, brand identity and the range of value-added and other subscriber services offered.
Subscriber growth in Algerias mobile market is expected to slow down, and the attention is expected to shift to maintaining or improving the average revenue per user, which has continued to decline under intensifying price competition between the three networks. The operators have entered the underdeveloped internet market by launching basic mobile data services, but the licensing of the third-generation spectrum has been delayed, which has made it difficult for them to fully compete in the broadband sector. There is still no clear date on when 3G will be launched in the market, but the Algerian government has made announcements that the launch could be expected at the end of 2013.
Competition for subscribers in Algeria is intense and is expected to increase in the future as a result of greater market penetration and new technologies, products and services. As a result of increased competition, mobile providers are utilizing new marketing strategies, including aggressive price promotions, to retain existing subscribers and attract new ones.
The following table shows our and our competitors respective subscriber numbers in Algeria as of December 31, 2012:
Operator |
Subscribers in Algeria (in millions) |
|||
Djezzy (VimpelCom) |
17.85 | |||
Mobilis (AMN) |
7.35 | |||
Nedjma (WTA) |
7.14 |
Source: management estimates
Burundi
The mobile industry in Burundi has grown rapidly in recent years. According to management estimates, subscriber numbers have increased from 1.0 million at the end of 2009 to approximately 2.75 million at the end of 2012, representing a penetration rate of approximately 22.35%.
The mobile telecommunications market in Burundi has five main network operators: Leo Burundi, Econet Wireless, Africell Tempo, SMART Lacell, and Onatel. Leo Burundi is our subsidiary.
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The following table shows our and our competitors respective subscriber numbers in Burundi as of December 31, 2012:
Operator |
Subscribers in Burundi |
|||
Leo Burundi (VimpelCom) |
1,439,828 | |||
Econet Wireless |
370,602 | |||
SMART Lacell |
262,133 | |||
Onatel Burundi |
166,747 | |||
Africell Tempo |
139,392 |
Source: management estimates
Central African Republic
The Central African Republic mobile telecommunications industry has grown quite rapidly over the past four years as a result of increased coverage and reduction of the price of handsets. While we see healthy demand in urban centers, increased growth in the usage of telecommunication services in rural areas has been largely hampered by the limited purchasing power of the population at large and the poor logistical infrastructure in the country. The rural zones of the Central African Republic lack roads, electricity, distributor networks and financial networks (banks) for the collection and safekeeping of cash. A large part of the country is considered insecure from a personal safety perspective. These issues directly affect our distribution, network roll-out and site maintenance activities in the provinces.
According to the management estimates, there were approximately 1.01 million subscribers in the Central African Republic as of December 31, 2012, representing a penetration rate of approximately 20.0%.
In the Central African Republic mobile telecommunications market we compete with three other operators: Orange; Moov and Azur. Orange is a member of the France Telecom group. Moov is a subsidiary of Atlantique Telecom, which is in turn a subsidiary of Etisalat (Emirates Telecommunications Corporation), the incumbent and leading provider of telecommunications in the UAE. Azur belongs to the Bintel Group, based in Lebanon.
The following table shows our and our primary mobile competitors respective subscriber numbers in the Central African Republic as of December 31, 2012:
Operator |
Subscribers in CAR |
|||
Telecel CAR (VimpelCom) |
441,980 | |||
Orange |
217,131 | |||
Azur |
202,913 | |||
Moov |
153,556 |
Source: management estimates
Zimbabwe
The mobile industry in Zimbabwe has grown rapidly over the past couple of years. Subscriber numbers have increased from fewer than 2.0 million at the end of 2008 to approximately 8.7 million at the end of 2012. The main drivers behind the growth of mobile communications in Zimbabwe is initially related to voice and increased desire for data services given its relatively young and dynamic population. Advertising, marketing and distribution activities and improved coverage have led to increased public awareness of, and access to, the mobile telecommunications market in Zimbabwe.
According to management estimates, there were approximately 8.7 million subscribers in Zimbabwe as of December 31, 2012, representing a penetration rate of approximately 68.66%.
The mobile telecommunications market in Zimbabwe has three licensed network operators: Econet Wireless Zimbabwe; Telecel Zimbabwe; and NetOne Zimbabwe. Telecel Zimbabwe is jointly owned by our subsidiary Telecel International Ltd. S.A. and the Empowerment Corporation. Econet Wireless Zimbabwe is a subsidiary of the Econet Wireless telecommunications group. NetOne Zimbabwe is a private company wholly owned by the Zimbabwean government.
The following table shows our and our competitors respective subscriber numbers in Zimbabwe as of December 31, 2012:
Operator |
Subscribers in Zimbabwe (in millions) |
|||
Econet |
4.92 | |||
Telecel (VimpelCom) |
2.58 | |||
NetOne |
1.15 |
Source: management estimates
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Marketing and DistributionMobile Business in Africa & Asia
In Africa & Asia, we generally offer our subscribers contract and prepaid tariff plans, each offering different benefits and targeting a certain type of subscriber. We also generally offer our subscribers a wide range of value-added services to choose from and loyalty reward schemes. Below is a summary of our sales and distribution arrangements in the various countries in which we operate:
| In Pakistan, we offer a portfolio of tariffs and products designed to cater to the needs and requirements of specific market segments, including mass-market subscribers, youth subscribers, personal contract subscribers, SOHOs (with one to five employees), SMEs (with six to 50 employees) and enterprises (with more than 50 employees). We offer corporate subscribers several postpaid plan bundles, which include on-net minutes, variable discount for closed user groups or CUG, and follow-up minutes based on bundle commitment. Our sales channels include 20 company stores, a direct sales force of 40 permanent employees and 319 contractual employees, 419 franchise stores, 73 contractual direct-selling representatives, and over 208,262 third party retailers. |
| In Bangladesh, we offer our subscribers several national prepaid, contract and hybrid tariff plans, each offering a different benefit and targeting a specific type of subscriber. We divide our primary target subscribers into five categories: high-value subscribers (for the top 20% of our high-ARPU-generating subscribers); public call offices (a telephone facility in a public place providing calling-card-based domestic and international telecommunications services), enterprises (for companies with 15 or more employees), SME accounts (for companies with one to 15 employees) and mass subscribers. We also offer specific-business value-added services and special pricing based on volume and contractual commitment, which include Fleet Tracking and Bulk SMS. We provide our large enterprise accounts with specialized customer service and enterprise relationship management. We distribute our mobile services and products through our own shops, a direct sales force of 335 (285 permanent and 50 temporary) employees, telemarketing through 120 representatives and approximately 31,181 SIM retailers and over 139,105 airtime retailers. |
| In Cambodia, we divide our offerings into the following types of pricing plans: local; international; tourist; and Internet. All price plans are based on a prepayment concept. Local price plans include plans for heavy users, handset packages and closed user groups for families and communities. Most tariffs are quoted in U.S. dollars. We distribute our mobile services and products through two exclusive distributors, approximately 37,000 SIM sellers and approximately 412,000 airtime sellers. |
| In Laos, we offer pricing plans for contract, prepaid and internet services for residential and corporate subscribers. Local price plans include plans for heavy users, handset packages and closed user groups for families and communities. Most tariffs are quoted in the local currency. We distribute our mobile services and products through ten exclusive distributors, 33 retail sales officers and 176 promoters. |
| In Algeria, we offer several contract and prepaid tariff plans, each offering a different benefit and targeting a certain type of subscriber. Our postpaid plans are targeted at our business subscribers and include Djezzy Business and Business Control. Our postpaid plans for residential subscribers include Djezzy Classic and Djezzy Control. Our prepaid plans for residential subscribers include Djezzy Carte and Allo. We also have a loyalty program called Imtiyaz, which gives customers bonus points depending on their usage. Bonus points can be exchanged for voice and messaging services or products. We also have an Imtiyaz Elite for our high-value customers, which offers additional benefits. We sell our mobile telecommunication services through indirect channels (distributors) and through our Djezzy branded shops, of which there were 89 as of December 31, 2012. Our nine exclusive national distributors cover all the 48 Wilayas and are distributing our products through 11,000 authorized points of sales. We also had a pool of more than 650 agents in a call center as of December 31, 2012. This pool of agents combines a series of insourced and outsourced agents that are directly managed by OTA management. |
| In Burundi, we have a channel partner network to distribute our products and services across the country including isolated rural areas. As of December 31, 2012, the network consists of six super distributors nationwide, eight branded company-owned and company-operated service centers nationwide, 120 sub-distributors and 11,500 non-specialized independent retail outlets. |
| In the Central African Republic, we offer subscribers several national contract and prepaid plans, each offering a different benefit and targeting a specific type of customer. We divide our primary target subscribers into the following groups: contract accounts (for wealthier Central Africans and foreigners; NGOs; multilateral organizations and business people); corporate floats (prepaid accounts created under one main corporate account) and prepaid or mass subscribers. We distribute our products and services through eight of our own shops, 5,787 registered dealers and numerous informal street resellers. |
| In Zimbabwe, we focus on providing our customers high-tech mobile phone products at affordable prices. We have an array of value-added products that reward customers in a higher ARPU tier. We run a non-exclusive national indirect distribution model using superdealers across the country (regionally controlled), and street resellers. As of December 31, 2012, we used superdealers and more than 2,500 street resellers. We have eight regional offices and own shops in seven regions and a booth in the international airport. |
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Fixed-line Business in Africa & Asia
Our fixed-line business in Africa & Asia is limited to our operations in Pakistan, Laos, Burundi and the Central African Republic. We do not offer fixed-line services in other countries in which we operate in Africa & Asia.
Description of Fixed-line Services in Africa & Asia
Our fixed business in Africa & Asia is limited to our operations in Pakistan, Laos, Burundi and the Central African Republic. We do not offer fixed services in other countries in which we operate in Africa & Asia. Our fixed line business in Pakistan includes internet, data and value added services over a wide range of access media, covering major cities of Pakistan. We also offer domestic and international long distance services, point-to-point leased lines, dedicated internet services through our access network, virtual private network, or VPN, services, value added services, such as web hosting, email hosting and domain registration, DSL and xDSL services, WiMax services, VSAT services, Metro Fiber, which provides last mile access to the enterprise sectors in Karachi, Lahore and Islamabad and P2P radios for connecting to the our network. In Laos, we offer WiMax covering few cities with low uptake. In Burundi, we offer WiMax 16d fixed broadband services using Alvarion equipment. In the Central African Republic, we offer limited fixed services, which include dedicated and shared Internet connections using WiMax.
Fixed-line Business Licenses in Africa & Asia
We maintain the required licenses for our fixed-line operations in Africa & Asia. In Burundi, we have a WiMax license, which is valid until April 2016.
CompetitionFixed-line Business in Africa & Asia
In Pakistan, our fixed-line business faces significant competition from other providers of fixed-line corporate services, carrier and operator services and consumer internet services.
In Pakistan, our main competitors for fixed-line corporate services are Pakistan Telecommunication Corporation, or PTCL, Multinet, Wateen, Supernet, Cybernet, Nexlinx and Nayatel. Our main competitors for carrier and operator services are PTCL, Wateen, Worldcall, Wi-Tribe, and Telenor Pakistan. Our main competitors for consumer internet services are PTCL, Wateen, World Call, Wi-Tribe and Qubee.
In Burundi, our main competitor for fixed-line services is CBINET.
In the Central African Republic, our main competitors for fixed-line services are Orange and Moov.
Marketing and DistributionFixed-line Business in Africa & Asia
In Pakistan, our BCD utilizes a direct sales force for corporate customers. We employ a team of regional sales managers in three different regions (South, Central and North) supported by dedicated sales force and account managers. For consumer DSL, we use direct sales channels, indirect sales channels and telesales. Our telesales operate in Lahore in Central Region with a team of telesales executives led by a sales manager. BCD offers WiMax services to the consumer market only in Karachi, through direct and indirect sales channels and telesales led by a sales manager. Direct sales are supported by a dedicated sales force of business development officers. Indirect sales are supported by retail business development officers which offer services through our franchise network. Our telesales channel also offer WiMax services.
In Burundi, we have a small dedicated direct sales force for our fixed-line services. Most sales are made through our fully owned shops in the countrys capital city Bujumbura.
In the Central African Republic, we have a small dedicated direct sales force for our fixed-line services. Most sales are made through our fully owned shops in the countrys capital city, Bangui.
Description of Operations of the Ukraine Business Unit
Mobile Business in Ukraine
Description of Mobile Services in Ukraine
Mobile Voice Services
As of December 31, 2012, approximately 8.0% of our subscribers in Ukraine were on postpaid plans and approximately 92.0% of our subscribers in Ukraine were on prepaid plans.
Call Completion and Value Added Services
In Ukraine, we offer the same call completion and value added services as in Russia. For a description of these services, see Item 4Information on the CompanyDescription of Operations of the Russia Business UnitMobile Business in RussiaDescription of Mobile Services in RussiaValue Added Services including Data Revenue.
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Roaming
As of December 31, 2012, Kyivstar provided voice roaming on 417 partner networks in 195 countries, GPRS roaming on 310 networks in 155 countries and CAMEL roaming on 137 networks in 96 countries.
Wireless Internet Access
In Ukraine, we provide our subscribers with wireless Internet access through GPRS/EDGE networks. The service, which was commercially launched in 2008 offers subscribers special wireless USB modems, which provide a simple way to access the Internet throughout Ukraine without access to fixed-line broadband or a long-term contract. Subscribers receive a discounted USB modem and SIM card with a pre-installed special Internet rate data plan.
