Malaysia’s decision to set up a single wholesale network (SWN) for 5G — owned by Digital Nasional Bhd (DNB), a special-purpose vehicle under the Ministry of Finance — has certainly caught many by surprise, not least because it is a complete deviation from what has been done before. For every generation of mobile networks in the country thus far, spectrums were allocated to the telcos, the mobile network operators (MNO) that go on to build their own (parallel) infrastructures. As with anything new, criticisms and pushback — in this case, primarily from telcos — are not unexpected.
We recently read an analysis on Malaysia’s decision on an SWN by DT Economics (a consultancy commissioned by GSM Association) entitled “Safeguarding the road to 5G in Malaysia”. According to GSMA’s website, “GSMA represents the interests of mobile operators worldwide, uniting more than 750 operators with almost 400 companies in the broader mobile ecosystem, including handset and device makers, software companies, equipment providers and internet companies, as well as organisations in adjacent industry sectors”. Thus, it is no surprise that the findings of the DT Economics report reflect views very similar to those of the telcos.
The report flags the risks of an SWN, including creating a monopoly in DNB and possibly less competition downstream (telcos). The former is certainly true, though we cannot see why competition among telcos will decrease. To be sure, how they compete for customers will certainly change. We will elaborate on this a little later.
DT Economics also raised the question of financing and funding risks for DNB as well as risks on execution, network resilience and pricing. We agree that all these risks exist. In fact, these are potential future risks common to all business ventures, no matter who undertakes it. They may or may not come to pass. No one knows for sure because no one can accurately predict the future. But these risks have never stopped entrepreneurs or their financiers.
We do not agree, however, that an SWN will lead to greater inefficiency and decreased quality of service — as the report claims — because we cannot know this for a fact. Again, these are future risks that may or may not happen. Is it not presumptuous and premature to jump to such conclusions? Indeed, why not give DNB the benefit of the doubt?
DNB has already proven that it can execute quickly — the RM11 billion (over 10 years and reduced from the initial RM15 billion estimate) design, build and maintenance contract was awarded to Ericsson in early July, about three months after the evaluation process began in April 2021. No question was raised on the transparency and integrity of the tender process, which was structured by Ernst & Young Consulting according to global standards and involved four panels, comprising about 50 local and international experts from 10 countries with current 5G network rollout experience.
There is no funding requirement from the government, with the entire amount financed by equipment vendors, banks and DNB’s own operating cash flows.
DNB management is helmed by Ralph Marshall, who has extensive experience in the corporate world, and few disputed his leadership abilities when he was with
Maxis Bhd. Readers should also be familiar with Morten Lundal, recently appointed independent non-executive director of DNB as well as former CEO of Maxis and, before that, Digi.Com Bhd. The top management team and advisers consist of professionals culled from various disciplines and industries and, of course, global telcos. They include
Dushyanthan Vaithiyanathan (formerly of Maxis and Telenor ASA), Ken Tan (Optus), Nik Azlan Aziz (UMW Holdings Bhd, MISC Bhd), Wan Mohd Zam (McDonald’s Corp), Ahmad Taufek Omar (Telekom Malaysia Bhd), Zuraida Jamaluddin (Celcom Axiata Bhd), Allen Lew (Optus, Singapore Telecommunications Ltd), Wan Ezrin Sazli (Time dotCom Bhd, Digi), Jose Luis Garcia (Telefonica SA), Tay Soo Meng (Singtel) and Anand Prasad (NTT Docomo Inc, Rakuten Group Inc).
Ericsson is bound by hefty contractual terms to ensure timely execution. On the concerns of network resilience, well, Ericsson is best in class for 5G network equipment and services — one of only a handful of major players in the world. The company is a global leader in 5G rollout. Incidentally, Singtel has also partnered with the Swedish communications equipment specialist for its next-generation mobile network. Indeed, Ericsson would be an obvious choice for any telecom operator looking to transition to 5G, including Maxis, Celcom and Digi.
As analysts, we understand, more than most, where the telcos are coming from, why they are pushing back against an SWN — even though we think they will actually come out ahead in terms of cash flow for the foreseeable future.
In the same vein, we fully appreciate that global equipment manufacturers and telcos might be concerned that the success of this SWN will pose challenges to their existing business model elsewhere globally. But such is the inevitability of innovation, rising efficiency and lower costs in a world of constant creative disruption, as in any other industry.
