Communications Markets in Vietnam

This report forms part of Pyramid Research’s Asia Pacific Country

Intelligence Report Series

June 2008 Edition

Table of contents

Section Page
Executive summary 3
Market and competitor overview 4
Vietnam in a regional context 5
Economic, demographic and political context 6
Regulatory environment 7
Demand profile 9
Service evolution 10
Competitive landscape 11
Vietnam’s major market players 12
Segment analysis 13
Mobile services 14
Fixed services 18
Identifying opportunities 22

ID# 192 © 2008 Pyramid Research

Executive summary
 Pyramid Research expects Vietnam to be one of Asia Pacific’s fastest growing markets, with total
telecommunications service revenue increasing at a CAGR of 12.9% during the 2007-2012 forecast period, against
the regional average of 5.0%. As such, Vietnam will become equal in size to its wealthier, but smaller, neighbor
Malaysia, with an expected revenue of US$6.1bn by 2012.

 The main growth engine will be the mobile sector, both voice and data, while the fixed sector enjoys growth in
broadband services.

 Demand for faster Internet connection will keep the market growing as dial-up subscribers switch to DSL services.
Despite low incomes, Vietnam’s huge youth segment, (65% of its 86m population is under the age of 30) who are
more tech-savvy than their older generation, will increase demand for connectivity.

 In the fixed space, challengers Viettel and FPT are causing headaches for incumbent VNPT, which has been losing
significant market share in the broadband space.

 Increasing mobile penetration will keep revenues climbing, despite falls in ARPS. We expect mobile voice and
data revenue to increase at a CAGR of 10.3% and 29.8%, respectively. As such, mobile operators will generate
$4.7bn in service revenue in 2012, almost double 2007 levels of $2.5bn.

 Viettel, which became the leader in 2006 after just three years of operation, will continue to maintain its lead
over other operators. Despite being a latecomer, Viettel expanded coverage in areas that were underserved by
existing operators, which helped the former gain substantial market share.

 The main risks to operators are falling ARPS levels, which will have an impact on margins in the long run. The
upcoming privatization of MobiFone, VinaPhone and Viettel is attracting interest from regional players such as
STT, Telekom Malaysia, NTT and Chunghwa Telecom.

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Market and competitor overview

4
 Vietnam in a regional context
 With a population of 86m and generating service revenue worth $3.3bn in 2007, Vietnam is one of the smaller
telecom markets in Asia-Pacific. However, with mobile and fixed penetration rates of just 42% and 13%,
respectively, in 2007, Vietnam offers great opportunities for vendors, regional operators, as well as investors as
it will be one of the fastest growing markets in the region. By 2012, Pyramid Research expects Vietnam to
generate $6.1bn in service revenue, recording CAGR of 12.9% during the next five years.

THE SIZE OF TELECOM SERVICES MARKETS, 2007 (US$ terms)

India
Total service revenue CAGR 2007-2012

Indonesia

Vietnam

China

Korea

Japan
Thailand
Taiwan Australia
Malaysia
Philippines Hong Kong

New Zealand
Singapore
GDP per capita

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Economic, demographic and political context: Policy shifts
from breakneck growth to stability
 The ruling Communist party will remain indifferent to calls for political pluralism and will continue to reject
demands for major political reform in 2008-09. A major challenge that the party will face is the need to manage
expectations of continued strong economic growth. The government is facing a number of challenging policy
issues, most notably the need to rein in inflation. Monetary policy will remain tight, while fiscal policy may be less
expansionary than previously planned. Real GDP growth will decelerate in 2008, owing to tighter controls on credit
and weakness in external demand. Annual inflation will soar to 18.2% this year, pushed up by rising food prices, but
will slow again in 2009 to around 9%. The government has shifted its policy focus from rapid growth to economic
stability. Thus it has tightened monetary policy and has set a real GDP growth target of 7.5% for 2008, down from
its original target of 8.5-9%.

