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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”)[email protected] (re shoestring1 or 2)[email protected] (basket methodology)[email protected]
