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M A Y 3 0 , 2 0 1 6S P E C I A L R E P O R T

SLEEPLESS OVER

SPECTRUM

TELCO DEEP DIVE

Th e bosses of the Big Th ree telcos,

by virtue of their large customer

base and revenue, will have a

lot on their plates as they try to

ensure they off er the best network

experience after the upcoming

spectrum exercise, which hopefully

will not hold any nasty surprises.

special report S2 THEEDGE MALAYSIAMALAYSIA | MAY 30, 2016

CO N T E N T S

2 USP FUND FOCUSES ON

DATA CONNECTIVITY, SPEED

4 THE SPECTRUM WAR

AND WHAT IT REALLY MEANS

SINGAPORE SLUGFEST:

THE GOOD, THE BAD AND THE UGLY

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USP fund focuses on data connectivity, speedBY KARAMJIT SINGH

In 2008, during the planning stages of Malaysia’s high-speed broadband rollout, a senior government leader remarked that the Malaysian Communications and Multimedia Commission (MCMC) seemed to be quietly sitting on a hoard of cash.

He was referring to the Universal Service Provi-sion (USP) fund, to which all telecommunications li-censees have to contribute, with the monies going to projects that help narrow the digital divide between the well-connected urban population and the poorly served rural communities.

The fund, set up in 2003, was previously known as the Universal Service Obligation (USO) fund and was managed by Telekom Malaysia Bhd (TM).

In 2008, the USP fund had between RM4 billion and RM5 billion in its coff ers. According to MCMC’s 2014 annual report, the total collection had exceeded RM12.5 billion since the creation of the fund.

The size of the fund has attracted the attention of various agencies that are undertaking digital-divide initiatives but do not have the fi nancial means to en-sure proper delivery. Politicians have been interested as well. This is why the schools netbook project and smartphone subsidy, both worth hundreds of millions of ringgit, were introduced in 2010 and 2013 respectively.

The current single biggest project the fund is in-volved in is the estimated RM800 million Sistem Kabel Rakyat 1Malaysia (SKR1M) announced in Budget 2014 to link Peninsular Malaysia to Sabah and Sarawak with a high-speed fi bre cable.

What is unique about SKR1M is that it adopts the public private partnership (PPP) model. According to Datuk Mohd Ali Hana-fi ah, chief offi cer of the communications and digital ecosystem sector at MCMC, “This is the fi rst time we have adopted the PPP model for a large project between the government (through MCMC) and TM.

“I don’t have the exact fi gures for this now, but about one-third of the total cost will be borne by TM while the remainder will come from the government,” he says.

As for concerns that the fund may be depleted, MCMC’s 2014 annual report shows that RM1.2 billion was contributed by licensees during the year. Yearly contributions have been in excess of RM1 billion since.

The fund has a strong balance because the contri-bution rate is fi xed at 6% of the Malaysian revenue the licensees earn; overseas revenue is not included.

According to Mohd Ali, Celcom Axiata Bhd, DiGi.Com Bhd, Maxis Bhd and U Mobile Sdn Bhd are “large contributors”, which MCMC defi nes as those contributing RM20 million and above.

With the margins of all telcos being squeezed, thanks to an aggressive price war of late, it is safe to say that the licensees are complaining about the 6% USP levy — the highest ratio in the world.

Mohd Ali does not deny this and off ers a glimmer of hope, saying that a review of the contribution rate was conducted when Datuk Ahmad Shabery Cheek was Communications and Multimedia Minister. “But we did not come up with anything defi nite,” he adds.

And while MCMC has yet to bring up the issue with current minister Datuk Seri Salleh Said Keruak, Mohd Ali says, “The idea is still there ... We just don’t have a time frame for this.”

FOCUS ON TOWERS, FIBRE AND 3GThe USP fund has been used mostly for building tow-ers in rural and sub-rural areas that were not covered by the telcos, either because of their remote locations or because they have been judged to be not commer-cially viable.

Those towers were built to off er voice services. “We have built 1,300 towers so far. The tenders were for 2G (second generation) towers, as our focus was on off ering voice connectivity then,” says Mohd Ali.

However, aware that the tide had shifted and focus was increasingly on data connectivity, MCMC in 2014 embarked on an initiative to upgrade the towers to 3G (third generation) so that they can off er mobile broad-band to users.

“In fact, we are targeting to complete the upgrade by the fi rst or second quarter of 2017,” says Mohd Ali. “Some of the towers could also be upgraded to off er 4G, and that depends on the availability of spectrum.”

He says MCMC is aware that users are now demand-ing more than just voice or data connectivity. They also want speed — a critical factor in determining user ex-perience in a data-centric world.

“Moving forward, one of the initiatives under the USP is to fi berise all towers built with USP funding. We have started with Langkawi, where Celcom Axiata has been given the job of fi berising all USP towers,” he says.

The advantage for users is the average 20Mbps to 22Mbps speeds they can enjoy when on LTE (long-term evolution, or 4G).

Aesthetic and safety are also important consider-ations for MCMC, according to Mohd Ali. “The public still has concerns about radiation from telecoms tow-ers but with fi bre, we are able to limit the number of large dishes jutting from these towers, with only small antennas attached to them.

“This becomes an important factor to allay some of the public’s fears, especially those in rural are-as,” he adds.

Mohd Ali: Moving forward, one of the initiatives under the USP is to fi berise all towers built with USP funding

E

This special report is a collaboration between Digital News Asia (DNA) and The Edge Malaysia

A cellular tower with large microwave dishes attached … In a fi berised tower, the microwave dishes are replaced by

fi bres, resulting in a more aesthetic structure with smaller omni antennas

that provide RF signals for coverage.

