With mobile use in Malaysia having long surpassed the 100% penetration rate, market players are seeking to boost profits by increasing data subscriptions and non-voice value-added services. A number of increasingly affordable handsets, along with carrier promotions and subsidies, is driving rapid smartphone adoption – critical to boosting the data market. The 4G spectrum, due to come on-line in early 2013, will help to increase speeds and free up space on crowded networks. Meanwhile, the fixed-line sector is increasingly dynamic, with Telekom Malaysia rolling out a high-speed broadband network to address perennial complaints about slow and congested internet connections. However, he limited extent of this roll-out, combined with the small size of the market and the incomes of customers, will act as a constraint on the IT sector’s growth. Overall, however, there is plenty of room for the uptake of advanced, high-speed fixed and mobile broadband subscriptions, which should be a main source of revenue for players in the telecoms sector for years to come.

IN CONTEXT: Malaysia’s progress in IT reflects a larger trend in the country’s development. It is wealthier than its ASEAN counterparts, but significantly lagging behind “Asian tigers” like Singapore and South Korea. The World Economic Forum’s 2012 Networked Readiness Index (NRI) confirms this, ranking Malaysia 29th of 142 countries. This is well ahead of others in Southeast Asia, with the next highest, Thailand, ranking 77th. But Malaysia, which hopes to achieve developed country status by 2020, in part through leveraging ICT, has a ways to go catch its tiger brethren. Singapore, for example, ranks second, and Taiwan, South Korea, and Hong Kong are 11, 12 and 13, respectively. Malaysia has been lauded for the degree to which government entities and businesses have adopted and promoted technology, but it falls behind in the infrastructure and usage section, which speaks to its relatively large size and significant rural population. Although cellular subscription penetration is around 120%, relatively few Malaysians own computers or use fixed broadband. Additionally, Malaysians have access to only 11.4 kbps of international bandwidth on average, ranking 69th globally, dwarfed by Hong Kong (777 kbps) and Singapore (172.2 kbps). Despite the considerable progress made in bringing computing technology to the masses, particularly with mobile technology, much room for growth remains.

LIBERALISATION: Two decades of liberalisation have created healthy competition in the mobile sector, even as the fixed-line market continues to be more or less monopolised by the legacy state firm. Until 1983, telecommunications services and regulation were controlled by the Ministry of Energy, Posts & Telecommunications. In that year, the operational functions were spun off into a separate entity, the state-run monopoly Telekom Malaysia (TM), which was then partially privatised in a 1990 listing on the stock exchange. The government maintained a single golden share, allowing it to veto decisions if they go against national interests. The regulatory functions remained under the Jabatan Telekom Malaysia (JTM) or Department of Telecommunications. In 1998 JTM was dissolved and its functions taken over by the newly created Malaysian Communications and Multimedia Commission (MCMC).

Telekom Malaysia’s monopoly on the communications sector was finally broken in 1993, and mobile licences were eventually granted to Mobikom, Celcom, Maxis, Mutiara Swisscom (later DiGi), Sapura Digital, and Time Wireless, in addition to Telekom’s own network, TM Cellular. Seven networks serving a market of 20m people at most was unsustainable, however, and the 1997 Asian financial left operators like TimeCel and Celcom deep in debt. Time Wireless and Sapura merged and were acquired by Maxis in 2002; TM Cellular and Celcom merged into TM Celcom, while a merger of Mobikom and Digi created Digi.com. Later Celcom was demerged, along with TM’s other international wireless holdings, into what became the Axiata Group.

FIXED LINE: Liberalisation gave the private telecoms players the right to compete in the fixed-line sector as well, but the promise of mobile, combined with anti-competitive policies that reinforced TM’s monopoly, made this unattractive for many years. Maxis and Celcom, for example, had long pushed for the MCMC to impose local-loop unbundling, which would have allowed them to use TM’s last-mile infrastructure at regulated prices. TM’s opposition, combined with a monopoly on international access cables, has kept it virtually unchallenged in the fixed-line sector. For years, its Streamyx service was the only ADSL option, but limited availability and slow speeds led users to cut the cord and embrace wireless broadband as soon at it was possible. In 2008, for example, Malaysia’s 1.07m ADSL connections represented 87% of the broadband market; by the first quarter of 2012, ADSL’s totals had increased to 1.71m, but its share had plummeted to 29.75%.

