Annual report 2019 Operational Results Infrastructure Network expansion MegaFon is the unrivalled leader in Russia 1 by number of base stations, with We are committed to maximising the speed and reliability of communications services for our subscribers, and are continuously investing in infrastructure and innovative technology. > 181,400 stations 2G 3G 4G 5G 1990s 2000s 2010s 2016–2019 Voice and SMS Mobile data and high- Mobile broadband and full- Ultrafast mobile internet, quality voice services scale IP network full-scale support of IoT ecosystems, and ultra-reliability MegaFon was the first in Russia to • provide 2G services in all • roll out a full-scale • launch the first 4G • demonstrate a record Russian regions commercial 3G network network (2012); connection speed • launch a commercial of 2.46 Gbit/s VoLTE network (2016); on a smartphone • demonstrate a data on a 5G network (2019); rate in excess of 1 Gbit/s • launch a 5G on a commercial lab – in collaboration smartphone (2018) with Saint Petersburg State University’s Graduate School of Management (2019) 1 According to Roscomnadzor as of 19 March 2020. 48 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226 MegaFon’s base stations, ‘000 4G/LTE coverage, % 2019 70.0 50.7 60.7 181.4 2019 82 2018 70.5 49.4 49.6 169.5 2018 79 2017 69.1 48.0 40.6 157.7 2017 74 2G 3G 4G/LTE MegaFon’s strong portfolio of unique high-speed data 4G/LTE networks spectrum assets is an important competitive advantage. While major Russian players have comparable bandwidth In 2019, we continued expanding our 4G/LTE coverage, positions in bands below 2,100 MHz, MegaFon enjoys increased the number of 4G base stations by 22% a fourfold advantage over its key rivals in the 2,600 MHz to 60,700, and carried on with our programme to upgrade band 1. This competitive edge enables MegaFon to: existing base stations. At the year end, 4G/LTE was • deploy 5G networks at a much lower cost than its available to 82% of Russia’s population, while data competitors in the 1–6 GHz spectrum; transmission speeds increased due to upgraded bandwidth • save up to 15% on CAPEX for 4G; at base stations. • deliver much faster peak data speeds with 4G versus its competitors. We also continued to invest in the development of LTE Advanced, a technology that supports data rates In 2019, MegaFon focused its infrastructure expansion of up to 300 Mbit/s, which is now available in 49 Russian efforts on: regions. We were the first in Russia to demonstrate a data • increasing 4G coverage in low and medium frequency rate of over 1.6 Gbit/s on a commercial smartphone ranges, improving network capacity; in Moscow. • upgrading its network and expanding capacity at existing sites to maximise operational savings; We also expanded our VoLTE footprint and improved its • developing new NB IoT technologies, including improved coverage. To improve voice quality on VoLTE networks, indoor coverage; we introduced EVS, an advanced codec able to cover • improving VoLTE voice service quality and coverage. the full dynamic range of the human voice, making phone calls seem as though the callers are standing right next Additionally, MegaFon replaced outdated equipment to each other. to enhance network reliability, reduce power consumption, and prepare base stations for LTE rollout at no additional cost. 1 Comparisons made for the FDD 2,600 MHz band (or Band 7 under 3GPP). 49 Annual report 2019 3G networks 5G DreamLab The number of our 3G base stations grew by 3% to 50,700 In September 2019, MegaFon launched its Digital at end 2019. In the future, MegaFon plans to migrate traffic Laboratory on the campus of the Graduate School and bands from 3G to 4G, as well as to prepare for 3G of Management at Saint Petersburg State University phase-out in the longer term. Further development of 3G to research 5G networks. Fitted out with a trial zone, will be focused on the UMTS2100 spectrum being refarmed the laboratory has become a platform for developing to LTE 2100 networks, as necessary, to maintain the current new 5G services. service level and network capacity. For more information see the HR Management section on page 88. 