1. technology and computing
2. consumer electronics
3. telephones
4. mobile phones

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September 2014
Issue 100
Asia Pacific
Telecommunications
INSIGHT
BMI’s monthly market intelligence, trend analysis and forecasts for the telecommunications industry across Asia Pacific
ISSN: 1750-7685
Contents
Asia
Asia Pacific Risk/Reward Ratings–
Q414
BMI View: BMI's Asia Pacific Telecoms Risk/Reward Ratings assess
the potential and challenges of investing in telecoms markets across the
region. As subscriber growth is no longer the key driving force behind
market value growth in many cases, most operators are now looking at
encouraging existing subscribers to increase their spending on services.
This makes factors such as economic health an increasingly important
determinant in ranking market opportunities. Future spending ability
and our long-term economic views are therefore integral to our adjusted
ratings. In the Q414 risk/reward outlook, we have categorised the Asian
countries in our telecoms portfolio into different geographical zones to
identify the risks and rewards associated with each region.
Developed Economies Deliver Best Risks To Rewards Payoff
Asia Pacific Risk/Reward Ratings Q414
Asia
Asia Pacific Risk/Reward Ratings – Q414................................................................. 1
Tencent: The East's Breakaway Internet Giant......................................................... 3
Mobile Data: Rise of Mobile Gaming........................................................................ 4
Global
Self Care Offers Greatest Wearables Potential.......................................................... 5
M2M: From Millions To Billions In 10 Years.............................................................. 6
China
Cloud Ready To Fly................................................................................................ 8
Hong Kong
Cloud Services Lift HKBN's Long Term Outlook........................................................ 8
India
Spectrum Sharing: Strongest Benefit, Smallest Disadvantaged.................................. 9
Tower Companies: Increasing Tenancy Key To Profitability.......................................10
Indonesia
Indonesian Towercos Top Asian Market Potential....................................................11
Data Centre Partnerships Offer Long-Term Investment Upside.................................12
Myanmar
Competition Heats Up With Newcomers.................................................................13
80
Thailand
70
4G Delay Confirms Risk Outlook............................................................................13
60
Singapore
50
Data ARPU Growth Threatened By Newcomer........................................................14
40
30
20
10
Telecoms Score
Laos
Sri Lanka
Nepal
Cambodia
Bangladesh
Vietnam
Myanmar
India
Thailand
Pakistan
Indonesia
Philippines
Taiwan
Malaysia
South Korea
China
Hong Kong
Australia
Japan
Singapore
0
Average
Source: BMI
Operators Gear Up For 4G Ecosystem
North Asian operators are experiencing declining subscription growth
rates and ARPUs amid strong competition from over-the-top (OTT)
services and saturated 3G markets. However, mass adoption of laptops,
smartphones and tablets drives fresh demand for broadband services.
Virtually all operators in North Asia have introduced commercial 4G,
with those in South Korea already conducting LTE-Advanced trials.
BMI expects the shift towards 4G and adoption of value-added services
(VAS), such as cloud computing, machine-to-machine (M2M) and big
data analytics, to make up the region's core growth theme.
China moves up by three places in our Q414 ranking after scoring a
huge improvement in the industry rewards component. The key impetus
is the introduction of 19 new MVNOs into the Chinese market dominated
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AsiaTelecommunications
by operators China Mobile, China Telecom and China Unicom.
We believe this will drive the number of products and niche services
as seen in other MVNO-driven markets such as Malaysia and Japan.
The MVNOs' wide distribution networks will facilitate access to a
vast addressable market and accelerate the 3G/4G migration trend.
The key downside is a reduction in ARPU if operators engage in
price-based competition.
There are no revisions to the telecoms score for either Taiwan
or Hong Kong this quarter as we have previously accounted for
the entrance of new 4G MVNOs in Taiwan as well as Hong Kong
Telekom (HKT)'s acquisition of mobile network operator CSL in
January 2014. South Korea's country risk score improves slightly
on President Park Geun-hye's proposal to deregulate and support
the services sector, a plan that aims to provide the country with
new pillars of economic growth and a more sustainable path of
economic expansion.
South East Asia: A Two-Speed Market
There is a huge disparity in telecoms market development within
South East Asia. More developed telecoms markets will see increasing contribution from data services, BMI forecasts. In contrast,
countries such as Vietnam, Cambodia, Laos and Myanmar are still
growing their basic voice and SMS subscriptions. The difference
between the two groups is due to the difference in economic progression, level of household disposable income and the state of telecoms
infrastructure development.
Among the less developed telecoms markets in the region, Vietnam is the highest ranked. Vietnam moves up by two positions in
Q414 to 14 th place following the divestiture of operator MobiFone
from state-owned Vietnam Posts and Telecommunications Group
(VNPT) in June 2014, a move BMI expects will promote constructive competition. Myanmar ranks lower than Vietnam in terms of
risks/rewards payoff after the government liberalised the mobile
sector in July 2013. Meanwhile, operator Smart Axiata launched
Cambodia's first mobile 4G services in January 2014 but BMI does
not believe there is much demand for 4G as 3G usage is still low.
Laos remains lowest ranked in this sub region as its political and
economic environment scores are weak.
The more developed telecoms markets in South East Asia are
Singapore, Malaysia, Indonesia, Thailand and the Philippines. Singapore is the highest ranked due to its stable regulatory environment
that is conducive to innovations and developments. This reflected
in Singapore's country risk score of 86.5, topping the Asia Pacific
list. Indonesia's telecoms rating dropped after the nation's risk rating
was downgraded from 58.5 to 57.5 over uncertainty surrounding
the outcome of the July 2014 presidential elections. BMI's Country
Risk team expects victory for candidate Joko Widodo, who has a
negligible track record in implementing economic policy, weighing
on the short-term economic risk outlook. We also highlight Thailand, which has witnessed political unrest since December 2013.
BMI's Country Risk team believes the political turmoil will persist
into H214, having a negative effect on FDI and preventing fiscally
funded large-scale infrastructure projects from getting the go-ahead
from the government. In June 2014, the Thai junta suspended the 4G
spectrum auction that was originally scheduled to take place in H214.
Asia-Pacific Telecoms Risk/Rewards Ratings–Q414
Rewards
Country
Japan
Risks
Industry Rewards
Country Rewards
Industry Risks
Country Risks
Telecoms Score
Rank
Previous Rank
67.5
73.3
80.0
70.4
71.2
1
1
Singapore
50.0
80.0
90.0
86.5
68.8
2
2
Australia
57.8
70.0
70.0
63.8
63.5
3
3
China
71.5
33.3
70.0
81.8
63.5
3
6
Hong Kong
47.5
73.3
90.0
64.2
62.7
5
4
South Korea
55.0
60.0
80.0
72.7
62.6
6
5
Taiwan
52.5
60.0
80.0
76.0
62.0
7
6
Malaysia
52.5
45.0
70.0
74.0
56.5
8
8
Indonesia
52.5
46.0
60.0
57.7
52.8
9
9
Philippines
50.0
43.3
60.0
64.4
52.0
10
11
Pakistan
51.8
42.0
60.0
48.4
50.1
11
12
India
47.5
32.1
65.0
65.4
49.0
12
13
Thailand
49.5
29.3
50.0
59.1
46.1
13
14
Vietnam
49.5
33.3
30.0
69.1
45.6
14
16
Myanmar
52.5
32.7
30.0
48.7
43.7
15
15
Bangladesh
50.0
33.3
60.0
21.9
43.2
16
10
Nepal
35.0
33.3
60.0
49.7
40.5
17
17
Cambodia
37.5
41.7
40.0
44.9
40.0
18
18
Sri Lanka
37.5
30.0
60.0
27.1
37.5
19
19
20
20
Laos
27.5
39.0
40.0
55.7
36.4
Average
49.8
46.6
62.3
60.1
52.4
Scores are weighted as follows: ‘Rewards’: 70%, of which Industry Rewards 65% and Country Rewards 35%; ‘Risks’: 30%, of which Industry Risks 40% and Country Risks
60%. The ‘Rewards’ rating evaluates the size and growth potential of a telecoms market in any given state, and country’s broader economic/socio-demographic characteristics
that impact the industry’s development; the ‘Risks’ rating evaluates industry specific dangers and those emanating from the state’s political/economic profile, based on BMI’s
proprietary Country Risk Ratings that could affect the realisation of anticipated returns. Source: BMI
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South Asia: Rural Coverage While Continuing 3G Push
South Asian countries have substantial growth potential due to
their underserved 2G and 3G markets, but face regulatory challenges which derail developments. With the exception of Sri Lanka,
the other four South Asian countries mobile penetration is below
100%. This rate, however, disguises markets where there are high
multi-SIM rates. Consumers often buy SIMs to take advantage of
promotions, or own one from all operators in order to receive lower
on-net calling.