S3 special focusTHEEDGE MALAYSIAMALAYSIA | MAY 30, 2016

MALAYSIAspecial report S4 THEEDGE MALAYSIAMALAYSIA | MAY 30, 2016

Th e spectrum war and what it really meansBY EDWIN YAPP

Every few years, the mobile communications world goes through an upheaval of sorts, as we move from one generation of technology to the next.

In Malaysia, there is added spice as oper-ators fi ght on a number of fronts, from price

wars to bragging rights over who has the widest ser-vice coverage or who has the fastest throughput in the country.

Lately, the one issue that has been hogging the headlines has been the reallocation of wireless op-erating spectrum.

But what is spectrum?Well, all wireless communications are based on

putting information onto electromagnetic waves, then transmitting those waves from one point to another. This information includes radio, TV, cellular voice and wireless broadband data.

Spectrum is the term used to describe the range of frequencies in which those electromagnetic waves are transmitted from one point to another.

In Malaysia, industry regulator the Malaysian Com-munications and Multimedia Commission (MCMC) is responsible for managing the spectrum.

Because there is only so much spectrum to go around, the allocation to diff erent mobile operators has always been hotly debated. And the reason why spectrum has been in the limelight more than usual this year is that the government, through MCMC, in February decided to review the spectrum bands as-signed to mobile service providers.

BRIEF HISTORYAlthough the MCMC has periodically conducted minor

spectrum reassignments, this is the fi rst major review it has undertaken since it fi rst allocated the 900MHz and 1800MHz spectra in the early 1990s.

Back then, Malaysia was preparing to modernise its mobile communications industry, moving from analogue to digital systems.

Because Global System for Mobile Communications was the de facto standard then, the government allo-cated both 900MHz and 1800MHz to fi ve operators: Binariang Sdn Bhd (which operated Maxis), Celcom Sdn Bhd, Digi Telecommunications Sdn Bhd, Sapura Digital Sdn Bhd (Adam), and Telekom Malaysia Bhd (TMTouch).

Subsequently, the market consolidated — Maxis bought over Sapura’s network and assets, including its spectrum, and TM consolidated its TMTouch as-sets with Celcom. This reduced the number of mobile operators in the country to three.

Meanwhile, U Mobile Sdn Bhd came into being only in 2007, after securing 3G spectrum from the MCMC in 2006. As the fourth player, and the smallest in terms of subscriber base, it struggled in its initial years. In 2009, its main investors — KT Freetel and NTT DoCoMo — pulled out, signalling their loss of confi dence in the operator.

A year later, U Mobile was thrown a lifeline when Singapore Technologies Telemedia (STT) acquired a 33% stake for about RM1 billion.

But it was still not smooth sailing for the compa-ny. In 2012, its then CEO Kaizad Heerjee, who was ap-pointed in 2010, abruptly resigned. His replacement, high-fl ying executive Jaff a Sany Ariffi n, only lasted a year before being summarily dismissed.

It was only under current CEO, Wong Heang Tuck, appointed in 2014, that the company began making signifi cant progress.

THE SURPRISE AUCTION THREATFor the last few years, there has been talk about real-locating the spectrum to rejuvenate the industry and create a more level playing fi eld. Closed-door meet-ings and discussions had been ongoing for some time.

Then on Jan 28, in his review of Budget 2016, Prime Minister Datuk Seri Najib Razak, who is also the fi -nance minister, surprised everyone by announcing his plan to “optimise government income by reallo-cating telecommunications radio spectra and making operators bid for them”.

The ambiguous phrase “making operators bid for them” sparked a massive sell-off of shares in the Big Three — Axiata Group Bhd, DiGi.Com Bhd and Maxis Bhd. They suff ered their biggest single-day declines in 12 months, with their market capitalisation plunging by a collective 7% or over RM9.4 billion.

These market jitters were primarily caused by uncertainty over the additional expenditure that the operators would incur in bidding for spectrum, and fears that such bidding would become irrational.

Four days after Najib’s announcement, the MCMC released a statement saying that it plans to reallocate spectrum in the 900MHz and 1800MHz bands among four players by August, in a bid to allay the sharp fall in the market, as well as to quell any further specula-tion as to how the spectrum would be redistributed.

The four — Celcom, DiGi, Maxis and U Mobile — will be assigned 900MHz and 1800MHz spectra for a 15-year period “for a fee”, which has still not been revealed.

The spectra assignments are understood to be as follows: Maxis and Celcom will be allocated two blocks of 10MHz spectrum (2 x 10MHz) each, while DiGi and U Mobile will be allocated 2 x 5MHz blocks each, all in the 900MHz band.

In the 1800MHz spectrum band, Maxis, Celcom and DiGi will each be allocated 2 x 20MHz, versus the 2 x 25MHz they were previously allocated. Meanwhile, U Mobile, which did not have any 1800MHz spectrum before this, will be allocated 2 x 15MHz.

THE HYBRID PATHThere are basically three common methods by which spectrum refarming can be carried out: (i) by auction; (ii) by the best business and technical case proposal (more commonly known in the industry as a “beauty contest”); or (iii) via grants.

The MCMC did not use any of these common methods, choosing instead to assign spectrum di-rectly to operators.

S5 special reportTHEEDGE MALAYSIAMALAYSIA | MAY 30, 2016MALAYSIA

Th e spectrum reduction

will lead to higher capital

expenditure [capex] as both

operators [Maxis and Celcom]

will need to invest in building

additional sites to maintain or

improve network coverage.

> Vivek

Consulting fi rm, Ovum, is of the opinion that the MCMC chose this “hybrid” approach because it wants to emphasise communications coverage, quality of service, and service aff ordability — looking to develop the sector as a whole instead of just ensuring revenue for the government.