Interconnect Revenues
We have several interconnection agreements with mobile and fixed line operators in Ukraine under which we provide traffic termination services. These services represent termination of incoming voice and data traffic from network of our competitors when their customers call or send data to our customers.
Revenues from Sales of Equipment and Accessories and Other Revenues
Handset offerings. We offer to our customers a broad selection of handsets and Internet devices, which we source from a number of suppliers.
Mobile Telecommunications Licenses in Ukraine
In Ukraine, we hold 900 MHz GSM and 1,800 MHz GSM cellular licenses to provide telecommunications services throughout the territory of Ukraine. These licenses were received on October 5, 2011 for a term of 15 years each and will expire on October 4, 2026. We have also obtained a range of national and regional radio frequency licenses for use of radio frequency resource in the referred standards and in specified standardsRRL and WiMax. In addition, we provide local, long-distance and international fixed-line telecommunications services throughout Ukraine. Our network covers all large and small cities and areas outside of these cities, together, covering territory where approximately 99.97% of the Ukraines population lives.
CompetitionMobile Business in Ukraine
Despite repeated requests from the leading Ukrainian operators, including Kyivstar, the launch of 3G services in Ukraine had been blocked by the Ukrainian regulators since 2005, when the Ukrainian government issued its first and only 3G license to Ukrtelecom, Ukraines state-owned fixed-line operator. The license is now held by Ukrtelecoms subsidiary Trimob. Kyivstar, MTS and Astelit were refused 3G licenses by the Ukrainian government in 2006. The Ukrainian government subsequently announced plans to hold a tender to auction one 3G license. However, the proposed auction has been postponed indefinitely.
According to Informa Telecoms & Media, as of December 31, 2012, there were approximately 56.9 million subscribers in Ukraine, representing a penetration rate of approximately 124.9%. There are currently three mobile operators with national coverage in Ukraine: Kyivstar, Mobile TeleSystemsUkraine (MTS Ukraine) and LLC Astelit. Kyivstar and URS, were unified under the brand Kyivstar following the VimpelCom Ltd. Transaction.
The following table shows our and our primary mobile competitors respective subscribers in Ukraine as of December 31, 2012:
Operator |
Subscribers (in millions) |
|||
Kyivstar (VimpelCom) |
26.0 | |||
MTS Ukraine |
20.42 | |||
Astelit |
7.95 |
Source: Informa Telecoms & Media for all companies except Kyivstar. © 2013 Informa Telecoms & Media. All rights reserved.
Kyivstar and MTS Ukraine
Kyivstar competes primarily with MTS Ukraine, which had a market share of 36.2% as of December 31, 2012 according to Informa Telecoms & Media. MTS Ukraine, which is 100.0% owned by MTS, operates a GSM-900/1800 network in Ukraine. MTS Ukraine also received a CDMA-450 license in 2006.
Other Competitors in Ukraine
Kyivstar also competes with Astelit, which operates throughout Ukraine and which had approximately 7.9 million subscribers as of December 31, 2012 according to Informa Telecoms & Media, representing a market share of 15.8%.
Marketing and DistributionMobile Business in Ukraine
In Ukraine, we offer several prepaid and contract tariff plans, each one targeted at a different type of subscriber.
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We divide our primary target subscribers into three large groups:
| youth; |
| business (subdivided into SME subscribers and large business subscribers); and |
| mass market subscribers. |
The Ukrainian mobile market operates primarily on prepaid plans. However, contract subscribers tend to generate higher average revenues for our company than prepaid subscribers generate. To attract more contract subscribers, we have differentiated our service levels to provide higher customer service to our contract subscribers, such as direct access to customer service agents on a dedicated contract subscriber customer service line, in addition to our initiatives to increase the flexibility and accessibility of the payment methods offered to contract subscribers.
Customer Loyalty Programs
In Ukraine, to promote brand loyalty we use Kyivstar club program, to provide a monthly bonus, which is a percent of the amount spent by the subscribers usage per month and the length of time the subscriber has been a Kyivstar subscriber.
Fixed-line Business in Ukraine
Description of Fixed-line Services in Ukraine
Business Operations
We have constructed and own a 26,157 kilometer fiber optic network, including 5,070 kilometers in cities of Ukraine and 1,207 kilometers in the Kyiv region, which is interconnected to the local PSTN in Kyiv, to other major metropolitan areas in Ukraine and to our gateway. We provide data and Internet access services in approximately 97 metropolitan cities in Ukraine.
Our fixed-line services include corporate Internet access, VPN services, data center, contact center, fixed-line telephony and number of value added services. Internet access services include connection to the Internet via ADSL, symmetrical and ethernet interfaces at speeds ranging from 256 kbps to 10 Gbps. We provide standard and advanced fixed-line telephony value added services, such as convergent fixed-mobile closed user groups. Fixed-line voice services are available in 28 major cities of Ukraine.
In order to reduce our dependency on other fixed-line operators, we have been building our own transmission capacity between the base station network and the mobile switching centers, consisting of fiber optic cable and radio links. Between our base stations and base station controllers, we use mini-links operating at 8 and 23 GHz, where capacity is not constrained. We have built dedicated fiber optic networks in larger cities, such as Kyiv, Kharkiv, Odesa, Dnipropetrovsk, Lviv, Donetsk, Vinnytsya, Khmelnytskyy, Zaporizhzhya, Simferopol and Mykolaiv. As of December 31, 2012, we owned approximately 44.306 kilometers of fiber optic cable and leased a negligible amount. For the last two years, we have had our own fiber optic cable network that is sufficient to meet most of our transmission requirements without any leased capacity.
Local Access Services. We provide local access services to corporate customers by connecting their premises to our fiber optic network, which interconnects to the local PSTN in 28 major Ukrainian cities.
International and Domestic Long Distance Services. We provide outgoing international voice services to business customers through its international gateway and direct interconnections with major international carriers. DLD services are primarily provided through our own intercity transmission network and through interconnection with Ukrtelecoms and other operators networks. We also hold an international license that enables it to provide international voice and data services to its business and corporate customers.
Dedicated Internet and Data Services. We provide a VPN service that has an integrated voice and data ISDN connection, frame relay, broadband digital subscriber line and dedicated Internet services.
Information Services. We provide telecommunications services to financial and banking companies, such as S.W.I.F.T., access to processing centers, news services to companies such as Reuters, as well as conduits to airline reservation systems in Ukraine. Our data center provides server co-location and hosting services for news agencies and financial and entertainment services providers.
Call Center Services. We launched our call center services in 2002 and are one of the main market players in providing hotline, telemarketing and other call center services for corporate clients in Ukraine. In 2012, we launched additional call center services, including multimedia messaging and software bundle rentals.
Mass Market Services. We offer telephone and Internet broadband access services (through FTTB or ADSL) for mass market customers.
Wholesale Operations
Our joint carrier and operator services division in Ukraine provides local, international and intercity long distance voice traffic transmission services to Ukrainian fixed-line and mobile operators on the basis of our proprietary DLD/ILD network as well as IP transit and data transmission services through our own domestic and international fiber optic backbone and IP/MPLS data transmission network.
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We derive most of our carrier and operator services revenue in Ukraine from voice call termination services to our own mobile network, and other local and international destinations. We have more than 100 national interconnections in cities in Ukraine through which we terminate traffic of our subscribers and generate revenues from call termination on our networks. We have 39 international interconnections with international partners for voice call termination and IP transit services.
Residential and FTTB Operations
In Ukraine, we offer the same spectrum of fixed-line and wireless Internet services. We began providing fixed-line broadband services in Ukraine in 2008 and as of December 31, 2012 provided services in 138 cities in Ukraine. In connection with this service, we have been engaged in project to install FTTB for fixed-line broadband services in approximately 47,200 residential buildings in 138 cities, providing over 66,500 access points.
Licenses for Fixed-line Business in Ukraine
The table below sets forth the principal terms of the licenses which are important to our fixed-line business in Ukraine.
License Type |
Region |
Expiration Date | ||
International communication | All territory of Ukraine | August 18, 2019 | ||
Long-distance communication | All territory of Ukraine | August 18, 2019 | ||
Local communication | All territory of Ukraine | August 29, 2015 |
CompetitionFixed-line Business in Ukraine
Business Operations
In the voice services market for business customers, we compete with Ukrtelecom, Datagroup, Vega, and a number of other small operators. The provision of Internet and data services to the end consumers is not licensed in Ukraine. As a result, there is a high level of competition, with more than 400 ISPs in Ukraine. Our main competitors in the corporate market for data are Ukrtelecom, Volia, Vega and Datagroup.
In the fast growing residential broadband Internet market, we compete with Ukrtelecom and Volya-Cable in Kyiv, as well as with strong local players in other cities.
Wholesale Operations
In Ukraine, carrier and operator services market competitors include Ukrtelecom, Ucomline (Farlep-Optima), Velton, MTC, Astelit, and Datagroup.
Consumer Internet Services
Our main competitors for provision of consumer Internet services in Ukraine are Volia and Ukrtelecom. From December 31, 2011 to December 31, 2012, we significantly increased the number of broadband subscribers in Ukraine by 54.2% from 397,338 to 612,665 subscribers.
Marketing and DistributionFixed-line Business in Ukraine
Business Operations
Our company emphasizes high customer service quality and reliability for its corporate large accounts while at the same time focusing on the development of its SME offerings. We sell to corporate customers through a direct sales force and various alternative distribution channels such as IT servicing organizations and business center owners, and to the SME through dealerships, direct sales, own retail and agent networks.
We use a customized pricing model for large accounts which includes, among other things, service or tariff discounts, volume discounts, progressive discount schemes and volume lock pricing. We use standardized and campaign-based pricing for SME customers.
Residential and FTTB Operations
Our marketing strategy is focused on attracting new subscribers. We offer several tariff plans, each one targeted at a different type of subscriber. In 2011 and the first quarter of 2012, our consumer fixed-line Internet services business was supported by ATL (above the line) campaigns, in which we advertised on TV, press, radio and the Internet in order to raise awareness of Kyivstar as a fixed-line broadband Internet provider. Since May 2012, our advertising focus shifted to BTL (below the line) activities, including leaflets distribution, in areas were the service is provided. These efforts are supplemented by limited ATL as well as by direct sales conducted on door-to-door basis in buildings in which broadband service is available.
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Fixed-line Broadband Internet Access. We offer a wide range of FTTB services tariffs targeted to different customer segments. There are four unlimited tariff plans with monthly fees, which offer different speeds up to 10 Mbps for active Internet users.
xDSL Services
Revenue generated from xDSL service is insignificant and shows a steady decrease as this technology is being replaced by newer technologies.
Description of Operations of the CIS Business Unit
Mobile Business in the CIS
Description of Mobile Services in the CIS
Mobile Voice Services
As of December 31, 2012, approximately 2.5% of our subscribers in the CIS were on postpaid plans and approximately 97.5% of our subscribers in the CIS were on prepaid plans.
Call Completion and Value Added Services. In the CIS, we offer the same call completion and value added services as in Russia (except for location based services). For a description of these services, see Description of Operations of the Russia Business UnitMobile Business in RussiaDescription of Mobile Services in Russia.
Roaming. In the CIS, we have roaming arrangements with a number of other networks, which vary by country of our operations.
| In Kazakhstan, as of December 31, 2012 we provided voice roaming on 447 networks in 175 countries, GPRS roaming on 247 networks in 100 countries and CAMEL roaming on 159 networks in 82 countries. |
| In Uzbekistan, as of December 31, 2012 we provided voice roaming on 436 partner networks in 174 countries, GPRS roaming on 261 networks in 119 countries and CAMEL roaming on 162 networks in 82 countries. |
| In Armenia, as of December 31, 2012 we provided voice roaming on 384 partner networks in 168 countries, GPRS roaming on 238 networks in 121 countries and CAMEL roaming on 165 networks in 87 countries. |
| In Tajikistan, as of December 31, 2012 we provided voice roaming on 156 networks in 83 countries, GPRS roaming on 124 networks in 75 and CAMEL roaming in 76 networks on 48 countries. |
| In Georgia, as of December 31, 2012 Mobitel provided roaming on 116 partner networks in 63 countries, GPRS roaming on 73 networks in 44 countries and CAMEL roaming on 48 networks in 36 countries. |
| In Kyrgyzstan, as of December 31, 2012 we provided roaming on 428 partner networks in 154 countries, GPRS roaming on 7 networks in 6 countries and CAMEL roaming on 29 networks in 24 countries. |
USB Modems
We have partnered with Opera Software to offer a Beeline branded version of the Opera Mini browser under a framework agreement that provides for the provision of such services in Kazakhstan, Armenia, Georgia and Tajikistan. Under this agreement, we have already begun to provide services in Kazakhstan and Tajikistan and expect to begin to provide services in Armenia and Georgia in 2013.
In Kazakhstan, we provide subscribers wireless Internet access over GPRS/EDGE/UMTS networks. Our UMTS/HSPA network was commercially launched in January 2011. The wireless Internet services that we offer include small screen Internet (data services and options in regular voice price plans) and large screen Internet (special internet price plans bundled with USB modem or without a modem for PC and note/netbooks).
