Rapid transformation: The sector is swiftly moving on with new technologies

The telecommunications market in Thailand is one of the more complicated in the world. Because of its history and the way it evolved with changing technologies – and changing politics – a regulatory bottleneck formed that held back development and kept the market from advancing as fast as its regional competitors. However, despite complications in terms of spectrum and concerns about the competitiveness of the sector, telephony in Thailand has been healthy and growing for years. The country is now working its way through the tangle, and 3G and 4G are indeed coming. Early reports indicate the former is being adopted more rapidly than expected, and the near-term outlook is that the latter is going to be implemented very fast. Thailand, in telecommunications terms, is going from the back of the pack in the region to the middle of it and could soon be in a position to lead.

A Pivotal Event

The event on which the country’s telecommunications fortunes pivoted was the 3G auction of 2012. While the auction was delayed many times and was itself controversial due to its structure and a few last-minute changes, in the end it appeared to be a watershed event for not only the industry but also the country. Thailand had successfully held an international-standard spectrum auction, managing to finally get beyond the concession system, an imperfect fix that kept costs relatively high and created a set of incentives that impeded growth. While most of the market is still dealing with legacy complexities related to the concessions, going forward it is set for more steady and predictable development under a best-practice licensing system. “Today, the Thai telecommunications industry features the most complex environment in the world,” Settapong Malisuwan, vice-chairman of National Broadcasting and Telecommunications Commission (NBTC), wrote in the Journal of Advanced “The 3G auction concluded on 16th of October, 2012 was the first milestone towards transforming Thailand’s mobile telecommunication industry from a concessionaire regime to a more liberalised market-based licensing regime.”

Sector History

The unique history of Thai mobile telecommunications left it for many years in a bind. Thailand has had telephones since 1881 – with the Department of Posts and Telegraphs being formed in 1883 – and has at times been seen as regional leader in terms of reform of the sector. For example, the separation of telephone services from the post and telegraph services took place in 1954, with the creation of the Telephone Organisation of Thailand (TOT). The TOT and the Communications Authority of Thailand (CAT), established in 1976, were set up as the monopoly providers of certain telecommunications services in the country. The former took care of domestic services and connections to neighbouring countries (Laos, Malaysia, Cambodia and Myanmar) and a long list of telecoms services, ranging from telegraph and telex to mobile services, while the latter handled international calls, the post office and, like TOT, mobile services.

But in the early 1990s both providers found themselves short of cash and started to offer concessions to a number of providers of fixed-line and mobile services. These concessions were carried out under a build-operate-transfer model, whereby the operator would be able to run the transferred assets for a limited period of time.

Advanced Info Service (AIS), the country’s first mobile operator, received a 25-year concession ( originally 20 years in 1990 but later extended to 25 years) under which it paid a revenue-sharing fee of 25% to TOT, but no access fee (although the terms of the deal have been amended many times over the life of the concession). Total Access Communications (TAC), operating under DTAC brand name, received a 15-year concession from CAT (extended later to 27 years ending in 2018). Its revenue sharing was lower (20%), but it paid an access fee to CAT.

Meanwhile, Orange received a 16-year concession in 1999 from CAT, and the business went on to become a part of True. Other players along the way included Hutchison-CAT Wireless, which was eventually acquired by True; Digital Phone Company (DPC), which was acquired by AIS; and ACT Mobile, a TOT-CAT joint venture.

The Telephone and Telegraphs Act of 1934 stated that all telecommunications were the responsibility of the government, though private companies could make and sell relevant equipment. Later laws, specifically those creating the TOT and CAT, allowed for the signing of concession agreements.

The situation, however, contravened World Trade Organisation (WTO) commitments, and measures were taken to bring the industry in line with global norms. In 1997 the Cabinet agreed to fully liberalise the telecoms market, and a master plan was formulated. Article 40 of the 1997 Constitution also declared that the airwaves were the property of the people and could not be controlled by a government ministry, essentially putting an end to future concessions. The Operation of Telecommunications Business Act of 2001 repealed the 1934 law, but stipulated that telecommunications companies must be controlled by Thai nationals.

