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, 2013 |
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 |
NASDAQ Global Stock Market | |||
Common shares, US$0.001 nominal value. |
NASDAQ Global Stock Market* |
* | 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:
1,756,731,135 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.* | 8 | |||||
ITEM 2.* | 8 | |||||
ITEM 3. | 8 | |||||
ITEM 4. | 38 | |||||
ITEM 4A. | 109 | |||||
ITEM 5. | 109 | |||||
ITEM 6. | 154 | |||||
ITEM 7. | 164 | |||||
ITEM 8. | 168 | |||||
ITEM 9. | 170 | |||||
ITEM 10. | 171 | |||||
ITEM 11. | 183 | |||||
ITEM 12. | 184 | |||||
ITEM 13. | 185 | |||||
ITEM 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds |
185 | ||||
ITEM 15. | 186 | |||||
ITEM 16A. | 190 | |||||
ITEM 16B. | 190 | |||||
ITEM 16C. | 190 | |||||
ITEM 16D. | 191 | |||||
ITEM 16E. | Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
191 | ||||
ITEM 16F. | 191 | |||||
ITEM 16G. | 191 | |||||
ITEM 17.** | 193 | |||||
ITEM 18. | 193 | |||||
ITEM 19. | 194 |
* | Omitted because the item is not required. |
** | We have responded to Item 18 in lieu of this item. |
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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. This Annual Report on Form 20-F includes audited consolidated financial statements as of and for the years ended December 31, 2013, 2012 and 2011 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.
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 Global Telecom Holding S.A.E., or GTH, 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.
As a result of the VimpelCom Ltd. Transaction, VimpelCom Ltd. is, as of April 21, 2010, the accounting successor to OJSC VimpelCom, and accordingly, historical financial and operating data for periods prior to April 21, 2010 in this Annual Report on Form 20-F represent selected financial and operating data of OJSC VimpelCom except for equity, which was restated to reflect the capital structure of VimpelCom Ltd.
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 and references to US$ or $ or USD or U.S. dollars are to the lawful currency of the United States of America. References to LIBOR are to the London Interbank Offered Rate, reference to EURIBOR are to the Euro 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, reference to Bangladeshi T-Bill are to Bangladeshi Treasury Bill 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 customer. |
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| 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. |
| 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 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 customer. |
| References to MPLS are to multiprotocol label switching. |
| References to MTR are to mobile termination rates. |
| 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. |
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| 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. |
| 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 revenue. 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 revenue 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.
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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 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 revenue per customer 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 and other markets in which we hold LTE licenses; |
| our expectations regarding future developments in the markets in which we operate; |
| our ability to obtain and maintain interconnect agreements; |
| our ability to close the transaction and settlement respecting our operations in Algeria; |
| possible developments in, outcome of and/or consequences of investigations by the U.S. Securities and Exchange Commission (SEC), the U.S. Department of Justice (DOJ), and the Dutch public prosecutors office, or other bodies which may carry out investigations, as well as our internal investigations, and any litigation related to or arising out of any of the foregoing, and the costs we may incur in connection with the foregoing, as well as any potential disruption or adverse consequences to us resulting from such investigations and any such litigation; 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, economic sanctions, 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 customer numbers and penetration rates caused by differences in the churn policies of mobile operators; |
| risks associated with our failure to close our transaction and settlement respecting our operations in Algeria; |
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| risks associated with developments in, the outcome of and/or consequences of investigations of our business which are ongoing or may be initiated, and any litigation related to or arising out of any of the foregoing, and the costs associated therewith, including relating to remediation efforts and enhancements to our compliance programs; 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.
PART I
ITEM 1. | Identity of Directors, Senior Management and Advisors |
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 five years ended December 31, 2013 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, 2013, 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. See also Explanatory Note above.
Years ended December 31, | ||||||||||||||||||||
2013 | 2012 (1) | 2011 | 2010 | 2009 | ||||||||||||||||
(In millions of US dollars, except per share amounts) |
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Service revenue |
21,529 | 22,122 | 19,579 | 10,291 | 8,691 | |||||||||||||||
Sale of equipment and accessories |
725 | 677 | 516 | 194 | 110 | |||||||||||||||
Other revenue |
292 | 262 | 167 | 37 | 12 | |||||||||||||||
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Total operating revenue |
22,546 | 23,061 | 20,262 | 10,522 | 8,813 | |||||||||||||||
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Operating expenses |
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Service costs |
5,133 | 5,439 | 4,962 | 2,251 | 1,895 | |||||||||||||||
Cost of equipment and accessories |
780 | 693 | 663 | 217 | 111 | |||||||||||||||
Selling, general and administrative expenses |
8,373 | 7,161 | 6,381 | 3,198 | 2,482 | |||||||||||||||
Depreciation |
3,050 | 2,926 | 2,726 | 1,403 | 1,190 | |||||||||||||||
Amortization |
1,791 | 2,080 | 2,059 | 610 | 440 | |||||||||||||||
Impairment loss |
2,973 | 386 | 527 | | | |||||||||||||||
Loss on disposals of non-current assets |
100 | 205 | 90 | 49 | 77 |
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Years ended December 31, | ||||||||||||||||||||
2013 | 2012 (1) | 2011 | 2010 | 2009 | ||||||||||||||||
(In millions of US dollars, except per share amounts) |
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Total operating expenses |
22,200 | 18,890 | 17,408 | 7,728 | 6,195 | |||||||||||||||
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Operating profit |
346 | 4,171 | 2,854 | 2,794 | 2,618 | |||||||||||||||
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Finance costs |
2,150 | 2,029 | 1,587 | 536 | 603 | |||||||||||||||
Finance income |
(91 | ) | (154 | ) | (120 | ) | (69 | ) | (58 | ) | ||||||||||
Other non-operating losses/(gains) |
172 | 75 | 308 | (35 | ) | 69 | ||||||||||||||
Shares of loss/(profit) of associates and joint ventures accounted for using the equity method |
159 | 9 | 35 | (90 | ) | (3 | ) | |||||||||||||
Net foreign exchange (gain)/ loss |
(20 | ) | (70 | ) | 190 | 5 | 404 | |||||||||||||
(Loss)/profit before tax |
(2,024 | ) | 2,282 | 854 | 2,447 | 1,603 | ||||||||||||||
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Income tax expense |
2,064 | 906 | 585 | 574 | 431 | |||||||||||||||
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(Loss)/profit for the year |
(4,088 | ) | 1,376 | 269 | 1,873 | 1,172 | ||||||||||||||
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Attributable to: |
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The owners of the parent |
(2,625 | ) | 1,539 | 543 | 1,806 | 1,142 | ||||||||||||||
Non-controlling interest |
(1,463 | ) | (163 | ) | (274 | ) | 67 | 30 | ||||||||||||
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(4,088 | ) | 1,376 | 269 | 1,873 | 1,172 | |||||||||||||||
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Earnings per share |
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Basic, (loss)/profit for the year attributable to ordinary equity holders of the parent |
$ | (1.53 | ) | $ | 0.95 | $ | 0.36 | $ | 1.50 | $ | 1.13 | |||||||||
Diluted, (loss)/profit for the year attributable to ordinary equity holders of the parent |
$ | (1.53 | ) | $ | 0.95 | $ | 0.36 | $ | 1.50 | $ | 1.13 | |||||||||
Weighted average number of common shares (millions) |
1,711 | 1,618 | 1,524 | 1,207 | 1,013 | |||||||||||||||
Dividends declared per share |
$ | 1.24 | $ | 0.80 | $ | 0.80 | $ | 0.80 | $ | 0.30 |
(1) | Figures for the year ended December 31, 2012 have been adjusted to reflect the adoption of IFRS 11 Joint Arrangements on January 1, 2013, as described in Note 3 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. These adjustments would not have impacted 2011 or other years presented, which remain comparable. |
At December 31, | ||||||||||||||||||||
2013 | 2012(2) | 2011 | 2010 | 2009 | ||||||||||||||||
(In millions of US dollars) | ||||||||||||||||||||
Consolidated balance sheets data: |
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Cash and cash equivalents |
4,454 | 4,949 | 2,325 | 885 | 1,451 | |||||||||||||||
Working capital (deficit)(1) |
(2,815 | ) | (2,421 | ) | (3,074 | ) | (1,023 | ) | (562 | ) | ||||||||||
Property and equipment, net |
15,493 | 15,666 | 15,165 | 7,299 | 5,861 | |||||||||||||||
Intangible assets and goodwill |
24,546 | 27,565 | 28,601 | 9,217 | 4,843 | |||||||||||||||
Total assets |
49,747 | 54,737 | 54,039 | 19,505 | 14,618 | |||||||||||||||
Total liabilities |
40,669 | 39,988 | 39,137 | 9,093 | 10,416 | |||||||||||||||
Total equity |
9,078 | 14,749 | 14,902 | 10,412 | 4,202 |
(1) | Working capital is calculated as current assets less current liabilities. |
(2) | Figures for the year ended December 31, 2012 have been adjusted to reflect the adoption of IFRS 11 Joint Arrangements on January 1, 2013, as described in Note 3 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. These adjustments would not have impacted 2011 or other years presented, which remain comparable. |
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Years ended December 31, | ||||||||||||||||||||
2013 | 2012 (1) | 2011 | 2010 | 2009 | ||||||||||||||||
(In millions of US dollars) | ||||||||||||||||||||
Other data: |
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Adjusted EBITDA * |
8,260 | 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. |
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Reconciliation of Adjusted EBITDA to profit for the year
(Unaudited, in millions of US dollars)
Years ended December 31, | ||||||||||||||||||||
2013 | 2012 (1) | 2011 | 2010 | 2009 | ||||||||||||||||
Adjusted EBITDA |
8,260 | 9,768 | 8,298 | 4,906 | 4,334 | |||||||||||||||
Reconciliation adjustments |
| | (42 | ) | (50 | ) | (9 | ) | ||||||||||||
Depreciation |
(3,050 | ) | (2,926 | ) | (2,726 | ) | (1,403 | ) | (1,190 | ) | ||||||||||
Amortization |
(1,791 | ) | (2,080 | ) | (2,059 | ) | (610 | ) | (440 | ) | ||||||||||
Impairment loss |
(2,973 | ) | (386 | ) | (527 | ) | | | ||||||||||||
Loss on disposals of non-current assets |
(100 | ) | (205 | ) | (90 | ) | (49 | ) | (77 | ) | ||||||||||
Finance costs |
(2,150 | ) | (2,029 | ) | (1,587 | ) | (536 | ) | (603 | ) | ||||||||||
Finance income |
91 | 154 | 120 | 69 | 58 | |||||||||||||||
Other non-operating (gains)/losses |
(172 | ) | (75 | ) | (308 | ) | 35 | (69 | ) | |||||||||||
Shares of (loss)/profit of associates and joint ventures accounted for using the equity method |
(159 | ) | (9 | ) | (35 | ) | 90 | 3 | ||||||||||||
Net foreign exchange loss |
20 | 70 | (190 | ) | (5 | ) | (404 | ) | ||||||||||||
Income tax expense |
(2,064 | ) | (906 | ) | (585 | ) | (574 | ) | (431 | ) | ||||||||||
(Loss)/profit for the year |
(4,088 | ) | 1,376 | 269 | 1,873 | 1,172 |
(1) | Figures for the year ended December 31, 2012 have been adjusted to reflect the adoption of IFRS 11 Joint Arrangements on 1 January 2013, as described in Note 3 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. These adjustments would not have impacted 2011 or the other years presented, which remain comparable. |
SELECTED OPERATING DATA
The following selected operating data as of and for the years ended December 31, 2013, 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.
