Asia Pacific Telecommunications Insight - September 2012

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September 2012
Issue 76
Asia Pacific Telecommunications

ASIA CONTENTS
Asia
BMIs monthly market intelligence, trend analysis and forecasts for the telecommunications industry across Asia Pacific
INSIGHT
More Efforts Needed To Promote Cloud Sector

The cloud computing industry in Asia Pacific is starting to gain traction with the increasing proliferation of quality fixed and mobile internet connectivity with, unsurprisingly, developed countries and regional hubs such as Japan, Hong Kong and Singapore leading the way. While emerging markets are trailing behind by a distance due to various reasons, we believe that telecoms companies should not be deterred by initial challenges, especially in the consumer segment, as the long-term revenue potential is too big to ignore. At present, one of the easiest entry point for telecoms firms to break into the cloud industry would be through the enterprise market where business clients are more receptive to cloud services in light of potential cost savings. Further, concerns about network reliability and data protection are gradually being addressed by cloud service providers. Indonesia's XL Axiata started marketing its Xcloud services in May and has allocated US$1mn to develop its cloud business. The firm is working with established players such as Microsoft, Fujitsu and IBM to reduce development cost and bolster its product portfolio. The mobile operator has a revenue target of US$5-6mn for its cloud services (comprising hosting, storage-as-a-service and server-as-a-service). By contrast, the consumer market is slightly trickier as evident from the fact that telecoms operators globally have yet to devise a successful model due to the prevalence of over-the-top (OTT) services such as Skype and WhatsApp. These OTT services pose a direct threat to telecoms operators' revenue stream while increasing stress on their data networks. However, like the Middle East, BMI believes that operators in emerging Asia still have room and the time to carve out a greater revenue share due to lower smart device adoption rates and wcultural differences. Teguh Prasetya, founder of the Indonesian Cloud Forum (ICF), has urged domestic telecoms operators to invest in cloud-based services, content and applications in order to leverage on their assets, which include the sizeable mobile subscriber bases, their user data and embedded billing. This is in line with our view that introducing cloud-based value-added services will reduce the possibility of operators becoming mere 'dumb-pipes' and generating revenue only through subscriptions. BMI believes that the immediate challenge for telecoms operators in emerging Asia is to encourage the adoption of internet services, particularly mobile data. According to the ICF, only 22mn out of Indonesia's 230mn mobile subscribers can be categorised as internet-friendly. Mobile 3G subscription rates in alternative Asian emerging market are still generally low. For example, Indian operators Bharti Airtel, IDEA Cellular and Vodafone India have slashed their 3G tariff rates due to poor consumer response. We believe that companies can take the opportunity presented by an infant mobile internet market and promote mobile data and cloud-base services together. Indonesian mobile
More Efforts Needed To Promote Cloud Sector........................................................ 1
Australia
Site Sharing To Boost VHAs and Optuss Networks.................................................. 2
New Zealand
Stronger Vodafone NZ To Challenge TCNZ .............................................................. 3
Indonesia
Telkom's Pacnet Bid May Not Yield Expected Results ............................................... 3
Timor-Leste
New Licences To Introduce Competition ................................................................. 4
Malaysia
FRiENDi Looks East .............................................................................................. 5
Thailand
3G Auction On Track, Outlook Remains Uncertain ................................................... 5
Vietnam
Resolve Skewed Competitive Landscape Before MNP............................................... 6
Philippines
Domestic Dominance Could Fuel Overseas Expansion ............................................. 7
Cambodia
Emaxx-Excell Deal Long Over ................................................................................ 7
Myanmar
Still A Major Risk For Entrants ............................................................................... 8
Japan
Amazon To Launch Prepaid Internet ...................................................................... 8 Flicker Of Opportunity For Japan's Smart TVs ......................................................... 9
South Korea
LGs First-Mover Advantage May Not Last ..............................................................10
Taiwan
EV-DO Upgrade To Boost APT ..............................................................................10
China
Baidu's New Smartphone A Safe Bet .....................................................................11 China Telecom Eyes Future With Cloud Gaming .....................................................11
India
Industry To Suffer From Continued Regulatory Uncertainties ..................................12 Challenges Remain Ahead For Reliance Communications ........................................13
Bangladesh
GSM Switch To Boost Citycell's Outlook .................................................................14
Afghanistan
3G Competition Heating Up ..................................................................................14
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AuStrAlIA
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operators are eyeing the domestic 3G market, and we believe that launching localised services will not only encourage consumers to sign up for data services, but also lessen the threat of OTT providers.
AUSTRALIA
Private Companies Cannot Do It Alone

The Asia Cloud Computing Association (an organisation comprising firms such as Alcatel-Lucent, Cisco, Dimension Data Asia Pacific, Rackspace and Telstra International) announced a Cloud Readiness Index in September 2011, which ranks 14 Asian countries. The index looks at criteria and conditions required for the successful implementation and uptake of cloud computing technology through 10 key attributes, which affect how products and services can be offered, delivered and consumed by the market. Developed countries scored well due to strong underlying infrastructure (quality of broadband and power grid as well as international connectivity) and an environment conducive for businesses and cloud developments (for example, regulatory conditions, data protection policy, government prioritisation and business efficiency index). While emerging markets generally fared poorly in several of these aspects, the situation could be improved if the governments are able to provide more support in addition to efforts from the private sector. Despite their relatively low readiness, BMI believes that the growth potential in emerging markets should attract companies to invest in the technology. The Asia Cloud Computing Association reckons that worldwide spending on cloud services is expected to reach US$150bn by 2014, and the spending on cloud computing is forecast to reach 30-40% of IT budgets by 2013. While the governments in emerging Asia are starting to create a cloud-friendly environment, the progress often hampered by slow policy reform and a lack of coordination with the private sector.
Site Sharing To Boost VHAs and Optuss Networks

