Clean slate: The sky is the limit as the sector prepares to expand from a low base

In 2013 two new international telecoms players entered Myanmar, providing the modern and affordable services necessary to bring the country into the 21st century. Every other industry will feel the effect of added connectivity and telecoms penetration, opening a plethora of avenues for different products. However, Myanmar’s telecoms sector remains one of the most underdeveloped in the world, and immense challenges lie ahead for both the international giants and local government and providers.

New Providers

After decades of neglect by international investors, the country has granted licences to Norway’s Telenor and Qatar’s Ooredoo to compete alongside the two local companies, Myanmar Post and Telecommunication (MPT) and Yatanarpon Teleport (YTP). With 55m unconnected citizens, these firms have the opportunity to tackle one of the final frontiers for mobile penetration. Yet there is a long haul ahead, and a huge amount of work is necessary before citizens can begin reaping the benefits. The licence winners are set to face skills shortages, customers in conflict zones and deep-rooted inefficiencies in the system. The risks are high for these players and margins may be tight, but the potential benefit for Myanmar citizens is immense.

Data

Myanmar has been ranked as having the world’s lowest rate of mobile penetration by the Asian Development Bank, estimated at 1.2% in 2010 and 10% in 2013. The region’s average is 78.2% and Vietnam’s rate is 175%. Until September 2013 there was one telecoms provider, MPT, which has run the mobile network and backbone gateway for Myanmar since their construction, only allowing small construction, maintenance and internet provision concessions to trickle down to other local companies.

MPT’s network now comprises an estimated 2000 stations providing both 2G and 3G services to 3.5m citizens in 2012 and an estimated 6m mobile users in 2013. This is expected to rise to 15,000 stations by 2017 and 27,000 by 2022, giving a compound annual growth rate of 49.5% for stations over the next four years and 12.4% for the five years after that.

During the telecoms licence tender process in 2013, the government set targets to increase mobile penetration to 80% by 2015 and boost the number of mobile users by 42m citizens within three years. This would result in a staggering 282% penetration growth rate for the next two years, and licence winners have already committed to reach that goal.

Internet

Internet penetration in Myanmar is estimated at under 1m users, or 1.5% of the population, who access via cell data or fixed line, with the majority of these accessing the net through mobile data plans offered by MPT at a MMK4/min ($0.004/min). Given the strict censorship imposed by the previous regime, the government was reluctant to allow internet access, and connectivity was restricted to ministries and select individuals until recently.

“In 2000 not even all the ministries had access to the internet,” said U Thaung Su Nyein, the managing director of Information Matrix, one of the country’s first IT services and media companies.

At the turn of the millennium Myanmar had a backbone capacity of 128 Mbit/s, and even today it has only 15 Gbit/s in total, through three land cables to its neighbours Thailand, China, India and Laos, as well as the submarine South East Asia-Middle East-West Europe (SEAMEWE) 3 cable to Singapore. This is compared to Thailand’s 526 Gbit/s total international backbone capacity, and the 2012 world total of 94 Tbit/s (94,000 Gbit/s). MPT estimates that Myanmar’s capacity will rise to 40 Gbit/s by 2014 and 200 Gbit/s by 2015, once the SEAMEWE 5 line is completed, but this will still be a long way behind other countries. For now, backbone capacity remains a key limitation on internet penetration.

Historical Block

Myanmar’s telecoms sector has been subdued by the government’s monopoly, partly through extortionate prices and partly through a severe lack of infrastructure capacity.

As of August 2013 the cost of a SIM card, at $200, remained prohibitively expensive for the majority of consumers in Myanmar. To be sure, this is a significant improvement from the previous price of $3000 five to six years ago, but coupled with the price of a handset the current charge is still not an option for most locals. Historically MPT have sold the cards at these prices in order to fund the network and maintain the towers, given that there was little tax revenue to fund the company.

“The revenues from this set-up are not sufficient to maintain or expand the network,” said U Thura Ko, founder of investment advisory firm YGA Capital. “Funding from local companies alone cannot deliver what is needed. So the government has only one option – to embrace foreign investors and inject much-needed capital and expertise into the system.”

Tender

At the beginning of 2013 the government announced its intention to tender four new telecoms licences, two of which would be given to foreign companies and two to local companies. The licences would enable these four firms to compete with the government’s MPT by renting the necessary spectrum space for 15 years, as well as allowing them to construct additional network towers for mobile coverage and increase backbone capacity for internet penetration. The licence will enable the holders to approach the market as they see fit.

Soon after the initial announcement was made in January, authorities launched an investigation into the Telecoms Ministry’s malpractice and the former minister of telecommunication and information technology, U Thein Tun, who had resigned earlier that month. The corruption case was one of the first of its kind, and acted as a signal to foreign investors and political observers that Myanmar was changing its ways to allow a transparent, legitimate tender.

