Emerging trends in telecom Rohan Samarajiva, with contributions from team

24 August 2006, CFA/Amba Research

Agenda Introduction „ Next market „ Fixed-mobile convergence „ Spectrum management „ Local loop unbundling „

If I know the future . . . Why would I tell you? „ Why wouldn’t I run to my broker and convert that knowledge into value? „

„

I do not know the future.

But I do think about trends in a broad sense . . . „ „

Incomplete knowledge, scenarios . . . Based on ongoing research … LIRNEasia

and sister networks RIA! (Africa)and DIRSI (Latin America & Caribbean) … Other „ „

Observation of fact patterns Not very different from what CFAs do? … But

less emphasis on financials

So, what is the plan for today? Scenarios, based on incomplete evidence „ Discussion from multiple perspectives „ Hopefully leading to useful knowledge; new questions, if not new answers . . . „

„

Not very different from what we do at LIRNEasia everyday . . .

Agenda Introduction „ Next market „ Fixed-mobile convergence „ Spectrum management „ Local loop unbundling „

One starting point: 3G Dialog’s announcement „ First in the region, in 2006 „ Big fuss re 3G was around 2000 „ Problem? „

… 3G? … Region?

Products (services) succeed because they „

Fill a gap in the product space that needs to be filled … Gap

may have arisen “naturally” or been created

„

Gaps located in time and space …A

“window” that is open for a period of time and then closes

Importance of time „

The gap that existed in 2000 may have been filled/redefined by 2006 … GMPCS

(Iridium, Globalstar, ICO) aimed to fill a gap that was being filled fast by GSM Too slow to market „ GMPCS has become an appendage of GSM „ What is Globalstar? ICO? „

No universal answer for 3G „

Even if the window is closing in developed markets, not necessarily the case in emerging markets … Mature

markets have plenty of broadband connectivity at low prices … Emerging markets don’t have capacity even for a price

What does 3G offer consumers? „

Mobile voice and data?

What does WiFi offer consumers? „

Voice and data anywhere?

Who will win? „

In the hands of … Terminal

manufacturers … Regulators Freeing up frequencies „ Pricing „

… Innovators

in terms of price and availability

Watch Taipei WiFi story „ Major WiFi push in country with 2nd highest mobile penetration in Asia „

Telekom Malaysia affiliates: Growth in pre- and post-paid customers Sri Lanka Indonesia

Bangladesh

TM affiliates EBITDA & EBITDA margins Sri Lanka Indonesia

Bangladesh

TM affiliates’ monthly Average Revenue Per Users (ARPUs) Sri Lanka, Rupees Indonesia, Rupiah (‘000)

Bangladesh, Taka

Reality: Growth in prepaid almost swamping postpaid; ARPUs Î USD 5; EBITDA margins holding at around 5060% ARPU per month: Prepaid vs. postpaid Sri Lanka Prepaid

Sri Lanka Postpaid

Indonesia Prepaid

Indonesia Postpaid

B'desh Prepaid

B'desh Postpaid

0.00

5.00

10.00

15.00

20.00

25.00

30.00

USD

All TM data: http://www.telekom.com.my/about_tm/investor_relation/

What’s the next market? 3G for the rich? or „ SEC groups C, D and E? „

The next billion . . . . „ „

Their mode of access will be wireless They will for the most part be from the Asia Pacific … From

the emerging economies in the Asia Pacific: high growth in low-teledensity countries „

„

„

Pakistan and Bangladesh growing at above 100% a year now India has enormous potential; even if China’s rapid growth moderates, multiple millions . . . .

From among the poor in the emerging economies

Teleuse on a shoestring 1 „

LIRNEasia’s 2005 survey research project looking at persons with income < USD 100/month … In

2006-07, study will be conducted in 5 countries (India, Pakistan, Philippines, Sri Lanka & Thailand) „

„

Random samples drawn to represent financially constrained population in country Supplemented by diaries and focus groups

… Study

completed in 2005 in 11 locations in India (over 2000 respondents) and Sri Lanka (over 1000); six languages „

Exploratory; not representative of country

Screening questions „

Did you use a telephone in past three months? … Less

than 1% screened out in LK by this question … Less than 15% in India „

Monthly income less than USD 100

Many people do not own the phone that they use 100

Own

Don't Own

77%

76%

80

52% 49%

60

51% 49%

40

24%

23%

20 0 < USD50

USD50-100

< USD50

Sri Lanka

India

Sri Lanka What people own Landline Only

USD50-100

India

< USD 50 2

USD50100 20

< USD 50 19

USD50100 37

Mobile Only

21

28

3

8

Landline + Mobile

1

4

1

6

Phone ownership doubles in higher income groups

How do the financially constrained communicate? Fixed (49%)

21%

Mobile

2%

11%

(19%)

3% 3%

23% 37%

‘Public’ access

Base: 3199

(66%)

Getting connected: Financing fixed line connections Obtaining a fixed line: paying in slightly installments How respondent paid for fixed line harder in Sri Lanka connection Use of installment plans