Towards Liberalisation

However, the existing concessions remained in place and the process toward liberalisation was slow. The National Telecommunications Commission (NTC) was formed in 2004 and the NBTC took over the responsibility for telecoms regulation in 2010, after the 2007 Constitution required a single regulator for both telecoms and broadcasting. While the regulators remained very much engaged in terms of pricing and details of the concession agreements, more than a decade passed without major a liberalisation. The 2006 WTO deadline passed, and while the government operators were technically privatised, they were not listed and remained 100% government owned. No new spectrum was added for more than a decade, the last being released in 2000, and the concession arrangements remained in place.

Most frustrating for the sector was the 2010 delay of the auction of spectrum at 2100 MHz. CAT argued to the Central Administrative Court that the 3G auction could not proceed because the NBTC had not yet been formed. The auction delay – it had been discussed since 2005 – led to some novel solutions for carriers eager to get more advanced services into the market. DTAC offered 3G at 850 MHz, while AIS was offering it at 900 MHz, both since 2008. TOT, meanwhile, started offering 3G in 2009 at 2100 MHz using W-CDMA/HSPA. But the lack of an auction of spectrum for 3G at 2100 MHz left Thailand without a full-fledged, state-regulated and approved 3G programme. Singapore and Malaysia, in comparison, have both had 3G since 2005. The less developed countries of the region are also ahead of Thailand in terms of 3G service. Cambodia has had it since 2006, Laos 2008 and Vietnam 2009. Even Myanmar will have 3G in 2014, with the relatively poor and until recently closed country almost as fast as Thailand in introducing the technology.

The concern is that the lack of full 3G has slowed the country’s overall economic development and that the concession structure was keeping the country from introducing the best available technology.

Cost Of Auction Delays

The National Institute of Development Administration, a Thai graduate university, estimated that the country lost between $4.12bn and $4.62bn because of the two-year delay in the auction. “Without concessions, Thailand would have had 4G a long time ago,” Narupon Rattanasamaharn, the senior vice-president of the regulatory division at the DTAC, told OBG.

At the last minute, the rules of the auction itself were changed. In August 2012 the NBTC reduced the maximum spectrum that could be won by a single bidder to 15 MHz, one-third of the total on offer. The set-up split the market evenly between the three dominant players. The commission vigorously defended the move, stating that it did so to prevent the creation of a duopoly. Prawit Leesatapomwongsa, a commissioner at NBTC, told OBG that another concern was also behind the move, and that it was as much an issue of technology as it was one of competition. One of the operators, TrueMove, argued that 10 MHz would not be enough spectrum to provide 3G services. Under the original plan it would have been possible for a bidder to be left with 10 MHz, potentially making it technically impossible for that bidder to provide 3G services.

Another concern was pricing. The reserve price was set low, at BT4.5bn ($147.2m) per 5-MHz slot despite independent assessments of BT6.44bn ($210.6m). Two of the three large operators just bid the reserve, while the other one offered 8% more. This sparked criticism, with Ministry of Finance officials and many others saying the process was flawed and that because of the low reserve price and the structure of the auction competition was limited. The NTBC countered that there was no evidence of collusion.

“The 3G auction last year was a significant move forward,” wrote Deunden Nikomborirak, a research director for economic governance at the Thailand Development Research Institute (TDRI), “although the auction, in my opinion, was more like a hand-out of the 3G licences as there was no real competition between the three contenders.”

Following The Guidelines

NBTC’s Settapong has noted in print that the auction adhered to international best practices, explaining that the International Telecommunications Union’s (ITU) guidelines on 3G auctioning were followed in order to achieve maximum competition and spectral efficiency.

The available total of 45 MHZ was divided into nine packages of 5 MHz to encourage smaller players to enter the bidding as well. Settapong added that a reserve price was set high enough to encourage the efficient and fair use of the spectrum, yet not so high that it discouraged the best companies from bidding. On the advice of academics, the commission went with a reserve price of some 70% of the estimated value of the spectrum being sold. The ITU, he said, advises that it is best to focus on qualitative aspects rather than on simply the total amount of money being raised.

In September 2013 the NBTC announced that the concessions of DPC and TrueMove would be extended for one year, from the original September 15, 2013 expiration dates. The move irked the TDRI and others, who said that it was probably unlawful, as the Spectrum Allocation Master Plan stipulates that spectrum must be returned to the NBTC for auctioning at the expiry of the concession. They also said that the delay was holding back the development of the country. The spectrum at 1800 MHz could have been auctioned off and used for 4G, but that process is at least a year off now due to the extension.