Malaysia’s new high-speed broadband initiative has the potential to upset this trend, however. Through a public-private partnership designed to make broadband faster and more reliable, TM won the remit to build a fibre-to-the-home (FTTH) network for central areas in Malaysian cities. The RM4bn ($1.29bn) fibre roll-out has reached 1.26m homes and achieved a strong take-up of roughly 33%. However, it faces competition from traditional mobile operators such as Maxis, P1, TIME, and Astro, who are taking advantage of the open-access provisions mandated by the government for the FTTH network. While TM still controls 95% of the FTTH market, enforced competition within the system should keep the sector dynamic and consumer-oriented.

BRANCHING OUT: Malaysia’s urban concentration of wealth has long made it uneconomical to connect rural areas to telecoms services. In the interest of bridging the digital divide, therefore, the government enacted the Universal Service Provision (USP) in 2002 to invest in underserved communities. Run by the MCMC, the USP provides infrastructure and computer hardware – including community broadband centres (CBC), fixed and wireless telephony, and 1Malaysia netbooks, part of the 1Malaysia campaign, which promotes equality and national unity – to rural and disadvantaged areas.

The USP is funded by a 6% tax on the revenues of major telecommunications providers, which brought in a total of RM1.22bn ($393.6m) in 2010, the latest year for which figures are available. Given the USP’s low expenditures relative to receipts – the MCMC spent just RM263m ($84.84m) on USP service providers in 2010 – the fund had accumulated a balance of RM6.7bn ($2.16bn) by the end of 2010. However, the MCMC announced plans in 2010 to spend RM4.15bn ($1.33bn) on various projects, including expanded cellular coverage, 1Malaysia netbooks and CBCs.

In 2011 the total of 1Malaysia netbooks distributed increased from 123,500 to 560,000, with a 1m target for year-end 2012. The number of cellular towers installed in the MCMC’s “Time 3” programme, which aims to boost penetration to 97% of the population, increased from 127 to 450 and aimed for 1000 by the end of the year. The MCMC is also transitioning to a “clawback” mechanism whereby operators can offer up to 50% of their USP contributions in the form of expanded services to underserved communities. This should help operators that had previously been taking on piecemeal USP contracts at cost; they will expand their own networks in a relatively economical way, although the prices they charge in USP areas will be capped.

MOBILE: While TM rules in the fixed-line sector and the USP programme fills in the gaps in remote areas, Malaysia’s telecoms market is dominated by the mobile operators. Mobile subscriptions topped 37m in the first quarter of 2012, with a corresponding penetration rate of over 128 per 100 inhabitants.

Mobile is now Malaysians’ preferred way to get broadband as well – 3.4m of a total 5.75m broadband connections were mobile, including mobile broadband, pay per use, WiMAX, and EVDO. The “big three” – Maxis, DiGi, and Celcom – established themselves as the dominant players over the past decade, although an upstart U Mobile is hoping to grab market share by dominating the lucrative mobile broadband market. Maxis is the leader, reporting year-end 2011 subscriber totals of 14m. Like most telecoms companies in emerging markets, most of its subscriptions (10.6m) are prepaid, compared to 3.4m on post-paid plans. Its two main rivals are close behind – Celcom had 11.98m (2.73m post-paid) subscribers as of 2011 while DiGi had 9.9m (with just 1.6m post-paid). These ratios have been fairly stable throughout the years – Maxis, Celcom, and Digi’s respective market shares of 37%, 33% and 27% in 2011 are within percentage points of the same figures from 2005. All three providers offer 2G and 3G services, with 4G access on the docket for early 2013 (see analysis).