Vodafone Hutchison Australia (VHA) and Optus signed a binding Memorandum of Understanding in May to expand their current network joint venture agreement, which would lower the cost to challenge the resurgence of mobile market leader Telstra. This development chimes with BMIs core view that telecoms operators would seek network-sharing opportunities in spite of intense competition due to the benefits.
Resurgent Telstra Is Cause For Concern
Australia Mobile Subscribers By Operator (000)
14,000 12,000 10,000 8,000 6,000 4,000 Telstra Optus Vodafone Hutchison Australia
Jun-10 Feb-10 Feb-11 Jun-11 Apr-10 Oct-10 Apr-11 Dec-09 Dec-10 Oct-11 Aug-10 Aug-11 Dec-11
2,000 0
Source: Operators, BMI
VHA and Optus signed an agreement in 2004 to share about 2,000 mobile sites in their 3G networks across Australia, and the enhanced agreement will see the two mobile operators build 500 new shared sites in the next four years in capital cities Geelong in Victoria and the central coast in New South Wales. The two firms will install its own transmitting equipment but they will share the AUD400,000 ASIA CLOUD READINESS INDEX
Regulatory Conditions Japan Hong Kong South Korea Singapore Australia Taiwan New Zealand Malaysia China India Thailand Indonesia Vietnam The Philippines 8.7 7.5 8.7 10.0 10.0 6.2 7.5 7.5 8.7 6.2 5.0 7.5 7.5 5.0 International Connectivity 9.0 9.0 7.0 9.0 6.0 8.0 4.0 6.0 9.0 6.0 5.0 4.0 5.0 5.0 Data Protection Policy 10.0 10.0 10.0 6.0 8.0 10.0 10.0 6.0 2.0 6.0 2.0 6.0 4.0 2.0 Broadband Quality 8.0 6.4 9.0 5.6 5.3 5.4 5.3 4.7 4.9 4.7 5.0 4.6 4.5 4.6 Government Prioritisation 8.2 8.4 8.6 9.4 6.6 7.3 8.7 8.8 5.2 6.6 4.1 4.3 3.5 3.7 Power Grid Quality 9.0 9.2 8.4 8.9 8.0 8.2 6.9 7.6 7.0 4.1 7.6 4.8 4.8 4.5 Internet Filtering 10.0 10.0 7.5 7.5 10.0 10.0 8.7 10.0 6.2 7.5 7.5 8.7 3.7 7.5 Business Efficiency Index 6.8 9.3 6.4 8.9 8.1 7.8 7.5 6.5 6.3 5.9 6.6 3.3 5.0 5.1 Global Risk 6.5 5.0 8.0 8.0 8.0 5.0 6.5 5.0 5.0 2.0 2.0 2.0 5.0 2.0 ICT Development 8.4 8.4 8.8 8.3 7.7 7.7 8.2 6.3 5.7 4.2 5.7 5.0 5.5 5.4 Index Score 85 83 82 82 78 76 73 68 60 53 51 50 48 45 Rank
1 2 3 4 5 6 7 8 9 10 11 12 13 14
Source: Asia Cloud Computing Association
www.telecomsinsight.com
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(US$405,505) construction cost. Optus has announced that the expanded deal with VHA will bolster its new mobile sites by about 960, thereby strengthening its 3G and 4G networks. Meanwhile, VHA will have approximately 1,800 new sites (after incorporating 400 Optus sites, the 500 new shared sites and 900 sites from its 3 mobile network). The new agreement is subject to the Australia Competition and Consumer Commission's approval, but we do not expect any opposition. BMI previously reported that Telstra finished 2011 strongly by gaining 1.699mn mobile subscribers (see 'Telstra's Recovery On Track, February 10), which dwarfed Optus's net addition of 444,000 and VHA's net loss of 554,000, and we believe that the network-sharing agreement highlights the two companies' intent to catch up with Telstra. There are several benefits arising from the closer cooperation between the second- and third-ranked mobile operators. Firstly, the two companies will be able to bolster their 3G network coverage and better challenge Telstra, which has the widest network in Australia. At present, smartphones and tablet computers that depend on 3G connectivity are the main revenue drivers for the Australian telecoms industry. It is necessary for operators to ensure that they have sufficient network capacity and coverage to cope with the burgeoning data demand to prevent loss of the revenue opportunity. Secondly, Telstra has taken a lead in the 4G market by rolling out commercial LTE services in September 2011. Sharing telecoms infrastructure should accelerate the efforts of VHA and Optus to deploy their own 4G services. Thirdly, cost savings should allow the firms to channel capital into areas that could boost revenues. VHA is already burdened with a hefty network upgrade bill following complaints about poor network performances. Similarly, Optus slashed 750 jobs, almost 8% of its total workforce, in early May to improve efficiencies.
Equal Fight
New Zealand Mobile And Fixed Broadband Market Shares (%), June 2011
120% Others TCNZ 2degrees Vodafone NZ
100%
80%
60%
40%
20%
Mobile
Fixed Broadband
0%
Vodafone NZs fixed broadband market share includes TelstraClears 16%. Source: Commerce Commission
NEW ZEALAND
Stronger Vodafone NZ To Challenge TCNZ

Vodafone New Zealand (Vodafone NZ) and Telstra announced on July 12 that they have reached an agreement for the sale of TelstraClear (TCNZ) to the former for a cash consideration of NZD840mn (US$633mn). BMI reaffirms our view that the transaction is a good deal as Vodafone NZ will be in a better position to compete with Telecom Corporation of New Zealand (TCNZ) on multiple fronts while Telstra will be able to focus on restructuring its main Australian operation. While Vodafone NZ is the country's leading mobile operator, it lags behind TCNZ in the fixed-line sector, particularly in terms of network infrastructure. The acquisition of TelstraClear fills the deficit, which will bolster Vodafone NZ's presence in the enterprise market, and allow the operator to offer a stronger telecoms solution in the retail sector. As previously highlighted, Vodafone NZ will have approximately 29% of the fixed broadband market, up from 13% before the acquisition, thereby closing the gap with leader TCNZ, which had 49% market share (as of June). TelstraClear's sale price of NZD840mn well exceeded analysts' valuations, which ranged from NZD350-425mn, according to the Australian Financial Review. Telstra has announced that it will return about NZD490mn in cash to Australia via a pre-completion dividend, and it will be incremental to its previously stated guidance for excess free cash flow of AUD2-3bn.
In the past year, Telstra has been restructuring its operations in light of the changing Australian competitive landscape, driven by the country's National Broadband Network project. Telstra was the first Australian mobile operator to launch LTE services, and it has been aggressively expanding into new high-growth businesses such as cloud computing and machine-to-machine, in addition to key overseas markets (India, Japan and Singapore). The allure of New Zealand has been fading in light of the country's limited growth potential and the distraction it has on Telstra's overall financial position. Additionally, the sale of AAPT's consumer arm to iiNet by TCNZ in September 2010 meant that there is less incentive for Telstra to remain in New Zealand as a defensive mechanism. The transaction is expected to complete in Q412, subject to the approval by the New Zealand Commerce Commission, the Ministry of Business, Innovation and Employment and the Overseas Investment Office. While the acquisition means that there is one less player in the market, we still expect regulatory approval since Vodafone NZ will be able to better challenge TCNZ in the fixed telecoms industry.
INDONESIA
Telkom's Pacnet Bid May Not Yield Expected Results

Telekomunikasi Indonesia (Telkom) has reportedly submitted a bid for submarine cable operator Pacnet as the Indonesian firm looks to reinvest profits generated from its domestic telecoms business. While acquiring Pacnet should boost Telkom's international recognition among other benefits, we are concerned about Telkom gaining significant exposure to the submarine cable industry, which is experiencing intense competition and declining prices. Telkom is a dominant player in the Indonesian telecoms market with strong market positions in the mobile, fixed-line and broadband sectors. Through its subsidiary Telekomunikasi Selular (Telkomsel), Telkom has about 40% market share in Indonesia's mobile industry. While the mobile penetration rate has almost reached 100%, we believe that the market still possesses substantial growth opportunities with prepaid being the main form of mobile subscription. Furthermore, 3G services have yet to gain traction, and mobile operators are stepping up efforts to spur adoption. Telkom reported that Q112 revenues from mobile and internet services increased by
tIMor-leSte
Asia
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7% and 12% year-on-year (y-o-y) respectively, and the operator generated net profit of IDR3.322trn (US$362mn), up by 17.5%. With a strong position in the Indonesian telecoms industry, it is no surprise that Telkom would look to overseas markets and inorganic growth for more revenue-generating opportunities. Telkom wanted to purchase Cambodian mobile operator CamGSM but cancelled the plan reportedly due to differences in valuation. BMI believes that acquiring another telecoms operator would be one of the more conservative means of expansion as it leverages on Telkom's expertise, but potentially attractive targets in South East Asia are limited. Frontier markets such as Myanmar hold significant longterm prospects but they carry equivalent risks.
Domestic Business Fuelling Expansion Ambition
Telkom Financial Results (IDRbn), 2010-2012
19,000 18,500 18,000 17,500 17,000 16,500 16,000 15,500
Jun-10 Mar-10 Mar-11 Jun-11 Dec-10 Sep-10 Sep-11 Dec-11 Mar-12
TIMOR-LESTE
New Licences To Introduce Competition

