Emerging trends in telecom Files/Presentation_Emerging...Emerging trends in telecom Rohan...

Emerging trends in telecom

Rohan Samarajiva, with contributions from team

24 August 2006, CFA/Amba Research

Agenda

IntroductionNext marketFixed-mobile convergenceSpectrum managementLocal 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)andDIRSI (Latin America & Caribbean)Other

Observation of fact patternsNot very different from what CFAs do?

But less emphasis on financials

So, what is the plan for today?

Scenarios, based on incomplete evidenceDiscussion from multiple perspectivesHopefully leading to useful knowledge; new questions, if not new answers . . .

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

Agenda

IntroductionNext marketFixed-mobile convergenceSpectrum managementLocal loop unbundling

One starting point: 3G

Dialog’s announcementFirst in the region, in 2006Big fuss re 3G was around 2000Problem?

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 spaceA “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 marketGMPCS has become an appendage of GSMWhat 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 pricesEmerging 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 manufacturersRegulators

Freeing up frequenciesPricing

Innovators in terms of price and availabilityWatch Taipei WiFi storyMajor WiFi push in country with 2nd highest mobile penetration in Asia

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

Indonesia

Bangladesh

Sri Lanka

TM affiliates EBITDA & EBITDA margins

Indonesia

Bangladesh

Sri Lanka

TM affiliates’ monthly Average Revenue Per Users (ARPUs)

Indonesia, Rupiah (‘000)

Bangladesh, Taka

Sri Lanka, Rupees

Reality: Growth in prepaid almost swamping postpaid; ARPUs USD 5; EBITDA margins holding at around 50-60%

0.00 5.00 10.00 15.00 20.00 25.00 30.00

B'desh Postpaid

B'desh Prepaid

Indonesia Postpaid

Indonesia Prepaid

Sri Lanka Postpaid

Sri Lanka Prepaid

USD

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

ARPU per month: Prepaid vs. postpaid

What’s the next market?

3G for the rich? orSEC groups C, D and E?

The next billion . . . .

Their mode of access will be wirelessThey 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 nowIndia 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 countrySupplemented 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 questionLess than 15% in India

Monthly income less than USD 100

Many people do not own the phone that they use

51%

23%

52%

24%

49%

77%

49%

76%

0

20

40

60

80

100

< USD50 USD50-100 < USD50 USD50-100

Own Don't Own

Sri Lanka India

Phone ownership doubles in higher income groups6141Landline +

Mobile

USD50-100

< USD 50

USD50-100

< USD 50

832821Mobile Only

3719202Landline Only

India Sri Lanka What people own

How do the financially constrained communicate?

Fixed(49%)

Mobile(19%)

‘Public’ access (66%)

21%2%

11%

3%23%

3%

37%

Base: 3199

How respondent paid for fixed line connection

0

20

40

60

80

100

Sri Lanka India

% o

f fix

ed li

ne o

wne

rs

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

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

Obtaining a fixed line: paying in installments

0

20

40

60

80

100

Sri Lanka India

% o

f ow

ners

paid full amount at once Paid in installments

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

Getting connected: Financing fixed line connections slightly harder in Sri Lanka Where owners got the money from Use of installment plans

Reflects connection charges for fixed phones

Sri Lanka incumbent = ~USD 200 (min.)Sri Lanka entrants = ~USD 100

India incumbent = USD 16

0

20

40

60

80

100

Sri Lanka India

% o

f mob

ile o

wne

rs

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

Base: full: 509SL: 322India: 187

Opposite case in mobiles: less people in India had money available for connection

Where owners got money for the connection from

0

20

40

60

80

100

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

% o

f mob

ile o

wne

rs

Sri Lanka totalIndia total

Bases:full:509SL: 322India: 187

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

71% fixed + public access users spend <USD4 per month (approx)

3734

13

8

0

10

20

30

40

50

60

<USD1 USD1-4 USD4-8 >USD8Average monthly expenditure on telecommunication (fixed + public access users)

% o

f fix

ed +

pub

lic a

cces

s us

ers

who

spe

nd...

Base: fixed + public access users: 2854

Same pattern on public access, but more spend <USD1 per month

50

36

64

0

10

20

30

40

50

60

< USD1 USD1-4 USD4-8 >USD8Average monthly expenditure on telecom (public access users)

% o

f pub

lic a

cces

s us

ers

who

spe

nd...

Base: Public access users: 1176

Mobile users spending much higher amounts

3

21

3430

0

10

20

30

40

50

60

<USD1 USD1-4 USD4-8 >USD8Average monthly expenditure on telecommunication (mobile users)

% o

f m

obile

use

rs w

ho s

pend

...

Base: mobile users: 616

33 % of Jaffna sample spend more than USD12 per month on mobile

0

14

20

26

33

0

5

10

15

20

25

30

35

< USD 1 USD1-4 USD4-8 USD8-12 >USD12

Average monthly expenditure on telecommunication (mobile users)

% o

f use

rs w

ho s

pend

...

