Rapid development in ICT leads to intense competition in Thailand

The Thai telecommunications sector is continuing to develop rapidly. Following the historic auctions of 2015, 4G services are quickly being deployed and subscribers have migrated to the new technology. Content and value-added services are being offered to fill the newly available bandwidth, while the sector is becoming more data-centric. Operators are now testing advanced, next-generation technologies, while the regulators and carriers are looking towards the future and the implementation of 5G services; Thailand is already running 5G trials with the help of global industry leaders.

In the background, metrics have started to tick up after a long, slow decline over a number of years, with average revenue per user (ARPU) on a clear firming trend. Customers in the country have shown themselves to be keen adopters and active users of new technologies. In recent years, Thailand has become known as the smartphone capital of South-east Asia and is a leader in terms of time spent online on handsets.

Despite the strides being made, there is still cause for caution. The exit of Jasmine International from the 4G market after failing to pay a deposit for the bandwidth won at auction has left the sector with only three major players. It was hoped that having four carriers competing in 4G would create a healthier market. Additionally, the cost of 4G is also a concern. Capital committed at the auctions and money spent on promotions to attract new customers have left some players scrambling to shore up their balance sheets. Generally, while interest is high, consumer demand appears to be flagging, with some indicators of usage starting to decline. Services in the market are, at times, failing to live up to their advertised performance numbers.

An Early Start

The first telephone was brought into Thailand in 1881, only five years after Alexander Graham Bell’s 1876 invention. The original line went from Samut Prakan to Bangkok to transmit news of incoming ships. A telegraph department was then established in 1884, and was followed by a public telephone system with 60 subscribers, which was introduced in 1888. A telephone exchange was developed in 1907, while long distance service was brought to the market in 1928. In 1937 direct dial was made possible, with connections being made with the use of five-digit numbers.

Regulation

The Telephone Organisation of Thailand – now known as TOT – was formed in 1954 with a remit that covered the provision of telephone services in the Bangkok area. The Communications Authority of Thailand (CAT), now known as CAT Telecom, was then established in 1977 to oversee international telecommunications and the post office.

Mobile phone services were introduced in 1986 when TOT rolled out a Nordic Mobile Telephone 470 system. The following year, CAT started offering its own services by utilising Advanced Mobile Phone System (AMPS) technology. Despite early cellular adoption and the liberalisation of the sector, anomalies of the law resulted in a less-than-ideal structuring of the sector. Government ownership of telecommunications assets was required, but the state entities did not have the financial strength to fund the roll-out of mobile networks. Concessions were thus granted to operators, starting in 1990. Under these agreements, infrastructure was privately developed on a build-transfer-operate basis, with operators sharing revenue at the rate of 20-30% for a set period of time outlined in the contract.

Tough Transition

While the workaround allowed the sector to grow without a major change to the law, it had the potential to lead to instability towards the end of the concession periods. The agreements expired starting in 2013, and operators faced significant continuity and planning issues. Spectrum allocations and auctions had to be timed so that the market would not be caught short. Critics also note that the effective prices being paid by operators for the use of spectrum was relatively high. Recent history suggests that concerns about the transition were justified, with new spectrum coming out barely in time to cover the end of the concessions. The 3G auction was also problematic. It was repeatedly delayed; talk of the sale began in 2005, but it was not actually held until 2012 (for a 2013 roll-out of services). It was also marred by the fact that only three companies bid (AIS, True Corporation and DTAC) and they only paid slightly above the reserve price.

Normalisation & End Of Concessions

The introduction of 4G went more smoothly than that of 3G. Like the 3G auctions, the sale of spectrum for the next-generation technology was delayed several times, but only for two years. The 4G auction was also seen as more competitive, with four bidders, and high prices. In the November 2015 bidding round, AIS and True Corporation won licences for 4G on the 1800-MHz spectrum. A month later, licences for 4G at 900 MHz were awarded to True Corporation and Jasmine International.

Importantly, the sales demonstrated the commitment to moving the sector rapidly from the awkward concession system to a more straightforward and internationally accepted method of utilising spectra. Two major sets of auctions within the space of just over three years have built confidence that the country will be able to stick to a schedule of predictable and fair bidding. Concern had been building that regulatory bottlenecks had left Thailand behind the technology curve – even trailing some of the less-developed nations in the region – but those fears have all but vanished with the successful 4G auction.