The Government of the Democratic Republic of Timor-Leste has announced the award of two new telecommunications licences, ending the monopoly of Portugal Telecom-owned Timor Telecom. The two licences have been issued to Viettel Global Investment and PT Telekomunikasi Indonesia International (Telin). BMI expects the competitive dynamic introduced by the licensing of new operators to benefit consumers. However, given the small size of the market, we consider Timor-Leste to hold limited potential for operators. The government initially awarded the licence to Digicel Pacific Limited, which has considerable experience operating in developing small island markets across the Caribbean, and Telin. Digicel had committed to launching GSM and 3G services to cover 91% of the population within four months. However, it was announced on July 11 that Digicel has withdrawn its application without providing a reason. According to the tender process rules in the Request for Applications of April 12 2012, the applicant with the next highest score would be awarded the licence. In this case, it was Viettel, which had scored 0.5 points less than Digicel out of 100 points. Viettel is committed to provide initial GSM and 3G coverage of 93% of the population and 95% in the next three months. Meanwhile, Telin has committed to launching services in under six months, with GSM and 3G access for 94% of the population. Given Viettel's experience in emerging markets and Telin's experience in Indonesia through sister company Telkomcel, we have a positive outlook for the commencement of services in Timor-Leste.
Limited Opportunities Despite Liberalisation
Timor-Leste Mobile Market Forecast, 2009-2016
900 800 700 600 500 400 300 200 100
2009 2010 2011 2012f 2013f 2014f 2015f 2016f
3,500 3,000 2,500 2,000 1,500 1,000 500 0
15,000
Revenue
Source: Telkom
Net Profit RHS
Pacnet owns the EAC-C2C submarine cable network that spans 36,800km between Hong Kong, China, South Korea, Japan, Taiwan, the Philippines and Singapore. Pacnet's network was extended across the Pacific Ocean via the EAC Pacific, which connects Chikura, Japan to Los Angeles and other Points of Presence in the US. In April 2011, Pacnet expanded its network reach to Chennai, India through the i2i cable system. The firm is also expanding its data centre and cloud business, and it announced in May that it will triple the capacity of its data centre in Sydney over the next year. Telkom's CEO has said that the firm aims to invest in fibre optic cables in order to improve connection speeds and it is open to mergers and acquisitions. BMI believes that Pacnet would fit the bill, and acquiring the submarine cable operator would raise Telkom's profile in Asia Pacific. Further, the submarine cable business is highly related to the telecoms industry. However, the two businesses are distinct, and Telkom does not have prior experience operating a submarine cable network. Telkom could allow Pacnet to maintain full autonomy but it would defeat the purpose of gaining full ownership. It is common for telecoms operators to invest in submarine cable networks, but they tend to form a consortium to reduce costs and risks. The entry of telecoms operators has also increased international bandwidth, resulting in declining prices. Like the telecoms sector, the submarine cable market is capital-intensive, and Telkom could suffer as it tries to grow the two businesses.
70 60 50 40 30 20 10 0
Number of Cellular Mobile Phone Subscribers ('000) LHS Number of Mobile Phone Subscribers/100 Inhabitants RHS
f = BMI forecast. Source: BMI, ITU, Portugal Telecom
Portugal Telecom reported it had 616,000 subscribers in TimorLeste at the end of March 2012, up 16.8% y-o-y. Based on this figure, Timor-Leste had a mobile penetration rate of just over 53% in Q112. BMI forecasts penetration will rise to over 58% at YE16, a forecast we previously upgraded when the end of Timor Telecom's monopoly was announced in April 2012. With the majority of Timor-Leste's population likely to have the option to choose between three mobile providers by Q113, BMI expects competition to change dynamics in the market. We expect the introduction of competition will benefit consumers through both lower prices and service innovation. Timor Telecom reported EBITDA margin of 55.7% in Q112, which is high
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for mobile markets, and indicates there is significant potential for downward movement in prices with the introduction of competition. In terms of service innovation, with all three providers expected to offer 3G mobile broadband services by Q113, the data market has strong growth potential from a reasonable base Timor Telecom reported 17.7% of mobile service revenue derived from Q112 data. Meanwhile, the government of Timor-Leste is also considering benefits beyond the consumer market, with ICT service availability to medical clinics, schools, agricultural management and other social areas outlined as an important benefit. BMI shares the Timor-Leste government's outlook for the contribution of competition to social goals and consumer welfare. However, we believe that, with a population of just 1.154mn in 2011 (albeit expected to reach 1.6mn by 2016), potential financial rewards are limited. Financial reward will also be limited by low incomes with GDP per capita of US$777 in 2011. However, both new operators have experience of operating successfully in markets with similar incomes, geography and scale and as such are well positioned to maximise potential benefit from real growth in private consumption over the medium term, which BMI forecasts to average 7.5% 2012-2020.
MALAYSIA
FRiENDi Looks East

Middle Eastern mobile virtual network operator (MVNO) FRiENDi will launch services in Malaysia by the end of 2012. FRiENDi will partner with sovereign wealth fund Kumpulan Perangsang Selangor Berhad (KPS) to roll out services. Following its merger with MVNO Virgin Mobile, FRiENDi announced plans to expand services in the Middle East, North Africa, Sub-Saharan Africa and South Asia. BMI believes Malaysian mobile network operators (MNOs') receptive approach to MVNOs makes it a good market in which to begin operations in the region.
Opportunities For Expansion
Mobile Penetration (%)
180 160 140 120 100 80 60 40 Malaysia Thailand India
2009 2010 2011 2012f 2013f 2014f
a good market in which to start operations. While the market seems a little crowded, FRiENDi's long experience in offering services as an MVNO should see it find success in the Malaysian market. KPS has invested in the mobile market through its subsidiary Perangsang Telco Sdn Bhd, which has entered into a partnership agreement with FRiENDi, Samena Telecom Limited and Ceres Telekom Sdn Bhd through a 30% equity stake in Ceres. The company's entry into the Malaysian market can be immediate as Ceres already holds the licences needed to launch services. FRiENDi believes there is still significant opportunity to take a leadership position in Malaysia's MVNO sphere, stating both the FRiENDi and Virgin Mobile brands would be used in the launch. Outside Malaysia, BMI believes the Thai market offers significant opportunities for FRiENDi, given the lower mobile penetration rate and smaller number of MVNOs in the market. However, much like Malaysia, the mobile market is already highly competitive. FRiENDi's experience should again hold it in good stead in Thailand and, if welcomed by MNOs in the market, could bring more subscribers into the market. While Pakistan, Bangladesh and India offer significant growth opportunities, regulatory difficulties will likely make these countries more difficult for service launches. In Pakistan the price of an MVNO licence increased from US$10,000 to US$5mn in October 2009, which only served to dissuade companies from entering the market as an MVNO. With low potential returns and a difficult political and business environment, the relative low risk and investment of launching as an MVNO was successfully removed by the increased price. Meanwhile, India's new regulations for the telecoms market includes introducing MVNOs into the market, but BMI does not expect licences to be made available in the near term and there is not yet any confirmation on when the National Telecom Policy will be enforced. Regulations in Bangladesh could also prove prohibitive. Indonesia's mobile market has eight active operators and no current MVNOs. With growth expected to remain strong in the market, MVNOs could be important in ensuring lower cost services continue to meet subscriber needs. However, Tune Talk has already hinted it would be interested in entering the Indonesian mobile market, which could suggest a gradual opening up to new operators. BMI believes FRiENDi and Virgin Mobile's experience in offering mobile services as MVNOs make them well suited to offering services in new markets. While Malaysia's market is already competitive, we believe the companies have a strong outlook as they expand services outside the MEA region.
THAILAND
Indonesia Bangladesh Pakistan

2015f 2016f
20 0
3G Auction On Track, Outlook Remains Uncertain

The 3G licence auction in Thailand is gradually approaching reality after the National Broadcasting and Telecommunications Commission (NBTC) announced in mid-June further details such as a rough reserve price for the spectrum. However, the convoluted nature of the Thai telecoms industry means that it is difficult to predict the outcome of the auction, which is scheduled for Q412, and the potential impact. The NBTC believes that the reserve price for each of the nine blocks of 5MHz spectrum will start from THB4bn, which is in line with the benchmark of THB12.8bn for 15MHz of spectrum set by its predecessor, the National Telecommunication Commission. Each
f = BMI forecast. Source: BMI, operators, regulators, World Bank (ITU)
Malaysian MNOs have not treated MVNOs as a threat to their main business, unlike operators in other markets. MVNOs can serve as a useful addition to a mobile market, boosting competition while allowing MNOs to focus on new services, mobile content and upgrading networks. Malaysian MVNOs vary from low-cost options such as Happy Prepaid and Tune Talk while XOX and Merchantrade focus on foreign workers in the country. With more than 10 MVNO licences already in the country, BMI believes FRiENDi has selected
VIetNAM
Asia
Telecommunications
participant can potentially secure a maximum of 20MHz of 2.1GHz spectrum during the simultaneous ascending-bid auction. Under the new draft information memorandum, the NBTC has removed the N-1 rule, which would have resulted in the cancellation of the auction if there were only one bidder.
Attractiveness Hindered By Uncertainties
Asia Pacific Telecoms Risk/Reward Ratings Q312
Industry Rewards 70 60 50 40 30 20 10 0
with the fundamental benefits that MNP brings, we struggle to see the scheme realising the potential rewards based on the existing market situation. Although the MIC started drafting the MNP guidelines in late 2010, details about the scheme remain scant. However, the ministry announced at the end of May that all mobile numbers will be centrally managed by its telecoms department instead of being partially managed by each network provider. The MIC claimed that the central numbers management method is being applied by as many as 70 countries worldwide.
MNP To Have Limited Impact
Vietnam Estimated Mobile Market Share, June 2012
Telecoms Rating
Country Rewards
Vietnamobile 2% VimpelCom 3% S-Fone 0%
VinaPhone 29% Country Risk Thailand