The key to unlocking mobile subscriptions growth is expanding into under-penetrated areas. India, Pakistan, Bangladesh and
Nepal all have around 70% mobile penetration and operators must
extend their networks to cover remaining suburban areas or come
up with innovative approaches to make the services accessible to
the remotest areas.
Bangladesh and Pakistan introduced 3G services in the past 12
months. We have raised the industry risk score for Pakistan from
50 to 60 after the Pakistan Telecommunication Authority (PTA) issued 3G concessions in May 2014. In the previous quarter, we also
upgraded Bangladesh's industry reward ratings after an improvement in ARPU following the 3G auction in September 2013. India's
overall telecoms score improves from 47.9 to 49.0 this quarter after
BMI's Country Risk team upgraded India's political outlook on the
back of the Bharatiya Janata Party's landmark election win in May
2014. Underpinning this upgrade are the increased unity within the
cabinet, positive changes in policy direction as well as a reduction
in security threats and constraints from both internal and external
groups. However, despite the impressive move up in our political
risk ratings, any major policy reforms – such as the breaking up of
state-owned companies and raising foreign investment caps – will
likely only take place beyond Prime Minister Narendra Modi's first
year in office.
Tencent: The East's Breakaway
Internet Giant
BMI View: South and South East Asian markets offer great commercial potential for Chinese Internet giant, Tencent. A combination
of low-cost smartphone adoption trends and the shift towards using
mobile devices to access online content are helping Tencent to gain
significant overseas presence with its mobile-based messaging application WeChat. That said, we see strict censorship controls and
China's tense relationships with its maritime neighbours as key
impediments to Tencent's regional expansion efforts.
Tencent Moves Beyond China's Borders
Tencent started its search for international opportunities since 2009.
To this end, the company modified its popular applications QQ
messenger and WeChat with multiple language supports in English,
French, Spanish, German, Korean, Japanese and Classical Chinese
to target international audiences. At the same time, the company has
placed a greater emphasis on global marketing campaigns. In July
2013, for example, Tencent recruited global football phenomenon
Lionel Messi to be the product ambassador for WeChat. Other
branding efforts include establishing local branch offices in overseas
markets such as Malaysia and India, as well as tie-ups with local
firms and celebrities to bolster the firm's local presence.
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Tencent's biggest overseas success to date has been establishing
WeChat in India and key South East Asian markets, such as Malaysia
and the Philippines. In July 2013, WeChat was the most downloaded
mobile social app on application stores in the Philippines, Singapore
and Thailand, according to thenextweb.com. Tencent's management
reported that monthly average users (MAU) for WeChat grew by
103.6% y-o-y in Q114 to reach a subscription base of 395mn; of that
figure, an estimated 15% comprised international users.
Growing Smartphone Sales To Bring Mobile Internet Opportunities
Domestic Smartphone Sales (000)
e/f = BMI estimate/forecast. Source: BMI
WeChat's foreign success can be attributed to two key trends.
The first is the emergence of budget handset makers such as China's
Xiaomi and India's Micromax, a trend that has led to rising adoption of low cost smartphones. At the same time, 3G networks are
beginning to be rolled out in emerging markets such as Pakistan and
Bangladesh, driving smartphone adoption even further. Between
2014 and 2018, BMI forecasts compound annual smartphone sales
growth in the region of 5-15% in the key markets of India, Malaysia,
Indonesia and the Philippines. We believe the strong smartphone
uptake creates unparalleled demand for mobile internet services.
The second most important trend is the shift from desktop
computing to mobile devices. The latter is increasingly viewed as
the preferred way of accessing online content and services. The
combination of mass smartphone adoption and first-time usage of
mobile-based messaging applications presents an enormous opportunity for WeChat to grow its subscriber base, particularly in
South and South East Asia. BMI believes these sub-regions present
Tencent with the greatest commercial opportunities as their nascent
smartphone markets mean that consumers' mobile behaviour has yet
to be defined. This is compared with mature markets in North Asia
where big companies such as Google, Facebook and Naver already
dominate the mobile internet scene.
WeChat Grows, QQ International Slows
The same optimistic outlook for WeChat, however, could not be said
for QQ International, Tencent's international instant messaging platform. The transition to mobile devices remains challenging and for
the PC-based instant messaging portal which was launched globally
in January 2009 with multiple language support. QQ International
only introduced mobile access in Q413 after Tencent decided that
its future lies in the mobile sector. Although mobile QQ recorded
426mn MAU in its first quarter – MAU for QQ instant messaging in Q413 was 808mn – BMI believes WeChat will continue to
remain the poster child for Tencent in the international market. So
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far, there is little anecdotal evidence to suggest QQ international is
widely adopted across Asia outside of China. As both WeChat and
QQ share so much in common in terms of features and functionalities, it seems odd for Tencent to push two very similar products to
the same market.
A more likely scenario, in our view, is that WeChat will continue
to be developed for international audiences while QQ International
is aimed more at foreign residents in China. When QQ International
was first launched, Tencent had intended it to be a communication
platform between Chinese and residential foreigners as popular
international services such as Facebook and Twitter are not available in China. Given the amount of marketing resources Tencent
spends on WeChat, it is clear the company intends for WeChat to
be its international mascot.
Strict Censorship Rule Could Be Tencent's
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services are beginning to be realised through the proliferation of
smart mobile devices and the rollout of mobile broadband networks
across Asia. BMI predicts 3G/4G penetration will increase rapidly
across the region, with countries in the Greater China and North
East Asia sub-regions forecast to take the lead in 3G/4G adoption:
59.3% and 61.1% in 2018, respectively. BMI believes this growth
will be largely aided by the widespread adoption of low-cost smartphones such as those produced by budget handset makers Xiaomi
(see 'Smart-Enough Low Cost Phones The New Hype?', January 14
2014). Demand for 3G services is expected to be more pronounced
in more developed Asian telecoms states such as South Korea, Japan, China, Taiwan, Hong Kong, Malaysia and Singapore, owing
to greater consumer spending power in these markets.
3G Growth In Asia Creates Huge Opportunities
For Mobile VAS
3G Penetration (%)
International Undoing
The biggest downside risk to Tencent's overseas venture is its strict
censorship rules. It is hardly surprising that communication via
WeChat is closely scrutinised by the Beijing administration, keen
to keep Chinese citizens from discussing politically sensitive topics
or gathering together to take on a cause. Tests conducted by blogger website TechInAsia had shown that certain inputs such as the
Chinese characters for the word ‘Southern Weekend’ – a magazine
at the centre of a separate censorship controversy – were blocked
when sent between users in China, Thailand, and Singapore at the
height of the controversy in January 2013. When international users
complained about these restrictions, Tencent reportedly referred to
the problem as a 'technical glitch'. In our view, such paternalistic
surveillance can be a very unwelcome development for many international users of WeChat who are used to greater freedom of speech.
To some extent, Tencent's expansion into the South East Asian
markets will be hampered by the tense maritime relationships the
Chinese government has with its neighbours. In the spring of 2014,
the emphasis shifted from the East China Sea, where China claims
the Japanese-administered Senkaku Islands (known as Diaoyu in
Chinese) to the South China Sea, where China established an oil rig
in waters claimed by Vietnam (see 'Q3 2014-2015: International
Crises Mask Broad Domestic Stability', June 30 2014). The standoff
between China and Vietnam, in particular, led to a series of antiChina protests following by unrests and riots across Vietnam in May
2014. These political risk developments will certainly pose a major
hurdle to Tencent's efforts to internationalise its services.