Nevertheless, not all went as hoped. In early 2016 Jasmine International was forced to exit the race for 4G services after it failed to make a required payment. It had been due to make an initial transfer of BT8bn ($225.4m) of its BT75.65bn ($2.1bn) bid on March 21, 2016 and provide bank guarantees for the rest. Jasmine International’s exit and the failure of DTAC to gain a licence left only two winners in the 4G auction market: AIS and True Corporation. In May 2016, AIS bid BT75.65bn ($2.1bn) and won the last 4G licence in an uncontested auction held to sell the licence forfeited by Jasmine International. DTAC’s situation is potentially worrisome. Its concessions at 850 MHz and 1800 MHz end in 2018, which will leave it with only one licence at 2.1 GHz. As the end of the agreement approaches, the company risks losing the confidence of its customers. However, DTAC insists that continuity will not be a problem. While the company recognises that it could be in a bind, it is optimistic that opportunities will arise in the future that will allow it to deliver an uninterrupted service at the current levels. Given the desire for competition, it is reasonable to assume that the authorities will want to make it possible for DTAC to remain a competitor. In some ways, missing out on the previous auctions might work in the company’s favour, as prices paid for the 4G spectrum were very high.

Financial Questions

Analysts believe that telecoms operators will face challenges because of the cost of investment in licences (Thailand’s rate per MHz being among the world’s highest), new infrastructure and the shutting down of 2G networks. Not only did the companies have to buy spectrum, build towers and install new base transceiver station equipment, but the transition to 4G was marked by an unprecedented round of handset give-aways to attract subscribers.

The operators have been competing fiercely to take ground, and in early 2016 credit rating agency Fitch issued a note saying that it continued to have a negative outlook on the sector due to intense competition, despite the exit of Jasmine International from the market. What has transpired has come as a surprise. Analysts had expected competition to increase for a time, but they had anticipated a lessening of intensity after the awarding of 4G licences. That did not happen, and competition remains much as it was before.

“The market cooled down when 900-MHz licences were awarded, but didn’t stay that way,” said Prasit Sujiravorakul, an analyst at securities company, Bualuang Securities. “Competition is still intense.”

Operational Costs

The companies themselves are starting to note the effects of high costs. AIS said in early 2016 that its full-year earnings would come in lower than expected due to the high levels of capital expenditure required for building out its 4G network and moving customers off of 2G by subsidising new handsets. The company was aiming for 10m 4G subscribers by the end of 2016, up from 7m in early 2016, with the total 4G coverage reaching 80% of the country.

While Fitch affirmed the company’s rating with a Stable Outlook at the end of 2016, it did so with a number of caveats. The agency noted the operator’s free cash flow would turn negative as a result of the heavy investment required for the 1800-MHz and 900-MHz bands. It also expects leverage to increase.

True Corporation is seen as having made a particularly sizeable gamble on 4G, as it bought two of the four available 4G licences. It is estimated that the cost of the licences will bring the company back into the red after having been pulled to profitability with the help of a 2014 investment by China Mobile (and the resulting paydown of debt). In early 2016, True Corporation said it would raise BT60bn ($1.7bn) in a rights issue to help pay for its 4G service. However, True Corporation is seen as doing somewhat better than the others as it focused on convergence early on.

In July 2016 Fitch issued a note on DTAC forecasting that the company’s service revenues would drop slightly in 2016 on intense competition and that the two other carriers were taking back market share. In the midst of these concerns about operating costs, operators are increasingly looking to compete on service quality and a broader content offering rather than price. The hope is that this will result in a stabilisation of margins.

Mixed Signals On Usage

Larger, structural issues are also affecting sector operators. Over time, they have found themselves to be in an unenviable position, acting as little more than pass-throughs for large, global players such as Netflix and YouTube, and competing directly with the likes of Facebook and Amazon. The carriers are responding by moving to more data-driven models and offering packages that cater to new usage patterns. These packages often include large data allocations and free access to a variety of streaming services.

Sector statistics are mixed to positive. Cellular subscriptions per hundred dropped for the first time ever in 2015, from 144.5 to 125.8. ARPU is far below its historical highs but has started to rise again. It dropped from BT602 ($17.96) in 2002 to a low of BT196 ($5.52) in 2014, then rebounded somewhat to BT231 ($6.51) by 2016. Revenue per minute has started to climb again as well. This dropped as low as BT0.41 ($0.012) in 2014, down from BT0.72 ($0.020) in 2011, but the rate has increased back again to BT0.45 ($0.013). In 2015 non-voice revenue surpassed voice revenue for the first time, while the rates achieved by all three carriers have started to converge in recent years.