As of December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
Selected company operating data(1): |
||||||||||||||||||||
End of period mobile customers (in millions): |
||||||||||||||||||||
Russia |
56.5 | 56.1 | 57.2 | 52.0 | 50.9 | |||||||||||||||
Italy |
22.3 | 21.6 | 21.0 | | | |||||||||||||||
Africa & Asia(4) |
88.9 | 83.5 | 77.7 | 0.7 | 0.4 | |||||||||||||||
Ukraine(4) |
25.8 | 25.1 | 23.2 | 24.2 | 2.0 | |||||||||||||||
CIS |
25.4 | 24.2 | 19.7 | 15.6 | 13.2 | |||||||||||||||
Canada |
0.6 | 0.6 | 0.4 | |||||||||||||||||
Total mobile customers |
219.6 | 210.5 | 205.2 | 92.7 | 66.5 | |||||||||||||||
Mobile MOU (2) |
||||||||||||||||||||
Russia |
291 | 276 | 243 | 219 | 211 | |||||||||||||||
Italy |
237 | 207 | 197 | | | |||||||||||||||
Africa & Asia |
||||||||||||||||||||
Algeria(4) |
216 | 274 | 289 | | | |||||||||||||||
Pakistan |
226 | 214 | 206 | | | |||||||||||||||
Bangladesh |
184 | 216 | 209 | | |
11
As of December 31, | ||||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
CAR |
59 | 49 | 47 | | | |||||||||||||||
Burundi |
25 | 37 | 37 | | | |||||||||||||||
Laos |
106 | 97 | 233 | | | |||||||||||||||
Ukraine(4) |
501 | 513 | 483 | 383 | 209 | |||||||||||||||
CIS |
||||||||||||||||||||
Kazakhstan |
290 | 213 | 148 | 120 | 93 | |||||||||||||||
Tajikistan |
270 | 241 | 229 | 179 | 173 | |||||||||||||||
Uzbekistan |
471 | 474 | 425 | 386 | 314 | |||||||||||||||
Armenia |
339 | 269 | 257 | 294 | 238 | |||||||||||||||
Georgia |
244 | 237 | 207 | 137 | 138 | |||||||||||||||
Kyrgyzstan |
265 | 272 | 303 | 258 | 164 | |||||||||||||||
Mobile ARPU (2) |
||||||||||||||||||||
Russia |
US$ | 10.6 | US$ | 10.8 | US$ | 11.0 | US$ | 10.8 | US$ | 10.1 | ||||||||||
Italy |
US$ | 16.3 | US$ | 18.5 | US$ | 21.7 | | | ||||||||||||
Africa & Asia |
||||||||||||||||||||
Algeria(4) |
US$ | 8.4 | US$ | 9.0 | US$ | 9.8 | | | ||||||||||||
Pakistan |
US$ | 2.3 | US$ | 2.6 | US$ | 2.7 | | | ||||||||||||
Bangladesh |
US$ | 1.5 | US$ | 1.8 | US$ | 1.8 | | | ||||||||||||
CAR |
US$ | 5.5 | US$ | 5.9 | US$ | 6.4 | | | ||||||||||||
Burundi |
US$ | 3.1 | US$ | 3.3 | US$ | 3.6 | | | ||||||||||||
Laos |
US$ | 6.0 | US$ | 5.6 | US$ | 5.1 | | | ||||||||||||
Ukraine(4) |
US$ | 4.7 | US$ | 5.2 | US$ | 5.2 | US$ | 4.8 | US$ | 4.7 | ||||||||||
CIS |
||||||||||||||||||||
Kazakhstan |
US$ | 7.1 | US$ | 7.6 | US$ | 8.3 | US$ | 9.2 | US$ | 8.1 | ||||||||||
Tajikistan |
US$ | 10.0 | US$ | 8.6 | US$ | 8.8 | US$ | 6.5 | US$ | 7.1 | ||||||||||
Uzbekistan |
US$ | 5.3 | US$ | 4.6 | US$ | 4.1 | US$ | 4.1 | US$ | 4.7 | ||||||||||
Armenia |
US$ | 7.1 | US$ | 6.8 | US$ | 8.1 | US$ | 10.3 | US$ | 13.2 | ||||||||||
Georgia |
US$ | 6.3 | US$ | 6.7 | US$ | 6.8 | US$ | 7.5 | US$ | 8.9 | ||||||||||
Kyrgyzstan |
US$ | 6.6 | US$ | 5.5 | US$ | 5.5 | US$ | 5.3 | | |||||||||||
Churn (as a percentage) (2) |
||||||||||||||||||||
Russia |
63.9 | 63.2 | 62.8 | 50.8 | 42.8 | |||||||||||||||
Italy |
36.6 | 35.2 | 28.3 | | | |||||||||||||||
Africa & Asia |
||||||||||||||||||||
Algeria(4) |
31.6 | 29.5 | 23.4 | | | |||||||||||||||
Pakistan |
23.0 | 25.2 | 29.5 | | | |||||||||||||||
Bangladesh |
22.3 | 25.2 | 18.5 | | | |||||||||||||||
CAR |
63.2 | 60.0 | 102.0 | | | |||||||||||||||
Burundi |
56 | 54.0 | 59.9 | | | |||||||||||||||
Laos |
102.6 | 141.0 | 258.0 | | | |||||||||||||||
Ukraine(4) |
35.3 | 29.8 | 28.9 | 29.5 | 81.0 | |||||||||||||||
CIS |
||||||||||||||||||||
Kazakhstan |
48.6 | 55.8 | 47.4 | 43.5 | 46.3 | |||||||||||||||
Tajikistan |
77.9 | 72.7 | 67.4 | 82.8 | 52.9 | |||||||||||||||
Uzbekistan |
53.5 | 55.1 | 59.7 | 54.2 | 63.7 | |||||||||||||||
Armenia |
62.6 | 83.9 | 87.6 | 67.6 | 58.6 | |||||||||||||||
Georgia |
74.0 | 79.1 | 70.1 | 94.1 | 46.6 | |||||||||||||||
Kyrgyzstan |
65.6 | 66.1 | 52.3 | 61.9 | 60.5 | |||||||||||||||
End of period broadband customers (in millions): |
||||||||||||||||||||
Russia |
5.4 | 5.0 | 4.6 | 3.3 | 2.1 | |||||||||||||||
Italy |
10.5 | 7.8 | 6.6 | | | |||||||||||||||
Africa & Asia |
| | | | | |||||||||||||||
Ukraine |
0.8 | 0.6 | 0.4 | 0.2 | 0.1 | |||||||||||||||
CIS (3) |
13.7 | 12.3 | 9.5 | 6.7 | 5.5 | |||||||||||||||
Total broadband customers |
30.3 | 25.6 | 12.3 | 3.7 | 2.2 |
12
(1) | For information on how we calculate mobile customer data, mobile MOU, mobile ARPU, mobile churn rates and broadband customer data, please refer to the section of this Annual Report on Form 20-F entitled Item 5Operating and Financial Review and ProspectsCertain Performance Indicators. The number of mobile customers for Africa & Asia includes customers of Telecel Zimbabwe (1.5 million for 2011, 2.6 million for 2012 and 2.6 million for 2013), 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) | 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. |
(4) | The customer numbers for 2012, 2011 and 2010 have been adjusted to remove customers in operations that have been sold and to reflect revised customer numbers in Algeria and Ukraine where the definition of customers has been aligned to the group definition. MOU, Mobile ARPU and Churn have been adjusted accordingly. |
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, 2013, the principal amount of our external debt for bank loans, bonds, equipment financing, and loans from others amounted to approximately US$27.5 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 the 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 at the time, and most of this acquired debt either remains outstanding or has been refinanced (but not reduced in principal amount). Since the Wind Telecom Transaction, we have also incurred additional external debt through bank loans, bonds and equipment financing. As a result the leverage of the VimpelCom Group is substantial.
Proceeds from debt obligations we have incurred or may incur are frequently loaned to our subsidiaries, including subsidiaries acquired in the Wind Telecom Transaction, and may be loaned by the borrowing subsidiaries to their subsidiaries. As a result, amounts we have received in incurring debt may not be available to us, or may not be 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 revenue 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.
13
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 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 on a particular debt obligation, we would be in default under the terms of that debt, and the holders of that debt would be able to accelerate the maturity of that debt, which in turn could cause defaults under cross default provisions in our other debt obligations. Such defaults could also result in loss of any assets that secure defaulted 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, or 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.
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 and may have the effect of preventing us or our subsidiaries from incurring additional debt. Other covenants limit our ability, and that of certain of our subsidiaries, to create liens on assets, make acquisitions, dispose of assets, enter into business combinations or engage in certain activities with companies within our group. A failure to comply with these covenants would constitute a default under the relevant agreements, which could result in acceleration of debt under a relevant agreement, and such an acceleration could, in turn, trigger cross-acceleration defaults that would cause some or all of our debt to be in default, depending on which legal entity within our group experiences the default. This could also lead to secured creditors taking enforcement actions against pledged assets securing our debt. Such a default and acceleration of the debtors obligations under one or more of these agreements 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 variety of factors that influence our revenues, profits and expenditures. These factors include the actual pace of customer growth and growth in usage over the period, the pace of technological development and consequent capital expenditures necessary to keep up with technological development, our acquisition plans, our plans for disposals and our ability to continue to generate sufficient amounts of revenue and ARPU growth. If we incur additional indebtedness, the related risks of leverage 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. The sanctions recently imposed by the United States, European Union and other countries in connection with recent developments in Ukraine and Russias annexation of Crimea may also negatively affect our ability to raise external financing, particularly if the sanctions are broadened. As a result, we may be unable to make necessary or desired capital expenditures, to take advantage of investment opportunities, to refinance existing indebtedness or to 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.
14
Furthermore, if credit ratings within our Group are downgraded, placed under surveillance or revised by rating agencies, our borrowing costs could increase and the access to the capital we need could be limited. Our credit ratings are based in part on factors over which we have no control, including conditions affecting the telecommunications industry in general or conditions affecting certain countries or regions in which we operate. Our credit ratings can change as a result of changing economic and market conditions, a deterioration in our results or performance or the ratings agencies perception of these or different factors. Any credit downgrade could therefore have a material adverse effect on 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 revenue is in currencies other than the U.S. dollar and Euro. As a result, we are exposed to foreign currency exchange loss risks related to the varying exchange rates of our local currencies against the U.S. dollar or Euro. Declining values of local currencies against the U.S. dollar or the Euro could make it more difficult for us to repay or refinance our U.S. dollar or Euro-denominated indebtedness or to purchase equipment and services. In Ukraine, for example, the recent political unrest and economic crisis, including international ratings agencies downgrading of Ukraines sovereign credit rating and significant capital outflows, have led to the weakening of the hryvnia since December 31, 2013. The Russian ruble has also fluctuated greatly since December 31, 2013, and may continue to be subject to volatility, potentially resulting in significant depreciation. Unless effectively hedged, foreign currency exchange 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.
In addition, the existence or imposition of exchange controls or other similar restrictions on currency convertibility, including possible economic sanctions, in any of 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, we may assume unexpected or unforeseen liabilities and obligations or incur greater than expected liabilities in connection with acquisitions and we may not be able to divest some of our activities as planned, in a timely manner or on terms and conditions acceptable to us.
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, and their ability to obtain and maintain frequencies and numbering capacity; |
| past and future compliance with applicable laws, rules and regulations (including, without limitation, tax, currency control, economic sanctions, anti-corruption 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; |
15
| developments in competition within each jurisdiction, including the entry of new competitors or an increase in aggressive competitive measures by our competitors; |
| 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.
Furthermore, these acquisitions may result in additional financing needs which could adversely affect our financial leverage and our debt-to-equity ratio. Acquisitions may also lead to substantial increases in intangible assets, including goodwill. Our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F reflect significant intangible assets, including goodwill. If we were to encounter continuing adverse business developments, including negative effects on our revenue, profits or cash or from foreign exchange rate developments, or if we were otherwise to perform worse than expected at the moment of an acquisition, then these intangible assets, including goodwill, might have to be written off, which could have a material adverse effect on our business, financial condition, results of operations and prospects. The likelihood of such adverse business developments increases in times of difficult or uncertain macroeconomic conditions. Risk of goodwill write-downs is also discussed below under Risks Related to Our MarketsThe international economic environment could have a material adverse effect on our business.
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. 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 revenue 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 or at all.
With respect to dispositions, we may not be able to divest some of our activities as planned, in a timely manner or on terms and conditions acceptable to us and the divestitures we do carry out could have a negative impact on our business, financial condition, results of operations and, potentially, our reputation. For example, we have announced our intention to divest our activities in the Central African Republic and Burundi but, as of the date this Annual Report on Form 20-F, have not been able to complete the sale of these operations.
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.
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.
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 covenants in debt agreements and corporate, tax and other laws and regulations. These covenants, laws and regulations include restrictions on dividends or limitations on repatriation of earnings under applicable local law, monetary transfer restrictions and foreign currency exchange restrictions in the jurisdictions in which VimpelComs subsidiaries operate.
16
VimpelCom has experienced significant examples of these limitations in its Italian and Algerian operations.
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 facilities agreement entered into by WIND Italy and the senior notes and senior secured notes issued by Wind Acquisition Finance S.A. and guaranteed by WIND Italy. 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 disputed 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 GTH. 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 GTH below. On April 18, 2014, we together with our subsidiary GTH entered into a share purchase agreement to settle our disputes with the Algerian Government and sell a non-controlling 51% interest in OTA to the Algerian National Investment Fund, subject to the satisfaction or waiver of certain conditions precedent. One such condition precedent is the lifting of the Bank of Algeria injunction restricting all Algerian banks from engaging in foreign banking transactions on behalf of OTA. Although we expect the transaction to close by the end of 2014, there can be no certainty that the closing conditions will be satisfied or waived and that the transaction will be completed. For more information, see Note 28 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.
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. 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 or to comply with our policies, including internal controls over financial reporting, 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.
GTH, 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 regulations applicable to public companies and to enforcement actions by Egyptian authorities. Following the 2011 revolution, the election and inauguration of a new government in Egypt and the ouster and replacement of that government with another new government, there are significant uncertainties about the future political, economic and regulatory environment and stability in Egypt. As a result, we are exposed to the risk of unpredictable and adverse government action and severe delays in obtaining (or denials of) necessary approvals from government bodies. We may not be able to effectively challenge such actions through legal proceedings. Furthermore, Egyptian tax law could be changed significantly or become subject to new interpretation, which could expose GTH to increased tax liability. For more information on tax claims of the Egyptian authorities please see Note 27 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. In addition, authorities and GTHs minority shareholders may bring claims against GTH or its officers and directors, some of whom are officers of VimpelCom. The risks relating to our majority stake in GTH 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 customers and retain existing customers, leading to loss of market share and revenue.
We have expended significant time and resources building our Beeline, Kyivstar, Wind, Infostrada, Mobilink, Leo, banglalink, Telecel, and Djezzy brand images. Our ability to attract new customers and retain existing customers 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 customers 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.
17
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 (VimpelCom Lao Co., Ltd), and Zimbabwe (Telecel).
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 possibility that our relationship with a strategic or joint venture partner will deteriorate; |
| the difficulty of maintaining uniform standards, controls, procedures and policies; and |
| 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. |
Although we perform due diligence on our strategic or joint venture partners, and put in place contractual arrangements in an effort to secure that these partners 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, including anti-corruption legislation. Moreover, it is possible that such an investigation or liability or enforcement action could constitute a default under relevant debt agreements, which might, in turn, cause the relevant debt to be accelerated and trigger cross defaults under other debt agreements.
We are subject to investigations by the SEC, DOJ and the Dutch public prosecutor, and are conducting an internal investigation, and we are unable to predict the duration, scope or results of these investigations or their impact on us.
As we previously disclosed, the SEC, DOJ and Dutch public prosecutors office are conducting investigations related to VimpelCom; these investigations appear to be concerned with our operations in Uzbekistan, including relations with Takilant Ltd. (Takilant). In June 2007, Takilant purchased from us a 7% interest in our business in Uzbekistan for US$20.0 million and entered into a shareholders agreement with us. In September 2009, Takilant exercised its option to put its 7% interest to us for US$57.5 million, an amount specified in the shareholders agreement. In addition, we had agreements with Takilant relating to the acquisition of frequency spectrum (including with respect to 3G and LTE) and channels in Uzbekistan pursuant to which we paid Takilant an aggregate of US$57.0 million.
It has been reported in the press that Takilant is currently being investigated in Sweden and Switzerland on allegations that it and certain persons associated with it have committed acts of bribery and money-laundering connected with their activities in Uzbekistan, and also that Takilant is being investigated in the Netherlands and perhaps other jurisdictions. These investigations may, in part, involve us.
As a result of concerns arising from press reports regarding Takilant, we commenced a review with respect to our operations in Uzbekistan, including our relations with Takilant, and in 2013 we retained external counsel with expertise relating to the U.S. Foreign Corrupt Practices Act (FCPA) and other anti-corruption laws and regulations to conduct such review.
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Following notice of the investigations by the SEC, the DOJ and the Dutch public prosecutors office, we established a special committee of the supervisory board in March 2014, consisting of all outside directors, to oversee the internal investigation being conducted by the Companys external counsel and our response to the inquiries by various authorities. While the initial focus of the investigation being conducted by the Companys external counsel has been related to our Uzbek operations, including our relations with Takilant, and whether there was any conduct in our operations in Uzbekistan that may have violated the anti-bribery provisions of the FCPA, the FCPAs books and records and internal controls provisions, applicable local laws and/or our own internal policies, the investigation is also reviewing our operations in additional countries.
We expect to incur costs in responding to requests for information, testimony and other information in connection with the investigations and in conducting the internal investigation, and we cannot predict at this time the ultimate amount of all such costs. These matters may require the involvement of certain members of our senior management that could impinge on the time they have available to devote to other matters relating to the business. We may also see ongoing media and governmental interest in these matters that could impact the perception of us.
The SEC, DOJ and Dutch investigations, as well as our own investigations, are continuing, and we are presently unable to predict the duration, scope or results of these investigations or how the results of these investigations may impact our internal controls, business, and the results of operations or financial condition. Further, there can be no assurance that such investigations will not be broader in scope than they currently appear, or that new investigations will not be commenced in these or other jurisdictions, or that there will not be litigation commenced against us.
