Synovate Final Report 060204

8/8/2019 Synovate Final Report 060204

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REVISED FINAL REPORT

Telecoms Wholesale Study Malaysia

Synovate Business Consulting Telecoms wholesale study: Final report 6-Feb-04 1

Prepared for Telekom Malaysia

Prepared by Synovate Business Consulting

Job number 03-0692

Date 6 February 2004


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Synovate Business Consulting

175A Bencoolen Street #10-01/02

Burlington Square Singapore 189650

Tel +(65) 6333 1511 Fax +(65) 6333 1884

www.synovate.com/bc


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Table of contents

1. Introduction 4

2. Environmental scan 9

3. Competitive landscape 15

4. Conclusions and strategic recommendations 47

5. Appendix 53



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1. Introduction

1.1 Project background

1.2 Data gathering methodology

1.3 Trade interviews conducted1.4 Caveats and limitations


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1. Introduction

1.1 Project background

Telekom Malaysia (TM) is embarking on a wholesale business for the Malaysian market. TM already offers suchservices domestically, though limited and in a small scale, to specific competitors through interconnectagreements.

The wholesale business comprises of selling and / or leasing components of TMs network to licensed operators,who are currently competitors to TM. These include but are not limited to the selling of bulk traffic minutes, leasedcircuits and various forms of access (e.g., DEL, ADSL, ISDN, etc.)

TM intends to further develop this business and this could be achieved through a better understanding of itscustomers needs, wants and preferences. The findings from this study will help TM assess areas of opportunitiesfor wholesale business, which will then serve as a basis for TM to formulate their business developmentstrategies.

Research scope:

Analysis time frame: Current: 2003

Country coverage: Malaysia (national level)

Synovate Business Consulting contacts:

Damien Duhamel, DirectorTel (65) 6430 6512 Fax (65) 6333 1884Email: [email protected]



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1. Introduction

1.2 Data gathering methodology


Primary research(Trade & customer interviews)

Secondary research(Desk research) Desk research from a variety of local and international sources:

Statistics office and other official sources

Industry associations and other semi-official sources

Local and international business news media

Published industry and company reportsReports from banks, financial analysts and stock exchanges

Internet and on-line sources

Annual reports

~ 3 interviews with industry experts / observers:

Telecommunications industry analysts

Government officials

~ 6 interviews with targeted telecommunications companies (1 to 2 interviews percompany):

Maxis

Time dotCom

Singtel

AtlasOne


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1. Introduction

1.3 Trade interviews conducted

A total of 11 interviews were conducted in Malaysia, distributed as follows:

Malaysian telcos

Maxis Communications .... Mr Azahar Ariff, Head, Wholesale Department,

Mr Hwang W Y, Domestic Wholesale Manager

Time dotCom ..... Mr Md Ishak Zainuddin, Head, International Marketing,

Ms Sharifah Rolan, International Marketing

AtlasOne Malaysia Ms Siti Nurbaya, Chief Operating Officer,

Mr Md Hijazi Tamyis, Assistant General Manager, Infrastructure

SingTel .... Mr Terry, Country Director

Industry experts and regulators

MCMC .. Mr Sameer Sharma, Advisor, Industry Development Division

Asiatele dotcom ..... Ms Bee-Kay Sen, Journalist, Malaysian deskAcasia ......... Mr Zuhairi, General Manager

Multimedia University ........ Lecturer (requested anonymity)



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1. Introduction

1.4 Caveats and limitations

Sources of information

The facts, figures and trends presented in this report have been subject to verification through a continuousresearch process that includes both primary research (such as speaking to industry experts and key playersthemselves), and benchmarking against findings from further desk research.

The primary research process will also aim to identify the underlying reasons that drive market events, as well tovalidate our analysis hypotheses and guide the formation of recommendations.

Synovate has merged and crossed-checked the different findings from the various available sources to ensure thata consensual and representative picture of the market could be provided.



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2. Environmental scan

2.1 Telecommunications industry overview

2.2 Industry dynamics

2.3 Technological movements in Malaysia2.4 Industry drivers


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2.1 Telecommunications industry overview

Telecommunications industry experiencingconsolidation

Large players such as TM are merging with Celcomand this is expected to result in cost savings frommerged operations

Time dotcom recently concluded the sale of its mobileoperations to Maxis which led to Maxiss improvedcoverage in key areas, as well as improved projectionsof the growth of its subscriber base

Price sensitive wholesale market

Due to the deregulation of the wholesale market inMalaysia, more players are entering the market (27new ASP licenses were granted in 2001, currentlymore than 30 companies are applying for the ASPlicense), leading to an increasingly competitive market

The wholesale market is extremely price sensitive, as

there are not many other factors to differentiate thevarious operators

Low penetration of subscribers to telecommunicationsservices in Malaysia indicates large potential forgrowth

The penetration of subscribers to telecoms services inMalaysia is relatively low compared to the region

The penetration of broadband users in Malaysia standsat 0.1% in 2001, as compared to South Korea which hasthe world highest penetration at 21% in that same year(Singapore at 5.5%, US at 6.5%)

Malaysia is targeting a 40% broadband penetration by2007/08

The telecommunications industry is expected to continueexperiencing growth due to Malaysias continuedadvancement towards a developed nation status, and itslarge untapped market

Telekom Malaysia is the incumbent

Telekom Malaysia (TM) has a 97% share of the fixedaccess lines market; it also has a 95% share of thebroadband subscribers in Malaysia

Maxis, Time and Digi are the other major providers butservices are restricted to mainly mobile and broadbandservices


Sources: Malaysian Communications and Multimedia Commission, executive interview with industry observersand telco operators, Office of Telecommunications Technologies, US Department of Commerce


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Telecoms wholesale market size estimated atRM230 million in 2003

The wholesale of telecommunications componentsthough established in late 2000, is still a nascentmarket with wholesale suppliers only engaging in thewholesale business as a small part of their main retail

business

The market size in 2003 is estimated to be at RM230million and has seen annual growth of over 25% overthe past 2 years

Main suppliers of wholesale products are Time, Maxis,Digi and Fibrerail; no one player has yet been able toestablish themselves as the leading player and nonehave been able to corner the market due to thewholesale suppliers focus on the retail market