While 5G will significantly improve user experience for, say, video streaming, cloud gaming and augmented reality/virtual reality applications, there is yet a compelling “killer app” that will drive the average consumer to upgrade their existing packages. In other words, telcos are likely to incur high upfront capex (cash outflow) but low additional revenue streams (cash inflow) in the initial years. Yes, they are likely to have to commit to a certain capacity fee to DNB (for access to the 5G network), but this will be less than the cost of building their own infrastructure. This is because utilisation will be far too low in the near-medium term for economies of scale. DNB, on the other hand, will have much better cost efficiency — by aggregating demand from all the telcos.
What telcos are really concerned with is what happens over the longer term. Malaysian telcos have long competed based on infrastructure — or, in layman terms, “coverage”. For instance, if you frequently travel around the country, chances are you will be a Celcom subscriber. Some of us are willing to pay premium prices to avoid pockets of brown spots and dropped calls, which are more common occurrences with some service providers (which we will not name here) relative to others.
Under the SWN, however, all telcos will have equal access to the 5G core network. In other words, the coverage area will be exactly the same, assuming the same level of capacity commitment with DNB. So, telcos will have to compete on product differentiation and services. This could disrupt the current market dynamics, the future winners and losers. For the telcos, this is uncertainty — and presents risks.
And, of course, without the spectrum and the ownership of the associated infrastructure, they fear their market valuations will be adversely affected — although, we would argue it does not have to be.
Malaysian telcos have been fantastic cash-generating investments. They make huge margins and profits. Chart 1 shows a comparison of their profitability and returns on assets with global peers. Over the years, investors have made multi-fold returns on their original investments — we have recommended and even bought the stocks in our portfolio — and even more so for the founding shareholders. They are right to protect their own interests, just as global equipment manufacturers will seek to do.
It is the government’s responsibility to protect the interests of consumers and make the best decision for the good of the country as a whole. It is about getting Malaysian consumers and enterprises access to world-class connectivity as the foundation to an increasingly digital economy.
Let us take off our analyst hat and put on the average man-in-the-street hat for a moment. For Malaysian consumers, the payback has been far less attractive. We pay relatively comparable prices for mobile services, slightly higher than Indonesia but lower than Thailand and Singapore. This is at the expense, however, of quality of service.
Malaysian telcos, on average, offer lower download-upload speeds as well as lower 4G availability and coverage compared with global peers, for roughly the same pricing (see Chart 2). And remember, this is after the government enforced lower prices (compared with the previously commercially negotiated prices) and faster speeds in mid-2018, under the Malaysian Communications and Multimedia Commission’s Mandatory Standard on Access Pricing reform.
We are almost certain that 5G prices under an SWN will be lower than if telcos were allowed to build their own core networks. Why? Malaysia is a relatively small country with a relatively small population. There are simply not enough people to share the total cost of building three or four parallel networks. And one SWN must cost less than three or four networks. It does not take a genius to work out the maths. DNB estimates that its total cost would be 40% less — not forgetting an SWN will also allow for the most efficient use of precious spectrum resources. Prices for users must then also be cheaper. And if telcos turn their focus to competing on more innovative products, quality of service and price points, then Malaysian consumers must be the ultimate beneficiaries.
Even more importantly, the migration to 5G is already unfolding at a rapid clip globally. Many countries, including Singapore and Indonesia, have launched commercial services. Malaysia cannot afford to lag behind — because the high-speed and ultra-low latency of 5G is critical in new enterprise and industrial use cases. It is the backbone of the future digital economy and the key to improved productivity and efficiency if Malaysia is to maintain competitiveness in the regional and global markets.
We should look at 5G as another basic and crucial utility — just like electricity, roads, ports, airports and such, all of which must be in place to attract new innovative investments that will bring about the creation of high-paying jobs.
DNB is committed to the first commercial 5G service launch in December 2021 (in Kuala Lumpur, Putrajaya and Cyberjaya) and to achieving 80% population coverage by 2024. We believe none of the telcos will be able to improve this rollout pace. Indeed, in the old scenario, 5G would have been available only by 2024. It took Maxis six years to reach 80% coverage for 4G, from the launch in January 2013.