Ovum research analyst Vivek Roy says the MCMC is aware that operators will need suffi cient capital to introduce and expand services.

“Auctions could have resulted in excessive bidding and high expenses for operators, and they could have chosen to pass on part of the cost to customers, which MCMC would not have liked,” he says.

CONSPIRACY THEORYWhile Vivek’s explanation is plausible enough, it has not stopped the rise of all sorts of conspiracy theories as to why the spectrum is being reallocated this way.

One is that the government is badly in need of revenue as crude oil prices have plummeted in the past two years. State-owned Petroliam Nasional Bhd is a net oil exporter and the country’s gross domestic product is heavily dependent on oil.

The scandals surrounding 1Malaysia Development Bhd have not helped either.

“It is possible that the government needed to off set the revenue loss quickly and if it had opted for an auc-tion or beauty contest, it would have taken too long,” says one industry source who requested anonymity.

“This way, the government can still get revenue by assigning spectrum to established players that it thinks can aff ord it,” the insider suggests, adding that although the fi nal price of the reallocated spectrum has not yet been determined, it could reach “billions of ringgit”.

The executive urged the government to take into account the fact that operators will have to spend billions as well on reconfi guring and retuning their networks.

Another industry source familiar with regulatory matters was more critical about the whole realloca-tion process, saying, “The manner in which the MCMC approached this was poorly coordinated, to say the least. I believe that the MCMC already had a working plan that laid out the relevant steps to manage the spectrum reassignment process, but the regulator did not adequately advise the government on the impli-cations, and this resulted in a shock to the markets.”

WINNERS AND LOSERSWhile the spectrum reassignment announcement was made in what can only be described as an off -the-cuff manner, industry watchers and operators had been waiting with bated breath for more than a year for the spectrum reallocation exercise.

But why does all this matter?For reference, both the 900MHz and 1800MHz

bands are used primarily by Maxis, Celcom and DiGi for second generation (2G) services, al-though all three operators have also begun using 1800MHz to carry 4G long-term evo-lution (LTE) services.

3G services provided by the three incum-bents and U Mobile operate between the 1920MHz and 2170MHz frequencies, while all four operators also operate 4G LTE ser-vices at 2600MHz.

The reassignment is important because the 900MHz and 1800MHz bands are coveted spec-tra — they provide an optimum compromise between coverage and capacity.

The lower 900MHz frequency has the advantage of being able to service larger areas than the higher 1800MHz fre-

quency. The 900MHz frequency can penetrate deeper into buildings, much better than 1800MHz. The impact of these properties cannot be overstated.

With these new assignments, DiGi, which has been eyeing a larger block of 900MHz for years now, fi nally gets a fairer shake, albeit at the expense of its 1800MHz band — a quid pro quo that many industry watchers feel it would not mind.

Ovum concurs, arguing that the low-frequency 900MHz band will benefi t DiGi’s network quality as it enhances indoor connectivity and enables wider coverage.

The research fi rm notes that this gain is at the expense of Maxis and Celcom, which will have re-duced spectrum in each of the 900MHz and 1800MHz bands, although Celcom has denied that this would be a problem.

“The spectrum reduction will lead to higher cap-ital expenditure [capex] as both operators will need to invest in building additional sites to maintain or improve network coverage,” says Vivek.

The other benefi ciary is U Mobile. Now that it has gained 2 x 5MHz in the 900MHz and 2 x 15MHz in the 1800MHz bands, it should become more competitive since it can extend network coverage and expand its product off erings, he adds.

Indeed, in February, U Mobile chief marketing of-fi cer Jasmine Lee said, “We’re very happy with what has been allocated, but we need to see what the specif-ic allocated segment of the spectrum is going to be.”

All this does not mean it is going to be a walk in the park for DiGi and U Mobile, though.

“Yes, Maxis and Celcom may have lost somewhat in terms of spectrum and may have to incur high-er capex costs, but they have been anticipating this move for some time now and it is not like they were caught off -guard,” says one technical expert who de-clined to be named.

“Capex for infrastructure is an ongoing, long-term play and the fact that it’s a one-time upfront fee to be paid over 15 years means they can plan for it.”

In addition, just because DiGi and U Mobile have received more spectrum, it does not mean that this will translate into more subscribers and, by exten-sion, more revenue.

Malaysia’s mobile market is highly competitive and the game is not just about having more spectrum and better coverage. It is also about what new features, pricing plans, deals and content you can provide to your subscribers.

It is about keeping customers on your network — that is, reducing churn and getting them to spend more.

REFARMING 2G SPECTRUMCoverage enhancements aside, the other major de-

velopment with the new spectrum assignment is that all four operators can start shifting more of their 4G LTE workloads from 2600MHz onto 1800MHz, and even onto 900MHz.

In industry parlance, this is called spectrum refarming, which would allow better coverage and

indoor penetration compared with operating 4G LTE in the 2600MHz band. This is particularly true

for DiGi and U Mobile, which will have access to a sizeable 900MHz block of spectrum by 2017.

As noted earlier, 900MHz and 1800MHz spectra are used for 2G services and while these services still exist, some portions can be set aside for oper-

ators to allocate to 4G LTE.Both Maxis and DiGi have actually already issued

requests for proposals (RFPs) from at least eight wire-less specialist contractors to work on such projects,

according to people familiar with the matter.The list of contractors includes equip-ment providers Huawei Technologies Co

Ltd (for Maxis) and ZTE Corp (for DiGi), as well as several small, independent wireless subcontractors.

Celcom has not issued any such RFP, but is believed to be going through a similar process via di-

rect negotiations, say people in the know.