“It is not only not enough time, and it is not the pressure of the commercial operators, it is the question of if we auction this year, we would have only two 2G operators: AIS and DTAC. That is the main point,” said Prawit. “So some commissioners wanted to delay the auction.”

However, the NBTC has said it will go ahead with the auction of 4G spectrum as planned in late 2014. According to the commission, a total of 42.5 MHz of spectrum will be issued: 25 MHz at 1800 MHz (now being used by TrueMove and AIS’s DPC) and 17.5 MHz at 900 MHz (in use by AIS). The latter is not set to expire until March 2015, but the regulator believes it is needed for the provision of 4G services and should be auctioned. The winner could use the spectrum after the end of the concession in 2015. The NBTC will be advised by the ITU. FURTHER COMPETITION?: Prawit and his fellow commissioner Supinya Klangnarong said that the best solution to promote further competition would be to add a fourth operator. Until this happens, the market is not competitive enough, they contend. One idea, according to Supinya, would be to have TOT or CAT provide a basic telecommunications service so that there would be an alternative, utility-type provider to the giants.

Supot Tiarawut, assistant to the president at Chulalongkorn University and a former telecoms executive and former director at the TDRI, argues that the regulations favour the incumbents and that the regulator has been trying to get cost information from the companies for five or six years, but that it has so far been unsuccessful.

Health Expansions

Despite these issues, telephony in Thailand has been expanding for years, and the products themselves have enjoyed rapid expansion of use. The number of fixed telephone lines per 100 people grew rapidly from approximately 0.17 per 100 in 1965 to 10.8 per 100 in 2008, before falling back as mobile telephony took off.

Meanwhile, the mobile market started slowly, but then flourished after the concessions were introduced in the early 1990s, with the number of subscriptions per 100 people breaking 100 in 2010. Comparing these figures regionally, Malaysia went from 0.83 fixed lines per 100 in 1965 to a peak of 19.75 in 2000, and mobile phones per 100 broke 100 in 2008, while Singapore went from 3.11 per 100 in 1965 to a high of 49.7 in 2000 and broke the 100 per 100 mark on mobile subscriptions in 2005.

According to the NBTC, the country had 6m fixed-line subscribers, down from 7.6m in 2007, and 92.5m mobile subscribers at the end of 2013, up from 9.6m at the beginning of 2002. The new 3G services appear to be doing well. AIS reported in the third quarter of 2013 that it had 10.47m 3G subscribers at 2100 MHz, up from 3.95m the previous quarter. Its 2G subscriber base was down to 28.65m, from 33.72m in the second quarter. AIS says it will have all its 2G subscribers moved to 2100 MHz in about four months, ahead of the one-year deadline placed on it by the regulators. DTAC is hoping to have all its customers transferred by 2016, and said in June 2013 that 3.5m of its 26m customers had already asked to move. The operators are keen to get customers over to the newly available frequency because it lowers their costs, as they have to share revenue with CAT or TOT under the concessions.

Prior to the new licences, AIS (together with DPC) had 42.81% of the 2G/3G market, DTAC had 28.68% and TrueMove (including Real Move) had 26.07%, according to NBTC. A number of other players had small slivers of the market. CAT Telecom had a 0.97% market share in the 2G/3G category, while a few companies offered limited 3G services at 1900 MHz. TOT had approximately 47,000 subscribers on that frequency and a number of mobile virtual network operators under TOT had together around 120,000 subscribers, including i-Kool, 365, i-Mobile 3G, IEC 3G and MOJO 3G.

Foreign Investment 

The foreign ownership laws in telecommunications have progressed over time in line with the country’s WTO obligations. In 2006 the limit on non-Thai ownership in local operators was raised to 49% from 25%.

However, matters related to ownership appear to be unresolved. While True Corporation is a Thai-owned and controlled company – with the CP Group owning the majority (64.26%) of the shares outright and the CP Group controlled 91.65% by the local Chearavanont family – the other two major operators have more complicated pedigrees. The Norwegian multinational Telenor owns approximately 62% of DTAC through a complex structure of direct and indirect ownership. Telenor Mobile Communications fully owns Telenor Asia, which has a 42.6% share in DTAC. Telenor South East Asia Investment is also fully owned by the parent, while it has 49% stakes in three companies which together give Telenor 22.43% of DTAC. Bualuang Securities calculates that this leaves Telenor with around 62.07% of DTAC.