Source: BMI
Viettel 37%
Industry Risks Regional Average
Thailand is one of the last countries in Asia Pacific that has yet to auction 3G licences. While we believe that the market is more than ready for 3G services, previous attempts to issue licences have been primarily foiled by political wrangles and complications arising from concessions between private and state telecoms operators. Following the collapse of the 3G auction in September 2010, True and CAT Telecom modified their concession agreement to allow the former to introduce 3G services. However, the deal has been deemed illegal by the NBTC as the regulator decided that it was in violation of the Frequency Allocation Act. Consequently, a series of amendments to the contract such as stipulating that CAT Telecom is solely responsible for spectrum control must be made. The existing concession-based telecoms model in Thailand is resulting in a high degree of uncertainty for operators. Spectrum will be returned to the regulator for reallocation, and it is still unclear what the competitive landscape will become, thereby potentially preventing operators from competing aggressively for the 2.1GHz spectrum. Further, the Asia Pacific market is transitioning towards 4G services, and Thai operators are caught right in the middle where launching 3G services now may not have the desired long-term outlook. While BMI acknowledges that the NBTC is trying to implement reforms in the market, immediate drastic changes are unlikely. Although there is pent-up demand for 3G services among Thai consumers, we do not expect strong interest from foreign operators due to the lack of clarity on rules and regulations within the telecoms sector, especially on the issue of foreign ownership.
MobiFone 29%
Source: VimpelCom, BMI
VIETNAM
Resolve Skewed Competitive Landscape Before MNP

Vietnam's Ministry of Information and Communications (MIC) has announced that it plans to implement mobile number portability (MNP) in the country from 2014 in order to empower consumers and pressure operators to improve service quality. While BMI agrees
Introducing MNP in Vietnam has the potential to slightly level the competitive landscape and provide a much-needed boost to the increasingly marginalised smaller operators: GTEL Mobile, S-Fone and Vietnamobile. The three firms account for about 5% of Vietnam's mobile market while state-backed operators Viettel, MobiFone and VinaPhone control the remaining 95%. Giving consumers the option to switch providers while retaining their mobile numbers could encourage subscribers of Viettel, MobiFone and VinaPhone to migrate to smaller operators, especially if smaller operators introduce competitively priced or tailored packages. However, this scenario may not play out nicely. Firstly, we have seen MNP schemes in countries such as India, Thailand and China receive muted response due to factors such as slow porting process and the fact that subscribers own multiple prepaid SIM cards. Secondly, larger operators could intensify the competition by matching smaller operators' strategies, which is a relatively easy move given their significantly larger scale. Thirdly, the Vietnamese mobile industry's competitive landscape could undergo significant changes in the next two years. The Vietnam Posts and Telecommunications Group, parent company of MobiFone and VinaPhone, has proposed merging the two mobile operators in order to comply with a change in business law. A possible outcome is a merged entity that has strong competitive advantage such as more than 50% of the mobile market share and extensive telecoms infrastructure. This in turn could drive smaller operators closer to the brink of exit. South Korea's SK Telecom has already withdrawn investment from S-Fone while Russia's VimpelCom followed suit in April. Without the support of foreign investors, S-Fone and GTEL Mobile could face the same fate of as EVN Telecom, which struggled to generate profitability and was taken over by Viettel in early 2012, much to the disappointment of EVN Telecom's 3G partner Hanoi Telecom.
PhIlIPPINeS
Asia
Telecommunications
Consequently, the worst case scenario would be a duopoly in the Vietnamese mobile market, and we foresee MNP having limited impact on consumer choices.
PHILIPPINES
Domestic Dominance Could Fuel Overseas Expansion

Although the Philippine Long Distance Telephone Company (PLDT) has denied a media report that it is in discussion to acquire TV stations in Indonesia or Vietnam, BMI believes that it is still a possible scenario in the future as it would provide the country's largest telecoms operator additional revenues from alternative geographical and sectorial markets, especially if it successfully invests in GMA Networks. GMA Networks is the Philippines second largest TV broadcaster, and discussions between the firm and PLDT to strike a deal have taken place in the last decade with no success due to pricing disagreements. While PLDT already owns a stake in third-ranked TV 5, acquiring a part of GMA Network would match the telecoms operator's strategy of bolstering its content portfolio, thereby helping PLDT shift away from its traditional business model of providing basic telecoms services and countering the threat of over-the-top (OTT) service providers.
Firm Grip On The Telecoms Market
Operator Market Shares By Segment (%)
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Mobile Fixed-Line Globe Telecom Broadband PLDT 0%
Eventually, PLDT could dominate both the Philippine telecoms and broadcasting industries, and BMI believes that this would pave the way for the firm to expand overseas with its enlarged scale and greater experience. Investing in another telecoms operator is the traditional model and could be seen as the more conservative approach, but at present, the content market presents stronger growth potential. Consequently, we believe that it is possible that PLDT could look to invest in the broadcasting industries of Indonesia and Vietnam as growing affluence and improving connectivity would spur demand for content. The prospects are not limited to the broadcasting industry as other OTT services such as SMS over IP are becoming increasingly lucrative.
CAMBODIA
Emaxx-Excell Deal Long Over

Digital Star Media's planned acquisition of Cambodia's GT-Tell, which operates under the brand Excell, collapsed in February, although this news has only just come to light. While this development is a blow to the mobile market given its overcrowded landscape, BMI reaffirms that the short-to-medium outlook would not have been promising even if the deal had gone through, as Digital Star Media had planned to focus on 4G technologies. In July 2011, the Phnom Penh Post reported that WiMAX operator Digital Star Media, which operates under the brand Emaxx, was in talks to acquire Cambodia's smallest mobile operator, GT-Tell, for an undisclosed sum. Digital Star Media planned to offer both WiMAX and LTE services in the Cambodian market, and it believed that the country's only CDMA operator would complement its strategy in terms of technological advancement. Digital Star Media originally planned to purchase GT-Tell's 28 mobile towers in all 24 Cambodian provinces.
Unsustainable Situation
Cambodia Estimated Mobile Market Share, March 2012 (000)
Smart Mobile, 2,400
Mobitel, 2,600 Metfone, 8,200
PLDTs subscriber figures include Digitel. Source: Operators, BMI
Cambodia Advance Communicati ons, 90 Beeline, 1,078 Mfone, 414 hello, 1,978 Excell, 42
GMA Networks has confirmed that discussions with PLDT are ongoing and an agreement has not been reached (as of mid-June). However, PLDT is confident that a deal will be forged by end-2012 and the price tag would be less than the PHP100bn (US$2.3bn) mark previously mentioned by GMA chairperson. GMA Networks and TV market leader ABS-CBN reportedly account for 60% of the Philippines' audience share with TV 5 in a distant third. Assuming that PLDT succeeds in acquiring GMA Networks, the combined market share of GMA Networks and TV 5 should top the market, thereby forming a duopoly with ABS-CBN as the second-ranked provider. While PLDT chairperson has said that it remains to be seen if the government would approve the acquisition, a repeat of PLDT's purchase of Digital Telecommunications Philippines, which resulted in a duopoly in the mobile industry, with PLDT controlling 70% market share, is highly possible given the lack of an adequate and effective competition law in the country.
Only Beeline and hello provided March 2012 data. Source: MPTC, operators, BMI
It was revealed in January 2012 by Digital Star Media's then-CEO Frank May that the company was still conducting the due diligence process. No reasons were given for the subsequent collapse in February. Regardless, we would have maintained our view that the Cambodian market is not ready for next-generation mobile technologies, much like many emerging markets in the region. While data from Cambodia's Ministry of Post and Telecommunications as well as mobile operators suggest that the penetration rate has exceeded 100%, the market still exhibits signs of relative immaturity. For example, we believe that majority of subscribers
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are using prepaid subscriptions and that 3G is still an underused and expensive service. Theoretically, WiMAX and LTE are ideal for bringing internet access to a large proportion of the population in a cost-effective manner. However, BMI believes that there is a lack of demand necessary to make Digital Star Media's plan commercially viable in the near term. 4G-compatible mobile devices have yet to reach the required number to reap economies of scale, partially due to the wide range of frequencies used. The situation in Cambodia is further exacerbated by language and cultural barriers, and a lack of awareness of the benefits of internet accessibility. Digital Star Media has not disclosed its strategy following the unsuccessful acquisition of GT-Tell. The operator could continue focusing on WiMAX, although the technology is being increasingly marginalised on the global scale. Mergers and acquisitions are still a possibility, but BMI believes that it is more likely Digital Star Media now becomes a target for a larger mobile operator such as Smart Mobile or Metfone. Meanwhile, the outlook for GT-Tell continues to look unsustainable in the long term. Besides being the only CDMA operator, local media reported that its subscriber base has stagnated at around 40,000 (BMI estimates that GT-Tell had 42,000 mobile subscribers in March). By comparison, market leader Metfone saw its subscriber base double between March 2011 and March 2012 to 8.2mn, although we caution that the number could be inflated through the inclusion of inactive accounts. We continue to see a need for consolidation in the Cambodian mobile market, and highlight the benefits of merging networks and services. In June, Smart Mobile announced that its subscriber base has crossed the 3mn mark, an achievement that we believe was aided by the acquisition of the previously TeliaSonera-owned Applifone (marketed as Star-Cell) in December 2010.
system, it would be extremely difficult to prevent unwanted transfer of technology and/or intellectual property to a local partner that may be inclined to break contract. The ministry has highlighted it is drafting a new communications law, which should address some of the legal and regulatory concerns. However, the robustness of legislation and the government's willingness to enforce laws are separate issues, especially for the latter considering the problem of cronyism, corruption, and government and political agendas, which are particularly prevalent in emerging economies.
Significant Barriers To Realising Potential
Myanmar Mobile And Broadband Subscriber Forecasts, 2009-2016
1,000 900 800 700 600 500 400 300 200 100
2012f 2013f 2014f 2015f 2011e 2016f 2009 2010
25 20 15 10 5 0
Number of Cellular Mobile Phone Subscribers ('000) LHS Number of Broadband Internet Subscribers ('000) RHS
e/f = BMI estimate/forecast. Source: BMI, ITU
MYANMAR
Still A Major Risk For Entrants