In Uzbekistan, we provide subscribers with wireless Internet access over GPRS/EDGE/UMTS networks. The UMTS/HSPA services were commercially launched in 2008 and the majority of the network was constructed in 2010. As of December 31, 2012, we provided UMTS services in 150 cities with a population of more than 50,000 each. We provide Internet services both for smartphones and featurephones as well as for USB dongles and tablet computers. For small screen subscribers, we have begun to integrate mobile services of popular social networks, including, for example, Twitter and Facebook. USB modems are locked for the Beeline network so that they only work within our network.
In Armenia, we provide subscribers with wireless Internet access over GSM/GPRS/EDGE/UMTS networks. UMTS services were commercially launched in 2009. For small screen subscribers, we launched data bundles for Internet access for a daily fee with unlimited data usage and a limit on speed only after a certain amount of usage per day and began to integrate mobile services of popular social networks, including, Twitter and Facebook. USB modems were commercially launched in July 2009. Subscribers receive a USB modem and SIM card with a pre-installed special Internet rate data plan.
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In Tajikistan, USB modems were launched in January 2008. We provide our subscribers with wireless Internet access via GSM/EDGE and UMTS networks. We provide Internet services for smartphones and featurephones as well as for USB dongles. In 2012, the usage of non-voice services 3G/GPRS Internet megabytes increased due to new Internet tariffs that Tacom offered.
In Georgia, USB modems were commercially launched for prepaid customers in June 2009 and modem traffic exceeded 19 million megabytes during 2012.
In Kyrgyzstan, we provide our subscribers with wireless Internet access through GPRS/EDGE/UMTS/HSPA+ networks. Our UMTS/HSPA+ network in Kyrgyzstan was launched in December 2010. USB modems were commercially launched for prepaid and contract customers in November 2009. We launched Plug&Play technology, which we call Hi-Link, in Kyrgyzstan in July 2012. We were the first operator in the CIS countries to offer such a service.
Mobile Telecommunications Licenses in the CIS
In Kazakhstan, we hold a national GSM-900/1800 and UMTS license for the entire territory of Kazakhstan, which has an unlimited term. The license can be terminated in certain circumstances, including voluntarily by the operator and in case of liquidation of the operator.
In Uzbekistan, we hold a national license for GSM-900/1800, UMTS and LTE covering the entire territory of Uzbekistan. This license expires on August 6, 2016.
In Armenia, we hold a GSM-900/1800 and UMTS license for the entire territory of Armenia. This license is scheduled to expire on March 3, 2013. The Armenian telecommunications regulator has issued a resolution, which will come into force on March 3, 2013 and will extend the term of the license to March 3, 2028.
In Tajikistan, we hold national GSM-900/1800, UMTS and LTE licenses for the entire territory of Tajikistan. These licenses expire on June 18, 2014, July 13, 2015 and December 9, 2015, respectively.
In Georgia, we hold two GSM-1800 frequency licenses and one E-GSM frequency license for the entire territory of Georgia. These licenses expire on July 23, 2013, January 26, 2017 and January 25, 2018, respectively. We have filed an extension for our GSM-1800 license expiring on July 23, 2013.
In Kyrgyzstan, we hold national GSM-900/1800 and UMTS licenses for the entire territory of Kyrgyzstan. These licenses expire on May 30, 2016 and October 23, 2015, respectively.
CompetitionMobile Business in the CIS
Kazakhstan
According to Informa Telecoms & Media, there were approximately 26.78 million subscribers in Kazakhstan as of December 31, 2012, representing a penetration rate of approximately 164.43%.
The following table shows our and our primary mobile competitors respective subscriber numbers in Kazakhstan as of December 31, 2012:
Operator |
Subscribers (in millions) |
|||
GSM Kazakhstan |
13.46 | |||
KaR-Tel (VimpelCom) |
8.60 | |||
Tele2 Kazakhstan |
3.40 | |||
AlTel |
1.32 |
Source: Informa Telecoms & Media for all companies except KaR-Tel. © 2013 Informa Telecoms & Media. All rights reserved.
Uzbekistan
According to Informa Telecoms & Media, as of December 31, 2012, there were approximately 20.30 million subscribers in Uzbekistan, representing a penetration rate of approximately 72.69%.
The following table shows our and our primary mobile competitors respective subscribers in Uzbekistan as of December 31, 2012:
Operator |
Subscribers (in millions) |
|||
Unitel (VimpelCom) |
10.20 | |||
Ucell |
9.48 | |||
UzbekMobile |
0.12 |
Source: Informa Telecoms & Media for all companies except Unitel. © 2013 Informa Telecoms & Media. All rights reserved.
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Armenia
According to Informa Telecoms & Media, as of December 31, 2012, there were approximately 3.75 million subscribers in Armenia, representing a penetration rate of approximately 121.00%.
The following table shows our and our primary mobile competitors respective subscribers in Armenia as of December 31, 2012:
Operator |
Subscribers (in millions) |
|||
K-Telecom |
2.40 | |||
ArmenTel (VimpelCom) |
0.80 | |||
Orange Armenia |
0.54 |
Source: Informa Telecoms & Media for all companies except ArmenTel. © 2013 Informa Telecoms & Media. All rights reserved.
Tajikistan
According to Informa Telecoms & Media, as of December 31, 2012, there were approximately 9.33 million subscribers in Tajikistan, representing a penetration rate of approximately 132.56%.
The following table shows our and our primary mobile competitors respective subscribers in Tajikistan as of December 31, 2012:
Operator |
Subscribers (in millions) |
|||
Babilon Mobile |
2.90 | |||
Indigo |
2.81 | |||
TT-Mobile |
1.84 | |||
Tacom (VimpelCom) |
1.13 | |||
TK Mobile |
0.62 |
Source: Informa Telecoms & Media for all companies except Tacom. © 2013 Informa Telecoms & Media. All rights reserved.
Georgia
According to Informa Telecoms & Media, as of December 31, 2012, there were approximately 5.42 million subscribers in Georgia, representing a penetration rate of approximately 125.54%.
The following table shows our and our primary mobile competitors respective subscribers in Georgia as of December 31, 2012:
Operator |
Subscribers (in millions) |
|||
Geocell |
2.03 | |||
Magticom |
1.61 | |||
Mobitel (VimpelCom) |
0.97 | |||
Aquafone |
0.45 | |||
A-Mobile |
0.30 |
Source: Informa Telecoms & Media for all companies except Mobitel. © 2013 Informa Telecoms & Media. All rights reserved.
Kyrgyzstan
According to Informa Telecoms & Media, as of December 31, 2012, there were approximately 6.07 million subscribers in Kyrgyzstan, representing a penetration rate of approximately 111.9%.
The following table shows our and our primary mobile competitors respective subscribers in Kyrgyzstan as of December 31, 2012:
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Operator |
Subscribers (in millions) |
|||
Alfa Telecom (Megacom) |
2.50 | |||
Sky Mobile (VimpelCom) |
2.48 | |||
AkTel |
0.90 |
Source: | Informa Telecoms & Media for all companies except Sky Mobile. © 2013 Informa Telecoms & Media. All rights reserved. |
Marketing and DistributionMobile Business in the CIS
All our mobile operations in CIS divide their primary target subscribers into five large groups:
| large account corporate subscribers (business market); |
| SME subscribers (business market); |
| high ARPU subscribers (consumer market); |
| youth segment (consumer market); and |
| mass market subscribers. |
In Kazakhstan, we offer more than ten different regional and nationwide tariff plans for the consumer market and more than ten different tariff plans for our business segment, each targeted at a different type of subscriber. In order to promote further growth of our subscriber base, we seek to offer a number of advanced services to corporate and mass market subscribers with high ARPU, while at the same time providing lower priced services for the more cost-sensitive mass market subscribers.
In Uzbekistan, we offer different prepaid tariff plans in two currencies (U.S. dollars and Uzbek soms), each one offering a different benefit and targeting a certain type of subscriber. Through our GSM network in Uzbekistan, we offer a number of advanced services to corporate and high-value subscribers, while at the same time providing low-priced services for the more cost-sensitive mass market subscribers.
In Armenia, we offer several dram-based prepaid and contract tariff plans, each one targeted at a different type of subscriber. As of December, 2012, 20.2% of ArmenTel subscriber base use postpaid plans. In order to promote growth of our subscriber base, we have implemented a regional program using alternative marketing strategies, such as door-to-door sales, and offering special tariff plans.
In Tajikistan, we offer several U.S. dollar-based and Tajik somoni-based prepaid and contract tariff plans, each one targeted at a different type of subscriber.
In Georgia, we offer 13 national lari-based prepaid tariff plans and 18 contract-based postpaid tariff plans for our SME and large account corporate customers.
In Kyrgyzstan, we offer 15 som-based price plans for our mass market subscribers and 20 price plans for SME and large account subscribers.
Customer Loyalty Programs
We have loyalty programs in each of the CIS countries in which we operate, except Tajikistan where we plan to launch our loyalty program in the first half of 2013. These programs allow subscribers to collect and redeem points for basic privileges from our partners and us. As of December 31, 2012, we had more than 8.0 million subscribers participating in these programs in the CIS.
We used target marketing campaigns in order to reduce churn. For example, in Kazakhstan, we launched a subscriber retention program in which we contacted more than a 100,000 subscribers per month who we perceived to be at risk of churn. In other CIS countries in which we operate, we launched approximately ten targeted marketing campaigns monthly for churn prevention.
Our distribution strategy is also targeted on churn prevention. We launched new trade terms for partners (dealers, distributors) based on subs ARPU in each of the CIS countries in which we operate, except Kyrgyzstan where we plan to launch new trade terms in 2H 2013. We also changed one of the main KPI for all employees from Gross adds to Net adds.
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Fixed-line Business in the CIS
Description of Fixed-line Services in CIS
Business Operations
Kazakhstan. We focus on small and medium businesses, offering services, including, high-quality, high-speed Internet, fixed-line voice and data transmission. We also offer specialized services for multi-national corporations and financial institutions. We provide the following services for corporate customers:
| hi-speed Internet access (including fiber optic lines, wireless technology, WiMax and satellite technology); |
| local, long-distance, international fixed-line voice services (including traditional telephony, IP and session initiation protocol (SIP) telephony); |
| local, intercity and international channels (including leased lines and IP VPN through fiber optic, wireless, WiMax and satellite technologies) and |
| organizational services for integrated corporate networks (including integrated network voice and data services). |
Uzbekistan. Our company is an integrated provider of a large range of telecommunication services available on the Uzbek market, such as network access and hardware and software solutions, including configuration and maintenance. Our company has its own basic fiber-optical digital network in the cities of Tashkent, Samarkand, Bukhara, Zarafshan and Uchkuduk, which is longer than 200 kilometers, and copper cables, which are longer than 250 kilometers, that allow users to connect and to render services practically in any region of Uzbekistan. We provide the following services for corporate and individual customers:
| hi-speed Internet access (including fiber optic lines and xDSL), telephony, and long distance and international long distance telephony on prepaid cards; |
| telephone communication services, based on copper wires and the modern digital fiber optic network; |
| dedicated lines of data transmission; and |
| dedicated line access and fixed-line mobile convergence. |
Armenia. Our company is an integrated provider of a large range of telecommunication services available on the Armenian market, such as PSTN-fixed and IP telephony, Internet, data transmission and network access, as well as domestic and international voice termination, and TCP/IP (transmission control protocol/Internet protocol) international transit traffic services. We operate a national network. We provide the following services for corporate and individual customers:
| local telephony services; |
| international and domestic long distance services; |
| dedicated Internet and data services (including ADSL and fiber optic lines); and |
| voice over data services. |
Wholesale Operations
Kazakhstan. We have several interconnection agreements with mobile and fixed-line operators in Kazakhstan under which KaR-Tel provides traffic termination services. Our subsidiary, TNS-Plus, has international interconnection agreements with operators in Russia, Uzbekistan and Kyrgyzstan and provides international voice traffic transit and international line rental services for Kazakh and international operators.
Uzbekistan. We have interconnection agreements with Uzbektelecom, the incumbent fixed-line services provider in Uzbekistan, through which all national and international traffic is routed, and other operators in Uzbekistan.
Armenia. Our subsidiary ArmenTel is the Armenian incumbent mobile and fixed-line operator. ArmenTel operates a national network and local networks in every city of Armenia. In Armenia, we provide domestic and international voice termination, intercity and local leased channels and IP transit.
Tajikistan. In Tajikistan, we have interconnection agreements with 13 local operators. Under the interconnection agreements, we provide voice call termination to our own network. We also have a license to provide international communications in Tajikistan which allows our subsidiary there to interconnect with OJSC VimpelCom directly.
Georgia. In Georgia, our subsidiary Mobitel has interconnection agreements with ArmenTel and OJSC VimpelCom, and 22 agreements with local operators. Under these agreements Mobitel provides voice call termination to its own network.
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Residential and FTTB Operations
In Kazakhstan, Uzbekistan and Armenia, we offer the same spectrum of fixed-line broadband and wireless Internet access as in Russia. For more information, see Description of Operations of the Russia Business UnitFixed-line Business in Russia. In Armenia, we offer PSTN-fixed and IP telephony services, as well as fixed-line broadband Internet access based on ADSL technology and dial-up services and wireless Internet access based on CDMA technology.
In Kazakhstan, and Tajikistan, we have launched a co-branded version of Opera Softwares Opera Mini web browser and offer unlimited browsing services to our subscribers. In Kazakhstan, Armenia, Georgia, Tajikistan and Uzbekistan, we have launched various mobile Facebook services and have plans to launch others. We believe that our partnerships with Opera Software and Facebook give us competitive advantages and promote growth of small screen data users and their data ARPU.
