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November 2012

Issue 78

Asia Pacific Telecommunications


ASIA CONTENTS
Asia

BMIs monthly market intelligence, trend analysis and forecasts for the telecommunications industry across Asia Pacific

INSIGHT

Polynesia Support For Pacific Cable


Although Pacific Fibre failed to raise the required funds to build a submarine cable linking Sydney and Los Angeles via New Zealand, another company, Hawaiki Cable, has emerged with a similar project that includes a group of Pacific Islands. BMI reaffirms that there is a business case for an additional cross-Pacific submarine cable, and the support of the Polynesian countries could push Hawaiki Cable's plan towards realisation. BMI previously reported that Pacific Fibre had planned to build a 13,000 kilometre (km) high-speed fibre optic cable connecting Australia and New Zealand to California (see our online service, August 3, 'New Zealand To Be Left Behind'). Hawaiki Cable's plan is slightly different with a backbone linking Sydney and Auckland with Hawaii and optical add-drop multiplexer branching units that will enable the connection of Apia (Samoa), Pago Pago (America Samoa), Norfolk Island, Noumea (New Caledonia), Port Vila (Vanuatu), Suva (Fiji) and Wallis and Futuna. Additional connections to Tahiti (French Polynesia) and the Cooks Islands have also been proposed. The Hawaiki cable is a repeatered two fibre pairs submarine cable system with a design capacity of eight terabytes per second (Tbps), and it is expected to be delivered by 2014, assuming that it is able to gather the necessary financial support. The Hawaiki cable project has been in the works for approximately three years, although it was only made public during the Pacific Islands Forum in late August 2012. Details about the project remain scant, but it reportedly has the support of Samoa, America Samoa and New Caledonia. This is unsurprising, given that these countries tend to be overlooked due to their location and size. Several countries in the Pacific Islands are connected to submarine cables such as the American Samoa-Hawaii cable, Gondwana-1, Honotua and Southern Cross Cable Network. However, the fragmented geography comprising many islands means that countries such as the Cooks Islands have to rely on satellite, which is more expensive and less reliable. Economic growth has a positive correlation with having access to fast and affordable broadband connections. The Pacific Islands are at a disadvantage due to their geographical location and small market size, which leave them with limited bargaining power when negotiating with submarine cable networks and satellite operators. Hawaiki Cable has yet to publicly disclose cables cost, although the defunct Pacific Fibre, which needed to raise US$400mn, could be used as a benchmark. The cost would be higher if more countries intended to link to the network, although they will most likely have to foot the bill. It is also not known if Hawaiki Cable has garnered the support of investors in New Zealand and Australia. Previously, telecoms operators such as iiNet and Vodafone New Zealand had pledged their support for Pacific Fibre. However, the Pacific Fibre cable would have linked directly to the US, while Hawaiki Cable would land in Hawaii.

Polynesia Support For Pacific Cable ........................................................................ 1

New Zealand
New Zealand To Be Left Behind ............................................................................. 2

Australia
iiNet's Acquisitions Paying Off ................................................................................ 2

Indonesia
3G Auction Set For September .............................................................................. 4

Singapore
M1 First To Nationwide LTE ................................................................................... 5

Malaysia
Cloud Projects Get PPP Boost ................................................................................ 5

Thailand
MVNO Market On Track For Growth ....................................................................... 6

Vietnam
Government Unlikely To Intervene On Higher Charges ............................................ 6

Myanmar
True Plans Myanmar Pay-TV Venture ...................................................................... 7

Hong Kong
SmarTone Launches LTE ....................................................................................... 8

Taiwan
Chunghwa Network Separation Threat Comes Closer .............................................. 8

Global
LGE's Handset Woes Deepen ................................................................................. 9

Japan
Sony Acquires So-net For Content Boost ...............................................................10

China
Lenovo And EMC Form Complementary Partnership ...............................................10 4G And VAS Key For China ...................................................................................11

Bangladesh
GSM Switch To Boost Citycell's Outlook .................................................................12

Maldives
Mobile Broadband Takes Over ..............................................................................12

India
Prohibitive 2G Price Set........................................................................................13 Bharti Share Price Plunges On Weak Results..........................................................14

Sri Lanka
Mobile Internet Poised For Further Growth ............................................................14

Editorial Office: 85 Queen Victoria Street, London EC4V 4AB, UK Tel: +44 (0)20 7248 0468 Fax: +44 (0)20 7248 0467 www.businessmonitor.com www.telecomsinsight.com

New ZeAlANd

Asia

Telecommunications

NEW ZEALAND

owned by Telecom Corporation of New Zealand, SingTel Optus and Verizon Business. Pacific Fibre would have gone hand in hand with New Zealand's Ultra Fast Broadband and Rural Broadband Initiative, which aims to provide ubiquitous fibre broadband connectivity. Data demand would grow exponentially when fibre broadband gains mass adoption as consumers embrace high-bandwidth activities such as video streaming, which would justify the construction of another international submarine cable. Incidents such as natural disasters or accidental cut-off by ships can disrupt internet access, and a lack of alternatives means that New Zealand will remain highly vulnerable. Despite the setback, we continue to see a business case for another submarine cable linking New Zealand to the international community, although companies would still face an uphill battle. As aforementioned, New Zealand is a small market and its place in the international submarine cable community is an add-on to the Australian market. However, Australia is already well served by systems such as the Australia-Japan Cable and the SEA-ME-WE-3, which indirectly connect across the Pacific Ocean. The lack of support from the New Zealand Superannuation Fund, which believed that the Pacific Cable was too risky to invest in, is also perplexing, given that the New Zealand government's research network and the Australian pension fund had provided funding.

New Zealand To Be Left Behind


Pacific Fibre announced on August 1 2012 that its planned submarine cable linking Sydney and Los Angeles via New Zealand has been cancelled after the firm failed to raise the required US$400mn. This is a blow to the country's telecoms sector, which will continue relying on the Southern Cross Cable for international bandwidth access. Although the existing cable still has the capacity to meet near- to medium-term demand, we believe the country still needs an alternative for competition, future proofing and risk management. Pacific Fibre was launched in March 2010, and it planned to build a 13,000km high-speed fibre optic cable connecting Australia and New Zealand to California. However, securing investors for a new cable when the Southern Cross still has plenty of capacity was a challenging task. Furthermore, New Zealand is a relatively small market, and it was difficult to solely rely on local investors. Turning to overseas funding has its problems too, with Pacific Fibre's co-founder Rod Drury stating that political wrangles, including tensions between the US and China over investment, surfaced during negotiations. The launch of the Pacific Fibre cable would have provided competition for the Southern Cross, and international bandwidth prices would most likely have declined, with consumers enjoying more affordable internet access. Presently, telecoms operators such as iiNet and Vodafone New Zealand, which had supported Pacific Fibre, will continue to rely on the Southern Cross Cable, which is
No Alternative To Southern Cross
Planned Pacific Fibre Route

AUSTRALIA

iiNet's Acquisitions Paying Off


iiNet reported a bumper FY2011/2012 (July-June), with net profit increasing by 11% year-on-year (y-o-y) after a slew of acquisitions that expanded the internet service provider's footprint into the Australian telecoms market. The growth strategy has been well executed, with further benefits expected as iiNet continues to integrate the operations. iiNet has made more than 40 acquisitions in the last 15 years, although the more significant ones happened in the last two years. IiNet acquired Melbourne-based ISP Netspace and AAPT's residential business in 2010 before purchasing Canberra-based telecoms company TransACT, which significantly boosted iiNet's presence in the Australian enterprise market (see our online service, November 18 2011, 'iiNet Poised To Grow With Another Acquisition'). Perhaps more importantly, iiNet bought key rival Internode (see our online service, December 23 2011, 'iiNet Charging Ahead In NBN-Fuelled Consolidation'), which helped to consolidate the former's position as Australia's second-largest DSL provider.