100

100

80

80

60

% of owners

% of fixed line owners

Where owners got the money from

40

60

40

20 20

0 Sri Lanka

India

Had to get finance from somewhere else I had the money (or someone in my household did

Base: full sample: 847 SL: 212 India: 647

0 Sri Lanka paid full amount at once

India Paid in installments

Base: full sample: 847 SL: 212 India: 647

Reflects connection charges for fixed phones

Sri Lanka incumbent (min.) „ Sri Lanka entrants „

„

India incumbent

=

~USD 200

=

~USD 100

=

USD 16

Opposite case in mobiles: less people in India had money available for connection Where owners got money for the connection from 100

% of mobile owners

80

60

40

20 Base: full: 509 SL: 322 India: 187

0 Sri Lanka

India

Had to get finance from somewhere else I had the money (or someone in my household did

% of mobile owners

Getting mobile handsets: 10% got it free; 33% of Indians bought 2nd hand 100

80

60 Sri Lanka total India total 40

Bases: full:509 SL: 322 India: 187

20

0 bought it brand new bought it second hand received it as a gift / got it free

% of fixed + public access users who spend...

71% fixed + public access users spend USD12 Base Mobile users (Jaffna): 125

„

‘On average, around the world, people spend about 2-3% of their income on telecom’

Telecommunications Regulation Handbook, infoDev; module 6

Rural respondents: fixed phones more affordable; less likely to change use if price changed Perception of current costs

Base: fixed (only) users

High

80

Affordable

60 40 20 0 Sri Lanka Urban

Sri Lanka Rural

N India Urban

N India Rural

S India Urban

S India Rural

S India Urban

S India Rural

Change in usage if costs were halved W ill increase usage W on't change

80

60

40

20

0 Sri Lanka Urban

Sri Lanka Rural

N India Urban

N India Rural

•Reflects telecom/transportation trade-off •Access deficit charge in India ensures lower cost of rural fixed phones

Mobiles more costly; use would increase if costs halved; rural users less unhappy re cost Base: mobile (only) users

Perception of current costs 100

High

80

Affordable

60 40 20 0

Sri Lanka Urban

Sri Lanka Rural

N India Urban

N India Rural

S India Urban

S India Rural

Change in usage if costs were halved 100

Will increase usage

Won't change

80 60 40 20 0

Sri Lanka Urban Sri Lanka Rural

N India Urban

N India Rural

S India Urban

S India Rural

Reflects reasons for choice of mobile : convenience

In sum . . . „

Great majority approached were telecom users, though 58% used other peoples’ phones … Next

„

market; primed and ready!

Still mostly through public phones … Could

be Indian idiosyncrasy; new research may yield different results

„

Barriers to participation in market exist … Biggest

barrier is availability of service … Lower handset prices, better 2nd hand markets likely to accelerate ownership

In sum . . . „

Poor seem willing to spend more than the norm on telecom high in some cases (1/3rd of Jaffna respondents spend more than 12%) that questions being redesigned (income Î expenditure) … Rural perceptions of greater affordability … So

„

„

Telecom-transport tradeoff?

Demand aplenty; will policy/regulation & suppliers (service & equipment) respond?

Agenda Introduction „ Next market „ Fixed-mobile convergence „ Spectrum management „ Local loop unbundling „

Fixed-mobile convergence Are two products seen as substitutes by consumers? „ This is the key question, not what policy says or regulators do „

… Though

policy/regulation can affect the way people see products

India versus Pakistan & Sri Lanka „

India has announced license unification as policy … But

not all the pieces are in place yet, three years later … Yet major progress on substitution side „

Pakistan & Sri Lanka seeking to maintain differences through licensing and related actions

Prices „ „

Perception is that fixed and mobile have converged in India; not yet in Sri Lanka Most objective way of comparing is by use of baskets (OECD methodology) …

Problem: South Asian mobile use is much higher than in OECD … Therefore, we compare only the OECD high-user mobile basket (1800 mts/yr) v. fixed (1200 calls/yr or 4400 mts/yr) „

But, cost per call/minute may be more important psychologically than basket …

Will know when research is complete … Only preliminary results given here (suggestions welcome)

India Fixed - Residential Basket vs Mobile - Prepaid and Postpaid High User Baskets (Annual Totals) 1,200.00

1,000.00 16% cheaper than fixed

USD PPP

800.00

600.00

32% cheaper than fixed

400.00

200.00

-

Fixed

Mobile - Postpaid

Mobile - Prepaid

-

79.63

99.99

Usage

776.30

627.02

638.75

Rental

326.00

213.84

-

4.31

8.98

3.56

SMS

Connection

Connection

Rental

Usage

SMS

Comparison of Sri Lankan Mobile Prepaid and Postpaid Tariffs (Annual Totals) 1,000.00 900.00 800.00

