The expansion of Myanmar’s telecoms market continues to live up to its early promise, with the reform of the industry viewed as the biggest economic success since the military ceded power in 2011. The dramatic surge in network coverage has empowered local businesses and provided remote villages with the opportunity to connect to the outside world. While the growth of mobile penetration since the liberalisation of the sector in the autumn of 2013 has been nothing short of astonishing, heavy monsoon rains, coupled with limited infrastructure, including power access and a neglected road system, continue to hinder network deployment in hard-to-reach areas. Likewise, unclear land rights make site selection for tower installation a major challenge. Despite these obstacles, the sector’s growth has reinforced economic and social progress, and the adoption of new technologies is narrowing a previously overwhelming digital divide. Investor appetite remains high within the ICT segment. Today, after decades of economic and political isolation, the telecoms sector has attracted the second-largest amount of foreign direct investment (FDI) after oil and gas. According to figures from the Directorate of Investment and Company Administration, as of October 2016 FDI reached $3.28bn for FY 2016-17. Of that, $1.62bn is attributable to the transport and telecommunications sectors. The bullish investment climate has translated into 92% SIM card penetration, and with the real penetration rate at 68% in December 2016, according to Nordea Equity Research, there is still substantial room for growth.
Wave Of Reform
Myanmar’s mobile revolution began at the end of 2013, when 91 international companies contested for two national telecommunication licenses (NTL), which were eventually awarded to the Norwegian firm Telenor and Qatar-headquartered Ooredoo. Prior to their arrival, the market was monopolised by the state -owned Myanmar Posts and Telecommunications (MPT), which has since entered into a joint venture (JV) with KDDI Summit Global Myanmar (KSGM) – a collaboration between Japanese giants KDDI and Sumitomo – in a deal valued at $2bn. The JV was undertaken in an effort to bridge the financial and technology gap between the MPT and their international counterparts. MEC tel, the military-backed operator owned by the Myanmar Economic Cooperation (MEC), has a mobile virtual network operator license and has been in operation since 2013.
Before the entrance of foreign telecoms firms, owning a cell phone was a luxury for the wealthy in Myanmar, with SIM cards priced in excess of $1500 during military rule. However, SIM cards now cost less than MMK1500 ($1.22), and the growing availability of affordable smartphones, including 3G-capable phones for as little as $19.44, has allowed for mobile penetration to rapidly increase, according to an August 2015 Forbes report.
Jes Pedersen, director of local tech community organisation Phandeeyar, told Forbes that by mid-2016 active SIM subscribers had grown to over 40m, up from 3m-4m only two years prior. According to an Ericsson report released in late 2015, Myanmar had 36m mobile subscribers, an increase of 5m in 12 months, making it the fourth-fastest-growing mobile market in the world. By May 2016 43.72m SIM cards had been distributed to a population of 54m by all four operators, including the mobile networks operator (MNO) MPT.
As of the first quarter of 2016 the MPT-KSGM joint operation was leading the subscription race with 20m customers on board, followed by Telenor, which surpassed the 18m mark in late 2016, while Ooredoo had over 8m in late 2016. Although the majority of the country has now been covered, significant numbers continue to roll in, with Telenor acquiring 927,000 customers in the third quarter of 2016 alone. One area that has surprised operators and network infrastructure companies alike is the rapid growth in data consumption. Telenor, for example, initially launched a combination of a 2G and 3G network, expecting that the majority of users would not be able to afford smartphones. However, with the rapid influx of cheap 3G-capable phones from China, the Norwegian firm had to readjust their initial network plans to accommodate a surge in data usage, thus the decision was made to prioritise 3G and 4G technology going forward. Efforts taken to move away from 2G technology now bode well for the firm, which reported in mid-2016 that operating profit for the company increased by 64% yearon-year to reach $73.6m. To close the gap on its competitors, Ooredoo has continued to differentiate and was the first to launch 4G services in May 2016. The initial launch was targeted towards the major cities of Yangon, Mandalay and Naypyidaw, with plans to expand once new spectrum is allocated within the 1800 MHz band. In August 2016 The Myanmar Times reported that by that same month Ooredoo had half a million 4G users across Yangon, Mandalay and Naypyidaw. Since then, MPT and Telenor have begun offering 4G services in select areas. The 1800 MHz spectrum auction has been pinpointed as the ideal frequency to support the development of 4G services. However, the initial auction was meant to take place before the end of 2016 and has since been pushed to March 2017. Until then, 4G expansion will be sidelined.
