The Edge, November 5 - 11, 2007
Inspired by the phenomenal share price performance of DiGi.Com Bhd, investors must be wondering if a similar repeat performance can be achieved elsewhere in the telecommunications sector. But with Maxis Communications Bhd delisted and Telekom Malaysia Bhd (TM) still deemed a mammoth government-linked company, where can the next big thing be?
Some reckon its going to be WiMAX, a wireless broadband technology that promises wide take-up, but thats by no means the consensus view.
"WiMAX will be what GSM was to the mobile voice world, " Amarjit Singh Chhina of YTL e-Solutions once said. As executive director of one of the four companies that has won a licence to rollout a WiMAX network, Chhina is expectedly bullish about WiMAX.
GSM is the basic technology that is behind the networks linking close to 2.7 billion handphone connections around the world, including all Malaysian handphone users.
WiMAX, on the other hand, is a newer technology aimed at providing wireless connectivity to the Internet over long distances. WiMAX allows a user, for example, to browse the Internet on a laptop computer, without physically connecting to a router or cable. It is not very different in concept to how WiFi works at hot spots, such as Starbuckscafes in Malaysia. Except that with WiMAX, users would be able to gain higher access speeds and remain connected while being mobile. WiMAX also promises more bandwidth than 3G, the dominant technology for mobile broadband currently being used by established mobile operators.
WiMAX supersedes many proprietary wireless broadband technologies of the past. WiMAX promises to be an internationally accepted standard so every player in the game will be building on the same basic technology. This will ensure interoperability among different providers and that new devices will be WiMAX-ready.
There have been a few attempts by players to rollout wireless broadband using proprietary technologies in Malaysia. These companies, such as Atlas One and TimedotCom Bhd, failed despite sinking in millions.
But WiMAX will be different because of its globally accepted standards and the devices that will come onstream, argue its proponents. Hence, if the WiMAX picture turns out to be true, then companies like REDtone International Bhd, Green Packet Bhd and YTL e-Solutions Bhd may be the ultimate winners in the game. Another WiMAX spectrum holder, Asiaspace Sdn Bhd, has plans to get listed.
But investors planning to take a bet on WiMAX have to consider a plethora of challenges lie in the path of WiMAX operators in Malaysia.
For starters, it is still a maturing technology and there arent sufficient devices in the market that are WiMAX- ready. Nevertheless, there is a strong possibility that those issues would eventually be solved.
A bigger worry
What is more significant is the recently announced plan by the government that TM, aided partially by public funding, will be spending a whopping RMIS billion to wire up the country with "fibre to the home" (FTTH), of which RMS billion will come from the government.
FTTH essentially refers to the concept of having an optical fibre channel running directly into customerspremises. This ensures just about the highest broadband speeds if executed properly and is a huge step-up from TMs current network which uses copper wires for its "last mile" delivery. The latter is what is used in TMs Streamyx service.
The government says its RM5 billion contribution to help TM in this task is premised on the theory that wiring up the country with such high speeds enhances a countrys competitiveness. To be sure, this is a widely accepted view in many developed economies. But it is left to be seen if the FTTH plan will be executed properly and in the most cost-efficient way by TM.
A significant side-effect of this plan is that it will erode even further the business case of the WiMAX players. Consider this: The WiMAX players are thinking of spending, at the most, RM500 million each to roll out their networks. And that too, assuming that their financiers actually lend them that money. Only part of the capital expenditure (capex) will come from internally generated funds.
Compared with the RM15 billion capex planned by TM, RM500 million is paltry.
Already, TM dominates the broadband scene with its fixed-line Streamyx service that is priced low enough to keep competitors out of the game. TM is able to do that, as a lot of its costs are already sunken.
Detractors of the FTTH plan say the government should not have been involved. Instead, market forces should be dictating TMs roll-out plans.
"By issuing four licences to WiMAX players, the governments broadband plan runs contrary to its earlier rhetoric of encouraging competition. On the one hand, the government issues the four licences and, on the other, it says it will give TM RMS billion for FTTH. Thats going to hit the business cases of the WiMAX players severely," says an industry player.
The government was also criticised for awarding the licences to non-established players. If bigger players like one of the existing mobile operators were issued a WiMAX licence, the technology w ould have a bigger chance of being tested, some argue. This is considering that they have existing infrastructure and know-how as well as more financial clout compared with the four awarded the WiMAX licences.
And while some argue that FTTH and WiMAX offer different means of reaching the customer and catering to different segments of the market, the industry observer says it makes little difference. "What is important to note is that every player in the broadband space is essentially offering one basic service-Internet access. Hence, even though the technologies may differ, they all end up competing with each other," he opines.
Indeed, some argue that the WiMAX players will find it difficult to raise funding. "It will be tough for financiers to make a case to lend money to WiMAX operators, considering the current market situation of broadband in Malaysia. Dont forget you also have two large telcos which are in the 3G space, offering mobile broadband," notes an analyst.
WiMAX operators still bullish
But WiMAX players are still confident they have a business case. For one, plans for the roll-out of the FTTH project are still sketchy and no firm deployment time lines have been set.
