Despite major changes Malaysia telecoms sector has maintained stability

The past two years have been somewhat trying times for the country’s telecoms companies, which have had to be adaptable enough to adjust to changing economic, market and regulatory conditions. A handful of knotty issues have converged to make market conditions and competition intense. However, there is light at the end of the tunnel as the sector appears to be preparing for a more stable period, and ongoing work on coverage, capacity expansion, modernisation and infrastructure-sharing agreements are beginning to yield net benefits for all.

Regulator

The telecoms sector is regulated by the Malaysian Communications and Multimedia Commission (MCMC). In November 1998 two pieces of legislation were enacted that created the foundations of the current regulatory model. These were the Communications and Multimedia Act, which set out a new regulatory licensing framework for the industry, and the Malaysian Communications and Multimedia Commission Act, which created the MCMC. The MCMC’s regulatory framework was built on 10 national policy objectives covering economic, technical and social regulation, as well as consumer protection. The MCMC also acts as the regulator for postal services and digital signatures.

Foreign companies looking to invest in the telecoms sector are allowed 100% foreign equity participation in applications service providers. However, a limit of 70% foreign participation remains in effect for network facilities providers and network service provider licences, and there are restrictions on foreign ownership allowed in Telekom Malaysia (TM). Norway’s DiGi and Singapore’s U Mobile are currently the only foreign firms operating in Malaysia’s telecoms sector.

Looking at domestic telecoms expanding outside the country, Axiata Group, which is already present in eight countries, announced the addition of a ninth in December 2015 with its expansion into Nepal. Axiata acquired an 80% stake in Nepal’s foremost mobile operator, Ncell, for $1.37bn. Ncell has some 13m subscribers, equalling a 48.8% market share. The acquisition is expected to contribute 9% to Axiata’s revenue and 19% to its profit after tax and minority interest, making it one of the group’s biggest earnings.

Mobile data consumption charges and international bandwidth connectivity charges are relatively high in Malaysia. Mobile coverage in the country’s urban areas tends to be good, but rural areas still suffer from poor coverage. As part of its remit, TM is in charge of tackling the gap in coverage between rural and urban areas. Projects designed to expand high-speed broadband and suburban broadband are therefore being carried out to increase speeds (see IT Overview).

Spectrum Reallocation

In February 2016 Prime Minister Najib Razak announced a spectrum reallocation of the 900-MHz and 1800-MHz bands in an effort to create a new revenue stream to supplement shortfalls from the oil and gas sector. As part of adjustments to the 2016 budget, Halim Shafie, MCMC chairman, announced the 900-MHz and 1800-MHz spectrum bands would be reallocated among the country’s four telecommunications companies (telcos): Maxis, DiGi, Axiata’s Celcom and U Mobile. The right to use a higher quota of the 900-MHz spectrum is valuable to telcos because a lower-frequency bandwidth enables them to expand their coverage.

Up to this point, Maxis, DiGi and Celcom had 50 MHz each of the 1800-MHz spectrum. DiGi had 4 MHz of the 900-MHz band, compared with Celcom’s 34 MHz and Maxis’ 32 MHz, while U Mobile did not have any spectrum in either of the two bands. Clarifying the reasoning for the spectrum reallocation in the MCMC’s statement to the press, Shafie said, “The reallocation takes into account the development of the sector and the nation as a whole. Specifically, a high priority has been put on communications coverage, quality of service and affordability of services.”

Licences will have a 15-year term and an as-yet-undetermined upfront fee will replace an annual apparatus assignment fee. While the amount of the fee is being determined, telcos will be allowed to make payments in phases so they can roll out services without passing the cost on to customers. This system was meant to allay concerns that telecoms fee payments could affect the roll-out of 4G services and dividend payments.

DiGi was allocated spectrum of 2x5 MHz of the 900-MHz band and 2x20 MHz of the 1800-MHz band, while Maxis’ spectrum allocation was reduced to 2x10 MHz of 900 MHz and 2x20 MHz of 1800 MHz. U Mobile was allocated 2x5 MHz of 900 MHz and 2x15 MHz of 1800 MHz, and Celcom’s spectrum was reduced to 2x10 MHz of 900 MHz and 2x20 MHz of 1800 MHz. The MCMC will issue the new frequency assignments by August 2016, and full implementation is expected by July 2017. The MCMC also said it will study possible changes to the 700-MHz, 2300-MHz and 2600-MHz spectrum bands by the end of 2016.