2.2 Industry dynamics

Large capital outlay required for building of networkinfrastructure

Network providers see the long term benefits ofdeveloping their network infrastructure but are reluctantto build up their own infrastructure

This is due to the extremely large capital outlayrequired for the construction of their infrastructure andthe uncertainty of the return on equity (ROI) it maygenerate

Network providers would thus prefer to lease networkcapacity from the incumbent as it would representsubstantial cost savings

Competitors building up their facilities

TM is experiencing strong service based competitionfrom its competitors

TMs competitors mainly own their own infrastructure

and lease some network components from TM

As the telecommunications industry develops, there willbe a need to develop more infrastructure by all playersand when the competitors develop their facilitiesfurther, TM will experience stronger facilities basedcompetition

Sources: Malaysian Communications and Multimedia Commission, executive interview with industry observers and telco operators


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2.2 Industry dynamics (contd)

Opportunity brought about from excess capacity inthe network

TM has invested in its fixed line infrastructure and hasseen a decline in the penetration of the fixed lineusage

There is currently a lot of excess capacity in itsnetwork capabilities and there is a large opportunity togenerate revenue by leasing off its excess networkcapacity to access seekers

Local Loop Unbundling (LLU) will allow competitors

access to TMs end users

TM dominates in the Malaysian telecommunicationsmarket and has a market share of 97% of the fixedline market

TM will be most affected by the LLU, as this will allowits competitors access to the last mile that connectsTM to its end users

With access to the last mile, competitors like Maxisand Time would be able to target the end users ofmost telecommunications segments

TMs reputation as a wholesaler improving

TM is now seen as more willing to price itscomponents more competitively and is generally moreaggressive in marketing itself to the wholesalecustomers

TMs dominance as an incumbent telco brings costadvantages

TM has intrinsic cost advantages due to the scale ofits operations and the well established nationwidenetwork which the other network providers do not

have

Geographically, TM is better connected to all parts ofMalaysia than the other network providers

Market demand moving towards data services

Currently voice services still form the main portion ofwholesale products sold by telecom carriers, butindustry players are reporting stronger growth in thedata segment, and are expecting the data wholesalesegment to overtake the voice wholesale segmentwithin 2 years




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2.3 Technological movements in Malaysia

xDSL and wireless connections represent stronggrowth areas

xDSL is the de facto technology for providingbroadband connection in Malaysia as it is able to usethe existing infrastructure of copper wires to provide

connectionWireless connection, now in its infancy in Malaysia, isexpected to be the next growth area as the nationaims to advance towards a mobile population

Improvements in VoIP technology leading to thecheaper long distance calls

Improvement in VoIP technology is closing the gap insound quality between VoIP and PSTN services

The effect is the reduction in price for long distance

domestic and international voice services for theconsumer

Leading players of Maxis and Time are experiencingover 20% growth in demand for VoIP services




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2.4 Industry drivers

Governing authorities deregulating thetelecommunications industry

The Malaysian Communications and MultimediaCommission (MCMC) was set up recently as agoverning authority over the telecommunications

industryObjectives are to promote competition in thetelecommunications industry by promoting a levelplaying field in Malaysia to the telecommunicationscompanies

Aim of MCMC is to ultimately lower the costs to the

consumers, leading to the implementation of theMandatory Standards of Access, where there is to besharing of network capacity thus lowering the costsfor telecommunications companies

Increase in demand for telecommunicationsservices

In line with the worldwide trend, the Malaysiantelecommunications market is driven by the increasingdemand for voice and data services

Companies with offices around Malaysia andother parts of the world are using more privateleased line connections

Increase in the use of foreign workers inMalaysia (from 0.5 million foreign workers in1994 to 1.8 million in 2002) drives the VoIP

market due to the need for them to call home atlow rates

Rising internet usage in Malaysia drives demand fordata services

The number of internet dial-up subscriptionsgrew from 205,000 subscribers in 1997 to 2.6

million subscribers in 2002, representing aCAGR of 66%




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3. Competitive landscape

3.1 Competitive overview

3.2 Maxis Communications Berhad

3.3 Time dotCom Berhad3.4 AtlasONE Malaysia Sdn Bhd

3.5 Singapore Telecommunications Ltd

3.6 Other players


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3.1 Competitive overview

Network infrastructure owned by the largetelecommunication operators

There are 25 Network Facilities Provider (NFP)licenses awarded in Malaysia

The large NFPs would include TM, Maxis, Time, Digi,

and FibrerailTM is the owner of most of the network infrastructurein Malaysia (97% of the per minute PSTN usage isprovided by TM), and in the light of its merger withCelcom, will increase its control of the availablenetwork infrastructure in Malaysia

Maxis, Celcom, Time, Digi and Fiberail represent theother large owners of network infrastructure inMalaysia

Most ASPs are providing VoIP services

There are 65 ASP licenses awarded in Malaysia

49 of the 65 licensees are awarded IP Telephonylicenses

Source: Executive interviews with Maxis and MCMC, Developing Network Content Industry in Malaysia, 2003

Industry players are aware of TMs new wholesaledivision

The industry is aware of TMs decision to have a moresignificant presence in the wholesale market

The larger wholesale suppliers of Maxis and Time

believe that TM will be able to easily capture marketshare due to its connectivity and cost advantages

AtlasOne and other smaller wholesale players areanticipating TMs impending entrance as TM has thenationwide connectivity that the current suppliers donot have



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Business focus on the mobile marketMaxiss main business is in the mobile servicesmarket, and its revenue from that segment typicallycontributes 80-85% of Maxiss revenue (RM3.8 billionin 2002)

Maxis is the largest cellular operator in the market in

terms of revenue and is now even more stronglyentrenched in its market leader position after recentlyacquiring Times mobile operations

The identified projected growth segment for Maxiswould be the mobile data services product segment

Established wholesale player in Malaysia

Its wholesale activities having started in mid 2001,Maxis is one of the key wholesale providers inMalaysia with revenue from its wholesale business atRM50 million in 2003, representing a market share of

22%Its network components are sold to the ApplicationsService Providers (ASPs) which include largecompanies such as REDTone and NextTelecommunication