An anti-corruption board was unveiled soon after the case, headed by the vice-president, U Sai Mauk Kham, aiming to clean up all areas of government to reassure foreign investors. The institution had already prosecuted some 17,000 civil servants as of February 2013. “The Myanmar government is aware of the scrutiny it will get and wanted to showcase this tender as being clean and transparent,” said U Thura Ko at the time of the tender.

Ticking The Boxes

With a new minister in place and the department having been purged of its murky roots, the tender process in its early stages drew over 91 expressions of interest. Myanmar became the last frontier finally opened for telecoms giants and received an enormous amount of press coverage globally. “Almost every operator in the world took an interest in the tender,” said U Min Zeyar Hlaing, the managing director of Myanmar Millennium Group.

From the initial fray a shortlist of 12 consortiums was selected by the ministry and the bidding wars began. Unprecedented partnerships arose, including George Soros Quantum Fund with Caribbean Digicel, and a behemoth of Vodafone and China Mobile, the largest group by estimated value. The latter eventually dropped out of the auction and, despite much publicity surrounding Soros’ attempt to invest in Myanmar, his group’s bid was rejected.

Winners

The winning bidders were announced on June 27, 2013. Telenor and Ooredoo were promised the licences to operate within Myanmar alongside the two existing local, state-owned operators MPT and YTP. Telenor is the $33bn Norwegian telecoms giant with operations in more than 30 countries, including some in the region, such as Bangladesh, Malaysia and Thailand. The company is 54% owned by the government of Norway, which has a long history in Myanmar, especially regarding its investments in oil and gas projects, as well as through the Myanmar Peace Initiative that aims to support the ceasefires in the country’s border regions.

Ooredoo, previously QTEL, is a $12bn telecoms provider, 55% owned by the state of Qatar and with operations in 16 countries at present, including Indonesia and the Philippines. The state’s relationship with Myanmar and South-east Asia in general is only just beginning, but it is expected to also be bidding for potential oil blocks in Myanmar. However, Ooredoo has already faced opposition from some of Myanmar’s extremist Buddhist leaders, who have labelled the firm Muslim-oriented and to be avoided by local Buddhist consumers. Muslims comprise an estimated 4% of the population of Myanmar, with Buddhism by far the dominant religion, with 89%.

Price War

The two foreign licence winners have already announced their pricing and service plans to entice customers and jab at their competitors prior to starting operations in Myanmar. On points of sale, Ooredoo has aimed higher by promising 240,000 SIM card sale points and 720,000 top-up locations, dwarfing Telenor’s 70,000 SIM card sale points and 95,000 top-up locations.

On pricing, Norway’s Telenor has proposed to undercut its international rival by just under 30% for call charges, promising MMK25 ($0.03) per minute compared to Ooredoo’s MMK35 ($0.04) per minute for on-net calls and MMK45 ($0.05) per minute for off-net. Both firms have agreed to radically lower the price of GSM SIM cards from their current $200 to MMK1500 ($1.65) once they begin sales.

Local Players

Alongside the foreign entrants, Myanmar’s two local telecoms providers, MPT and YTP, will be competing. MPT is the 100% subsidiary of the Ministry of Post, Communications and Telegraphs, and was the sole telecoms services provider in the country until the new licences were issued. Founded in 1884, it has had exclusive rights to the mobile spectrum and backbone in Myanmar since the network was installed. When the licence tender process began, however, the company began inviting private firms to cooperate, as well as forming a joint venture with the Ministry of Defence, which controls a separate CDMA network in some coastal regions. The new government joint venture will work in unison, and once the Telecoms Law is enacted the company will become a separate entity from the ministry to better serve its customers and compete with the new players. Furthermore, MPT proposed that the company will aim to be public and eventually float its shares on the new Yangon Stock Exchange once it is created in 2015.

YTP is the second telecoms services provider in Myanmar and is majority owned by the Ministry of Post, Communications and Telegraphs with other shareholders, including many of the largest conglomerates in the country. The company was once Bagan Cybertech, established in 2003 as the sole internet provider for Myanmar before it was confiscated by the government in 2005. It currently provides internet and satellite services, but that will change once its licence is granted.

Outlook

The competing telecoms licence holders are set to battle hard for their market shares in Myanmar. Through this competitive force the country is expected to rapidly increase its connectivity and millions of citizens will soon have access to mobiles and the internet. The telecoms licence tender was the biggest story for Myanmar-bound investment and development in 2013, and a key example of how the country plans to progress. From a very low base the sector now has the chance to propel itself into the 21st century, but the huge task at hand is not for the faint hearted. The next two years will be a test unlike anything the sector and the government have seen before, and investors will be watching closely.

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The Report: Myanmar 2014

Telecoms & IT chapter from The Report: Myanmar 2014

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