The right mix: A large and diverse market offers consumers options and investors opportunities

Telecoms in Malaysia is in transition as 2G and 3G are quickly giving way to 4G long-term evolution (LTE). The market for devices is rapidly evolving with the introduction of new technologies. In the long term this will mean an explosion in usage and innovation and greatly improved business for operators. It will also mean a better experience for users and considerable spin-off effects as speeds increase and networks’ capabilities increase dramatically. But as in the rest of the world, Malaysia is set for a challenging period of adjustment. To go from 3G to 4G will take significant investment from both telecoms firms and consumers. It will also require another round of price discovery, with operators searching for the right mix of offers to keep customers engaged while maintaining profitability.

Malaysia is likely to come through the transition in better shape for the market. Prudent regulation has led to a strong market structure that promotes stability while encouraging experimentation. A core of stable operators is complemented by a wide range of smaller, varied players. By keeping an eye on pricing and implementing regulations that allow for fair usage of existing networks, Malaysia has avoided the wholesale dumping found in other markets while still managing to create a space for aggressive strategies, creative marketing and cutting-edge innovation.

Long History

The Malaysian telecoms system traces its roots back to 1891, when a telephone exchange was installed in Kuala Lumpur, along with 400 miles of communications line. Only 21 phones were operating until 1946, when the Post and Telecommunications Department handled phone services. The same year, the Telecommunications Department in Peninsular Malaysia was formed. It was later merged with the Telecommunications Department of Sabah and Sarawak to form Jabatan Telekom Malaysia (JTM). Mobile phones were introduced in Malaysia in 1985, when the 450 MHz ATUR system was established by JTM. In 1987 phone services were transferred to Syarikat Telekom Malaysia (STMB), which was listed in 1990 and became Telekom Malaysia (TM) in 1991. In 1988 STM Cellular was formed and provided mobile services on an analogue ETACS 900 network. In 1989 Celcom took over STM Cellular, and in 1993 six licences were issued. The sector had been slightly deregulated since 1983, when private firms were permitted to sell telecoms equipment. DiGi offered the first digital service, at 1800 MHz, in 1995 and was the first to offer prepaid services in 1998. Celcom also began providing digital service, at 900 MHz, in 1995.

Market Making

As a result of the 1997-98 Asian financial crisis, the sector was significantly restructured, with larger, better-established players acquiring weaker companies. TM took over Celcom, after the latter faced a debt crisis. Maxis bought Timecel, and Norwegian firm Telenor increased its stake in DiGi so that it had effective control. The regulation of the sector was also significantly changed. The Communications and Multimedia Commission Act was passed in 1998, and in 1999 the Malaysian Communications and Multimedia Commission (MCMC) was established.

For the next decade or so the market settled and refined the structures that had been put into place following the financial crisis. Maxis was privatised and then relisted, with Saudi Telecom buying a 25% stake. In 2008 Celcom was spun-off by TM. In 2001 Telenor acquired a 61% stake in DiGi, with an agreement that the shareholding would be taken below 49% by 2006. U Mobile was founded in 2006, received its prefix (018) from regulators in 2007 and launched services in 2008. It had two strategic partners, including Japan’s NTT DoCoMo, but they sold their shares.

Though three main players dominate the market and have divided it up fairly evenly, market shares remain fairly dynamic. According to Telenor, the subscriber market share in 2013 broke down as follows: DiGi with 26%; Maxis holds 32%; and Celcom with 31%. U Mobile, mobile virtual network operators (MVNOs) and others share the remaining 11%. CIMB Equities Research has undertaken a more detailed analysis and found that DiGi had 27.6% of mobile services revenue, according to its September 2013 report. CIMB added that Celcom’s share was 35.1% and Maxis’ 37.3%. The brokerage noted that Maxis has been steadily losing market share, from above 40% in 2009, while Celcom has been gaining, about three percentage points in that time. DiGi’s share has fluctuated, dipping below 25% at one point, but the company is regaining lost ground and its share is now over 2009 levels. The brokerage believed Celcom could beat Maxis sometime in 2014.