Mobile Data: Rise of Mobile
Gaming
BMI View: Increased smartphone adoption and the shift from
desktop computing to mobile devices are creating new demand for
mobile games, particularly in the more advanced Asian telecoms
markets. As gaming platforms, publishers and developers cash in on
the mobile games opportunities, we expect competition to intensify.
High quality and more sophisticated games releases will also result
in greater monetisation opportunities for the mobile gaming sector.
Increased Smartphone Adoption Provides A
Key Enabler
The potential commercial opportunities for mobile value-added
4
f = BMI forecast. Source: BMI
Recent third-party data suggest that these mature Asian markets
have become significant consumers of games via smartphones, tablets and other portable connected devices. BMI expects this trend to
continue unabated, with the only constraints being pricing and the
costs borne by operators in upgrading their networks. According to
analytics specialist App Annie Index, as of May 2014, six of the top
10 global publishers on Apple iOS and Google Play by revenue were
from China and Japan, and seven of the top 10 games on Google
Play by revenue were released by South Korean and Japanese games
publishers. iResearch Consulting Group predicts that Chinese mobile
gaming revenues will grow by a compound annual rate of 27.9%
between 2013 and 2017, reaching CNY36.7bn (USD5.9bn). This
latent demand for gaming creates huge commercial opportunities for
games developers, publishers and distribution platforms.
Mobile Games Competition Intensifies
Web games developers have increasingly switched their focus
towards mobile games in recent quarters. In China, for example,
online games developer Shanda Games reported average daily
active users (DAU) of 462,700 in Q114 for its mobile games segment, representing an increase of 59.4% y-o-y. Evidence of strong
subscription growth had prompted the company to release several
mobile games hits such as 'Million Arthur' and 'Guardian Cross', of
which the former was successfully launched in multiple markets
across South Korea, Taiwan, China, Singapore and Malaysia.
Games developers are not the only ones benefiting from these
mobile games opportunities, BMI notes. Platforms and publishers such as Tencent and Qihoo 360 have positioned themselves
to capture the mobile gaming potential and have ramped up their
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monetisation models. Tencent is leveraging its WeChat and mobile
QQ messaging applications to distribute its mobile gaming genres.
Qihoo, on the other hand, reported that its internet value-added
service revenues achieved a solid 172% y-o-y growth to reach
USD124.8mn in Q114 on the back of growing demand for PC games
and a strong ramp-up in mobile games. Although the company did
not specify mobile games revenue contribution, BMI believes the
company has made positive progress in monetising mobile games
via its app store distribution channel. In its May 2014 SEC filing,
Qihoo's management noted that mobile monetisation and search
had achieved faster-than-expected ramp up and are now an integral
focus of its future strategy.
The Philippines, Vietnam, India and Indonesia
Are High-Potential Mobile Gaming Markets
Domestic Smartphone Sales (000)
e/f = BMI estimate/forecast. Source: BMI
In Japan and South Korea, prominent mobile messaging applications such as LINE and KakaoTalk are similarly on the lookout for
mobile gaming monetisation opportunities. KakaoTalk differentiates
its services from rival messaging applications by combining free
texting with games and mobile commerce. Looking at its monetising
model, BMI believes it is likely the company is treating the messaging platform as a subscription growth driver while treating the
gaming platform as revenue generator. This model has so far proved
successful, with the company reportedly earning gross revenue of
USD311mn in H113, according to thenextweb.com.
Three-Year Outlook For Asian Mobile Games
BMI believes Asia's mobile gaming markets are, at present, in a
state of high subscription growth but suffer from under-developed
monetising potential. In our view, two key trends will emerge over
the next three years. First, most of the mobile gaming subscription
growth will continue to be derived from mature telecoms markets
with widespread 3G/4G adoption. It is not surprising that the largest
mobile gaming commercial opportunities also exist in large smartphone user countries such as China, South Korea, Japan, Singapore,
Malaysia and Taiwan, where high-speed mobile broadband connections are ubiquitous. BMI attributes this to the high user traction
of mobile games in these countries. We also note the high mobile
gaming growth potential in countries such as the Philippines, Vietnam, India and Indonesia where low-cost 'smart-enough' handsets
are driving domestic smartphone sales.
Second, we expect mobile games industry players to gradually
shift their focus from gaining subscription shares to extracting the
full monetisable value from their customers. At present, games
developers derive their revenues from either paid-mobile games
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downloads or virtual item sales, after offsetting commissions paid to
third-party platforms for distributing mobile games. The monetisation of these mobile games has not yet caught up with subscription
growth, for instance, with Shanda Games reporting that its mobile
games revenue declined 38.4% y-o-y in Q114 despite a 59.4%
growth in DAU over the same period. The decrease was largely
due to a decline in revenue from several key mobile games which
are entering the mature stages of their lifecycles, including 'Million
Arthur' and fewer new releases, according to the company. Considering the company derives only less than 10% of its net revenues
from mobile games in Q114, BMI believes more can still be done
to extract the sector's vast potential, either through better monetising
model or more sophisticated games releases.
How Mobile Operators Fit In
Few of Asia's mobile network operators report revenues from sales
of mobile games and ancillary products and services. This is not
surprising, given the complexity of revenue-sharing agreements with
other players in the mobile gaming ecosystem, as well as the fact that
a growing number of games are now purchased off-net or off-portal
and operators merely generate income from data transfer traffic.
However, games developers and publishers need to work more
closely with operators as these companies provide direct access
to hundreds of millions of potential consumers that their own or
third-party app stores cannot target effectively. In May 2014, China
Mobile, China Unicom and China Telecom announced plans to collaborate with each other and with fames publishers to help publish
as many as 100 games a year. They target annual sales of CNY1mn
(USD160,000) per game. Assuming a revenue-sharing model similar
to that of Apple's App Store and iTunes platforms (30% to the mobile operators, 70% to the developers/publishers), this represents a
potentially lucrative new revenue stream for mobile operators facing
falling voice revenues and spiralling handset subsidisation costs.
Already reporting modest success in monetising mobile gaming
services, Asia's mobile network operators are preparing to move to
the next level.
Global
Self Care Offers Greatest Wearables Potential
BMI View: Growing awareness of chronic diseases and fitness is
leading more consumers to try new means of managing their health.
Self Care is the area of the Telecare market that offers greatest
potential profits for telecoms operators and device manufacturers
though the development of sophisticated wearable devices. Mobile
devices and mobile operating systems offer consumers the ability to
manage their own health in a number of highly customisable ways.
Smartphone market leaders Apple, Samsung and Google launched
their healthcare apps and devices in May and June 2014. As smartphone growth in developed markets slows considerably, vendors are
seeking new ways to encourage loyalty and increase spending. Of
the available wearable devices in the market, health wearables offer
practical applications and BMI believes these devices will lead the
growth in wearables over the next 12 months.
The new launches relate predominantly to the fitness market
with brands such as Google Fit, S Health and Apple Health. These
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allow users to track their own health and fitness levels. These data
are stored for consumer use only, with few instances of the data
being used to monitor overall health by healthcare professionals.
BMI believes this is the greatest hurdle to making self care apps
and wearables a fundamental part of the healthcare system in developed markets.
With limited connection between the devices’ data and electronic
health records these apps and devices are more consumer driven,
rather than requirements from healthcare providers. As an out-ofpocket expense, we believe growth will be driven by developed
market consumers in North America and Western Europe, as well
as wealthier consumers in the larger cities of emerging economies.
As BMI’s Telecare Matrix shows, top markets include UK, Japan,
France, USA and Italy where consumers are accustomed to buying
high-end mobile devices and spending heavily on a monthly basis.
Even so, we expect it to remain a niche product while unconnected
from healthcare providers.
platform offering longer term loyalty among users. However, BMI
believes wearables will remain a niche product over the next 1-3
years as devices have yet to prove their necessity to consumers.