Increased Competition

TM, the country’s leading fixed-line and broadband player, is planning to re-enter the mobile market after a nine-year absence. Laying the groundwork for this in October 2014, it acquired a 55.3% stake in WiMAX-based operator Packet One Networks (P1) for a price of RM350m ($86.66m), further upping its stake in February 2016 to 72.9%. P1 plans to roll out mobile 4G LTE service in 2016. The other four major telcos – Celcom, DiGi, Maxis and U Mobile – are keeping their eyes on this development. TM has all the hallmarks of a heavy-hitter, with deep pockets for investment, an existing consumer base of 3.5m, a strong market presence, an international gateway, a fixed network and other back-haul fibre connections.

The TM-P1 entity’s combined spectrum assets include TM’s existing 10 MHz and 8.5 MHz in the 850-MHz and 450-MHz bands, respectively, which could be re-farmed for 4G LTE. P1 has 50 MHz in the 2300-MHz and 2600-MHz bands, and 30 MHz and 20 MHz in the 2.3-GHz and 2.6-GHz bands, respectively. P1’s 2300-MHz band was used to deploy WiMAX and its 2000 WiMAX sites are mostly LTE-ready. P1 plans to use its 2600 MHz TD-LTE spectrum for its LTE roll-out if it receives approval from the regulator. TM-P1’s low- and high-band spectrums are likely to enable them to build a dominant network with the gold standard of good coverage and high capacity.

In a move seen as testing the waters, TM ventured into select areas of the wireless space with its TM go service in August 2014. If all goes to plan, TM could have a “seamless network capable of supporting all customers anytime, anywhere, with any device” within three to five years, according to research from Malaysian financial services group CIMB. Indeed, CIMB sees TM’s takeover of P1 as a “credible threat” in the mobile market.

Big Three Results

The first nine months of 2015 presented Celcom, DiGi and Maxis with a challenging operating environment, in which the sector as a whole recorded declines in both revenue and earnings, in part because of the introduction of a goods and services tax in the first half of 2015, as well as intense price cuts. Operators were forced to minimise costs in order to preserve margins given their inability to increase prices. Competition among the telcos has remained intense. Maxis is attempting to capture a bigger slice of the prepaid worker share, while Celcom is still trying to regain the market share it lost as a result of a major system fault during an IT transformation programme gone awry in 2014.

By mid-2015 Celcom had 12.34m subscribers, closely followed by Maxis with 11.95m revenue-generating subscribers and DiGi with 11.67m subscribers. Of the three telcos, DiGi is perceived as the most vulnerable to impacts from intense competition for subscriber market share. In the third quarter of 2015 DiGi and Celcom both had flat prepaid average revenue per user (ARPU) on a quarter-on-quarter basis, at RM38 ($9.41) and RM32 ($7.92) per month, respectively, while Maxis’ prepaid ARPU increased by RM2 ($0.5) to RM35 ($8.66) per month. Research house AmResearch expected DiGi to be stressed to maintain its higher ARPU as the three telcos struggle to poach market share. DiGi also appears to be losing foothold in the post-paid segment. Its third quarter 2015 post-paid ARPU slid RM1 ($247,535) even as subscribers rose by 5000 to 1.8m.

Sector Income

The surprise comeback in the second half of 2015 came from Celcom, which fought to recover the 1.2m subscribers it had lost between the second quarter of 2014 and the first quarter of 2015 due to the IT mishap and floods at end of 2014. For the first nine months of 2015 Maxis, Celcom and DiGi’s combined revenue totalled RM17.15bn ($4.25bn), a marginal decline from the RM17.27bn ($4.27) reported for the same period in 2014. Service revenue, which does not include revenue from the sale of devices, totalled RM15.92bn ($3.94bn) for the three telcos, down slightly from RM16.01bn ($3.96bn) in the previous year. Maxis excelled with a 44.8% share of all post-paid revenue, whereas DiGi led prepaid revenue with a 36.7% share.

Meanwhile, net profits in the first nine months declined for all three operators: Maxis was down 8% and DiGi fell 9%, while Celcom plummeted 22%. The lower profits were blamed on intense competition among operators, the weak ringgit, lagging consumer sentiment and depreciation from the implementation of network expansions. Despite the lower profits, the telcos added 110,000 new customers for the quarter ended September 30, 2015 over the same quarter in 2014. Maybank Investment Bank’s research house, Maybank IB Research, said in a March 2016 report that it sees U Mobile as the main disruptive threat to the sector in 2016. “U Mobile has continued to launch products with aggressive pricing and features,” according to Maybank’s report. Known as “the data-centric telco,” U Mobile’s new spectrum allocation is expected to enable it to compete better with the big three. Yet the fourth quarter of 2015 proved to be another difficult quarter, as the big three telcos posted net profits below expectations and decreased full-year service revenue for a second consecutive year. In addition, depreciation, interest expense and taxes were higher than expected, lowering net profits overall.

