Malaysian telcos in the dark as govt reallocates spectrum
By Goh Thean Eu February 4, 2016
- MCMC opts for upfront spectrum assignment fees, instead of much-feared auction
- With fees yet to be announced, telcos at a loss on how to proceed with planning
THE past one week has been a rollercoaster ride for Malaysian mobile operators, and the signs are that it will be a while before this ride ends.
About a week ago, Malaysian Prime Minister Najib Razak, in a review of the national Budget 2016, announced plans to optimise government income by reallocating telecommunications radio spectrums and making operators bid for them.
The market did not take to the announcement well, and the share prices of mobile operators Axiata Group Bhd, Digi.Com Bhd and Maxis Bhd suffered their biggest single-day declines of the past 12 months.
Collectively, the ‘Big Three’ mobile operators’ market capitalisation plunged by 7% or over RM9.4 billion (US$2.2 billion at current rates) on Jan 28.
The decline was partly driven by concerns about the additional expenditure that would be incurred bidding for spectrum, as well as uncertainties on how rational the bidding would be for the much sought-after 900MHz and 1800MHz spectrums.
After all, Malaysian mobile operators have never had to engage in a spectrum auction before.
Then on Feb 1, the Malaysian Communications and Multimedia Communications (MCMC) announced that the 900MHz and 1800MHz spectrums would be assigned “for a fee” to Celcom, Digi, Maxis and U Mobile for a 15-year period.
This essentially means that the two spectrum bands will be allocated to the telcos via what the industry regulator described as an “upfront spectrum assignment fee,” as opposed to the much-feared bidding or auction process.
Based on statements subsequently issued by the telcos, it is understood that Maxis and Celcom will be allocated 2 x 10MHz in the 900MHz band, while Digi and U Mobile Sdn Bhd will each be allocated a 2 x 5MHz block.
In the 1800MHz spectrum space, Maxis, Celcom and Digi will each be allocated 2 x 20MHz, versus the 2 x 25MHz they were allocated previously. Meanwhile, U Mobile will be allocated a 2 x 15MHz block to work with.
Operators still in the dark
While their statements gave some idea of how much spectrum each was getting, the telcos themselves are pretty much still in the dark and are at a loss to make plans for the near- to mid-term.
“So far, other than the amount of spectrum allocated to them, the players have no idea how much the ‘upfront spectrum assignment fees’ will be. The regulator has yet to put a price tag on this,” an industry source told Digital News Asia (DNA).
“Only with the pricing announced can they get a clearer picture of how to budget their expenses,” said the source who requested anonymity.
The MCMC plans to issue the spectrum assignment fees to the four players by August, and said it expects full implementation of the 900MHz and 1800MHz spectrums by Jan 1, 2017 and July 1, 2017, respectively.
Although the operators have at least 10 months to make use of the spectrum allocated to them, their hands are pretty much tied when it comes to deciding on the optimal strategy for their capital expenditure and network architecture plans.
In a statement, MCMC chairman Dr Halim Shafie stressed that the payments will be in phases, thus allowing the telcos to roll out services without passing the costs on to consumers.
Upfront fee vs auction
While it is safe to say that the cost of the upfront spectrum assignment fee will likely not be exorbitant, many are still wondering why the Malaysian Government opted for this method when it could have raked in significantly more with an auction.
Just as importantly, many are wondering about the apparent U-turn.
On Jan 28, shortly after Najib made his announcement, Communications and Multimedia Minister Dr Salleh Said Keruak, writing in his blog, said that the reallocation through a market-based approach would contribute revenue to the Government.
In fact, the reserve price of the whole 60MHz block of the 900MHz band could have started at RM1.9 billion (US$450 million) if the Government had opted for a bidding process, instead of an upfront spectrum assignment fee.
“Using Singapore as a reference, the auction reserve price for the 900MHz bands is currently set at S$20 million (US$14 million) for a 2 x 5MHz block,” Alliance Research analyst Toh Woo Kim said in a report.
“Adjusted for forex and population size, this means the auction reserve price for the whole 60MHz of 900MHz band spectrum in Malaysia could start at RM1.9 billion.”
But having telcos embroiled in an auction war could result in higher-than-expected bids, and essentially, much higher expenses.
This could lead to a few scenarios: The telcos would potentially make less money; their shareholders would experience lower dividends or returns on investment; and last but not least, the telcos may decide to pass on some, if not all, of the cost to consumers.
“So on the one hand, the Government may have got a lot of revenue from an auction, but keeping the costs reasonable would also help ensure that the telcos remain committed to investing on improving their networks for the future.
“I think the upfront spectrum assignment fee is a good balance between an annual assignment fee and an auction,” said an analyst who declined to be named.
However, another telecommunications industry observer does not agree with the new move.
“I think it is better for the industry to go through bidding or an auction. It is a transparent process. The telcos can bid for the spectrum based on what they need and what they can afford. That way, there won’t be any wastage,” said the observer.
“Of course, there’s a possibility that the auction will get heated and bidding becomes irrational.
“However, I think the many spectrum auctions that have occurred globally and around the region would serve as reminders to Malaysian telcos to not go overboard.”
Reallocation impact on telcos
Although the analysts DNA spoke to are confident the MCMC would not set exorbitant spectrum assignment fees, the spectrum allocation will nevertheless heighten competition.
“U Mobile will now get spectrum allocation in the prized 900MHz and 1800MHz bands. This will allow the company to broaden its coverage within Peninsular Malaysia,” UOB Kay Hian analyst Chong Lee Len said in a report.
“Together with Telekom Malaysia’s convergence plans, we expect competition to heighten further in the next two years. We expect U Mobile to embark on a market share trajectory target.”
Indeed, at a separate event, U Mobile chief marketing officer Jasmine Lee said, “We’re very happy with what’s allocated, but we need to see what the specific allocated segment of the spectrum is going to be.
“I think you will hear more news from MCMC as it progresses,” she said after a signing ceremony between U Mobile and mobile services enabler Sedania Innovator Bhd, reports Lum Ka Kay.
But all this would also likely result in higher capital expenditure (capex) for some of the bigger players, in particularly Maxis and Celcom.
For Maxis and Celcom, which each previously had over 30MHz in the 900MHz band, getting the 2 x 10MHz block means they would need to invest more to ensure their networks are efficient.
Picture a highway operator that was used to managing 14 million cars on a 30-lane highway, and is now given a 20-lane highway to manage the same amount of traffic – that highway operator would need to invest in more flyovers, better lighting systems, or better roads, to ensure traffic remains smooth.
“Assuming no additional spectrum is made available, Celcom estimates the reduction in spectrum holdings will see its capex rise by RM1-2 billion over the next 10 years (or an additional 25% capex allocation).
“We also expect Maxis to progressively increase its capex budget due to the reduction in spectrum holdings,” said UOB Kay Hian’s Chong.
Nevertheless, a 2 x 10 MHz block is still a substantial amount for Maxis and Celcom. Digi, for most of the time, has been operating with a mere 2 x 2MHz block.
All eyes on MCMC
Over the next several months, industry observers will be closely watching MCMC’s next move.
Besides watching out for the price of the upfront assignment fee, the telcos will also be waiting for the industry regulator’s decision on the 700MHz, 2300MHz and 2600MHz bands.
MCMC is expected to make a decision on those spectrums by the end of this year.
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