M2M: From Millions To Billions
In 10 Years
BMI View: We have long-held a positive view on the potential of
machine-to-machine (M2M) technology to transform the telecoms
industry. We expect to see strong growth in this area over the next
10 years, with the technology forming a key part of our 2024 outlook
(see ‘The Telecoms Industry In 10 Years’, 12 June 2014).
Smartphones Tap Into Growing Market
Global Healthcare Expenditure (USDbn)
14,000
12,000
Developed Markets Already High Smartphone
Penetration
10,000
Smartphones Shipments By Region (%)
8,000
100
90
6,000
80
70
4,000
60
2,000
50
40
North America
Western Europe
Middle East
Latin America
Eastern Europe
Africa
2018f
2017f
2016f
2015f
2014f
2013f
2012
2011
2010
2009
2008
2007
0
Caribbean
Asia
Global
f = BMI forecast. Source: BMI, Vendors, Mobile Operators
For healthcare wearables and apps to become a common feature
in health management, BMI believes there will need to be acceptance among healthcare providers and clinicians. This will be driven
by regulatory approval for apps and devices. In the meantime, these
services form a key part of the marketing strategy for smartphone
and mobile operating system companies to cement consumers in their
product ecosystems. The greater usage by consumers on a particular
platform or device, the more difficult it becomes to change to a new
2023f
2022f
2021f
2020f
2019f
2018f
2017f
2016f
2015f
2013
2012
2011
10
2010
20
2014f
0
30
f = BMI forecast. Source: BMI, WHO
For telecoms companies, M2M represents the next step in the transition from voice to data, with huge revenue growth opportunities
presenting themselves as more SIM cards are connected to networks.
Mobile phones are generally limited to one per person in any market.
However, with M2M, the ratio could be anywhere between five to
10 connected devices per person. We believe this will enable the
number of connected M2M datacards to outnumber the amount of
cellular subscriptions within 10 years.
We are growing increasingly optimistic towards M2M technology as governments are also taking notice of the sector’s potential
and playing an active role in the technology’s development. For
example, Brazil’s government has lowered taxes on M2M SIM
cards, while in the UK, smart meter contracts have been auctioned
Top Markets For Self Care Development Opportunities
Tech Base
Market Opportunity
United Kingdom
Excellent
High
Japan
Excellent
High
France
Excellent
High
United States
Excellent
High
Italy
Excellent
High
Germany
Excellent
High
South Korea
Excellent
Medium
Australia
Excellent
Medium
Spain
Excellent
Medium
Canada
Excellent
Medium
Source: BMI’s Telecare Matrix
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off. Alliances between operators and M2M vendors are becoming
increasingly common and a critical part of the M2M ecosystem, as
telecoms operators’ investment in upgrading to 4G networks provides the backbone infrastructure for M2M connectivity. Auction
of ‘white space’ spectrum from the digital switchover should also
provide a boon for the M2M market, allowing companies further
bandwidth and greater coverage of rural regions. Meanwhile, the
switch to 700MHz frequencies is expected to be completed by the
end of 2015 and should also provide a global standard of technology
which will allow M2M to flourish.
ing cost of SIM cards will help to bolster margins and is a further
indicator that M2M is becoming a reality with multiple industries
beginning to explore the potential benefits.
Further To Rise After Hype Plateau
BMI M2M Index
250
200
M2M Moving Beyond The Hype
150
Selected Operator M2M Connections (mn)
35
2012
2013
100
30
25
15
10
5
0
Telefónica
China Mobile
Vodafone*
AT&T
* Vodafone FY ends in March. Source: Bloomberg, BMI
The costs associated with M2M technology have also come down
significantly. M2M is a low margin business, as the small amounts of
data transmitted means that it requires thousands of connected SIM
cards to translate into strong revenue growth. However, the declin-
Jun -14
Jan -14
Aug -13
Mar-13
Oct-12
May-12
20
Dec-11
Jul-11
50
Source: BMI, Bloomberg
We expect developed markets and China to show the strongest
M2M growth over the next two to three years. However, there is
still enormous long-term potential in emerging markets over the next
five to 10 years. China is currently the largest market for M2M in
the world in terms of total connections and we expect it to stay in
front, as its huge population creates a larger market. There has also
been significant progress in the US, Japan and the Nordic countries,
where we expect to see M2M connections account for a greater
proportion of mobile subscriptions.
To help us assess the accuracy of our bullish view towards the
M2M industry (by way of determining whether investors share our
positive outlook) we have created a market cap weighted custom
What Is Machine-To-Machine (M2M) Technology?
Technologies that allow businesses to wirelessly connect everyday devices, heavy equipment, vehicles and utilities to each other and to central hubs using mobile
operator networks.
SIM cards are used to remotely capture events and record data that can then be disseminated by users and algorithms to create efficiencies and cut costs for businesses.
The data from these ‘smarter’ products translates into actionable business intelligence.
For example, an insurance company can remotely monitor the driving habits of its customers to offer tailored rates that reduce risk for the company.
Source: BMI
BMI M2M Index
Company
Security
Weighting (%)
Value
CalAmp
CAMP US Equity
5.2
10.221
Comarch
CMR PW Equity
1.7
3.285
DGII US Equity
1.8
3.504
Elecsys Corporation
ESYS US Equity
0.3
0.676
Fleetmatics Group
FLTX US Equity
9.2
18.139
Digi International
Gemalto
GTOMY US Equity
68.7
135.914
Numerex Corporation
NMRX US Equity
1.8
3.512
ORBCOMM Inc
ORBC US Equity
2.7
5.355
Sierra Wireless Inc
SWIR US Equity
5.0
9.816
Telit Communications
TTCNF US Equity
3.1
6.218
USA Technologies Inc
USAT US Equity
0.6
1.106
100.0
197.75
M2M Index Total
Source: BMI, Bloomberg
www.telecomsinsight.com
7
China
AsiaTelecommunications
index, denominated in US Dollars. The companies included are those
which we believe are heavily exposed to the M2M growth trend, and
can therefore expect to benefit as vendors of M2M SIMs, as well as
M2M software and service providers. The index saw strong growth
between 2011 and 2013. However, it has dropped by 9.8% since
the start of 2014. While we believe much of this earlier growth was
based on hype surrounding the M2M industry with little concrete
results, we are now seeing strong growth in connections reported by
mobile operators as well as revenue and profit growth from M2M
vendors. With further positive developments expected, such as the
release of digital dividend spectrum, lower costs of M2M equipment and favourable government policies, we believe that M2M
has further to rise, with the number of connections expected to
increase into the billions and overtake mobile phone subscriptions
within the next 10 years.
Hong Kong
China
Cloud Ready To Fly
Government support for the cloud computing market in China will
see growth take off over our five-year forecast period. A policy
identifying cloud computing as a nationally strategic industry will
accelerate development and place China among the industry’s biggest players. The focus on selling cloud services internationally will
only have a limited impact on our forecasts but we believe developments will filter through into local market growth.
Government Supports Growth
China Cloud Computing Forecasts
e/f = BMI estimate/forecast. Source: BMI
China’s Ministry of Industry and Information Technology (MIIT)
estimates China’s cloud computing market was worth CNY4.76bn
in 2013, up 36% from 2012. The strong growth reflects BMI’s view
that cloud computing is gaining traction in both developed and
emerging markets. BMI’s forecasts show the domestic market was
worth CNY4.3bn in 2013 and we expect growth to average 58%
over our forecast period seeing Chinese consumers and businesses
spending CNY41bn on cloud computing by 2018.
Businesses, particularly small and medium enterprises, will
drive demand for cloud computing in China. While consumer cloud
services are available and will continue to expand, BMI believes
these services will be lower cost and have only a small impact on
the market’s growth.
The MIIT’s goal of increasing cloud revenues by at least 50%
annually ‘over the next few years’ focuses on generating revenues
for cloud services from international sources and building China’s
8
presence in the global cloud computing market. Nevertheless, increased development by Chinese companies on their cloud services
offerings will support the domestic market’s growth. Chinese cloud
companies face competition from large established cloud computing
companies such as Salesforce.com, EDS and Amazon Web Services,
which have already targeted China’s cloud potential.