USD PPP

700.00 600.00 36% cheaper

500.00 400.00 300.00 200.00 100.00 -

Mobile - Postpaid

Mobile - Prepaid

SMS

43.92

43.92

Usage

579.51

501.79

Rental

250.53

-

Connection

12.10

21.78 Connection

Rental

Usage

SMS

Counter-intuitive results According to OECD high-user comparison in USD PPP, IN fixed > IN postpaid > LK postpaid > IN prepaid > LK prepaid „ Unable to easily compare with LK fixed because of minutes bundled with rental „

IN & LK pre- & post-paid mobile: OECD high-user annual baskets compared 1000

900

800

700

USD PPP

600

500

400

300

200

100

0

IN Mobile - Postpaid

IN Mobile - Prepaid

LK Mobile - Postpaid

LK Mobile - Prepaid

Proof of the pudding . . . „

„

Nearly 90,000 BSNL subscribers have surrendered their connections in Calcutta between April and November. “Over three years, about 100,000 subscribers have surrendered their phones every year. This time, the number is even bigger,” a senior CalTel official said. “This is a worldwide phenomenon, the growth is in the mobile phone sector,” BSNL chairman and managing director A.K. Sinha said. He was in the city today to inaugurate an information and media centre at Telephone Bhavan and a customer service centre at Alipore. Sinha said across India, 25 lakh BSNL subscribers have surrendered their fixed phones till November. From Indian Telegraph http://www.lirneasia.net/2005/08/fixed-line-substitution/

No convergence in Sri Lanka? „

Sri Lanka is RPP, though a majority of incoming calls may not be charged … Fundamentally

different … Also, people believe mobile >fixed „

Perception matters . . . … Otherwise,

why would anyone buy a CDMA phone for LKR 7700 x 3 installation charge from SLTL? … But on the other hand, mobiles have fashion and status connotations (at least among the Indian poor?). ..

Reasons for choosing to use a mobile It improves my social status 80

Most economical way to receive calls

It is fashionable to use one

70

72

60

Most economical way to make calls

57 60

50

I can use value added services like SMS etc.

40 35

49

To control my communication expenditures

30

34

20

30

7

7

10 40

11 32

To save travel time and cost

It allows privacy

26

72 25

0

13

64

42

53

The connection is clear

41 57

48 59

It is the only available service/ No other choice

71

It is easier to use 57

67 78

I can use it while on the move

It is easy for me to access 79

I can use it at any time

Sri Lanka

India

www.lirneasia.net

Agenda Introduction „ Next market „ Fixed-mobile convergence „ Spectrum management „ Local loop unbundling „

Spectrum management Critical to everything in telecom „ Philosophical/technological issues „ Situation in Sri Lanka „

Big picture „

Old centrally planned and managed framework under threat from two directions … Property

rights and decentralized decision

making … Commons and unlicensing

Current regime is good for those who have frequencies „

Quasi property rights regime … Cannot

sell frequencies, but can sell the company with the frequencies to capture value „ „

(Lanka Bell with CDMA frequencies) – (LB without) = Value of 2.5 MHz of CDMA 800 But 200,000 new users

… Creates

solid barriers to entry … No incentives to increase efficiency of use … Downside is potential rent seeking from Minister down „ „

Well designed auctions can alleviate But not being adopted (why is 5th license USD 4m?)

President has ordered refarming, but not a change in paradigm „

Can be done … As

was done with CDMA 800 and GSM 1800 in 2002-05 Consultation papers „ Informed input „ Government officials educated on replacement costs vs depreciated costs „

Hypothetical refarming process Step

Main policy actions

Parallel policy actions

1

Government sets overall policy and authorizes negotiations with seven operators (O1 – O7)

2

System and frequency license modifications negotiated (Modifications include removal of technology restrictions from O1, O2, etc.; and may include extending license term of O4 (which will gain no benefits but has to yield frequencies)

3 & 3A

O4 and O5 release GSM 900 frequencies; O1, O2, and O3 will also be requested to agree to phased release of frequencies to enable overall ordering of the bands

1800 MHz Tender Board releases funds for band clearing (some 1800 MHz frequencies have been auctioned to GSM operators)

4 & 4A

O6 assigned GSM 900 frequencies & releases CDMA 800 frequencies

1800 GSM and 1900 CDMA bands fully cleared

5 & 5A

O1, O2, and O3 assigned CDMA 800 frequencies

Auction frequency slots that may be used for CDMA 1900 or GSM 1800 to current operators but possibly also to newcomers

Agenda Introduction „ Next market „ Fixed-mobile convergence „ Spectrum management „ Local loop unbundling „

Local loop unbundling „

Major regulatory issue … Go

too slow; new entrant voice and data providers will

die … Go too fast; network buildout will stall „

But how relevant in LK and similar economies? … Talk

„

to me after backbone access assured to all

Interesting twist in LK: who owns the SLTL local loop? … Customer

who paid distance-based installation

charge? … If yes, what is the problem?

More info: Rohan Samarajiva www.lirneasia.net (e.g., search “shoestring”) [email protected] (re shoestring1 or 2) [email protected] (basket methodology) [email protected]