Despite the challenges facing the sector, increased competition and investment are fuelling growth

The telecommunications sector in Papua New Guinea has changed dramatically in recent years. Until recently the industry was characterised by high prices and slow, inconsistent service, although increased competition is now causing this to change. While communications will always be difficult in a country where many people are geographically isolated and the terrain is so challenging, the relevant infrastructure in PNG is quickly developing towards international standards – and at prices that are near enough to international norms.

Changing Landscape

The country has long been working to find the right formula for the government-owned telecoms operator, bmobile (formerly known as BeMobile), which has operated in PNG since 1997. In 2008, the company responded to the challenge of a new entrant, Digicel, by bringing in new investors.

Hong Kong-based private equity group General Enterprise Management Services took 20% of the stock, Trilogy International Partners of the US took 20%, PNG’s National Superannuation Fund received 5%, and Nambawan Super, another defined contribution fund, also received 5%. The restructuring, however, did not stop the decline of bmobile. The government argued that the outside investors, together known as the Capital Way consortium, failed to deliver on their promises to regain market share from Digicel In late 2013 and early 2014 PNG saw a number of significant telecoms deals, restructurings and investments – transactions that are quickly changing the competitive landscape of the country. At first, it seemed as though activity in PNG telecoms was set to stall and that momentum would be lost. In August 2013 a transaction that would have resulted in Vodafone Fiji managing bmobile fell through. According to sector research and consulting firm TeleGeography, this was largely due a disagreement over infrastructure rollout.

After the collapse of the deal, the decision was made by the PNG authorities to provide additional financial support to bmobile without an external partner. The government recapitalised the carrier by investing $88.2m and increasing its share of the company to 85%. The benefits of the intervention were substantial. Sundar Ramamurthy, CEO of bmobile, said that performance metrics improved quickly after the new capital was invested, with the completed call ratio in Lae and Port Moresby jumping from 33% to 98.5%. However, the CEO also warned that the initial recapitalisation would not be sufficient to accomplish everything that needed to be done for the company, but it was a start and would allow bmobile to be competitive in the market.

Ramamurthy, who had previously worked with the Independent Public Business Corporation (IPBC) on the creation of a national data company, said that a key part of the company’s strategy would be shifting focus from voice and SMS segments towards data. The government investment, while effective, was essentially a rescue effort. The company is estimated to have 10% (or less) of the market and in late 2013 Ramamurthy said that one option was to simply shut down the carrier.

New Direction

In addition to having its balance sheet bolstered, the company also made efforts to repair its reputation. After the recapitalisation, it tried to wipe the slate clean, with a director from its main shareholder going as far as apologising for the errors made in the past in the management of bmobile. IPBC managing director Wasantha Kumarasiri said that he recognised that the company had charged too much in the past and that he understood why customers would still harbour negative feelings toward the carrier and asked for forgiveness. Up until the entrance of mobile operator Digicel in 2007, bmobile demanded very high rates, and this has never been totally forgotten. A SIM card from bmobile was PGK125 ($54) before the arrival of Digicel; however, this was dropped to PGK25 ($11) after Digicel began offering SIM cards for PGK20 ($9). While bmobile has always been somewhat favoured because it is the national company, it has never fully capitalised on its home team advantage.

Management Partner

The government still has a lot to do in terms of both financing and management, and some steps have already been taken to shore up the bmobile brand and the company's offerings. After the Fiji deal fell through, the IPBC entered talks with Vodafone UK to directly manage bmobile, and in July 2014 Vodafone entered a non-equity strategic relationship with the PNG operator.

The deal, which will involve bmobile's operations in both PNG and the Solomon Islands, will allow local customers to roam on Vodafone's international network and Vodafone's corporate customers with managed services contracts elsewhere to access these services via bmobile. The two companies will also jointly offer business and retail customers various products and services under the terms of the exclusive agreement.