LicensesFixed-line Business in CIS
The table below sets forth the principal terms of the fixed-line, data and long distance licenses that are important to our fixed-line business in the CIS. We have filed or will file applications for renewal for all of our licenses that expire in 2013.
License Type |
Countries, Companies |
Expiration Date | ||
Local Communication Services | Uzbekistan, Buzton | July 5, 2016 | ||
Kyrgyzstan, Sky Mobile | April 20, 2017 | |||
Armenia, Armentel | March 3, 2013 | |||
International and National Communications Services |
Armenia, Armentel | March 3, 2013 | ||
Uzbekistan, Buzton | January 15, 2015 | |||
Uzbekistan, Unitel | March 28, 2026 | |||
Uzbekistan, Unitel | April 24, 2026 | |||
Kyrgyzstan, Sky Mobile | May 30, 2016 | |||
Tajikistan, TAKOM | August 11, 2016 | |||
Tajikistan, TAKOM | September 7, 2016 | |||
Telematic Services | Tajikistan, TAKOM | July 24, 2017 | ||
Kyrgyzstan, Sky Mobile | August 4, 2015 | |||
Data Transmission Services | Uzbekistan, Buzton | August 30, 2016 | ||
Uzbekistan, Unitel | July 22, 2015 | |||
Tajikistan, TAKOM | December 9, 2015 | |||
Kyrgyzstan, Sky Mobile | May 30, 2016 |
CompetitionFixed-line Business in the CIS
Business Operations
Kazakhstan. We are a fast growing alternative Internet service provider in Kazakhstan, where we compete primarily with state-owned provider, Kazakhtelecom (whose group includes Nursat, Sygnum, Kepter Telecom, Online.kg, Radio Tell, and Vostok Telecom), KazTransCom owned by TeliaSonera, TransTelecom owned by the Kazakhstan Temir Zholy (a railway company), Astel (a leader in the provision of satellite services) and several other small operators in the regions.
Uzbekistan. We operate large independent fixed-line services in Uzbekistan, where we offer a full spectrum of integrated telecommunication services. In Uzbekistan, we compete with the state-owned provider, Uzbektelecom, East Telecom, Sarkor Telecom, Sharq Telecom and EVO. There is a high level of competition in the capital city of Tashkent. The fixed-line Internet market in the regions remains undeveloped.
Armenia. We are the largest fixed-line services operator in Armenia, where we offer a broad spectrum of fixed-line services to government, corporate and private customers across Armenia. There are more than 14 active operators in Armenia. The largest operators are U!Com, Armenian Datacom Company CJSC, GNC-Alfa, CrossNet and FiberNet. There has also been a consolidation of rival companies through strategic partnerships, mergers and acquisitions. For example, in 2011, the largest Russian fixed-line operator, Rostelecom, acquired telecommunication network services operator GNC-Alfa. U!Com acquired Icon communications and Netsys in 2011 and InteractiveTV in 2012.
In 2009, the following 14 companies with which we compete were granted fixed-line technology licenses: (Internet service providers) iCON, Armenian Datacom Company, Cornet-AM, Bionet, Web, Hi-Tech Gateway Inc., Arminco, Softlink, Netsys, Xalt, Crossnet; (restaurant complexes) Complex Dzoraghbyur; AATVQ CJSC and Ardnet LLC. In 2010, the following three companies were also granted fixed-line technology licenses: Griar Telecom, U!Com and GNC-Alfa. In 2010, Crossnet and Arminco began providing fixed-line services.
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Residential and FTTB Operations
The basic technologies of Internet access in the CIS include fixed-line broadband Internet access (comprising ADSL and Ethernet); wireless broadband Internet access (including 3G, CDMA, WiFi); and dial-up. Our main competitor in Kazakhstan is Kazakhtelecom. Our main competitors in Uzbekistan are UzNet, Sarkor, TPS, SharqStream and EVO. Our main competitors in Armenia are U!Com, Orange, VivaCell and Armenian Datacom Company. Rostelecom has announced that it launched fixed-line broadband Internet and telephony services for consumers in Armenia in December 2012 and is planning to launch digital television services in Armenia in the first quarter of 2013. Competition in the CIS is based primarily on penetration, price, included traffic and speed of connection.
From December 31, 2011 to December 31, 2012, we significantly increased the number of broadband subscribers in Kazakhstan and Armenia by 150.0% and 15, respectively.
Marketing and DistributionFixed-line Business in CIS
Kazakhstan. We are focusing our development in Kazakhstan on subscriber base and revenue growth, which we aim to promote by expanding our transport infrastructure, strengthening our position in the market, developing our sales efforts and data services.
Uzbekistan. In Uzbekistan, our strategy includes maintaining our current market position by retaining our large corporate clients subscriber base.
Armenia. In Armenia, our strategy includes focusing on subscriber retention and ARPU growth by developing new services, including Internet access through a fiber optic network with a guaranteed speed to corporate customers and government organizations.
Seasonality
Our mobile telecommunications business is subject to certain seasonal effects. Generally, revenues from our contract and prepaid tariff plans tend to increase during the December holiday season, and then decrease in January and February. Mobile revenues are also higher in the summer months, when roaming revenue increases significantly as subscribers tend to travel during these months. Guest roaming revenue on our networks also grows in this period.
Our fixed-line telecommunications business is also subject to certain seasonal effects. Among the influencing factors are the number of working days during periods and periods of vacations. Generally, our revenues from our fixed-line telecommunications business are lower when there are fewer working days in the period or a greater number of subscribers are on vacation, such as during the summer months. In Russia, for example, due to the large number of public holidays in January, May and November, we see relatively low level of services usage in these months.
Equipment and Operations
Mobile Telecommunications Equipment and Operations
Mobile Telecommunications Network Infrastructure
GSM and 3G technologies are based on an open architecture, which means that equipment from any supplier can be added to expand the initial network. Our GSM/GPRS/EDGE networks, which use Alcatel-Lucent, Ericsson, Huawei and Nokia Siemens Networks equipment, are integrated wireless networks of base station equipment, packet core equipment and digital wireless switches connected by fixed microwave transmission links, fiber optic cable links and leased lines. We manage all major suppliers centrally to leverage the whole group and ensure that we receive on an ongoing basis the best commercial terms possible. We make supplier selection decisions based on a total cost of ownership, seeking to optimize network operations and provide the best value and experience to our customers.
Site Procurement and Maintenance
We enter into agreements for the location of base stations in the form of either leases or cooperation agreements that provide us with the use of certain spaces for our base stations and equipment. Under these leases or cooperation agreements, we typically have the right to use premises located in attics or on top floors of buildings for base stations and space on roofs of buildings for antennas.
New Technology
We continue to move toward a high-speed broadband connection environment deploying new technologies in fixed-line and mobile networks. We are also introducing new network technologies aiming to improve the service quality, optimize network
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usage and increase investment efficiency, such as step-by-step migration to next generation architecture, direct tunneling (which provides the possibility to cope with fast growing data traffic at a lower cost and smooth evolution to flat All-IP network architecture), tandem free operation (TFO), transcorder free operation (TrFO) and other related technologies. TFO and TrFO are the technologies that remove voice transcoding operations during the call so the voice quality can be improved and resources in media gateways can be saved. All of these technologies are being implemented in commercial networks in Russia after testing to ensure the quality of the network.
We continue to move toward a high-speed broadband connection environment deploying new technologies in mobile networks and fixed-line. We are also introducing new network technologies aiming to improve the service quality, optimize network usage and increase investment efficiency, through a step by step migration to flat All-IP next generation architecture. Wind is pushing mobile broadband network enlarging the coverage and improving the performances using the state of art for 3G/HSPA+ technology. Moreover with recent acquisition of new spectrum for 4G/LTE technology we will integrate the 3G/4G mobile broadband offer improving the indoor quality, enlarging the coverage and increasing the performances in order to improve and make easier the user experience.
In order to comply with the requirements of the 4G/LTE licenses that OJSC VimpelCom was awarded for Russia in July 2012, OJSC VimpelCom must launch LTE services by June 2013 and subsequently meet further requirements, as further described in Description of Operations of the Russia Business UnitMobile Business in RussiaMobile Telecommunications Licenses in RussiaLTE License. OJSC VimpelCom is currently expanding and improving its access and transport network in Russia. We also have a license for LTE services in Uzbekistan and Tajikistan and have launched three pilot LTE networks in CIS countries (the first full-fledged live market pilots of LTE on post-Soviet territory).
In 2011, the Italian Ministry for Economic Development announced a tender for the assignment of rights of use for the frequencies in the 800, 1,800, 2,000 and 2,600 MHz bands. This tender for new fourth-generation mobile frequencies generated a total revenue of 3.95 billion and Italys four main telecom operators (Telecom Italia, Vodafone, WIND Italy and H3G) won the new frequencies.
WIND Italy has been awarded two blocks of 800 MHz spectrum and four blocks of 2,600 MHz spectrum following the completion of the 4G competitive spectrum auction initiated by the Italian Ministry for Economic Development. This additional spectrum in Italy will enable WIND Italy to further enhance its indoor data service coverage and to utilize high performance LTE/4G technology.
We are also implementing 3G HSPA and HSPA+ protocols on our mobile network. To support radio interface expansion, we are continuously upgrading mobile backhaul with high speed IP and hybrid microwaves, connecting NodeBs to fiber.
To support rapidly growing data traffic, we have installed dense wavelength division multiplexing, or DWDM, equipment on our Russian backbone and in some CIS countries. We are also implementing an expansion of our IP backbone network to support movement to an all-IP network architecture.
For a discussion of the risks associated with new technology, please see the section of this Annual Report on Form 20-F entitled Item 3Key InformationD. Risk FactorsRisks Related to Our IndustryOur failure to keep pace with technological changes and evolving industry standards could harm our competitive position and, in turn, materially adversely affect our business.
Fixed-line Telecommunications Equipment and Operations
Fixed-line Telecommunications Network Infrastructure
Russia
Our transport network carries voice, data and Internet traffic of mobile network, FTTB and our fixed-line customers. The backbone of our transport network is our optical cable network. The main fiber ring, Urals ring and optic rings in the Siberian region of our network connect the major cities in the European part of Russia, the Urals and Eastern Siberia. The total length of our optical cable network reaches 33,516 kilometers. Our protected optical line connects Moscow and St. Petersburg, and passes to Stockholm, London and Frankfurt. Two independent optical lines connect our optical networks in Russia and Ukraine. We have also built a third cross-boundary line in Kazakhstan, which connects our Russian network to our networks in Kazakhstan, Uzbekistan and to Asian telecommunications operators. The intercity ring lines to the Siberia region connect the major cities in the Ural and Siberia regions: Tumen, Omsk, Novosibirsk, Kemerovo and Krasnoyarsk. We have also built the new line to the North of Urals region, Surgut. We also lease capacity from Rostelecom, Transtelcom, Eurotel and other providers to reach the Eastern part of Russia. We use satellite technology to connect remote sites where terrestrial communications are not available.
Our regional transport networks are based on synchronous digital hierarchy (SDH) and metropolitan ethernet network (MEN) technology. We have built local SDH networks in more than 100 cities of Russia. We have also built the interregional (also called zone) transport networks that connect our sites in small towns and the countryside. The total length of regional fiber cables constructed within the cities is 28,000 kilometers and the total length of our zonal fiber cables is 21,145 kilometers. The MEN network is constructed in more than 82 cities, which provide our customers with IP VPN services, voice services and access to Internet.
Our fixed-line voice network has the following three levels: local, regional and federal. The local voice networks, constructed in 103 cities, provide customers with fixed-line voice services. Our local network in Moscow is integrated into the telephone network and connected to 142 transit and local nodes of urban telephone network (UTN). We have completed construction of zone networks in 52 Russian regions, which helps us to minimize payments to incumbent local operators for voice transit. Our federal transit network consists of eight international transit exchanges, 14 intercity communications transit exchanges installed in each of the federal districts of Russia, and connection points (access nodes) located in each region of Russia. The network provides mobile and fixed-line customers with long-distance voice services and minimizes our costs of traffic.
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Our IP/MPLS data network carries mobile network and FTTB IP traffic and allows us to provide our customers with IP VPN services. Our data network core runs at a speed of 400 Gbps. Our Internet network is one of the largest in Russia. We have interconnection agreements with international and Russian ISPs.
FTTB
Our company is rolling out FTTB networks in Russia, Ukraine and the CIS. Our management has experience in the efficient roll-out of fiber optic networks in densely populated metropolitan areas. Technically, FTTB offers higher transmission speed, more bandwidth and better security compared to all existing xDSL and other quasi-broadband solutions. In Russia, where the local loop has not been unbundled and the quality of copper lines is generally poor, construction of fiber networks helps to create alternative high quality access to subscribers apartments.
As of December 31, 2012, we had approximately 2.3 million subscribers connected to our FTTB network in Russia. The network operates in 161 cities across Russia (137) and the CIS (24). The acquisition of Cortec in 2008 strengthened our companys position in the broadband Internet market. We have the largest FTTB network in Moscow and the core broadband market in Russia.
Italy
In Italy, we have an integrated network infrastructure providing high capacity transmission capabilities and extensive coverage throughout Italy. Our mobile and fixed-line networks are supported by over 21,600 kilometers of fiber optic cable backbone in Italy and 4,735 kilometers of fiber optic cable MANs as of December 31, 2012. Our network in Italy uses a common system platform, which is referred to as the intelligent network, for both our mobile and fixed-line networks.
