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Rostelecom slims down for financial and digital gains

2017-08-08 By Wang Hui

To pack some financial muscle onto its digital ambitions, the Russian operator Rostelecom decided to monetize 8.8 million square meters of its property across Russia by moving its sites downstream and freeing up equipment rooms to better use idle assets. 

Digitalization isn’t free

Traditional CT equipment rooms no longer meet operators’ ICT service development needs. With high maintenance costs further hindering digital transformation, more carriers are opting to reconstruct equipment rooms and monetize undervalued sites to lower OPEX and drive up revenues.

Rostelecom’s Digitization Strategy 2020 set out its aim to increase the percentage of its income from digital services to 60 percent in 2020, up from 40 percent in 2015. To achieve this, the telco kicked off with a heavy investment in digitalization, in particular by acquiring video content and ramping up video quality. Simultaneously, it launched a broadband acceleration program to meet the high bandwidth needs of video services and built DCs to provide IT services.

Rostelecom’s investment in large-scale network construction and video placed a huge burden on its cash flow. Added to weak income growth and declining CAPEX investment over the previous few years, its digitalization project lost pace, with legacy network reconstruction even stalling at one point. Rostelecom needed new inflows of cash fast.

Rise through reuse

Globally, equipment room closures are on the increase for two reasons:

Idle sites: A Rostelecom survey discovered that the majority of its equipment room hardware was old and cumbersome PSTN equipment. With continued user churn, 40 percent of its PSTN equipment ports were now idle. At the same time, the operator had replaced old equipment with compact high-density equipment that took up less space during All-IP transformation. Coupled with fiber optic deployment, which moved sites downstream, and the fact that most of Rostelecom’s equipment rooms were in regions where broadband acceleration had been completed, the bulk of its equipment had been relocated from equipment rooms into outdoor cabinets – equipment room vacancy rate exceeded a hugely wasteful 70 percent. 

Lagging behind ICT service deployment: More advanced communications and energy tech means that traditional CT equipment rooms can no longer deliver the goods. DC deployment and hosting services, for example, place new load bearing, voltage, and temperature control demands on equipment rooms.

OPEX & CAPEX

Simple restructuring allowed the operator to close these equipment rooms and monetize its assets.

Dramatic reduction in OPEX: By analyzing a typical access network room, Huawei discovered that the complete renovation of equipment room equipment, air conditioning, and monitoring systems could slash electricity use, space, and maintenance costs by 80 percent, 90 percent, and 60 percent, respectively. By renovating 2 million PSTN lines, for example, fellow European telco Belgacom cut electricity costs by 65 percent after closing its equipment rooms. For a single equipment room, overall OPEX savings could be as high as 70 percent.

Adding to the urgency, a strict 2015 property tax enacted in Russia had wiped over 10 percent from Rostelecom’s annual profits. A common problem in Europe, tax shocks can be offset by closing equipment rooms. 

Organizational efficiency improvements: Equipment room closures facilitate network simplification and upgrades. It frees large numbers of maintenance personnel from maintaining outdated equipment – they can instead focus on new ICT technology and operators can dedicate a greater proportion of their staff to marketing and sales to increase income.

A positive business cycle: Reducing OPEX and monetizing equipment rooms increased Rostelecom’s available capital for large-scale network modernization, speeding up digital transformation. Completing digital transformation would boost Rostelecom’s income, which would in turn accelerate network modernization, forming a positive business cycle.

Rostelecom published an asset monetization strategy in its November 2016 investor report. A statistical analysis of its nationwide fixed assets revealed a total of 8.8 million square meters of property, most of which was equipment rooms containing network equipment. Rostelecom set up a special company to monetize these assets using various methods, including sales, SPV, and auctions.

Local press reported that Rostelecom hoped to raise 12 billion rubles (US$2 billion) by monetizing these 8.8 million square meters, including the Central Telegraph building in Moscow’s business district. At over 700,000 square meters, this particular building would raise a staggering amount.

Equipment rooms for access networks accounted for the largest number of sites. The operator selected Huawei’s one-stop cabinet solution to move most of the hardware in these rooms down the network. 

3 disposal scenarios

There were three disposal solutions for the remaining hardware: One, relocate all equipment to smaller and more economical neighboring equipment rooms; two, shrink the original sites using Huawei’s Micro Module solution, which is a unified equipment room containing power, rack, air conditioning, and monitoring systems. It can be quickly deployed in basements and uses little power. Three, relocate all equipment to outdoor container equipment rooms. Huawei’s container equipment rooms offer more adaptability to the environment than ordinary equipment rooms. In particular, they offer advantages in harsh environments, and are able to function in earthquakes and temperature extremes.

After closing its equipment rooms, there were three disposal scenarios: one, sell off property for cash; two, surrender leased property; or, three, use them for a different function like  a service center or retail outlet if the location is suitable, or a data center if not.

A boost in income

In collaboration with Huawei, Rostelecom sold off some of its equipment rooms after moving sites down, something that the operator will continue doing over the next few years. 

Rostelecom is not the first operator to monetize its equipment rooms, with other operators in Belgium, Italy, Poland, and Russia doing the same. After closing most of its high-value equipment rooms Belgacom, for example, was in a stronger position to transform its structure and operations and invest in digital transformation.

It’s not just about money. The telecoms industry has one of the largest carbon footprints – closing equipment rooms and retiring old equipment and technology can lower energy consumption and slash CO2 emissions. We believe that this trend will continue to grow.

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