Source: Pacific Fibre

SELECTED FIXED BROADBAND GROWTH IN THE PACIFIC ISLANDS


2010 Fixed Broadband Subscribers ('000) New Caledonia French Polynesia Fiji Tonga Wallis and Futuna Tuvalu Samoa Vanuatu
Fiji 2011 data are as of June 31 2011. Source: ITU

2011 Penetration Rate (%) 15.2 11.9 2.7 1.1 7.8 2.4 0.1 0.2 Fixed Broadband Subscribers ('000) 42.8 36.0 23.2 1.3 1.1 0.4 na na Penetration Rate (%) 16.8 13.2 2.7 1.2 8.4 4.6 na na

38.2 32.2 23.2 1.1 1.1 0.2 0.2 0.5

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AustrAlIA

Asia

Telecommunications

iiNet reported a 19% y-o-y increase in revenue to AUD831mn, while EBITDA was up 47% to AUD145mn due to factors such as organic growth in iiNet's operations and the inclusion of TransACT's and Internode's revenues. Encouragingly, the firm has yet to reap the full rewards as it has not completely integrated its acquisitions. The process of merging TransACT and Internode is expected to run into Q413, and we foresee further upside potential. TransACT has helped increased iiNet's business revenue to AUD120mn (AUD170mn annualised), from AUD57mn the previous financial year. The increase in iiNet's economies of scale will translate into cost savings as the firm enters into new international bandwidth agreements.
A Strong Grip On Second
Australia DSL Market By Operators (000)
Jun-11 Jun-12 3,000 2,500 2,000 1,500 1,000 500 0

Source: Company reports, other public media and management statements, DSL only and excludes HFC, Fibre and satellite customers, iiNet

The growing presence in Australia's internet market is also allowing iiNet to ramp up its expansion into the mobile sector. The ability to offer multiple services across the telecoms industry is a powerful tool to attract and retain subscribers, and it also helps iiNet to better compete with multi-play operators Telstra and Optus. Since the acquisition of Internode in December 2011, iiNet's share price has been trending upwards, before reaching an all-time high on the back of positive financial results. Given the firm's strong fundamentals and growing opportunities in light of its participation in Australia's National Broadband Network, we continue to see upside potential in terms of support.
Acquisitions Spurring Surge
iiNet Share Price (AUD), 2009-2012
4.0 3.5 3.0 2.5 2.0 1.5 1.0

Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

Oct-11

Jan-09

Jan-10

Jan-11

Jan-12

Apr-12

Jul-09

Jul-10

Jul-11

Internode Jul-12

Telstra

iiNet

Optus

Source: BMI, Bloomberg

TPG

www.telecomsinsight.com

ININdoNesIA

Asia

Telecommunications

ININDONESIA

3G Auction Set For September


The Indonesian government has announced that it will adopt the revised Ministerial Degree of Information and Communication Technology No.1/2006 for the tender of spectrum in the 2.1 gigahertz (GHz) band. The planned auction, which was to take place by late September, was delayed after Telecomunikasi Selular (Telkomsel) was declared bankrupt. Nevertheless, the growth potential of Indonesias 3G sector is evident from the strong interest in the last two blocks of spectrum. We retain our belief that Telkomsel and XL Axiata are the front runners given their larger subscriber bases, which translates into more users per spectrum. Despite Telkomsels announced bankruptcy, we believe there will be strong interest in acquiring spectrum when the government reopens the bidding. The base price of the last two 3G spectrum block has been set at IDR200bn (US$21.1mn) per year each, which is higher from the previous auction price of IDR180bn in December 2011 after adjusting for factors such as inflation. Competition for the spectrum is expected to be intense, with Telkomsel, XL Axiata, Axis Telekom and Hutchison CP Telecommunications all interested in securing additional bandwidth for 3G services. However, Telkomsels financial position will need to be clarified before it can participate in the auction. Although we believe that the bulk of the Indonesian consumers are still using the older and cheaper 2.5G GPRS technology for mobile internet access, demand for faster 3G services has been on 2.1GHZ SPECTRUM ALLOCATION
Channel 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 Frequency Band 19201925 19251930 19301935 19351940 19401945 19451950 19501955 19551960 19601965 19651970 19701975 19751980 21102115 21152120 21202125 21252130 21302135 21352140 21402145 21452150 21502155 21552160 21602165 21652170

the rise. While the Indonesian regulator and mobile operators do not disclose their 3G subscriber data, we have seen anecdotal evidence to support our view. For example, Axis Telekom announced in February 2012 that it will invest US$800mn in 2012 to expand its network, with an emphasis on improving HSPA coverage. Meanwhile, XL Axiata reported that the number of mobile data users on its network grew by 32% y-o-y to 26.5mn at the end of June 2012, with data traffic for H112 reaching 10,945TB, up from 3,749TB in H111. XL Axiata has claimed that its national 3G network utilisation is about 50%, with utilisation reaching 100% in the largest cities and certain areas. It is a similar scenario for alternative operators such as Telkomsel, which reported an 82% y-o-y increase in the number of mobile data users, to 47mn. Indonesias top five mobile operators - Telkomsel, Indosat, XL Axiata, Axis Telekom and Hutchison CP Telecommunications - each have two blocks of 3G spectrum (see below table). Axis Telekom and Hutchison CP Telecommunications were the latest companies to gain additional spectrum in 2011, and their intent to secure a third block is further testament to the sectors growth momentum and potential. It is difficult to determine which two operators will emerge victorious in their bid to secure an additional block of 3G spectrum. However, we believe that XL Axiata will adopt an aggressive approach, given that it has comparatively less spectrum holdings than Telkomsel and Indosat. XL Axiata has one 3G spectrum block in the 1800 megahertz (MHz) frequency band, while Telkomsel and Indosat have three blocks and one block respectively. BMI estimates that there were about 16.238mn 3G subscribers in Indonesia at the end of 2011, representing a 25% y-o-y increase

Operator Hutchinson CP Natrindo TS (Axis) Natrindo TS (Axis) Telkomunikasi Selular Telkomunikasi Selular Hutchinson CP Indosat Indosat XL Axiata XL Axiata To be auction in September 2012 To be auction in September 2012 Hutchinson CP Natrindo TS (Axis) Natrindo TS (Axis) Telkomunikasi Selular Telkomunikasi Selular Hutchinson CP Indosat Indosat XL Axiata XL Axiata To be auction in September 2012 To be auction in September 2012

Uplink/Downlink UL UL UL UL UL UL UL UL UL UL UL UL DL DL DL DL DL DL DL DL DL DL DL DL

Licence Period 20062016 20112021 20062016 20092019 20062016 20112021 20062016 20092019 20062016 20102020

20062016 20112021 20062016 20092019 20062016 20112021 20062016 20092019 20062016 20102020

Source: Kementerian Komunikasi dan Informatika Republik Indonesia

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sINgAPore

Asia

Telecommunications

on the back of increasing demand for smartphones (such as the BlackBerry device) and tablet computers. We operators to step up their expansion and market plans in 2012 in order to increase revenue generated from premium 3G services and mitigate downward pressure, amid the countrys intense competition. We expect the number of Indonesias 3G subscribers to reach 25.61mn, or 10.1% of the mobile market, by end-2016.