“The project is divided into two

portions. The fi rst is to come up with a refarming plan to clear up existing 2G spectra and free them so that operators can move 4G LTE technology onto the cleared space,” says the technical expert.

“The second part of the project involves optimis-ing the entire system — 2G, 3G, and 4G LTE — and making sure that all systems work well after the re-farming exercise.”

These projects are expected to cost between RM10 million and RM15 million and will take 12 to 18 months to complete, says the expert.

“The refarming of 1800MHz must take place by December this year, while the 900MHz must happen by June 2017, as these are the MCMC’s guidelines.”

The exercise is signifi cant from a coverage point of view and will enable operators to fi ll in “holes” where they do not have 4G LTE right now. In addition, using 900MHz to roll out 4G LTE will cost the operators two to three times less in capex.

“Meanwhile, moving 4G LTE to 1800MHz, and us-ing that in conjunction with 2600MHz 4G LTE, would aid the operators in terms of capacity and give them the ability to serve more people in a dense location,” says the expert.

Ovum’s Vivek expects the refarming of 900MHz to allow DiGi and U Mobile to address capacity and coverage issues, allowing more people to connect.

“I think we will probably see them becoming more aggressive in grabbing market share,” he says. “They will probably get better network performance and possibly expand their services.”

However, DiGi is still expected to struggle to re-farm both its 900MHz and 1800MHz spectra. It may have gained 2 x 5MHz of the 900MHz spectrum, but it has been forced to give up 5MHz of the 1800MHz spectrum. This means that clearing space on 1800MHz for 4G LTE will be tight, says the expert.

“And it will tighter still in the 900MHz band as trying to squeeze 4G LTE onto a 2 x 5MHz 900MHz block will be a real challenge.

“U Mobile will likely gain the most because it does not have any legacy 2G services to think about, and it can roll out everything with 4G LTE on both 900MHz and 1800MHz.”

FINAL WORDSFor subscribers, the spectrum reallocation exercise will be mostly unfelt, given that most consumers do not know what wireless technology they are using at any given time while on their mobiles. But they would certainly feel it if there is a slip in voice or data quality.

This is why operators are proceeding very carefully in appointing the right specialist wireless contractors, and setting very high key performance indicators, as they will expect the network quality to be “at least equal to or better than” before, says the technical ex-pert familiar with the bids.

Whichever operator plays its cards right with the spectrum re-engineering exercise — and is able to come up with a better and more effi cient network — will defi nitely have the upper hand, as 2017 will be the year that operators plan to exploit the true power of LTE, he says.

The expert also says that, currently, 3G is already congested in most operators’ networks and so all of them are anxious to offl oad as much traffi c as they can onto their 4G networks.

“The trouble is, 4G isn’t contiguous yet — that is, continuously overlapping from one cell to another — and all operators need the lower frequencies to achieve this, especially the 900MHz and 1800MHz band,” he says.

“Only then can they roll out more advanced ser-vices such as Voice over LTE (VoLTE) — as Singapore has done — which needs contiguous coverage, so they can maximise the use of 4G spectrum.

“My advice for subscribers? Take a wait-and-see approach to how operators cope with the entire re-en-gineering exercise and observe the impact. Then, suss out what kind of new off ers may come out with new features like VoLTE.

“Only then, decide which operators give you the best value in network quality, features and pricing,” he says. E

special focus S6 THEEDGE MALAYSIAMALAYSIA | MAY 30, 2016MALAYSIA

S7 special reportTHEEDGE MALAYSIAMALAYSIA | MAY 30, 2016

MOBILE SERVICE REVENUE1Q 2016 1Q2015

REVENUE YOY CHANGE REVENUE YOY CHANGE

Singtel S$520 mil 0.3% S$518 mil 1.8%

M1 S$163.4 mil -1.9% S$168.4 mil -3.2%

StarHub S$298.1 mil -2.4% S$313.0 mil -0.2%

SUBSCRIBERS1Q 2016 4Q2015

SUBSCRIBERS MARKET SHARE SUBSCRIBERS MARKET SHARE

Singtel 4.101 mil 49.8% 4.101 mil 50.4%

M1 1.942 mil 23.3% 1.928 mil 23.1%

StarHub 2.198 mil 26.7% 2.188 mil 26.5%MARKET SHARE CALCULATED BASED ON CURRENTLY AVAILABLE STATISTICS AVAILABLE FROM IDA (FEB SUBSCRIBER NUMBERS)