One or more enforcement actions could be instituted in respect of the matters that are the subject of some or all of the investigations. The DOJ and SEC have a broad range of civil and criminal sanctions under the FCPA and other laws and regulations including, but not limited to, judgments, settlements, injunctive relief, debarment or other relief, disgorgement, fines, penalties, modifications to business practices, including the termination or modification of existing business relationships, the imposition of compliance programs and the retention of a monitor to oversee compliance with the FCPA, and criminal convictions and/or penalties. The Dutch public prosecutors office and enforcement authorities in other jurisdictions also have a range of sanctions under the relevant laws and regulations. There can be no assurance that any investigation will not conclude that a violation of applicable law has occurred. The imposition of any of these sanctions or remedial measures could have a material adverse effect on our business or financial condition.
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 agreement or similar arrangements which may impact the composition of our Supervisory 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 addition, in Pakistan and Bangladesh our subsidiaries directly compete with subsidiaries of Telenor and it is possible that we will compete with Telenor and/or Alfa Group in other markets in the future.
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.
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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 eight 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.
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 our other debt agreements. In such an event, our obligations under one or more of these agreements could become immediately due and payable, which could 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.
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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 revenue is often unpredictable, and our revenue sources are short-term in nature.
Future revenue from our prepaid mobile customers, our primary source of revenue, and our contract mobile customers is unpredictable. We do not require our prepaid mobile customers 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 customers to enter into service contracts; however, many of these service contracts can be canceled by the customer 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 customers to have less discretionary income, thus affecting their spending on our services. The loss of a larger number of customers than anticipated could result in a loss of a significant amount of expected revenue. Because we incur costs based on our expectations of future revenue, our failure to accurately predict revenue could adversely affect our business, financial condition, results of operations and prospects.
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 customer 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 customers 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 Italy 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 customer base. Competition for customers 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, as occurred during the summer in 2013 when all operators in Italy reduced pricing in order to gain market share. 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 customers, in addition to attracting customers 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 customers or for which our existing or future customers are not willing or able to pay. We also may not be able to develop other platforms, products and services to attract and retain customers, 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 or we may not be able to effectively monetize the use of such products and services to generate profits for us. If we fail to extract additional revenue from our existing customers or continue to expand our customer base, our business, financial condition, results of operations and prospects will be materially adversely affected.
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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 customer database piracy or other database security breaches, which may materially adversely affect our reputation, lead to customer lawsuits, loss of customers or hinder our ability to gain new customers 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 customers, including their names, addresses, home phone numbers, passport details and individual tax numbers. In addition, the breach of security of our database and illegal sale or other unauthorized release of our customers personal information could materially adversely impact our reputation, prompt lawsuits against us by individual and corporate customers, lead to violations of data protection laws and adverse actions by the telecommunications regulators and other authorities, lead to a loss in customers and hinder our ability to attract new customers. 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. In addition, we may be exposed to cyber-attacks, which could result in equipment failures or disruptions in our operations. Our inability to operate our fixed-line or wireless networks as a result of such events may result in significant expense or loss of market shares. These factors, individually or in the aggregate, could have a material adverse effect on our business, financial condition, results of operations and prospects.
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 evolving technology, industry standards and service demands. 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. In some areas, we operate in a 4G network, and we are exploring options for developing a 4G network in other markets. New network development requires significant financial investments and there can be no assurance that we will be able to develop 3G or 4G 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 compatible devices may not currently support the cost of 4G development in certain
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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 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 revenue and profits and therefore may hinder recovery of our significant capital investments in 3G or 4G services as well as our growth.
The next step in telecommunications in Ukraine is the deployment of 3G networks. The 3G auction was announced and subsequently canceled by government authorities in 2009, and no auction 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 invest a certain amount in our network in each year in which it is being constructed. By the end of 2013, we launched LTE networks in seven regions, including Moscow. For more information regarding the terms of our LTE license, please see the section of this Annual Report on Form 20-F entitled Item 4Information 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.
However, 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 and MegaFon entered into a MVNO agreement with Scartel for the joint development and provision of 4G technology networks under the LTE standard in Russia. In the last quarter of 2013, MegaFon acquired LLC Scartel and LLC Yota from Garsdale Services Investments Ltd, MegaFons controlling shareholder. As a result, MegaFon obtained a competitive advantage both in terms of frequency resources and LTE network development using Scartels network.
WIND Italy has made significant investments in obtaining its UMTS licenses related frequencies and has continued to significantly invest in the development of its network, in addition to the planned investments in its LTE network during the next several years. 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. The next generation network, if introduced, would replace partially Telecom Italias legacy copper network with fiber. Although there is uncertainty around implementing the roll-out of such next generation network, including the timing, 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.
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,
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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, radio access network solutions, 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 Solutions and Networks, although some of the equipment that we use is available from other suppliers. From time to time, we have experienced delays in 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.
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, software bugs 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 customers 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 error 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 customers and consequently impair our ability to obtain and retain customers 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, customer 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 customer balances and could impact our reputation if customers are billed incorrectly.
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. In addition, we rely on roaming partners to provide services to our customers while they are outside the countries in which we operate. To the extent that we are unable to find and engage appropriate third party providers on acceptable terms or 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 and other smartphones, will contribute to our customer 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.
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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 revenue. 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.
Allegations of health risks related to the use of mobile telecommunication devices and base stations could have a material adverse effect on us.
There have been allegations that the use of certain mobile telecommunication devices may cause serious health risks. The actual or perceived health risks of mobile devices could diminish customer growth, reduce network usage per customer, 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.
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.
Our competitive position and future prospects depend on our senior management and other key personnel and our inability to attract, retain and motivate qualified key personnel could have a material adverse effect on our business, financial condition and results of operations.
Our ability to maintain our competitive position and to implement our business strategy is dependent to a large degree on our senior management team and other key personnel. In the markets in which we operate, competition for personnel with relevant expertise is intense. The loss of members of our businesses senior management teams or an inability to attract, retain and motivate qualified key personnel could have a material adverse effect on our business, financial condition, results of operations and prospects.
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
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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, Uzbekistan, Kyrgyzstan 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.
For more information about the competition proceedings in which our subsidiaries are involved, see Note 27 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.
New or proposed changes to laws in Russia and other markets in which we operate may adversely affect our business.
In December 2012 legislation was adopted in Russia, which permitted mobile customers to use the mobile number portability service, or MNP, for a fee determined by the operator (which must not exceed 100 rubles) from December 1, 2013. MNP was implemented during 2013 only at the regional level, allowing customers 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. The number database for customers who would like to use MNP has been set up by the Russian government. We spent US$17 million on MNP launch and support in 2013. Although we expect that, until the end of the first quarter of 2014 (as discussed below), the launch of MNP will not affect the market shares of operators, we cannot be certain that this will not negatively impact our market share over a longer term, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
In November 2013, the Russian Government approved a transitional period for MNP up to April 7, 2014, during which the receiving operator (recipient) has a right to appoint the terms of number portability, but no later than April 15, 2014. From April 8, 2014, all operators will be obliged to transfer customer numbers to a new operator within eight days after conclusion of a new
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operator contract with consumers or 29 days for corporate customers. Operators (donors) who do not comply with these terms will have to serve these customers free of charge until the end of the MNP time limits. We currently anticipate that we will be able to complete MNP requests within these time limits. However, if, after we receive a warning from the relevant regulator, we are still unable to comply with the time limits for MNP, the relevant license under which we provide the services to the transferring customer could be revoked. Accordingly, these MNP regulations or other 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.
Certain draft laws are under discussion in Russia which, if adopted as currently drafted, could cause our revenue from the provision of roaming services and international roaming retail services to 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.
For a discussion of developments in the regulation of mobile termination rates affecting our business in Italy, see Item 4Information on the CompanyRegulation of TelecommunicationsRegulation of Telecommunications in Italy. These developments have in the past and can in the future adversely affect our business in Italy.
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 had a significant negative impact during 2013. These or similar regulations in other markets in which we operate could adversely affect our business, financial condition, results of operations and prospects.
In Ukraine, new legislation came into effect in 2012, which, among other things, implements a national roaming service giving customers the ability to transfer their mobile numbers from one telecommunication network to another. In 2013, the procedure for the provision of MNP services was approved by the Ukrainian regulator with a starting date of MNP service from July 1, 2014. The implementation of MNP may result in changes to the current market shares of the Ukrainian mobile telecommunications operators.
In December 2012, the National Regulator of Armenia adopted the principles and timetable for the Implementation of MNP services in Armenia. The porting time may not exceed three working days with gradual reduction to one working day and shall be free of charge. Since December 2012 the National Regulator of Armenia adopted further rules and took further actions to implement the various decisions. MNP was implemented on April 1, 2014. The implementation of MNP may result in changes to the current market shares of the Armenian telecommunications operators.
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 Italy 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 or comply with 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 non-compliance, the applicable regulator could decide to suspend and seek termination of the license or permit. The occurrence of any of these events could materially adversely affect our ability to build out our networks in accordance with our plans and to retain and attract customers, could harm our reputation and could have a material adverse effect on our business, financial condition or results of operations.
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. 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 a government regulator finds that we have failed to fulfill the specific terms of any of our licenses, frequency permissions or other governmental permissions or permits or that we have provided 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 permits or refuse to renew licenses, frequency permissions or other governmental permissions or permits that are up for renewal.
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A suspension and/or the subsequent termination of licenses or refusal to renew our licenses, frequency permissions and/or other governmental permissions or permits 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, upon the renewal or extension of a license, 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 customer 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. For instance, 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, 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. In Algeria, OTA was officially notified of the award of its 3G license on December 3, 2013 and in Bangladesh, banglalink was awarded a 3G license on September 8, 2013. In Pakistan, Mobilink, was awarded a 3G license on April 23, 2014.
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 customer 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, including, but not limited to, prohibiting the use of equipment from certain manufactures due to national security concerns or imposing important bans on certain types of equipment. 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.
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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.
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 Note 27 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. 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, Armenia, Georgia, 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 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 GTH.
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.
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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 GTH.
GTHs subsidiary OTA accounts for a significant proportion of GTHs consolidated revenue. 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 for the tax years 2004 to 2009. OTA continues to challenge these claims but has prepaid, under protest, claimed amounts and penalties totaling approximately DZD71.9 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.
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, save for a recent limited exemption allowing the importation of 3G equipment, 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 DZD99.0 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 DZD6 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.
On April 12, 2012, GTH submitted a formal Notice of Arbitration against the Algeria State in respect of actions taken by the Algerian State 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, GTH 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 State 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.
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 Note 27 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. 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.
On April 18, 2014, we together with our subsidiary GTH entered into a share purchase agreement to settle our disputes with the Algerian Government and sell a 51% interest in OTA to the Algerian National Investment Fund, subject to the satisfaction or waiver of certain conditions precedent. Specifically, as part of the settlement: (1) at closing of the transaction, OTA will definitively discontinue, with no admission of wrongdoing or liability, all pending proceedings relating to the disputes with the Algerian tax administration relating to tax reassessments for the years 2004 to 2009, (2) the foreign exchange and import restrictions put in place by the Bank of Algeria against OTA on April 15, 2010 will be lifted on closing of the transaction, following the payment by OTA to the Algerian Treasury of the fine of DZD99.0 billion (approximately US$1.266 billion), (3) at closing of the transaction, OTA will definitively discontinue (with no admission of wrongdoing or liability) all pending related proceedings, and (4) upon signing of the share purchase agreement on April 18, 2014, GTH suspended its current arbitration against the Algerian State initiated on April 12, 2012 and, upon closing of the transaction, the parties to the arbitration will terminate the arbitration and all claims relating thereto.
Although we expect the transaction to close by the end of 2014, there can be no certainty that the closing conditions will be satisfied or waived and that the sale transaction will be completed. If the sale transaction is not completed, then the aforementioned settlements will not be effected. In such case, there can be no certainty that the Algerian tax authority will not make further tax assessments against OTA or other GTH 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 GTHs business, prospects, financial condition and results of operations. Furthermore, although OTA maintains that it has, and its senior executive has, acted in compliance with the law, if the sale transaction is not completed there is no guarantee that OTA will not become liable to pay some or all of the Bank of Algeria 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. If the sale transaction is not completed, GTHs 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 GTHs investments in Algeria, and there can be no assurance that there will not be further new laws and changes to existing laws that will
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have a negative impact on OTA and GTH. 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.
For more information, see Notes 27 and 28 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.
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.
However no assurance can be currently given as to whether and when these amendments will be enacted, their exact nature, and the possible impact on our business.
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 GTH. 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.
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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 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 companies in the same tax group. Subject to certain limitations, 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 an example, authorities in the Russian Federation are discussing the possible introduction of substantial fines for violation of the laws relating to customers personal data processing. The amount of a fine might run up to US$8,600 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 DZD100,000 (equivalent to US$1,267) for each unidentified SIM is paid for the first year and increase to DZD150,000 (equivalent to US$1,901) for the second year. This law also specifies that the details of implementation of this provision
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will be clarified by further legislation that has not been published. Following the measures that are currently being introduced in order to modernize the Algerian administrative system, in some regions the competent bodies have started to refuse legalizing IDs. The Ministry of Home Affairs is expected to clarify the approach to be taken by mobile operators. 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 and permits. 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, licenses and/or permits. Any such finding could have a material adverse effect on business, financial condition or results of our operations.
In addition, it may be difficult and/or 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 and 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 customers 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.
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 difficulty 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.
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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.
Russian legislation, named 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 of any future transactions resulting 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 of the issue. 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.
We are subject to a number of anti-corruption laws, including the 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. The FCPA also requires public companies to maintain accurate books and records and devise a system of sufficient internal accounting controls. We regularly review and update our policies and procedures and internal controls designed to provide reasonable assurance that we, our employees, distributors and other intermediaries comply with the anti-corruption laws to which we are subject. However, there are inherent limitations to the effectiveness of any policies, procedures and internal controls, including the possibility of human error and the circumvention or overriding of the policies, procedures and internal controls. There can be no assurance that such policies or procedures or internal controls 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.
We operate in Africa, Russia and other countries of the former Soviet Union, as well as other countries which pose elevated risks of corruption violations. If we are not in compliance with anti-corruption laws and other laws governing the conduct of business with government entities and/or officials (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 or policies by us or any governmental body 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.
After late 2008, the economies in our markets were adversely affected by the international economic crisis, and economies in markets in which we operate continue to suffer. Among other things, the crisis led to a slowdown in gross domestic product growth, increase of inflation, 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 customers. 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 customers 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. VimpelCom has recognized substantial amounts of goodwill in connection with its acquisitions, in particular the acquisitions of Golden Telecom in 2008, Kyivstar in 2010 and Wind Telecom in 2011. At December 31, 2013 the gross value of goodwill was US$14,709 million. In 2013 we recorded impairment of goodwill in Ukraine of US$ 2,085 million, the investment in Canada of US$ 764 million and other assets in various countries of US$ 124 million.