3.2 Maxis Communications Berhad background

Maxis Communications Key data

Business focus: Mobile services

Wholesale products: PSTN wholesale minutes,leased lines

Target wholesale customers: ASPs in general such asREDTone, Nextel

Network infrastructure: Owned by Maxis

Network components used: Wholesale minutes, private

leased circuits

Involvement in wholesale: High

Likelihood of developinginfrastructure: High

Source: Executive interviews with Maxis and MCMC, Maxis Annual Report 2002


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3.2 Maxis Communications Berhad summary

Perception of fixed linebusiness

High growth but not Maxissbusiness focus, 1-2% of revenue

Interest in enteringfixed line business

Already in Selling mainly PSTNwholesale minutes since mid-2001

Network capacity Owns infrastructure in maincities such as KL and Penang

Likelihood of offeringexcess on wholesale

Low low levels of excess capacity

Costing and pricing of

products

PSTN wholesale minutes

terminating in Singapore costsUS$0.02 to US$0.04

Terms and conditionsof product offerings

1 year contract subject to quarterlyrevisions. Preference for aminimum commitment of 1-2million minutes monthly

Length of time tolaunch products

1-2 months for existing PSTNwholesale minutes

Target customers Large ASPs such as RedTone andNext Telecommunications

Plans to invest inbuilding infrastructure

Will only build up in major cities

Plans for joint venturesto offer wholesaleservices

No plans for joint ventures

Selection of operatorfor lease or purchase

Connectivity, price, and quality

Products and servicesof interest

Leased lines and PSTN wholesaleminutes

Purchase period Immediate interest due to need fornetwork access in the major cities

Products and servicesexpectations

Required quality to be met

Acceptable fee Needs to earn margins of at least15%

Purchasing andselection criteria

Good connectivity at reasonableprices


Source: Executive interviews with Maxis


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3.2 Maxis Communications Berhad wholesale details

Perception of wholesale business

Fixed line wholesale business seen to have stronggrowth potential

Driven by the deregulations in the industry and thegrowth in the telecommunications industry, Maxisbelieves that the wholesale business in Malaysia willexperience strong growth

This is substantiated by its leased lines and its PSTNand VoIP wholesale minutes experiencing strongdemand

To tap into this growing market, there is a growing

number of ASPs in the market; new ASPs include TVstation Natseven TV and radio station Suara Johor

Interest in entering fixed line business

Wholesale business not the focus of Maxiss business

Although Maxis has been in the wholesale business foralmost three years and see strategic long term benefitsin investing in its own infrastructure, it would prefer toconcentrate on its retail market as that is Maxiss mainbusiness focus

Currently selling only 2-3% of its existing networkcapacity to the wholesale market, its revenue from thewholesale business (RM50 million in 2002) typicallymakes up 1-2% of its annual revenue

In Maxiss experience, the wholesale market is anextremely price sensitive market

Network capacity

Network infrastructure owned by Maxis

Maxis owns the network infrastructure for its mobile andfixed line networks

Usage levels of its various network component stand atan average of 70%

At present, Maxis does not provide any ADSL servicesand has no plans to provide the service




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Legend

Areas where Maxis ownssignificant networkinfrastructure

Areas where Maxis ownsnetwork infrastructure

Extensiveness of network coverageNetwork developed in all major Malaysian cities

Geographically, Maxis network infrastructure is located in allmajor Malaysian cities such as KL, Penang, Ipoh, JB, etc

This is also where there are higher levels of demand fornetwork

Maxis will expand on its network capacity in these areas, butwill not develop infrastructure in the less economicallydeveloped towns where demand is significantly lower

Plans to invest in building infrastructure

Likely to build up infrastructure in major cities

According to Maxis, the network component experiencingthe highest level of demand is the leased lines

This is due to the growing level of data and voicecommunications required between the different offices oflarge local companies

The other component experiencing strong demands is thetelephony wholesale minutes (including both VoIP andPSTN)

Maxis estimates that they would need to increase theirvolume by at least 1 million minutes of PSTN wholesaleminutes monthly in KL


Source: Executive interviews with MaxisNote: Information is only indicative of the major areas where Maxis has a developed network, map information may not be an exhaustive representation of actual network topology


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Plans to invest in building infrastructure (contd)Lease network infrastructure in rural areas

Due to frequent high demand, Maxis commonly experiencesshortages in its leased circuit network

Maxis currently has no options when it experiencesshortages so the calls do not get connected

Specifically for rural areas, Maxis will be interested incooperating with TM if TM supplies the leased circuits atcompetitive prices; Maxis would prefer to lease from TMrather than to build up its own network infrastructure due tothe large capital requirements for the infrastructuredevelopment




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Likelihood of offering excess capacity onwholesale

Low likelihood of offering excess capacity on wholesale

Maxis originally entered the wholesale business to selloff its excess capacity in order to increase its revenue

At its present usage levels of 70%, Maxis has a highlevel of network usage, especially in KL and Penang,where is in need of network access

Due to the high usage levels and increasing demand,Maxis does not have the capacity to offer its excessnetwork on wholesale

Costing and pricing of network components

Wholesale margins between 10% to 20%

Price of wholesale PSTN minutes terminating atSingapore ranges from US$0.02 to US$0.04

Maxis earns an average margin of 20% for itswholesale PSTN minutes

The margins earned are dependant on the destinationof the call; popular and cheap destinations like the US,UK or Australia would see margins ranging from 10% to15%

Source: Executive interviews with Maxis and MCMC

Terms and conditions of product offerings

Terms of agreements varies with customers

Maxiss wholesale business is targeted at the ASPswho in turn sell mostly to corporate customers

Being an extremely price sensitive market, the ASPs

will switch to operators who offer lower prices

There isnt a fixed pricing structure; the price level isdetermined by the importance of the relationship of theASP to Maxis and the current market conditions

Terms of contracts offerings would vary depending onthe requests of the client

Typical contracts would include

Payment based on nett of minutes swapped(typically between operators)

Payment based on minutes used (may or maynot include a minimum time used)

Maxis would prefer the customer to have acommitment of at least 1 to 2 million minutes a month



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Length of time to launch product

As Maxiss main product (PSTN wholesale minutes) arestraightforward, it only takes between 1 to 2 months topackage and launch their existing PSTN wholesaleminutes

Potential target customers

Maxiss current customers are large ASPs such asREDTone and Next Telecommunications

Maxis will continue to target such ASPs as they have thepotential to purchase in large volumes