As we said, consumer demand for 5G will start slowly. Thus, telcos are unlikely to be aggressive in terms of their rollouts. Rather, we bet they would work existing 4G assets (already sunk costs) for as long as possible — even if at the expense of quality. It makes solid business sense. But anecdotal evidence indicates that existing 4G capacities are already stretched — especially with the sharp increase in data consumption because of the Covid-19 pandemic. Case in point: Download speeds — hence quality of service — of both Maxis and Celcom have fallen sharply over the past year (see Chart 3).
At the start of this article, we said an SWN is a new structure for Malaysia’s mobile telecom industry. But it has been adopted elsewhere in the world — some more successfully than others, for a variety of reasons. What this means is that DNB will have the benefit of hindsight, learning from the experience and mistakes of others. In fact, the concept itself is a proven cross-industry model.
For example, an SWN for 5G is similar to Singapore’s Open Electricity Market, launched in 2018. In a nutshell, the wholesale electricity market was separated from the retail market. Electricity retailers buy electricity in bulk from the Energy Market Company (EMC) and compete to sell to consumers. Accordingly, they must expend more effort to design innovative offers and price plans — adding genuine value to basic electricity supply. For instance, some electricity retailers are partnering with third parties to offer rebates and vouchers, loyalty programmes, bundling with insurance and other products and services. This has led to more choices and flexibility for Singaporeans. Surveys indicate that consumers can cut their electricity bill by up to 20% to 30% of the regulated tariffs. There has been no disruption in electricity supply for those who switched retailers.
Every decision, be it in policy, business or life in general, involves a trade-off. We weigh the potential risks against the potential payback. In this respect, none of the risks mentioned above will lead to critical failure. Given the collective experience and expertise of DNB’s board of directors and management team, we are quite certain that they too are well aware of all the risk factors — and are up to the challenge.
The potential gains are very clear. An SWN is far from an alien concept. It is a proven structure that, executed correctly, will lead to more innovative mobile products and quality of services, at lower prices for consumers.
An SWN is the best structure to ensure the fastest and cheapest 5G rollout, which is so important for the country’s future growth — in the transition to a knowledge and service-based economy and the creation of new, and higher-paying, jobs.
It should be very obvious by now where we stand in this debate — because we too are, first and foremost, consumers. In fact, Boston Consulting Group, a global management consulting firm and leading business strategy adviser, reached this very same conclusion in a comprehensive study (conducted in conjunction with GSMA) back in March 2020. Their findings are published in the report, “Realising 5G’s full potential: Setting policies for success”.
On network-sharing agreements, the report notes: “While the strategic considerations have to be weighed on a case-by-case basis, infrastructure sharing with other operators has the potential to reduce network costs significantly. A recent study by the GSMA, the results of which are supported by own [sic] project work, has shown that it can reduce infrastructure costs by up to 40% … As we have seen, the deployment of 5G puts an enormous capex and opex burden on mobile operators. Operators in many markets are, therefore, entering into network-sharing arrangements to bring down each company’s costs and achieve economies of scale.”
(You can read the full report here.)
Do you know what we find most ironic? The fundamental business models for many digital companies — such as Amazon.com Inc, Microsoft Corp and Google (for cloud services and infrastructure) as well as Airbnb Inc, Netflix Inc and Uber Technologies Inc — are centred on everything-as-a-service and sharing. Yet, our telcos are not in favour of sharing a 5G network that is key to enabling this very transition, to a digital economy.
The Global Portfolio fell 0.7% for the week ended Sept 15, dragged down by persistent weakness in Alibaba Group Holding Ltd shares, which fell 10%. Other notable losers were Apple Inc (-3.9%) and Johnson & Johnson (-3.8%). General Motors Co (+5.8%), Microsoft (+1.5%) and Home Depot Inc (+0.5%) were the big gainers last week. Total portfolio returns now stand at 64.6% since inception. The portfolio is still outperforming the MSCI World Net Return Index, which is up 58.8% over the same period.
Meanwhile, the Malaysian Portfolio fell 0.6% last week, but better than the 2.7% loss for the FBM KLCI. We disposed of all our shares in Telekom, Maxis and Digi, netting a combined 13% returns over our cost of investment. Last week’s losses pared total portfolio returns to 136.5% since inception. Nevertheless, this portfolio is outperforming the benchmark FBM KLCI, which is down 15%, by a very long way.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.