On at least an annual basis, we perform an impairment test for each cash generating unit (CGU) as required by IFRS. Estimating recoverable amounts of CGUs must, in part, be based on managements evaluations, including the determination of the appropriate CGUs, the discount rate, estimates of future performance, the revenue generating capacity of the assets, timing and amount of future purchases of property and equipment, assumptions of the future market conditions and the long-term growth rate into perpetuity (terminal value). 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. In addition, the different possible developments as a result of a financial and economic crisis, in particular related to customer behavior, competition reaction in this environment in terms of offers and pricing or in response to new entrants, regulatory adjustments in relation to reductions in consumer prices and our ability to adjust costs and investments in keeping with possible changes in revenue may adversely affect our forecasts and lead to a write-down in tangible and intangible assets.
A write-down in tangible and intangible assets 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. For further information on the impairment of tangible and intangible assets and recoverable amounts (particularly key assumptions and sensitivity), see Note 10 to the consolidated financial statements included elsewhere in this Annual Report on Form 20-F.
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
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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 customers and, consequently, our business.
Some of the jurisdictions in which we operate have experienced significant social unrest. For example, GTH is an Egyptian company listed on the Egyptian Stock Exchange. Since 2011, there have been 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. In addition, in 2012 and 2013, 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.
Ukraine has experienced significant social and political unrest in recent months, including large-scale political protests resulting in the death of numbers of Ukrainians and the removal of Viktor F. Yanukovich as president of Ukraine in February 2014. Further deterioration of conditions in Ukraine could materially adversely affect our business, financial condition, results of operations and prospects. Due to recent developments in Ukraine and Russias annexation of Crimea, the United States, the European Union, Australia, Canada, and a number of other countries have imposed sanctions on certain individuals and financial institutions in Russia and have proposed the use of broader economic sanctions. In response, Russia has imposed entry bans on certain U.S. and E.U. officials, and some Russian officials have indicated that Russia would impose sanctions in response to sanctions imposed on Russia by other countries. If the United States and the European Union were to impose further sanctions, including sanctions on additional Russian businesses or additional Russian financial institutions, or if there were an increase in hostilities in Ukraine or in the region, it could result in instability or worsening of the overall economic situation in Ukraine, Russia, Europe or in the global capital markets generally, which could impact our group. In particular, we could be materially adversely impacted by a decline of the Ruble against the U.S. Dollar or the Euro exchange rates and the general economic performance of Russia. The annexation of the Crimea by Russia and unrest in Eastern Ukraine may result in significant damage or loss of assets and may also present some regulatory issues, the resolution of which may adversely impact our group. As a result, the instability in the region and economic sanctions and other geopolitical developments could materially adversely affect our business, financial condition, 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 Risks Related to Our BusinessWe are exposed to foreign currency exchange loss and convertibility risks. In case of significant social unrest in some of the countries in which we operate, the local authorities may order our subsidiaries to temporarily shut down their entire network or our networks may be shut down due to nationwide strikes. For example, in 2013, our subsidiary in Pakistan was ordered to shut down parts of its mobile network and services on a regular basis. Also, our subsidiary in Bangladesh was forced to shut down its network on a number of occasions due to nationwide strikes. In addition, local governments or other factions could make inappropriate use of our network and force us to broadcast propaganda or illegal instructions to our customers. Forced shutdowns or inappropriate use of our network 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.
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 customers and our customer 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.
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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 customers 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 customers, 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 have operations.
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 305,000,000 VimpelCom convertible preferred shares outstanding which may be converted into VimpelCom common shares at the option of the shareholder (presently Telenor) any time between October 15, 2013 and April 15, 2016 at a price based on the NASDAQ price of VimpelCom ADSs, subject to certain limitations under U.S. securities laws. If 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.
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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 leverage, its capital requirements, contractual restrictions, legal proceedings and such other factors as VimpelComs supervisory board may consider relevant. For more information on our policy regarding dividends, see Item 8. Financial InformationPolicy on Dividend Distributions.
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 certain corporate governance requirements under the NASDAQ rules.
Our ADSs are listed on the NASDAQ Global Select Market; however, as a Bermuda company, we are permitted to follow home country practice in lieu of certain corporate governance provisions under the NASDAQ listing rules that are applicable to a U.S. company. The primary difference between our corporate governance practices and the NASDAQ rules relates to NASDAQ listing rule 5605(b)(1), which provides that each U.S. company listed on NASDAQ must have a majority of independent directors, as defined in the NASDAQ rules. Bermuda corporate law does not require that we have a majority of independent directors. We do not have a majority of independent directors, as defined in the NASDAQ rules. Accordingly, you will not have the same protections as are afforded to shareholders of companies that are subject to all of the NASDAQ corporate governance requirements. For more information on the significant differences between our corporate governance practices and those followed by U.S. companies under the NASDAQ listing rules, 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, 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 753 million as of December 31, 2013. We provide services under the Beeline, Kyivstar, banglalink, Mobilink, Telecel, Leo, Djezzy, WIND and Infostrada brands. As of December 31, 2013, we had 220 million mobile customers. For a breakdown of total revenue 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.
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.
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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 (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 and Italy, and equity shareholdings in Canadian and Zimbabwean operations. |
| On September 10, 2013, VimpelCom switched the listing of its ADSs to the NASDAQ Global Stock Market from the NYSE. On October 29, 2013, VimpelCom achieved another major milestone with its inclusion in the NASDAQ-100® Index. |
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 2013 is divided into the five following business units, all of which report to our headquarters in Amsterdam:
| Russia; |
| Italy; |
| Africa & Asia; |
| Ukraine; and |
| the Commonwealth of Independent States (or CIS). |
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 April 30, 2014. 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%(1) | ||
WIND Acquisition Holdings Finance S.p.A. |
Italy | 100%(2) | ||
WIND Telecomunicazioni S.p.A. |
Italy | 100% | ||
WIND Retail S.r.l. |
Italy | 100% | ||
VimpelCom Holdings BV |
Netherlands | 100% | ||
OJSC VimpelCom |
Russia | 100% | ||
Kyivstar PJSC |
Ukraine | 100%(3) |
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Subsidiary |
Country of Incorporation |
Percentage Ownership Interest (Direct and Indirect) | ||
Limnotex Developments Limited |
Cyprus | 71.5%(4) | ||
LLP KaR-Tel |
Kazakhstan | 71.5.%(5) | ||
LLP TNS-Plus |
Kazakhstan | 49%(6) | ||
LLC Tacom |
Tajikistan | 98.0%(7) | ||
LLC Golden Telecom |
Ukraine | 100%(9) | ||
LLC Unitel |
Uzbekistan | 100%(10) | ||
LLC Mobitel |
Georgia | 80.0%(11) | ||
CJSC ArmenTel |
Armenia | 100% | ||
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% | ||
Global 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) | ||
Global 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) | 92.23936% of the share capital of Wind Telecom S.p.A. is owned by VimpelCom Amsterdam B.V., and the remainder 7.760636% is owned by WIND Acquisition Holdings Finance S.p.A. |
(2) | 0.0025% is owned by managers of WIND Telecomunicazioni SpA. |
(3) | VimpelCom Ltd. hold 99.9961% of the outstanding shares 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. |
(4) | OJSC VimpelCom holds 71.5% indirectly through a wholly owned holding company. |
(5) | Limnotex Developments Limited holds 100% directly. |
(6) | VimpelCom Holdings B.V. holds 49% indirectly through a wholly owned Dutch and Kazakh holding companies. |
(7) | VimpelCom Holdings BV holds 98.0% indirectly through a wholly owned BVI holding company. |
(8) | Kyivstar holds 100% directly. |
(9) | OJSC VimpelCom holds 100% indirectly through a number of its wholly owned subsidiaries. |
(10) | OJSC VimpelCom holds 100% indirectly through wholly owned Dutch and BVI holding companies. |
(11) | VimpelCom Holdings B.V. holds 80.0% indirectly through a number of wholly owned subsidiaries. |
(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) | GTH holds 57.5% directly and 39.3% indirectly through two wholly owned Maltese subsidiaries. |
(16) | GTH holds 100% indirectly through two wholly owned Maltese subsidiaries. |
(17) | GTH holds 99.9% indirectly through a Maltese subsidiary. |
(18) | GTH holds 100% indirectly through a Maltese subsidiary. |
(19) | GTH 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 customers:
| 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 customer locations), media, content delivery channels and mobile financial services (such as mobile bill payment); |
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| access to both national and international roaming services which allow our customers and customers of other mobile operators to receive and make international, local and long distance calls while outside of their home network; |
| 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 customers 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 21,647 kilometers of fiber optic cable backbone and 1,458 LLU sites for direct customer 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 customers, including large corporate customers, SMEs and SOHOs; and |
| Internet and Data Services, which provide Internet and data transmission services to both consumer and corporate customers; |
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 Italy 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 optimizing cash flows, and our businesses combine mature, strong cash-generating companies with emerging growth opportunities in a number of regions. We combine strong 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 especially in mobile data, but also in fixed-line data and mobile voice, by tailoring our strategy in each individual market according to its local characteristics.
We believe that customers 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 especially in Russia and Italy, and 3G in other markets in which we operate. As such, our strategy is primarily mobile-based and we seek to prioritize resources and investment allocation to mobile broadband 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.
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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 220 million customers as of December 31, 2013. 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.
| Profitable Growth. We aim to drive revenue growth that leads to higher profitability by focusing on gaining share in mobile data revenue 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 revenue 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, while continuously modernizing our networks. 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 group-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 revenue 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 broadly comprises three types of businesses grouped according to their stages of development:
| We consider our emerging markets Russia, Ukraine, CIS, Bangladesh, Pakistan and Algeria. These markets each have a large potential customer base, high revenue growth from relatively low penetration, with the exception of Russia, and significant growth potential for mobile data. In these markets, we will seek to leverage our knowledge and experience across our emerging markets footprint and in our more mature market in Italy to capture this growth. In most of these emerging markets, we plan to deploy capital to modernize the networks to capture the growth potential from increased penetration and mobile data growth. |
| In Italy, a large and mature market, we are focused on increasing profitability and sustaining the strong cash flow generation. We are also focused in deleveraging the business. The market is highly penetrated, but has potential for broadband growth in fixed-line and in mobile. Here, we will remain focused on reinforcing our solid market positions and continue to invest in our mobile data network. |
| Finally, we have early stage operations, such as in 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 |
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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. |
| 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 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, Laos and Kyrgyzstan. 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 and Kyivstar Business brands. In Italy, our WIND brand is well established and enjoys high recognition. 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 customers 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. |
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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 customer segments. We believe that our ability to provide specialized customer service has helped us maintain a high level of customer satisfaction with our products and services and control churn. We also believe that we have provided particularly strong customer service to our corporate customers. |
| 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 a 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. |
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 customers under two types of payment plans: postpaid plans and prepaid plans. As of December 31, 2013, approximately 8% of our customers in Russia were on postpaid plans and approximately 92% of our customers in Russia were on prepaid plans.
Voice Services
We provide all of our customers with voice services that include airtime charges from mobile postpaid and prepaid customers, including monthly contract fees for a 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 customers 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.
For a description MTR and MNP, please refer to the section of this Annual Report on Form 20-F entitled Item 4Information on the Company Regulation of Telecommunications Regulation of Telecommunications in Russia.
Roaming
As of December 31, 2013, our operations in Russia had active roaming agreements with 560 GSM networks in 212 countries, respectively, in Europe, Asia, North America, South America, Australia and Africa. In addition, as of December 31, 2013, we provided to our Russian customers GPRS roaming with 403 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 customers.
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 customer 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 customers monthly bill.
OJSC VimpelCom offers customized application for mobile network enhanced logic (CAMEL), an intranetwork prepaid roaming service. This service allows prepaid customers 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 customer accounts caused by roaming. As of December 31, 2013, we provided our Russian customers CAMEL roaming through 237 operators in 128 countries.
As of December 31, 2013, we also had domestic roaming agreements with five regional GSM providers in Russia, which provide roaming for customers in more than nine cities across Russia.
Value Added Services including Data Revenue
Our value added services include messaging services, content/infotainment services, data access services (on 2G, 3G and 4G basis), financial value added services (which help customers manage their credit balances), location based services (which monitor customer locations) media and content delivery channels.
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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 and voice messaging. Different price offers for messaging services are offered to different segments of our customers.
We offer our customers 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 |
| customized ringtones (RBT). |
Wireless Internet Access
We provide our customers with wireless Internet access through GPRS/EDGE, 3G/HSPA and 4G/LTE. We launched 3G Internet services commercially in September 2008 in Russia, and we launched 4G in Moscow in May 2013.
We currently offer Internet access through USB modems in every region of Russia, and our customers benefit from 3G speeds in every region in Russia as of December 31, 2013. 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, our tiered data-plans provide smartphone customers with data, voice and SMS packages. In 2013 we launched tiered data-plans differentiated by customers needs and made unified data-plans offers for any device type and any data consumption.
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 customers 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 customers 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 technology 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.
In January 2013, we introduced a fleet management program which provides customers with the possibility of monitoring cars and employees from one web-interface. In April 2013, we launched Pay-me in certain regions which provides customers with a mobile terminal to pay using their smartphone.
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In September 2013, we initiated an internal project M2M Alliance: SIM profile management the key goal of which is to launch a technical solution in line with M2M World Alliance joint requirements and roadmap which we expect to introduce to the market by July 2014.
Corporate SMS services. We provide direct connections for SMS centers of large companies and aggregators. In November 2013, we launched project Anti-SPAM. This project has the goal of reducing spam SMS messages received by our customer. In the first stage an automatic anti-spam filter was introduced followed in the second stage by a black&white list option for our customers. On December 2, 2013 we also launched short number 1888 for the cancellation of SMS broadcast messages to customers. This is a joint project of Beeline and the eight biggest SMS aggregators of Russia.
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 2013 we continued the expansion of our fixed mobile convergence services into 17 new cities in Russia. increasing the total number of cities in which we provide these services to 91. In February 2014, we plan to provide these services to an additional 48 cities.
Mobile cloud solutions. In November 2013, we launched an MDM project as a part of the BYOD (bring your own device) concept. We were the first operator in the Russian market who launched MDM. In December 2013, we were the first operator in the Russian market to launch Google Apps for business. We are continuing to develop our product portfolio for the BYOD concept.
Interconnect Revenue. 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.
Revenue from Sales of Equipment and Accessories and Other Revenue. During 2013 the Beeline retail chain demonstrated significant growth. As of December 31, 2013 the number of owned retail stores exceeded 1,238 compared to 401 owned retail stores as of December 31, 2012 and, the number of owned modules exceeded 78 compared to 6 owned modules as of December 31, 2013. At the same time there was a focus on operational efficiency. In order to promote Beelines retail chain and increase smartphone penetration a campaign was launched in August 2013 with Samsung. As a result a large number of Samsung Pocket Neo devices have been sold.
VimpelCom was the first operator in Russia to sign a contract with Apple. Since October 2013 all new iPhones have been available in Beeline retail stores and Apple has a large share in Beeline retail chain t as a result. In addition, during 2013 Beeline customers with new iPhones were able to use our LTE network.
Specialized customer care. We provide specialized customer service to our different customer segments. We believe that our ability to provide specialized customer service has helped us maintain a high level of customer 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 3Key InformationD. 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 |
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(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: 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 (GSM-900), which is located within the North-West super-region, and the Orenburg region (GSM-900/1800), 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 customers 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 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 on their 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. 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 launched LTE services as of June 1, 2013. OJSC VimpelCom was required to extend services to six regions in Russia by the end of 2013. OJSC VimpelCom is then required to extend services to 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 RUB15 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.