Market Leader

While bmobile has struggled, Digicel has been steadily expanding. In 2011 the company acquired Datanets, an IT services firm that ran an internet service provider (ISP) that offered WiMAX and portable connections. In 2013, Digicel purchased the very-small-aperture terminal business of Remington Group, a locally-owned diversified conglomerate, and then later in the year took over as the wholesale provider for Daltron, a local ISP that is part of the WR Carpenter Group. In sum, the company, which already dominates the mobile phone business, has significantly expanded its presence as an internet company.

Digicel has also been active in building its wholesale capacity. In early 2013, the company signed an agreement with SES Partners and O3b Networks to utilise the former's NNS-9 C-band satellite capacity and the latter's medium earth orbit constellation. The combination of the two networks will allow for both efficient and low latency connectivity. The O3b system is designed to improve connectivity via the use of eight satellites in orbit at 8000 km. The configuration allows signal transmissions to reach most of the world's currently under-served markets and the company has so far received orders from the Cook Islands, Madagascar, Somalia, Palau, Malaysia and American Samoa. John Mangos, CEO of Digicel, told OBG, “We have been building a lot, but the results of this will really show in 2015.”

Fixed-Line Developments

In May 2014, Telikom PNG, the state-owned fixed-line operator, acquired Datec, a wholly-owned subsidiary of Steamships Trading Company. Datec provides a wide range of ICT services, solutions and products in networks, applications, training and web design. Datec will be used in part to help Telikom PNG expand into internet and data services. The two companies will remain separate, according to media comments made by Telikom PNG chairman Minish Patel, and Datec will focus on providing services that the state operator has so far been unable to provide successfully, such as some retail services.

Telikom PNG has recently been undergoing a complete overhaul. In July 2013, the company signed a PGK600m ($243.9m) deal with China’s Huawei to help upgrade infrastructure and improve service. About PGK500m ($203.25m) of the funding comes from the Export-Import Bank of China via the IPBC and the rest from Telikom PNG itself. Investments will include improvements to the company's existing infrastructure – making it entirely internet protocol based so problems can be addressed before complaints arrive – and putting new infrastructure in place to improve mobile connectivity. The current management of the company also commented that the front line marketing and service presence needs work.

The IPBC has said that the company's assets need a complete upgrade and failure to do so could result in Telikom PNG's business shrinking dramatically. To improve efficiency, the firm is seeking to reduce total staffing from 1400 to 900 through voluntary attrition. However, management has also been quick to point out that Telikom PNG has already restructured its debts to reduce interest costs and is now profitable. One key focus area for the company is its subsidiary, Citifon, the CDMA mobile operator that was formed in 2011. Telikom PNG has decided to end investment in that technology and transition the carrier to 4G.

High-speed mobile connections are seen as the future for PNG's telecoms sector, and Digicel is already ahead. The company switched on ten 4G LTE sites in March 2014, eight of them in the central business district. The service is being made available to post-pay customers first and will eventually be made available to pre-pay – a new LTE SIM card is needed to utilise the service. Following the initial trials, the plan is to roll the service out to more of the country over time.

New Entries

The biggest recent news for the sector has been the issuing of a mobile operator concession to Awal Telecom, a Dubai-based company. A total of three licences were granted – gateway operator, individual application operator and individual mobile operator – and these are good for 10 years. The company says it will be branded within the country under the name A-Tel and that it will be targeting areas in PNG that are currently underserved. The company pointed out in public comments that it was not seeking to take customers away from the existing carriers.

The response from the public has been mixed. Some people have commented that introducing Awal will add to the competition and help to lower rates. Others have argued that Telikom PNG should be the one to provide the competition and that it would be better to keep more ownership domestic. Concerns have also been raised about the viability of the new entrant and whether it has the ability to be successful or even to survive. There have been questions regarding Awal's track record, its corporate structure and lack of infrastructure.