Plans for joint ventures with other operators tooffer wholesale services

Maxis currently has no plans for joint ventures orpartnerships as the wholesale business is not the focus

of Maxiss business


Selection criteria of operator for lease andpurchase

The selected operator has to have the requiredconnections available and the price has to bereasonable

Products and services of interest

Maxis is only interested in Leased Lines and PSTNwholesale minutes

Acceptable feeAs the retail prices fluctuate less than the wholesaleprices, it would not be profitable for Maxis unless itcould make margins of at least 15%


C i i l d


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Additional information

Maxis building up customer relations as a reaction toTM entering the wholesale market

Maxis views TM impending entrance into thewholesale business as a large threat to Maxiss

wholesale business as TM has the scale andconnectivity that Maxis does not

Due to these reasons TM is likely to be able to offer afar lower price than Maxis or othertelecommunications operators in Malaysia

In response to the upcoming threat, Maxis has been

building up relations with their existing ASPcustomers, although Maxis believes that the ASPswill switch easily to the lowest priced operator



3 C titi l d


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Focus on the broadband and fixed line marketsTime operates a fully optical fibre trunk network in Malaysia,and is also a major Malaysian payphone operator

Having sold its mobile operations to Maxis, Time isconcentrating its business on the broadband and fixed linemarkets

The mobile segment was too competitive and Time was notmaking any progress in gaining market share

In order to avoid direct competition with TM, leased lines aregenerally provided by Time to companies which it perceivesthat TM is not pursuing

High involvement in the wholesale business

Times wholesale business has seen growth of over 300%from 2002 to its current level of RM130 million (representinga market share of 56%) and expects this strong growth tocontinue

At least 50% of its current available capacity is soldwholesale; the wholesale business is a significant businessto Time with revenue of RM130 million in 2002 forming 14%of Time dotComs total revenue

Time is mainly involved in wholesale selling of interconnectservices to the other first tier operators like TM, Maxis and

Digi and to the smaller ASPs


3.3 Time dotCom Berhad background

Time dotCom Key data

Business focus: Broadband,Fixed line

Other products and services: Broadband,

Payphone,Internet services

Target wholesale customers: VoIP operators (mostlyselling internationalwholesale minutes and1800 access numbers)

Network infrastructure: Owned by Time

Network components used: Wholesale minutes, privateleased circuits, ADSL


Likelihood of developinginfrastructure: High

Source: Executive interview with Time


3 Competiti e landscape


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3.3 Time dotCom Berhad summary

Perception of fixedline business

High growth, strategically important 14% of Time dotComs revenue


Already in Selling voice and dataservices for 6 years

Network capacity Owns infrastructure Backbonealong N-S highway, in major cities


Unlikely Currently low levels ofexcess


products

Wholesale PSTN minutes terminating

in Singapore US$0.02 per minute;ADSL tariff rates RM140k annually


Yearly contracts, may be revisedquarterly, no volume commitmentrequired

Length of time tolaunch products Repackaging existing products 1 to 3months; Structuring new products more than 1 year

Target customers VoIP ASPs and global carriers suchas Singtel


Will build up in major cities; preferto lease in rural areas


No plans to enter joint ventures


Price is most important


International wholesale PSTNminutes from global carriers

Purchase period Immediate interest in areas of highdemand such as KL, Klang Valley


Price is of critical importance

Acceptable fee Requires to make margins of 10-15%


Looks for lowest priced operator


Source: Executive interviews with Time

3 Competitive landscape


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3.3 Time dotCom Berhad wholesale details


Perception of wholesale businessWholesale business of strategic importance

Due to the wholesale business forming an important partof Times revenues and its strong growth, the wholesalebusiness is of strategic importance to Time

With the ownership of a RM4 billion fibre optics networkspanning across the peninsular and 1,600 km ofsubmarine fibre optics cables running along the coastlineof the peninsular, Time has a relatively comprehensivenetwork in Malaysia

Currently more than 50% of its network capacity is soldin the wholesale market, and Time intends to maintain itsfocus in the wholesale market


In the fixed line wholesale business for 6 years

Time has been selling voice services for 6 years and

data services for about 3 years

Time is not in the wholesale business to clear its excesscapacity but because its sees the development of thewholesale business as an area of strategic importance

The wholesale business is of strategic importance toTime as it represents another option if it is unable to selldirect to the end user, it is still able to sell to the resellers


Network capacityOwns infrastructure, with high usage level

Time owns its own infrastructure, although its scale andconnectivity (both domestic and international) are not able tomatch TMs market domination

The network components sold include ADSL services,telephony wholesale minutes, and leased lines

At a usage level of more than 80%, Time is reaching itscapacity and has minimal excess capacity

Due to the advanced equipment it is using, Time can easilyupgrade its network to one that can provide 50% more

bandwidth

Network components experiencing growth

The network components experiencing the strongest growthwould be the broadband (growing at more than 25%annually) and the wholesale minutes (20% annual growth)

In comparison, the leased lines market segment isexperiencing an annual growth of 4-5%

In the voice transmissions market, VoIP minutes areexperiencing the fastest growth

The growth of VoIP minutes is not at the expense of PSTNminutes though PSTN is experiencing a slower growthcompared to the VoIP minutes



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Extensiveness of network coverageRelatively comprehensive network

Time owns over 3,600km of land-based fibre optics cablesrunning along the major highways and over 1,600km ofsubmarine fibre optics along the coastline of the peninsular

Its has a strong presence in all major Malaysian cities such

as KL, Klang Valley, Penang, Ipoh, JB, Taiping, etc


Build up in major cities, lease in rural areas

Time has concrete plans to expand upon its network

capacity in the major cities within the next two years due tothe huge demand in network capacity

In the rural areas, Time would rather lease from TelekomMalaysia as Time is not able to justify the costs ofdeveloping its own network in areas of low demand




Source: Executive interviews with TimeNote: Information is only indicative of the major areas where Time has a developed network, map information may not be an exhaustive representation of actual network topology

Legend

Areas where Time owns

significant networkinfrastructure

Areas where Time ownsnetwork infrastructure

Backbone trunk fibre



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Likelihood of offering excess on wholesale

Low level of excess

Due to its usage levels of more than 80%, Time has alow level of excess capacity and will not be able toexpand its wholesale network capacity