As of December 31, 2012 we had 1,455 LLU sites for direct subscriber connections, and had interconnections with 613 SGUs (local exchange interconnection in which customers are connected in a local loop), which allows us to provide carrier pre-selection and carrier selection access for indirect subscribers throughout Italy, as well as wholesale services.
In Italy, our Internet network consists of an aggregated data network with more than 168 points of presence, or POPs. Our POPs are made up of 112 ATM/Frame Relay POPs, 56 IP POPs, broadband remote access servers for ADSL direct and indirect access Internet services and virtual private network corporate services, more than ten network access servers for dial up access Internet services and EDGE routers for direct Internet access corporate services. We currently have 105 EDGE routers for broadband x play services and an Internet MPLS hierarchical backbone connecting all IP points of presence and the main national and international operators.
Ukraine
Our transport network is designed to provide a full spectrum of telecommunication services for corporate and enterprise customers, including: Private Leasing Channel, voice, IP voice, L2VPN, IP VPN, and Internet access.
Our transport network is based on our optical cable network utilizing DWDM, SDH and IP/MPLS equipment. The DWDM and SDH networks connect all the main regional and mid-sized cities of Ukraine, including Kyiv, Kharkov, Dneipropetrovsk, Donetsk, Zaporozhye, Lviv, Odessa, Lugansk, Poltava, Sumy, Kirovograd, Kherson, Chernovtsi, Cherkassi, Vinnitsa, Zhitomir, Nikolaev Chernigov, Kherson, Uzgorod, Lutsk, Rovno, Ivano-Frankovsk, Ternopol, Khmelnitskiy, Simferopol, Sevastopol, Yalta, Kremenchug, Krivoy Rog and Mariupol. All our DWDM and SDH optical networks are fully ring-protected and can be self-healing which is necessary to ensure up time in the telecommunication industry. Our core IP/MPLS network is fully mesh-protected, meaning that the recovery mechanisms which provide different levels of protection or restoration against different failure modes are available for network up time. It connects all the main regional cities of Ukraine. The total length of our fiber optic cables is 44,306 kilometers. We have SDH and Ethernet interconnections with major European carriers in Russia, Poland, Hungary, Romania, Slovakia and Belorussia.
Our interregional and metro transport networks are based on our optical cable and microwave systems utilizing SDH, PDH, Ethernet and IP/MPLS technologies. We have deployed metro SDH and IP/MPLS optical networks in more than 138 cities of Ukraine. The total length of fiber cables constructed within the cities is 22,883 kilometers.
Our IP/MPLS data network carries mobile network and FTTB IP traffic, allowing us to provide L2VPN, IP VPN and Internet services. We have interconnections with major European ISPs in Poland (Telia), Hungary (Level3), Germany (Telia, L3) and Russia (Sovintel). We are interconnected with Ukrainian local ISPs Volia and Ukrtelecom and have internet exchanges with UA-IX, AMS-IX DE-CIX, Datagroup, Vega, Eurotranstelecom.
Kyivstars fixed-line voice network is based on softswitch technology with dual homing for media gateways controllers (MGCs) and it has combined local-transit and long-distance functionality. It is possible to use PRI, SIP, H.323 connections for fixed-line business users and provide local and long-distance transit of voice services. Six media gateways (MGw) provide the interconnection with PSTN in 22 cities in most regions of Ukraine through TDM technology. Protected MGC provides voice services for customers by VoIP technology on the entire territory of Ukraine. In addition, MGC is connected to eight international VoIP operators. Similarly, Kyivstars fixed-line core network is connected to 73 TDM and 14 VoIP national operators.
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International voice services are provided by two international switching centers located in Kyiv and Dnipropetrovsk, which are integrated with the existing Kyivstar mobile network and have established connections with 39 international TDM operators (863xE1). The network provides mobile and fixed-line customers with long-distance voice services and minimizes our cost of traffic.
We also have the separate fixed-line network of Golden Telecom Ukraine (GTU). It has the following three levels: local (class 5), long-distance and transit (class 4) and international. GTU fixed-line local voice networks, constructed in 29 cities throughout Ukraine, provide customers with fixed-line voice services. GTUs local network in Kyiv is integrated into the telephone network and connected to two transit and local nodes of UTN. Similarly, GTUs fixed-line network is connected in other regional centers of Ukraine providing 64 connections to transit and local nodes. It is possible to use PRI, SIP and H.323 connections for fixed-line business users and provide local and long-distance transit of voice services. GTUs fixed-line network is connected to 61 TDM and 12 VoIP national operators. International transit of fixed-line voice services is provided by two Kyivstar ISCs and one own international switching center in Kyiv which is connected to six international TDM operators (45xE1). The network provides mobile and fixed-line customers with long-distance voice services and minimizes GTUs costs of traffic.
In the future we plan to merge Kyivstars and GTUs fixed-line networks for local, long-distance and international transit voice services.
Kazakhstan
Our subsidiaries TNS-Plus LLP and 2Day Telecom LLP provide a wide spectrum of fixed-line telecommunications services, including Internet access, ADSL, FTTB, WiFi, WiMax, VoIP, VPN and VSAT. TNS-Plus owns more than 11,970 kilometers of fiber optic main lines across Kazakhstan, which are based on Ericsson SDH and Huawei SDH/DWDM equipment. As of December 31, 2012, we had approximately 162,000 subscribers connected via FTTB technology in Kazakhstan.
Uzbekistan
Our subsidiary Buztons network provides international telephony and Internet access through JSC Uzbektelecom. Buztons network consists of 127 nodes situated throughout Uzbekistan. The main technologies of our access networks are ADSL (15,560 ports) and FTTB (1,162 buildings). Our main line in Tashkent is based on fiber-optic equipment. The network also includes long-leased channels and local fiber optic networks in Tashkent, Zarafshan and Uchkuduk.
Armenia
ArmenTels fixed-line infrastructure covers all districts of Armenia with a full set of equipment (international gateway, digital-analogue exchanges, Internet protocol digital subscriber line access multiplexers (DSLAMs), copper wire access network, fiber-optic backbone network, data network). Its network consists of 158,719 ADSL ports and 161 exchanges of which 80 are digital. Our company provides interconnection with international operators and national mobile operators in Armenia. ArmenTels CDMA Wireless Local Loop network is used to provide fixed-line telephone services to rural customers.
Intellectual Property
We rely on a combination of trademarks, service marks and domain name registrations, copyright protection and contractual restrictions to establish and protect our technologies, brand name, logos, marketing designs and Internet domain names. We have registered and applied to register certain trademarks and service marks in connection with our mobile telecommunications businesses. We have also registered and applied to register certain trademarks and service marks with the World Intellectual Property Organization in order to protect them.
Our registered trademarks and service marks include our brand name, logos and certain advertising features. Our copyrights are principally in the area of computer software for service applications developed in connection with our mobile and fixed-line network platform. We have copyrights to some of the designs we use in marketing and advertising our mobile services.
Properties
In Russia we own a series of five buildings consisting of approximately 26,000 square meters at 10, Ulitsa 8 Marta in Moscow. We use these buildings as an administrative office, technical center, warehouse and operating facility. In addition, we own a series of five buildings on Lesnoryadsky Pereulok in Moscow, constituting approximately 15,360 square meters, that are used as an administrative office, warehouse and operating facility. These buildings also house the main switches for our Moscow 3G/GSM network and our main and reserve IT centers. We have other offices at 4, Krasnoproletarskaya Street, in the center of Moscow. These consist of three leased administrative buildings of approximately 32,400 square meters. We own a portion of a building in the center of Moscow on Ulitsa 1st Tverskaya Yamskaya consisting of approximately 3,000 square meters that we use as a subscriber service center, administrative and sales office. We also own office buildings in some of our regional license areas and lease space on an as-needed basis.
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In Italy we own certain sites where some of our telecommunications network equipment is located, including 287 radio centers (for all of which we own the towers and rooms for equipment, and for approximately 120 out of 287 we also own the land where the radio centers are located), 586 towers (from 15 meters up to 70 meters in height), about 5,700 towers on rented locations on which antennas for radio coverage are installed, and approximately 1,000 other minor towers.
Kyivstar owns a series of buildings consisting of 34,068 square meters at Degtyarivska, 53 in Kyiv. We use these buildings as offices, print-centers, sales and call centers and switching-off centers. In addition, we own a set of buildings at Gagarina, 103 in Dnipropetrovsk, consisting of 16,398 square meters, that we use as a switching-off center, call center, sales center and storage unit; a building at Vyshgorodska, 21 in Kyiv, consisting of 2,364 square meters, that we use as a switching center; a building at Bugaivska, 3 in Odesa, consisting of 8,438 square meters, which is currently under renovation and that we plan to use as offices, a switching-off center and data center; a building at Shelushkova, 96 in Zhytomyr, consisting of 1,770.2 square meters, that we use as a switching-office center and offices; a building in Rovno, consisting of 1,426 square meters, that we use as a switching-office center and offices; a building at Gorkogo, 84 in Chernigov, consisting of 1,032 square meters, that we use as a switching-office center and offices; a building at Keletska, 54B in Vinnitsa, consisting of 1,500 square meters, that we use as a switching-office center and offices; a building at Gogolya, 413 in Cherkasy, consisting of 1,695 square meters (including garage), that we use as a switching-office center and offices; and a building at Artema, 169k in Donetsk, consisting of 2,275 square meters, that we use as offices, a switching-off center and a customer service center. We also own office buildings in some of our regional license areas and lease space on an as-needed basis.
In Pakistan, our subsidiary PMCL owns a number of properties consisting over 28,000 square meters, in Karachi, Lahore and Islamabad. The properties are all associated with its operations and include call centers, data centers, office buildings and switching stations.
For a description of certain telecommunications equipment that we own, please see Equipment and OperationsMobile Telecommunications Equipment and OperationsMobile Telecommunications Network Infrastructure and Equipment and OperationsFixed-line Telecommunications Equipment and OperationsFixed-line Telecommunications Network Infrastructure above.
Disclosure of Activities under Section 13(r) of the Securities Exchange Act of 1934
Under Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Securities Exchange Act of 1934, as amended, or the Exchange Act, we are required to disclose whether we or any of our affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or certain designated individuals or entities. Disclosure is required even when the activities were conducted outside the United States by non-U.S. entities including non-U.S. entities that are not otherwise owned or controlled by U.S. entities or persons and even when such activities were conducted in compliance with applicable law.
The following information is disclosed pursuant to Section 13(r). None of these activities involved our U.S. affiliates.
| Our Armenian subsidiary, ArmenTel, and Telecommunications Company of Iran, or TCI, an Iranian Government-owned company, have an agreement for the provision of voice services, which has been in place since 2003. Under the agreement, ArmenTel sends direct traffic to TCI and TCI sends both direct and transit traffic to ArmenTel. We (including ArmenTel) did not provide any telecommunications equipment or technology to TCI. ArmenTel intends to continue providing voice services to TCI under the agreement for the foreseeable future. During 2012, our gross revenues received from these activities involving TCI were approximately US$721,274 and net profits were approximately US$596,573. |
| We have active roaming agreements with GSM mobile network operators in various countries throughout the world, including with TCI, MTN Irancell, Taliya Mobile and Telecommunication Kish Company (also known as TKC KIFZO) in Iran. TCI and MTN Irancell are owned or controlled by the Iranian Government, and our other roaming partners in Iran may be affiliated with the Iranian Government. Pursuant to our roaming agreements with these companies, our subscribers receive customary international roaming services on their networks, and their subscribers receive such services while roaming on our networks outside those countries. We intend to continue our roaming agreements with TCI, MTN Irancell, TKC KIFZO and Taliya Mobile for the foreseeable future. During 2012, our gross revenues received from roaming arrangements with TCI and MTN Irancell were approximately US$614,000 and US$20,000, respectively, and net profits were approximately US$525,000 and nil, respectively. During 2012, our gross revenues received from roaming arrangements with MTN Irancell and TKC KIFZO were collectively approximately US$20,700 and no net profits. |
Telenor ASA may be deemed an affiliate based on its indirect share ownership in us through Telenor East and the officers of the Telenor ASA group who are on our board. Telenor East has provided us with the information included below relevant to Section 13(r). This information relates solely to activities conducted by Telenor ASA subsidiaries and does not relate to any activities conducted by us. We are not representing to the accuracy or completeness of such information and undertake no obligation to correct or update this information.
A subsidiary of Telenor ASA is a party to an international interconnect agreement with Katsan General Trading LLC (formerly known as TIC Iran), which is majority-owned and controlled by an agency of the Iranian government. Other subsidiaries of Telenor ASA are parties to roaming agreements with Mobile Telecommunication Company of Iran (MCI), MTN Irancell and Taliya Mobile, all of which are majority-owned and controlled by agencies of or entities affiliated with the Iranian government. For fiscal year 2012, the aggregate gross revenues of Telenor ASA and its subsidiaries arising from such agreements was approximately US$3,000,000, and the aggregate net profits from such agreements was approximately US$550,000.
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Legal Proceedings
FAS Claim
In April 2012, the FAS brought a claim against two of VimpelComs strategic shareholders at the time, Telenor East and Weather II, in the Moscow Arbitration Court. The FAS named VimpelCom Ltd., VimpelCom Holdings B.V., OJSC VimpelCom, OOO Altimo and Altimo Coöperatief as third parties under the claim.