Concerns raised include the fact that the company's International Telecoms Union (ITU) membership was not obtained until after the PNG licences were being acquired. In June 2014, the National Information and Communication Technology Authority (NICTA), in part responding to the criticism, emphasised that the authority must still evaluate the company to ascertain whether it is has the capital and experience to build out the proposed network. The licences are just one step of the process, and commercial questions also hang over the deal. Prior to the entrance of Awal, industry leaders had questioned whether PNG could support a fourth carrier, given the small size of the market.

Space To Grow

PNG remains a place somewhat on the fringes of the ICT revolution. It is ranked 142 of 192 in terms of download speeds on Ookla's Household Download Index (rated at 4.73Mbps). It is behind Bangladesh, Iraq and Argentina, but interestingly ahead of Indonesia, Laos and the Philippines and not far behind Malaysia (at 125th place, rated at 5.95Mbps). In terms of internet penetration, ITU statistics indicate that 6.5% of the population uses the internet. That is less than the Solomon Islands (8%), Vanuatu (11.3%), the Marshall Islands (11.7%), Kirabati (11.5%), Indonesia (15.82%) and Tuvalu (37%). The situation is much the same in terms of telecoms. Mobile phones per 100 inhabitants was at 40.98 in 2013, fewer than Solomon Islands and Somalia. The industry has long said that the high cost of the internet and phone services is an impediment to business and needs to be corrected.

The sector is beginning to perform much better and it is starting to operate closer to international norms. Not only are internet rates coming in line and expected to fall further, but performance is already at fairly good levels. Despite the country's low ratings on Ookla's Household Download Index, PNG held up well against other island nations, which are at a disadvantage given their remoteness. The Northern Mariana Islands, for example, are ranked 168 at 3.24Mbps, Antigua and Barbuda are 167 at 3.26Mbps and the British Virgin Islands are 164 at 3.40Mbps. And while internet and mobile phone penetration may be comparatively low, it is quickly rising. Between 2012 and 2013, the percentage of people using the internet almost doubled in PNG, from 3.5% to 6.5%, while the percentage of people with mobile phones grew exponentially from 1.6% in 2006 to over 40% in 2013.

Dropping Costs

Perhaps most importantly for the sector, costs are beginning to drop. In early 2013, Telikom PNG cut its wholesale internet rate from PGK0.09 ($0.04) per MB to PGK0.03 ($0.012) per MB. This follows a drop from PGK0.64 ($0.26) to PGK0.09 in 2010. Datec immediately said it would be doubling customer quotas, but industry observers and critics wondered whether the change would be meaningful. While the headline price has changed, so too have the terms of the contract. Whereas before, a customer would buy a quota and be charged a penalty rate for spikes over the quota, under the new system, according to Telikom PNG’s announcement and comments from ISPs, the wholesaler put a hard cap on the ceiling. ISPs therefore have to estimate their peak demand ahead of time and buy sufficient quota to cover the maximum spikes. Noel Mobiha, an academic and former acting chief executive for Telikom PNG, said in comments to the drop in the headline rate may not end up lowering costs for the end user. According to his calculations, if a company uses only 30% of their quota but has occasional spikes to 100% of their allowable bandwidth, they could end up paying more under the new pricing scheme than they paid before the change.

Whatever the case, prices are and will continue to drop because of increased competition and the availability of options other than Telikom PNG’s wholesale offerings. While retail access remains relatively expensive and quality can be inconsistent, it is getting very close to being acceptable to most businesses and individuals. According to Mangos, the retail cost of internet bandwidth has dropped more than 95% in the last two years and that at higher volumes, bandwidth costs in PNG are comparable to those in Australia.

Growing Popularity

At the end of 2013, the country had 240,000 users on Facebook, up about four-fold in three years, and usage patterns seem to be very local in focus. The 10 most popular Facebook brands among PNG users are mostly from within the country. A local jobs site, PNGworkForce is in the number one spot, followed by Digicel, Skerah (a PNG business and tourism promotion site), GoGo Cola, Hausples (a property site) and pngBuynRent.

