NEW TELECOM ENTRANT IN ARMENIA BRINGS FIBER TO THE

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 000073 SIPDIS E.O. 12958: DECL: 02/04/2020 TAGS: ECON EINT EINV AM TU SUBJECT: NEW TELECOM ENTRANT IN ARMENIA BRINGS FIBER TO THE HOME REF: YEREVAN 52 Classified By: A/DCM JOHN MAHER. REASONS 1.4 (B/D) SUMMARY -------------- ¶1. (C) The development of Armenia's information, communications and technology (ICT) sector promises another advancement with the introduction of "triple play" service and fiber to the home. U-Com, a new entrant in the Armenian ICT sector, plans to launch this convergent service. Customer trials are now underway in downtown Yerevan and two nearby neighborhoods for a planned launch in April 2010 and further expansion later in the year. This service offers a major advancement in telephone, television and internet service. Though allegedly backed by powerful political insiders who see opportunities in the potentially lucrative telecoms sector, U-Com faces significant obstacles in educating the public and building owners about the service and its advantages, as well as a potentially debilitating cost structure. Interconnecting with other existing operators has also met with limited success, and may limit widespread acceptance outside Yerevan. An open border with Turkey would lower operating costs. END SUMMARY. BACKGROUND AND PLANS -------------- ¶2. (SBU) U-Com (www.ucom.am),an internet service provider, began operations in 2007 with a rudimentary WiMax technology that connects corporate customers to U-Com's fiber-optic network on a limited basis. By 2008, the strategy to deliver a fiber-to-the-home (FTTH) solution took shape and by 2009 they had wired central Yerevan and two nearby affluent neighborhoods. Depending on its success in Yerevan, U-Com plans to expand "triple play" service (TV, Internet, and fixed-line telephony) to the cities of Gyumri and Vanadzor by the end of 2010. Stringing the country with fiber optic cable can be extremely costly, and Hayk Yesayan, General Director of U-Com, added: "We have to make money in Yerevan before we can expand any further." WIRING YEREVAN -------------- ¶3. (SBU) U-Com is stringing fiber-optic lines along the streetlight electrical cables in each neighborhood. The fiber enters residences on the same conduits used by telephone, electric, and gas lines. Within buildings, the fiber uses existing service shafts or ducts to reach individual dwellings. ¶4. (C) U-Com did not reveal their investors' identities, but hinted at foreign investment from Europe, the U.S. and Russia in addition to domestic Armenian sources. (NOTE AND COMMENT: One local name mentioned is the current Mayor of Yerevan, Gagik Beglarian, who, it was suggested, used his influence to facilitate access to streetlight poles. An ownership role by such an insider is entirely consistent with how of business is typically conducted in Armenia. END NOTE AND COMMENT). SERVICE LEVEL AND COMPETITION -------------- ¶5. (SBU) Each end customer will have the capacity for maximum speed of 1 Gigabit per second (Gbps). This allows for convergent triple-play services: Internet, fixed-line telephone and TV (including 76 standard definition, 4-5 high definition (HDTV),and interactive video-on-demand services in high definition). No other competitor in Armenia has announced such an ambitious plan. ¶6. (SBU) U-Com,s competition is fragmented over several service types: Mobile operators in the voice market, cable and satellite TV in the video market, and the many internet service providers (ISPs). Their biggest challenge so far has been in educating the public about convergent services and the advantage of switching to a single provider for three services. The lack of number portability is seen as the biggest obstacle in convincing customers to adopt the new model. FIBER NETWORK IN YEREVAN AND BEYOND -------------- ¶7. (SBU) U-Com owns the fiber used in Yerevan and plans to own the fiber laid in any future area. It currentlyleases fiber capacity between towns and cities from all three major bandwidth providers in Armenia: GNC Alfa, FiberNet, and YEREVAN 00000073 002 OF 002 Armentel. U-Com has partnered with GNC Alfa by investing in their infrastructure in return for favorable prices. U-Com currently does not have redundancy in their fiber network, but plans to improve survivability of cable breaks by creating metropolitan rings of fiber that would connect each customer to at least two different servers of content and connectivity. CURRENT AND FUTURE PLANS -------------- ¶8. (SBU) U-Com has completed a contract to connect municipal offices in all the regions of Armenia with high-capacity fiber links. It plans to deploy fixed-line telephony service in all the towns with municipal offices. The competitive advantage will be lower tariffs on international calls and on long-distance charges within Armenia between customers on the same network. U-Com is in the process of applying for an area code and a number scheme, . The company is not involved with the GOAM's nationwide broadband initiative ("Broadband Armenia")(reftel),but is receptive to participation. IMPORTING EQUIPMENT -------------- ¶9. (SBU) U-Com has faced little to no difficulty in importing electronic equipment from Europe and the U.S. It has taken advantage of a GOAM policy that defers the VAT payment on imported goods for three years if the value of the good exceeds AMD 300 million($800,000). The network equipment is primarily imported from Ericsson in Sweden. U-Com also imports their CISCO and Motorola set-top-boxes directly from the U.S. INTERCONNECTING WITH INCUMBENT PROVIDERS -------------- ¶10. (SBU) One of the major challenges U-Com faces is in interconnection with fixed-line telephony providers. While it has successfully tested its interconnection with the mobile operators (Beeline, Vivacell, and Orange),interconnection with the fixed-line telephone service of Armentel in Yerevan was only partially successful. In addition, Armentel lacks the ability to interconnect with operators at any location outside Yerevan. Armentel does not have the equipment at their regional offices to interconnect (billing and connectivity) with other operators, nor do they have any plans to add such equipment. This means that a U-Com customer outside Yerevan would incur long-distance charges when calling an Armentel customer in the same town or in any location outside Yerevan. Failure to resolve this shortcoming could seriously complicate U-Com's efforts to expand its services outside Yerevan, and there is little incentive for Armentel to help U-Com resolve it. (Note: Under current law, no operator is required to interconnect with any other operator unless the Public Services Regulatory Commission (PSRC) specifically mandates it. END NOTE.) ACCESS TO TURKEY -------------- ¶11. (SBU) U-Com looks forward to the open border with Turkey for connectivity to Europe, which it expects would lower the price of providing Internet and improve the quality of all services. COMMENT -------------- ¶12. (SBU) U-Com's planned service is part of the meteoric improvement in telecommunication services in Armenia in just the past year. They have an ambitious service model and while -- as with many recent entrants to the ICT sector -- they appear to have murky insider participation, the company thus far appears to be acting within the scope of the law. Their success or failure is difficult to predict, but introduction of this service will increase expectations of the Armenian public. END COMMENT. YOVANOVITCH