With security a key hurdle in the expansion of cloud computing
services, BMI believes Chinese SMEs will favour Chinese cloud
providers for their IT services expansion, particularly as a result of
the NSA spying scandal. Our forecasts show there is considerable
potential for cloud services in China and government support for
developments is a major boost to our expectations of the market.
We believe there is upside risk to our forecasts as cloud computing
becomes a fixed part of companies’ IT spending.
Cloud Services Lift HKBN's
Long Term Outlook
BMI View: Hong Kong's reputation as a leading regional business
hub will increasingly depend on the availability of advanced communications services and solutions. Although already well served
by data centres, the enterprise market lacks choice in scalable
cloud services. HKBN's partnership with eight leading technology
companies sees its long-term outlook improve.
Hong Kong Broadband Network (HKBN) is working with Broadsoft, Cisco Systems, Deltapath, Hitachi Data Systems, Macroview
Telecom, Oracle Asia Pacific, Polycom and Towngas Telecom
to develop and market a complete suite of cloud computing solutions to its corporate clients, ranging from small and medium-sized
enterprises (SMEs) to multinationals and other carriers. The move
is the latest development in HKBN's strategy to transform itself
into a full ICT services provider and reduce its dependence on the
crowded retail telecoms services market.
BMI forecasts spending on cloud computing services in Hong
Kong to rise steadily over the 2013-2018 period, from USD103mn
to USD414mn. Cloud spending per capita will therefore increase
from 14.3% to 55.5% of total IT spending over this timeframe,
ultimately accounting for 16.0% of total spending on IT services,
software and hardware in the country.
HKBN has yet to detail its long-term strategy with respect to the
cloud services market in Hong Kong, including a likely timeframe for
the roll out of key services and solutions. However, BMI notes that
the operator–one of the largest alternative telecoms infrastructure
operators in the country–is already well placed to take advantage of
the nascent cloud opportunity. Its 100Mbps nationwide fibre-optic
network has the capacity, resiliency and security needed to cater to
the heavy data traffic requirements of pan-Asian clients operating
out of Hong Kong and it has a well-established reputation amongst
local businesses for its traditional telecoms services.
The company believes there is huge potential in Hong Kong's
non-residential market for telecoms and ICT services. It values that
market at around HKD15bn; its current telecoms-focused activities
account for just 2.5% of that market. The company believes that its
new cloud-optimised business model enables it to offer advanced
services to SMEs at considerable savings to its traditional equipmentbased offering yet delivering double the revenue per customer.
With service revenue and service EBITDA up by 10% and 19%,
www.telecomsinsight.com
India
AsiaTelecommunications
respectively, y-o-y in the half-year ended March 2014, it is clear that
the company's transformation is beginning to reap rewards. Adding
scalable cloud solutions from leading vendors will help ensure that
financial growth continues, playing into BMI's bullish view of the
company's long-term future.
India
Spectrum Sharing: Strongest
Benefit, Smallest Disadvantaged
BMI View: Proposed new spectrum sharing rules in India make
reaching out to under-served areas more attractive to operators.
This provides considerable upside potential for future revenue and
customer growth. However, we believe the new rules would help only
a few, already-dominant players, while increased spectrum usage
charges would increase the financial burdens on smaller operators.
Business Hub Depends On Cloud
Hong Kong Cloud Computing Forecast
– is not an 800MHz licensee. Similarly, small regional players such
as Tata TeleServices, Telenor, MTS and Aircel will see few opportunities owing to the fact that, in most cases, potential partners
use different bands.
Further hurdles include the proposal that only two operators can
collaborate in spectrum sharing deals and, even then, half of the
spectrum being shared by each party will count towards their total
spectrum holdings. As spectrum ownership is capped at 25% of total
spectrum allocated to each 'circle' and at 50% of any single band
within a 'circle', the potential number of deals that can be reached
is somewhat diminished.
Furthermore, as spectrum sharing effectively results in increased
spectrum usage, so operators engaging in spectrum sharing will see
an increase in their spectrum usage payments to the government.
TRAI has recommended a 0.5% increase in those charges, applicable
to individual sharing agreements. For those operators already owning
significant parcels of spectrum, this will represent a significant but
bearable additional operational cost. It would nevertheless need to
be factored into capex plans and may dissuade them from using the
spectrum-sharing rules to reach out to disadvantaged areas, counter
to the TRAI's ambitions.
Spectrum Sharing Offers Market Expansion
Upside
Mobile Market Forecasts, 2012-2018
e/f = BMI estimate/forecast. Source: BMI
The Telecom Regulation Authority of India (TRAI) has recommended that mobile network operators be allowed to share spectrum
in the interests of raising spectral efficiency and encouraging them
to invest more in rural areas. However, the proposals apply only
when operators hold frequencies in the same band and in the same
service 'circle'. The aim of preventing operators from dominating in
markets where they are not licensed spectrum owners is laudable,
but BMI believes the new rules benefit only the largest players with
pan-Indian footprints and do little to help smaller players.
Vodafone India, Bharti Airtel, IDEA Cellular and Bharat
Sanchar Nigam Ltd (BSNL) would have the most to gain from the
new rules as they mostly operate in the same circles and hold 2G
and 3G spectrum in the same bands. We believe they would quickly
draw up strategic partnerships aimed at reducing congestion in their
largest and most profitable 2G circles and look to exploit enhanced
network roll-out opportunities for 3G. Of particular interest will be
the opportunities afforded for low-cost 4G roll-out: few operators
hold pan-India 4G concessions and the high cost of building 'closed'
4G networks means that returns on investment will be hard to realise
without easier resource-sharing rules.
Despite its size, Reliance Communications will not be able to
take full advantage of the new rules because it has few peers in the
800MHz market and its preferred partner – Reliance Jio Infocomm
www.telecomsinsight.com
e/f = BMI estimate/forecast. Source: BMI, operators, COAI, TRAI
Further downside from the new rules impacts the telecoms towers
sector. Increased spectral efficiency would lower demand for capacity on towers, leading to a decreased tenancy and, therefore, recurring
revenues on which third party tower companies depend (see 'Indian
Tower Companies: Increasing Tenancy Key To Profitability', July 22
2014). We there await with considerable interest the government's
decision on whether to implement the TRAI's guidelines.
Assuming that the new rules are implemented as planned, we
see considerable potential for additional subscription and service
revenue growth arising from shared spectrum agreements in the
medium term. In particular, there will be a boost to 3G/4G uptake
as lower rollout costs will allow operators to lower prices and thus
attract new customers to their networks. We currently forecast total
mobile subscriptions to rise from 890.7mn in 2013 to 1.104bn by the
end of 2018, with the number of 3G/4G subscriptions rising from
44.1mn to 134.8mn over the same period.
9
India
AsiaTelecommunications
Tower Companies: Increasing
Tenancy Key To Profitability
BMI View: Indian telecoms tower companies will benefit from
accelerated network rollouts by service providers. Strong mobile
subscription growth – which continues to be driven by 2G services and expansion into underserved areas – coupled with capex
constraints results in potent demand for passive infrastructure.
Meanwhile, growing mobile data utilisation requires more efficient
tenancy management, raising the need for specialist third-party
asset management.
Outlook And Risk
With BMI forecasting rapid mobile subscription growth in India,
we believe there is a growing need for infrastructure sharing in
this cost-conscious market, making dedicated tower companies an
attractive investment prospect. Since Indian telecoms operators'
advanced 3G services currently rely on the relatively inefficient
1800MHz, 2100MHz and 2300MHz frequencies, more base stations
will be needed to provide the same coverage than is the case with
900MHz spectrum. This will increase tenancy rates in the Indian
tower market, which averaged 2.0 in 2013.
3G-driven Data Opportunities To Increase Tower
Tenancies
India
e/f = BMI estimate/forecast. Source: BMI
There are several downside risks to India's towers market. First,
the Indian telecom industry is heading towards consolidation following the removal of a foreign direct investment (FDI) cap in July
2013. Merging parties could look to offload redundant tower sites
(see 'Bharti Airtel Purchases Loop Mobile', February 24 2014).