Myanmar announced in July that it is working on a reform plan to bring affordable telecommunications services that are on par with international standards. It is also looking for consultants to facilitate the industry liberalisation process, which would in turn open up the market to interested foreign companies. While the Myanmarese telecoms market harbours significant long-term growth opportunities in light of years of isolation, BMI holds firm to our view that there is too much uncertainty at the moment, which poses a myriad of risks. The minister of communications, posts and telegraphs, Thein Tun, has announced that state-owned telecoms operators Myanmar Post and Telecommunication and internet service provider Yatanarpon Teleport are planning to form joint ventures with local and international firms, which is in line with our view previously stated in our special report. Having a local partner is important because the international community has little knowledge about the Myanmarese business practices and consumer preferences, in addition to helping to reduce bureaucratic red tape. However, selecting a competent local partner in a frontier market is a challenging task. The monopoly of Myanmar Post and Telecommunication and Yatanarpon Teleport means that there is a lack of options for international players. Further, Investor protection and general legal framework are also particularly lacking in Myanmar, even when compared with potential 'peer' states such as Vietnam, Cambodia, and Laos. Given the catatonic state of Myanmar's legal
BMI expects telecoms operators that have vast experience operating in emerging markets to have the greatest chance of creating a profitable business in Myanmar. These would include companies such as Vietnam's Viettel, which has presence in Cambodia, Laos, Peru, Haiti and Mozambique, and Telekomunikasi Indonesia, which recently acquired a mobile licence in Timor-Leste. We expect less interest from operators in developed countries such as Telenor, Vodafone and Axiata, many of which have suffered setbacks in emerging markets recently due to regulatory uncertainties and intense competition.
JAPAN
Amazon To Launch Prepaid Internet

Amazon is to launch a prepaid internet service in Japan before the end of Q212, according to Japanese business journal Nikkei. The company will sell SIM cards with 500MB data usage for US$25 a month, becoming the first company to offer such a service in Japan. BMI believes the service will be popular in the Japanese market, which reports buoyant mobile internet growth. Further, it gives an indication of the changes we expect to see in Amazon's global offerings throughout 2012. Amazon will use the MVNO model to deploy services. It is expected to partner with Japan Communications (JC), which uses NTT DoCoMo's 4G LTE network. Despite JC seeming to refute claims in a press release, BMI believes this is unlikely to indicate the rumours are false. It is common practice in Japan to refute claims of a product launch if such news is leaked prior to an official announcement. The vagueness of JC's press release seems to suggest that the launch is not just a rumour.
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Growth Continues
Mobile Internet Subscribers 2009-2012
104,000 102,000 100,000 98,000 96,000 94,000 92,000 90,000 88,000 86,000
Dec-09 Dec-10 Sep-09 Sep-10 Sep-11 Dec-11 Jun-09 Jun-10 Mar-09 Mar-10 Mar-11 Jun-11 Mar-12
No. of Mobile Internet Subscribers ('000) % chg q-o-q RHS
2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5%
through 2012. The government is enacting fiscal tightening and as the yen depreciates, there is less potential for consumption growth in the market, which will provide an obstacle for expansion.
Flicker Of Opportunity For Japan's Smart TVs

Japanese consumer electronics manufacturers have had a rough time recently. A generally bearish view of the country's manufacturers is a far cry from the strong reputation previously held by the likes of Sony, Panasonic and Toshiba. The yen continues to appreciate and newcomers from South Korea, China and Taiwan have also made their impact felt. However, new data on sales of smart TV sets a new segment of the AV market show that Japanese manufacturers are keeping up with their rivals, which BMI believes could suggest an opportunity to turn around flagging businesses. Japan's largest consumer electronics OEMs have struggled to keep up with innovative newcomers that have successfully built their brands in both developed and emerging markets. Major Japanese electronics manufacturers Sony, Sharp and Panasonic reported financial losses, with Sony's JPY457bn (US$5.7bn) FY 2012 loss, its fourth straight financial year without profit. As BMI highlighted before, several factors have affected these companies' ability to turn around their businesses. The yen's continued strength makes devices from Sony, Sharp, Panasonic and their peers more expensive and less competitive, particularly when newcomers from China have lower costs and accept reduced margins to get their products to market. Despite the disadvantages facing Japanese manufacturers, data from NPD Display Search's quarterly report on smart TV shipments, Japan reports the highest percentage of smart TVs in overall TV shipments. In Q112, 36% of all TVs shipped to Japan were smart TVs, considerably higher than the global average of 20%. Japanese consumers are forward looking, expecting the latest innovations, which has helped drive the demand for smart TVs. Sales of smart TVs in regional peer China were around 30% but this is largely driven by the strength of local manufacturers such as Skyworth, Konka, Changhong and TCL. Sony was the strongest brand in Q112, according to the NPD's report, but not considerably higher than Skyworth. While Chinese brands perform well in their home market, they do not yet have the international recognition of Japan's major vendors. Although newcomers such as LG Electronics and Samsung Electronics, both based in South Korea, have gained significant ground, BMI believes the Japanese vendors still have some currency in their brands. Asia News Networks reports that Japanese brands are trusted among Indian consumers 'to deliver quality' and BMI believes the companies must build on this in other markets to regain their position. While the data suggests a more positive outlook for Japan's OEMs, we do not believe the companies are out of the woods yet. We maintain our view that fundamental problems still need to be addressed, particularly innovation and distinctiveness in their products. Nevertheless, the companies retain some of their earlier reputation for quality, building on this to regain their position as innovators will go a long way to making Japanese consumer electronics companies fierce global competitors once more.
84,000
Source: BMI, Operators
The leak also suggested that the SIM cards would be compatible with unlocked smartphones and tablets using iOS, Android and other operating systems, in addition to the Kindle. This could be an indication that Amazon is aiming to increase outreach of its Kindle ebook, which it has yet to launch on the Japanese market. The Amazon share price has been following a downtrend over the past month, as poor profit margins deter investors. However, revenue continues to rise, as the company seems intent on growth at the expense of income. Further, the ambiguity over its strategy is causing alarm among some investors. However, it enjoys a soaring PE ratio (over 175), which maintains investor interest, and its growth strategy is likely to pay off in the medium term once market share is secured.
Will Performance Improve?
Amazon Share Price (US$)
260 240 220 200 180 160 140 120 100 80
Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Dec-09 Dec-10 Aug-09 Aug-10 Aug-11 Dec-11 Jun-09 Jun-10 Jun-11 Apr-12 Feb-10 Feb-11 Feb-12 Jun-12
60
Source: BMI , Bloomberg
BMI believes there is still potential for growth in the mobile internet market, which Amazon can capitalise on. The country is highly receptive to new technology, which bodes well for the release of the prepaid SIM cards and also for the future success of the Kindle ebook. ARPUs are among the highest in the Asia-Pacific region and the potential for LTE expansion is high. However, BMI believes there are a number of issues which Amazon will have to contend with when entering the Japanese market. The mobile internet market is highly competitive and ARPUs are falling, while bureaucratic obstacles may limit the potential for expansion. Further, macroeconomic factors may limit the potential for Amazon expansion, as private consumption looks set to remain anaemic
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SOUTH KOREA
LGs First-Mover Advantage May Not Last