SINGAPORE

M1 First To Nationwide LTE


After becoming the first mobile operator in South East Asia to launch a commercial Long-Term Evolution (LTE) network in mid-2011, albeit limited in availability, Singapore's M1 4G service became fully operational with nationwide coverage on September 15 2012. BMI has seen LTE gaining traction in other parts of the region, and we expect Singapore to follow suit, given the increasing number of compatible devices and network coverage. The growth momentum should accelerate once all three mobile operators have deployed pan-island services.
Strong LTE Growth In South Korea
Mobile Market Growth By Technology (000)
45,000 10,000 9,000 40,000 8,000 7,000 35,000 6,000 5,000 30,000 4,000 3,000 25,000 2,000 1,000
Nov-11 Jan-12 Jun-12 May-12 Feb-12 Mar-12 Dec-11 Apr-12 Jul-12

recorded between December 2011 and March 2012. However, the LTE growth momentum in Singapore could be affected by several factors. All three mobile operators have previously lowered their generous data caps from 12 gigabytes (GB) to as low as 2GB, meaning that consumers may opt for slower 3G speeds instead of running the risk of exceeding the allowance. Secondly, there is a high proportion of postpaid subscribers in the country (53% as of June), although it is a similar scenario in South Korea and its growth trajectory has been robust. Thirdly, the adoption of the LTE service is dependent on popular device availability. While operators have launched smartphones from makers such as Samsung Electronics and HTC, the majority of Singaporean subscribers favour Apple's iPhone, according to a ConsumerLab report by Ericsson. Unlike most of Asia Pacific (such as Australia, Malaysia, Indonesia and Thailand), iOS is the preferred mobile operating system in Singapore, accounting for 46% of the total, while Google's Android was second at 29%. Android was the favoured system if looking at the region as a whole, accounting for 31% compared with iOS' 19%. Consequently, if Apple's next iPhone does not support LTE technology or the bandwidths of Singaporean LTE networks, the LTE adoption momentum would be lower. However, the opposite could see LTE adoption spike. Lastly, competition is vital, and the intensity should peak once SingTel Mobile and StarHub fully enter the LTE market. We have started to see operators adjusting their pricing after SingTel Mobile announced shortly after M1's LTE announcement that it will not position its 4G service as a value-added service by pricing its 3G and 4G services the same.

MALAYSIA

Cloud Projects Get PPP Boost


Eight new projects to expand cloud computing services in Malaysia are to be started in 2012 with an investment of MYR300mn (US$94.6mn) from public-private partnerships (PPPs). The investment aims to improve the take-up of enterprise cloud services and is expected to generate MYR1.68bn to gross national income (GNI) by 2020. BMI believes using PPPs to encourage the roll-out of cloud computing is a good step for Malaysia's IT market, combining government support with industry expertise.
Cloud Services To Grow
Malaysia IT Market Forecasts By Sector
Software sales, US$mn Services sales, US$mn Computer hardware sales, US$mn 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0

20,000

3G 2G (RHS)
Source: ITSTAT

LTE (RHS) WiBro (RHS)

M1's LTE service, which operates in the 1800MHz and 2.6GHz bands, encompass both street level and in-building coverage. Previously, the service was only available to enterprise mobile broadband users in Singapore's financial district, but consumers are now able to access the next generation service via other mobile devices such as smartphones and tablet computers. While M1 is not the first mobile operator in Singapore to launch LTE services for smartphones, it is the first to launch a nationwide network. SingTel Mobile launched its 4G smartphone service in June 2012, but the operator is only expected to deliver 95% island coverage by March 2013. Meanwhile, StarHub is building its LTE network in key business areas and is expected to launch commercial services by end-2012. Nationwide coverage is important for attracting consumer interest as subscribers will be able to enjoy LTE speeds throughout Singapore. At present, SingTel Mobile's LTE subscribers drop down to 3G/HSPA+ when outside of the LTE network. South Korean mobile operators had been aggressive in terms of rolling out their LTE networks, and they achieved nationwide coverage by June 2012. At the end of July, there were 8.663mn LTE subscribers in South Korea, up from 696,000mn in November 2011. Net additions between April and July were 5.061mn greater than the 2.905mn

2011e

2009

2010

2012f

2013f

2014f

2015f

e/f = BMI estimate/forecast. Source: BMI, EITO, World Bank, ITU, EU, IDC, Gartner, ISI

The projects will form part of the Digital Malaysia initiative,

2016f

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thAIlANd

Asia

Telecommunications

which includes a number of ICT projects aiming to boost ICT as a percentage of GDP from around 10% in 2010 to 17%. The initiative is also expected to generate around 160,000 jobs, with a total investment from PPPs reaching MYR31.2bn by 2020. The eight projects focused on enterprise cloud computing will contribute 710 high-value jobs to the total. Encouraging enterprise cloud computing is one of a number of ambitious initiatives, including a national cloud computing platform. With government backing, concerns over where data is stored a major issue in the proliferation of cloud computing internationally may be reduced as it can be assumed that the cloud will be located within Malaysian territory. Data stored in cloud servers outside a country can be subject to different regulations and laws governing privacy. The benefits for Malaysian businesses will come in the form of reduced overheads for IT services, which is an area that is set to grow rapidly in this market. BMI forecasts a 10.7% CAGR between 2012 and 2016 higher than the market total CAGR of 8.6%. The Digital Malaysia initiative should prove a significant driver of new services in the market and encourage greater usage of new IT products. With government and operator investment in Malaysia's high-speed broadband network (HSBB) boosting broadband connectivity in the country, cloud computing will be a logical step for many organisations, particularly those wishing to keep their overheads down. Other Digital Malaysia projects include the Asian e-Fulfilment Hub aiming to put Malaysia at the centre of e-commerce in the region, an e-payments service for SMEs, microsourcing for income generation, customised online education and an m-wallet platform, reports Telecom Asia.

THAILAND

MVNO Market On Track For Growth


Thai state-owned telecoms operator TOT is in the midst of revamping its mobile virtual network operator (MVNO) business model and has so far awarded 40% of its 3G network capacity to a subsidiary of Samart Corporation. TOT previously signed five companies as MVNOs to resell its 3G services; however, growth was limited by the lack of coverage and capacity. However, with TOT currently expanding its 3G network, we believe that the prospects for its MVNOs are brighter. This would in turn spur more similar deals
3G Expected To Boom
Thailand 3G Subscriber Forecast, 2009-2016
35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Number of 3G Phone Subscribers ('000) (LHS) 3G Market As % Of Entire Mobile Market (RHS) 40 35 30 25 20 15 10 5 0

from alternative telecoms operators. Under a five-year agreement, I-Mobile Plus will have the exclusive right to TOT's 3G network capacity, which would position the company as TOT's main MVNO. This is similar to the situation under TOT's previous MVNO model, where I-Mobile had reportedly sold 170,000 3G connections out of the 500,000 available. Meanwhile, another MVNO, Loxley, is in talks with TOT for exclusive rights to 20% of 3G network capacity, silencing reports that Loxley is considering bidding for a 3G licence in the upcoming auction. Instead, Loxley has formed an alliance with Malaysia's MVNO Tune Talk , which would also help Loxley expand into the Malaysian ICT industry. In February 2012, TOT announced that it was in talks with two European telecoms operators to provide 3G services as MVNOs. However, given the ongoing turmoil and uncertainties in Europe, we believe that the remaining MVNOs will comprise primarily domestic firms, which have knowledge about the market and possess the distribution channels. The Bangkok Post has reported that the prospective winners for the remaining 40% are 365 Communication, M Consult Asia, IEC Technology, Acumen and Jasmine Telecom Systems, several of which are existing TOT MVNOs. We believe that the MVNO business model can thrive in the Thai market, assuming that the regulations permit, due to the pentup demand for 3G services after constant delays in the issuance of licences. We believe that at the initial launch, 3G providers will look to serve as much of the market as possible. However, as the market matures, MVNOs will become a more attractive option to monetise excess capacity, which would otherwise be unused, by targeting lower profitable niche segments, such as low-income consumers and foreign labourers. TOT has said it currently has 2,300 3G base stations, and it expects the number to increase to 5,320 by October 2012. In the next two years, the network will comprise about 18,000-20,000 base stations, which would boost the attractiveness of its 3G MVNOs, thereby offsetting lost concession revenue in light of the changing competitive landscape.