The Dip

Like most telecom markets, Malaysia has been suffering from declining revenue growth and pricing pressures. The business globally is highly competitive and expensive, and consumers are very demanding. CIMB noted that revenue growth for the three major operators in Malaysia has been declining steadily since 2007 and by 2012 was almost flat. Revenues from traditional businesses, voice and data are falling, and data revenues are not picking up the slack fast enough. Meanwhile, voice-over-internet-protocol and new messaging services have outpaced voice and SMS sales. The result is a steady fall in average revenues per user (ARPU) and steady pressure on margins.

Companies have faced relentless capital expenditures as they fight to not only keep up with changing technologies but to supply their customers with consistent and stable service. Because of the high penetration rate, which stands at more than 140%, and intense competition, they are also faced with a market where good pricing is difficult to achieve. Maybank found that consumers are especially sensitive to increases: DiGi raised the price of a starter pack by 24% in early 2013, it lost over 100,000 subscribers.

Recent corporate results show a sector dealing with moderate headwinds. Celcom Axiata only reported a 4% increase in revenue in Malaysia by the end of 2013. Its voice revenues declined 2% and SMS revenues were down 12%, though this was offset by a 16% jump in data revenues. Maxis reported a 1.4% increase in revenue in 2013, but the company saw an 8.5% dip in its subscriber numbers. DiGi reported a 6.4% rise in revenues, with a rise in subscriber numbers of 4.8%.

While Malaysia is being challenged by many of the same forces that challenge the industry globally, it has held up better than most. The regulators have worked hard to prevent dumping and other anti-competitive behaviour, and the structure of the market, with three main players, has kept pricing firmer than it would be in markets with smaller competitors. While ARPU has been declining as it has been elsewhere, it has not crashed in Malaysia and is still high enough to support investment. All the major operators are reporting prepaid ARPU above $10 per month, and analysts estimate it will remain above that level for at least two years.

LTE 

The roll-out of 4G has been quite mixed in terms of the impact on the bottom line. Because of the lack of compatible handsets, early and aggressive roll-outs did not bring much in the way of revenue. It also appears that despite the faster speeds, LTE is not commanding higher prices in the market. Maybank notes, for example, that Maxis is not getting a premium for its 4G services. On the other hand, analysts have noted that because operators have been upgrading their networks for a number of years, they have gotten ahead of the capital expenditure wave and will not face the huge out-of-the-ordinary costs to get LTE running.

The investment rush has been on for a while and will continue. In early 2013 DiGi started an upgrade of 6000 sites to achieve 3G coverage of 75% of the country, and in early 2014 the company said it would be spending RM900m ($280.89m) on infrastructure. In late December 2013 Celcom said it would be spending RM1bn ($312.1m) in 2014, roughly what it spent a year earlier. It was aiming for over 600 LTE base stations by the end of 2013 and double that by the first quarter of 2014. In early 2014 the company said it was spending RM400m ($124.84m) to install more than 2000 LTE base stations around the country by the end of the year. Altel Communications signed a deal in early 2014 with Huawei Technologies for services related to the roll-out of 4G.

Working Together 

Significantly, companies have started to cooperate with each other. For example, in 2012 U Mobile signed a 10-year tower-sharing agreement with Maxis. The following year, Altel agreed to team up with Celcom in developing LTE services. Altel received the largest award on the 2600-MHz spectrum of 20 MHz, and analysts agree that this resource is important for any company wishing to fully utilise LTE. They also say other such deals could be signed, as all the bidders but Altel received only 10 MHz.