Another drawback is the downward pressure on rental rates.
Bharti Infratel reported in March 2014 that its monthly average
revenue per tenant was INR34,000 (USD570). In comparison, Indonesian tower companies charge an average USD1,300 per month.
The difference is due to Indian tower companies' unique practice
of offering a 10% discount to both existing and new tenants when
a new tenant is added to the tower.
Third, there is a risk that the government's Department of Telecommunications (DoT) will bring tower companies under the
purview of unified licensing. If approved, tower owners would be
required to pay a licence fee of about 8% of their adjusted gross
revenue to the state. Presently, tower companies just pay a one-off
registration fee of INR5,000. The proposal was raised by the DoT
10
in October 2013; there is no news on whether the government will
proceed with this idea but, given its view of the telecoms market as
a cash-cow, we believe the risk is high.
Bharti Infratel: Close Relationships With
Leading Operators
BMI believes Bharti Infratel's large scale and pan-India presence
make the firm a key beneficiary of the anticipated tenancy growth
in the local towers market. Bharti Infratel owns 100% of its core
towers business as well as 42% of Indus Towers, a joint venture
with Vodafone India and Aditya Birla Telecom on a 42%, 42%
and 16% ownership split, respectively. The company's consolidated
portfolio of over 83,000 towers in March 2014, which includes
36,000 of its own towers and the balance from its interest in Indus
Towers, makes it one of the largest tower infrastructure providers
in the country with a presence in all 22 telecoms 'circles'.
Another factor in favour of Bharti Infratel is its right of first
refusal for rollouts from incumbents Bharti Airtel, Vodafone and
IDEA ; these three players jointly accounted for 55% of the mobile
subscriptions market in 2013. BMI believes this has a positive implication for the revenue scalability for Bharti Infratel as the leading
telecoms players are expected to further increase their market shares
by acquiring smaller players.
Reliance Infratel: Benefiting From Reliance
Jio's Entry
Reliance Infratel is a subsidiary of Reliance Communications with
a portfolio of nearly 50,000 towers across all 22 telecoms circles,
as of March 2013. In March 2014, Reliance Communications was
reported to be seeking potential buyer for its 95% stake in Reliance
Infratel at the valuation range of INR150bn to INR200bn to help
deleverage the parent's balance sheet.
Reliance Infratel is a beneficiary of the entrance of new tenant
Reliance Jio, which holds a nationwide 4G permit. Reliance Jio had
expressed its ambition to commence 4G offerings in H215 using
2300MHz spectrum and the 1800MHz frequencies it obtained at an
auction in February 2014. The launch of 4G services using these
high-frequency bands is expected to drive an increase in tenancy as
more network sites will be needed to deploy 4G. In order to meet its
4G launch date target, Reliance Jio has established leasing agreements with Reliance Infratel, Bharti Infratel, Viom Networks and
ATC India Tower.
Reliance Infratel had entered into three partnership agreements
with Reliance Jio as of March 2014; an inter-city fibre-optic sharing
agreement in April 2013, a nationwide telecom towers infrastructure
sharing agreement in August 2013 and a Master Services Agreement
in March 2014 to share Reliance Communications' extensive intracity fibre-optic network. These infrastructure sharing pacts are the
first few business tie-ups between the once-feuding brothers Anil
Ambani and Mukesh Ambani, who own Reliance Communications
and Reliance Jio Infocomm respectively. Although Reliance Infratel
may not be the exclusive towers provider to Reliance Jio, BMI notes
these infrastructure sharing pacts are signs of healthy progress from
the animosity that has existed between the Ambani brothers for years.
Viom Networks: Highest Tenancy In India
Viom Networks' strength lies in its pan-Indian presence and high tenancy ratio. The company reported it had the nation's highest tenancy
ratio of 2.3 in December 2013, compared with Bharti Infratel's 2.0
www.telecomsinsight.com
Indonesia
and Reliance Infratel's 1.84. The company had over 42,000 towers
across all 22 telecoms circles in India supporting close to 92,000
tenants as of July 2014. Like Bharti Infratel, Viom's wide portfolio of
telecom towers gives the company significant exposure to voice and
data growth as telecoms operators ramp up capacity and coverage.
Viom Networks is a joint venture between Tata Teleservices
Ltd and SREI Infrastructure. Viom Networks' shareholders are
presently considering options regarding the sale or refinancing of
that company. In early January 2014, Viom said that several private
equity investors were discussing plans to buy into the company. An
overseas listing has also been considered. With a high tenancy ratio
and expansive coverage, Viom Networks is an attractive proposition
for private equity funds.
The key risk to Viom is its tenant mix. Presently, less than 10%
of Viom's revenue comes from incumbents such as IDEA and
Vodafone; revenues from new operators such as Telenor, Aircel
and MTS India make up close to 33% of the firm's revenue mix,
although these three mobile operators jointly accounted for less than
13% of the mobile subscriptions market. As India's telecoms market
heads towards consolidation and incumbent operators gain further
market share, Viom's tenancy risk profile will increase significantly.
AsiaTelecommunications
fer significant investment upside. The median enterprise value to
EBITDA ratio (trailing twelve months) was 17.1x, which is lower
than the 21.7x among US tower companies, despite the higher
growth potential.
TBG: Strong Client Relationship With Large
Telecoms Operators
BMI sees huge investment potential in Tower Bersama Group
(TBG) due to its strong client base and strong financial position.
TBG is the second largest independent tower company in Indonesia
in terms of tower sites and tenancy; the company had 8,866 tower
sites and a tenancy ratio of 1.73 in 2013. Presently, the majority
of the firm's tower portfolio is in high-demand areas such as Java,
Bali and urban areas in other parts of Indonesia where population
density is high.
Strong Growth Expected For 3G Sector
Indonesia 3G/4G Subscriber Growth Forecasts
Indonesia
Indonesian Towercos Top Asian
Market Potential
BMI View: The combination of a solid growth outlook amid robust demand, high EBITDA margins and a favourable regulatory
environment bode well for Indonesian tower players. The trend of
rising smartphone and tablet adoption in Indonesia, driven by wireless data usage, has increased demand for base stations and tower
rollouts. BMI forecasts Indonesian 3G/4G subscriptions growth of
18.8% CAGR between 2014 and 2018, reaching 75.4mn by the end
of the five-year period.
As operators apportion more capex towards coverage rollout, BMI
expects demand for tower sites and base stations to grow. A major
plus for the Indonesian tower industry is that most 3G customers
are served by the relatively inefficient 1800-2100MHz frequencies,
which require more towers to provide the same signal coverage than
is necessary with lower frequencies. Indonesian tower companies
also benefit from a favourable regulatory regime, which prevents
foreign companies from owning tower firms and encourages the telecoms operators to share towers rather than building single-tenancy
tower sites. These factors explain why independent tower companies
in Indonesia enjoyed one of the highest EBITDA margins in the
tower business globally in 2013, close to 80%.
The key downside risks to Indonesia's tower industry include
difficulties in securing new building permits for tower sites and
payments defaults by smaller telecoms players. The Tower Decree
issued in March 2008 requires tower owners to seek approvals from
local government bodies before they can construct new towers. BMI
believes this ruling increases the competition among tower companies to acquire new locations for future expansion. Meanwhile,
a prolonged price war in Indonesia's overcrowded mobile market
has placed huge debt burdens on smaller operators, posing a threat
of default in tower rental payments (see 'Bakrie Telecom Defaulted
On Debt Payment', November 11 2013).
From a valuation perspective, Indonesia's tower companies of-
www.telecomsinsight.com
f = BMI forecast. Source: BMI
A key differentiator for TBG is its strong client relationship with
top three telecoms operators PT Telkom, Indosat and XL Axiata. In
2013, these companies contributed close to 75% of TBG's revenues.
BMI notes this greatly improves the firm's revenue scalability as
the incumbents are expected to become bigger customers to independent tower companies when consolidation in the mobile market
takes effect: XL recently acquired Axis Telekom, Bakrie Telekom
is facing significant financial difficulties and minor players such as
3 Indonesia (Hutch) and Ceria could be targeted for their passive
and active infrastructure, including spectrum (see 'Axiata Acquisition
Paves Way For Future Consolidation', December 3 2013).