Viewed as a crucial resource for the development of the country and the sector, spectrum management has come under criticism in recent times, which then forced the government to delay auctions in 2016. The delays came as a result of calls from industry leaders to clarify policy surrounding spectrum management. According to Liman Zhang, CEO of Myanmar Huawei, measures must be taken to balance the demand and capacity available. “Spectrum allocation is critical and needs to be carefully planned. Failure to do so will lead to major congestion problems and dissatisfied customers,” Zhang told OBG. “Timely and efficient spectrum auctions are central to the long-term development of the industry and play a key role in supporting investor confidence.”
Despite delays, in October 2016 the government successfully raised $244.16m by auctioning three lots of 2×20 MHz across three regions to four different local internet service providers, with each licence guaranteed for 15 years. The successful winners were Fortune International, Global Technology, Amara Technologies and Yatanarpon Teleport. As it stands, MPT has the most spectrum in the market with 70 MHz, while Telenor and Ooredoo both have 40 MHz. However, all three are eagerly awaiting the allocation of spectrum within the 1800-MHz band, as it will enable them to expand their 4G coverage. As of late 2016 MPT was the only operator to access spectrum in the 1800-MHz band, granted on temporary basis during the 2013 South-east Asian Games in Naypyidaw.
Another player is joining the race for spectrum allocation. In an effort to further strengthen the country’s telecoms market, the government tendered a 15-year operating licence, which was narrowed down to a JV between the Vietnamese military-backed Viettel, Myanmar National Telecom Holding (MNTH) and Star High Public Company. The Vietnamese MNO was awarded its license in late 2016, and will invest $1.5bn in order to launch the network and will hold a 49% share, while 22% will be held by the MNTH consortium of 11 local companies and the remaining 29% will be held by Star High Public Company, which is under the umbrella of the MEC.
The military-run MEC is also the parent company of MEC tel, which has functioned under a mobile virtual network operator licence since April 2013. Historically, MEC tel has operated an 800-MHz code division multiple access network and, according to an August 2015 report by The Myanmar Times, the telco had 3.8m subscribers by mid-2015. Local press, including The Myanmar Times and Frontier Myanmar magazine reported throughout 2016 that Star High is expected to leverage off MECtel’s existing network. As of December 2016 the JV had not yet finalised the commencement of an NTL, with negotiations being held up by concerns around financing and decision making. If a middle ground is found, the collaboration is set to have access to assets including 1000 towers and 13,000 km of fibre, which was put in place by MEC tel.
While negotiations are still ongoing for Myanmar’s fourth NTL, Viettel has pledged to invest $1.5bn to achieve 95% national coverage by 2020. Given the company’s experience in rolling out low-cost networks in rural areas such as Mozambique and Cameroon, as well as the ability to leverage co-locations, the 95% target by 2020 is feasible. However, if negotiations are successful, it may prove challenging for the JV to penetrate the market. Since Ooredoo and Telenor entered the once greenfield market, voice, data and SMS prices have fallen dramatically. Still, some industry experts believe that the new operator will benefit from the progress already made by the existing providers. Vijendran Watson, country managing director of telecommunications infrastructure firm Edotco, told OBG, “Myanmar is a unique case. The new operator will benefit from all the heavy lifting that has been done by the operators and tower companies before their entrance.”