Costing and pricing of products

Costing of ADSL lines distance independant

According to Time, due to the increasedcompetitiveness of the domestic and international

wholesale market, wholesale prices have been fallingin the past

Wholesale PSTN minutes from Malaysia terminating inSingapore were priced at US$0.02 in the 4th quarter of2003

Prices of ADSL lines are distance independent and the

tariffs of a 2Mbps connection with links and access areat priced at RM140,000 annually


Terms of wholesale dependent on nature of wholesale

The terms for domestic traffic between operators isusually on a send and pay basis; this is where theoperators are invoiced based on the volume of voice

trafficInternational voice traffic arrangements between telcostypically require a commitment to purchase an agreedvolume of voice or data traffic

For data services, no volume commitment is required





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Customers are global carriers and ASPs

Global carriers form the larger group of customers andSingtel is a major customer of Times wholesale PSTNminutes

ASPs form the other group of customers and VoIPASPs are the main target group

First tier operators buy and sell interconnect services,ASPs purchase mainly wholesale minutes

Wholesale products sold to other first tier operatorslike TM and Maxis are mainly interconnect servicesbetween the operators

Products sold to other ASPs are mainly internationaland local wholesale minutes, and customer accessnumbers like 1800 numbers; these are usually sold toVoIP operators

Such customers are usually very price sensitive andwould buy from the operator offering the lowest price

TM is Times main competitor in the sales ofwholesale minutes

Plans for joint ventures to offer wholesaleservices

No plans due to uncooperative market

The telecoms wholesale market is viewed upon byTime as an uncooperative and competitive market with

few carriers entering into partnerships and jointventures

Due to this, Time does not have any plans to enter intojoint ventures with competing carriers; despite thecompetitive market, it is open to partnerships if viable





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Selection criteria of operator for lease andpurchase

Due to the price sensitivity of the market, price is mostimportant to Time

Products and services of interestTime would be looking to lease network connections inrural areas as it does not have any intention of buildinginfrastructure in those areas

In the long term, it is unlikely to lease networkconnections in major cities as it prefers to build up its

own network capacity; this is due to its long term viewof the telecoms wholesale market

Products of interest to Time would be mainlyinternational connections to the US, Australia andSingapore

Acceptable fee

Time would need to make profit margins of at least 10-15%




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p p



Times advantage is in its advanced equipment

TM is operating an older network and may need tochange parts of its network infrastructure to becompatible with the newer infrastructure

This leads to its networks having less capabilities andstability

As a newer player in the market, Times moreadvanced infrastructure is more easily upgradeable andcompatible with the newer fibre optics connections





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New entrant to the telecommunications industry withfunding from Kuwait company

Formed in 1998 as Kasturi Capital (name changed toAtlasOne in 2002), AtlasOne is a relatively new entrant tothe telecommunications industry in Malaysia

AtlasOne has signed an agreement for arranging funding of

$50 million from Kuwait-based International Leasing andInvestment Company (ILIC) for the first phase of theAtlasOne's broad band communication services in Malaysia

AtlasOne has three main business units, AtlasOne Mobilewhich focuses on the mobile connections, AtlasOne Grid,which builds up wireless infrastructure for buildings for its

corporate customers, and AtlasOne International, whichfocuses on the wholesale business

Business activities focus on wireless broadband

AtlasOnes focus is on the wireless broadband market,

currently targeting corporate customersThe base stations owned and operated by AtlasOneconnect the corporate customers buildings to the networkand provide roaming services to its subscribers

AtlasOnes last mile is a wireless connection, but needs thenetwork infrastructure backbone

p p

3.4 AtlasONE Malaysia Sdn Bhd background

AtlasONE Key data

Business focus: Wireless broadband

Target wholesale customers: Smaller ASPs

Network infrastructure: Leases network throughTime, Fiberail, andothers;Building up ownwireless last mileconnection

Network components used: Wholesale minutes,private leased circuits, ADSL


Likelihood of developing Backbone network: Low

infrastructure: Last mile : High

Source: Executive interview with AtlasOne




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3.4 AtlasONE Malaysia Sdn Bhd summary

Perception of fixedline business

Business focus on wireless last mileconnection


Already in trading in domesticaccess minutes from Time

Network capacity Leases backbone network


High


products

Wholesale PSTN minutes to Singapore

US$0.03 to US$0.04 per minuteDomestic VoIP minutes are bought atRM0.20 per minute from Time


Annual contracts

Length of time tolaunch products

2.5GHz spectrum to be launched in Q22004

Target customers Smaller ASPs and propertydevelopers


Will build up wireless last mile, willlease backbone network


No plans


Connectivity requirements has to bemet


Dark fibre backbone network

Purchase period Will be expanding within the nexthalf a year, volume requireddepending on demand upon rollout


Supplier needs to have fastresponse time when problems occur

Acceptable fee Need margins of 20%


Connectivity followed by price


Source: Executive interviews with AtlasOne



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3.4 AtlasONE Malaysia Sdn Bhd wholesale details

Interest in entering fixed line business (contd)Already in wholesale business

AtlasOne has been in the wholesale business since2000; it is currently trading in voice traffic volume

Activities include reselling of international wholesalevoice minutes from MCI, and domestic VoIP minutes

from Time to ASPs such as Nasioncom

High interest due VoIP and broadband marketexperiencing growth

Currently VoIP services is experiencing the largest

demand, and the nascent broadband market isexperiencing the largest growth in Malaysia

The demand for the cheaper VoIP services is duemainly to the large number of foreign workers inMalaysia seeking for cheaper alternatives when callinghome

Wholesale business provides AtlasOne with volumeof transactions

The wholesale business is an extremely price sensitivebusiness, where the margins are very low

The importance of this segment is that it can providethe wholesale volume for AtlasOneSource: Executive interview with AtlasOne

Perception of fixed line businessWholesale important part of AtlasOnes business

AtlasOnes wholesale business contributes an equalportion to its revenue as its retail business and is animportant operation to AtlasOne

Business focus on wireless wholesale business

AtlasOnes long term business plan is to develop thewireless last mile connection market in Malaysiaspecifically for the provision of data services

Currently, the voice market is still AtlasOnes bread and

butter segment

Wholesale business in voice and data services

AtlasOne is involved in the telecoms wholesalebusiness both as a buyer and a seller of networkinfrastructure

