Friday, June 25

Leveling the broadband playing field


As the backbone of the digital economy, internet connectivity – or high speed internet connectivity in particular – is vital to ensure a nation’s continued digital growth at optimum speed.

For the nation to develop its digital economy, high speed internet connectivity needs to be easily accessible by the mass market.

However, even as internet infrastructures continue to be upgraded and expanded across the nation both rural and urban over the past few years, Malaysian consumers have been offered only a handful of choices in terms of high-speed internet services.

SOURCE: World Bank.

SOURCE: World Bank.

These choices also usually carry a premium price tag which most middle-income Malaysian households are unwilling to invest on.

According to World Bank’s Economic Monitor report published earlier this year, high-speed broadband access rates are much higher in Malaysia, relative to other countries as it ranks 74th out of 167 countries for fixed broadband services and 64th out of 117 countries for fibre broadband services.

“Ensuring that Malaysia’s digital infrastructure provides ubiquitous, reliable, and ultrafast broadband internet service is key to unlocking the potential of the digital economy. Nearly 80 per cent of the population is online, primarily through mobile networks.

“But the country lags in the coverage and adoption of fixed broadband services, especially compared to its level of economic development.

“There were only nine fixed broadband subscriptions per 100 inhabitants in 2016, less than income per capita would predict and only a fraction of Malaysia’s 92 active mobile broadband subscriptions per 100 inhabitants.

“Malaysia also has slower download speeds and higher prices than most advanced economies. And it appears that Malaysia will become less competitive in the near future,” said the World Bank in its ‘Malaysia’s Digital Economy: A New Driver of Development’ report.

It pointed out that most advanced economies are actively rolling out ultrafast broadband internet connections, which operate at speeds over 100 megabits per second (Mbps), and provide the foundation innovations such as artificial intelligence, the Internet of Things, and Industry 4.0.

“In contrast, Malaysia’s broadband initiatives call for a maximum download speed of only 100Mbps, and even that is restricted to state capitals, major towns, and high-growth areas. The maximum speed in the suburbs and rural areas are not planned to exceed 20Mbps and 4Mbps, respectively,” it added.

It further saw that high prices, low coverage, and limited ambitions for fixed broadband in Malaysia are driven by a lack of market competition in the industry.

With high prices and low coverage, it is no surprise that it has been reported that only 18 per cent of households in Malaysia have access to high-speed broadband services while World Bank had also pointed out that only 62 per cent of businesses in Malaysia are connected to the internet, with only 46 per cent having access to fixed broadband services.

Aware of this, the Federal government had recently announced measures to encourage competition in the broadband industry in the hopes that this could bring down broadband prices.

It had also stressed on the Mandatory Standard on Access Pricing (MASP) that was first issued by the Malaysian Communications and Multimedia Commission (MCMC) late last year and implemented this year.

The Federal government had also introduced the National Fiberisation and Connectivity Plan (NFCP) which is now being developed by the Communications and Multimedia Ministry through MCMC.

Under the NFCP, the government has set three key priorities which include speed, affordability, and coverage.

“While the mobile broadband space has a very high penetration rate, we need more high-speed fixed broadband infrastructure to support the growth of the digital economy,” said Communications and Multimedia Minister Gobind Singh Deo when announcing details on the NFCP.

In response to the government’s agenda to cut broadband prices by 25 per cent by year-end following the review of the Mandatory Standard of Access Pricing, all the fixed broadband service providers have reduced their respective broadband package prices.

As the fixed broadband segment begins to see more competitive prices, the research team at Kenanga Investment Bank Bhd (Kenanga Research) said: “Despite escalating competition in the fixed broadband segment, we believe the current package prices are competitive enough and able to achieve the government’s agenda.”

With that, BizHive Weekly checks in on several major telecommunication companies and their progress to offer better internet services to consumers and businesses.

TM heeds the call for lower prices, increased speed

According to World Bank, Telekom Malaysia Bhd (TM) controls 92 per cent of fixed broadband subscriptions, making Malaysia’s fixed broadband market more concentrated than that of any other country in Asean or the Organisation for Economic Co-operation and Development (OECD).