Green Packet CEO Puan Chan Cheong reckons that the FTTH plans will only be rolled out in urban areas. "This means TM will be addressing the same market it is having now. Hence, most of TMs FITH customers are likely to be its existing ADSL customers," says Puan. (ADSL, or asymmetric digital subscriber line, is the technology behind Streamyx, running on copper lines.)
Puan also believes that pricing for FTTH services to customers will be expensive, as TM would need to recoup investments from its FTTH roll-out, "FTTH could be beyond the reach of the mass market. Only heavy users who are willing to pay for FTTH will go for the service. The majority of the mass market for broadband would be keen on speeds of between one and two megabits per second (mbps), especially those upgrading from dialup services," he says.
Puan also reckons that FTTH will help WiMAXs take-up. "High-speed fixed broadband will drive the usage of the Internet and expand the broadband ecosystem. This will ultimately drive the usage of WiMAX and mobile broadband," he says.
Adds Wei Chuan Beng, CEO of REDtone, "The take-up from WiMAX will come from the nomadic users. This is the future, where users will want Internet access on the go."
Another national broadband plan
It is understood that a national broadband plan is in the works, including the zoning of areas where FTTH will operate but where WiMAX will also playa complementary role. Driven by the Malaysian Communications and Multimedia Commission (MCMC), the plan groups major cities under Zone A, where there will be multiple modes of Internet access, which includes FTTH, 3G and WiMAX. Zone A will also have the highest penetration of broadband.
Zone B will be suburbs and second-tier townships. Here, there will be less FTTH but more WiMAX plus fixed broadband, such as TMs Streamyx services as well as Maxisand Celcoms 3G. Zone C will be rural areas where the universal service provision (USP) fund will be tapped for broadband roll-out. (The USP is a fund, estimated at about RM2 billion currently, with contributions from all licensed telecommunications companies in the name of rolling out telephony and Internet access to rural areas.)
But broadband plans in Malaysia have a history of not materialising in the form that they are planned. A previous plan had sought to encourage market forces to determine how broadband access will be rolled out. But that plan did not come to fruition.
Analysts say the new initiative by TM to use FTTH leaves little for WiMAX players to tap. "Already, it is very difficult for any player to compete against Streamyx, which is the basic fixed-line Internet access offered by TM that has cornered more than 90 % of the broadband market in Malaysia. And now you have this RM15 billion FTTH plan. It is hard to see any player willing to sink investment to compete against that," notes a telecommunications analyst. It should be noted though that Malaysia has a relatively low household Internet penetration of 12.8%.
Plans to merge WiMAX players fall through
Earlier, there was a plan for the four WiMAX players to bring their resources together under a special purpose vehicle in order to share their roll-out costs. However, it is understood that the plan is close to falling through. A key reason is that each player has different financial strengths, risk appetites and rollout schedules.
Some WiMAX operators like Datuk Abdul Ghani Abdullah, who runs Asiaspace Sdn Bhd, say the certification of WiMAX equipment is still not finalised by the industry, specifically, the WiMAX forum. The WiMAX forum is an international body made up of WiMAX operators and equipment vendors to promote the technology. Ghani says this forum has not finalized the standard and level of equipment, such as base stations, that need to be used in order to have a uniformed WiMAX roll-out worldwide. "As such, we cant buy the equipment yet."
Asiaspaces current business model is to build and lease telecommunications towers to mobile operators. It has more than 100 such towers and plans to use them in its WiMAX roll-out. Ghani also says he has obtained funding and will roll out when the time is right.
Considering the challenges faced by WiMAX operators, some investors are turning their attention to TM. After all, it is TM that is poised for the massive RM5 billion "subsidy" from the government to roll out FTTH.
If, indeed, there is a huge appetite for broadband, it is likely that TM is well-poised to capture that market.
Recall that TM is now on the verge of splitting itself into two separate listed companies. One will focus on its fixed line and broadband services, while the other will contain its mobile assets, including Celcom and its regional mobile companies.
There is no dearth of interest in the listed mobile arm as it has assets in growing markets like India, Indonesia, Bangladesh and Sri Lanka. TMs fixed-line business is drawing renewed interest. TM is said to be planning a book-building exercise to meet demand for shares in RegionCo (the name given to the mobile arm) when it gets listed later this year or early next year.
When the demerger plan was unveiled, analysts said there would be more demand for RegionCo shares as not many investors want exposure to the more staid fixed-line business of the telecommunications company.
But as more details of the FTTH plans come out, a contrarian view is emerging, one is placing high hopes on TMs fixed-line business because of the potential of broadband.
A recent report by icapital.biz says the investment community has downplayed the potential of TMs fixed-line division. The reports points out that when British Telecommunications pIc spun off its mobile unit in 2001, broadband demand continued to drive revenue growth for BT. Broadband demand also drove the earnings of fixed-line operators Hanarotelecom Inc and KT Corp of South Korea.
In any event, there are still investors who are willing to take a bet on WiMAX players in the event that those companies prove to be the next big wave in telecommunications. Perhaps, a time will come when customers will be willing to pay whatever it takes to have access to the Internet while on the move. And if WiMAX fills that need and does so profitably, then those who placed their early bets on WiMAX would be the ones who would have the last laugh. l like those who put their money early in GSM technology and made a huge killing.