LG Electronics announced in end-May that global sales of its LTE smartphones have reached 3mn units, which positioned the firm among the frontrunners in the nascent LTE market. While this should provide a much-needed boost to the South Korean manufacturer's stuttering mobile business, the competitive landscape will quickly intensify as the global LTE industry matures and rival handset makers ramp up their LTE device portfolio. Despite the growing potential, not all device manufacturers have been able to capture the boom in global demand for smartphones and tablet computers. Apple and Samsung Electronics are the notable outperformers but rivals such as Motorola Mobility, Research In Motion, Sony, HTC and LG Electronics have struggled in light of the strong competition. BMI previously reported that the focus on the infant LTE handset market puts LG Electronics in a good position as more LTE networks are coming online. Besides sales from North America and Japan, LG Electronics's domestic market also played a vital role as all three mobile operators have launched LTE services. At the end of April, there were 4.850mn LTE subscribers in South Korea, according to IT Statistics of Korea, up from 1.191mn in December 2011. During this period, the number of 3G subscribers declined from 44.334mn to 41.794mn. LG Electronics expects to expand its LTE market presence to 20 countries by end-2012. A key factor to support its strategic emphasis on the 4G technology is LG Electronics's ownership of 23% of approximately 1,400 LTE patents filed worldwide, according to the manufacturer citing a report from Jefferies & Company.
Early Emphasis On LTE Yielding Results
LG Handset Unit Financial Results (KRWbn), 2010-2012
4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Sales Operating Profit RHS 100 50 0 -50 -100 -150 -200 -250 -300
Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112
LG Electronics may have a first-mover advantage with its early focus on LTE. However, we believe that rival manufacturers are waiting for the technology to mature, which is largely pegged to the availability of the necessary spectrum. For example, several operators in Asia Pacific are refarming existing spectrum such as 1800MHz while waiting for the country to complete the transition to digital TV, which will free up spectrum in the 700MHz frequency band. Once companies are able to launch the same product in multiple markets (without the need to modify them to work on different LTE networks), LG Electronics's upper hand could be quickly eroded, especially if market leaders Samsung Electronics and Apple try to convince existing users of their products to upgrade.
TAIWAN
EV-DO Upgrade To Boost APT

After repeated delays, Asia Pacific Telecom (previously Asia Pacific Broadband Wireless) announced in June that its new CDMA2000 1xEV-DO mobile broadband service will be launched on October 1. BMI believes the upgrade, as well as the potential introduction of attractive smartphone models, could help reverse the operator's declining 3G subscriber base, although there are limitations to its growth potential.
Positive Growth Expected
Taiwan 3G Subscriber Forecast, 2009-2016
30,000 25,000 20,000 15,000 60 10,000 5,000 0 40 20 0 140 120 100 80
2011e
2009
2010
2012f
2013f
2014f
2015f
Number of 3G Phone Subscribers ('000) LHS Number of 3G Phone Subscribers/100 Inhabitants RHS
e/f = BMI estimate/forecast. Source: NCC, Operators, BMI
-350
Source: LG Electronics
While BMI agrees that LTE-compatible handsets are the future, more conventional 3G mobile devices are still the main growth and revenue driver. For example, Samsung Electronics announced in February that it has sold 20mn Galaxy S II units since April 2011, and the device's successor similarly does not feature LTE capability. Although a larger battery has allowed Apple to introduce an LTE iPad, the company could not offer the high-speed connectivity globally as mobile operators launch LTE on a wide variety of frequencies ranging from 700MHz to 2.6GHz.
Asia Pacific Telecom is the only CDMA2000 operator in Taiwan, although it competes with Chunghwa Telecom, Taiwan Mobile, Far EasTone and VIBO Telecom in the country's overall 3G sector. However, along with VIBO Telecom, Asia Pacific Telecom lags behind the remaining operators as they also offer 2G services. Asia Pacific Telecom reported 3mn 3G subscribers in April 2011, up from 2.6mn in June 2010, but it has seen limited growth since then. Instead, the operator said that its subscriber base declined to 3.05mn in June from 3.1mn in February. The decrease in the number of subscribers has been attributed to the delay in rolling out its new EV-DO service, which is about one year behind schedule. As of March, Asia Pacific Telecom had upgraded more than 600 CDMA2000 to EV-DO, and another 2,000 are scheduled to be upgraded in Q312. According to Asia Pacific Telecom, the CDMA2000 1xEV-DO infrastructure gives the operator a cost advantage over its rivals. In order to achieve 80% population coverage, Asia Pacific Telecom would need to deploy 2,500 base stations, while its W-CDMA
10
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counterparts would need to roll out 6,000-8,000 base stations. Additionally, Asia Pacific Telecom plans to partner with China's CDMA2000 mobile operator China Telecom to jointly procure handsets to further lower cost. This would allow Asia Pacific Telecom to target more costconscious consumers and those who have yet to make the transition to smartphones. The operator plans to procure 1.1mn handsets in 2012, of which 20-30% will be smartphones. Further, Asia Pacific Telecom was negotiating a deal with Apple to sell a CDMA variant of the iPhone, and BMI believes that this could become a reality in the near future given that China Telecom secured an agreement to sell CDMA iPhones in China in February. However, this is dependent on Asia Pacific proving that its network can cope with a surge in data use. Due to its smaller scale when compared with the likes of Chunghwa Telecom and Taiwan Mobile, as well as a different mobile technology, it would be difficult for Asia Pacific Telecom to become the market leader in terms of subscriber. The operator also recognises the limitations as it envisages 4mn 3G subscribers in 2014. However, the strategy of targeting the low-to-middle segment of the market could still profitable.
CHINA
Baidu's New Smartphone A Safe Bet

Baidu, the leading Chinese internet search engine, has launched a new smartphone powered by its proprietary cloud-centric operating system (OS). The low-cost, sub-US$150 handset will be sold through China Unicom and, thanks to its deep connectivity with Baidu's online search, location and entertainment services and applications, should mirror the success of international rivals touting the Google Android operating system. BMI believes that the range of the new phone's capabilities, plus its affordability, is a surer bet for the company, which is looking to differentiate itself from established global and local rivals alike.
Baidu Taking On The Giants
China Smartphone Market Share By Vendor, Q411
HTC 3% Apple 9% Others 5% Nokia 23%
interfaces are also linked to Baidu's cloud-based services, which are expanding rapidly and include mapping and location-based services, music and video content, gaming, social networking, advertising and news. In many ways, Baidu mirrors global search giant Google and has sought to replicate its success in the connected device market with a proprietary operating system linked to all of its services and features. While Google-developed Android products are slowly entering the Chinese smartphone market, their impact is blunted by the fact that Google services are heavily censored and restricted at the delivery end of the service supply chain, rendering them slow and ineffective in accessing specific content and applications. This is why many Chinese still prefer Windows and Nokia Symbian handsets. Gartner estimates that Nokia handsets accounted for 23% of the Chinese smartphone market in Q411 and Samsung accounted for a further 28% with its Windows and Bada-powered phones. Apple's iPhone is very popular among the more affluent, youthful sections of urban society, but availability is relatively limited and the high cost of the handset means that it will remain unaffordable for the vast majority of consumers. Gartner estimates that Apple accounted for 9% of the market in Q411. Local handset suppliers include Huawei Technologies and ZTE (market shares of 15% and 9%, respectively), offering a mix of Windows and Android-powered phones, but these offer only limited connectivity to locally optimised services, solutions and applications. This is where Baidu hopes its new offering will score over its rivals and how it can outmanoeuvre consumer electronics giant Lenovo, which is also pushing into the smartphone market after dominating the personal computer segment. Ostensibly, Baidu's latest foray into the smartphone market is more compelling than its earlier, lacklustre partnership with Dell. And, with its significant existing online user base, the Baidu smartphone has every chance of becoming a leading force in the market, very quickly, BMI believes.
China Telecom Eyes Future With Cloud Gaming