POSTPAID SUBSCRIBERS1Q 2016 1Q2015

SUBSCRIBERS YOY CHANGE SUBSCRIBERS YOY CHANGE

Singtel 2.328 mil 2.7% 2.266 mil 3.0%

M1 1.208 mil 4.4% 1.157 mil 5%

StarHub 1.344 mil 3.3% 1.301 mil 2%

POSTPAID REVENUE 1Q 2016 1Q2015

REVENUE YOY CHANGE REVENUE YOY CHANGE

Singtel S$489 mil -1.7% S$497 mil 0.4%

M1 S$145 mil -1.4% S$147 mil 9%

StarHub S$278.2 mil 4.9% S$265 mil 1%NOTE: SINGTEL AND STARHUB’S POSTPAID REVENUES INCLUDE INTERNATIONAL CALLS REVENUE

PREPAID SUBSCRIBERS1Q 2016 1Q2015

SUBSCRIBERS YOY CHANGE SUBSCRIBERS YOY CHANGE

Singtel 1.773 mil -2.7% 1.822 mil 2%

M1 734,000 2.9% 713,000 -24%

StarHub 855,000 1% 846,000 -26%

PREPAID REVENUE1Q 2016 1Q2015

REVENUE YOY CHANGE REVENUE YOY CHANGE

Singtel S$489 mil -1.7% S$497 mil 0.4%

M1 S$145 mil -1.4% S$147 mil 9%

StarHub S$278.2 mil 4.9% S$265 mil 1%

ARPU TRENDS2016 POSTPAID 2016 PREPAID 2015 POSTPAID 2015 PREPAID

Singtel S$70 S$18 S$73 S$17

M1 S$58.60 S$13.20 S$62 S$15.10

StarHub S$69 S$17 S$68 S$18

FIBRE BROADBAND1Q 2016 1Q 2015

SUBSCRIBERS MARKET SHARE SUBSCRIBERS MARKET SHARE

Singtel 501,000 51% 418,000 55%

M1 136,000 14% 108,000 14%

StarHub 298,000 30% 193,000 25%

PAY TV2016 2015

SUBSCRIBERS REVENUE SUBSCRIBERS REVENUE

Singtel 423,000 S$58 mil 423,000 S$55 mil

StarHub 528,000 S$94.5 mil 545,000 S$96.0 mil

Singapore slugfest: Th e good, the bad and the uglyBY BENJAMIN CHER

It has been an eventful year for telecommunications companies in Singapore. As with Malaysia, the city state has announced a spectrum reallocation exercise as it gears up for the entry of a fourth telco.

For the fi rst quarter ended March 31, 2016, Singapore Telecommunications Ltd (Singtel), M1 Ltd and StarHub

Ltd collectively recorded mobile revenue of about S$981.5 million (RM2.9 billion), a 1.8% decrease from a year ago. Because of the diff erent methods used by each company in reporting its fi nancial numbers, this mobile revenue total excludes Singtel’s and M1’s revenue from interna-tional calls. The details are even less clear in StarHub’s case.

While the January to March period is usually weak-er for the telecoms industry as a whole, the decline in revenue does raise some doubts about the viability of a fourth telco in the market.

NUMBERS TELL A STORYSingtel remains the leader, being the only telco to report growth in revenue on a year-on-year (y-o-y) basis, even though it was a meagre 0.3% increase. M1 and StarHub reported mobile revenue declines of 1.9% and 2.4% re-spectively.

Despite its increase in revenue, Singtel’s subscriber numbers remained unchanged, with only a shake-up in the mix of postpaid and prepaid customers.

However, M1 and StarHub saw an increase in subscrib-ers, adding 14,000 and 10,000 new customers respectively.

As for data taking over everything, the average Singtel customer used 2.4GB of data and 2.29 million of its cus-tomers are now on its 4G (fourth generation) network.

And while 66% of Singtel’s postpaid customers were on tiered plans, 29% of them exceeded their data bundles.

For M1, 75% of postpaid customers were on tiered data plans and 20% of them exceeded their data bundles, using an average 3.3GB of data.

StarHub did not disclose how many customers ex-ceeded their data bundles but revealed that 65% of its postpaid customers were on tiered data plans.

POSTPAID AND PREPAIDThe postpaid market remained the biggest revenue con-tributor for all three telcos. All three picked up more post-paid subscribers in the fi rst quarter of 2016.

However, only StarHub managed to grow its postpaid revenue (by 4.9%) while Singtel and M1 saw declines of 1.7% and 1.4% respectively in their y-o-y mobile revenue.

Singtel attributed the decline to lower roaming, voice and SMS revenues while M1 attributed it to lower roam-ing revenue.

StarHub appears to be the biggest loser in terms of subscriber growth, picking up 43,000 subscribers y-o-y in the postpaid segment, compared with Singtel’s 62,000 and M1’s 51,000.

Singtel’s postpaid gains were off set by its loss of 49,000 prepaid subscribers. M1 and StarHub, on the other hand, turned their prepaid fortunes around, picking up 31,000 and 9,000 new subscribers respectively.

However, M1’s growth in subscribers did not translate into revenue growth. It recorded a 1.4% drop in prepaid revenue. Singtel recorded a drop in prepaid revenue of 1.7%, less than the 2.7% churn it saw in this period. Only StarHub was able to turn its prepaid gains into additional revenue, recording a modest 4.9% y-o-y growth.

ARPU TRENDSPostpaid average revenue per user (Arpu) continued its downward trend across all three telcos, with lowered voice and SMS revenue to blame.

Singtel was the only telco that was able to eke out a meagre S$1 growth in its prepaid Arpu, continuing its growth from last year.

FIBRE BROADBANDAll three telcos — plus internet service providers (ISPs) such as MyRepublic and ViewQwest — competed in the fi bre broadband space. However, the three telcos current-ly hold a 95% share of the market, making the impact of the ISPs minimal.

All three telcos increased their subscriber base, but in terms of market share, Singtel and StarHub dropped four and fi ve percentage points respectively. Only M1 managed to maintain its market share at 14%.

However, as both Singtel and StarHub offer fixed broadband and fi bre broadband while M1 off ers only fi bre

broadband, revenue growth may not be an accurate barom-eter of their broadband business. Singtel and StarHub do not break down revenue from their broadband business.

PAY TVOn the pay TV front, StarHub saw a loss of subscribers, leading to a decrease in revenue. Singtel maintained its subscriber base and increased revenue from the pay TV business from S$55 million to S$58 million, continuing its revenue growth from last year.

StarHub’s drop in subscribers coincided with US video streaming giant Netfl ix’s global availability announce-ment in January.

ANALYSTS’ VIEWSWith the possibility of a fourth telco entering the market, analysts continue to advise investors to stay away from operators that are reliant on mobile revenue.