Thailand is seen as a leader in mobile internet usage, with the average amount of time spent online via mobile phone standing at four hours per day. An estimated 74% of the country instant messages on a daily basis, compared with 55% worldwide. Half of Thailand connects with Line, while half of all online purchases are done via mobile devices and one-third of all e-commerce purchases are done via Facebook or Instagram. Forecasts suggest that Thailand’s e-commerce market will triple in size between 2016 and 2020.

Some companies are seeing the opportunity for value-added offerings. Music services in particular are gearing up for the increased bandwidth being brought on by the arrival of 4G. Companies active in the subsector include Deezer, Joox and YouTube (Line had entered the music streaming business in Thailand but quickly exited). For value-added players, the plan is to transition from ad-based models to subscription-based ones.

Smartphone Capital

Thais spend an average of 105 minutes a day watching video on their smart-phones, according to Facebook. That is the highest level in the world and far above the global average of 65 minutes. Smartphone penetration in the country is estimated to be about 32% of the population, and that number is predicted to rise to 40% by 2021. Because of the high usage and fast growth, Thailand has been dubbed the smartphone capital of ASEAN. Samsung has an estimated 40% of the smartphone market, followed by Apple with 15%. The country is Samsung’s largest market in South-east Asia for smartphone sales. Overall, the handset market grew by only 2% in 2016, while the major brands suffered falls in sales volume as Chinese brands, such as Oppo, Huawei and Vivo, pushed aggressively for a share.

Oppo, which came to Thailand in 2008, says that it is working to localise its products so that it can compete directly with the major players, such as Samsung. It will be offering a smartphone specifically designed for the Thai market in early 2017. In the third quarter of 2016 the company was ranked number three in the Thai smartphone market, with a share of 12-13%.

Competition in the Thai smartphone market is so intense that Japan’s Sharp decided to exit altogether. Some claim the market is mature already. The replacement cycle has lengthened from 12-18 months to 18-24 months. Low-end phones, retailing for under BT5000 ($140.86), lead the market with a 40% share. Mid-tier phones, running from BT5000 ($140.86) to BT15,000 ($422.57), make up another 40% of the market.

Deals & Bandwidth

The bandwidth situation remains unsettled. True Corporation and AIS subsidiary DPC had concessions that expired in 2013 for 1800-MHz services. AIS’s 2G concession at 900-MHz ended in September 2015, though it was extended through late 2016. In late 2016, AIS signed a six-month roaming agreement with TOT for use of capacity on its 2. 1-GHz spectrum. AIS is paying a monthly fee of BT325m ($9.7m) for the right. If the two agree, the programme will be expanded, with AIS paying BT3.9bn ($109.9m) to TOT for the right to use 80% of the 2.1-GHz capacity.

In 2015 TOT received permission to develop 4G services at 2.3-GHz, but in August 2016 the National Broadcasting and Telecommunications Commission (NBTC) said that it was not impressed with the proposal submitted by the state company. It noted that the plan lacks detail and is excessive, envisioning the utilisation of the full 60-MHz of spectrum for the service. TOT has until the end of 2017 to prepare an acceptable proposal, otherwise it will lose the bandwidth.

In early 2017 DTAC said that it was holding discussions with TOT about a partnership to provide broadband services at 2.3 GHz. The year before, the regulator had rejected DTAC’s attempt to utilise unused CAT Telecom spectrum at 1800 MHz, stating that it would be in violation of the company’s concession agreement. Later in the year the NBTC said that in July 2018 it would be re-auctioning 45 MHz of 1800-MHz bandwidth currently being utilised by DTAC. The auction will be held two months before the concession ends, with the reserve price for the bidding set at BT3bn ($84.5m) per MHz, or BT135bn ($3.8bn) for the entire block. An early auction should allow for a smooth transition.

Technology Tweaks & Leaps

The technology being used in Thailand is advancing quickly, arguably at a faster rate than in any other country in the region. LTE subscriptions are predicted to reach 30% of the total by 2018, while True Move, a subsidiary of True Corporation, is working on unveiling LTE-Advanced. This is being undertaken in cooperation with Ericsson under a three-year contract.

According to the NBTC, Thailand will be the first ASEAN country to adopt 5G, having enlisted Ericsson to conduct a live test of the technology. It hopes to have the standard in place by 2020. 5G will provide speeds 100 times faster than 4G, at about 5.7 GB per second.