E-commerce has existed in PNG for some time, with the first retailing site, EsiShop, introduced in 2006. New additions to the segment include MarketMeri, a trading site similar to eBay that was founded in late 2013. PNG is a place well suited for e-commerce development. Because so many people live in rural areas (an estimated 85%), internet shopping could hold high potential simply because it is easier for a person with a mobile handset to order goods than it is for them to go to the nearest retailer. Online shopping would also improve pricing for consumers, as the local markets might be less competitive than the larger retailers in the cities.

Another area that is rapidly growing in the country is online publishing, with a wide range of blogs. While PNG is a vibrant democracy with a strong media sector, the internet has brought a new dimension to the public discourse. Blogs and Twitter accounts, such as PNGblogs, PNG exposed, PNG Attitude, Malum Nalu, Doc Spin It and a number of others offer the public a wide range of perspectives on the country, its economy and events of the day. While at times confrontational and controversial, they have helped to enliven the on-going debates in the country and have raised some important questions.

Cloud Computing

For the time being, cloud computing opportunities are quite limited within the country. The lack of international bandwidth, high costs and latency issues make it difficult to utilise international services, while local issues with respect to connectivity also make certain technologies prohibitive. However, with falling prices, some of the services that just a short time ago may have seemed impossible are now very much within the realm PNG’s grasp. Datec already provides a wide range of relevant and innovative offerings including Linux VC containers, virtual private servers, dedicated servers, co-location and data backup. And while prices are high, they are slowly moving within reach of many businesses. Although prices are still high – Datec's 1 TB cloud backup solution costs PGK749 ($304) per month compared to Amazon’s 1TB storage costs of about $30 per month – having a local provider can reduce other costs and improve service. Demand also appears to be increasing as companies see the need to improve efficiency and combat fraud. While slowing economic growth has them looking more closely at costs, they are seeing that one way to improve the bottom line is by making better use of technology.

“Moving forward, managed services and outsourcing will increase,” Graham Rix, CEO of Daltron, told OBG. “In the past five or six months, we have had a lot of companies investing in IT to improve efficiency.”

Reform & Liberalisation

The key to PNG's rapid liberalisation and market development is good regulation. By world standards, the market is very young. Phone service was only introduced in the country in 1964, and from there, development was slow but steady, following the course of liberalisation charted by many developing nations. The Post and Telecoms Services Division was corporatised in 1982, and telecoms was split from the post office in 1996.

After some delay, competition was introduced to the mobile sector in 2007 with the arrival of Digicel and in 2009 a new regulator was formed. The NICTA took over the responsibilities of the previous regulator, the PNG Telecoms Authority, as well as some of the duties of the Independent Competition and Consumer Commission as they relate to telecoms.

NICTA has been a deft and relatively effective regulator. While it has been working to regulate the industry in a difficult environment, such as dealing with a state-owned fixed-line monopoly (Telikom PNG) and a private near monopoly (Digicel), it has slowly applied the right sort of pressure to convince the various interests to allow more competition.

In early 2012, NICTA initiated an inquiry into wholesale internet costs. It published a paper on the subject, which was comprehensive and measured, ultimately concluding that Telikom PNG has a superior market position that could potentially be abused. In 2013, the Ministry of Communications and Information Technology deemed that wholesale internet services were socalled declared services and that access has to be guaranteed to all and that rates have to be set at the same rate for all customers, including Telikom PNG itself. The wholesale provider cut rates almost immediately.

Regulation

As part if its review of the telecoms industry, NICTA also examined Digicel for possible market dominance issues. The key problem identified as the high cost of calls from Digicel customers to bmobile customers. The latter accused the former of making out-of-network rates too high. After a good deal of discussion, NICTA finally ordered rates from one carrier to another to be capped at 40% above in-network rates. It recognised that discriminatory pricing may at times be justified but that excessive differences are potentially problematic in terms of competition.