BaseMobile 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

0

20

40

60

80

Sri Lanka Urban Sri Lanka Rural N India Urban N India Rural S India Urban S India Rural

High Affordable

0

20

40

60

80

Sri Lanka Urban Sri Lanka Rural N India Urban N India Rural S India Urban S India Rural

Will increase usageWon't change

•Reflects telecom/transportation trade-off

•Access deficit charge in India ensures lower cost of rural fixed phones

Base: fixed (only) users

Change in usage if costs were halved

Perception of current costs

Mobiles more costly; use would increase if costs halved; rural users less unhappy re cost

0

20

40

60

80

100

Sri Lanka Urban Sri Lanka Rural N India Urban N India Rural S India Urban S India Rural

High Affordable

0

20

40

60

80

100

Sri Lanka Urban Sri Lanka Rural N India Urban N India Rural S India Urban S India Rural

Will increase usage Won't change

Reflects reasons for choice of mobile : convenience

Base: mobile (only) users

Change in usage if costs were halved

Perception of current costs

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 existBiggest barrier is availability of serviceLower handset prices, better 2nd hand markets likely to accelerate ownership

In sum . . .

Poor seem willing to spend more than the norm on telecom

So high in some cases (1/3rd of Jaffna respondents spend more than 12%) that questions being redesigned (income expenditure)Rural perceptions of greater affordability

Telecom-transport tradeoff?

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

Agenda

IntroductionNext marketFixed-mobile convergenceSpectrum managementLocal 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 LankaMost objective way of comparing is by use of baskets (OECD methodology)

Problem: South Asian mobile use is much higher than in OECDTherefore, 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 completeOnly preliminary results given here (suggestions welcome)

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

-

200.00

400.00

600.00

800.00

1,000.00

1,200.00

US

D P

PP

Connection Rental Usage SMS

SMS - 79.63 99.99 Usage 776.30 627.02 638.75 Rental 326.00 213.84 - Connection 4.31 8.98 3.56

Fixed Mobile - Postpaid Mobile - Prepaid

16% cheaper than fixed

32% cheaperthan fixed

Comparison of Sri Lankan Mobile Prepaid and Postpaid Tariffs(Annual Totals)

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

800.00

900.00

1,000.00

US

D P

PP

Connection Rental Usage SMS

SMS 43.92 43.92 Usage 579.51 501.79 Rental 250.53 - Connection 12.10 21.78

Mobile - Postpaid Mobile - Prepaid

36% cheaper

Counter-intuitive results

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

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

0

100

200

300

400

500

600

700

800

900

1000

IN Mobile - Postpaid IN Mobile - Prepaid LK Mobile - Postpaid LK Mobile - Prepaid

USD

PPP

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 Telegraphhttp://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 differentAlso, 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

7

35

30

13

67

5748

59

32

11

7 26

42

25

49

71

72

79

78

53

41

57

64

72

34

60

40

57

0

10

20

30

40

50

60

70

80It improves my social status

It is fashionable to use one

I can use value added services like SMS etc.

It allows privacy

The connection is clear

It is easier to use

It is easy for me to access

I can use it at any time

I can use it while on the move

It is the only available service/ No other choice

To save travel time and cost

To control my communication expenditures

Most economical way to make calls

Most economical way to receive calls

Sri Lanka India w w w . l i r n e a s i a . n e t

Agenda

IntroductionNext marketFixed-mobile convergenceSpectrum managementLocal loop unbundling

Spectrum management

Critical to everything in telecomPhilosophical/technological issues Situation in Sri Lanka

Big picture

Old centrally planned and managed framework under threat from two directions

Property rights and decentralized decision makingCommons and unlicensing

Current regime is good for those who have frequencies

Quasi property rights regimeCannot 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 800But 200,000 new users

Creates solid barriers to entryNo incentives to increase efficiency of useDownside is potential rent seeking from Minister down

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

President has ordered refarming, but not a change in paradigm

Can be doneAs was done with CDMA 800 and GSM 1800 in 2002-05

Consultation papersInformed inputGovernment officials educated on replacement costs vs depreciated costs

Hypothetical refarming process

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

O1, O2, and O3 assigned CDMA 800 frequencies

5 & 5A

1800 GSM and 1900 CDMA bands fully cleared

O6 assigned GSM 900 frequencies & releases CDMA 800 frequencies

4 & 4A

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

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

3 & 3A

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)

2

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

1

Parallel policy actionsMain policy actionsStep

Agenda

IntroductionNext marketFixed-mobile convergenceSpectrum managementLocal loop unbundling

Local loop unbundling

Major regulatory issueGo too slow; new entrant voice and data providers will dieGo 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”)zainudeen@lirne.net (re shoestring1 or 2)iqbal@lirne.net (basket methodology)samarajiva@lirne.net