It supplies voice and data services to other smallerASPs

Network components sold include wholesale minutes,fixed access line and leased lines



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Network capacity

Existing network capacity low

AtlasOne owns its own base stations and rents theexisting dark fibre from NSPs, namely TM, Time andFiberail

AtlasOne then installs its own transponders so that itcan have full control over its network

Their current network usage level is below 50%, forvoice services and below 40% for data services;AtlasOne is aiming to reach usage levels of 60-70% forboth services

Extensiveness of network coverage

Operating network in Klang Valley, Penang and JB

The highest demand comes from KL and Klang Valley,followed by Penang and Johor Bahru Legend

Areas where AtlasOneowns significant networkinfrastructure

Areas where AtlasOneowns networkinfrastructure




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Plans to invest

AtlasOne may build its own landing station to reduce itsdependence on TM

AtlasOne is currently at the mercy of the incumbent TM,from whom the connection to the international carriers

are acquired from, and depend on for much of their localnetwork access

There is an intention to build a landing station forinternational connections so as to reduce its dependenceon TMs network, but this will be an extremely expensiveinvestment

AtlasOne will be able to build up the infrastructure as ithas the financial backing from its investors

If TM continues to offer AtlasOne competitive rates,AtlasOne will shelve its plans to build the landing station

Long term goal to provide nationwide coverage for its

wireless broadbandAtlasOne will build up its last mile wireless connection toreach its long term goal of providing nationwidecoverage for its wireless broadband service

It intends to ride off Fiberail or Fibrecomm for thebackbone connection


Prices currently low: expectations of rising prices

AtlasOne prices its wholesale PSTN minutes thatterminate in Singapore at US$0.03 to US$0.04 perminute

Domestic wholesale PSTN minutes are bought atRM0.20 and is sold off at between RM0.30 to RM0.35

AtlasOne expects the upcoming expiration of Singtelscontracted voice volume commitment in Malaysia tolead to higher wholesale prices

It is pricing its 3.5GHz spectrum (2Mbps) at US$2,500

per month, but is willing to reduce the price toUS$1,500 if the volume purchased is high

Terms and conditions

Dark fibre leased on an annual basis

AtlasOnes leases its dark fibre from carriers such asTime, Fiberail or Fibrecomm on yearly contracts thatmay be renewed annually




O S


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Length of time to launch products

AtlasOnes 2.5GHz spectrum connection is expected tobe launched by the second quarter of 2004 and will beable to provide roaming services for its data subscribers

Its 3.5GHz fixed wireless connection has already beenlaunched


AtlasOne sells their excess capacity mostly to othersmaller ASPs such as Quantum Business Sdn Bhd andNasioncom Sdn Bhd that serves the Malaysian market

AtlasOne also sells direct to the end users, mostly tocorporate property developers that purchase the wirelessconnection for their buildings

Plans for joint ventures with other operators to

offer wholesale servicesCurrently there are no plans for joint ventures orpartnerships


Selection criteria

When selecting a potential network provider, the mostimportant aspect to AtlasOne is that the provider mustmeet AtlasOnes geographical connectivity requirements(e.g., if AtlasOne needs a connection from Kuala Lumpurto Johor Bahru, the provider has to own such a network

connection)

Once this requirement is met, the most important criteriawill be the price at which is arrived upon

This price is dependant on the negotiation skills of theparties involved as well as the volumes moved


AtlasOne is looking to lease dark fibre components forits backbone network

Acceptable feeIt is willing to accept margins of 20%



3 4 A l ONE M l i Sd Bhd h l l d il


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AtlasOnes perception of the Malaysian wholesalemarket

According to AtlasOne, Digi and Time are the twolargest suppliers of dark fibre in Malaysia, with Maxis

being the other suppliersAtlasOne also believes that TM is able to supply darkfibre

Preference of working with TM

As the incumbent, TM owns the most comprehensivenetwork infrastructure in Malaysia

In the past, TM has been less aggressive in settingprices and less responsive in responding to wholesalecustomers

In the past few months, AtlasOne has noticed asignificant change in TMs attitude. TM is increasinglymore aggressive with its pricing and is improving theresponsiveness of TMs wholesale team

AtlasOne would prefer to work with TM, especially ifthere was an LLU agreement that would regulate theunbundling of the last mile connections

The drawback of working with TM is that their list pricesare typically 10-20% higher than the list prices of thecomponents provided for by Time and Maxis



3 5 Si T l i ti Ltd b k d


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3.5 Singapore Telecommunications Ltd background

Singtel Key data

Business focus: Customer support

Target wholesale customers: Not selling wholesale inMalaysia. Office supports

existing Singtel customers Network infrastructure: Leases network through

Acasia, which in turnpurchases from TM

Network components used: Wholesale minutes, private

leased circuits

Involvement in wholesale: Minimal

Likelihood of developinginfrastructure: Minimal

Small operation in MalaysiaSingapore Telecommunications (Singtel) is operating a5 man office in Malaysia

The Malaysian offices role is mainly to service theneeds of Singtels customers who require networkconnections to Malaysia

Incumbent telco in Singapore

Singtel owns most of the network infrastructure inSingapore and is the only carrier with a comprehensivedomestic nationwide network in Singapore

It has an estimated 60% market share of the telcomarket in Singapore and has been selling Local LeasedCircuits to its competitors at near retail prices

On 16th December, Singapores InfocommDevelopment Authority (IDA, Singapores equivalent ofMCMC) ruled that Singtels wholesale prices for the

Local Leased Circuits would have to be priced at most50% cheaper than the retail prices; wholesale prices ofthe last mile connection

Source: Executive interview with SingTel



3 5 Si T l i ti Ltd


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3.5 Singapore Telecommunications Ltd summary

Perception of fixed linebusiness

Growing industry


Interest in routing traffic throughSingapore Selling mainly privateleased line connections

Network capacity Purchases through ACASIA


None not in reselling business inMalaysia

Costing and pricing ofproducts

PSTN minutes terminating inSingapore costs the retail corporatecustomers about US$0.05 per minute


Annual contracts direct with the enduser

Length of time tolaunch products Less than 1 month for moststandard products

Target customers Large corporations such as Toyotaand Motorola


None


Looking into possibility ofpartnerships with Malaysian carriersnot to offer wholesale but to provide