KEY INDICATORS 2005A 2006A 2007A 2008E 2009E 2010E 2011E 2012E
Population [000] 83,770 84,858 85,947 87,036 88,128 89,223 90,322 91,638

Households [000] 25,150 25,600 26,340 27,110 27,930 28,780 29,650 30,550

Businesses [000] 1,682 1,877 2,082 2,300 2,538 2,799 3,083 3,393

Nominal GDP [US$bn] 52.8 61.7 70.1 84.3 98.6 114.3 132.6 154.8

Nominal GDP per capita [US$] 631 727 815 968 1,120 1,280 1,470 1,690

PPP-adjusted GDP per capita

[US$] 3,010 3,320 3,640 3,970 4,360 4,780 5,230 5,700

Consumer price inflation [%] 8.3 7.7 8.3 18.2 9.0 7.2 7.6 7.2

Exchange rate [LC/US$] 15,858 15,994 16,164 15,990 16,120 16,225 16,286 16,414

Source: Economist Intelligence Unit

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Regulatory environment: Waiting for privatization
 The Vietnamese regulator, the Ministry of Information and Communications (MIC), maintains a firm grip on the
sector, as government approvals are required for initiatives such as interconnection and ownership changes. The
regulator is planning to list a minority share of a few state-controlled operators this year, which will hopefully
bring more transparency to a very clouded market.

REGULATORY STRUCTURE & POLICY

Policymaking and Vietnam’s regulator is the Ministry of information and Communications (MIC). It formulates policy
regulatory authorities in postal services, telecommunications, IT, radio-frequency management and national information
infrastructure. It is also the government arm responsible for managing state funds in the
telecommunications, posts and IT industries. Although the MIC is striving to be more open and
liberal to benefit the market, ownership of telecom companies impairs its ability to independently
regulate the industry. The MIC has a stake in the country’s incumbent operator, VNPT, which leads
it to influence policies in favor of VNPT.
Basic law governing the The current piece of legislation governing the sector is the May 25, 2002, Post and
telecommunications Telecommunications Ordinance. The Ordinance was drafted with the idea of introducing
industry cooperation and competition in a then-monopolistic telecom market.

State of privatization / The Vietnamese government still has a large stake in the country’s telecommunications sector, as
liberalization the largest fixed and mobile operator, VNPT (parent of mobile operators VinaPhone and
MobiFone), is controlled by the government and the second largest operator, Viettel, is controlled
by the Ministry of Defense. However, Pyramid Research expects privatization to take place in 2008
(although potential delays can push the date back to 2009), starting with MobiFone listing one-
third of its equity on the local stock market, allocating another third to strategic partners and
retaining the remaining third. We expect VinaPhone and Viettel to follow.

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Regulatory environment (cont’d)
MAJOR TELECOMMUNICATIONS POLICY ISSUES

3G spectrum licensing Mobile operators are currently submitting their applications for 3G licenses. The ministry is
planning to hold an examination to determine which operators are most fit to provide 3G
services. The regulator has announced that it will award four licenses. Winners can expect to
receive 15MHz of FDD spectrum and 4MHz of TDD spectrum. We expect all six major operators to
participate in the examination.
WiMAX spectrum The regulator had granted trial licenses in early 2006 for fixed WiMAX that did not lead to any
licensing commercial licenses. The regulator has now licensed four operators — FPT, EVN, Viettel and
VNPT — to trial the mobile version of the technology for one year. The former three operators
have been allocated frequency in the 2.3GHz—2.4GHz band while VNPT was awarded a block in
the 2.5GHz band. These operators are also given geographic boundaries for their trials.
Foreign-ownership The Vietnamese government remains reluctant to fully open its telecom market to foreign
restrictions investors. With its accession to the WTO, however, the government has committed to open the
telecom sector, albeit gradually. Currently, indirect ownership is allowed in the form of joint
ventures (JV), where foreign interests are allowed to form a JV with a local licensee. When the
JV is a network operator, foreign capital contribution cannot exceed 49% of total capital. The
upcoming privatization is also an opportunity for foreign ownership. MobiFone, which will be the
first among the three operators planning to list, is willing to offer one-third of the company’s
total stakes to strategic partners.
Universal Service The Vietnamese government currently levies the following fees to fund its universal service fund:
Obligations (USO) -5% of the revenue for mobile telecom services, 4% of the revenue for international telephone
service and international leased-line subscription service, and 3% of the revenue for domestic
telephone service and domestic leased-line service.
Tariffs Dominant operators (defined as having more than 30% of market share) are not allowed to freely
adjust tariffs without the permission of the regulator. In 2007, Viettel joined the ranks of
VinaPhone and MobiFone as a dominant mobile operator.