VIETNAM

Government Unlikely To Intervene On Higher Charges


The lopsided Vietnamese telecoms market is starting to rear its head, after local media reported that the Vietnam Post and Telecommunications Group (VNPT) and Viettel have raised various charges, which are to the detriment of their smaller rivals. BMI has long highlighted that unhealthy competition exists due to the two dominant players, but we do not foresee the situation improving in the near term as the government has shown little willingness to intervene. In late June 2012, VietNamNet Bridge, citing operators such as CMC TI and Hanoi Telecom -owned Vietnamobile, reported that VNPT and Viettel have raised telecoms circuit leasing charges by about 200-300%. Both companies have provided legitimate reasons for increasing the leasing charges. VNPT has asked its subsidiaries to maintain independent accounts, which means that companies such as VTN have to revise their business plans in order to protect profitability. Meanwhile, Viettel has acquired EVN Telecom, which used to lease out its infrastructure. However, Viettel has claimed that EVN Telecom's clients have to re-contract at Viettel's leasing rates as charges applied by EVN Telecom are not profitable.

2009

2010

2011

2012f

2013f

2014f

2015f

2016f

f = BMI forecast. Source: ITU, BMI

www.telecomsinsight.com

MyANMAr

Asia

Telecommunications

Regardless, competition in Vietnam's telecoms market is becoming less healthy. While it was operating an unsustainable business model, EVN Telecom was a disruptive presence, which provided much relief to alternative smaller operators. We believe that companies such as Vietnamobile are now left with limited options but to accept leasing rates from VNPT and Viettel, as alternatives such as building their own infrastructure takes too long and are too costly. In July, Hanoi Telecom officially lodged a complaint with the Ministry of Information and Communications (MIC), claiming that VNPT has unexpectedly raised the leasing fees for base transceiver stations by 110-562%. While Hanoi Telecom accepts that higher rates are inevitable in light of inflation, particularly energy cost, it believes that the increases are overly high and unbearable.
Strong Influence Over Others
Vietnam Mobile And Fixed-Line Market Shares (%), 2011
EVN Vietnamobile, 8.0% Telecom, 0.2% SPT, 0.1% Beeline, 3.2%

the rental tariff hikes until end-July, with the ministry seeking an explanation for the sizeable raises. However, allowing Viettel to acquire EVN Telecom, and the prospect of approving VNPT's plan to merge MobiFone and VinaPhone suggest to us that the government might not have a significant influence over the rental hikes, which remain justifiable from an operational perspective.

MYANMAR

True Plans Myanmar Pay-TV Venture


Thai converged services operator True Corporations has unveiled ambitious expansion plans for its pay-TV business, including establishing operations in nearby Myanmar and Vietnam. BMI believes that, with a reported 60% share of the Thai TV market at the end of 2011 and strong adoption rates in provincial Thailand, True has a good chance of making a success of its international growth initiative. This strategy will also help the company reduce its dependence on the Thai market, which is increasingly competitive and, owing to converged product bundling, is seeing margins weakening. Details regarding expansion into Myanmar and Vietnam are scant, but the Bangkok Post cites True CEO Suphachai Chearavanont as saying that at least THB1bn has been earmarked for investment in a joint venture with local partners, which is most likely to be the state-owned national broadcasting authority. Reportedly, True will produce local language programming, but a reference to the popularity of Thai content in Myanmar and other international markets suggest it could quickly build a large and loyal customer base by leveraging its existing content portfolio.
Sun Always Shines On TV
TrueVisions Pay-TV Subscribers (000) And ARPU (THB)

Viettel, 40.5%

VinaPhone, 30.1%

MobiFone, 17.9% VTC, 0.1% SPT, 1.5% EVN Telecom, 7.9%

Viettel, 22.3%

1,600 1,400 1,200

900 880 860 840 820 800 780 760 740 720 Q109 Q309 Q110 Q310 Q111 Q311 Q112 700

FPT Telecom, 0.2%

1,000
VNPT, 68.0%

800 600 400

Source: MIC

200 0

As aforementioned, Hanoi Telecom has the option of constructing its own stations instead of renting. In fact, the operator has said that the increase in annual leasing fees would allow it to build a new station. While this could be a viable alternative, it would go against the government's policy of encouraging network sharing in order to reduce cost and resource wastage. Two prominent international telecoms operators South Korea's SK Telecom and Russia's VimpelCom have already fled the Vietnamese market, and BMI would not be surprised if Hong Kong's Hutchison Telecommunications International, which co-owns Vietnamobile, follows suit. At present, the MIC does not control infrastructure leasing fees. However, we believe that it is necessary for some form of interventions such as a price floor and price ceiling to protect the interests of the lessors and lessees, especially if the government is able to find companies abusing their market positions. Encouragingly, it was announced that the MIC had requested VNPT and Viettel to delay

Free to air Freeview


Source: True Corporations

Premium ARPU (THB)RHS

Standard

In Thailand, the TrueVisions arm of the True group offers freeto-view and subscription TV services to 1.7mn registered subscribers via digital direct-to-home (DTH) satellite and digital hybrid fibrecoaxial (HFC) cable networks. The company has invested heavily in the implementation of DOCSIS 3.0 technology on its cable network, which passes approximately 800,000 homes in the Bangkok metropolitan areas. It has also subsidised the roll-out of satellite receivers in less affluent provincial areas of the country and is upgrading its set-top-boxes to support high-definition (HD) content. The latter also sees the introduction of more secure MPEG-4 encryption systems, which should safeguard the company against piracy. TrueVisions was significantly restructured in 2010 to better

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hoNg KoNg

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exploit business growth opportunities in the Thai pay-TV market, particularly in the advertising field. Advertising revenue increased by 46.7% to THB707mn in 2011, enabling TrueVisions to secure more attractive programming content and expand the range of channels it offers. We expect similar strategies to be used in Myanmar and Vietnam, where satellite-based services are widely received by consumers. However, formal pay-TV service provision models run greater operational risks in these markets due to low household expenditure on intangible services, dependence on free-to-air and pirate broadcasts due to non-existent or poorly enforced regulatory systems, and risks that state-imposed censorship could dull the attractiveness of the new services. We believe that low returns on investment are the most immediate risk. In Thailand, TrueVisions has had mixed success sustaining Average Revenue Per User (ARPU) growth. Blended ARPU of THB825 (US$26.10) per subscriber each month in Q112 resulted in y-o-y and quarter-on-quarter (q-o-q) growth of 9.7% and 5.1% respectively, but comes after considerable infrastructural and content-related investments and as (piracy notwithstanding) customers increasingly shun standalone premium services (down 8.5% y-o-y and 0.5% q-o-q) in favour of advertising-based free-to-air and 'Freeview' offerings. In regards to state intervention in the media, Myanmar and Vietnam have poor track records and True could easily find itself inadvertently breaching the countries' fluid and byzantine laws regarding broadcasting. It is likely that in both countries, True will have to partner with the local state-owned broadcasters, which presents potential difficulties in terms of managing the business' growth along profit-making lines, developing local content and distributing foreign made programmes. Premium services are also virtually unknown in both markets, and convincing consumers to pay a monthly fee for a range of content they have already been able to, freely or cheaply, access through other means would be another obstacle for True. Nevertheless, state attitudes towards the media are beginning to thaw, most notably in Myanmar, and by being at the forefront of liberalisation in these markets, True should be comfortably positioned for growth in the long term.

also believe that SmarTone's strategic focus on the higher end of the market, with a significant proportion of postpaid subscriptions, is an asset when promoting new higher value services.
LTE Roll-out To Meet Wireless Data Demand
Mobile Subscriptions By Technology (000) & Mobile Data Usage Per Subscription (MB) RHS
10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000
Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112 Q212

700 600 500 400 300 200 100 0

2.5G Subscriptions ('000) 3G/4G Subscriptions ('000) Mobile Data Usage Per Subscription (MB) RHS
Source: OFCA