New Partners

In early 2014 Celcom and Digi agreed to extend their 2011 network sharing agreement by another three years, and in late December 2013 TM signed a 10-year backhaul agreement with both Digi and Celcom. It will provide wholesale bandwidth connectivity in Peninsular Malaysia for the two companies. The deal is expected to result in RM400m-600m ($124.84m-187.26m) in lease fees for TM. The operators said the deal allows them to use their resources efficiently and avoid duplication of efforts. Ahmad Husny, the CEO of Fiberail, told OBG, “The roll-out of infrastructure is one of the things that hinders the progress of the telecoms industry in Malaysia. The national rollout of infrastructure in the telecoms industry is very expensive. What is taking place today is that the main telecoms providers are optimising costs by sharing infrastructure development.”

In addition to LTE, roaming is considered a potential area for growth and opportunities. With the advent of the ASEAN Economic Community in 2015, operators are looking for ways to gain revenues as people become more mobile, and they are looking to do so without charging so much that people switch off their phones altogether when travelling. At present, customers are often surprised by the roaming charges they receive even when travelling within the region.

While operators are increasingly providing ways to disable roaming, many understand that it would be better to offer a service that would allow customers to roam without worry and with a local number. Some, like Tune Talk, are looking to establish themselves in multiple markets so that their customers can operate seamlessly when they cross regional borders. Others, such as MVNO XOX, are working to integrate technology solutions that accomplish the same without the need for local presences in all markets.

MVNO 

While the Malaysian telecoms market is now stable and relatively mature, MVNOs promise to provide significant innovation and creative investment. At last count, the country has an estimated 16 MVNOs. Five (Tune Talk, XOX, Merchantrade, redONE Network and Smart Pinoy) use Celcom’s network, another five (Happy Mobile, Tron, SpeakOut Wireless, Clixster and MY Evolution) use DiGi’s network, three (Baraka Telecom, IME Telco and Salamfone) use Maxis’ network, and another three (Sisteer, Enabling Asia and Buzz Me) are on U Mobile. Some are actually mobile virtual network enablers or mobile virtual network aggregators, which assist others in setting up their own MVNOs.

A number of different strategies are employed. Some MVNOs target a younger demographic, essentially trying to brand their way to market share. Others are targeting immigrant groups, relying on shared language or culture to create affinity. Still others believe MVNOs should be more ambitious. They argue that they can lead the sector, innovate quickly, test different products and make the necessary mistakes that the larger players might avoid. The big operators should focus on providing infrastructure and basic services, they add, while MVNOs should do everything else and deal with the challenges of a changing marketplace.

Some operators have found this arrangement to be convenient and beneficial and are embracing it. They see MVNOs as a good source of revenue, as well as a good way to keep larger telecoms companies on their toes. “MVNOs are the ones who can be disruptive,” said Jason Lo, CEO of Tune Talk.

At the same time, there is concern that the country may have too many MVNOs. Some of the companies may not fully understand the business and may not have the resources to develop a strong brand. While the relative free-for-all in the sector may have created value, the concern is that the sector is already crowded for a country with only 30m people. Few of the names are recognisable and because they have the same back-end in terms of capacity suppliers it can be tough to differentiate. Tune Talk has the advantage of Tune Hotels and AirAsia, with which it can cross-sell, as well as considerable expertise and capital. But others may have a tough time establishing themselves. “A brand is not built overnight,” said Lo.

Outlook

The Malaysian telecoms market has two engines of growth: big players who build infrastructure and provide the bulk of the service and MVNOs who are nimbler and better able to adapt. It seems that this model will remain in place for now. While nine companies received LTE licences, consolidation is inevitable in terms of mergers or, more likely, just the sharing of resources. While some MVNOs may vanish, the sub-sector will likely remain robust. The main operators seem to like them, and regulators are keeping a close eye on them. Although growth has slowed, business is still quite good and returns are enough to support the investments that need to be made. Despite any drop in headline numbers, a strong foundation is being built.

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The Report: Malaysia 2014

Telecoms & IT chapter from The Report: Malaysia 2014

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