The driving force of all three telcos in the coming year appear to be their SIM-only plans and quad-play off erings, at least for Singtel and StarHub, according to Su Lian Jye, senior analyst at ABI Research.

“All three telcos estimate stable performance in 2016 and I personally do not foresee an exceptional fi -nancial performance, as subscriber growth has slowed and entered into population-growth-rate territory,” Su says via email.

Nikhil Batra, telecommunications research manag-er at IDC Asia/Pacifi c Pte Ltd, concurred. “The market is expected to grow in the low single digits and the posi-tioning of the telcos vis-à-vis each other is expected to remain the same.”

“In the fi rst week of March, due to the rumoured en-try of a fourth telco in Singapore, a price war ensued, as a result of which the service providers eff ectively doubled the data allowance for their contract customers for as little as S$3 (RM8.81) per month,” Nikhil says via email.

“Although the eff ect of the same was not particularly evident in 1Q results, the uptake of the off er has been decent,” he adds.

Both analysts agreed that SIM-only plans might be the next driving force in Singapore’s telecoms indus-try. “The emergence of aff ordable fl agship handsets is expected to be the next growth driver, with the launch of Xiaomi Mi 5 and the upcoming OnePlus 3 and Moto X 2016,” says Su.

“Although new headline-grabbing smartphones are still no doubt a growth driver, the slowdown in Apple’s iPhone sales indicates a speed bump in premium hand-set purchases.

“Customers who are moving to aff ordable fl agship handsets can then look for preferred SIM-only plans from the three telcos, which makes the SIM-only plan a clever strategy to ensure growth,” he adds.

IDC’s Nikhil believes enterprise/fi xed services and ICT services helped the telcos off set some of their defi cits in handset sales. “Handset sales dropped dramatically for all the telcos, as much as 37% y-o-y for StarHub,” he says.

“Even though handset sales vary from quarter to quarter, and should not be read into much, it indicates a shift towards SIM-only plans,” he adds.

Both analysts are of the opinion that Netfl ix will make a dent in the pay TV market. However, Su believes that major sporting events might boost subscriber num-bers temporarily.

“Netfl ix’s brand recognition among young viewers, as well as its aff ordable pricing, will convince certain customer segments to ‘cut the cord’,” says Su.

“On the fl ipside, Netfl ix off ers no sports channel, so I believe a major event, such as the UEFA Europe-an Championship, will temporarily boast pay TV sub-scriptions for Singtel and StarHub in the remainder of 2016,” he adds.

Nikhil notes that pay TV contributes signifi cantly to earnings at both Singtel and StarHub. “Netfl ix’s video streaming service has proved to be very competitive to incumbent cable service providers in many a market, and is likely to pose serious problems to Singtel and StarHub.”

NEW PLAYERS, SPECTRUM WOESThe recent entry of mobile virtual network operator Circles.Life in Singapore has also brought about talk of yet another price war.

“The new service provider Circles.Life … will pose some questions but will not aff ect the Big Three for now,” says Nikhil. “However, since Circles.Life is leveraging M1’s infrastructure, and is very fl exible and agile, it could again spark some kind of price war, which might aff ect their profi t margins.”

The impending spectrum auction also spells some uncertainty for the three telcos. “MyRepublic and Con-sisTel are preparing strongly for the auction by raising money and garnering business support,” remarks Nikhil.

“MyRepublic is leveraging SDN (software-defi ned networking) and NFV (network functions virtualis-ation) technologies to signifi cantly reduce the capex (capital expenditure) required to begin its operations, and will put a lot of pressure on the incumbents when it launches its service.

“However, the eff ect of these factors will most likely be seen only by the end of 2017,” he adds. E

special report S8 THEEDGE MALAYSIAMALAYSIA | MAY 30, 2016

E

Wait, there’s a fi fth player now?BY GOH THEAN EU

For most of the past two decades, the Malaysian mobile telecommunications industry has been pretty much a three-player affair between Maxis Bhd, Celcom Axiata Bhd and DiGi.Com Bhd. It was only recently that U Mo-bile Sdn Bhd emerged as a strong No 4, taking on these incumbents.

And 2016 will be an interesting year for the industry with webe digital sdn bhd coming in as the fi fth player (not includ-ing mobile virtual network operators).

The last time we had so many players was probably in the late Nineties, when there were six companies pushing analogue and digital mobile cellular services. These were Binariang Sdn Bhd (via the Maxis brand), Mobikom Sdn Bhd (Mobifon), Sapura Digital Sdn Bhd (Adam), DiGi.Com (DiGi 1800), Cellular Commu-nications Network (M) Sdn Bhd (Celcom GSM and ART 900) and Telekom Malaysia Bhd (TMTouch and ATUR 450).

Back then, mobile penetration was still limited, but the land-scape today is completely diff erent.

TAKING ON THE INCUMBENTSThe mobile penetration rate in Malaysia is already more than 140%, so one must be wondering if webe has what it takes to at-tract customers and whether it has enough fi repower to take on its deeply entrenched rivals.

Analysts are quite optimistic that webe — formerly known as Packet One Networks (M) Sdn Bhd (P1) — and a subsidiary of fi xed-line giant TM will be able to make an impact in this highly saturated market.

“Under such market conditions, most new players will have a tough time competing against the big boys,” says Mercury Securities head of research Edmund Tham when contacted. “However, webe is diff erent. With TM’s backing, it should have enough bullets to battle the incumbents.”

At the time of writing, webe had already organised two media events but had yet to offi cially reveal its price plans. Nevertheless, it is believed that the price plans have been widely circulated on social media and tech forums.

Should these plans remain the same when offi cially unveiled, one can expect them to cause a stir in the market as they include an unlimited voice, data and text message package for as low as

RM80 a month, and another off ering 20GB of data, 1,000 minutes of voice calls and 1,000 text messages for as low as RM8 a month.