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Vietnam demand profile: Revenue doubled in the past two
years and will almost double again in the next five years
 The Vietnamese telecom market, excluding traditional pay-TV, generated $3.3bn in service revenue during 2007,
which is more than double the 2005 revenue of $1.6bn. We expect service revenue to continue the strong
upward trend and almost double again over the next five years as the fast-growing economy increases
consumers’ budgets for telecom services. In the midst of growing concerns for basic food supplies in the region,
we expect inflation to be of concern as some consumers will have to tighten their budgets. However, we remain
neutral on its impact on overall telecom service revenue since Vietnam is one of the region’s main rice exporters
and hence will benefit some from the rise in costs. We forecasts the Vietnamese market to generate $6.1bn in
telecom service revenue in 2012, representing a CAGR of 12.9% from 2007 levels. Mobile voice, mobile data,
broadband Internet and fixed voice revenue from limited mobility services will be the main growth drivers.

$8 VIETNAM COMMUNICATIONS MARKET, US$bn, 2005-2012 REVENUE CAGR, 2007-2012

Broadband Internet 34.6%

$6
Dial-up Internet -7.7%
Revenue (US$ billions)

Fixed VoIP 71.0%

$4 Fixed circuit- 0.1%

switched voice
Mobile data 29.8%

$2 Mobile voice 10.3%

Total market 16.2%

$0
2005A 2006A 2007A 2008E 2009E 2010E 2011E 2012E

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Vietnam service evolution: Data and mobile continue
to gain importance and increase their revenue shares
SERVICE REVENUE MIX, SERVICE REVENUE MIX,  Fixed-mobile substitution (FMS) is a
world-wide trend, and Vietnam is no
VOICE, DATA & VIDEO FIXED & MOBILE
exception. However, while growth in
2007: US$3.3bn 2007: US$3.3bn PSTN lines is modest compared with
that of mobile lines, it is still positive
Video and will remain so during the
Data 0% forecast period. Mobile penetration
25% has exploded in the past few years,
doubling in 2005, 2006 and again in
2007. However, we suspect that the
number of subscribers is inflated by
25-35%. Even if we discount
Voice
subscriber figures, however, growth
75%
has been impressive, and we expect
the proportion of service revenue
from mobile to increase to 77% of the
2012: US$6.1bn 2012: US$6.1bn total pie in 2012, from 74% in 2007.
 On the data front, late 3G
deployments and aggressive ADSL
campaigns from fixed operators have
put the emphasis on fixed broadband
growth. Mobile and fixed data, which
combined represented only 25% of
total revenue in 2007, will grow to
generate 37% of total revenue by
2012.

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Competitive landscape: Challengers increase their market
share at the expense of fixed and mobile incumbent VNPT
 Vietnam’s telecom market is concentrated with VNPT dominating both the fixed market as well as the mobile
market through its mobile operators VinaPhone and MobiFone. However, VNPT started seeing its dominance
gradually erode with Viettel’s entrance into the fixed and mobile markets. Viettel has especially been successful
in the mobile arena, where it now claims to be the market leader with 14m subscribers. This statement,
however, is challenged by MobiFone, which also claims that it has the highest number of subscribers. Pyramid
Research’s forecasts currently show Viettel leading the market, although even if Viettel’s numbers are inflated
and MobiFone is, in fact, the market leader, we believe that VNPT will continue giving up market share as
VinaPhone struggles to add subscribers in a rapidly developing market. Smaller operators S-Fone and EVN will
also see their market shares increase, despite being CDMA operators. HT, which was the least successful in
promoting CDMA services, is currently shifting to GSM in an attempt to increase subscribers.

REVENUE BREAKDOWN, 2007: US$3.3bn REVENUE BREAKDOWN, 2012: US$6.1bn

Others
Others 10%
6%
EVN EVN
3% 11%
VNPT VNPT

66% 41%
S-Fone
5% S-Fone
10%

Viettel
20%
Viettel
28%

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Vietnam’s major market players

COMPANY OWNERSHIP LINES OF BUSINESS REVENUE (US$bn) WHAT’S IN STORE?