China Telecom and Taiwan-based fixed-mobile convergence applications provider Ubitus announced in June that they have formed a partnership to deliver cloud gaming services to internet-connected TVs in China. BMI believes that there are several important factors that could bring success to this collaboration, which include China Telecom's fixed broadband market leadership, local regulations prohibiting gaming consoles and strong demand for internet-connected TVs in China. Unlike 3D TVs, which have suffered languid consumer demand due to factors such as limited content and poor viewing experience, internet-connected or smart TVs are more well received as consumers can combine multiple online services (for example, social media and online videos) on a single platform. Under China's policy for fixed-mobile convergence, the Chinese internet-connected TV market is expected to expand to 53mn by end-2013, and cloud gaming is another feature that could help spur demand for internet TVs. We have recently seen major TV manufacturers establishing partnerships with cloud gaming service providers. In early June during the Electronic Entertainment Expo conference, Samsung Electronics signed a deal with Gaikai to stream gaming titles written for Sony's PlayStation 3 and Microsoft's Xbox 360 to its smart TVs, thereby eliminating the need for consumers to purchase separate dedicated
Huawei 15%
ZTE 13%
Samsung 28% Sony Ericsson 4%
Source: Gartner
The Changhong H5019 is a Foxconn-manufactured touchscreen device that sports cloud-based voice and handwriting recognition, potentially putting it on a par with high-end offerings such as Apple's iPhone and Samsung's Galaxy smartphones. However, these user
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gaming consoles. Similarly, OnLive announced at the same time that it was adding LG Electronics's smart TVs to the number of platforms that could run its cloud-based gaming system. Cloud gaming carries out the processing and video rendering in the cloud, which is then streamed to users, thereby removing the need for a gaming console. This method of bringing gaming to Chinese consumers could become a lucrative business as Chinese regulations prohibit the sales of consoles such as the PlayStation, although units are available through the grey market. Ubitus's GameCloud platform will be launched on October 1, and we expect China Telecom to enjoy exclusivity.
Cloud Gaming Complements Leadership
China Telecom And China Unicom Fixed Broadband Subscribers (000)
China Telecom China Unicom
90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000

Dec-10
Sep-10
Sep-11
Dec-11
Jun-10
Mar-10
Mar-11
Jun-11
Source: Operators
Industry Risks
Country Risk
INDIA
Source: BMI
Industry To Suffer From Continued Regulatory Uncertainties

The collateral damage arising from the Indian telecoms regulatory debacle has widened after Augere has reportedly decided to withdraw from the market due to difficulties in raising funds. The drawn-out investigations and contentious measures to resolve issues have not aided investor confidence. Worryingly, BMI believes that the situation will continue to cast a shadow on the sector in 2012.
Due to the convoluted nature of the telecoms mess in India, a quick resolution within by end-2012 is unlikely, especially when the government remains undecided on key issues. A white paper on 'black money' has been published by the Indian government, which noted that the 'Vodafone tax case provides an instance of the misuse of corporate structure for avoiding the payment of taxes'. This indicates that the government will continue pursuing Vodafone (and possibly other foreign firms involved in similarly structured mergers and acquisitions) for lost taxes. However, the government
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Telecoms Rating
Industry Rewards
Country Rewards
China Telecom is the country's largest fixed broadband provider with 81.45mn subscribers at the end of April. The operator is currently in the midst of deploying the world's largest fibre optic network and it plans to grow its fibre broadband subscriber base to 100mn by 2015. Although most of the intensive processes are handled in the cloud, high-speed broadband connectivity is still required to deliver a seamless and low-latency cloud gaming experience to consumers. Consequently, we believe that China Telecom is well placed to help drive development in the cloud gaming market. As cloud gaming eliminates the need for consumers to purchase a gaming console, thereby reducing cost, the combined cost of an internet-connected TV and high-speed broadband connection could still be beyond the reach of majority of the consumer market. The cloud gaming market is also still at its infancy, and at the current stage where quality such as frame rates and response time are inferior to console gaming, we do not expect serious gamers to be swayed.
Mar-12
Augere is backed by France Telecom and private equity firms such as Harbinger Capital, New Silk Route and Vedanta Opportunity Fund. Through its subsidiary Augere (Mauritius), the firm secured 20MHz of broadband wireless access (BWA) spectrum in Madhya Pradesh during the June 2010 auction, and it had announced plans to soft launch TD-LTE services under its Zoosh brand in Madhya Pradesh and Chattisgarh in early Q212. Augere displayed its commitment by becoming one of the first BWA licence holders to contract a network vendor after selecting Ericsson in October 2011. Augere is an unfortunate victim as it was not implicated in the 2G licence scandal that affected companies such as Bahrain Telecommunications, Telenor and Etisalat, some of which have exited the Indian telecoms industry. Back in February, BMI had expected limited collateral damage from the cancellation of 2G licences with the greatest impact on companies in directly related sectors. For example, telecoms towers firm Viom Networks would lose 20-21% of its tenancy if Telenor withdraws its investments. However, the negative effects have spilled out after the Indian government and regulator failed to swiftly resolve the issues. Instead, we have seen the authorities place a high price on the 2G re-auction and try to revive the Vodafone tax case, which were detrimental to domestic and foreign investor confidence. According to Augere CEO Lars Henrick Stork, through an interview with the Economic Times, the firm's investors have been ruffled by the 2G scandal, in addition to the repeated delay in the unveiling of the New Telecom Policy, which was scheduled to be announced in 2011. As a result, its investors have halted funding. Assuming that Augere follows up on its divestment plan, we expect alternative BWA licence holders, namely Bharti Airtel, Tikona Digital Networks and Aircel, to be interested in its spectrum and network infrastructure. Consequently, there is limited negative effect on the overall Indian 4G market. However, we believe that Augere's exit sends out further warning signs to the Indian government with more capital outflow as a real possibility.
India Was Leading In Early 2011
Asia Pacific Telecoms Risk/Reward Ratings Q312
80 Indonesia China India 70 60 50 40 30 20 10 0
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has not provided immediate clarity on the issue after it postponed the implementation of measures to claw back taxes owed by foreign investors by a year from early May after backlash from the international community.
Challenges Remain Ahead For Reliance Communications

Reliance Communications has announced better-than-expected financial results for the quarter ended March, which was a significant improvement from previous quarters. However, the operator continues to be laden with hefty debt, although it is planning to list its submarine cable assets in Singapore, in addition to negotiating a sale of its tower arm. BMI believes that the immediate outlook for the firm remains uncertain largely due to the regulatory uncertainty, which is unlikely to be resolved in the near future.
Finally Growth
Reliance Communications Net Profit
18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000
Jun-09 Jun-10 Mar-10 Mar-11 Jun-11 Dec-09 Dec-10 Sep-09 Sep-10 Sep-11 Dec-11 Mar-12
data services but, like its peers, consumer adoption has been below expectations. Consequently, the operator followed Bharti Airtel, IDEA Cellular and Vodafone India and have slashed tariff rates by almost 62%. The price cut should spur consumer interest, although there is a risk that sustained subscriber growth in the nascent market would require a price war.
Debt Is Still A Burden