“At such price points, I would expect a signifi cant portion of the 2.34 million [TM] household customers to give the new ser-vice a try,” says Tham.

While such prices will attract many mobile users who are not satisfi ed with their existing providers and who are looking for a change, can webe attract enough customers and keep them loyal over the long term?

A telecommunications analyst, who declines to be named, says the incumbents’ current lead is quite solid and it will take more than just attractive mobile plans to shake their position.

“Look at U Mobile. It has been off ering attractive packages for years and yet it is still lagging far behind the No 3 player,” says the analyst.

SHORT-TERM PAIN, LONG-TERM GAIN? Based on webe’s “leaked” price plans, it seems that the company and its parent TM are looking at a short-term pain, long-term gain strategy with the aim of capturing a sizeable market share quickly in order to have a solid business case.

While webe’s entry is likely to spark a new round of price wars, it remains to be seen how long it will go on. After all, in-tense competition would mean higher customer acquisition costs and, in turn, aff ect TM’s bottom line.

“We maintain our ‘sell’ recommendation with an unchanged target price of RM5.90 (current trading price: RM6.40 to RM6.78),”

says UOB Kay Hian analyst Chong Lee Len.“At that target price, the stock trades at 24.5 times 2016 [fore-

cast] price-earnings ratio ... In all, we expect near-term earnings to remain uninspiring.”

Chong says the cautious stance partly reflects the longer-than-expected synergistic integration of webe, which was bought at a steep valuation of 22 times enterprise value/earn-ings before interest, taxes, depreciation and amortisation, and the limited scope of a dividend upside due to the higher capital expenditure needed to roll out wireless connectivity.

But knowing very well that such a venture will hurt the bot-tom line in the near term, why did TM make the move to acquire the controlling stake in P1 for US$350 million (RM1.423 billion) in the fi rst place?

The one-word answer is “convergence”. The bet is that increas-ingly, consumers will want to have just one telecommunications company providing a full range of services, such as mobile, broad-band, fi xed-line and even internet protocol television services, instead of having to deal with multiple service providers.

In fact, TM has for years now been positioning itself as the “convergence champion”.

“[TM] really needs to bundle its off erings effi ciently as this will increase ‘stickiness’ and its average revenue per user,” says Tham. “Today, consumers want their mobile and fi xed-line ex-perience to be seamless.”

BIGGER IMPACT NEEDEDWith the webe acquisition over and done with, there is no turn-ing back for TM. Analysts say it is important for webe to learn from past mistakes and to better execute its strategy.

Back in the P1 days, it took the company more than three years to hit the 500,000-subscriber mark.

“It will need to move faster than that if it wants to be sustain-able in the long run,” says another analyst from a local brokerage.

But the teams at both TM and webe are seasoned warriors. In its early days, the former P1 had competed head-on with then rival TM and deep-pocketed YTL Communications Sdn Bhd. And TM had not only the deepest pockets but also quite a bit of experience in the mobile business. Celcom Axiata was once its wholly-owned subsidiary before it and other entities were spun off to create Axiata Group Bhd. Prior to that, TM also owned Mo-bikom and TMTouch.

WEBE

KEN

NY

YAP

/ TH

E ED

GE

Watch out, U Mobile is about to get seriousU Mobile Sdn Bhd has gained a reputation as the mobile

operator with the most innovative and value-for-mon-ey packages, putting pressure on its bigger rivals.

For instance, its Hero 70 plan allows customers to make unlimited phone calls to all networks as well as provides a 15GB data quota. Its Data Backpack

service allows customers to use their existing data quota over-seas at no additional charge and its U Data Roam service gives customers unlimited data roaming for as low as RM10 a day.

In contrast, most of its rivals are either reluctant or do not see the need to lower their data roaming rates in any signif-icant way.

Despite these attractive plans, the truth of the matter is that U Mobile is still trailing the big boys. Currently, it has over four million subscribers — at least seven million behind its nearest competitor.

The question, then, is why is U Mobile trailing so far be-hind when it has such attractive plans?

There are two main reasons. The fi rst is its rather interesting history. Today, U

Mobile is 49% owned by Straits Mobile Investment Pte Ltd, a unit of Singa-pore Technologies Telemedia (STT). U Telemedia Sdn Bhd, controlled by tycoon Tan Sri Vincent Tan, is the second largest shareholder with a 21.46% stake. Tan also has a direct

6.2% stake in U Mobile.Its shareholding structure has

changed substantially over the past decade. Before STT came in as a major shareholder,

U Mobile was owned by Tan and tel-ecommunications giants NTT

DoCoMo and KT Freetel (now part of the KT Corp group).

It must have seemed then, that having two

established mobile companies as in-

vestors was a

dream come true for U Mobile. It would have been able to take advantage of the best practices and lessons learnt in other markets and replicate them here in Malaysia.

Unfortunately, it did not turn out that way. Speculation was rife that NTT and KT Freetel could not see eye to eye on some key issues, which may have partly led to both companies de-ciding to sell their stakes.

“During the transition from the previous investors [NTT and KT Freetel] to the new investors [STT], U Mobile’s business and subscriber base were aff ected,” says one industry analyst who declines to be named.

Apart from shareholder changes, U Mobile has seen a number of changes in its top management. Prior to current CEO Wong Heang Tuck, there was Jaff a Sany Ariffi n, who was sacked, and before that, Kaizad Heerjee, who left when his contract expired.

“Today, there are still consumers who wonder if U Mobile will be here for the long term,” says an industry observer.