The FAS alleged that Telenor Easts February 15, 2012 purchase (the Purchase) of 234 million preferred shares in our company from Weather II violated relevant Russian law because Telenor East, as a company majority-owned by a foreign state (the Kingdom of Norway), may not exercise control over a Russian entity having strategic importance for the national defense and state security (such as our Russian subsidiary, OJSC VimpelCom).
In connection with the claim, following a petition of FAS, the Moscow Arbitration Court issued rulings granting injunctive relief, which prohibited: (i) VimpelCom Ltd. and VimpelCom Holdings B.V. from voting at OJSC VimpelCom general shareholders meetings on matters relating to a change of the members of the management bodies, and passing resolutions on approval of major transactions and interested party transactions; (ii) Telenor East and Weather II from changing the composition of VimpelCom Ltd.s supervisory board; (iii) Telenor East and Weather II from exercising their rights under the option agreement dated February 15, 2012; (iv) payment to the shareholders of OJSC VimpelCom of dividends based on OJSC VimpelComs 2011 operating results, and transfer of the cash intended for dividend distribution from OJSC VimpelCom accounts to the accounts of VimpelCom Ltd. or other companies with foreign banks; (v) the external auditors elected at the Annual General Shareholders Meeting of VimpelCom Ltd. held on May 21, 2012 from exercising the powers conferred on them; (vi) the board of directors of OJSC VimpelCom elected at the annual general shareholders meeting of OJSC VimpelCom from exercising their powers pursuant to the charter of OJSC VimpelCom; and (vii) other actions and steps designed to transfer the funds out of OJSC VimpelCom.
In November, 2012, the FAS withdrew its claim after Altimo increased its stake in VimpelCom Ltd. to 47.85% from 41.9% by purchasing the shares of Bertofan Investments Limited, a company owned by Ukrainian businessman Viktor Pinchuk. The injunctions issued in the proceedings were subsequently cancelled.
Proceedings Involving OJSC VimpelCom and Its Subsidiaries
KaR-Tel Litigation
On January 10, 2005, KaR-Tel received an order to pay (Order to Pay) issued by The Savings Deposit Insurance Fund, a Turkish state agency responsible for collecting state claims arising from bank insolvencies (the Fund), in an amount of the equivalent of approximately USD 4.2 billion at the exchange rate as of December 30, 2012.
Through various court proceedings since 2005, the Company has petitioned to annul the Order to Pay. On October 25, 2010, the 4th Administrative Court of Istanbul reviewed KaR-Tels petition to annul the Order to Pay and ruled in favor of KaR-Tel. The court decision has been appealed by the Fund. The court file was sent by the Court to the Council of State for the appeal proceedings. On March 22, 2012 the Funds appeal on the decision of the 4th Administrative Court of Istanbul dated October 25, 2010 to annul the Order to Pay was reviewed by the Prosecution Office of the Council of State and was sent to the 13th Chamber of the Council of State for review on the merits. As of the date of this Annual Report on Form 20-F, no decision on the appeal has been rendered. The adverse resolution of the Order to Pay, actions regarding the ownership of KaR-Tel or any other matter that may arise in connection with these matters or any other claims made by the Fund or by any other party could have a material adverse effect on our business, financial condition and results of operations, including an event of default under some or all of our outstanding indebtedness.
FAS Antimonopoly Litigation
The FAS commenced proceedings against OJSC VimpelCom and OJSC Mobile TeleSystems (MTS) regarding alleged price collusion with respect to the sale prices of iPhones by OJSC VimpelCom and MTS. On April 26, 2012, the FAS issued a decision pursuant to which OJSC VimpelCom and MTS were found guilty of price fixing in that they acted in concert to fix identical wholesale prices for certain iPhone models from September, 2010 to April, 2011. As both parties voluntarily ceased the alleged wrongdoings, the antimonopoly case was terminated. On July 17, 2012, the FAS fined OJSC VimpelCom RUR 18.2 million (the equivalent to USD 0.6 million as of July 17, 2012), which was paid in full.
Sky Mobile Litigation
Sky Mobile is one of fourteen defendants to litigation proceedings in the High Court of the Isle of Man brought by affiliates of MTS. The claim arises from a dispute in 2005 between the claimants and Fellowes International Holdings Limited over the ownership of Bitel, a Kyrgyz telecommunications company. The claimants allege that a Kyrgyz judgment in 2005 which determined that Fellowes, rather than the claimants, was the rightful owner of Bitel, was wrongfully obtained. The claimants further allege that a sale of BITELs assets to Sky Mobile in 2006 was wrongful. The legal proceedings in this matter are pending. There can be no assurance that MTS or any other party will not bring an additional action against our company or any of our subsidiaries in connection with Sky Mobile or, if so brought, that
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we will prevail in any such lawsuit. The adverse resolution of any matter that may arise in connection with Sky Mobile could have a material adverse effect on our business, expansion strategy and financial results.
Tax Proceedings in Russia
On January 21, 2011, OJSC VimpelCom received a report from the tax authorities in relation to a tax audit that was conducted with respect to OJSC VimpelComs 2007 and 2008 Russian tax filings asserting claims against OJSC VimpelCom of RUR1.2 billion (equivalent to approximately US$39.3 million at the exchange rate as of December 31, 2012). OJSC VimpelCom challenged the tax audit report in court of the first instance with respect to approximately RUB 0.94 billion (equivalent to approximately US$31.0 million at the exchange rate as of December 31, 2012) of the amount claimed in the audit. Several courts upheld OJSC VimpelComs challenge and OJSC VimpelCom paid the RUB 0.25 billion (equivalent to US$8.3 million at the exchange rate as of December 31, 2012) balance of the fine that it had not challenged. The tax inspectorate filed an appeal with the Court of Cassation but this appeal was dismissed on November 30, 2012. On February 28, 2013 the tax inspectorate filed an appeal with the Supreme Arbitration Court concerning amount around RUR 0.4 billion (equivalent to approximately US$13.0 million at the exchange rate as of December 31, 2012). A court date has not yet been set.
LLC Summa Telecom
LLC Summa Telecom filed a claim in first instance with the Moscow City Arbitration Court against the State Commission for Radio Frequencies (the Commission), the Ministry of Communications and Mass Media of the Russian Federation (the Ministry) and the Federal Service for Supervision of Communications, Information Technology and Mass Media (Roskomnadzor). LLC Summa Telecom claim sought to revoke the courts September 8, 2011 decision which refused to allocate frequencies in the 2500-2700 MHz frequency range and to compel the defendant to allocate the following spectrum bands: 2500-2530 MHz, 2560-2570 MHz, 2620-2630 MHz, 2660-2670 MHz, and 2680-2690 MHz.
On July 12, 2012, the Moscow City Arbitration Court upheld the claim and ruled in favor of LLC Summa Telecom. The Commission, the Ministry and Roskomnadzor filed an appeal, along with certain third parties. On September 26, 2012, OJSC VimpelCom was added as a third party to the proceedings. On October 25, 2012, the 9th Arbitration Court of Appeals overturned the July 12, 2012 decision and dismissed LLC Summa Telecoms claim. LLC Summa Telecom filed an appeal, but this was dismissed by the court on February 14, 2013.
On March 7, 2013, Summa Telecom filled an appeal with the Supreme Arbitration Court of the Russian Federation to review the rulings in exercise of the courts supervisory powers. This review is currently pending. If LLC Summa Telecom prevails on its claim, it could initiate new proceedings which could potentially lead to a revision of the LTE tender, in which OJSC VimpelCom was awarded licenses and frequencies for the provision of LTE services in Russia. If a revision includes revocation of any part of LTE spectrum granted to us, it could result in a material adverse effects on our business, financial condition, results of operations and prospects.
Kazakhstan Antimonopoly Proceedings
First Roaming Claim
On May 14, 2010, the Antimonopoly Agency of Kazakhstan (the Agency) initiated an investigation of the alleged breach of antimonopoly laws by all three Kazakhstan GSM-operators (KaR-Tel, GSM Kazakhstan OAO Kazakhtelecom LLP, and Mobile Telecom Systems LLP), for abuse of dominant position. The Agency alleged that these companies had infringed consumers rights by requiring a minimum threshold amount in a consumers prepaid account to be able to use certain roaming services.
As a result of various court proceedings, the administrative fines for KaR-Tel have been reduced from KZT 11.6 billion (the equivalent of approximately USD 78 million as of June 15, 2012) to KZT 155 million (the equivalent of approximately USD 1 million as of June 15, 2012) following a decision by the Interregional Administrative Court on June 15, 2012. On August 16, 2012 the administrative fine was recognized and paid by KaR-Tel. The decision is subject to appeal by the company and the public prosecutors office within one year from the date thereof. The company is considering whether it will appeal the decision.
Second Roaming Claim
In 2010 the Agency also initiated an investigation with respect to alleged concerted actions of certain Kazakhstan and Russian GSM-mobile operators in relation to establishing and/or preserving monopolistic roaming tariffs. Kar-Tel denied any involvement in these alleged concerted actions and following various court proceedings the Interregional Administrative Court of Almaty ruled in favor of KaR-Tel on March 1, 2012. The period for appeal has expired.
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Dominant Market Position
On October 10, 2011, Kar-Tel was recognized by the Agency as having a dominant position in the interconnection market. If a company is recognized as having a dominant position, it is subject to special reporting obligations to the Agency, increased scrutiny in relation to anti-monopoly and competition issues and potential price regulation (e.g., tariff caps). Following various court proceedings against the claim of the Agency that KaR-Tel has a dominant market position, KaR-Tel submitted an application to the Supreme Court of Kazakhstan for supervisory review of the case. This appeal was rejected by the court on January 10, 2013. The decision is only subject to appeal by the public prosecutors office, which can appeal until October 18, 2013. KaR-Tel believes that its position is justified and is considering applying for appeal at the public prosecutors office.
Proceedings Involving Kyivstar
Antitrust Proceedings in Ukraine
In December 2012, the Antimonopoly Committee of Ukraine (or UAMC) completed two investigations regarding Kyivstars and MTS Ukraines roaming charges and other local mobile tariffs. As a result of these investigations, the UAMC issued binding recommendations requiring Kyivstar to reduce certain roaming charges and tariffs for mobile services to a level equal to those on a market with significant competition.
These recommendations have been implemented with no negative effect on marketing, tariff policies or plans. Both investigations have now been closed by the UAMC.
However, the UAMC is investigating the distribution by Kyivstar of allegedly misleading information on its tariffs. In this respect the UAMC imposed a fine of 50,000 UAH on Kyvistar (equal to approximately US$ 6,000 at the exchange rate as of June, 2012), which Kyivstar paid in June, 2012.
Proceedings Involving Wind Italy and its Subsidiaries
On September 13, 2012, the Italian Competition Authority (or the ICA) opened an anti-trust investigation in respect of three Italian MNOs (Telecom Italia, Vodafone and WIND) and carried out dawn raids on their premises. The investigation was started following a claim by an Italian MVNO, Bip Mobile. Bip Mobile claimed an alleged agreement between Telecom Italia, Vodafone and WIND which was aimed to prevent the entry of Bip Mobile into the Italian mobile market through collusive pressure on the multi-brand point of sales starting as of June, 2012. WIND is currently defending its conduct against Bips Mobiles allegations and cooperating with ICA in accordance with usual legal and procedural steps. We expect that the investigation will be completed by the end of September, 2013 which could result in an ICA decision of condemnation and fine of the MNOs or the dismissal of Bip Mobiles claim.
Pursuant to Section 15 of Italian Law no. 287 of October 10, 1990, as amended, in the most serious cases, depending on the gravity and the duration of the infringement assessed, the ICA may decide to impose a fine up to 10% of the turnover of each undertaking over the previous fiscal year.
Proceedings Involving OTH and Its Subsidiaries
Algeria Tax Litigation
OTA has recently been subject to tax claims by the Algerian tax authority with respect to the payment of taxes during its taxation period between 2002 and 2009.
Claims for July 2002 to August 2007 Period
In 2001, when OTA signed its investment agreement with the Algerian Investment Promotion Organization in connection with its GSM license, OTA was granted favorable tax treatment for a period of five years starting in July, 2002 and ending in August, 2007. OTA has been charged by the Algerian Directions des Grandes Entreprises (DGE) with a final tax reassessment for 2004 and has been ordered to pay approximately DZD 4.34 billion, including penalties (equal to approximately US$57.0 million at the exchange rate as of December 31, 2012). While a tax claim remains outstanding, OTA is unable to repatriate dividends to foreign investors, including OTH. With respect to the 2004 tax assessment, OTA filed a claim against the DGE and paid a deposit equal to the reassessed amount for 2004 and penalties, in order to obtain a payment deferment (in accordance with Article 74 of the Tax Procedure Code) and allow OTA to repatriate 50.0% of OTAs 2008 dividend to foreign investors.
In November 2009, OTA received a further final tax reassessment for the years 2005 through 2007 from the DGE ordering it to pay approximately DZD 43.9 billion, including penalties (equal to approximately US$637.0 million at the exchange rate as of December 31, 2012). The DGE has alleged that (i) OTA did not keep proper manual accounts during these years notwithstanding that OTAs accounts were fully audited and approved by both OTAs international auditors and its local statutory auditors, and (ii) OTA had deducted certain expenses such as management and bad debt expenses and therefore understated the taxable income.
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In Algeria the tax authorities are able to raise additional tax assessments for four years after the end of the relevant tax period. OTA has received the final tax assessment for the years 2004, 2005, 2006 and 2007. OTA filed a tax claim objection (tax appeal) on the 2004, 2005, 2006 and 2007 final tax assessments.