VNPT State owned Local telephony, long Revenue: US$2.1bn* Privatization of

distance, IP-based (including revenue from mobile arms
services, leased lines, VinaPhone and MobiFone and
GSM mobile services MobiFone) VinaPhone; WiMAX
trial
Viettel Ministry of Defense Local telephony, long Revenue: US$796m* Privatization;
distance, IP-based coverage expansion;
services, leased line, JV with Taiwan’s
GSM mobile services Chunghwa Telecom;
WiMAX trial
SPT VNPT(18%), private investors Local telephony, IP- Revenue: US$191m* Coverage expansion;
(Parent of based services, leased (mobile only) WiMAX trial
S-Fone) line, CDMA mobile
services
Hanoi Telecom Private investor Local telephony, long N/A Coverage expansion;
distance, IP-based migration to GSM
services, leased line,
mobile service
EVN Wholly owned by state-run Local telephony, long Revenue: US$127m* Coverage expansion;
Electricity of Vietnam Group distance, IP-based (mobile only) WiMAX trial
services, leased line,
CDMA mobile services

* Pyramid Research estimate

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Segment analysis

13
 Mobile services at a glance
 The Vietnam mobile market witnessed strong growth in 2007, almost doubling penetration rates from just 23% at
year-end 2006 to 42% at year-end 2007. Pyramid Research expects this trend to continue, albeit at slower pace,
and forecasts mobile subscriptions to reach 83.2m at year-end 2012, giving Vietnam a penetration rate of 91%.
However, we believe these figures could be inflated by 25-35% as operators try to use higher market share rates in
their marketing campaigns to entice prospective subscribers. The government is preparing to launch a probe this
month, yet operators continue to stand by their figures. Data represents a mere 14.1% of total ARPS, which is low
by Asian standards, as usage is mostly limited to SMS services given limited GPRS/EDGE coverage. The proportion
of prepaid customers currently stands at 71% of total customers. As penetration rates increase and additional low-
income users come onto the network, we expect the proportion of prepaid customers to increase.

MOBILE SUBSCRIPTIONS AND PENETRATION, 2005-2012 KEY MARKET INDICATORS, 2007A

Subscription penetration [% of pop] 41.5%

Subscriptions Penetration
90 100%
User penetration [% of pop] 28.6%
80 90%

Penetration of population
80%
Subscriptions (millions)

70 Prepaid subscriptions [% of total] 71.4%

70%
60
60% MVNO subscriptions [% of total] 0.0%
50
50%
40 Annual churn rate [%] 37%
40%
30
30%
ARPS [US$] $7.45
20 20%
10 10% Data ARPS [% of total ARPS] 14.1%
0 0% MOU [monthly minutes of use] 156
2005A 2006A 2007A 2008E 2009E 2010E 2011E 2012E

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 Mobile services revenue picture: Mobile data usage to
increase as 2.5G networks are expanded nationwide
 We expect ARPS to continue declining throughout the forecast period as users
with lower incomes, and thus lower consumption patterns, subscribe to MOBILE DATA REVENUE MIX
mobile service and bring down the market average. This downward trend is
likely to stabilize somewhat from 2011 on as penetration levels reach 90%. 2007: US$329m
The regulator is currently receiving applications for 3G licenses, which it
plans to grant in late August 2008. We do not expect commercial 3G services Info-
until late 2009, and even so to be limited to a few metropolitan areas.
tainment
Hence, we believe that the main focus for the operators will be to expand
2.5G services nationwide to increase data uptake. 23%
Messaging
TOTAL ARPS, AND DATA ARPS AS A PERCENTAGE OF TOTAL ARPS, 2005-2012
74%
ARPS Percentage data Connec-
$10 30% tivity

Data ARPS percentage of total ARPS

3%
25%
$8
Total ARPS (US$/month)

20% 2012: US$1.2bn

$6
15% Info-
tainment
$4
10% 45%

$2 Messaging
5%
45%
Connec-
$0 0%
tivity
2005A 2006A 2007A 2008E 2009E 2010E 2011E 2012E
10%

