Telco Deep Dive: LTE’s elusive business model

On May 26, Digital News Asia (DNA) released its first Deep Dive report, which looked at the telecommunications space in Malaysia. Over these next two weeks, we will be publishing the articles from the PDF report on our portal, plus other stories. To download the Telco Deep Dive, click here. In this article, Edwin Yapp explores the LTE landscape in Malaysia and wonders how operators intend to recoup their investments.

  • No clarity on how operators intend to recover massive investments into LTE
  • Video streaming and downloads, M2M and other digital services could be key
Telco Deep Dive: LTE’s elusive business model

THE wireless industry’s next-generation technology Long-Term Evolution (LTE), sometimes referred to as Fourth Generation (4G), is said to be a natural migration path for 3G wireless systems.
 
LTE works over an all-Internet Protocol-based network and is used to power everything from high-definition voice and video calls, to video-streaming and high-speed downloads.
 
But while countries in the West, notably the United States and the United Kingdom, have ramped up LTE rollout in their markets, Malaysia’s ambition to do the same has been somewhat muted.
 
The reasons for this are varied.
 
Industry analysts Digital News Asia (DNA) spoke to say that while LTE deployment in the nation may be on track, it is still not clear how its mobile network operators (MNOs) are adapting their business models to recover the million-dollar investments they have made into the technology.
 
Industry watchers also note that the bitter lessons MNOs have learnt from going all-out in their 3G launches almost a decade ago have taught them to be more measured in their LTE rollout. These include being too aggressive in their marketing before 3G coverage was adequate, and the disappointment from overselling the promise of fast 3G download speeds.
 
The Malaysian Government, through industry regulator the Malaysian Communications and Multimedia Commission (MCMC), first approved mobile operators to use the 2,600MHz (Band 7) in December 2012, paving the way for eight local operators to use the spectrum for LTE deployment.
 
It is not exactly clear how much each operator paid for the spectrum, but industry executives familiar with the regulatory process say each licensee was reported to have paid a RM10 million (US$3.2 million) in an irrevocable bank guarantee to secure its spectrum.
 
Since 2013, only four operators – Maxis, DiGi, Celcom and U Mobile – have launched their LTE services commercially, albeit focused on the urban cities in Malaysia.
 
Naveen Mishra, industry principal for telecommunications at analyst firm Frost & Sullivan Asia Pacific, says the population coverage for LTE goes up to only 15%, although the market has significant 3G coverage ranging between 80% and 90% of the population.
 
Telco Deep Dive: LTE’s elusive business modelDiGi chief operating officer Albern Murty (pic) was not specific about his company’s plans or targets, saying however that its long-term ambition is to make LTE services available where DiGi already has 3G, to allow customers to take advantage of the faster data speeds.
 
“We plan to expand 3G coverage, currently at 80%, to 86% population coverage, by end-2014,” he says, adding that DiGi’s LTE expansion would reach 50% population coverage by 2017.
 
Meanwhile, Celcom says that it has about 700 LTE sites already in service and plans to have 2,014 sites by year-end, while U Mobile says that its LTE service has been available in parts of urban cities since December 2013, but declined to give details.
 
Maxis declined to comment on its rollout and LTE expenditure plans, while the other licensed LTE operators have not fully revealed their exact LTE rollout plans.
 
In a bid to encourage competition among operators and spur LTE growth, the MCMC has indicated that it expects MNOs to incrementally grow their respective LTE coverage at about 10% of the population per year beginning 2013, culminating at 50% of the population by 2017. MNOs which do not comply will risk an unspecified sum in fines.
 
Investment figures
 
To date, all four operators have not revealed the specific investments they have made in LTE, only giving indications of how much they would spend in terms of capital expenditure (capex) for 2014, which generally comprises upgrades to their existing networks as well as their LTE rollout.
 
DiGi has indicated that it would spend about RM900 million on its entire capex for 2014, which includes upgrading existing 3G sites and for its LTE rollout. Celcom has said it does not intend to spend more than RM1 billion for its total capex.
 
Jeffrey Tan, investment analyst with RHB Research, says LTE capex is incremental and telcos typically would have allocated some 20-30% of their total capex sums for LTE rollouts … or about RM200 million to RM300 million (US$67 million to US$100 million).
 
An industry executive who is familiar with the LTE capex rollout concurs with this estimate, noting that when LTE is more widely available from 2015 onwards, the percentage of total capex for LTE rollout would likely increase to between 30% and 40%.
 
However, another industry executive DNA spoke with notes that while operators were fiercely competitive over their 3G services, all of them have been fairly muted in their LTE advertising campaigns.
 
This stems from the fear that engaging in too aggressive a marketing blitz would backfire, should LTE services underwhelm due to the lack of coverage.
 
“When 3G was first launched, everyone went to town with their 3G marketing and promotions,” the executive says, on condition of anonymity. “But that backfired on them because 3G took time to roll out and there weren’t many exciting and interesting applications to take advantage of the technology then.
 
“Many subscribers then were left disappointed,” he says.
 
Next Page: What services can we expect, and are we looking at game-changers?

 
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