Malaysian half circuitSelection of operatorfor lease or purchase

Has no choice as it goes throughACASIA


Leased lines

Purchase period Within 1 month from acquisition ofnew contract


Required quality to be met

Acceptable fee Needs to earn margins of at least15%-20%


Price and customers requirementsto be satisfied


Source: Executive interviews with Singtel, Time, Maxis and AtlasOne


3 5 Singapore Telecommunications Ltd business details


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Perception of fixed line business

Fixed line wholesale business growing industry

From the increasing demand for leased lineconnections from the international market to and fromMalaysia, the fixed line business in Malaysia isexperiencing growth


No intention of selling wholesale products in Malaysia

Singtel does not have any plans to participate inwholesale or reselling of telecoms products in Malaysia

Leading Malaysian carriers such as Time and Maxis donot view Singtel as a competitor, but view Singtel as apotential customer

This is because Singtel is approaching Malaysiancompanies to rout outgoing international telecomstraffic through Singapore, and Singtel will need theMalaysian half of the circuit

Sales made to Malaysian companies are handled as anaccount in Singapore

3.5 Singapore Telecommunications Ltd business details

Source: Executive interview with Singtel, Time, Maxis

Interest in entering fixed line business (contd)

Targets end users in Malaysia to rout international trafficthrough Singapore

Singtel is targeting the multinational corporation end usersin Malaysia to rout their international voice and data traffic

through Singapore

Network capacity

Singtel rides on TMs network through Acasia for itsMalaysian connections

Singtel does not own any network infrastructure inMalaysia

The Singtel office in Malaysia is set up mainly to supportSingtels customers who require network access fromtheir Singapore office to the Malaysian office

To connect to the Malaysian network, Singtel goes

through Acasia to complete the Malaysian half of thecircuit

Acasia is a consortium representing 6 major carriers inthe Southeast Asian region

As a consortium, Acasia decides upon a price which TMhas to accept




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Likelihood of offering excess on wholesaleSingtel does not participate in wholesale or resellingactivities in Malaysia and will not have excess capacityas the network capacity is leased as per its customersvolume requirements

Even if the volume is underutilized, the customer hasalready paid Singtel for the capacity


Singtel charges its retail corporate customers betweenaround US$0.05 per minute for PSTN minutes

terminating in Singapore


A typical contract with the corporate customers last ayear and are reviewed and renewed annually

Length of time to launch productsIt takes less than a month to launch a standard product asthere is no need to repackage its products as customersmainly buy Singtels standard products

Potential target customersSingtel targets large multinational companies such asToyota and Motorola due to their requirements for highertraffic volumes


Singtel has no plans to develop its own networkinfrastructure nor to expand its operations in Malaysia

As a foreign player, Singtel is not allowed to build its ownnetwork facilities in Malaysia; even if Singtel enters into ajoint venture with a Malaysian company, there are still toomany regulations that safeguard Malaysias interests tobe worthwhile for Singtel to participate

The main business development areas that Singtel iscultivating is the US and the Australian market


Source: Executive interview with Singtel, Time, Maxis and AtlasOne




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Plans for joint venture to offer wholesaleservices

Singtel is looking into the possibility of partnershipswith Malaysian carriers not to offer wholesale servicesbut to provide Malaysian half circuit

Selection of operator for lease or purchase

As Singtel is part of the Acasia consortium, it has to gothrough Acasia and thus TM for its networkrequirements


The product with the highest demand and growth isthe private leased circuit that provides dedicatedconnection between offices in Singapore and Malaysia

Other needs are wholesale minutes (mainly Premium

VoIP quality) and data servicesSingtel does not provide ADSL connections toMalaysia

Purchase periodSingtel needs to finalize the details with the Malaysiancarriers as soon as possible after acquiring a newcontract and would need to finalize the purchase within amonth of the acquisition at most

Products and services expectations

As Singtels customers dictates the quality requirements,the quality of the connections provided by the Malaysiancarrier has to meet the minimum quality requirements

Acceptable fee

Singtel needs to earn margins of at least 15% to 20% forthe business to remain viable


Source: Executive interview with SingTel, Time, Maxis and AtlasOne




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Additional informationAcasia serves ASEAN telecommunications carriers

Acasia is a consortium of the six Association ofSoutheast Nations (ASEAN) telecommunicationsoperators

It represents the various ASEAN telcos when they neednetwork connections from the other parties of theconsortium

The price is decided upon by the panel representing theparticipating telcos which the local telco has to accept

Additional informationAsean telcos mainly lease private leased lines and ISDNconnections through Acasia

The network components experiencing strong demandfrom the ASEAN countries are the private leased linesand the ISDN connections

The demand for voice services is growing at the highestrates, driven by the growing communications needsbetween offices in different parts of the world

Users of this service include MNCs like Toyota,Eriksson and Motorola and other large MNC

manufacturers


Sources: Executive interviews with SingTel and Acasia

Note: Acasia is a consortium comprising of The Communications Authority of Thailand, PT Indosat, Jabatan TelekomBrunei, Philippine Long Distance Telephone Company, Singapore Telecom, Telekom Malaysia Berhad


3 6 Other players


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3.6 Other players

Fiberail operates a fibre optics network along therailroads

Fiberail was formed as a joint venture between TMand Keretapi Tanah Melayu Berhad (KTMB,Malaysias national rail operator)

The lines are laid along the rail network, where KTMB

has the right of wayFiberail is mostly in the wholesale business

Fibrecomm operates its network along the oil andgas pipelines

Fibrecomm was formed as a joint venture betweenTenaga and Celcom

Its cables run along its oil and gas pipelines

Its is also mostly in the wholesale business, selling tothe ASPs

Source: Executive interviews with Maxis and MCMC, Developing Network Content Industry in Malaysia, 2003

Digi targeted at the mobile retail marketDigi operates earth station, fixed lines and cables, andother network components used in conjunction withother network facilities

Digis focus is targeted at the mobile services retailbusiness rather than the wholesale business