The second possible reason for U Mobile still lagging is the spectrum it has. Currently, it only owns the 2.1GHz and 2.6GHz spectra, although it has a domestic roaming partner-ship with Maxis Bhd.

“The spectrum disadvantage puts U Mobile in a challenging spot when it comes to in-building coverage,” says the analyst.

But that disadvantage may soon be a thing of the past.

A WINDFALL YEARU Mobile, like other telecommunications companies in Ma-laysia, experienced a challenging 2015. Growth was aff ected by the implementation of the Goods and Services Tax. This year may be equally challenging for the industry as a whole, but promises to be a bit kinder to U Mobile.

This year, the company was awarded two valuable spectra — the 1800MHz and 900MHz bands. It will be able to activate its 1800MHz coverage by early next year, while the sought-after 900MHz band will be switched on by July next year. With this, U Mobile will fi nally be able to compete head-on with its rivals.

According to an industry source with a technical back-ground, the spectra allocated to U Mobile will help the com-pany operate more effi ciently.

“With the reallocation of the two spectra, the company can now cover an area with fewer sites. At the same time, the capacity per site (a term that describes how many mobile sub-scribers it can accommodate in that one area) will increase.

“In short, coverage will improve and [its customers’] mo-bile experience will likely be signifi cantly better than before,” says the technical expert.

However, the spectrum reallocation also means that U Mo-bile will need to relook at its network strategy and its capital expenditure (capex) plans.

Last October, the company announced that it would be spending RM3.5 billion to RM4 billion over the next fi ve years, or RM700 million to RM800 million annually, to expand its network coverage.

“In terms of capex, there won’t be much change to the over-all numbers. But in terms of timing, we may accelerate some of it upfront,” CEO Wong said after the industry regulator, Malaysian Communications and Multimedia Commission, had announced the spectrum reallocation.

CHANGING THE PERCEPTIONWong also said 2016 would be “a year for U Mobile to strength-en its foundation”.

The move to accelerate its upfront capex is necessary, as it will allow U Mobile to fully capitalise on the two new spectra that will be activated next year.

“Even though the 1800MHz and 900MHz bands will be acti-vated January and July next year, the work needs to start now. So, when the spectrum is in the hands of the company, it can just be ‘switched on’,” says the industry source.

But Wong dismisses the idea of his company going into an all-out attack next year, saying that it has been consist-ently innovating and trying its best to deliver value to its customers.

“We also understand that there are some negative per-ceptions of the company. It takes time to change consumer perception, but we believe that if we continue with what we are doing, eventually, we will win consumers’ hearts,” he says. “Just as, importantly, we have a group of very supportive and committed shareholders.”

Despite its chequered past, the spectrum reallocation promises a bright future for U Mobile. “Coupled with its innovative and attractive plans, it is only a matter of time before it catches up with the incumbents,” says an analyst. —By Goh Thean Eu

Wong: 2016 would be ‘a year for U Mobile to strengthen its foundation’ E

webe CEO CC Puan (fi fth from left) at webe’s launch

THEEDGE MALAYSIAMALAYSIA | MAY 30, 2016 S9 special focus

U Mobile WiFi Calling:Every WiFi station is a Telco TowerEveryone can appreciate how frustrating it is to have a mobile phone call cut short in places like basements and elevators where network coverage from telcos tend to be weak. Th is will be a thing of the past with U Mobile’s WiFi Calling. Never before could a mobile user in Malaysia make or receive calls in areas of no reception until now. Th is service, the fi rst of its kind in the country, will enable you to continue to make calls as long as you are connected to a WiFi network. Essentially, every WiFi station is now your U Mobile Network Tower. Th e best part? Th is is available to all U Mobile Prepaid and Postpaid customers at no additional cost.

IT IS EASY TO START

MAKING WIFI CALLS

To start making WiFi Calls, you just need to enable the

service on a mobile device that is compatible with U Mobile WiFi Calling. Again, no new

number is required.For a list of U Mobile WiFi Calling compatible device

please visit u.com.my/wifi calling

WIFI CALLING EXPERIENCE IS

SEAMLESS You may think U Mobile’s WiFi Calling is

nothing new since Voice Over Internet Protocol Calls have enabled you to make calls via a WiFi signal for years. Well the

simple answer is U Mobile’s WiFi Calling is completely diff erent.

For starters, all WiFi Calls are made with your existing mobile number. You

are also able to make WiFi Calls to both mobile numbers as well as fi xed lines. You

are even able to make IDD calls with U Mobile’s WiFi Calling.

Hence, your WiFi Call experience is completely fuss free and each call will feel

like a normal mobile phone call. ENJOY SAVINGS

There will be no roaming charges for calls made via WiFi connection to

Malaysian numbers, even if the call is made from

overseas. This means, every time a U Mobile

customer makes a WiFi call to a Malaysian number, regardless of where he

or she is, the call will be treated like it was made

from Malaysia.

BENEFITS OF U MOBILE WIFI CALLING1 Have no fear when indoor network coverage is weak

As long as you have WiFi connection, you can make and receive calls

2 Seamless user experience

· Make and receive calls via existing mobile number · Make calls to mobile numbers as well as landlines · You can even make IDD calls

3 No roaming charges for calls made via WiFi connection to Malaysian numbers when travelling overseas

4 Easy to set up and use

· Once you enable the service on a compatible mobile device you can start making WiFi calls

5 Calls will be in High Defi nition (HD) Voice* so your calls will sound a whole lot clearer

6 Service is available at no additional charge for U Mobile customers

* WiFi Calls will be in High Defi nition (HD) Voice when they are made and received from a phone that supports HD Voice via a HD Voice enabled network.

Standard call rates will apply to all WiFi calls.

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