“As Malaysia’s national champion, TM was instrumental in achieving widespread basic connectivity, but its dominance of the upstream market, control of the national backbone, and high degree of vertical integration gives it a structural advantage that is now inhibiting progress,” it added.

Given its position, TM was one of first few companies that were called out by the government to lower its fixed broadband prices and increase its internet speed to all its subscribers.

Heeding this call, TM had announced its Performance Improvement Programme 2018 (PIP 2018) which also highlighted its commitment to enhance and provide affordable broadband services.

For subscribers of its fibre broadband network, unifi, TM said it plans to upgrade the speed for all existing unifi customers at more than double the speed with no extra cost. As for new customers, it offered new entry level unifi packages.

Earlier this year, it had also announced plans to upgrade Streamyx (copper network) customers in unifi areas nationwide.

While upgrading its customers’ services from copper network to its fibre broadband network might seem like a mammoth task, TM has ensured its commitment to address the issues faced by Streamyx in a more comprehensive manner.

As of November, TM said, it has upgraded nearly 50 per cent of over 340,000 Streamyx customers residing in unifi coverage areas to unifi; at the same price of their current plan. TM said it aims to complete this unifi upgrade exercise by March 2019.

Nevertheless, it stressed the limitations of the current copper network and in this respect, it has been in ongoing engagement with government, ministry, regulator and other stakeholders on how to solve the legacy copper issues affecting Streamyx customers.

As for the financial impact on TM, undoubtedly the changes in its service rates will negatively affect its earnings as can be seen in its recently released third quarter (3Q) results.

“TM slipped into the red in 3QFY18 with a net loss of RM176 million. This, however, included chunky exceptional items of RM635 million mainly relating to the impairment of legacy network assets (down RM995.4 million) and unwinding of discount for put options in a subsidiary (RM312 million),” said TA Securities Holdings Bhd’s research team (TA Securities) in its report.

This comes as TM’s first nine months of the FY18’s core net profit declined 17.7 per cent year-on-year, mainly on lower data (down 9.2 per cent y-o-y) and voice revenue (down 7.4 per cent), albeit partially offset by higher internet revenue (up 5.4 per cent y-o-y).

Meanwhile, TM’s data was partly affected by provisions of RM132.4 million to reflect the estimated impact from the Mandatory Standard of Access Pricing while internet was driven by unifi TV content take-up and unifi mobile subscribers.

Within the broadband segment, it noted trends continued with unifi net adds (44,000 q-o-q) and Streamyx net churns were down 60,000 q-o-q.

“While ARPU of both held steady, we expect unifi ARPU to decline in the quarters ahead on the back of downtrading activities as refreshed packages at lower price points were only introduced towards the end of 3QFY18,” it opined.

Looking ahead, it said: “In all, we expect the group to remain challenged by regulatory pressures and greater competition.

“We expect internet revenue to decline further in 4QFY18 on the back of downtrading activities leading to lower ARPU as well as market share loss to Maxis and TIME following their introduction of competitive broadband offerings in September 2018 and October 2018.”

Meanwhile, Kenanga Investment Bank Bhd’s research team (Kenanga Research) said: “The authority’s intentions on making broadband a necessity coupled with the revised MSAP framework and rising risk of subscription plans down-trading are set to pose tremendous risks to TM’s earnings prospect.

“Besides, the recent leadership change coupled with the potential exclusion from the FBM KLCI could also add to the uncertainties.”

Maxis ups the ante with new fibre broadband plans

Following an agreement with TM, Maxis Bhd (Maxis) has expanded its presence in the fibre broadband scene, offering revised broadband plans to entice the growing data-hungry market.

According to a report by CGS-CIMB Securities (CGSCIMB), with the new plans, Maxis has moved ahead of the finalisation of new access agreements with TM, which are still in the final stages of negotiations. Maxis says it will offer higher speed plans in the coming months, once it secures access from TM.

Based on a statement by Maxis, both the new consumer and business fibre plans are available in speeds of up to 100Mbps, at prices 36 to 65 per cent lower than previous similar plans.

For consumers, the 100Mbps plan comes at RM129 per month, and 30Mbps at RM89 per month.