HONG KONG

SmarTone Launches LTE


SmarTone has launched commercial 4G LTE services in the 1,800MHz band, becoming the last of Hong Kong's five operators to offer LTE services. BMI believes SmarTone has considerable potential to upsell 4G LTE services to its existing subscription base; however, we expect gains from rival operators' subscription bases to be limited as they all already offer LTE services. Hong Kong is one of the most developed wireless data markets in the world, with SmarTone the last of five mobile operators to launch LTE by refarming 10MHz of its 1,800MHz spectrum for the service. The new LTE service was initially only available to customers by invitation and became available on general sale from September 11 2012. SmarTone offers volume-based plans ranging from 5GB to 20GB, costing up to US$60 per month. BMI believes demand for the service from SmarTone's existing subscription base will be strong. The growth in 3G/4G subscriptions in Hong Kong has been robust, as has growth in the volume of wireless data consumed per subscription. We consider this a good indicator of demand for higher capacity wireless data services and

However, with SmarTone trailing its rivals in the launch of LTE services, the opportunities to poach subscribers are limited. SmarTone's launch follows a move by CSL New World Mobility, which was the first mobile operator to simultaneously deploy Dual Cell HSPA+ (42Mbps) and LTE over an entire national network in 2011. Following this, China Mobile Hong Kong introduced commercial 4G LTE services in April 2012. Meanwhile, PCCW and Hutchison Telecommunications Hong Kong built a collaborative network, and 3 Hong Kong and PCCW Mobile launched 2.6GHz LTE in May 2012. One potential source of competitive advantage that may enable SmarTone to attract subscriptions from its rivals is its utilisation of the 1,800MHz band. Compared to services in the 2.6GHz band, SmarTone's service will offer superior indoor coverage due to the use of lower frequency spectrum. However, this opportunity is limited, given other operator's capacity to utilise 1,800MHz spectrum (CSL is aiming for 100% 1,800MHz LTE population coverage by YE12). Furthermore, BMI believes SmarTone would face significant challenges in communicating a competitive advantage in indoor coverage to consumers, given the lack of precision of the claims. Therefore, while there is some short-term potential, we consider SmarTone's LTE launch to be a value generation strategy, rather than a competitive threat for other operators.

TAIWAN

Chunghwa Network Separation Threat Comes Closer


The National Communications Commission (NCC) of Taiwan has reportedly decided to remove the monopoly on last-mile network access held by incumbent Chunghwa Telecom (CHT). BMI's view is that network separation would give alternative fixed-line and broadband operators fair, transparent and affordable access to the millions of homes and offices served by the CHT network and, more importantly, help lower the cost of broadband and voice telephony services for consumers. The Taiwanese fixed-line market has been open to competition

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since June 2001, and although some strong players have entered the market, mostly backed by financially well-endowed local and international businesses, CHT continues to account for 95.3% of the local telephony market, 74.1% of the domestic and international long-distance services market and 79.2% of the fixed broadband market, principally through its ability to control access to its lastmile infrastructure and set prices.
CHTs Support Pillars Under Threat
Taiwan Fixed-Line And Broadband Market Trends
30,000 25,000 20,000 15,000 10,000 5,000 0

LGE's Handset Woes Deepen


South Korean consumer electronics manufacturer LG Electronics has revealed further losses at its mobile handset business, as the company comes under increasing competitive pressure in the smartphone segment. This was not completely unexpected as the feature phone market which accounts for at least half of LGE's handset sales is in decline, while the smartphone segment is suffering from pricing pressure from low-cost Indochinese suppliers. Although LGE hopes that investment in new LTE-enabled devices will improve its performance, BMI thinks that margins in its handset business will remain low for the foreseeable future. Handset sales totalled KRW2,286bn in Q212, down 6.8% q-o-q and by 28.6% y-o-y; this was mostly due to a 47.2% y-o-y decline in quarterly handset shipments from 24.8mn to 13.1mn. The company has stopped reporting its smartphone shipment figures; this could be because these would seem fairly weak when compared to the tens of millions of iPhones being sold every quarter by arch-rival Apple. Analysts estimate that, despite consistent increases in smartphone shipments, such devices still account for less than half of LGE's handset output, leaving the handset business exposed.
Darkening Outlook Despite LTE Focus
LGE Mobile And Handset Financial Indicators
3,500 60 40 20 0 -20 2,000 1,500 1,000 500 0 -40 -60 -80 -100 -120 -140 Q111 Q211 Q311 Q411 Q112 Q212 -160

2009

2010

2011

2012f

2013f

2014f

2015f

Number of Main Telephone Lines in Service ('000) Number of Broadband Internet Subscribers ('000)
f = BMI forecast. Source: BMI, operators, NCC

Alternative operators have had to rely on local loop unbundling and co-location facilities to provide services to their customers, but negotiating these arrangements with CHT can be a lengthy and expensive process. Network separation would require the incumbent to establish separate wholesale and retail businesses and to offer last-mile access at cost. Restructuring CHT will be an expensive task and will weigh on the company's profits across multiple quarters, as will a marked reduction in network access fees that have historically cushioned the operator from the effects of declining fixed-line usage. Taiwan's Executive Yuan and Legislative Yuan still need to approve the changes to the telecommunications law. As the state continues to own 37.2% of CHT, it may have a vested interest in ensuring that the company's revenues which are a significant contributor to state coffers are not adversely affected and could therefore block the amendment or at least impose a phased introduction of network separation. This seems unlikely to BMI, given the relatively open nature of the government and its willingness to incentivise foreign investment in key industries such as telecommunications. Nevertheless, it remains a potential downside risk of which investors should be mindful. BMI expects the principal fixed-line and broadband alternative players Taiwan Fixed Network, New Century Infocomm Technology, Asia Pacific Telecom, cable TV operator kbro and international cable operators Reach Global and FLAG Telecom to respond enthusiastically to this development and seek new and improved network access agreements with CHT. Fairer access pricing should help them develop more attractively priced products and services, and will ultimately help to slow or reverse the decline in fixed-line usage and bolster fixed broadband growth in Taiwan. BMI forecasts the number of fixed-line connections to fall from 12.553mn in 2012 to 11.579mn in 2016, while the number of broadband connections boosted by popular mobile broadband services will grow from 24.784mn to 27.614mn over the same period.

2016f

3,000 2,500

Mobile LHS Mobile Op Income


Source: LGE

Handset LHS Handset Op Income

GLOBAL www.telecomsinsight.com

In moving to counter Apple, Samsung , HTC and Research In Motion at the higher end of the market, LGE has been incurring higher marketing and distribution costs, and may also be under increased pressure from mobile network operators to offer attractive discounts on key devices. In the US, AT&T and Verizon have reported better Q212 operating margins as a result of lower iPhone sales, as well as a new focus on less expensive smartphones while still largely forsaking feature phones. This is having a devastating effect on LGE's handset margins, with an operating loss of KRW59bn recorded in Q211; this is in stark contrast to the profit of KRW35bn seen in Q112. The company reports that sales of LTE products are strong and that demand for such devices will continue to increase. Its plan is to continuously launch new LTE-enabled devices in developed markets and increase the efficiency of its supply chain management processes in order to return to profitability. While BMI agrees that the company needs a good range of next generation devices capable of supporting LTE access, we caution that commercial LTE networks (and thus, potential device buyers) are still few in number and that operators will be cautious when committing to take large numbers of LTE devices at a time when network roll-out and customer acquisition

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costs remain very high. For these reasons, we do not expect LGE to completely escape its handset profitability problems in the short to medium term and may be better advised to focus on developing a small range of highend LTE-enabled devices that compete more effectively with the iPhone and the Samsung Galaxy family, which currently spearhead this market.