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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 customer 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 customers, mobile penetration rates and annual customer growth rates in Russia.
Period |
Customers (in millions) |
Penetration Rate |
Annual Customer Growth(1) |
|||||||||
As of December 31, 2013 |
247.4 | 173.5 | % | 5.7 | % | |||||||
As of December 31, 2012 |
234.2 | 163.8 | % | 2.0 | % | |||||||
As of December 31, 2011 |
229.5 | 160.2 | % | 4.0 | % | |||||||
As of December 31, 2010 |
220.4 | 154.3 | % | 5.5 | % | |||||||
As of December 31, 2009 |
209.0 | 146.1 | % | 10.8 | % |
(1) | Growth rate as compared to year end 2011. |
Source: For customers, customer 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 80.9% of the mobile market in Russia as of December 31, 2013. As a result of competition, mobile providers are utilizing new marketing efforts, including price promotions, to retain existing customers and attract new ones. Competition for customers 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, 2013, according to publicly available information, Scartel provides commercial services for private customers in 26 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 customer services offered.
The following table shows our and our primary mobile competitors respective customer numbers in Russia as of December 31, 2013:
Operator |
Customers in Russia (in millions) |
|||
MTS |
75.3 | |||
MegaFon |
68.1 | |||
VimpelCom |
56.5 | |||
Tele2 |
23.7 |
Source: For all companies except OJSC VimpelCom, Informa Telecoms & Media. © 2013 Informa Telecoms & Media. All rights reserved.
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MTS. One of our primary competitors in Russia is MTS. According to Informa Telecoms & Media, as of December 31, 2013, MTS had approximately 75.3 million customers in Russia, representing a market share of 30.5%. It has a greater share of the high value customer 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 the Moscow region which provides MTS with a potential advantage in quality of its LTE services in the 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 mobile customers. In 2012, Altimo sold its entire 25.1% stake in MegaFon to a private investor. According to Informa Telecoms & Media, as of December 31, 2013, MegaFon had approximately 68.1 million customers, representing a market share of 27.5%. 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 the 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 VimpelCom has 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 some of the telecommunications market in Russia. Tele2 had approximately 23.7 million customers in Russia, representing a market share of 9.6%. It currently provides GSM mobile services in 42 regions of Russia, including St. Petersburg, Leningradskaya Oblast, 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, Nenets AO, Evenkiysky District of Krasnoyarsk Krai, Evreyskaya AO, Kamchatka, Chukotka (as of the date hereof commercial operations have not started yet) 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. As a result of, amongst others, these transactions, Rostelecom is currently the largest fixed-line operator and fifth largest mobile operator in Russia.
In December 2013, Rostelecom shareholders voted to approve the spin-off of its mobile assets (including telecommunications equipment and intellectual property rights), into its subsidiary company, CJSC RT-Mobile. According to public reports, Rostelecom intends to contribute its mobile assets in a joint venture with Tele2 Russia. 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 contest in July 2012. In addition, it has an LTE TDD license in approximately 40 regions in Russia which gives Rostelecom a potential advantage in 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 customers several national prepaid and contract tariff plans, each offering a different benefit and targeting a certain type of customer.
We divide our primary target customers in Russia into four groups:
| key/national accounts, for which monthly revenue from mobile and fixed-line services exceeds US$20,000; |
| large accounts, for which monthly revenue from mobile and fixed-line services exceeds US$2,000 or companies having high revenue potential; |
| SME customers, for which monthly revenue from mobile and fixed-line services is less than US$2,000; and |
| mass market customers. |
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We also offer regular telecommunication services and specific value added services and tariff plans with discounts and special pricing for our key/national accounts, which include all multi-regional companies and government institutions. The typical corporate customer pays on a contract basis for our fixed-line and mobile services. We provide our corporate customers 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.
We currently offer Internet access through USB modems in every region of Russia, and our customers benefit from 3G speeds in every region in Russia as of December 31, 2013. We offer special wireless Plug&Play-USB modems, which provide our customers with a convenient tool for Internet access.
Customer Loyalty Programs
We recognize the need to continuously build and increase the loyalty of our customers. In July 2013, we launched a new national loyalty program Happy Time for all prepaid B2C customers. The program is focused on increasing customer lifetime and has simple and attractive conditions. A participant receives bonuses for every top-up which depends on the customers lifetime with Beeline. Bonuses can be spent on Beelines services. In December 2013, Happy Time also became available for postpaid B2C customers - they receive a discount on their monthly bill. As of December 31, 2013, we had more than 1.42 million customers participating in the program.
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 customer, 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 customers, 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 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 in major metropolitan areas in Russia.
International and Domestic Long Distance Services. We offer international long distance services to our customers via our FTN, which covers the entire territory of Russia and also includes eight international communications transit nodes across Russia.
We provide 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 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
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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. Within the bounds of VPN service we also provide the ability to connect remote offices to a corporate IP VPN network via wireless GPRS/EDGE/3G networks. We are currently planning to use LTE wireless network in the near future. 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.
Intellectual and Value Added Services. Our company offers an increasing range of value added services, including toll free (800) numbers, virtual PSTN number, SIP-connection, data center services, such as co-location, web hosting, audio conference, service level agreement (SLA), 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., Bloomberg and all Russian stock exchanges.
Fixed Corporate and Cloud Services. We also offer to our corporate customers IPTV services, certain Microsoft Office packages (including SaaS), videoconferencing services (incl. Cisco WebEx) and sale, rental and technical support for telecommunications equipment. Our company is the first telecom operator in Russia, authorized by Microsoft to resell cloud service MS Office 365.
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, Huawei 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.
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.
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 customer in Russia and/or terminating with a fixed-line customer 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 more than 130 access points in Russia. Large Russian content providers such as Mail.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. Currently the Beeline TV product is run in 37 regions. In 112 cities of the 37 regions, we provide IPTV service. As of December 31, 2013, we had more than 900,000 IPTV customers. 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. 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, 2013, 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 2014.
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 March 9, 2017/May 23, 2018 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 28, 2016/April 18, 2018 |
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License Type |
Region |
Expiration Dates (Earliest/Latest) | ||
Leased Communications Circuits | ||||
Services | Moscow | July 5, 2016/August 28, 2018 | ||
St. Petersburg | June 8, 2015/October 4, 2017 | |||
Novosibirsk | July 5, 2016/November 12, 2018 | |||
Nizhny Novgorod | July 5, 2016/November 12, 2018 | |||
Rostov-on-Don | July 5, 2016/November 12, 2018 | |||
Khabarovsk | August 25, 2015/July 5, 2016 | |||
Ekaterinburg | November 12, 2018 | |||
Krasnodar | July 5 2016/November 12, 2018 | |||
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, 2018 | |||
Nizhny Novgorod | August 1, 2017 | |||
Rostov-on-Don | August 1, 2017 | |||
Khabarovsk | April 18, 2018 | |||
Krasnodar | August 1, 2017/April 18, 2018 | |||
International and National Communications Services | ||||
Russian Federation | December 13, 2019 | |||
Telematic Services | ||||
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, 2018 | |||
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, 2019 | |||
St. Petersburg | August 1, 2017/April 17, 2019 | |||
Ekaterinburg | September 5, 2018 | |||
Novosibirsk | August 1, 2017 | |||
Nizhny Novgorod | August 1, 2017 | |||
Rostov-on-Don | August 1, 2017 |
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License Type |
Region |
Expiration Dates (Earliest/Latest) | ||
Khabarovsk | September 14, 2015 | |||
Krasnodar | September 14, 2015/April 17, 2018 | |||
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, 2016/December 6, 2017 |
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 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 the 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, 4G and CDMA).
Competition for customers 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 the 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 customers 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, pricing plans, Internet connection speed, services quality, customer service level, brand identity and a range of value added and other customer 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.
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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 managed IP VPN, managed PBX, managed customer premises equipment, managed security, cloud services (including IaaS, SaaS, PaaS, 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 at different customer segments. There are four unlimited tariff plans with monthly fees but differing 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).
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, 2013, we had more than 120,000 cable TV customers.
Fixed-line Telephony. We offer two telephony services for residential users: traditional time division multiplexing (also referred to as TDM) accessible 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, 2013, we had approximately 160,000 fixed-line telephony customers.
Description of Operations of the Italy Business Unit
Our Italy Business Unit consists of our operations in Italy under our wholly owned subsidiary WIND Italy.
Mobile Business in Italy
Description of Mobile Services in Italy
Mobile Telecommunications Services
In Italy, we primarily offer our mobile telecommunications services under two types of payment plans: postpaid and prepaid. As of December 31, 2013, approximately 7.3% of our customers in Italy were on postpaid plans and approximately 92.7% were on prepaid plans.
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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 customers 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 customers, we offer a number of all-inclusive flat rate monthly tariff plans to contract and prepaid consumer customers that include a set amount of calling minutes, SMSs and gigabytes of mobile Internet access for a fixed monthly fee.
For a description MTR and MNP, please refer to the section of this Annual Report on Form 20-F entitled Item 4Information on the Company Regulation of Telecommunications Regulation of Telecommunications in Italy.
Corporate Voice Offerings. In Italy, we provide corporate voice services to large corporate customers, 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 customers, 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. As interest for mobile applications (APPS) is growing, with the aim of bringing greater mobility to business processes, WIND Italy has also launched the Enterprise Mobility Services through strategic partnerships and vertical System Integrator agreements.
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 customers. 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 monthly fee.
In Italy, we offer the following data services and value added services:
| Mobile Internet. Our mobile customers can connect their mobile phones to the Internet using GSM, GPRS, LTE or UMTS technologies. |
| PC Mobile Internet. Our mobile customers 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 customers. |
| 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 customers as well as services specifically targeted at students. MMS provides multimedia (photo, video and sound) content, such as sports events, news, gossip, music and a chat service. |
| Content and Innovative Services: In 2013 WIND Italy had a strong focus on innovative services based on the mobile phone for payments with the aim of simplifying the customers life by improving the user experience; in addition WIND improved its MyWIND App, signed a partnership with Google for carrier billing and started roll-out in thirteen cities for mobile ticketing. |
| NFC: during 2013, WIND Italy implemented different initiatives to test NFC services. |
International Roaming. Our mobile customers in Italy can use our mobile services, including SMS, MMS and data services where available, while roaming in other countries. Roaming coverage outside Italy is provided through our roaming agreements with approximately 479 international operators in 214 countries as of December 31, 2013.
Handset Offerings. We offer our customers 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, only to higher value customers.
Mobile Telecommunications Licenses in Italy
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,
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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.
WIND Italy 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 2011, WIND Italy obtained 2 blocks at 800 MHz and 4 blocks at the 2600 MHz band. All other Italys main telecom operators Telecom Italia, Vodafone and H3G also obtained frequencies.
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. In July 2013, AGCOM reviewed the plan of allocation of frequencies for digital terrestrial television network service. The lots of frequencies inside 700 MHz previously assignable for five years to TV have been cleared from the assignment procedures. In this plan revision, AGCOM sets out a gradual liberation of TV channel 57-60 (corresponding to the band 758-790 MHz) by 2016 and the liberation of the remaining portion of 700 MHz band by 2020. Subsequently, AGCOM resolution had been refined in October and December 2013. In January and March 2014 AGCOM issued two resolutions to handle some interference matters between Italian digital terrestrial television and the neighboring countries.
In 2013, AGCOM also started public consultation on the use of 3.6-3.8 GHz frequencies in order to understand the interest of the market in potential future assignment thereof as this range of frequencies could be suitable for international mobile telecommunication services. The consultation resulted in no assignment procedure being decided by the Authority. In 2013 AGCOM updated the assignment rules for frequencies in the band 26-28 GHz (suitable only for wireless local loop and short distance backhauling).
CompetitionMobile Business in Italy
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 our principal competitors. Telecom Italia and Vodafone have well established positions in the Italian mobile market and each has a greater market share than WIND Italy. Hutchison 3G has been aggressively seeking new customers through the use of handset subsidies, which are not customarily offered in the Italian market and heavily discounting its offering compared to WIND Italy. Following the intense competitive environment witnessed in the summer of 2013, some aggressive promotions of certain operators were discontinued in the fall of 2013.
Telecom Italia, as the incumbent in the market, has the advantage of longstanding relationships with Italian customers. Vodafone Italy 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, the four network operators in Italy offer mobile telecommunications services to approximately 87.0 million registered customers as of December 31, 2013, representing a penetration rate of approximately 142.8% of the Italian population. As of December 31, 2013 there were 17 MVNO/ESPs providing services in the Italian market, with an aggregate market share of approximately 6%. Penetration is distorted by the widespread use of multiple SIM cards by individual users. The market is mostly prepaid.
According to Informa Telecoms & Media, as of December 31, 2013, excluding MVNOs, Telecom Italia had a market share of 35.9%, followed by Vodafone with 29.1%, WIND Italy with 25.6% and Hutchison 3G with 9.4%.
Following the very intense competitive environment witnessed in the summer of 2013, some aggressive promotions of certain operators were discontinued in the fall of 2013.
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Marketing and DistributionMobile Business in Italy
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 offerings with the same testimonials of Giorgio Panariello and Vanessa Incontrada. These testimonials emphasize 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 made strong developments on digital touch points (Web sites, Mobile sites, MyWIND App, Self-care areas, Social Network) to improve the customer experience.
WIND Italy confirms its commitment to innovative startups and upcoming businesses: Wind Business Factor is the platform of business coaching and networking addressed to startups and new entrepreneurs (managers/businessmen).
At the end of 2013 WIND Italy launched All Inclusive Solidarity closer to Italy, an initiative that confirms its commitment to social issues. Customers who opt for All Inclusive Solidarity, contribute with a donation of 50 cents per month to support concrete projects of social support and WIND Italy doubles the amount donated by each customer.
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 customers in Italy, we use different marketing strategies depending on the nature and size of a customers business. For large corporate customers 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 customers, we emphasize an integrated approach focusing on all three of our mobile, fixed-line voice and broadband capabilities.
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, 2013, in Italy we had 167 WIND owned stores and approximately 532 exclusive franchised outlets operating under the WIND name. WIND Italy also utilizes 1,044 non-exclusive points of sale, 918 electronic chain store outlets and approximately 5,847other 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 website.
Sales to large corporate customers 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 WIND Italys website.
Given the increasing importance of Customer Experience as a strategic element of differentiation in the market, WIND Italy has created a new function for the Customer Experience Development. This functions objective is to ensure the continuous improvement of customer satisfaction, developing a customer experience model with the fundamental support of all business functions. The activity will be carried out using a methodology based on NPS (Net Promoter Score). This indicator is able to correlate the level of loyalty and growth and it is now used worldwide to assess the quality of customer experience. NPS is becoming increasingly central to the WIND Italys strategy; in addition to being measured periodically through market research, NPS will be used as a tool for continuous monitoring of customer perception when interacting with WIND Italy In this way, it will be possible to better assess the level of customer satisfaction and implement improvement actions. Top management will have a continuous alignment on the results and it will guarantee the necessary level of commitment.