As of March, Reliance Communication's net debt has grown to INR358.393bn, up from INR320.485bn in March 2011. The hefty debt, a result of the 3G auction and roll-out, has been an ongoing concern, especially when the operator has repeatedly failed to reduce the amount.
Part Of Reliance Infratels Appeal
Reliance Infratels Network Capacity And Useful Life
India-East India-West Middle East-East
150 Net Profit (INRmn) % chg y-o-y RHS 100 Middle East-West Intra Asia Trans-Atlantic 0% 20% 40% 60% 80% 100%
50
Utilised India-East
Unutilised
-50
-100
India-West
Middle East-East
Source: Reliance Communications
Middle East-West
Reliance Communication's revenue declined by 32.6% y-o-y to INR53.1bn (US$958mn) in the quarter ended March, but this was higher than analysts' expectations as polled by Reuters. Similarly, the operator's net profit for the quarter exceeded analyst estimates and grew by 96.7% to INR3.316bn, representing the first y-o-y increase since the quarter ended June 2009. The profitability improvement could be attributed to Reliance Communication's position as the second-largest mobile operator in India, and a surprise increase in the minutes of use (MOU). MOU grew for the first time in five years to 227 minutes, up from 224 minutes the previous quarter, which is a particularly impressive feat given that Indian mobile operators have been hiking voice tariff rates. Reliance Communications also reported that its revenue of INR0.44 per minute was among the highest in the industry for the last eight consecutive quarters.
Intra Asia
Trans-Atlantic 2015
Source: Reliance Communications
2020
2025
2030
2035
Operations Still Struggling

On May 28, the date that Reliance Communications released its latest financial results, its share price opened 3.4% higher than the previous day. However, BMI believes that Reliance Communications remain vulnerable fundamentally. Due to strong competition and price-sensitive consumers, the operator's ARPU dipped below the INR100 mark to INR99 for the quarter ended March, while its monthly churn rate in the quarter reached a high of 4.5%. Securing 3G licences were supposed to boost its revenue through premium
In April, Reliance Communications received initial approval to list its submarine cable unit in Singapore, which is forecast to raise US$1.4bn. The operator's submarine cable assets span across 68,000km, and have landing sites at 46 locations in 26 countries. Further, an average of 80% of capacity on its network is available to be monetised with useful life ranging from 2022 to 2031. An initial public offering (IPO) could take place in Q212 and proceeds would help alleviate pressure on the operator. Meanwhile, Reliance Communications also has been trying to offload its tower unit Reliance Infratel, first through an IPO before turning to private equity firms. However, the plan to divest Reliance Infratel has been in place for about two years without success, although Reliance Communications has announced that it is waiting for regulatory clarify from the government.
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Regulatory Risk Runs High

The ongoing regulatory debacle has not helped Reliance Communications. BMI has highlighted the growing collateral damage from the Indian government's inability to quickly resolve issues, and it is possible that private equity firms in talks with Reliance Communications could be increasingly concerned, especially when the prospect of the tower sector is highly tied to the mobile market. Reliance Communications has announced that the sale of Reliance Infratel will only proceed once the Department of Telecommunications and the Telecommunication Regulatory Authority of India clear the issues on spectrum allocation and licensing guidelines. We believe that given the contentious decision of setting a high price, a resolution may not emerge in the near future.
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 due to continuous bad performances in light of 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).
Citycell Not Keeping Pace With Industry
Bangladesh Mobile Subscriber Growth By Operator (000)
120,000 Teletalk Citycell Airtel Robi Axiata Bangladesh Grameenphone 100,000 80,000 60,000 40,000 20,000 0
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.
AFGHANISTAN
3G Competition Heating Up
The Afghanistan Telecom Regulatory Authority (ATRA) awarded the country's second 3G licence to MTN Afghanistan on June 20, three months after rival Etisalat launched its network. More licences are expected to be awarded with remaining mobile operators expressing interest, according to the regulator. BMI believes that the added competition should provide a much-needed boost to the country's telecoms industry, particularly in lowering the cost of accessing the internet. The ATRA invited bids for 3G licences in August 2011 but disqualified potential new entrants Sahar 3G, Toseye Eatemad Mobin and Shezai Tel USA as they were deemed to have failed to meet the requirements. Sequentially, the licences are to be awarded to existing GSM operators, namely Etisalat, MTN Afghanistan, Afghan Wireless Communications (AWCC) and Telecom Development Company Afghanistan (Roshan), as per the approval of the ministers' committee for the telecoms sector and 3G tender conditions. Both licences that have been awarded cost US$25mn each, and the price is expected to be the same for Roshan and AWCC. MTN Afghanistan expects to launch 3G services by mid-July, although BMI believes that coverage would be limited. At launch, Etisalat's 3G services were only available in Kabul, but the operator expanded coverage into Jalalabad in June. The rapid commercialisation of 3G services indicates that operators have already been upgrading their equipment and networks. If the ATRA awards the remaining two licences in the near future, we expect commercial 3G services from all four operators by end-2012, which presents an upward risk to our Afghanistan 3G subscriber forecast. We believe that the existing high prices for internet services will provide significant demand for 3G. According to the Ministry of Communication and Information Technology, the internet price for 1MB of data per month fell by 67% from 2011 to 2012 but remains a prohibitive US$300. During this period of time, the number of internet users increased from 1mn to 2mn. Meanwhile, Etisalat's 3G plans vary from AFN499 (US$10) a month for 1GB of data (smartphone) to AFN899 (US$19) for 4GB of data (USB dongle). Given a level playing field each 3G licence costs US$25mn and individual operator's market share is about 22-29% we expect competitive 3G pricing, which would further spur adoption. At present, we forecast 1.146mn 3G subscribers in the coun-
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Robi Axiatas subscriber data differ from that of the BTRC. Source: BTRC, Operators, BMI
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 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.
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try at the end of 2016, up from 50,000 in 2012. However, the potential large-scale availability of affordable 3G services could result in rapid subscriber growth. That said, development is dependent on operators being able to expand their networks, a situation complicated by doubts surrounding the country's security.
Growth Could Accelerate
1,400 1,200 1,000 800 600 400 200 0
Afghanistan 3G Subscriber Forecast, 2009-2016
3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
2013f
2014f
2015f
Number of 3G Phone Subscribers ('000) LHS Number of 3G Phone Subscribers/100 Inhabitants RHS
f = BMI Forecast. Source: MCIT, ATRA, Operators, BMI
Analyst: Jianwei She Sub-Editor: Mia Kilroy Subscriptions Manager: Nuria Bernardez Production: Barbara Fitzsimons, Reema Patel Publishers: Richard Londesborough/Jonathan Feroze www.telecomsinsight.com
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Asia Pacific Telecommunications Insight - September 2012

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IMPORTANT NOTICE:

Asia Pacific Telecommunications

More Efforts Needed To Promote Cloud Sector

More Efforts Needed To Promote Cloud Sector........................................................ 1

Private Companies Cannot Do It Alone

Site Sharing To Boost VHAs and Optuss Networks

Source: Operators, BMI

Source: Asia Cloud Computing Association

Stronger Vodafone NZ To Challenge TCNZ

Telkom's Pacnet Bid May Not Yield Expected Results

New Licences To Introduce Competition

3,500 3,000 2,500 2,000 1,500 1,000 500 0

Net Profit RHS

FRiENDi Looks East

Indonesia Bangladesh Pakistan

3G Auction On Track, Outlook Remains Uncertain

f = BMI forecast. Source: BMI, operators, regulators, World Bank (ITU)

Vietnamobile 2% VimpelCom 3% S-Fone 0%

VinaPhone 29% Country Risk Thailand

Industry Risks Regional Average

Resolve Skewed Competitive Landscape Before MNP

Domestic Dominance Could Fuel Overseas Expansion

Emaxx-Excell Deal Long Over

Mobitel, 2,600 Metfone, 8,200

PLDTs subscriber figures include Digitel. Source: Operators, BMI

Still A Major Risk For Entrants

Amazon To Launch Prepaid Internet

No. of Mobile Internet Subscribers ('000) % chg q-o-q RHS

2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5%

Flicker Of Opportunity For Japan's Smart TVs

Source: BMI, Operators

Source: BMI , Bloomberg

LGs First-Mover Advantage May Not Last

EV-DO Upgrade To Boost APT

Baidu's New Smartphone A Safe Bet

China Telecom Eyes Future With Cloud Gaming

Samsung 28% Sony Ericsson 4%

China Telecom China Unicom

90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000

Industry To Suffer From Continued Regulatory Uncertainties

Challenges Remain Ahead For Reliance Communications

Debt Is Still A Burden

Source: Reliance Communications

Operations Still Struggling

Regulatory Risk Runs High

GSM Switch To Boost Citycell's Outlook

3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

2012 Business Monitor International. All rights reserved.

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