On March 7, 2010 OTA received a rejection on its submitted administrative appeal filed on December 27, 2009 against the notice of reassessment dated November 16, 2009 received from the DGE in respect of the tax years 2005, 2006 and 2007. OTAs administrative appeal in relation to the 2004 tax reassessment was also rejected. OTA appealed these rejections before the Algiers Administrative Tribunal. Its claims were rejected in April 2012. OTA appealed the decision of the Administrative Tribunal before the State Council in July, 2012; these proceedings remain pending.
Claims for 2008 and 2009 Tax Years
On September 30, 2010, OTH announced that OTA had received a preliminary tax notification from the DGE in respect of the years 2008 and 2009, in which the DGE had re-assessed taxes alleged to be owed by OTA in the amount of approximately DZD 17.1 billion (equal to approximately US$217.0 million at the exchange rate as of December 31, 2012), despite the fact that OTA had already paid the taxes due for these years.
The tax audit for these years was initiated in early 2010 following the tax filing for 2009.
This reassessment was based primarily on the allegation that OTA had not kept proper accounts for the years 2008 and 2009 notwithstanding that OTAs accounts had been fully audited and approved by both OTAs international auditors (KPMG) and its local statutory auditors.
OTA received a final tax notification from the DGE in respect of the years 2008 and 2009 in December, 2010. OTAs administrative appeal against this notification was rejected in March, 2012 (of which OTA was formally notified in June, 2012); OTA appealed this rejection before the Algiers Administrative Tribunal in October, 2012; these proceedings remain pending.
Furthermore in 2011 OTA received an additional tax notification from the DGE in respect of the penalties for claims for July 2002 to August 2007 period, in the amount of approximately DZD 6.56 billion (equal to approximately US$81 million at the exchange rate as of 31 December 2012).
OTA continues to appeal all of the tax claims and continues to believe that the tax assessments are unjustified. Without prejudice to its rights and the rights of its shareholders under the investment agreement with the Algerian Investment Promotion Organization, applicable bilateral investment treaty and applicable laws, OTA was required to prepay claimed amounts and penalties totaling approximately DZD 71.9 billion (equal to approximately US$955 million using the average annual exchange rates according to the years in which amounts were prepaid). For more information on the risks associated with these tax claims, see Item 3Key InformationD. Risk FactorsLegal and Regulatory RisksThe Algerian Government has made substantial tax and other claims against OTA which have harmed OTAs business, and the Algerian Government has announced its intention to unilaterally acquire OTA from OTH.
Other Legal Proceedings in Algeria
On April 15, 2010, an injunction by the Bank of Algeria came into effect that restricts all Algerian banks from engaging in foreign banking transactions on behalf of OTA. OTA has challenged this injunction in the Algerian courts but the case is still pending. As a result of the injunction OTA is prevented from importing equipment from foreign suppliers and is prevented from transferring funds outside of Algeria. The Algerian authorities alleged breaches of foreign exchange regulations by OTA and a member of its senior management. On March 28, 2012, the Algerian Court of First Instance handed down a judgment against OTA and a member of OTAs senior executive team. The judgment consists of fines of DZD 99.0 billion (approximately US$1.3 billion at the exchange rate as of March 28, 2012) including a criminal sentence against a member of OTAs senior executive team. On April 5, 2012, OTA and its senior executive appealed the Criminal Courts judgment and on May 27, 2012, the Algerian Criminal Court of Appeal handed down judgment on the day of the hearing, confirming the judgment against OTA, suspending the criminal custodial sentence previously ordered against OTAs senior executive and transferring the burden of payment of the DZD 6 billion fine ordered against the senior executive to OTA. On May 31, 2012, OTA lodged a final appeal against the May 27, 2012 judgment before the Algerian Supreme Court, which is still pending.
OTA maintains that OTA and its senior executive have acted in compliance with the law.
Arbitration following Tax Reassessments and Bank of Algeria litigation
On April 12, 2012, OTH submitted a formal Notice of Arbitration against the Algerian government in respect of actions taken by the Algerian government against OTA. The claim in the Notice of Arbitration is being made under the arbitration rules of the United Nations Commission on International Trade Law. In its Notice of Arbitration, OTH asserts that since 2008 its rights under the Agreement on the Promotion and Reciprocal Protection of Investments between Egypt and Algeria have been violated by actions taken by the Algerian government against OTA, including the Algerian Court of First Instances March 28, 2012 judgment against OTA and a member of its senior executive team and the Tax Reassessments. VimpelCom is currently engaged in productive negotiations with the Algerian government to sell a 51% stake in OTA to the Algerian government. The negotiations contemplate that VimpelCom would retain governance and management control of OTA and would continue to consolidate the results of OTA. The negotiations are ongoing and there can be no assurances that an agreement will be reached.
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OTH Tax Litigation
The Egyptian Large Taxpayers Office (the LTO) conducted a review of OTHs tax filings for tax years 2000-2004. The LTO concluded that certain investments made by OTH during this time period were actually license fees paid to foreign governments for which Egyptian withholding tax was due according to Egyptian tax laws. The LTO accordingly assessed EGP 1.9 billion (equal to approximately US$327 million at the exchange rate as of December 31, 2010) in additional tax liabilities against OTH for these tax years. OTH challenged the LTOs assessment in a proceeding before an appellate committee of the Egyptian Ministry of Finance. On May 15, 2012, the appellate committee cancelled the LTOs assessment for certain of the tax years. Based on the appellate committees decision and subsequent assessments issued to OTH, OTHs assessed liability as of November 29, 2012 stood at approximately EGP 323.0 million (approximately US$ 53 million at the exchange rate as of November 29, 2012) in back taxes for the relevant years and approximately EGP 430.5 million in penalties and interest (approximately US$ 70 million at the exchange rate as of November 29, 2012). In addition, as a result of the appellate committees decision, the LTO assessed additional tax liabilities in subsequent tax periods relating to the carry forward losses. As of December 31, 2012, OTH has paid approximately EGP 199.0 million (approximately US$ 31 million at the exchange rate as of December 31, 2012) toward the assessed amounts while it continues to challenge them. The LTO has also challenged the appellate committees decision and is seeking to reinstitute its original assessment.
Iraqna Litigation
On November 19, 2012, Atheer Telecom Iraq Limited (Atheer, an affiliate of the Zain Group) initiated English High Court proceedings against Orascom Telecom Iraq Ltd. (OTIL) and Orascom Telecom Holding SAE (OTH) in relation to a dispute arising out of the sale by OTIL of its Iraqi mobile subsidiary, Iraqna, in 2007 to Atheer. Atheers claim is founded on the tax covenants in the underlying 2007 share purchase agreement (SPA) between the parties. In particular, Atheer is seeking declarations from the Court that OTIL and OTH are liable to indemnify it in respect of three alleged tax liabilities: (1) a capital gains tax liability in the sum of IQD 219.0 billion (equal to approximately US$ 188 million at the exchange rate as of December 31, 2012) in respect of the transaction that formed the subject-matter of the SPA; (2) an income tax liability in the sum of approximately IQD 96.0 billion (equal to approximately US$ 82 million at the exchange rate as of December 31, 2012) in respect of the years 2004-2007; and (3) a withholding tax liability in the sum of approximately IQD 7.0 billion (equal to approximately US$ 6 million at the exchange rate as of December 31, 2012).
The dispute is pending before the English High Court (Queens Bench division) in London. OTIL and OTH are vigorously defending against the alleged tax liabilities.
Regulation of Telecommunications
General Regulatory Environment
We are generally subject to regulation governing the operation of our business activities. Such regulation typically takes the form of industry-specific laws and regulations covering telecommunications services and general competition law applicable to all activities. The following section describes the regulatory framework and the key regulatory developments in Russia, Italy, Algeria, Pakistan, Bangladesh, Ukraine, Kazakhstan, Uzbekistan and Armenia. We are also subject to significant regulation in other countries in which we operate. Such regulations have a significant impact on our local operations in those countries, but we believe that such regulations are not material to our consolidated business and results of operations.
Regulation of Telecommunications in Russia
The Communications Law is the principal legal act regulating the Russian telecommunications industry. The Communications Law sets forth general principles for the regulation of the telecommunications industry, including a description of the institutional framework for the federal governments involvement in the regulation, administration and operation of the telecommunications industry. The most important aspects of the Communications Law with respect to our business address the federal governments authority to:
| license communications service providers; |
| allocate radio frequencies; |
| certify telecommunications equipment; |
| allocate numbering capacity; |
| ensure fair competition and freedom of pricing; and |
| conduct oversight of operators compliance with the terms of their licenses and Russian law. |
In order to establish and commercially launch a wireless telecommunications network, a company must receive, among other things:
| a license to provide mobile telephony services using a specific standard and band of radio frequency spectrum; |
| permission to use radio frequency for its radio electronic devices, or REDs; |
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| a decision on allocation of radio frequency bands; |
| registration of its REDs and high-frequency equipment; |
| authorization to put into operation communications networks (including communications facilities); and |
| a decision on allocation of numbering resources. |
For the risks related to the regulation governing the operation of communications networks, see the section of this Annual Report on Form 20-F entitled Item 3Key InformationD. Risk FactorsLegal and Regulatory RisksWe face uncertainty regarding our frequency allocations, equipment permits and network registration, and we may experience limited spectrum capacity for providing wireless services.
Russian Regulatory Authorities
Regulation in the telecommunications area in Russia is conducted by several governmental agencies. These agencies, whose functions are not often clearly defined, form a complex, multi-tier system of regulation and supervision that is subject to frequent revision.
The Ministry of Communications and Mass Media, or the Ministry, is currently the federal body with executive power to regulate the telecommunications industry. The Ministry has the authority to set policy and adopt regulations in the area of communications and make proposals to the President and the Russian Government on the issuance of legal acts regarding certain key issues in the area of communications. The Ministry controls and coordinates the activity of the following entities: (i) the Federal Communications Agency, or Rossvyaz, (ii) the Federal Agency on Press and Mass Media, or Rospechat, and (iii) the Federal Supervisory Service for Communications, Information Technologies and Mass Media, or Roskomnadzor.
Rossvyaz and Roskomnadzor have functions particularly relevant to our business. Rossvyaz is responsible for allocating numbering resources and certification of communication facilities in accordance with the established procedure. Roskomnadzor is responsible for the licensing of activities in the area of telecommunications, issuing permissions for radio frequency use, control over telecommunications and information technologies, control over radiation of REDs and high-frequency devices and the registration of REDs and high-frequency devices.
Licensing to Provide Telecommunications Services and Radio Frequency Allocation
Under Federal Law No. 99-FZ of May 4, 2011 On Licensing of Certain Types of Activities, the Communications Law, the Regulation of the Russian Government No. 228 dated March 16, 2009 On the Federal Supervisory Service for Communications, Information Technologies and Mass Media and the Regulation of the Russian Government No. 8 dated January 12, 2006 On Approval of the Regulations for Holding a Tender (Auction, Contest) for a License to Provide Communication Services, Roskomnadzor issues licenses to provide telecommunications services on the basis of an application from an eligible applicant or, when applicable, on the basis of results of a tender or an auction. Licenses are generally issued for a term of three to 25 years and a legal entity or individual person can only render commercial telecommunications services upon issuance of a license.
Roskomnadzor has the right to renew an existing license upon application which may be rejected if, as of the date of submission of the application, the operator has been found to have violated the terms of the license and such violations have not been cured. The Communications Law also regulates the procedures for re-issuing a license in the case of a reorganization of the license holder or transfer of communications networks and means to other persons.
The Communications Law identifies a limited number of reasons pursuant to which licenses may be suspended by the licensing body, including identification of license violations, cancellation of permissions to use radio frequencies or failure to comply with the requirements of the notice issued by the licensing body within the cure period. Prior to suspension, the licensing body generally issues a warning that the license may be suspended if corrective action is not taken. The Communications Law also provides that a telecommunications license may be cancelled for certain reasons, upon a claim by an interested person or the licensing body, such as provision of inaccurate information when applying for the license, failure to eliminate the circumstances which caused the suspension of the license validity or failure to perform obligations undertaken when receiving the license on the basis of a tender or an auction. The licensing body can also terminate a license in a liquidation or winding up of the license holder.
Licenses issued prior to the enactment of the Communications Law and Regulation No. 87 of the Russian Government dated February 18, 2005 On Approval of the List of the Types of Communications Services and the List of Conditions Included into Licenses, or Regulation 87, generally contain a number of other detailed conditions, including a start-of-service date, requirements for adhering to technical standards and a schedule of the capacity of the network that the licensee must attain. These license conditions also require that the licensees services, by specified dates, cover either (i) a specified percentage of the territory for which the license is issued or (ii) a specified number of cities within the territory for which the license is issued. Conditions in licenses issued after the enactment of Regulation 87 must include the period during which the licensee is entitled to provide the relevant services, the start-of-service date, and the territory in which the relevant services are to be provided, as well as certain other conditions depending on the type of the licensed activity, including information on the calculation of compulsory payments into the universal services fund, as described below.