Fixed-line Business in Italy
Description of Fixed-line Services in Italy
In Italy, we offer a wide range of fixed-line voice and Internet broadband services. We offer these services to both consumer and corporate customers.
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Our fixed-line voice customer base in Italy consisted of approximately 3.0 million customers as of December 31, 2013. Our direct customers mainly comprise LLU customers.
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 2013 we launched services in fiber FTTH (Fiber To The Home) in Milan in partnership with Metroweb.
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 customers, so long as the line is ADSL or ADSL 2+ capable.
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 customers with a fixed-line voice service and unlimited connectivity to broadband. In addition, we offer a bundled offering with a fixed-line voice service, unlimited connectivity to broadband and a mobile SIM with All Inclusive postpaid and prepaid offer.
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 customers 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 customers, including large corporate customers, SMEs and SOHOs.
For larger corporate customers in Italy, we typically tailor our offerings to the needs of the customer and, where applicable, to competitive bidding requirements. We offer our large corporate customers 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 customers 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 for SME and SOHO customers include All Inclusive Business providing unlimited calls to national fixed and mobile and unlimited Internet access; in addition, Internet Pack offer includes one Wi-Fi router, one Internet Key 3G along with a Data SIM contract. The WIND Impresa offer provides six to 60 simultaneous voice calls, on VoIP technology and a combined service for renting, running, and maintaining telephone switchboards. We offer customized services tailored to customers specific requirements based on the most advanced technologies.
LicensesFixed-line Business in Italy
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.
CompetitionFixed-line Business in Italy
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 customers 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 customer base in Italy to contract, thereby impacting our revenue and profitability.
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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, 2013.
Based on our internal estimates, as of December 31, 2013, Telecom Italia had approximately 6.8 million broadband customers in Italy, representing a market share of approximately 50.4% of broadband retail connections, followed by WIND Italy with approximately 2.2 million broadband customers, representing a market share of approximately 16.1% of broadband retail connections and by Vodafone/TeleTu, with approximately 1.7 million broadband customers representing a market share of approximately 12.9% of broadband retail connections. Fastweb had approximately 1.9 million active broadband customers, representing a market share of approximately 14.3% of broadband retail connections. All other operators had in the aggregate approximately 0.9 million broadband customers, representing a market share of approximately 6.3% of broadband retail connections.
Marketing and DistributionFixed-line Business in Italy
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 customers. However, in 2013, we have increasingly adopted pull sales channels which are more effective and efficient in order to increase the fixed business marginality.
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.
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, and Laos and in Zimbabwe through our equity investment in Telecel Zimbabwe.
Mobile Business in Africa & Asia
Description of Mobile Services in Africa & Asia
In Africa & Asia, we generally offer our customers mobile telecommunications services under contract and prepaid plans. In Algeria, we also offer hybrid plans. As of December 31, 2013, we had the following percentages of contract and prepaid customers:
| In Pakistan, 1.7% of our customers were on postpaid plans and approximately 98.3% were on prepaid plans. |
| In Bangladesh, 5.6% of our customers were on postpaid plans and approximately 94.4% were on prepaid plans. |
| In Laos, 1.6% of our customers were on postpaid plans and approximately 98.4% were on prepaid plans. |
| In Algeria, 2% of our customers were on postpaid plans, approximately 2% were on hybrid plans and approximately 96% were on prepaid plans. |
| In Burundi, 0.01% of our customers were on postpaid plans and approximately 99.9% were on prepaid plans. |
| In the Central African Republic, 0.2% of our customers were on postpaid plans and approximately 99.8% were on prepaid plans. |
| In Zimbabwe, 0.4% of our customers were on postpaid plans and approximately 96.6% 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 customers, including monthly contract fees for predefined number of voice traffic and roaming fees for airtime charges when customers travel abroad.
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In Africa & Asia, we generally provide our customers with 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 customers to send pictures, audio and video to mobile phones and to e-mail) and mobile instant messaging; |
| content/chat/infotainment services, which vary depending on the country of the customer; |
| data access services (on GPRS and EDGE, and in certain countries, 3G); and |
| RBT. |
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, 2013 we had active roaming agreements with 270 GSM networks in 144 countries. In addition, as of December 31, 2013 we provided GPRS roaming with 144 networks in 88 countries. As of December 31, 2013, we provided our customers with CAMEL roaming through 48 operators in 39 countries. |
| In Bangladesh, as of December 31, 2013 we had active roaming agreements with 380 GSM networks in 141 countries. In addition, as of December 31, 2013 we had GPRS roaming facilities in 271 networks in 93 countries. We also offer in-flight and maritime roaming with Emirates Airlines and Malaysian Airlines. |
| In Laos, as of December 31, 2013 we had active roaming agreements with 268 networks in 128 countries. We provide data roaming cover to 124 networks in 59 countries as of December 31, 2013. Inbound roaming has played a key role among our roaming operation in Laos. As of December 31, 2013, we had roaming agreements with 266 roaming partners, accommodating roamers from 128 countries with data roaming. |
| In Algeria, as of December 31, 2013 we had active roaming agreements with 416 GSM networks in 155 countries and GPRS roaming with 178 networks in 90 countries. We also provided our customers in Algeria with CAMEL roaming through 133 operators in 78 countries as of December 31, 2013. |
| In Burundi, as of December 31, 2013 we had roaming agreements with 207 networks in 104 countries. We provide our customers in Burundi with CAMEL roaming through 34 operators in 28 countries as of December 31, 2013. |
| In the Central African Republic, as of December 31, 2013 we had active roaming agreements with 257 GSM networks in 138 countries. As of December 31, 2013 we provided our Central African customers with CAMEL roaming through eight operators in eight countries. We also had a national roaming agreement with Moov, which provided roaming for customers in three cities in the Central African Republic as of December 31, 2013. |
| In Zimbabwe, as of December 31, 2013 we had active roaming agreements with 356 networks in 148 countries. We also had five agreements with Telecel as the VPMN via the Link 2 One hub and VRS hub and 17 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 customer 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 customers monthly bill.
Interconnect Revenue
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 a network of our competitors when their customers call or send data to our customers.
Revenue from Sales of Equipment and Accessories and Other Revenue
Handset offerings. We offer to our customers a broad selection of handsets and Internet devices, which we source from a number of suppliers.
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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, 3G WLL, Long Distance and International licenses for the entire territory of Pakistan and for Azad Jammu Kashmir and Gilgit Baltastan. The 2G licenses will expire in 2022 and the 3G license will expire 2029. |
| In Bangladesh, we hold a 2G and 3G license for the entire territory of Bangladesh. The 2G license will expire in 2026. The 3G license will expire in September 18, 2028. |
| 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 November 14, 2012 (effective as of January 1, 2013) and is renewed on an annual basis. |
| In Algeria, we hold 2G, 3G ISP and VSAT licenses for the entire territory of Algeria. The 2G license will expire in 2016. The 3G license will expire in December 2, 2028. |
| 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, WIMAX 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 significant 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 132.3 million customers in Pakistan as of December 31, 2013, representing a penetration rate of approximately 73.5% (inclusive of Azad Jammu Kashmir and Northern Areas). The Pakistani mobile telecommunications market has five main operators: Mobilink, Telenor Pakistan, Ufone, Warid and Zong. Telenor Pakistan is a member of 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 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 customers per operator as of December 31, 2013:
Operator |
Customers
in Pakistan (in millions) |
|||
Mobilink (VimpelCom) |
37.6 | |||
Telenor Pakistan |
33.4 | |||
Ufone |
25.0 | |||
Warid |
12.8 | |||
Zong |
24.0 |
Source: The Pakistan Telecommunications Authority
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Bangladesh
The mobile telecommunications industry was introduced late in Bangladesh. Since GrameenPhone (GP) launched its GSM technology in 1997, the industry has grown rapidly. In the last decade the penetration increased from 0.8% (in 2002) to 68.3% in 2013. 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 customer 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 113.8 million customers in Bangladesh as of December 31, 2013, representing a penetration rate of approximately 68.3%.
The mobile telecommunications market in Bangladesh is highly competitive. The top three mobile operators, Grameenphone, Banglalink and Robi, collectively held approximately 88.7% of the mobile market in Bangladesh as of December 31, 2013 (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 (91.6%) and NTT DOCOMO Inc, Japan (8.4%). 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 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 the Bangladesh Government, the state-owned telephone operator, which launched its operations in 2004.
The following table shows our and our primary mobile competitors respective customer numbers in Bangladesh as of December 31, 2013:
Operator |
Customers in Bangladesh (in millions) |
|||
Grameenphone |
47.1 | |||
Banglalink (VimpelCom) |
28.8 | |||
Robi |
25.4 | |||
Airtel |
8.3 | |||
Citycell |
1.4 | |||
Teletalk |
2.8 |
Source: The Bangladesh Telecommunications Regulatory Commission.
Laos
The Lao telecommunications market is very competitive, with aggressive promotions, low per-minute prices and rotational churn. With a penetration rate of less than 71% as of December 31, 2013, the market is still rapidly expanding, as evidenced by the growth in customers year after year as tariffs decline and handsets become more affordable.
According to Informa Telecoms & Media, there were approximately 4.8 million customers in Laos as of December 31, 2013.
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, 2013:
Operator |
Market Share | |||
Unitel |
55.9 | % | ||
LTC |
26.7 | % | ||
VimpelCom Lao Co. (VimpelCom) |
6.7 | % | ||
ETL |
10.7 | % |
Source: For all companies except VimpelCom Lao Co., 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-customer 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 Informa Telecoms & Media, there were approximately 40.1 million customers in Algeria as of December 31, 2013, representing a penetration rate of approximately 101.3%.
In Algeria, there are three mobile operators: Djezzy, operating through our subsidiary OTA; Mobilis, a subsidiary of Algerias incumbent operator, Algérie Télécom; and Ooredoo. 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. In December 2013, a 3G license was granted to all three operators. 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 customer services offered.
Customer 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.
Competition for customers 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 customers and attract new ones.
The following table shows our and our competitors respective customer numbers in Algeria as of December 31, 2013:
Operator |
Customers in Algeria (in millions) |
|||
Djezzy (VimpelCom) |
17.6 | |||
Mobilis (AMN) |
13.0 | |||
Nedjma (WTA) |
9.5 |
Source: For all companies except Djezzy., Informa Telecoms & Media. © 2013 Informa Telecoms & Media. All rights reserved.
Burundi
The mobile industry in Burundi has grown rapidly in recent years. According to Informa Telecoms & Media, customer numbers have increased from 1.0 million at the end of 2009 to approximately 3.3 million at the end of 2013, representing a penetration rate of approximately 32%.
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 customer numbers in Burundi as of December 31, 2013:
Operator |
Customers in Burundi |
|||
Leo Burundi (VimpelCom) |
1,734,000 | |||
Econet Wireless |
805,000 | |||
SMART Lacell |
279,400 | |||
Onatel Burundi |
372,100 | |||
Africell Tempo |
306,300 |
Source: For all companies except Leo Burundi., Informa Telecoms & Media. © 2013 Informa Telecoms & Media. All rights reserved.
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 Informa Telecoms & Media, there were approximately 1.31 million customers in the Central African Republic as of December 31, 2013, representing a penetration rate of approximately 28%.
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 customer numbers in the Central African Republic as of December 31, 2013:
Operator |
Customers in CAR |
|||
Telecel CAR (VimpelCom) |
407,562 | |||
Orange |
356,000 | |||
Azur |
246,750 | |||
Moov |
131,000 |
Source: For all companies except Telecel CAR., Informa Telecoms & Media. © 2013 Informa Telecoms & Media. All rights reserved.
Zimbabwe
The mobile industry in Zimbabwe has grown rapidly over the past couple of years. Customer numbers have increased from fewer than 1.8 million at the end of 2008 to approximately 13.7 million at the end of 2013. 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 Informa Telecoms & Media, there were approximately 13.7 million customers in Zimbabwe as of December 31, 2013, representing a penetration rate of approximately 94.7%.
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.
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The following table shows our and our competitors respective customer numbers in Zimbabwe as of December 31, 2013:
Operator |
Customers in Zimbabwe (in millions) |
|||
Econet |
8.7 | |||
Telecel (VimpelCom) |
2.6 | |||
NetOne |
2.5 |
Source: For all companies except VimpelCom Lao Co., Informa Telecoms & Media. © 2013 Informa Telecoms & Media. All rights reserved.
Marketing and DistributionMobile Business in Africa & Asia
In Africa & Asia, we generally offer our customers contract and prepaid tariff plans, each offering different benefits and targeting a certain type of customer. We also generally offer our customers 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 customers, youth customers, personal contract customers, SOHOs (with one to five employees), SMEs (with six to 50 employees) and enterprises (with more than 50 employees). We offer corporate customers 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. As of December 31, 2013, 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 customers several national prepaid, contract and hybrid tariff plans, each offering a different benefit and targeting a specific type of customer. We divide our primary target customers into five categories: high-value customers (for the top 20% of our high-ARPU-generating customers); 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 customers. 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 354 (317 permanent and 37 temporary) employees, telemarketing through 344 representatives and approximately 40,268 SIM retailers and over 167,652 airtime retailers, as of December 31, 2013. |
| In Laos, we offer pricing plans for contract, prepaid and Internet services for residential and corporate customers. 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 customer. Our postpaid plans are targeted at our business customers and include Djezzy Business and Business Control. Our postpaid plans for residential customers include Djezzy Classic and Djezzy Control. Our prepaid plans for residential customers 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, 2013. Our nine exclusive national distributors cover all the 48 Wilayas and are distributing our products through 11,800 authorized points of sales. We also had a pool of more than 750 agents in a call center as of December 31, 2013. This pool of agents combines a series of insourced and outsourced agents that are directly managed by OTA management in three languages (Arabic, French and Amazigh). |
| 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, 2013, 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 customers several national contract and prepaid plans, each offering a different benefit and targeting a specific type of customer. We divide our primary target customers into the following groups: contract accounts (for wealthier Central Africans and foreigners; NGOs; multilateral organizations and business people); |
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corporate floats (prepaid accounts created under one main corporate account) and prepaid or mass customers. We distribute our products and services through eight of our own shops, 5,787 registered dealers and numerous informal street resellers, as of December 31, 2013. |
| In Zimbabwe, we focus on providing our customers with 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, 2013, 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. |
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 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 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.
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Description of Operations of the Ukraine Business Unit
Mobile Business in Ukraine
Kyivstar Transformation program
Kyivstar experienced significant pressure on results in 2013, due to the transition to lower priced bundled tariff plans. Taking into account Kyivstars strong network performance and capacity, Kyivstar, during 2013, implemented commercial measures to improve mobile service revenue trends, through its transformation program to refocus its commercial strategy from volume-based to value-based management with a customer centric approach and concentrating on customer excellence.
Description of Mobile Services in Ukraine
Mobile Voice Services
As of December 31, 2013, approximately 8.9% of our customers in Ukraine were on postpaid plans and approximately 90.9% of our customers 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.