2G Networks In 2019, the number of 2G base stations stood at 70,000. Key plans for 2020 include GSM spectrum being refarmed to LTE 900 networks in order to improve network coverage in rural areas and urban buildings and deploying a bearer layer for VoLTE calls. Developing 5G networks Tower infrastructure The first 5G pilot zones in millimetre wave bands were launched in Moscow and Saint Petersburg JSC First Tower Company (FTC) is a MegaFon subsidiary with the following early practical results: set up in 2017 to provide effective management • a record connection speed of 2.46 Gbit/s achieved for the Company’s tower infrastructure, increase its return on a smartphone on a 5G network; on CAPEX invested, and expand into the fast growing tower • first international call made over a 5G network; lease market. • first of MegaFon’s permanent 5G pilot zones deployed in Moscow near Moscow State University; The company employs professionals with the necessary • first unmanned control of coal mine transport skills in telecoms, property management, IT solutions, deployed (Listvyazhnaya mine, Kemerovo) and infrastructure construction and expansion. FTC’s in the Russian Federation. resources include a shared back office hub in Samara, regional competence centres managing land lease In 2020, we plan to launch the first real segments contracts for towers, and a call centre handling enquiries of the future 5G networks (although this is dependent from external counterparties, suppliers, and customers. on the outcome of spectrum auctions in the Russian Strong collaboration between all units of the company has Federation), and to continue 5G spectrum clearing through made for significant efficiencies in customer service. a joint venture already established between all operators, as well as developing and enabling new use cases for 5G. To maintain a high level of service, FTC maintains a company-wide database of assets and installed MegaFon’s involvement in the national Digital Economy equipment which are managed by a dedicated IT platform. programme is of particular importance for the Company in this regard as the programme is expected to be a key By the end of 2019, a total of approximately 16,700 driver of telecommunications industry development towers had been built, of which 503 towers were built according to decisions taken by the SCFR 1 5G network in the reporting year. development is a key part of the programme. 1 State Commission on Radio Frequencies: an inter-agency coordinating body at the Ministry of Digital Development, Communications and Mass Media of the Russian Federation. 50 About MegaFon 14–35 Strategic report 36–81 Sustainability 82–109 Corporate governance, securities, and risk management 110–147 Financial statements and appendix 148–226 FTC’s strategic goals for 2020: In 2019, MegaFon completed the first phase • prepare its tower portfolio for 5G deployment; of the deployment of ASON 2 security technology, which • continue development in cities with high traffic density; will ensure high network reliability and lower upgrade • engage in federal and municipal projects, including costs associated with traffic growth. ASON was launched Smart City projects; on the Moscow–Samara, Moscow–Volgograd and Moscow– • partner with state-owned facilities to install Nizhny Novgorod routes. Plans are in place for ASON scaling the company’s infrastructure; in the North-West, Caucasus and Ural branches. • continue dual-use pole construction. MegaFon began shifting the IPBB 3 interregional network of the Caucasus branch to a IP/MPLS 4 backbone network Backbone and backhaul networks via direct gateways in the regions. This will optimise traffic routes and DWDM backbone network utilisation. Continuous expansion of its fibre-optic (FOCL) network The project will be completed in 2020, and a similar project allows MegaFon to provide a better subscriber experience, will be implemented for the IPBB network of the North-West including improved mobile network capacity and increased Branch. mobile data speeds. In 2019, MegaFon continued the construction of mWDM By the end of 2019, the total length of MegaFon’s backbone networks in Moscow, Saint Petersburg, Nizhny Novgorod, networks reached 140,400 km, up 3.2% y-o-y. Yekaterinburg, Samara, Ufa and Volgograd, which improved the quality of the services provided in these cities. Backbone and backhaul FOCL networks, ‘000 km Network quality 210.9 2019 140.4 MegaFon boasts an advanced, extensive infrastructure, and a significant edge in spectrum availability, which 204.4 2018 136.1 allows us to provide a high-quality voice experience and record-high mobile data speeds. 199.8 2017 134.1 Backhaul FOCL, including: MegaFon is Backbone the unrivalled In 2019, MegaFon continued shifting its backbone fibre- optic network from non-coherent systems to DWDM 1 leader coherent systems which accelerate data speeds, reduce by average data transfer rate in Russia 5. latency and cut the costs of further upgrades. DWDM coherent system equipment was installed on the Moscow– Samara, Moscow–Volgograd, Yekaterinburg–Novosibirsk, Saint Petersburg–Smolensk, and Kazan–Ufa routes. 1 DWDM (Dense Wavelength Division Multiplexing) – modern technology 4 MPLS (Multiprotocol Label Switching) – a routing technique for carrying a large number of channels on the same fibre. in telecommunications networks that directs data from one node to the next 2 ASON (Automatic Switched Optical Network) – technology for automatic based on short path labels. switching of optic lines in DWDM networks. 5 Speedtest by Ookla.