The authority has also examined domestic roaming and facility sharing, and in early 2014 determined that there was no need to recommend these be designated as declared services. NICTA is still examining whether any measures need to be taken with respect to the pricing of entry-level broadband. According to the regulator, the price of wireless broadband in the country is about 20% to 80% of the average monthly income, and fixed broadband is about 150% of that level. NICTA said that the international benchmark is 5% of average monthly income for broadband services. It has issued a consultation paper on the subject.

NICTA has initiated various other inquiries on data collection, consumer protection and universal access, but its most important work has been keeping the small market competitive. Its major victory has been to push the dominant players toward more balanced positions in the market by using its power to recommend the designation of declared services. It has also used licensing in a similar manner. In particular, it has issued 20 individual network gateway services licences, each of which allows the licensee to establish an international gateway capable of competing with the APNG-2 cable to Australia. The first batch of licences, issued in 2011 and 2012, went to established players: Telikom PNG, Digicel, Datec, Daltron, Remington Group, Hitron and bmobile. Most of the rest have gone to newcomers that could potentially shake up the market. Many of the licences were issued in 2013 and 2014.

NICTA has said it understands the limitations of these licences: if the licensees use satellites, they will have to deal with latency issues. But there are numerous possibilities that exist: medium earth orbit satellites, such as O3b, or even the installation of another undersea cable. Additionally, even the threat of new competition or the possibility of losing non-urgent traffic to competitors will keep the pressure on APNG-2 rates. The regulator has also issued a great number of non-gateway individual application licences, which allow for the provision of internet services. At last count, 36 had been awarded, the most recent being in mid-2014.

Given the efforts of the regulator, a market is now forming that has the potential to be highly competitive. While possible bottlenecks remain, and it appears that considerable consolidation has taken place in the ISP space and that Digicel will remain the dominant wireless provider, there is room for alternative options in the market. International capacity will increase while consumers will have a range of choices in terms of delivery. The regulator is also remaining vigilant, and has appeared to be watching closely to make sure anti-competitive strategies remain at a minimum.

PNG DataCo & NTN

The country is also pursuing some larger initiatives that promise to help in the creation of a more competitive market. In early 2013, PNG DataCo received network and gateway licences, and its board met for the first time in early 2014. According to reports, the company will take over the job of wholesaling bandwidth from Telikom PNG and will run the main international gateway. It will sell to all carriers, including new entrants and Telikom PNG, on an equal basis. Telikom PNG will be restructured and will focus on the retailing of relevant products and become much like any of the other ISPs or network operators. The expectation is that this will make for lower and better pricing and encourage more development in the sector.

PNG DataCo will operate the National Transmission Network (NTN). The NTN is a fibre project that will link the major cities in the country. The main leg of the network is a 700-km line running from the Hides gas field to the PNG liquefied natural gas plant. Another 50-km line will run from the plant to Port Moresby. That cable system will connect to a fibre optic line being constructed from Lae to the Southern Highlands, which will itself link into PPC-1. PPC-1 links Australia to Guam with onward connections to the US and Asia and it has 10 times the capacity of APNG-2 (see analysis).

Outlook

The PNG telecoms sector is in a period of transformation. If all goes according to plan, international connectivity will improve, local connectivity will become faster and cheaper, redundancy now lacking will be built into the system and costs will fall further. It is also likely that consumers will have more choice as new players enter the market.

As speeds increase, capacity improves and costs come down, ICT is set to become a more integral part of many PNG businesses to help them improve their competitiveness. Meanwhile, with mobile penetration increasing and internet growth rising, the communication patterns of PNG’s population are set to change.

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The Report: Papua New Guinea 2014

Telecoms & IT chapter from The Report: Papua New Guinea 2014

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