AIS, meanwhile, is working with Huawei to optimise the technology it is using. Together with the Chinese vendor, it is utilising so-called beamforming technology in order to increase speeds five to eight times. In beamforming, multiple towers direct their signals towards a customer’s location to meet demand. DTAC is working with Nokia on improving the speed of mobile broadband. They are endeavouring to optimise the Thai company’s backbone performance by implementing a software-defined network-ready IP/Optical network. The result will be the delivery of ultra-broadband to around 40% of the country’s population.

Regulation

The regulator has been active in overseeing the sector and calling for adjustments to benefit the consumer. In early 2017 the NBTC ended a requirement that AIS and True Corporation should charge for 4G services on a per-second basis. It was argued that this arrangement, required under the licences awarded, would make unlimited plans impossible.

The regulator has also called for low-cost 4G SIM cards to be offered to the poor and the disabled. The announcement, made at the end of 2016, requires that companies comply by March 2017 and that the tariffs on these cards be 10% cheaper than the market rate. Bridging the digital divide is one of the regulator’s goals. In early 2017 the NBTC said that it would be allowing 7-Eleven convenience stores to start taking number portability applications for True Corporation, a related company. AIS and DTAC had asked the NBTC to look into this arrangement when first proposed a year earlier, suggesting that it was improper. The NBTC finally ruled, arguing that it would be permitted if the paperwork for the transfer was sent from the telecoms provider itself.

The NBTC has said that all carriers will have to utilise an online fingerprint ID system for the registration of SIM cards (though most users will not be required to register with the new system). The government says the move is designed to increase security as the country moves to becoming a more mobile and cashless society. The government has also been working to expand access. To increase connectivity at the local level, it set aside $571m in late 2015 for the purpose of bringing broadband to the vast majority of villages in the country. Thailand is also working to improve international links with the development of new submarine cables, specifically upgrading connections with India and Hong Kong. By late 2016, the country had seven submarine cables, while in comparison Singapore had 20.

Licences

In early 2017 Mobile LTE received a licence to become a satellite operator. While it currently operates as a mobile virtual network operator (MVNO) that picked up but did not lodge an application for a 4G licence, it hopes to start offering sophisticated telecommunications services via satellite. The new licence is 15 years in duration, allowing for satellite-transponder leasing and satellite-signal uplink/downlink operations.

In early 2017 a UK company, Lycamobile, and a Malaysian company, Enabling Asia Tech, initiated discussions with TOT regarding the formation of an MVNO and a mobile virtual network aggregator (MVNA). Enabling Asia Tech has already applied with the authorities. If granted, the company would become the first MVNA in Thailand. (It already has an MVNO called Mobile-8 Telecom, operating under the Muzzme brand name). At present the MVNO market in Thailand is small, with the exception of Real Move, the MVNO on CAT Telecom’s 850-MHz network. MVNOs have been asking the regulator to encourage TOT and CAT Telecom to lower their bandwidth prices so carriers can compete effectively.

Infrastructure

CAT Telecom and DTAC have agreed to create two joint ventures, one for fibre and the other for tower infrastructure, which will create a more effective utilisation of concession assets. AIS had proposed a joint venture with TOT to operate the towers from the now expired concession at 900 MHz, but TOT felt the two should simply comply with the agreement and that the towers should be transferred back at the end of the concession period. The firms eventually agreed on continued use of the 2G towers, with AIS paying the state enterprise a fee of BT5.6bn ($157.8m) annually for the first five years, and BT3.6bn ($101.4m) a year after that. In 2016 True Corporation said it would lease some of its tower assets to DTAC. This agreement will initially cover 115 towers; however, no number has been given on the total value of the transaction. DTAC said it is interested in leasing more assets, while AIS has said that it would like to lease out more of its towers. The regulator has been pushing tower sharing while the companies themselves are under pressure due to capital expenditures on 4G licences and related equipment. In early 2017 TOT placed its plans for an infrastructure fund on hold. It hoped to set up the fund by March 2017 to expand its underground piping business which already has 25,000 km of underground cable assets that are rented to 10 telecoms companies. But TOT found that its current rental agreements last only three years, making its assets unsuitable for a fund with a 10-15 year duration.

It is now renegotiating its contracts, hoping to have a fund in place in 2018. Singapore Telecommunications has restarted discussions to purchase part of Temasek’s stake in Intouch Holdings. Temasek owns 41% of Intouch, while Intouch and Singapore Telecommunications own 40% and 23% of AIS, respectively.

Outlook

The Thai telecommunications sector is developing quickly technologically, but is now facing challenges on the business side. Huge sums have been spent on licences, while demand for services in the market has reached a plateau. The industry is constrained on how much it can commit to expanding business right as new services are required to attract customers and raise revenues, but is looking to achieve better balance.