4 C l i d t t i


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4. Conclusions and strategic

recommendations4.1 Profile summary

4.2 Industry influencers and decision makers

4.3 Opportunities and threats

4.4 Strategic recommendations

4. Conclusions and strategic recommendations

4 1 Profile summary


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4.1 Profile summary

Maxis CommunicationsASPs in general

Utilization of network at 70%

Selling wholesale minutes and private leased

circuits

Likely to require leased circuits from TM

Competitor in selling most other wholesale

products

Time dotComVoIP operators

Utilization of network over 80%

Selling wholesale minutes, private leased circuits

and ADSL services

Likely to require wholesale minutes from TM

Competitor in selling most other wholesale

products, especially ADSL services

AtlasONE

Smaller ASPs

Utilization level of voice services less than 50%,

data services less than 40%

Selling wholesale minutes, leased circuits andADSL

Likely to require trunk network dark fibre from TM

Not TMs direct competitor mainly sells

wholesale wireless connections

SingTel

Customers of Singtel with offices in Singapore

and Malaysia

Likely to require private leased circuits from TM

Not a competitor to TM Wholesale



4 2 Industry influencers and decision makers


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4.2 Industry influencers and decision makers

Country level influencer(government)


MCMC pushing strongly for theimplementation of the LLU

LLU allows full competition withthe ultimate aim of reducing pricesfor the consumer

Detrimental for TM as it allows itscompetitors access its customers

Market sentiments is that the LLUis unlikely to implemented by 2004due to the lack of interest andpolitical support

TM should be prepared for acompetitive wholesale market as itis only a matter of time before itthe LLU is implemented

Country level influencer(non government)

Likely industry movement

TM needs to quickly develop itswholesale business to maintain itsmarket position

The wholesale market isexperiencing strong growth and isalso seeing a lot of new ASPsentering the market

With the entrance of TM, and thederegulations, TM is likely to losesome market share in the endconsumer customer segment

TM has the advantage of itsestablished network, and shouldbuild on the product segments of

VoIP and leased circuits that areexperiencing strong growth

Deregulations will bringstrong foreign competition

Deregulation in the industrywill bring in foreign telcos likeVodafone who are muchstronger than TM in terms ofindustry expertise and capitalsupport

Foreign competitors will bringalong lower prices

TM may need to considerforming strategic partnershipswith the other local telcos tojointly develop their

competitive advantages tofend off the impendingchallenge




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Identified

opportunitiesTOP PRIORITY

Identified

opportunitiesSECONDARY PRIORITY

Maxis and Time do not have TMs connectivity andthis represents an opportunity for TM

Although Maxis and Time own their own infrastructure,they are not able to offer the level of connectivity thatTM can provide due to TMs extensive nationalcoverage

Maxis and Time will require TMs backbone network inparts of Malaysia where they do not own the

infrastructureTM will be able to approach Maxis and Time to providethem with network access in those areas, especially inareas where TM do not wish to develop

This should be TMs priority market as they will be ableto purchase in higher volumes

Connectivity is the ASPs basic need

Network providers see the long term benefits of

developing their network infrastructure but are reluctantto build up their own infrastructure

This is due to the extremely large capital outlayrequired for the construction of their infrastructure andthe uncertainty of the return on equity (ROI) it maygenerate

Network providers would thus prefer to lease networkcapacity from the incumbent as it would represent asubstantial cost savings

TM should approach the smaller ASPs with its superiorconnectivity as its value proposition

This should be the second priority as there are many

ASPs who require purchase in lower volumes and arethus a less attractive wholesale customer



4.3 Opportunities and threats (contd)


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3 Oppo tu t es a d t eats (co t d)

Identifiedthreats

Identifiedthreats

Maxis and Time are TMs largest competitors

As Maxis and Time own their own infrastructure, theyare already in the wholesale business, and have

established relations with the ASPs and some nichemarkets

To stave off competition from TM, Maxis is building uptheir relations with their existing clients byunderstanding their needs so as to be able to cater totheir needs

Time is preparing for the LLU, where it will have accessto TMs last mile network

LLUs allow competitor access to TMs customers

With the unbundling of the local loop, competitors areable to access TMs last mile connection to its

customers and would thus be able to approach TMsexisting customers with a more competitive deal

TM may need to cannibalize its margins to these retailcustomers to retain their business

Other small players also established in niche areasFiberail and Fibercomm are just two examples ofsmaller players who own network infrastructure inMalaysia and who already have built up their customerbase

Smaller NFPs like AtlasOne who do not wish lay their

own cables are already purchasing from the nicheplayers



4.4 Strategic recommendations


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g

Exploit TMs cost advantagesTM should exploit its cost advantages to offer awholesale price lower than that of the competitors tothe other access seekers

TM should attract the other access providers topurchase wholesale components from TM by charging

the access providers prices such that they are still ableto earn enough margins

This is to prevent the other access providers frombuilding up their own infrastructure, which will erodeaway TM monopolistic advantage in the long run

Develop VoIP telephony servicesThere is a global increase in the demand for voicetraffic

This is due to the improvement in quality of VoIPtechnology and the significant price differential betweenVoIP and PSTN minutes

TM should ensure that it has sufficient capacity for thegrowth in VoIP in line with this global trend

Invest in leased linesThe demand for leased lines is expected to experiencethe strongest growth

TM has the most developed leased line network acrossthe nation, and its strongest competitors Time andMaxis do not have the capacity to compete with TM

This is also the network component that Maxis andSingtel has the largest needs of

TM should invest more resources into developing andupgrading the its leased line network component to beable to supply the other access providers with theirrequirements


5 Appendix


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5. Appendix

5.1 Abbreviations and acronyms

5. Appendix

5.1 Abbreviations and acronyms


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y

3G Third generation

ADSL Asymmetric Digital Subscriber Line

APAC Asia Pacific

ASEAN Association of Southeast Asian

Nations

ASP Applications Service Provider

B2B Business to business

CAGR Compounded Annual Growth Rate

DEL Direct Exchange Line

DSL Digital Subscriber Line

EBITA Earnings before Interest, Tax,

Depreciation and Amortization

GDP Gross Domestic Product

IP Internet Protocol

ISDN Integrated Services Digital Network

KLSE Kuala Lumpur Stock Exchange

LLU Local Loop Unbundling

MCMC Malaysian Communications and

Multimedia Commission

MNC Multinational Corporation

PSTN Public Switched Telephone Network

Q Quarter

RM Malaysian Ringgit

TM Telekom Malaysia

US United States

VoIP Voice over Internet Protocol


Synovate Final Report 060204

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