Extending broadband’s reach in Russia

Rosnano, the state technology fund, has invested in Silicon Valley firm NeoPhotonics in a move to develop broadband Internet capacity in Russia. Tim Jenks, NeoPhotonics’ founder and CEO, said he had been watching the pace of development of the Russian and Eastern European broadband markets for several years. “Not only are these markets deploying high-speed, agile and fiberoptic networks, but also we are seeing more of our customers target service providers and invest locally in Russia and more broadly in Eastern Europe,” he said, Rosnano’s web site reported. Analysts agreed that the potential for rapid growth exists, not only domestically, but also in the use of the country’s territory as a transit region for signals between Europe and Asia. They cautioned, however, that climate and distance could pose problems for construction of an international signal network, as could Rosnano’s poor record of maintaining projects that were not immediately profitable. Rosnano paid $39.8 million in cash, 17 percent of its capital, to acquire newly issued common stock in NeoPhotonics, which designs and manufactures photonic integrated circuits, or PICs. PICs increase the functionality, agility and, most of all, speed of bandwidth-intensive networks, from 10 gigabits per second to 100. NeoPhotonics’ own PICs can also adjust bandwidth more easily for volatile traffic. Jenks founded NeoPhotonics in 1996, later inventing the PICs, which work without converting signals from light. “Essentially, light goes into the chip, is manipulated by the chip, and all the networks that provide voice, network data and video are really optical,” he said in an interview to the web TV channel SNNLive. “Keeping the light in the light domain is what our chips do.” Rosnano and NeoPhotonics announced the deal on April 30, when both companies published their investment communiques. Sergei Polikarpov, Rosnano’s managing director and now a member of NeoPhotonics’ board, said that his company will support expansion of NeoPhotonics’ market presence in Russia. In particular, Polikarpov said, Rosnano will build a research and development, production, and processing facility in Russia by July 31, 2014. “With our support in Russia, we can further enhance the company’s development cycles and shorten the time for broader adoption for Neo- Photonics’ products in Russia and in the global market,” Polikarpov said. Mikhail Bodyagin, Internet industry analyst at iKS-Consulting, told The Moscow News that Rosnano is trying to catch up with the fast-growing broadband market. According to their latest research, the share of broadband-connected households went up by 6 percent last year, reaching 40 percent penetration among all Internet-equipped residences in Russia, and 22 million Russians have broadband in their homes, of whom 16 percent live in Moscow. Apart from the big cities, however – where broadband providers are competing to increase speeds – there is a big gap in the market, said analyst Ismail Belov of international think tank IDC. Because of Russia’s unique geographical position, it is well-placed to serve as a transit point for broadband signals between Europe and Asia, as well as between the different regions of the country. “A short time ago, 3G was the main hope for broadband to bring such services as high-definition television and telemedicine to far, remote places, but it has since been proven that 3G has serious technical limitations,” Belov said. The 3G signal works poorly over long distances, a significant drawback in a country the size of Russia, so the technology can be used only at the so-called “last mile” proximity to the user. “This literally means that a high-density network of transmitters needs to be installed all over the country’s huge territory, while only voice and SMS exchanges can operate more or less well if the density isn’t achieved,” Belov said. While the market niche and technical elements give positive indications of the investment’s potential, analysts cautioned that financial aspects of broadband expansion should be scrutinized more thoroughly. Belov noted that the volume of the broadband market, including the potential for signal transit across Europe and Asia, could be twice as big as the whole Russian communications market’s current volume. He added, however, that the initial investment would be huge due to climate and distance, as companies would have to build transnational optical lines that would work with PICs, able to transmit hundreds of gigabits of information at one time without loss. “Scale-wise, I would compare such a project with the Baikal- Amur Railway,” he said, the train line extending from the Irkutsk region north of Mongolia to the Pacific coast, whose problematic construction stretched for nearly 60 years from the 1930s. Rosnano’s reputation for supporting projects that have not proven immediately profitable has also come into question. Dow Jones Newswires has reported that Neo- Photonics, which went public in 2011, has seen improving revenues in the past few quarters, but has been slow to turn a profit. In March, Rosnano’s directors closed 13 investment projects that the fund had been jointly supporting, which had been previously approved by the supervisory board of Rosnanotech, Rosnano’s predecessor until it became a joint-stock company in March 2011. Rosnano said that the main reasons for termination of the projects were “refusal of the applicant to carry out the project, usually because of a worsening financial position,” and “irreconcilable disagreement with Rosnano over financial obligations.” For more than half of the projects, the planners reported that they intended to continue with alternative sources of support. The fund emphasized, however, that the cancelled projects represented a minority of its support, 3.1 percent of its approved budgets. As of March of this year, Rosnano had approved 145 projects with budgets totaling 568.6 billion rubles ($19.3 billion), and had contributed a share of 239.8 billion rubles ($8.12 billion).