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Mobile services competitive landscape: Viettel maintains
leadership while VinaPhone continues to struggle
 Although “Vina” brands generally are growing in popularity in Vietnam due to its patriotic image, VinaPhone is
unable to enjoy any positive externalities from its name. It has been struggling to keep up with market growth
since 2005, giving up its leading position to Viettel in 2006. It is also facing additional pressure from sister
company MobiFone, which is now a larger operator than VinaPhone. We expect its decline to continue as
challengers S-Fone and EVN steadily gain market share. Viettel is aggressively slashing prices to keep its market
lead, which it gained by aggressively expanding services to underserved regions, and while the financials of
Viettel are not available, we expect its price reductions are having an impact on profitability and that it may be
forced to tone down its campaigns. CDMA operator Hanoi Telecom received permission from the regulator to
switch its network to GSM. However, we expect that merely changing technologies will not help the operator
much unless the move is accompanied by attractive offers and differentiated services.
MARKET SHARE (PERCENTAGE OF SUBSCRIPTIONS)

50%
Vinaphone
Percentage of subscriptions

40%
Mobifone

30% Viettel

20% S-Fone

EVN Telecom
10%
Hanoi
0% Telecom
Cityphone
2005A 2006A 2007A 2008E 2009E 2010E 2011E 2012E
-10%

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Mobile services technology issues: Mobile broadband to be
the main driver of 3G adoption
 Vietnam lags behind its neighbors in the region in terms of technology advancement. We estimate that in 2007,
95% of handsets on the market were 2G, while the remaining 5% were 2.5G. However, we expect 2.5G to grow in
importance as operators expand their 2.5G coverage nationwide and as 2.5G handset prices fall with the increase
in worldwide production of 3G handsets. While CDMA operator S-Fone currently offers EV-DO services in five
major cities, it will be only in late 2009 and early 2010 when we will be able to observe any significant 3G
uptake. As such, 3G penetration will stand at just 27% of total accounts by 2012, one of the lowest rates in the
Asia Pacific region.

SUBSCRIPTIONS BY TECHNOLOGY GENERATION, 2005-2012

2G 2.5G 3G
90

80

70
Subscriptions (millions)

60

50

40

30

20

10

0
2005A 2006A 2007A 2008E 2009E 2010E 2011E 2012E

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 Fixed services at a glance
 The Vietnamese fixed market continues to experience growth in the narrowband and broadband markets. While
we expect narrowband penetration to increase for the next few years, growth will slow down by 2011 due to
increases in broadband uptake (which will replace narrowband for data needs) and fixed-mobile substitution (for
voice needs). On the other hand, broadband penetration will start seeing acceleration as ADSL prices come down
to approach dial-up pricing levels. As such, we expect broadband penetration to reach 5.5% of the population in
2012, from just 0.2% in 2007 and an expected 0.5% penetration in 2008.
 ADSL uptake is concentrated in metropolitan areas, with Hanoi and Ho Chi Minh city taking 65% of total
subscribers. Slow speeds and unreliability of services has kept adoption levels below its potential, and we see
Viettel’s competition to VNPT as a positive force that will work to address these issues.

FIXED-LINE PENETRATION, 2005-2012 (PERCENT OF POPULATION) KEY MARKET INDICATORS, 2007A

Narrowband Broadband
20%
Fixed line penetration [% of pop] 11.4%
Penetration of population

16%
Broadband penetration [% of pop] 0.2%

12%
PC penetration [% of pop] 2.6%

8%
Internet penetration [% of pop] 6.0%

4%
ARPL – Residential [US$] $1.55

0% ARPL – Business [US$] $14.27

2005A 2006A 2007A 2008E 2009E 2010E 2011E 2012E

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Fixed services revenue picture: Revenue from broadband
Internet to outpace that of narrowband this year
 Fixed voice generated $354m in 2007, and we expect this to slightly grow to $372m in 2012 due to increases in
revenue generated by VoIP while revenue from PSTN will start declining as a result of a reduction in tariffs. On
the Internet side, most connections are currently achieved through narrowband lines, as there is a lack of supply
in broadband connections, and hence revenue from narrowband made up 64% of total Internet revenue in 2007.
This is a significant decline from 2005 when dial-up represented 85% of total revenue. We expect broadband to
start generating more revenue than narrowband beginning in 2008. Total Internet revenue will grow at a CAGR of
15% during the next five years from $509m in 2007 to $1.0bn in 2012.