The country’s fixed-line operators fared somewhat better. TM’s annual results for 2015 were in line with expectations, with revenue growing at 4.3% year-on-year (y-o-y) to RM11.72bn ($2.9bn). Yet in common with the other operators, it saw profits fall 11.7% y-o-y to RM166.8m ($41.29m) in the third quarter of 2015, which it blamed on exchange rate losses and higher tax charges. TM’s fixed-line customers declined 1.1% to 4.2m y-o-y in the third quarter of 2015. Time dotCom performed also above expectations with y-o-y revenue growth of 14.4% by the end of December 2015 and net profits of RM463.38m ($114.70m).

Investing In Infrastructure

Even in the face of this taxing environment, the three mobile operators have continued to prioritise investments in network coverage and infrastructure improvements. With an eye on the country’s growing smartphone penetration rate – 71% of Malaysians own a smartphone, according to a joint survey by Google and Germany’s TNS Infratest – each telco is striving to become the 4G service provider of choice. During the first nine months of 2015, the three telcos together spent a total of RM1.95bn ($482.69m) on capital expenditure, a 14% increase over the RM1.7bn ($420.81m) they had spent in 2014.

According to CIMB’s report, telecoms’ capital expenditure rose 1.2% y-o-y in 2013 and 9.9% y-o-y in 2014, and is estimated at 14% in 2015, as well as expected to reach 13.2% y-o-y in 2016, as the operators carry out works including network coverage and capacity expansion and modernisation, as well as making upgrades to their IT systems. CIMB expected operators to continue fiberising existing and new sites to deliver faster 4G speeds and support growth in customers’ use of data.

During the third quarter of 2015, Maxis alone spent RM359m ($88.87m) in network improvements and expansions. The telco now claims its 4G LTE coverage extends to 55% of the population, with 95% coverage in key markets and 60% in state capitals. Meanwhile, DiGi claimed its 4G LTE network reached 50% of Malaysia’s population and was available in 28 major cities and secondary towns nationwide, with an average 80% population coverage in key market centres.

Smartphones Rule

Mobile penetration in the country is very high at 140% (the equivalent of 1.4 phones per person), according to 2014 data from On Device Research. On Device also found that smartphones were the device of choice Malaysians use to connect to the internet. In the second quarter of 2015 the cellular penetration rate per 100 inhabitants had risen to 148.3, according to MCMC statistics. Indeed, smart data platform Vserv’s 2015 “Smartphone User Persona Report” for Malaysia found that the country’s smartphone user base has been growing at a 10% compound annual growth rate between 2013 and 2017. Furthermore, a key sought-after demographic, Malaysians who are younger than 30 years of age, account for some 64% of all smartphone users. According to On Device Research, users spend an average of three hours a day on their smartphones, the highest rate in South-east Asia. Devices that run Android operating systems dominated, at 65% of the smartphone segment, followed by Apple’s iOS and Microsoft’s Windows at 13% each, with Blackberry trailing at 9%.

Network Sharing

With revenues down and competition growing fiercer, in January 2016 Celcom and TM-P1 announced two network sharing agreements that should help the telcos achieve better roaming and coverage, as well as LTE coverage at a lower cost. This is a strategy that sector consultants have urged the MCMC to pursue for the entire sector as it faces low subscriber growth, declining ARPU, and pressure on earnings before interest, tax, depreciation and amortisation (EBITDA). Network sharing has been well tolerated in other countries’ telecoms markets that are at a similar state of growth as Malaysia’s, such as T Mobile and 3 UK in the UK, Cingular and T Mobile in the US, and Telia and Tele 2 in Sweden.

One network sharing agreement has Celcom extending its partnership in TM’s Next-Gen Back-haul service in order to accelerate Celcom’s 4G LTE coverage through TM’s current fibre network. In addition, Celcom signed up to be P1’s domestic roaming partner for P1’s new mobile 4G LTE service. This will provide P1 customers with nationwide coverage similar to that of U Mobile’s Domestic Roaming arrangements with Celcom and Maxis, which cover areas where U Mobile’s 3G and 4G sites are currently unavailable. If these sharing agreements prove to be successful, they will likely become a firm trend as the telcos look to each other for help in raising revenue and lowering investment costs while at the same time waiting for TM to enter the market.

Outlook

The general outlook for telcos in 2016 is one of flat revenue and EBITDA amid a challenging operating environment. Monetisation will remain a crucial issue, with poor consumer sentiment and a weak ringgit contributing to compressed bottom lines. All three major players have signalled that they will price products rationally to compete in 2016, and customers should therefore be able to take advantage of good deals even as spending power is weakened by slower growth in incomes. Many are hoping 2017 will offer more stability, or at least more visibility. By that year, the spectrum re-allocation should be completed, and the amount of fees each telco must pay should be established. In addition, the effects of TM’s entrance into the sector will likely have been included in forecasts and expectations, so that, when that occurs, each telco will be in a position to evaluate how it fits into the new scheme of things.