Business customers meanwhile can take up the 100Mbps plan for just RM139 per month, and 30Mbps for RM99 per month, inclusive of business grade service options of ‘Always On’ and ‘peace of mind’ benefits.

“Maxis did not undercut TM’s price on the Home 100Mbps plan. However, the 30Mbps plan was priced lower than our expectations of circa RM100 more.

“Based on the MASP and a contention ratio of 30:1, we estimate the monthly wholesale cost would have been RM88.50. Maxis appears to have foregone subs acquisition cost and any profit margin,” CGSCIMB said.

It also believed that Maxis’s 30Mbps plan is available to all, which might force TM to eventually extend its RM79 per month 30Mbps offer beyond the B40 households (RM4,500 monthly income and below).

“This could pose further downtrading risk for its more price-sensitive unifi (and applicable Streamyx) households, although we believe most subs will choose to upgrade speeds to at least 100Mbps (which is RM129 per month),” it added.

For Business Fibre Broadband, Maxis’s 100Mbps price is 30 per cent cheaper and 10-times faster than TM’s existing RM199/month entry-level 10Mbps biz lite plan. In order to keep the price, TM will now have to upgrade speeds by more than 10-times.

“We believe that most of TM’s SME customers are on the RM329 per month biz pro plan (which we presume will see at least a 10x speed upgrade). If Maxis is also able to price attractively for 500Mbps-1Gbps packages, it may represent a risk for TM.

“We estimate some circa 20 to 25 per cent of TM’s unifi broadband subs are business customers (accounting for potentially circa 25 to 30 per cent of unifi revenue, if not more),” it added.

With Maxis’ deep discounted prices on its fibre broadband services, how will it affect its earnings?

According to AllianceDBS Research Sdn Bhd (AllianceDBS), in 3Q18, Maxis Home Fibre revenue increased by 14.3 per cent y-o-y to RM80 million on a higher subscriber base of 202,000 subs.

“We expect Maxis to record stronger net adds in the coming quarters, following the recent implementation of MSAP which saw the company reduce its fibre broadband pricing and garner over 40,000 sign-ups for its new packages,” opined.

Meanwhile, Kenanga Research commented that the introduction of Maxis’ RM89 per month (at half the previous gross price) unlimited 30Mbps plan has triggered some fretfulness among the fixed broadband players.

Nevertheless, it noted: “Despite escalating competition in the fixed broadband segment, we believe the current package prices are competitive enough and able to achieve the government’s agenda.

The likelihood of a full-blown price war is low at this juncture, in our view, as the industry players will still aim to preserve their margins.”

Axiata’s Celcom takes a step to reviewing its prices

For Celcom Axiata Bhd (Celcom), the company is making baby steps into reviewing its broadband plans by starting with its fibre broadband services in Sabah.

Celcom’s advanced broadband fibre service for homes and businesses in the Sabah community – Celcom Home Fibre and Celcom Business Fibre – has been enhanced to deliver more than double the speed of high-speed internet fibre connection service at affordable prices.

“Celcom is making broadband services more affordable by reducing its Celcom Home Fibre and Celcom Business Fibre prices by half, while offering more than double the speed for internet.

“We will continuously work towards expanding our fibre technology and high-speed broadband internet access for businesses and communities in both urban and rural areas, further upholding the government’s agenda for nationwide broadband penetration,” Celcom’s chief executive officer Mohamad Idham Nawawi said.

While not much has been revealed on why Celcom has expanded its broadband services in Sabah, analysts generally believe that Celcom’s parent group Axiata Group Bhd (Axiata) is on the right track to recovery.

Following the publication of its 3Q18 results, Kenanga Reseach commented: “Despite continued operational challenges, management’s long-term vision to become the next-generation digital champion by year 2021/2022 remains unchanged.

“However, in view of the rapid change in the global and national macro coupled with the local industry and regulatory factors, management has decided to emphasis on profitable growth as well as cash focus over the short-term (in two-year) period.”