JAPAN

Sony Acquires So-net For Content Boost


Sony's latest attempt to improve its financial performance and outlook has comprised the Japanese firm reaching an agreement to acquire all of the outstanding shares of So-net Entertainment that it does not currently own. Sony plans to position So-net as one of the key components of its network services business in Japan and Asia, which in turn would boost Sony's growing emphasis on generating higher revenue from content. So-net was jointly established by Sony, Sony Music Entertainment and Sony Finance International in 1995, before launching internet services the following year. In addition to providing internet connections such as fibre-to-the-home and mobile data, So-net also operates in the media and entertainment sector through subsidiaries M3 (medical portal) and Gamepot (social gaming). Sony has announced that it will explore the possibility of collaborating with M3, which would complement a potential alliance between Sony and the world's largest endoscope maker, Olympus. By making So-net a wholly owned subsidiary, Sony also believes that it will be able to fully leverage on So-net's business portfolio and assets through the simplification of their capital relationships. The aggregate consideration of the acquisition is expected to be about JPY60bn.
No Major Changes
Sony Share Price (JPY) And Selected Acquisitions And Divestments (2011-2012)
Acquired Ericsson's stake in Sony Ericsson Divested stake in S-LCD Acquired So-net Acquired Gaikai 2,200 2,000 1,800 1,600 1,400 1,200 1,000 800 600

as purchasing Ericsson's stake in the joint venture Sony Ericsson, selling its share in an LCD plant to partner Samsung Electronics and acquiring cloud-based gaming company Gaikai. The move to take over So-net was well received by its shareholders, although we remain concerned about the company's near-term outlook, especially in light of the challenging business environment. In addition to a slow response to consumers' changing preferences and competition from rivals such as Samsung Electronics, Sony's main markets the US, Europe and Japan are still in economic turmoil, which would limit consumers' spending on consumer electronics and discretionary services such as entertainment. BMI previously highlighted that Sony's rapidly declining competitiveness in the consumer electronics market means that the firm should turn its attention to generating revenue from its portfolio of content services such as music and games. While we believe that So-net is another piece to the puzzle, the transition is a slow process due to Sony's size and structure, in addition to the fact that its consumer electronics business is still a major revenue generator, despite profitability having been weak.

CHINA

Lenovo And EMC Form Complementary Partnership


Lenovo and EMC have announced a strategic and complementary partnership, leveraging the two companies' respective strengths in order to boost the sales of server and storage technology. BMI believes that the collaboration is a good fit for the firms gaining market exposure to areas that they lack in. The collaboration will span across three main areas: Lenovo and EMC have formed a server technology development programme that will accelerate and extend the former's capabilities in the x86 industry-standard server segment. Lenovo will market these servers, while EMC will also embed them into selected storage systems. The two firms have established an OEM and reseller relationship, in which Lenovo will resell EMC's network storage solutions to its clients. This will initially occur in China before extending to the global market, in accordance to Lenovo's server expansion plan. Lenovo and EMC will use Iomega's assets to provide Network Attached Storage systems to SMBs and distributed enterprise sites. Lenovo is still an emerging player in the server, services and software market, with the firm having generated 90% of its revenue in FY2011/12 (April-March) via notebooks and desktops. We believe that the partnership with EMC will help Lenovo to build up its IT portfolio and credential in China, given the former's technologies and expertise, before leveraging on EMC's global network to expand into overseas markets. Although Lenovo is the world's secondlargest PC manufacturer, the firm is highly reliant on Asian markets, particularly China, for sales. This would help Lenovo close the gap with IT enterprise market leaders Dell, Hewlett-Packard and IBM. The venture away from the personal computer market is a necessary step for Lenovo, due to shifting consumer and business preferences. Sales of desktops and notebooks have been declining as consumers increasingly opt for smartphones and tablet computers for their content consumption needs. While tablets are still not an exact replacement for notebooks, rapid technological advancement could

Nov-11

Aug-11

Source: BMI, Bloomberg

Sony has been under immense pressure from its shareholders in light of its continued abysmal financial performance. While sales in the quarter ended June 2012 increased by 1.4% y-o-y, net loss widened from JPY15.5bn to JPY24.6bn. In its earnings announcement in early August 2012, Sony also downgraded its FY2012/2013 (AprilMarch) financial forecasts from its previous expectations in May. The company has undergone several restructuring efforts, such

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mean that the scenario is not too far off from becoming a reality. Meanwhile, having Lenovo as a partner will help EMC break into the Chinese market, which would otherwise be challenging for a foreign company. Lenovo's extensive client base, which includes the Chinese government, enterprises and SMBs, and distribution channel would be immediately available to EMC. Although the Chinese economy is facing economic uncertainty, the significant market size and potential will provide long-term revenue opportunities, as well as diversification away from the traditional US and European markets.
EMC Can Be A Big Help
Lenovo Revenue By Product (LHS) And Geography (RHS)
Others, 5.1% MIDH, 5.0%

attract consumers. The operator's TD-SCDMA network is not as well as supported by international handset makers, which puts China Mobile at a disadvantage in comparison with rivals such as China Unicom and China Telecom, with both having had an agreement with Apple to sell the iPhone. Net profit was boosted by alternative sources such as interest income and profit from associates to reach CNY62.240bn. Nevertheless, net profit margin still fell by 1.2pp, from 24.5% to 23.3%.
Hefty Subsidies Is The Root Cause
China Mobile Share Price (HKD), 2011-2012
95 90 85 80 75

Desktop, 33.4%

Notebook, 56.5%

70 65

Nov-11

Jan-11

Jun-11

Jan-12

Jun-12

Jul-11

May-11

May-12

Feb-11 Mar-11

Feb-12

Mar-12

Apr-11

Oct-11

Aug-11

Sep-11

Dec-11

Apr-12

Jul-12

Source: BMI, Bloomberg

Mature Markets, 12763

China, 12395

Emerging Markets (Ex China), 4803


Others include servers, services and software, and Medions non-PC business. Source: Lenovo

The reselling of EMC's network storage solutions would also bolster EMC's brand awareness, while the joint venture would allow EMC to target SMBs, leaving the parent company to continue focusing on more lucrative large enterprises.

4G And VAS Key For China


China Mobile saw a significant plunge in its share price after the operator's H112 financial results missed analysts' estimates, on the back of rising subscriber acquisition costs. Although China Mobile is still the world's largest mobile operator by subscriber base, it is inherently disadvantaged by its proprietary 3G TD-SCDMA network, which is not as widely supported by device manufacturers as rival technologies W-CDMA and CDMA2000. We continue to expect China Mobile to push for the commercial launch of 4G TD-LTE and mobile content as its main future revenue drivers. China Mobile's H112 operating revenue increased by 6.6% y-o-y) to CNY266.530bn, but EBITDA declined by 0.9% to CNY123.051bn, resulting in a 3.4 percentage point (pp) decrease in EBITDA margin from 49.6% to 46.2%. China Mobile noted a broad base increase in operating expenses, particularly hefty subsidies to

China Mobile had 683.076mn mobile subscribers at the end of June 2012, 67.079mn of which are using 3G subscription, representing 9.8% of its total. By comparison, China Unicom's proportion of 3G subscribers (57.530mn) was 26.2%, while China Telecom came out on top with 35.3% (50.960mn). China Mobile still occupies the market leadership position in China's 3G sector, although it is under pressure from China Unicom. Between July 2011 and June 2012, China Unicom gained 33.585mn 3G subscribers. China Mobile came in second with 32.052mn, while China Telecom added 29.420mn. In order to fend off competition, China Mobile chairperson Xi Guohua has announced that the operator will increase handset subsidies in 2012 to CNY26bn, up from the CNY20bn originally forecast. The operator is also eyeing more compatible mobile devices with a possibility that the next iPhone variant could support TD-SCDMA. Securing an agreement with Apple would be a short-term boost to China Mobile's outlook, but we believe that the key long-term revenue generator would come in the form of 4G services. Unlike the TD-SCDMA standard, TD-LTE has been adopted by operators in other countries such as India and Australia, which means that there is a greater incentive for device makers to manufacture compatible handsets. Furthermore, while selling the iPhone would bolster China Mobile's data user base, revenues generator from mobile applications (apps) would flow towards Apple and developers. China Mobile is currently testing its own mobile app store for Android-based smartphones as paid apps on the official Google Play store is not accessible in the country. This would create a source of sustainable, long-term earnings for China Mobile, which would otherwise rely largely on selling connectivity for revenue. China Mobile reported that traditional voice services contributed 66.5% of total operating revenue in H112, while data services accounted for 28.5%. The importance of applications and information services is highlighted by the fact that they accounted 9.2% of total operating revenue. Although we expect the proportion of wireless data traffic to continue increasing in light of greater adoption of 3G services, there is a need to focus on value-added services to better