While the deployment of 4G has opened up a new avenue for income, 3G technology still dominates. The first and most of the second phase of the MNOs’ rollout was concentrated on the densely populated cities of Yangon, Naypyidaw and Mandalay. As would be expected, average revenue per user (ARPU) across the three cities exceeds that in rural areas. As network rollout extends deeper into Myanmar’s landscape ARPU is gradually falling. Prior to the entrance of the two giant MNOs, monthly ARPU was at an impressive $9, although network penetration was at an unimpressive 10%. ARPU for operators in 2015 was fairly surprising considering the maturity of the industry, ranging from $5 to $7 a month, driven by the surprisingly high appetite for data. Since then, more rural clientele has led to a drop in the measure, with Telenor reporting a 28% decline in ARPU in late 2016, while Ooredoo noticed a 35% decline between the second quarter of 2015 and the same period in 2016. While the Qatari firm has not had the early success of Telenor in terms of profit generation, its financial results throughout 2016 were remarkably better than the previous year. The first three quarters of 2015 yielded an earnings before interest, taxes, depreciation and amortisation (EBITDA) deficit of $8.2m, while the first three quarters of 2016 yielded an EBITDA deficit of $1m. Ooredoo also saw a rise in revenue over the same period, reaching $302.1m the first three quarters of 2016, compared to $214.8m over the same period in 2015. In comparison, Telenor reported a third quarter 2016 EBITDA of $93.5m and revenue of $145.1m in the third quarter alone, contributing 5.3% of Telenor’s global revenue.
Broadly speaking, tower companies can be divided into three major groups. The first group includes the existing four largescale players: Irrawaddy Green Towers (IGT), Apollo, Huawei and Edotco. The two discount tower companies make up the second group and include EcoFriendly Towers, which had built slightly over 300 of 700 towers for Telenor by the second quarter of 2016, and Malaysia’s OCK, which has been contracted by Telenor for 920 towers, of which 50 had been switched on by mid-2016. According to an August 2016 report by industry association Tower Xchange, OCK is receiving lease rates below $1000 per month, inclusive of power. With a total investment worth $75m for 920 towers, that means an average of a little more than $80,000 per tower, which is 25% less than the average build cost of other tower companies at approximately $100,000 per tower. The third group consists of Pan Asia Majestic Eagle (PAMEL) and Myanmar Infrastructure Group (MIG), which were contracted to build 1250 and 500 towers, respectively, for Ooredoo.
Edotco is in a favourable position to acquire PAMEL’s 1250 sites, with a 1.8 tenancy ratio – referring to the number of operators that have antennae and other infrastructure on the towers – in the near future, according to Tower Xchange’s report PAMEL’s sites were leasing in excess of $1700 per month as of late 2016. While Edotco may be considering adding PAMEL’s collection of towers to its portfolio, it may well have to compete with Viettel for the acquisition once they enter the market. As of mid-2016 Edotco had spent $221m acquiring 1250 sites belonging to the Myanmar Tower Company (MTC) under Digicel Group at $176,800 per tower, with a notable tenancy ratio of 1.9. Edotco has pledged a further $200m to build 5000 towers across Myanmar. MIG began handing over its assets in late 2016, and was initially established as a JV between Singapore Myanmar Investco (SMI) and Golden Infrastructure Group. SMI sold their 97% stake in MIG to Hong Kong’s Shining Star International Holdings for $12.6m in October 2016.
According to figures from Tower Xchange, 10,750 towers had been constructed in Myanmar by mid-2016. By the end of the second quarter of 2016 Telenor independently owned 5831 sites and was within reach of 7000 by the end of 2016. The company’s total capital expenditure in Myanmar throughout 2015 amounted to $419m, with the vast majority going towards network infrastructure. According to a December 2016 report by consultancy KPMG, capital expenditure intensity across all the 13 markets that the Norwegian MNO covered for 2015 was 45%. In Myanmar, however, it was 170%, which shows that for every $1 in revenue the firm spent $1.70. With the firm set to have 13,000 sites to achieve comprehensive coverage, a significant portion of its expenditure will be geared towards tower construction for the next couple of years. Thus far, Telenor has relied heavily on contracting Apollo Towers, funded by equity fund Texas Pacific Group, to construct 1800 towers, and IGT to build 1800 towers, thus making it Myanmar’s largest tower company. As of the second quarter of 2016, including co-locations, Telenor had a combined total of 6800 sites.