Relative newcomer U Mobile, which launched its network in early 2008, grew to 2m users by May 2012. Rather than challenging the infrastructure head start of the larger providers, U Mobile uses network-sharing agreements that allow it to piggyback on other operators, while its own network focuses on high-speed mobile internet. U Mobile signed a 10-year 3G radio access network (RAN) sharing agreement with Maxis in October 2011, and reported in November 2012 that its network coverage had been expanded with Maxis’s 2G network.

VIRTUAL REALITY: Mobile virtual network operators (MVNOs) continue to play an important, albeit small, role in Malaysia’s mobile industry. MVNOs, which neither own spectrum nor operate their own network infrastructure, form partnerships with the mobile network operators (MNOs) to provide specialised services to targeted groups.

Celcom has been the most active of the MNOs in terms of partnerships, viewing MVNOs as opportunities to expand into underserved markets rather than as competitors. Celcom-based MVNOs include TuneTalk, which offers loyalty points for the affiliated AirAsia and Tune Hotels; Merchantrade, popular among South Asian migrant workers; XOX, which targets the Chinese community; RED tone, which is aimed at businessmen; and SMART Pinoy, catering to the Filipino community.

Celcom earns RM200m ($64.52m), or 5% of its revenue, from MVNOs – a ratio it is planning to expand to 10%. DiGi supports two of the most recent MVNOs – SpeakOut Wireless and TRON, which have launched over the last two years. Maxis, meanwhile, supports just one MVNO – the Islamic-oriented Salamfone.

The challenge for MVNOs is to offer a product that is distinct enough to gain traction, without appearing to cannibalise the host MNO’s own subscriptions. “The defining factor for MVNOs is their relationship with the mobile network operator,” Jason Lo, CEO of TuneTalk, told OBG. “If they don’t want you to succeed, you won’t.”

With the development of smartphones, moreover, the competitive advantage for MVNOs is shifting away from value-added services (VAS) and towards hard-to-reach niche markets. Services like mobile banking, SMS messaging, and call ringback tones (CRBT) used to differentiate MVNOs. Now, with SMS and voice rates commoditised and smartphones, which have their own app ecosystems, on the rise, consumers are less dependent on operators, virtual or otherwise, for their content services. Instead, they want cheaper and faster internet from their carriers.

IT’S A SMART WORLD AFTER ALL: Malaysia has not been immune to worldwide trends that favour data over voice and smartphones over feature phones. Non-voice revenues (including mobile internet and SMS) represented 43.5% of mobile revenues for Maxis in 2011, compared with 38.1% in 2010.

Celcom’s non-voice share stayed flat around 34%, while Digi’s rose from 22.5% in 2010 to 28.7% in 2011. Data revenues are increasingly edging out SMS within this category – both Celcom and Maxis register around a 60% share for “advanced data.” Similarly, 3G use has exploded over the last four years, although growth has slowed recently. From just 1.8m subscriptions nationwide in the first quarter of 2008, 3G expanded to 4.4m by the end of that year and to 8.6m by the fourth quarter of 2010. Subscriber figures grew 20% in 2011 and had reached 11.3m by the first quarter of 2012. The growth of smartphones is responsible for much of this expansion; although estimates within this category vary, Maxis reported that in 2011, 31% of its customer base was using smartphones.

Kevin Henry, the director of data business for U Mobile, told OBG, “Handset manufacturers have made smartphones more affordable, but telcos are playing a role as well, by offering discounted smartphones on a contract basis.” Meanwhile, Henry said, driving smartphone growth would be difficult among the majority of users on prepaid plans, who tend to be unwilling to pay large sums or commit to 12 months for a phone.

Celcom joined DiGi and Maxis in 2010 to offer the iPhone 4, Apple’s flagship device, while all four providers, including U Mobile, now sell the Samsung Galaxy S III. While Nokia’s legacy Symbian OS still holds a 38% market share among smartphones, its margin is being eclipsed by Android (28%) and iOS (18%).

Average revenue per user (ARPU) for post-paid users, around RM100 ($32.26), is roughly three times that of the prepaid category. This model has been more successful for Celcom and Maxis, which have at least 22% of their customers on post-paid plans, than for DiGi, which has just 16% due to a downmarket customer base.