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monetise China Mobile's data network, instead of allowing the revenue to flow to other stakeholders.
Data And VAS Equally Important
China Mobile Operating Revenue Breakdown
H111

phones are locked to one network, and the switching process requires cooperation of the old and new operators. Citycell's situation is further exacerbated by the fact that it is Bangladesh's only CDMA 1x mobile operator.
Citycell Not Keeping Pace With Industry
Bangladesh Mobile Subscriber Growth By Operator (000), 2009-2012
120,000

Others 4.8% SMS & MMS 9.1% Data 25.9% Wireless Data Traffic 7.7% Applications and Information Services 9.1%

Voice 69.3%

Teletalk Citycell Airtel Robi Axiata Bangladesh Grameenphone

100,000 80,000 60,000 40,000 20,000 0

Jun-09

Jun-10

Mar-09

Mar-10

Mar-11

Jun-11

Dec-09

Dec-10

Sep-09

Sep-10

H112

Others 5.0% SMS & MMS 8.3% Data 28.5% Wireless Data Traffic 11.0% Applications and Information Services 9.2%

Robi Axiatas subscriber data differ from that of the BTRC. Source: BTRC, Operators, BMI

Voice 66.5%

Source: China Mobile

BANGLADESH

GSM Switch To Boost Citycell's Outlook


Pacific Bangladesh Telecom, which markets under Citycell, has announced that it plans to spend BDT16bn (US$196mn) to switch from CDMA technology to GSM. The decision has been made following continuous bad performances, which were due to technology limitations. The long-awaited change, assuming that the operator receives regulatory approval, should help bolster Citycell's outlook as it would allow subscribers of rivals firms to easily migrate to its network. According to the Bangladesh Telecommunication Regulatory Commission (BTRC), Citycell had 1.713mn subscribers at the end of May, representing only 1.9% market share. Since launching services in 2005, Citycell's mobile subscriber base has not exceeded the 2mn mark and significantly lags behind larger rivals Grameenphone (38.412mn), Banglalink (25.252mn), Robi Axiata (18.733mn) and Airtel (6.667mn). CDMA is typically more cost-effective, and Citycell's 800MHz spectrum is suitable for target sparsely populated rural regions. However, the technology can also become a disadvantage in emerging markets. GSM consumers can easily switch providers by swapping SIM cards without purchasing new handsets. By contrast, CDMA

The BTRC has rejected Citycell's requests to switch to GSM technology over the years. However, Citycell is undergoing a mobile licence renewal, and the new licence will be technology neutral, thereby technically allowing Citycell to change from CDMA to GSM. Citycell's migration plan involves paying BDT7.5bn for 5MHz of spectrum in the 1800MHz band, while retaining 5MHz of spectrum in the 800MHz band for subscribers who refuse to make the switch. As a result of the shift to higher frequency, Citycell plans to increase its number of base transceiver stations from 860 to 2,500. We do not expect significant resistance from the regulator, especially if Citycell pays its licence renewal fees (operators such as Grameenphone are in disagreement with the BTRC over the dues). BMI believes that making the switch would bring Citycell to the same competitive landscape as its rival operators. However, operating two separate networks is a costly and inefficient model. We believe that this solution to prevent subscriber backlash is temporary, but we eventually expect Citycell to fully migrate to GSM.

MALDIVES

Mobile Broadband Takes Over


Mobile subscriptions in the Maldives reached 549,934 in June 2012. The market continues to add new subscribers, despite penetration reaching 172%. We have upgraded our forecasts slightly for this market for year-end 2012 as a result of new data. However, looking at historical trends for the market, BMI expects growth and some subscriber losses to take place in H212. What is more noteworthy is the continued strong growth in mobile broadband figures, accounting for almost 80% of the broadband market. The mobile market grew 3.7% in the first six months of 2012 and 2.8% y-o-y, with especially strong growth in prepaid services, according to data from the Communications Authority of the Maldives. Y-o-y growth was slowed by a 4.2% decrease in postpaid subscriptions, offsetting the 3.9% increase in prepaid connections. While we have raised our forecasts for the mobile market, we anticipate that subscriptions will decline in H212, which has been seen in previous years, with temporary connections to prepaid platforms

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discounted later in the year. More encouragingly for mobile operators in the Maldives, mobile broadband saw 50.6% y-o-y growth in June 2012, reflecting a trend BMI has observed across many emerging markets. In the Maldives, the fixed line market had been declining; it picked up mid-2012, but BMI believes that this is temporary. We believe the market will continue declining but at a slower pace, with lower demand for fixed broadband accelerating the decline. Mobile broadband already dominates broadband connections and will continue to rise as a proportion of total connections.
Slower Growth To Come
Maldives Telecoms Subscriber Forecasts
700 600 500 400 300 200 100 0 35 30 25 20 15 10 5 0

previously recommended by the TRAI. Unsurprisingly, it has still attracted the criticism from operators such as Bharti Airtel and IDEA Cellular given that the price is still a massive increase from previous allocations. There is no doubt that the higher reserve price is a fairer representation of the spectrum's scarcity, in addition to the fact that the 2008 spectrum allocation has been tainted with alleged corruption, which resulted in the resource being undervaluedoperators paid INR16.5bn for 4.4MHz of 2G spectrum. However, there is still inconsistency in the pricing as the base price for 3G spectrum auction in 2010 was INR35bn. At the end of the auction, the average price was approximately INR167.5bn, just slightly higher than the reserve price of the upcoming 2G auction. A mitigating factor would be that the 2G spectrum will be technology-neutral, thereby allowing operators to roll out 2G, 3G or 4G services. Nevertheless, the majority of the Indian consumers are still likely to rely on the basic 2G service in the near-to-medium term as evident from the slow take-up of 3G services in the country, which means that advanced technologies are unlikely to be highly lucrative even if operators deploy the services.

What Now?
We expect operators that participate in the auction will largely focus on 2G services, but the high reserve price would translate into tariff hikes for consumers. The director general of the COAI has said that operators would incur an additional debt of INR3.25trn in order to bid for the spectrum, while tariff rates could increase by INR0.30 a minute. This would put a dampener on India's mobile subscriber growth, which is already showing signs of weakness. Latest data from the TRAI note that the market expanded by 14.921mn in Q212 to 934.094mn, down from the 40.107mn increase seen in Q211. With penetration rates in urban cities well above 100%, consumers in rural regions would get the short end of the stick as operators scale back on network expansion while raising prices.
India Struggling To Maintain Momentum
India Mobile Subscriber Growth (000), 2009-2012
1,000,000 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000
Dec-09 Dec-10 Sep-09 Sep-10 Sep-11 Dec-11 Jun-09 Jun-10 Jun-11 Mar-10 Mar-11 Mar-12 Jun-12

2012f

2013f

2014f

2015f

Number of Cellular Mobile Phone Subscribers ('000) (LHS) Number of Broadband Internet Subscribers ('000) (RHS) Number of Main Telephone Lines in Service ('000) (RHS)
f = BMI forecast. Source: BMI, CAM

INDIA

Prohibitive 2G Price Set


The Indian government has finally set the reserve price for 2G spectrum that was freed up after the Supreme Court cancelled 122 licences in February 2012. Although the new base price is lower than the one previously recommended by the Telecommunication Regulatory Authority of India (TRAI), it still represents a significant hike that is most likely to be passed on to consumers. The Hindu reported on August 3 that the Union Cabinet has fixed a minimum price of INR140bn (US$2.53bn) for 5MHz of pan-India 2G spectrum in the 1800MHz GSM band. Meanwhile, the reserve price of 5MHz of CDMA spectrum is set at INR182bn (US$3.29bn). The Hindu has also reported that the auction is likely to miss the Supreme Court's August 31 deadline and take place in Q412 instead, given the pace of auction preparation and auctioneer appointments. This is because the Department of Telecommunications has said that it will only release the information memorandum containing details about the spectrum sale to the empowered group of ministers on August 27, thereby leaving the government with three days to carry out the necessary procedures such as inviting applicants and clarifying queries. Additionally, India's telecoms industry has often resorted to litigious options to resolve disputes with the government, and it is no different this time. The Cellular Operators Association of India (COAI), the industry body that represents GSM operators such as Bharti Airtel and Aircel , is 'carefully examining its legal options' about issues, which include 'discrimination' in terms of spectrum fees and charges between GSM and CDMA operators.