Another benefit TBG has is its strong cash flow visibility. The
company's management is committed to undertake new tower constructions only after securing long-term lease commitments from
telecom operators. In our view, this eliminates a lot of speculative
developmental risk. Most of the company's contracts are also on
a minimum of 10-year lease terms with clauses that protect the
company against inflationary risk–25% of the rental is pegged to
the country's inflation rate. According to BMI's Oil and Gas team,
diesel prices are expected to remain at historically elevated levels
above USD100 per barrel over the next three years.
Protelindo: Largest Tower Portfolio And
Compelling Valuation
Serana Menara Nusantara (Protelindo) is the market leader based
on three important operational metrics: number of tower sites, size
11
Indonesia
AsiaTelecommunications
of tenant base and tenancy ratio. At the end of 2013, the company
owned 18,322 tenants on 9,746 tower sites, giving a tenancy ratio of
1.88. The company's biggest strength is its expansive geographical
coverage. Approximately 95% of Protelindo's towers are located in
Indonesia's four most populated regions: Java, Sumatra, Kalimantan
and Sulawesi. Over the next three years, BMI expects Protelindo
to remain the largest tower operator given its track record of tower
acquisitions; Protelindo purchased Hutch's 3,600 towers between
2008 and 2010.
Indonesia’s Tower Companies Offer Cheaper Valuation Than US Peers
TTM EV/EBITDA
25
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
20
15
10
5
EV / EBITDA TTM
SBA Communications
Crown Castle
American Tower Corp
Bharti Infratel (Consl)
Solusi Tunas Pratama
Tower Bersama
Protelindo
0
EBITDA Margin (RHS)
Source: Bloomberg
That said, Protelindo's perceived weaker relationship with the top
vendors will limit its revenue scalability, in our view. Unlike TBG,
only 36% of Protelindo's leasing income came from Telkomsel, XL
Axiata and Indosat in 2013. Although the revenue mix has improved
from less than 30% in 2011, the rate of change is still too slow owing
to the use of long contractual lock-in periods. BMI believes it is vital
for Indonesia's tower companies to increase their revenue exposure
to top three telecoms operators as they are expected to gain greater
mobile market share over time by acquiring smaller operators.
BMI believes a major weakness of STP is its customer mix. Over
the past two years, STP has been heavily reliant on tier-2 telecoms
operators such as Bakrie Telekom and Hutch for its revenue. Given
the weak growth metrics reported by Bakrie in 2013, it is important
STP further diversify its customer profile towards larger mobile
operators. A major positive is that STP's management has actively
worked to rebalance its lopsided revenue dependence, as contributions from XL Axiata, PT Telekom and Indosat increased from
22.6% in 2012 to 34.6% in 2013.
Data Centre Partnerships Offer
Long-Term Investment Upside
BMI View: Indonesia offers the greatest potential for returns on
data centre investment in Asia. A new strategic partnership with
Dimension Data provides additional upside to our bullish forecasts
for spending on cloud computing services as the relationship will
give Telkomsigma greater traction among Japanese multinationals
operating out of Indonesia.
Telkomsigma and Dimension Data are to collaborate on the development and provision of end-to-end data centre services to local and
global enterprises. Specifically, they will pool their resources and
capabilities to enable them to reach out to the Japanese business community in Indonesia, a market that Telkomsigma has yet to penetrate.
Dimension Data is owned by Japan's NTT and can leverage its parent's global high-capacity fibre backbone and points of presence as
well as its proprietary remote networking technology and solutions.
Telkom Spotted Market Potential Early
Indonesia Cloud Computing Spending Forecasts
STP: Strong Presence In Greater Jakarta
Solusi Tunas Pratama (STP) began commercial operations in 2008
and is the third largest independent tower company in Indonesia.
By the end of 2013, the firm had 2,798 towers and average tenancy
of 1.68. STP is a niche tower operator that focuses on acquiring
and building towers in the Greater Jakarta area and Java where the
population density is highest. By concentrating its operations in a
geographical area, STP is able to reduce its operating costs while
extending its footprints in areas with the highest traffic growth
potential.
e/f = BMI estimate/forecast. Source: BMI
BMI forecasts Indonesia's data centre and related services market
STP’s Towers Locations (2013)
Area
Greater Jakarta
No. of Towers (2013)
1,352
Java
984
Sumatera
227
Kalimantan–Sulawesi
100
Bali–Nusa Tenggara
118
Papua
Total
17
2,798
Source: STP
12
www.telecomsinsight.com
Myanmar
to be among the fastest-growing in Asia over the next five years,
driven by growing demand for cloud computing, system integration
and advanced connected services such as online financial solutions.
This view is informed by our observations that an acceleration in new
business start-ups has been accompanied by a surge in investments
in local business hubs by multinational players.
Furthermore, rapid improvements in wireline broadband infrastructure capacity and Telkomsigma's ambitious data centre
capacity investments lead us to forecast Indonesian cloud computing spending to grow from just USD62mn in 2013 to USD270mn
by 2018. By then, cloud will account for 14% of total IT spending
in the country, among the highest in the region. As Telkomsigma
is the leading provider of such services in Indonesia, partnerships
with global players such as Dimension Data can only deliver further
upside to this outlook.
Telkomsigma is part of the PT Telkom group, Indonesia's incumbent telecoms operator. By the end of 2015, the group expects to be
operating the fourth-largest data centre business in the world with
100,000 square metres of capacity. New tier-2 and tier-3 facilities
will have been built out by the end of 2014 and, with the completion of Indonesia's first tier-4 facility also scheduled for this year,
Telkom will have 70,000 square metres of capacity at its disposal.
Telkomsigma's services and solutions have, so far, been tailored
to meet the needs of local businesses. However, by adding the service
portfolios of strategic global partners–deals have recently been struck
with China's Huawei Technologies and Australia's Telstra – we
believe it can significantly broaden both its appeal and its reach and
ultimately accelerate returns on investment for Telkom.
Myanmar
Competition Heats Up With
Newcomers
AsiaTelecommunications
75% mobile coverage by 2016 although we see downside risk in the
government's aggressive deployment requirements, as few emerging
markets have achieved this feat in such a short span of time (see
'Unique Opportunity, Major Challenges Await Licence Winners',
June 28 2013). We expect the initial growth phase to be driven by
cost effective coverage and affordable mobile service pricing.
The key downside risk to the partnership is cultural compatibility.
Examples of rocky relationships between foreign investors and local partners are not unusual. Telenor, for example, is increasingly
at odds with its Indian partner Unitech over issues such as rights
issuance (see ' Unitech, Telenor In New Argument', July 27 2012).
The Norway-based company has, more recently, incurred the wrath
of Thailand's new military junta, further souring its relations with a
state increasingly wary of international investment in key strategic
industries. Given the vast differences in Japanese culture and the
newly liberalised Myanmar market, the likelihood of an eventual
dispute is significant, in our view.
Thailand
4G Delay Confirms Risk Outlook
BMI View: The postponement of the 4G auction confirms our shortterm telecoms risk outlook. We believe regulatory headwinds are
unlikely to dissipate anytime soon under the military Junta and this
will upset operators' business development and investment plans,
particularly AIS. The risk of a potential increase in base pricing for
spectrum is also significantly raised, in our view, as the delay pushes
the operators closer to concession expiration dates.
Bulk Of Subscription Growth Expected In 2014
and 2015
Mobile Subscribers (000)
BMI View: Telecoms competition will intensify as a result of Japanese investment in incumbent MPT. We expect Myanmar's two new
mobile operators to respond aggressively to this unexpected new
threat. However, KDDI's deep technical exp ertise and operational
know-how can only help mobile penetrat ion increase to 87.7% by
2018.
It is BMI's view that newly-licensed Telenor and Ooredoo will
embark on aggressive coverage expansion and low-cost retail
strategies to secure healthy market shares before a reinvigorated
Myanmar Post and Telecommunication (MPT) enters the fray (see
'Myanmar's Ambition Starts With Network Sharing', July 12 2013).