Roaming
As of December 31, 2013, Kyivstar provided voice roaming on 420 partner networks in 195 countries, GPRS roaming on 313 networks in 157 countries and 3G roaming on 123 networks in 177 countries.
Wireless Internet Access
In Ukraine, we provide our customers with wireless Internet access through GPRS/EDGE networks. The service, which was commercially launched in 2008 offers customers 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. Customers receive a USB modem and SIM card with a pre-installed special Internet rate data plan.
Interconnect Revenue
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 a network of our competitors when their customers call or send data to our customers.
Revenue from Sales of Equipment and Accessories and Other Revenue
In October 2013 we canceled sales of handsets for B2C customers because of low margins for this business.
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.
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In 2013 the SCM group acquired Ukrtelecom, including its subsidiary TriMob LLC, the only UMTS license holder in Ukraine. The implementation of mobile number portability was postponed by the state regulatory body NCCIR at the end of 2013 and is expected to become effective as of July 2014.
The Ukrainian government subsequently announced plans to hold a tender to auction a 3G license. However, the proposed auction has been postponed indefinitely.
According to Informa Telecoms & Media, as of December 31, 2013, there were approximately 60.8 million customers in Ukraine, representing a penetration rate of approximately 135%. There are currently three mobile operators with national coverage in Ukraine: Kyivstar, Mobile TeleSystemsUkraine (MTS Ukraine) and LLC Astelit.
The following table shows our and our primary mobile competitors respective customers in Ukraine as of December 31, 2013:
Operator |
Customers (in millions) |
|||
Kyivstar (VimpelCom) |
25.8 | |||
MTS Ukraine |
22.7 | |||
Astelit |
9.2 |
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 is 100.0% owned by MTS, operates a GSM-900/1800 network in Ukraine. MTS Ukraine also received a CDMA-450 license in 2006. Kyivstar also competes with Trimob, a company which was separated from Ukrtelecom to provide services under a 3G license, which, according to Informa Telecoms & Media, had approximately 1.2 million customers as of December 31, 2013, and with other small CDMA players.
Other Competitors in Ukraine
Kyivstar also competes with Astelit, which operates throughout Ukraine and which had approximately 9.2 million customers as of December 31, 2013 according to Informa Telecoms & Media.
Marketing and DistributionMobile Business in Ukraine
In Ukraine, we offer several prepaid and contract tariff plans, each one targeted at a different type of customer.
We divide our primary target customers into two large groups:
| B2B (subdivided into SME customers and LE customers); and |
| B2C (mass market) customers. |
The Ukrainian mobile market operates primarily on prepaid plans. However, contract customers tend to generate higher ARPU for our company than prepaid customers. To attract more contract customers, we have differentiated our service levels to provide higher customer service to our contract customers, such as direct access to customer service agents on a dedicated contract customer service line, in addition to our initiatives to increase the flexibility and accessibility of the payment methods offered to contract customers.
Customer Loyalty Programs
In Ukraine, to promote brand loyalty we use Kyivstar club program, to provide a monthly bonus, which is a percentage of the amount spent by the customers usage per month and the length of time the customer has been a Kyivstar customer.
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Fixed-line Business in Ukraine
Description of Fixed-line Services in Ukraine
Business Operations
We have constructed and own 24,375 kilometer fiber optic network (local FOL mobile, FTTB and fixed business), including 5,070 kilometers within cities, 2,991 kilometers (local FOL for mobile and fixed-line business) and 1,038 kilometers local FOL for FTTB 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 dependency on other fixed-line operators we build 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 of MW is not a constraint. We have built dedicated fiber optic networks in large cities, such as Kyiv, Kharkiv, Odessa, Dnipropetrovsk, Lviv, Donetsk, Vinnytsya, Khmelnytskyy, Zaporizhzhya, Simferopol and Mykolaiv. As of December 31, 2013, we owned in total 45,980 kilometers of fiber optic cable (including Backbone and MAN) that reasonably satisfy our needs in terms of transmission network capabilities with a negligible level of leased capacity needed.
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 customer 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 2013, we updated our call center platform and launched additional call center services, such as multimedia messaging.
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.
We derive most of our carrier and operator services revenue in Ukraine from voice call termination services to our own mobile network, and voice transit to other local and international destinations. We have more than 100 national interconnections in cities in Ukraine through which we terminate traffic of our customers and generate revenue from call termination on our transits. We have 43 international interconnections with international partners for voice call termination and transit and 20 interconnects for data services.
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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, 2013 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 64,000 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 of Ukraine | August 18, 2019 | ||
Long-distance communication | All of Ukraine | August 18, 2019 | ||
Local communication | All 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. There is a high level of competition with more than 2,000 ISPs in Ukraine. Our main competitors in the corporate market for data services are Ukrtelecom, Volia, Vega and Datagroup. In 2013 SCM Group acquired Ukrtelecom, Ukraines incumbent telecom operator.
In the fast growing residential broadband Internet market, we compete with Ukrtelecom and Volia as well as with strong local players across Ukraine.
Wholesale Operations
In Ukraine, carrier and operator services market competitors include Datagroup, Ukrtelecom, and Vega.
Consumer Internet Services
Our main competitors for provision of consumer Internet services in Ukraine are Volia and Ukrtelecom. From December 31, 2012 to December 31, 2013, we significantly increased the number of broadband customers in Ukraine by 24.3% from 612,665 to 761,532.
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.
Fixed services have significant potential considering positive difference in market share and brand preference for the B2B market. Fixed-line services are used as an effective tool to acquire, develop and retain corporate large accounts, especially in financial, agricultural and retail sectors. For customer acquisition we use a two-step approach: first, we acquire customers with fixed-line services, and then we promote our mobile service. For that purpose Fixed-Mobile convergent services and offers were developed.
M2M market is experiencing significant growth. Special M2M offers and a number of value added services are being used to benefit from this market growth.
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Residential and FTTB Operations and operator services revenue in Ukraine
Our marketing strategy is focused on attracting new customers. We offer several tariff plans, each one targeted at a different type of customer. In 2013 our consumer fixed-line Internet services business was supported by BTL activities, including a leaflets distribution, in areas where the service is provided. These efforts are supplemented by limited ATL as well as by direct sales conducted on a door-to-door basis in buildings in which broadband service is available.
Fixed-line Broadband Internet Access. We offer a wide range of FTTB services tariffs targeted at different customer segments. There are four unlimited tariff plans with monthly fees, which offer different speeds up to 100 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, 2013, approximately 2% of our customers in the CIS were on postpaid plans and approximately 98% of our customers 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, 2013 we provided voice roaming on 435 networks in 181 countries, GPRS roaming on 339 networks in 130 countries and CAMEL roaming on 163 networks in 88 countries. |
| In Uzbekistan, as of December 31, 2013 we provided voice roaming on 462 partner networks in 182 countries, GPRS roaming on 298 networks in 131 countries and CAMEL roaming on 187 networks in 89 countries. |
| In Armenia, as of December 31, 2013 we provided voice roaming on 389 partner networks in 171 countries, GPRS roaming on 273 networks in 124 countries and CAMEL roaming on 174 networks in 88 countries. |
| In Tajikistan, as of December 31, 2013 we provided voice roaming on 182 networks in 86 countries, GPRS roaming on 152 networks in 79 and CAMEL roaming in 87 networks on 52 countries. |
| In Georgia, as of December 31, 2013 Mobitel provided roaming on 143 partner networks in 90 countries, GPRS roaming on 101 networks in 81 countries and CAMEL roaming on 83 networks in 75 countries. |
| In Kyrgyzstan, as of December 31, 2013 we provided roaming on 428 partner networks in 159 countries, GPRS roaming on 56 networks in 47 countries and CAMEL roaming on 48 networks in 37 countries. |
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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, Kyrgyzstan and Tajikistan. Under this agreement, we have already begun to provide services in Tajikistan, Armenia and Georgia. In Kazakhstan, we provide customers with 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 customers 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, 2013, we provided UMTS services in 150 cities with a population of more than 50,000 each. We provide Internet services both for smartphones and feature phones as well as for USB dongles and tablet computers. We focus on small screen users and we have begun to integrate mobile services of popular social networks. Devices provided are locked for the Beeline network so that they only work within our network. We actively work on data pricing and 3G network optimization.
In Armenia, we provide customers with wireless Internet access over GSM/GPRS/EDGE/UMTS networks. UMTS services were commercially launched in 2009. For small screen customers, 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, Odnoklassniki and Facebook. USB modems were commercially launched in July 2009. Customers receive a USB modem and SIM card with a pre-installed special Internet rate data plan.
In Tajikistan, USB modems were launched in January 2008. We provide our customers with wireless Internet access via GSM/EDGE and UMTS networks. We provide Internet services for smartphones and feature phones as well as for USB dongles. In 2013, the usage of non-voice services 3G/GPRS Internet megabytes increased due to new Internet tariffs that Tacom offered. In addition, we have offered a new Internet option without data volume limitations.
In Georgia, USB modems were commercially launched for prepaid customers in June 2009 and modem traffic exceeded 15 million megabytes during 2013.
In Kyrgyzstan, we provide our customers 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 2013, we impaired our LTE license in Uzbekistan. For more information, see Item 5. Operating and Financial Review and ProspectsResults of OperationsYear Ended December 31, 2013 Compared to Year Ended December 31, 2012Impairment Loss.
In Armenia, we hold a GSM-900/1800 and UMTS license for the entire territory of Armenia. The Armenian telecommunications regulator has issued a resolution, which came into force on March 3, 2013 which extend the term of the license from March 3, 2013 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, 2023, January 26, 2017 and January 25, 2018, respectively.
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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 27.5 million customers in Kazakhstan as of December 31, 2013, representing a penetration rate of approximately 166.5%.
The following table shows our and our primary mobile competitors respective customer numbers in Kazakhstan as of December 31, 2013:
Operator |
Customers (in millions) |
|||
GSM Kazakhstan |
14.3 | |||
KaR-Tel (VimpelCom) |
9.2 | |||
Tele2 Kazakhstan |
2.8 | |||
AlTel |
1.3 |
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, 2013, there were approximately 19.7 million customers in Uzbekistan, representing a penetration rate of approximately 67.7%.
The following table shows our and our primary mobile competitors respective customers in Uzbekistan as of December 31, 2013:
Operator |
Customers (in millions) |
|||
Unitel (VimpelCom) |
10.5 | |||
Ucell |
8.5 | |||
Others |
0.7 |
Source: Informa Telecoms & Media for all companies except Unitel. © 2013 Informa Telecoms & Media. All rights reserved.
It is expected that a third mobile operator will join Unitel and Ucell in the market in the fourth quarter of 2014.
Armenia
According to Informa Telecoms & Media, as of December 31, 2013, there were approximately 3.8 million customers in Armenia, representing a penetration rate of approximately 125.9%.
The following table shows our and our primary mobile competitors respective customers in Armenia as of December 31, 2013:
Operator |
Customers (in millions) |
|||
K-Telecom |
2.4 | |||
ArmenTel (VimpelCom) |
0.7 | |||
Orange Armenia |
0.6 |
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, 2013, there were approximately 11.7 million customers in Tajikistan, representing a penetration rate of approximately 140.8%.
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The following table shows our and our primary mobile competitors respective customers in Tajikistan as of December 31, 2013:
Operator |
Customers (in millions) |
|||
TCell |
3.3 | |||
Tacom (VimpelCom) |
1.3 | |||
Babilon Mobile |
3.5 | |||
MegaFon TJ |
3.0 | |||
TK Mobile |
0.6 |
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, 2013, there were approximately 5.0 million customers in Georgia, representing a penetration rate of approximately 115.3%.
The following table shows our and our primary mobile competitors respective customers in Georgia as of December 31, 2013:
Operator |
Customers (in millions) |
|||
Geocell |
1.8 | |||
Magticom |
1.7 | |||
Mobitel (VimpelCom) |
1.1 | |||
Aquafone |
0.2 | |||
A-Mobile |
0.2 |
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, 2013, there were approximately 6.3 million customers in Kyrgyzstan, representing a penetration rate of approximately 113.1%.
The following table shows our and our primary mobile competitors respective customers in Kyrgyzstan as of December 31, 2013:
Operator |
Customers (in millions) |
|||
Sky Mobile (VimpelCom) |
2.7 | |||
Alfa Telecom (Megacom) |
2.5 | |||
Aktel |
1.0 |
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 customers into five large groups:
| large account corporate customers (business market); |
| SME customers (business market); |
| high ARPU customers (consumer market); |
| youth segment (consumer market); and |
| mass market customers. |
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 customer. In order to promote further growth of our customer base, we seek to offer a number of advanced services to corporate and mass market customers with high ARPU, while at the same time providing lower priced services for the more cost-sensitive mass market customers.
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In Uzbekistan, we offer different prepaid tariff plans in two currencies (U.S. dollars and Uzbek soms). We have developed a leading position across most segments on a platform of segment customized offers supported with strong product brands, having improved our position in the high value segment following the network closure of a competitor by the Uzbek authorities and the launch of dedicated value proposition through Status. Our branded service New O! appeals to the upper segment of the mass market. For B2B clients we develop individual offers.
In Armenia, we offer several dram-based prepaid and contract tariff plans, each one targeted at a different type of customer. As of December, 2013, 19.7% of the ArmenTel customer base use postpaid plans. In order to promote growth of our customer base, we have implemented a regional program and launched new straightforward and affordable price plans.
In Tajikistan, we offer several Tajik somoni-based prepaid and postpaid tariff plans, each one targeted at a different type of customer.
In Georgia, we offer 12 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 12 som-based price plans for our mass market customers and 27 price plans for SME and large account customers.
Customer Loyalty Programs
We have loyalty programs in each of the CIS countries in which we operate. These programs are based on various principles with one main target to increase the lifetime and ARPU of our customers. As of December 31, 2013, we had more than 6.1 million customers participating in these programs in the CIS.
We used target marketing campaigns in order to reduce churn. In the CIS countries in which we operate, around 1000 targeted marketing campaigns were launched in 2013.
Our distribution strategy is also targeted on churn prevention. We launched new trade terms for partners (dealers, distributors) based on customer ARPU in each of the CIS countries in which we operate. We also changed one of the main KPIs for all employees from Gross adds to Net adds.
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; |
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| 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
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.
Residential and FTTB Operations
In Kazakhstan, 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 Kazakhstan, we launched a co-branded version of Opera Softwares Opera Mini web browser and offer unlimited browsing services to our customers. We also launched various mobile Facebook services and have plans to launch others.
In 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 Tajikistan, we launched a co-branded version of Opera Softwares Opera Mini web browser and offer unlimited browsing services to our customers. In Armenia, Georgia, Tajikistan and Uzbekistan, we 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.
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License Type |
Countries, Companies |
Expiration Date | ||
Local Communication Services | Uzbekistan, Buzton | July 5, 2016 | ||
Kyrgyzstan, Sky Mobile | April 20, 2017 | |||
Armenia, Armentel | March 3, 2028 | |||
International and National Communications Services |
Armenia, Armentel | March 3, 2028 | ||
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 and CrossNet. 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. Armenian Datacom Company CJSC acquired FiberNet in 2010.