AIS has a similar structure to DTAC. Singapore Telecommunications (SingTel) has 21.27% of AIS, while Temasek, which controls SingTel, owns an estimated 54.9% of Shin Corp, which in turn owns 40.45% of AIS. As with DTAC, the foreign shareholder has both a direct and an indirect holding, which results in a majority, but which does not appear to give it actual voting control. In the case of AIS, Temasek owns 41.6% of the shares and 49% of a company which holds a 13.3% share in the operator.

Thailand is starting to take a closer look at these shareholdings. In 2011 the NBTC issued foreign dominance notification rules that require local telecoms firms to police their shareholdings and certify that they are not controlled by their foreign owners. While the 49% limit has not changed, the concern has been that complex structures are being used to follow the letter but circumvent the spirit of the law. A list of prohibitions is included to prevent the utilisation of workarounds. Nominees, for example, are strictly forbidden, and the use of preferential shares to gain extra voting rights is not allowed. In addition, the foreign shareholders cannot gain control by choosing top management or through financial engineering that employs loans, credits or guarantees. They are also prohibited from using intellectual property rights to transfer value from the Thai entity, writing procurement or management contracts or creating joint venture structures to transfer expenses or benefits to the foreign entity. DTAC filed a suit against the regulator claiming that the law does not empower the NBTC to make such rules.

Challenging Times

As in most telecoms markets, average revenue per user has dropped considerably over the years, falling from BT449 ($13.70) per user per month in 2004 to a recent low of BT187 ($6.10), according to figures from the NBTC. Fixed-line average revenue per user in 2013 was around BT380 ($12.40) per month. The NBTC is working to keep pricing low. It set a BT0.99 ($0.03) limit on per-minute 2G charges in April 2012, under maximum rate of service fee for domestic mobile voice service notification, and has sought to reduce charges by around 15-20% as 3G services are introduced.

The political unrest that has affected the country in recent years has had an impact on the business of the operators, according Asia Plus Securities. The company anticipates that fourth-quarter 2013 voice revenues at AIS were up only 1.6% over the third quarter in part due to the troubles. However, the brokerage is optimistic about the future. While the firm is facing heavy investment, transition and promotion costs due to the new 3G services and the phasing out of 2G, Asia Plus believes these costs will be more than balanced by the lowering concession fees paid to TOT for use of spectrum. It is also expected that the introduction of a new iPhone model will result in a surge in equipment sales, rising an estimated 75% quarter-on-quarter for AIS.

DTAC has also been facing headwinds. Consolidated revenue from the sale of telephone services in the third quarter of 2013 were down to BT19.1bn ($624.6m) from BT19.4bn ($634.4m) a year earlier, though sales of telephone sets and starter kits increased to BT2.2bn ($71.9m) from BT1.7bn ($55.6m). Overall profits were also down. In the third quarter, subscriber growth slowed considerably.

The company added only 239,424 new subscribers compared with 1.75m a year earlier and 622,901 in the second quarter of 2013. Subscribers at the end of the third quarter totalled 27,470,883.

True Corporation has been facing the most challenges. In the third quarter of 2013 the company’s consolidated revenues fell to BT15.5bn ($506.9m) from BT21.9bn ($716.1m) a year earlier, while consolidated losses widened to BT6.3bn ($206m) from BT2.4bn ($78.5m). In late November 2013 Moody’s downgraded the company to “B3” from “B2” and placed all of its ratings under review. While the agency cited the lowering of concession payments as a plus, it noted that increased competition in 3G and a rapid decline in 2G earnings will keep the pressure on margins. It added that the need for capital expenditure will strain the company’s balance sheet.

In an attempt to shore up its balance sheet, True launched an infrastructure fund, the True Telecommunications Growth Infrastructure Fund in 2013. The fund includes a range of assets: 11,845 telecom towers, 52,362 km of fibre-optic network and 1.2m broadband service ports. In selling the fund, the company raised a total of BT58.81bn ($1.8bn) in December in the country’s second-largest initial public offering ever. Jasmine International is also considering an infrastructure fund.

Outlook 

The outlook for the sector is more positive than it has been in years. Given the 3G auction and the bright prospects for 4G, companies are set to see their businesses improve, and customers will likely benefit from better performance. The regulator is likely to keep a close watch on pricing and will have to make sure that the small number of players does not result in consumers paying too much for services, while at the same time allowing the firms to earn enough from their basic business to make the necessary investments in new infrastructure.