2016f

2009

2010

2011

70,000 60,000 50,000 40,000 30,000 20,000 10,000 0

Total Mobile Subscribers (LHS)

No of Net Additions (LHS)

Due to non-submission of data for March 2012, figure includes operators data from January and February 2012. Source: BMI, TRAI, operators

Accurate But Unrealistic


The INR140bn reserve price is lower than INR180bn that was

Existing players in the Indian telecoms market have yet to express interest in participating in the auction after the reserve prices have been determined, although IDEA Cellular has said that the reserve price does not present a commercially viable business case. BMI believes that we will not see new entrants, given the high cost of entry, while existing operators would most likely look to secure 2G spectrum in some telecoms circles, instead of a pan-India licence, due to the prohibitive cost. The only exception could be Reliance Industries, which already has a pan-India 4G licence. The firm

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could be looking to bid for 2G spectrum in as many telecoms circles as possible in order to support its telecoms business ambitions. Additionally, Reliance Industries, along with incumbents such as Bharti Airtel and IDEA Cellular, could acquire telecoms assets of firms such as Etisalat-DB, S Tel and Loop Telecom, which have had their licences cancelled. This would in turn bring much-needed consolidation in the industry. While the Indian government is making it easier for operators to borrow money from banks (for example, spectrum can now be mortgaged and banks can auction the asset in the event of default), major Indian mobile operators such as Bharti Airtel, Reliance Communications, Vodafone India and Aircel are already saddled with hefty debt, following the 3G and broadband wireless access auctions in 2010. Raising funds through equity is another option, although we are sceptical that investors would buy into the Indian growth story after the weak global macroeconomic outlook, subdued performance by the Indian economy (see our online service, August 2, 'Growth Forecast Toned Down) and prolonged telecoms regulatory uncertainty, as well as the high spectrum base prices.

Bharti Share Price Plunges On Weak Results


India's Bharti Airtel saw a major plunge in its share price after announcing disappointing earnings, which resulted in the operator being downgraded by several investment banks. Adverse market developments such as intense competition have eroded the operator's profitability even though its revenue and consolidated subscriber base have been on the rise. BMI foresees continued weakness in the near term, given the ongoing turmoil in Bharti Airtel's main Indian operation. Bharti Airtel's consolidated financials, which include its operations in South Asia and Africa, continued to show increasing revenue. However, profitability has not improved as its net profit declined to INR7.622bn in the quarter ended June 2012, down from INR12.152bn in the same period in 2011. This is a result of poor performances from both regions.
Investors Losing Confidence
Bharti Airtel Share Price (INR), 2009-2012
550

tax hike to 10.3% to 12.36%, effective April 1 2012. Meanwhile, the net loss in Africa widened to INR6.693bn from INR3.016bn over the same period in light of pressures on EBITDA, higher depreciation and substantial finance cost including foreign exchange losses. Although Bharti Airtel is India's mobile market leader, it had a market share of only 20.1% at the end of June, due to the overcrowded landscape. BMI believes that the near-term outlook for the operator remains challenging as it continues its aggressive strategy to retain and grow its subscriber bases. Bharti Airtel has been offering subscribers free talk time while slashing 3G tariff rates in light of weak consumer demand. Additionally, the operator is engaging in network upgrades and expansions such as the deployment of India's first 4G network, which BMI argues the country is not yet ready for. Perhaps the biggest risk for the company is the uncertain regulatory environment. India's law ministry announced in end-July that the telecoms department can terminate the mobile permit of Bharti Airtel, along with other firms such as Vodafone India and IDEA Cellular, for entering into 3G roaming agreements. The prohibitive reserve price for 2G spectrum (see our online service, August 7, 'Prohibitive 2G Price Set') will also have an impact on Bharti Airtel when it is time for the operator to renew its 2G licence.

SRI LANKA

Mobile Internet Poised For Further Growth


Latest data from the Telecommunications Regulatory Commission of Sri Lanka (TRCSL) showed that the mobile sector continued to lead growth in the country's internet industry with a 108% y-o-y increase in the number of subscribers. Unsurprisingly, mobile operators such as Etisalat Sri Lanka are eyeing the opportunities in the nascent market, and BMI expects efforts such as network expansion and localised content to drive service adoption.
Mobile Soaring Ahead
Sri Lanka Internet Subscriber Growth (000), 2009-2012
1,400 Mobile Fixed 1,200 1,000

500 800 450 600 400 400 350 200 300


Sep-11e Jun-10 Jun-11 Mar-10e Mar-11e Dec-09 Dec-10

250 200

Jun-09

Jun-10

Jun-11

Jun-12

Mar-09

Mar-10

Mar-11

Dec-09

Dec-10

Sep-09

Sep-10

Sep-11

Dec-11

Mar-12

Source: BMI, Bloomberg

Sep-12

e = BMI estimate. Source: TRCSL

In India and other countries in South Asia, Bharti Airtel reported that net profit declined by 5.5% y-o-y to INR14.338bn in the quarter ended June 2012. The operator attributed the weaker financial performance to the Telecommunication Regulatory Authority of India's guidelines that restricted the sales of 'combo packs', and a service

The TRCSL reported that there were 765,062 mobile internet and email subscribers at the end of June 2012, up from 367,764 the previous year. During this period, the number of fixed internet subscribers grew from 323,000 to 380,525. The exponential mobile internet growth and the growing disparity between the number of fixed and mobile internet subscribers are the result of lower capital expenditure required to deploy mobile data networks. Addition-

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Sep-10

www.telecomsinsight.com

Dec-11

Mar-12

Jun-12

srI lANKA

Asia

Telecommunications

ally, mobile devices such as smartphones and netbooks are more affordable and convenient compared with traditional desktop, the former being an important factor given Sri Lanka's GDP per capita of US$2,835 in 2011 (according to the World Bank). Due to low-base effects, Sri Lanka's mobile internet sector has been growing at more than 100% y-o-yover the past two years. We expect high double-digit growth in the near to medium term, considering that mobile internet has yet to be adopted by majority of the population Sri Lanka's mobile internet penetration rate at the end of June is less than 4%. BMI reported that Etisalat Sri Lanka became the first operator in the country to launch Dual Cell-HSPA+, which is expected to deliver faster mobile broadband speeds compared with rival mobile technologies (see our online service, August 14, 'Upgrade To Capitalise On Demand'). However, unlike in more developed countries,

merely expanding network coverage does not translate into a higher adoption of mobile internet services. There is generally a lack of awareness and understanding about the benefits of having internet access, which is a running theme in many emerging markets. Additionally, there is typically a deficiency in content in vernacular languages. According to the firm's marketing manager, although Sri Lanka has a high literary rate and English is a commonly used second language, consumers are more comfortable using local languages when accessing the internet. Besides planning to increase internet adoption by focusing on smartphones and other mobile devices, Etisalat is adopting measures to reduce the language barriers and educate consumers. We believe that initiatives could include providing tools for the general public to create localised mobile applications or deploying staff at the grassroots level to improve consumer awareness.

Analyst: Jianwei She Sub-Editor: Wendy Davies Subscriptions Manager: Nuria Bernardez Production: Reema Patel Publishers: Richard Londesborough/Jonathan Feroze www.telecomsinsight.com

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