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.
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 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 launched digital television services in Armenia in 2013. Competition in the CIS is based primarily on penetration, price, included traffic and speed of connection.
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Marketing and DistributionFixed-line Business in CIS
Kazakhstan. We are focusing our development in Kazakhstan on customer 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 customer base.
Armenia. In Armenia, our strategy includes focusing on customer 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, revenue from our contract and prepaid tariff plans tend to increase during the December holiday season, and then decrease in January and February. Mobile revenue are also higher in the summer months, when roaming revenue increases significantly as customers 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 revenue from our fixed-line telecommunications business are lower when there are fewer working days in the period or a greater number of customers are on vacation, such as during the summer months.
Equipment and Operations
Mobile Telecommunications Equipment and Operations
Mobile Telecommunications Network Infrastructure
GSM, 3G and 4G/LTE technologies are based on an open standards, which means that standard compliant equipment from any supplier can be added to expand the initial network. Our GSM/GPRS/EDGE/UMTS/LTE networks, which use mainly Ericsson, Huawei, Alcatel-Lucent, Nokia Siemens Networks, Cisco Systems and ZTE equipment, are integrated wireless networks of radio 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 mainly on compliance with technical and functional requirements and 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 radio units and 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 customer experience, optimize network usage and increase investment efficiency, such as step-by-step migration to next generation architecture. In certain countries we have implemented key technologies to improve voice quality, such as tandem free operation (TFO), transcorder free operation (TrFO) and we are in the process of evaluating the introduction of HD Voice codecs. 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 these and following technologies are being implemented in commercial networks in Russia after testing to ensure the quality of the network.
In the area of data services we have successfully launched Data Traffic Management systems that provide the unique possibility to increase customers perception of mobile broadband services and at the same time more efficiently utilize network resources. We are currently working on extending the functionality of DTM infrastructure to further stretch the possibilities of data services monetization and improve the customer experience, such as Mobile Toolbar, Fair Usage Policy for data services, etc.
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We are investing in radio access technologies that will ensure a high level of quality of our broadband services in the future, such as 3G/HSPA+, LTE, at the same time using the possibilities to optimize investments by rolling out Single-RAN network.
We have successfully conducted several pilots of technologies increasing network efficiency. One of the most significant projects is the SON (Self Organized Network) pilot in Moscow which yielded highly positive results.
In order to comply with Russian MNP regulations, as further discussed in the section of this Annual Report on Form 20-F entitled Item 3Key InformationD. Risk FactorsLegal and Regulatory RisksNew or proposed changes to laws in Russia and other markets in which we operate may adversely affect our business, we have launched MNP process in December 2013.
In order to comply with the requirements of the 4G/LTE licenses that OJSC VimpelCom was awarded in Russia in July 2012, OJSC VimpelCom has launched LTE services in seven regions in the Russian Federation in 2013. OJSC VimpelCom is currently expanding and improving its access and transport network in other regions of Russia to comply with further requirements, as further described in Description of Operations of the Russia Business UnitMobile Business in RussiaMobile Telecommunications Licenses in RussiaLTE License.. We also have licenses for LTE services in Uzbekistan and Tajikistan and have launched three pilot LTE networks in CIS countries (the first fully-fledged live market pilots of LTE on post-Soviet territory).
We are also developing 3G HSPA and HSPA+ technologies on our mobile networks including introduction of HSPA+ dual carrier technology. 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 optical cable network. The Big European Ring (main fiber ring) and a few rings in Central, Ural, Siberian, South and North Caucus regions connect the major cities in Western part of Russia and Eastern part up to and including Siberia. We also lease capacity from Rostelecom and Transtelcom to reach the Far-Eastern part of Russia. The New Chord provides additional protection and capacity for The Big European Ring. The total length of our optical cable network reaches 35,501 kilometers. We use satellite technology to connect remote Russian sites where on-land communications are not available. There are protected optical lines connecting Moscow and St. Petersburg, and which pass to Stockholm, London and Frankfurt. Two independent optical lines connect our optical networks in Russia and Ukraine. Three cross-boundary lines to Kazakhstan provide reliable connection to Kazakh, Uzbek and other Asian telecommunication operators.
Our regional transport networks are based on Wavelength division multiplexing (DWDM) technology, synchronous digital hierarchy (SDH) and metropolitan ethernet network (MEN) technology. The Metro DWDM networks are built in Moscow, St. Petersburg, Nijnij Novgorod, Ekaterinburg and other major cities of Russia. We have built the interregional (also called zone) transport networks that connect our sites in small towns and the countryside. The total length of local fiber cables is 42,164 kilometers and the total length of our zonal fiber cables is 37,528 kilometers. The MEN network is constructed in more than 200 cities, which provide our customers with IP VPN services, voice services and access to Internet.
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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.
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.
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 customers apartments.
As of December 31, 2013, we had approximately 2.3 million customers connected to our FTTB network in Russia. The network operates in 161 cities across Russia (136) 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 21,647 kilometers of fiber optic cable backbone in Italy and 4,880 kilometers of fiber optic cable MANs as of December 31, 2013. 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, 2013 we had 1,458 LLU sites for direct customer connections (around 60% of the population is covered), and had interconnections with the incumbent operator in order to offer voice and data services to the rest of the population.
IP Network, based on MPLS hierarchical backbone and connected to main national and international operators, is developed in all of Italy and it is able to offer fixed and mobile broadband services to consumer and corporate customers.
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, Dnipropetrovsk, 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 uptime of the transmission network. 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 uptime. It connects all the main regional cities of Ukraine. The total length of our fiber optic cables is 45,980 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 24,375 kilometers.
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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 and Russian ISPs in Amsterdam (AMS-IX), Hungary (Level3), Germany (DE-CIX), Russia (Beeline) and Ukraine (Cogent, DATA-IX). We are interconnected with Ukrainian local ISPs Volia and Ukrtelecom and have Internet exchanges with UA-IX, DTEL-IX, Datagroup, Vega, Eurotranstelecom, Gigatrans, Colocol, Sotal, Topnet, Triolan, UARNet, Freenet.
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 30 cities in most regions of Ukraine through TDM technology. Protected MGC provides voice services for customers through VoIP technology in the entire territory of Ukraine. In addition, MGC is connected to ten international VoIP operators. Similarly, Kyivstars fixed-line core network is connected to 77 TDM and 12 VoIP national operators. 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. We are a provider of the long-distance service to both mobile and fixed-customers allowing us to optimize traffic cost.
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 50 TDM and 11 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 four international TDM operators. 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, 2013, we had approximately 183,824 customers connected via FTTB technology in Kazakhstan.
Uzbekistan
Our subsidiary Buztons network provides international telephony and Internet access through JSC Uzbektelecom. Buztons network consists of 116 nodes situated throughout Uzbekistan. The main technologies of our access networks are ADSL (15,608 ports) and FTTB (1,273 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-analog exchanges, Internet protocol digital customer line access multiplexers (DSLAMs), copper wire access network, fiber-optic backbone network, data network). Its network consists of 221,400 ADSL ports and 166 exchanges of which 119 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.
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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 customer 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.
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 5,900 towers on rented locations, excluding roof top sites, 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 and call centers and switching centers. In addition, we own a number of buildings throughout Ukraine consisting of over 60.000 square meters that we use as office space, switching centers, call centers, sales centers, date centers and storage units; In Pakistan, our subsidiary PMCL owns a number of properties consisting of 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 are 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 2013, our gross revenue received from these activities involving TCI were approximately US$203,000 and net profits were approximately US$25,000. |
| In 2001,our Russian subsidiary, OJSC VimpelCom, began providing telecommunications services, including mobile and fixed line services, to the Embassy of Iran in Moscow. The gross revenue for these services in 2013 was approximately US$29,000 and net profits were approximately US$14,000. OJSC VimpelCom intends to continue the services to the Embassy of Iran. |
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| 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 customers receive customary international roaming services on their networks, and their customers receive such services while roaming on our networks outside those countries. We intend to continue our roaming agreements with TCI, MTN Irancell, Taliya Mobile and TKC KIFZO for the foreseeable future. During 2013, our gross revenue received from roaming arrangements with TCI and MTN Irancell were approximately US$237,000 and US$19,000, respectively, and net profits were approximately US$121,000 and nil, respectively. During 2013, our gross revenue received from roaming arrangements with Taliya Mobile and TKC KIFZO were collectively approximately US$141 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 the accuracy or completeness of such information and undertake no obligation to correct or update this information.
Various Telenor ASA subsidiaries have entered into roaming agreements and interconnection agreements with Iranian telecommunication companies. Pursuant to these roaming agreements, the Telenor subsidiaries customers are able to roam in the particular Iranian network (outbound roaming) and customers of such Iranian operators are able to roam in the relevant subsidiaries network (inbound roaming). For outbound roaming, Telenor subsidiaries pay the relevant Iranian operator roaming fees for use of its network by Telenor subsidiaries customers, and for inbound roaming the Iranian operator pays the relevant Telenor subsidiaries roaming fees for use of the Telenor subsidiaries network by its customers.
Telenor subsidiaries were party to the following roaming agreements and interconnection agreements with Iranian telecommunication companies in 2013:
(1) Telenor Norge AS, a Norwegian subsidiary, has roaming agreements with Mobile Telecommunication Company of Iran (MCI) and MTN Irancell (Irancell). During 2013, Telenor Norge AS recorded net expenses related to these roaming agreements of US$176,807.75 to MCI and US$53,774.62 to Irancell.
(2) Telenor Sverige AB, a Swedish subsidiary, has roaming agreements with MCI and Irancell. During 2013, Telenor Sverige AB recorded net expenses and net revenues related to these roaming agreements of US$9,984.28 in net revenues from MCI and US$13,422.32 in net expenses to Irancell.
(3) Sonofon AS, a Danish subsidiary, has roaming agreements with MCI and Irancell. During 2013, Sonofon AS recorded net expenses related to these roaming agreements of US$30,354.42 to MCI and US$10,571.76 to Irancell.
(4) Telenor d.o.o., a Serbian subsidiary, has a roaming agreement with MCI. During 2013, Telenor d.o.o. recorded a net expense of US$3,666.77 related to this roaming agreement.
(5) Telenor Magyarország Zrt, a Hungarian subsidiary, has a roaming agreement with MCI. During 2013, Telenor Magyarország Zrt recorded net revenues of US$20,087.76 related to this roaming agreement.
(6) Cosmo Bulgaria Mobile EAD, a Bulgarian subsidiary, has roaming agreements with MCI and Taliya Mobile (Taliya). During 2013, Cosmo Bulgaria Mobile EAD recorded net revenues related to these roaming agreements of US$11,982.71 from MCI and US$2.26 from Taliya.
(7) DiGi.Com Bhd, a Malaysian subsidiary, has a roaming agreement with MCI. During 2013, DiGi.Com Bhd recorded a net expense of US$193.86 related to this roaming agreement.
(8) Telenor Pakistan (Private) Ltd., a Pakistani subsidiary, has roaming agreements with MCI, Irancell, Taliya. During 2013, Telenor Pakistan (Private) Ltd. recorded net expenses and net revenues related to these roaming agreements of (i) US$21,548.32 in net revenues from MCI, (ii) US$9,014.98 in net revenues from Irancell, and (iii) US$32.87 in net expenses to Taliya.
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(9) Total Access Communications Plc. (dtac), a Thai subsidiary, has roaming agreements with MCI and Irancell. During 2013, dtac recorded net expenses and net revenues related to these roaming agreements of US$257,139.33 in net revenues from MCI and US$11586.49 in net expenses to Irancell.
(10) Telenor Global Services AS, a Norwegian subsidiary, has an interconnection agreement with MCI. During 2013, Telenor Global Services recorded a net expense of US$891,066 related to this interconnection agreement.
Telenor and its subsidiaries intend to continue these agreements.
Legal Proceedings
Current Legal Proceedings
For details of current legal proceedings, please see Note 27 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. For details of the investigations by the SEC, DOJ and Dutch public prosecutors office, please also see Item 3Key InformationD. Risk FactorsRisks Related to Our BusinessRisks Related to Our BusinessWe are subject to investigations by the SEC, DOJ and the Dutch public prosecutor, and are conducting an internal investigation and we are unable to predict the duration, scope or results of these investigations or their impact on us.
Concluded Legal Proceedings
The legal proceedings contained in this section were concluded in the fiscal year ended December 31, 2013.
Wind Telecom Tax Audit
In early 2013, the Agenzia delle Entrate (ADE) (Italian tax authority) initiated an audit of Wind Telecom for the tax year 2009 and alleged that certain tax deductions taken by Wind Telecom in connection with the disposal of Wind Hellas and Wind Hellas affiliates were unlawful - allegations which Wind Telecom firmly denied.
On July 31, 2013, Wind Telecom agreed to settle the audit by agreeing to pay the sum of approximately EUR 31 million to the ADE (approximately US$42 million at the exchange rate as of September 30, 2013). Pursuant to the terms of the settlement, EUR 15 million of the settlement amount had to be paid (and was paid) within 20 days of the settlement date with the balance to be paid in quarterly instalments.
Pursuant to the indemnities contained in the share purchase agreement between the company and Orascom TMT Investments S.a.r.l. (formerly, Weather Investments II S.a.r.l), the company is pursuing reimbursement of a significant portion of the settlement from Weather II and has recorded the amount as an indemnification asset.
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. Many of the regulatory developments reported in the following section involve ongoing proceedings or consideration of potential proceedings that have not reached a conclusion. 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.
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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; |
| 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.
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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 canceled 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.
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 in 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 in 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 RUB300 for one frequency assignment. The annual payment rate is RUB1,400. 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 in 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
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technology. This amendment came into force on May 13, 2012. Since November 25, 2013 the One-Off and Annual Payment Rate for radio technology standards are set in relation to radio frequency bands allocated by decisions of the State Radio Frequency Commission or specified in the license. The payment period for cellular radio technologies is calculated from the date of the decision of the State Commission for Radio Frequencies or the date of issue of the license in the case of license bidding.
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 revenue from communications services provided to customers and other users in the public communications network. Amounts paid as value added tax are excluded from the calculation of revenue.
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 regulation 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 does not permit 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. Since December 1, 2013 the provisions of this regulation do not bind mobile operators to follow a requirement to use strictly allocated numbering capacity in the case of customer number transfers under MNP procedure.
Please see the section of this Annual Report on Form 20-F entitled Item 3Key InformationD. Risk FactorsLegal and Regulatory RisksNew or proposed changes to laws in Russia and other markets in which we operate may adversely affect our business for more information on the MNP laws in Russia.
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 customers only if they are registered as additional numbers under local communications services provisions. As these additional numbers can only be allocated to customers by the local network operators, all numbering capacity in the ABC code allocated under our GSM licenses was re-allocated under our license for local communications services. We entered into agreements for the provision of local and wireless communication services with new customers to whom we provide the numbers in the ABC code. Some of our customers 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 customer agreements with certain customers in order to ad