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In addition to obtaining a license, wireless telecommunications operators have to receive a permit for radio frequency usage for every radio transmitter they operate. The permit for radio frequency usage is issued by Roskomnadzor on the basis of decisions of the State Radio Frequency Commission and the conclusion of the Main Radio Frequency Center examination, which evaluates the electromagnetic compatibility of the REDs and coordinates radio transmitter usage with the Defense Ministry, Federal Protective Service and the Federal Security Service of the Russian Federation. Under the Communications Law, permits for the use of radio frequencies are granted for ten years or a shorter period if such shorter period is indicated in the application. Radio frequency permit duration may be extended if by its expiry no regulations or decisions of the State Radio Frequency Commission are adopted that limit the possibility of such an extension. Radio frequency allocation permission may be suspended or terminated for a number of reasons, including failure to comply with the conditions to which the frequency allocation was subject.
The Government Regulation No. 171 of March 16, 2011, On Establishment of One-Off and Annual Payment Rate for Radio Frequency Spectrum Usage in Russia (Regulation 171) established rules for charging one-off payments and annual payments for radio frequency spectrum usage in Russia. The rules govern all user categories and radio facilities operating in all types of networks. Pursuant to Regulation 171, which came into effect on January 1, 2012 and by Order No. 164 of June 30, 2011 On approval of calculation procedure of one-off and annual payment for radio frequency usage on the territory of the RF, the Ministry established the calculation procedure for one-off and annual payments. This calculation procedure was amended by the Order of the Ministry No. 352 of December 22, 2011 On amendments to calculation procedure of one-off and annual payment for radio frequency spectrum usage on the territory of the RF, which was approved by the Ministry Order of June 30, 2011 No. 164, which decreased the one-off payment rate and updated the calculation procedure for frequency assignments. The amendment came into effect on February 17, 2012. Pursuant to the amended regulation, the amounts of one-off and annual payments are determined by multiplying the rate by the quantity of frequency assignments indicated in the permit for radio frequency usage and by the index depending on the frequency bandwidth category (civil, governmental, joint use), population within a RED location, frequency range in use, working frequency channel width, the perspective of the radio technology and network social dimension. At present the one-off payment rate is RUB 300 for one frequency assignment. The annual payment rate is RUB 1,400. This calculation procedure was amended by the Order of the Ministry No. 121 of April 20, 2012 On Amendments to Calculation Procedure of One-Off and Annual Payment for Radio Frequency Spectrum Usage on the Territory of the RF, approved by the Ministry Order of June 30, 2011 No. 164, which decreased the population index within a RED location in the city of Moscow and the index of network social dimension for WiFi technology. This amendment came into force on May 13, 2012.
Universal Services Fund
The Communications Law provides for the establishment of a universal service fund into which all telecommunications operators are required to make compulsory payments in order to compensate operators for losses from offering universal services in remote regions of Russia. An operator must make quarterly payments to the universal services fund of 1.2% of its quarterly revenues from communications services provided to subscribers and other users in the public communications network. Amounts paid as value added tax are excluded from the calculation of revenues.
Equipment Certification
Pursuant to the Communications Law, telecommunications equipment used in Russia requires confirmation of compliance with certain technical requirements in the area of telecommunications and information technologies and must be certified. The regulation of the Russian Government dated June 25, 2009 On Approval of the List of the Communication Equipment Subject to Mandatory Certification sets forth the types of communications equipment that are subject to mandatory certification. The Federal Communications Agency is responsible for confirming such compliance. The design, production, sale, use or import of encryption devices, which include some commonly used digital wireless telephones, requires a license and equipment certification from the Federal Security Service.
The decision of the Russian Government No. 539 dated October 12, 2004 On the Procedure for the Registration of Radio-Electronic Equipment and High-Frequency Devices (as amended) approved a list of certain high-frequency equipment manufactured or used in the Russian Federation that requires special registration by Roskomnadzor. The registration is specific to the entity that receives them and do not allow the use of the equipment by other parties.
Numbering Capacity
The regulation of the Russian Government dated July 13, 2004 No. 350 On Endorsing the Rules for Distribution and Use of Numeration Recourses of the Unified Electric Communication System of the Russian Federation (as amended) specifies the procedures for allocating numbering capacity and the use of numbering recourses under the Communication Law. The Federal Communications Agency is responsible for allocating numbering resources and for determining whether such resources are limited, and, in cases stipulated by the Communications Law, the Federal Communications Agency may change the allocated numbering capacity or withdraw it in full or in part. Further, the Federal Communications Agency is responsible for re-issuance of decisions on allocation of numbering capacity if an operator is reorganized. Under the Communications Law, an operator is required to pay state duties for the allocation of numbering capacity and access codes for telecommunication services for signal point codes. The amount of these duties is established by Russian tax legislation.
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A number of new regulations pertaining to certain aspects of the Russian federal numbering system were adopted. The two major areas affected by the regulations are as follows:
Numbering capacity usage in the ABC codes. Federal telephone numbers using the ABC code may be used by mobile subscribers only if they are registered as additional numbers under local communications services provisions. As these additional numbers can only be allocated to subscribers by the local network operators, all numbering capacity in the ABC code allocated under our GSM licenses were re-allocated under our license for local communications services. We entered into agreements for the provision of local and wireless communication services with new subscribers to whom we provide the numbers in the ABC code. Some of our subscribers use other fixed-line operators numbers based on our agency agreements with such operators. In order to implement the agency scheme, we have had to enter into new subscriber agreements with certain subscribers in order to add the relevant fixed-line operator as a party to such agreements.
Russian system and plan of numbering. A new system and plan of numbering was approved by the Ministry Order of November 17, 2006 No. 142 On Approval and Introduction of Russian System and Plan of Numbering, which materially changed the principles of numbering allocation and utilization in Russia. On June 15, 2012, the Ministry issued Order No. 158 On Amendments to the Russian System and Numbering Plan, which were approved by the Ministry Order of November 17, 2006 No. 142, which cancelled DEF codes assign to certain communication operators. Under regulations currently in force, the DEF codes for mobile telephone communication network operators are as follows: 900-909, 910-919, 920-929, 930-939, 941, 949, 950-953, 958, 959, 960-969, 970-979, 980-989, 990-996, 999.
For the risks related to the new numbering system, see the section of this Annual Report on Form 20-F entitled Item 3. Key InformationD. Risk FactorsLegal and Regulatory RisksWe operate in an uncertain regulatory environment, which could cause compliance to become more complicated, burdensome and expensive and could result in us operating without all of the required permissions.
Pricing, Competition and Interconnections
The Communications Law generally provides that tariffs for telecommunications services may be negotiated between providers and users, although tariffs for some types of telecommunications services (for example, provision of long distance telephone connections to fixed-line users or provision of local telephone connections to fixed-line users) are regulated by the federal government. Wireless telecommunications operators are free to set their own tariffs. However, the amendments to the Communications Law, which came into effect on July 1, 2006, provide that the users are not to pay for incoming calls.
Further, the Communications Law prohibits the use of a dominant position to hinder, limit or distort competition and it requires federal regulatory agencies to promote competition among telecommunications service providers. Under the Communications Law, an operator that, together with its affiliated entities, has at least 25.0% of the overall traffic in a certain geographic area or throughout the Russian Federation is considered an operator occupying a significant position in the communication network of general use (a Significant Operator). Significant Operators are subject to greater regulation by the Russian Government. At present, neither we nor our Russian subsidiaries are included in the register of subjects of natural monopolies. Therefore, neither we nor our Russian subsidiaries are subject to these regulations.
Russian legislation also prohibits operators of public switched telephone networks to refuse to provide connections or discriminate between operators. However, a regional fixed-line operator may charge different interconnection rates to different wireless telecommunications operators, subject to certain limitations.
Compliance with Government Surveillance System
The Communications Law provides that telecommunications may be intercepted only pursuant to a court order. Federal Law No. 144-FZ, dated August 12, 1995, On Operational Investigative Activities, initiated a surveillance system, known as SORM, which is operated partly by the Federal Security Service, a government agency responsible for surveillance. SORM requires telecommunications providers to ensure that their networks are capable of allowing the government to monitor electronic traffic and requires telecommunications providers to finance the cost of additional equipment needed to make their systems compliant. Currently, we believe that we are in compliance with Russian law requirements related to SORM and, accordingly, certain government agencies are able to monitor electronic traffic on our network.
Interaction between telecommunications operators and the governmental authorities engaged in surveillance activities is governed by Regulation No. 538 of the Russian Government dated August 27, 2005, On Approval of the Rules of Interaction between Telecommunications Operators and the Authorized Governmental Bodies Engaged in Surveillance Activities.
Regulation of Internet Services
Regulation 87 requires that an operator providing Internet services has a license for provision of telematic services and a license for data transfer. The procedure for transferring Internet traffic is not determined by regulation. Although currently there is no comprehensive regulatory scheme directly applicable to Internet content, the Russian media have reported that the Russian State Duma has considered the possibility of adopting legislation regarding Internet content. According to the Federal Law of July 27, 2006 No. 149-FZ, the Government Regulation of October 26, 2012 No.1101 and the Temporal Procedure of Cooperation of the Register Operator with Hosting Provider and the Procedure of
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Obtaining Access to the Information Contained in the Register by the Communication Operator, Rendering Internet Network Access Services, of October 25, 2012 approved by Roskomnadzor, all communication operators providing Internet access services beginning from the from November 1, 2012 must limit access to websites that contain information prohibited to be provided in Russia, which are listed in the applicable register.
Regulation of Telecommunications in Italy
The National Regulatory Authority (Autorità per le Garanzie nelle Comunicazioni, or AGCOM) and the Communications Department of the Italian Ministry of Economic Development together regulate all aspects of the telecommunications markets in Italy, comprising the mobile, fixed-line and Internet markets following their own competencies coming from exiting EU regulation as adopted in Italy. Their regulatory powers mainly include licensing, authorizations, access interconnection, frequency allocation, numbering, universal service obligations, tariff regulation and there balancing and arbitration of disputes between operators.
AGCOM is financed by a fee based on operators income results following regulation performed by AGCOM each year. The Public numbering schemes are adopted by AGCOM and managed for numbers assignation by the Ministry.
The Italian Competition Authority (Autorità Garante della Concorrenza e del Mercato) is the competent authority for competition related issues of the telecommunications market in Italy.
Business undertaken by WIND Italy in the European Union is subject to the EU framework on telecommunications regulation which includes directives, recommendations and opinions. As such, as a member of the EU, Italy is required to implement directives issued by the EU, which directives may take effect automatically on a member state. Regulations adopted at the EU level also have general application and are binding and directly applicable on EU member states.
Licenses, Authorizations and Concessions
In Italy licenses, authorizations and concessions for frequencies and numbering right of use are required by the Ministry for Economic Development. The continued existence and terms of licenses, authorizations and concessions are subject to review by regulatory authorities and to interpretation, modification or termination by these authorities. Moreover, authorizations, licenses and concessions as well as their renewal terms and conditions may be affected by regulatory factors. WIND Italy is licensed to provide fixed-line and mobile telecommunications services in Italy. WIND Italys license to operate its GSM/GPRS network expires in 2018, while its UMTS license expires in 2029. On September 29, 2011, WIND Italy was awarded spectrum in both the 800 MHz and 2,600 MHz frequencies following the completion of the competitive spectrum auction initiated by the Italian Ministry for Economic Development. The acquisition of 800 MHz frequencies by WIND Italy carries obligations of minimum broadband coverage. For this WIND Italy plans to make significant investments in its LTE network during the next several years. However, the terms of WIND Italys licenses and frequency allocations are subject to ongoing review and, in case of relevant issues, are subject to modification.
Market Analysis
The Italian telecommunications market is regulated pursuant to a regulatory framework that was adopted by the European Commission in 2002 to harmonize the regulatory environment among European countries to promote convergence between telecommunications and broadcast networks and services, and to further encourage competition in the telecom market. This regulatory framework consists of the Framework Directive (2002/21/EC), Access and Interconnection Directive (2002/19/EC), Authorizations Directive (2002/20/EC), Universal Service Directive (2002/22/EC), Data Protection Directive (2002/58/EC), Directive on the competition in the markets for electronic communications services (2002/77/EC) and Regulation on unbundled access to the local loop (2000/2887/EC). This regulatory framework is further complimented by the EU radio spectrum policy, governed by the Radio Spectrum Decision (2002/676/EC), as updated in Commission Decision 2009/978/EU (amending RSPG), the Recommendation of the European Commission on Relevant Markets (2003/311/EC), or the Initial Recommendation, and the European Commission Guidelines for market analysis and the assessment of significant market power (2002/165/EC), or the Guidelines. The EU regulatory framework has been implemented in Italy through the adoption of the legislative decree of August 1, 2003, no. 259 (Codice delle Comunicazioni Elettroniche, or the Electronic Communications Code), which became effective on September 16, 2003.
In 2009 the European Commission updated the regulatory framework introducing Directive 2009/140/EC (Better Regulation Directive) and Directive 2009/136/EC (Citizens Rights Directive) confirming market analysis procedural settings and granting certain powers to the European Commission to enforce NRA to operate in accordance with the European regulatory framework. The updated regulatory framework has been implemented in Italy in May 2012 with legislative decree 70/2012, which introduced changes to the national Electronic Communications Code.
The Electronic Communications Code requires AGCOM to carry out, taking into account the Initial Recommendation and the Guidelines, a market analysis to identify operators with significant market power, or SMP, i.e., operators which, either individually or jointly with others, enjoy a position equivalent to dominance, that is to say a position of economic strength affording them the power to behave to an appreciable extent independently of competitors, customers and ultimately consumers. This analysis is undertaken with a view to check if SMP operators are identified, and to impose certain regulatory obligations on such dominant operators or otherwise confirm,
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