MOBILE BROADBAND: Tablets, which can connect to the internet through either Wi-Fi or 3G/4G, are helping drive the emerging segment of mobile broadband. Valued at $374m in 2011, the Malaysian tablet market was the most lucrative among six ASEAN markets (excluding Singapore). GFK Asia reported in November 2012 that for the period from January-November 2012 Malaysian consumers spent $1.1bn on 2m on tablets and laptops. According to the report, Android was also the leader in this segment regionally, accounting for nearly two of every three units sold.

Wireless broadband has proliferated in the Malaysian sector, with non-GSM operators launching WiMAX and LTE services to cater to young device-toting professionals. All four cellular operators offer broadband outside of a cellular service, selling microSIM cards for tablets, USB modems for portable computers, and Mi-Fi devices that can act as Wi-Fi hubs for multiple devices. However, these operators have competition from dedicated broadband providers such as YES, Packet 1 Networks (P1), RED tone, and Asiaspace, which all won licenses in 2007 to deploy WiMAX networks.

However, most operators faced technical difficulties in deploying the technology and by 2009 MCMC issued fines to all providers except P1 for failing to utilise their awarded spectrum. YES was the second to launch in November 2010, offering “converged” services that include high-speed broadband and voice calls via packet data. RED tone also managed to carry out a successful launch, while AsiaSpace’s service encountered early difficulties and was shut down.

COMPETITION: Given Malaysia’s relatively small population, the three WiMAX providers competing with four major GSM operators have limited the growth potential of individual players. P1, which had a first-mover advantage in WiMAX, hit 350,000 users in September 2011, while YES reported the same month that it had 300,000 subscribers less than a year after launch. By contrast, Celcom reported a total of 937,000 subscribers to mobile broadband, while Maxis boasted 668,000 users at the end of 2011. The crowded market has led providers to compete on the speed and coverage area of their networks. RED tone, for example, is the only WiMAX provider to offer coverage in Sabah and Sarawak, where low population density and income levels have scared away other operators. YES 4G offers one of the fastest networks, albeit at a premium price.

Meanwhile, GSM operators have rushed to upgrade their networks to the high-speed packet access-plus (HSPA+) standard, offering 42 Mbps access to centrally located users. U Mobile, which launched the advanced network in March 2011, has made their HSPA+ speeds a core element of their branding, while Maxis launched the service in March 2012, and Celcom announced plans to upgrade to its network to use HSPA+ and LTE.

THE NEXT FRONTIER: With tablets and smartphones using ever more data, both consumers and operators are hoping for faster, less congested networks. While Malaysian telecoms companies have used the 4G terminology loosely, applying the label to everything from YTL’s YES WiMAX to HSPA+ services, most observers agree LTE is true “next generation” technology.

The MCMC, which regulates the wireless spectrum, announced in December 2011 its preliminary decision to award LTE licences to nine companies. This includes all four GSM operators, all four WiMAX players including the inactive AsiaSpace, as well as the new entrant Puncak Semangat. The spectrum will be available for use starting in January 2013, pending the MCMC’s approval of licencees’ business plans. Given the high cost of deploying LTE networks, the MCMC is pushing operators to collaborate by sharing network equipment and enacting roaming agreements. Already, Maxis has teamed up with RED tone and U Mobile, while Celcom is working with Digi.com (see analysis).

OUTLOOK: Having already reached saturation in basic cellular penetration and with a tight field of competitors, Malaysia’s telecoms sector is not an especially easy market for newcomers. However, the country’s young, tech-savvy middle class provides a ripe market for advanced data-centric services.

With so many options available to discerning consumers, operators must balance the concerns of price, network quality and coverage, and profit margin. At the same time, the flexible regulatory regime embraced by the MCMC ensures that the door is not closed to new market entrants, and the willingness of operators to cooperate with competitors and MVNOs allows companies to sell to end-consumers without massive infrastructure investments. Finally, while competition within the country’s fixed-line segment is minimal, the increasing capabilities of wireless providers are presenting TM with the challenge that all operators within the sector are now facing: evolve, or become irrelevant.