MGTS Is Russian Into DSL Upgrade

Russian carrier Public Joint Stock Company Moscow City Telephone Network (MGTS) is upgrading its broadband capabilities with an infrastructure combo from Nokia Corp. (NYSE: NOK) and Redback Networks Inc. (Nasdaq: RBAK). (See Redback, Nokia Win in Moscow.)

The carrier, which operates Moscow's access network and has 4.5 million voice and data subscribers, is to install Nokia IP DSLAMs and Redback's SmartEdge gateways in its local exchanges throughout the city as part of its ongoing network modernization program. The value of the new deal was not revealed.

Whatever the cost, the investment is part of a broader capex plan to upgrade the carrier's network. MGTS will spend 3.2 billion rubles (US$112 million) on its network in 2004, up from 2.5 billion rubles ($88 million) in 2003. That modernization includes the replacement of some legacy analog voice switches with digital equipment. MGTS is using a new OSS system to manage and track its new infrastructure (see MGTS Picks NetCracker's OSS).

The broadband system upgrade will enable the carrier to provide more services more efficiently as it attempts to double its number of broadband subscribers by year's end, according to MGTS. The carrier has 15,000 DSL subscribers now, mostly business users, and aims to reach 31,000 by the end of the year. To date, MGTS has been using a combination of equipment from Cisco Systems Inc. (Nasdaq: CSCO) and Lucent Technologies Inc. (NYSE: LU) to provide broadband access. A spokesman for the carrier won't say whether this is being replaced, only that the new-deal equipment, which is already being added to the network, is for the network's "modernization."

The spokesman adds that it is already possible to provide a wide range of services, such as video on demand and TV services, using the existing network, but that it's expensive to do. He says the new equipment will help make the provisioning of such services more economical should MGTS decide to offer them; MGTS is also considering a VOIP service.

However, the carrier is not planning to cut its DSL access prices following the upgrade, and that won't help with the uptake of the service, says Eugene Popov, an analyst specializing in the Russian market at Pyramid Research. "Pricing is the key issue in Russia, and broadband won't take off until the cost comes down. DSL costs $75 a month or more, and up to $600 a month for the higher speeds for business users. That's very expensive for residential users."

Popov adds that alternative broadband access services, including cable modem, fixed wireless, and satellite, cost just as much, if not more. He says a key issue is the cost of international capacity out of Russia for IP traffic, and it would be hard to cut prices much until these costs were reduced.

MGTS is predicting growth in its DSL subscriber base, and is expecting continuing growth in its overall revenues, too. The carrier reported a net profit of just over 2 billion rubles ($70 million) in 2003 (under Russian accounting rules), up 83 percent from 2002. Total revenues were 12.7 billion rubles ($445 million), up 26 percent from 2002's 10.1 billion rubles. Revenues are expected to increase by about 16 percent to 14.8 billion rubles in 2004.

MGTS isn't the only Russian operator investing in new infrastructure at present. See: Golden Telecom Builds Ethernet MAN, Alcatel Tests VOIP Waters in Russia, Ericsson Wins Ethernet DSL Deal, and Veraz Wins VOIP Deal in Russia.

— Ray Le Maistre, International Editor, Boardwatch