VOICE REVENUE (US$bn), 2005-2012 INTERNET REVENUE (US$m), 2005-2012

Circuit-switched Packet-switched (VoIP) 800 Narrowband Broadband

$400
700

Revenue (US$ millions)

Revenue (US$ millions)

600
$300
500

400
$200
300

$100 200

100
$0 0
2005A 2006A 2007A 2008E 2009E 2010E 2011E 2012E 2005A 2006A 2007A 2008E 2009E 2010E 2011E 2012E

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Fixed services competitive analysis: VNPT loses leadership
as new operators challenge with VoIP and broadband
 VNPT continues to dominate the PSTN market in Vietnam and will continue to do so despite competition from
Viettel.
 FPT and Viettel’s entry into the broadband market has made a great impact on market share during the past
couple of years. VNPT’s market share, which was 73% in 2004, is now just 31%, standing second behind FPT and
closely followed by Viettel. VoIP market share also follows this trend.
 As demand for Internet increases and as broadband increasingly becomes the choice among the young
Vietnamese population (65% of the population is under 30 years old), competition to attract subscribers has
heated up. Viettel, for example, started giving away three months of free service to new customers and six
months of free service for existing fixed-line subscribers. As the market is still in its infancy, we believe that
market dynamics, and hence future market share, can shift dramatically given the right promotions and offers.

MARKET SHARE BY SERVICE, 2007A

100%
90%
Others
Market share (subscriptions)

80%
70%
FPT
60%
50%
Viettel
40%
30%
VNPT
20%
10%
0%
Fixed voice VoIP Dial-up Internet Broadband Internet

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Fixed services technology issues: Proportion of DSL lines
will increase more than threefold to 33%
 The Vietnamese fixed market is currently dominated by two narrowband voice technology lines — specifically
PSTN and FWA — collectively accounting for 90% of total lines — and one broadband access technology: DSL.
PSTN lines account for a dominating 79% of total lines while DSL and FWA account for 10% and 11%,
respectively. With increasing demand for broadband Internet driving the fixed market, we expect DSL lines to
take 33% of the 21.2m expected lines in 2012. WiMAX, which was tested in early 2006 with the 802.16d
technology but rejected due to high equipment costs, was given another chance through its mobile version.
Assuming licenses will be granted in 2009 and commercial services offered in 2010, we expect it to take 2% of
total lines in 2012.
ACCESS LINES BY TECHNOLOGY, 2007 ACCESS LINES BY TECHNOLOGY, 2012
10.9m 21.2m

WiMAX
FWA
2%
11%
FWA
xDSL 24%
10% PSTN
41%

xDSL
PSTN 33%
79%

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Identifying opportunities in Vietnam

22
Main opportunities: Largest opportunities for vendors as
growth in subscribers lead to increasing Capex
Although explosive growth in subscribers is a healthy sign of growth, excessive promotions to
increase short-term growth can end up hurting in the long run in a dominantly prepaid market.
Rather than trying to compete for the other operators’ subscribers, target the remaining 50m
FOR OPERATORS people who do not yet have mobile services. In order to reach the low-income segment, operators
in some countries offer government-approved special tariffs specifically designed for just those
people. This could be an alternative approach to increasing subscribers, without decreasing overall
tariffs.
With the upcoming 3G licenses, as well as the potential for mobile WiMAX licenses to be offered in
2009, Vietnamese operators will continue to demand network equipment and managed services.
Viettel’s huge success in attracting subscribers is mostly due to its aggressive network expansion
policy, where it was able to reach those who did not have access to mobile services. Other
FOR VENDORS operators will try to follow suit, hence also increasing demand for traditional 2G and 2.5G networks.
We expect Vietnam’s mobile subscribers to grow at a CAGR of 15.4% during the next five years,
putting it as the 12th fastest growing market in the world by subscribers and third in the APAC
region behind only India and Indonesia.
The Vietnamese mobile market is one of the most attractive markets in the region as mobile
penetration rates are still at sub-40% levels and will hence continue to grow at double-digit growth
rates for the next few years. While falling ARPS can hit profitability, increasing demand for mobile
FOR INVESTORS data services from the youth segment can help to keep the floor up to maintain margins.
MobiFone’s upcoming offering is a good bet as we expect it to maintain its position as number two
in the Vietnamese mobile market.

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