It noted that key strategies include focus on profit growth relatively more than revenue or market share growth, spotlight on operating expenditure (opex) and capital expenditure (capex) efficiency, reprioritise/re-scope some investments with long payback, fund investments in new growth areas, mostly through strategic partnerships or financial investors (directly or indirectly), monetise existing investments for cash and validation, accelerate structural changes (that is industry consolidation, network sharing and productivity), as well as impair non-productive assets.

“While Celcom, XL and Robi shared their respective operational strategies, the key common approaches are to sustain and improve profitability via adopting a better capital management, monetise network investments and digitalise across functions and businesses.

“Besides, Celcom also shared its ambitions on cost optimisation with an aim to save circa RM900 million and increase its earnings before interest, tax, depreciation and amortisation (EBITDA) by 25 per cent over the next three years through investing in new network and digitalisation initiatives.

“All these strategies are set to drive structural changes in costs as well as generate further savings to Axiata moving forward,” it said.

The future of high-speed internet in Malaysia

Overall, while major telecommunications companies in Malaysia have announced a reduction in their fixed broadband prices, analysts still believe that the current broadband market is still unbalanced.

AmBank Investment Bank Bhd’s research team (AmBank) had noted that the Malaysian Communications and Multimedia Commission (MCMC) announced that four telecommunications companies have reduced their fixed broadband prices to below RM100/month, with some packages increasing speeds.

“Even with these lower priced plans, we note that the playing field is still uneven due to the different speeds offered under the operators’ packages.

“Also, the targeted market is different as Time DotCom and Celcom do not have the extensive nationwide connectivity of TM’s high-speed broadband network under Unifi. This means that consumers still are not able to switch fixed broadband providers in high-rise buildings, remote and rural areas,” it opined.

“We expect downtrading activities by consumers who are likely to opt for the lowest priced packages as the higher speed plans may not be necessary for the larger portion of the residential market.

“Hence, we view the lower fixed broadband prices as negative for the sector as higher demand from more affordable broadband prices will not be able to offset lower average revenue per user, which translates to substantial cuts in telco’s earnings prospects and lower reinvestment capability in rolling out fibre connectivity throughout the nation,” it added.

Meanwhile, to boost the digital growth agenda in Malaysia, the Federal government had recently announced the National Fibre Connectivity Plan (NFCP) during Budget 2019, with a RM1 billion allocation for 2019.

It also announced a target of 30Mbps for fixed broadband at affordable prices for rural and remote areas within five years and it had also stressed on the implementation of MSAP so broadband prices can be lowered by at least 25 per cent by the end of this year.

AmInvestment commented: “The government is already expected to fund up to RM1.1 billion for the RM1.8 billion High-Speed Broadband (HSBB) 2 and RM1.6 billion Sub-Urban Broadband (SUBB) projects which are being undertaken by TM over 10 years beginning in 2016.

“As the RM1bil new allocation for ex-urban connectivity is likely to be at least partially included in the HSBB2 and SUBB, the impact to TM is likely to be minimal.

“Other fixed broadband players such as Time DotCom and Celcom’s Sabah operations, which do not have a nationwide infrastructure, are not affected.

“Notwithstanding the budget’s neutral impact, sentiments on TM and Time DotCom remain negative given the government’s current aim to reduce fibre prices amid increasing competition with Maxis and potentially new entrants leveraging on the MSAP.”

The government is also in talks with several foreign companies to potentially allow them to offer broadband services in a bid to boost connectivity and spur greater competition in the country.

“The government is targeting to increase broadband coverage in populated areas by at least five-fold by 2023. The goal is for 98 per cent broadband coverage in populated areas by 2023 at a minimum speed of 30Mbps,” said the research team of MIDF Amanah Investment Bank Bhd (MIDF Research).

Overall, the efforts made by the Federal government can be seen as a step in the right direction as the World Bank had recommended that Malaysia’s policy objectives to be two-fold: enhance the quality and affordability of broadband services and improve access to ultrafast fixed broadband networks.

However, it also noted that to achieve these objectives, the government should consider using existing infrastructure more efficiently through regulatory action and closing remaining coverage gaps by creating the enabling environment to attract more private capital.

“These high priority measures are necessary to jumpstart the development of the ultrafast broadband market. Implemented correctly, they can reduce entry barriers for more investments and increase competitive pressure on the market,” it added.