Ooredoo, similar to its Norwegian counterpart, used third-party tower company for their rollout. Although in 2015 the Qatari enterprise shifted gear from their initial decision to hold power assets, it has since required the that power and tower solutions be provided by tower companies. According to Tower Xchange’s report, the firm surpassed the 3800-tower mark prior the launch of 4G services in May 2016. While Ooredoo retained the 1250 sites constructed by the MTC, Edotco is providing full tower and power service, including co-locations, and Ooredoo was operating from 4300 sites in the second quarter of 2016. As of mid-2016 MPT had 2600 captive towers and was co-located on around 1600 sites. With a combined total of 4200 locations, the firm is quickly closing in on its 5000 target. Of the $2bn combined capital commitment by the MPT-KSGM JV, $1.6bn is intended for network infrastructure. From the get-go the former state monopoly has employed the services of Chinese giant Huawei to construct their towers.
Access to stable power remains a major obstacle to service level agreements. The rising demand for data has amplified the amount of power a site needs to run. Depending on the grid connection, power can range from as little as 80 V up to 220 V, with the average around 120 V. As the country’s national grid expands, operating costs should decline, yet in the meantime the majority of sites will have to rely on a mixture of power solutions. Daw Phyu Phyu Win, CEO of ABC Telecomm, told OBG, “One of the biggest challenges to the development of telco infrastructure is the lack of power. As it stands, almost half of all towers have no access to power from the national grid. This has a significant impact on operating costs and revenue generated due to electricity shortages.”
An increase in infrastructure-sharing puts further strain on power demands, according to Ronald Choucair, CEO of Linfra Myanmar, a Beirut-headquartered company that is under the umbrella of IPT PowerTech group, a provider of power solutions and telecoms infrastructure services. “It all comes down to coverage and cost, which leads to tower sharing between operators, which means more tenants for individual sites, and thus more power is needed to keep a site operational,” Choucair told OBG. “External forces also have a part to play. We cannot use generators between 6.00pm and 6.00am due to the noise limits, so we switch to battery power during these times.”
For the foreseeable future, power limitations across most of the country will continue to draw down the revenue of operators. The limited distribution of the national grid creates a lopsided cost to run sites in rural areas, in comparison to the business centres of Yangon and Mandalay. In addition, constructing towers in less accessible locations comes at a premium. To add to those constraints, tower construction has had to work around ethnic and communal conflict in certain territories. Thus, tower companies have had to reject certain sites in hard-to-reach areas due to the complexity of the build and limited potential for co-location, which reduces the cash flow from towers.
Labour & Land
While the industry has managed fairly well to alleviate power shortages, it continues to battle with the lack of human capital. A good portion of IT graduates fail to meet the minimum requirements set by international employers, which stems from a derailing of the education sector during military rule. Throughout economic isolation the best IT graduates left Myanmar in search of better remuneration in the neighbouring countries of Thailand, Singapore and Japan. Repatriates that have made the decision to return are benefitting from premium wages, but their impact as a whole is limited. Zhang told OBG, “The demand for IT professionals far outweighs the available supply. In order to bridge the gap the private sector needs to invest in vocational training.”
In addition to the limited availability of skilled labour, the sector has also to mitigate land issues. Tower companies continue to struggle with the lack of overarching land policy. Vague property rights are a major factor that must be addressed when trying to acquire land for a new site. The problem stems from past nationalisation of land ownership, which has resulted in titling issues and a distorted land registry. In some cases one piece of land is claimed by various owners who have different documentation. To date, foreign companies are not allowed to own land, although they can enter into a 50-year lease agreement.
Myanmar has reached a pivotal point in its technological evolution, and data providers are eager to invest in a sector that continues to rapidly expand. Successful implementation of a carefully planned spectrum roadmap is critical for the long-term development of the sector. Over the short term network infrastructure initiatives will continue to be the dominant force behind foreign investment and job creation. The bulk of heavy lifting has already taken place, which will benefit the imminent entrance of a new player. Until that time, operators will prioritise existing customers by finding the optimal balance between quality and affordability. While the pricing war simmered in 2016, the arrival of a new player is likely to trigger a new round of price cuts. In short, customers will benefit from better coverage and lower prices.