Leveraging the technical expertise and financial resources of KDDI
and Sumitomo Corporation, MPT will be well-placed to develop
attractive wireline and mobile services for its existing customer base.
KDDI is the second largest mobile operator in Japan by subscription share, as of Q114, and it brings deep operational expertise and
the know-how to defend market share in an open market setting.
It also offers access to an extensive international submarine cable
network, which could considerably lower bandwidth costs for MPT.
Reuters reports that the three companies plan to invest approximately
USD2.0bn over the next 10 years in the joint business.
BMI forecasts mobile subscribers to increase from 9.2mn in 2013
to 48.2mn in 2018. The bulk of the growth is expected to come in
2014 and 2015, when these international operators start to launch
their mobile services. Myanmar's government is keen to achieve
www.telecomsinsight.com
e/f = BMI estimate/forecast. Source: BMI
The Risk To Outlook
The telecoms sector will continue to be a target of the Junta's reforms and further uncertainty is expected after the Junta ordered
the suspension of the 1800MHz and 900MHz spectrum auctions,
scheduled for August and November 2014, respectively. The latest
move is in line with our expectations of a heightened risk of delay
to the 4G auction (see 'Short-Term Risk Outlook Will Worsen', May
28 2014). Of further concern is a Bangkok Post report claiming that
the Junta wants to revamp the 2010 Frequency Allocation Act to
help state-owned TOT regain its rights to revenues from its mobile
concession partners. In addition, the office of the auditor general
13
Singapore
AsiaTelecommunications
has also ordered regulator NBTC to transfer the auction fees from
digital TV licences to state coffers and has also raised the prospect
of dissolving the NBTC altogether.
ment obstacles. Nevertheless, increased competition would boost
breadth and quality of services and the upstart newcomer could be
a useful catalyst for change.
Operators At Risk
Privately-owned MyRepublic has proposed acquiring 20MHz of
sub-1GHz spectrum plus a further 100MHz of 2.3GHz or 2.6GHz
spectrum in order to establish a new mobile broadband service
in Singapore. The wireline broadband operator believes the lack
of price competition in the mobile market means that consumers
are unwilling to utilise advanced services due to the high price of
data bundles. It advocates the licensing of a fourth mobile operator
focused on unlimited data plans as a means of reinvigorating the
data services market.
Singapore
Data ARPU Growth Threatened
By Newcomer
BMI View: In addition to its lack of scale, MyRepublic's ambitions
to become Singapore's fourth converged services provider will be
frustrated by substantial strategic, regulatory and business environ-
Data ARPU Growth Under Threat
Monthly Data Plan ARPU By Operator (SGD)
35
30
25
20
15
SingTel
StarHub
Q114
Q313
Q413
Q213
Q113
Q412
Q312
Q212
Q411
Q112
Q311
Q111
10
Q211
Mobile operators, particularly AIS, are most at risk if the 4G auctions
were to be delayed beyond November 2015 – the expiration date of
AIS' 900MHz spectrum concession. Under this scenario, AIS would
be left with only 15MHz of 2100MHz to serve its 42mn subscriptions. Considering the growth in data usage, we see considerable
risk to AIS' ability to maintain network quality.
We believe DTAC and True are less at risk as each of them
owns 850MHz spectrum which is highly suitable for cost-effectively
reaching rural and low-income areas with advanced services, and
their concessions are not due to expire for at least another three years.
However, DTAC has problems of its own. In June 2014, Norway's
Telenor – which owns 42.6% of DTAC – issued a lengthy apology
after angering the Thai Junta with a public announcement that it had
been ordered to briefly block Facebook access the previous month.
The apology followed NBTC's threat to ban DTAC from participating in the 4G licence auction process over the incident; it is unclear
whether that apology will carry sufficient weight with the Junta.
As operators are pushed closer to their respective concession
expiry dates, BMI expects the risk of an escalation in base spectrum
pricing for the 1800MHz spectrum to be raised considerably. The
1800MHz band is most suitable for 4G use because it is compatible
with the broadest range of smart devices worldwide. However, only
two licences will be offered in the 1800MHz auction, while at least
three operators are participating. Even though DTAC already owns
1800MHz spectrum under concession, it is likely to bid as there are
regulatory cost savings to be made by migrating customers to a new
block of licensed spectrum–frequencies it can use unconditionally
without interference from cash-strapped TOT or CAT Telecom.
We believe the delay only serves to heighten operators' anxiety
of being left out of the crucial 1800MHz market and will push the
final bid prices higher.
M1
Source: BMI Mobile Operator Database
The company correctly anticipates strong opposition from incumbents SingTel Mobile, M1 and StarHub; they are likely to claim
that, owing to market saturation and the small size of the addressable
market, a fourth player would harm their ability to invest in networks
and services. It also acknowledges that Singapore's regulatory apparatus does not yet provide the tools it would need to succeed in
its aims of acquiring a 10-15% share of the mobile market.
We consider that MyRepublic overestimates its ability to convince the Infocomm Development Authority (IDA) that it should
reserve spectrum for a new player rather than auction it to the highest bidders. Even if its case were accepted, it would still require
regulatory support – in the form of a mandatory national roaming
agreement with existing operators – that would be difficult to broker.
After three years, French newcomer Free Mobile has yet to secure
a comprehensive network access deal with its peers as the regulator
Spectrum Ownership In Thai Telecoms
Operator
Frequency
Spectrum Allocation
Contract Type
Expiry
AIS
900MHz
17.5MHz
BTO (TOT)
Nov 2015
AIS
1800MHz
12.5MHz
BTO (CAT)
Sep 2013 + 1 yr extension
AIS
2100MHz
15MHz
Auction Licence
2027
DTAC
850MHz
10MHz
BTO (CAT)
2018
DTAC
1800MHz
50MHz
BTO (CAT)
2018
DTAC
2100MHz
15MHz
Auction Licence
2027
TRUE Corp
850MHz
15MHz
Wholesale (CAT)
2025
TRUE Corp
1800MHz
12.5MHz
BTO (CAT)
Sep 2013 + 1 yr extension
TRUE Corp
2100MHz
15MHz
Auction Licence
2027
Note: BTO–Build-Transfer-Operate concession, secured from TOT plc or CAT Telecom, as appropriate. Source: Operators
14
www.telecomsinsight.com
Singapore
AsiaTelecommunications
has proved unwilling to intercede in negotiations. We also believe
Singapore's existing operators will have noted with dismay the
impact Free has already had on the profitability of France's three
incumbents and their ability to invest in advanced services.
MyRepublic proposes building an initial network of 200-300
macro base stations in order to launch services; however, it will
need much deeper coverage in order to achieve traction it needs
to recover its projected SGD250-300mn (USD160-240mn) investment. Network access and roaming would be vital in reaching the
majority of consumers; persuading the regulator to mandate this
would be difficult at best.
BMI's Mobile Operator Database shows that SingTel and
StarHub would have much to lose if price competition intensified
in the non-voice services market. SingTel's data ARPU reached
SGD32 (USD25.6) in Q114 and has risen rapidly in recent quarters
owing to its ability to promote data within multi-product bundles
straddling its broadband, TV, voice telephony and mobile businesses.
StarHub's data ARPU is also growing, albeit at a slower pace and
is–for the moment–the lowest in the market at SGD19.3. For M1,
however, the trend is downwards in nature, recording ARPU of
SGD19.5 in Q114.
SingTel's high data ARPUs and slow-growing total user base
versus M1's ARPU decline and robust subscription growth suggest
that data plans are expensive and that consumers would benefit from
more competitive pricing. While there is scope for a fourth operator–
and we believe MyRepublic's low-cost, low-margin strategy marks
it out as a credible candidate – we share the incumbents' views that
a newcomer would merely cannibalise the existing market rather
than add organically to it.
Analyst: Andrew Kitson
Sub-Editor: Sofia Abasolo
Subscriptions Manager: Yen Ly
Production: Fauzia Borah Isahaque
Copy Deadline: 23 July 2014
www.telecomsinsight.com
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