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Telenor Asia (A) : mobile data service

Allampalli, D. G.; Gilbert, A. Lee

2003

Gilbert, A. L., & Allampalli, D. G. (2003). Telenor Asia (A) : mobile data service. Singapore: The Asian Business Case Centre, Nanyang Technological University. https://hdl.handle.net/10356/99871

© 2003 Nanyang Technological University, Singapore.

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TELENOR ASIA (A) : Publication No: ABCC-2003-007 MOBILE DATA SERVICE Print copy version: 14 Apr 2004

A. Lee Gilbert & D G Allampalli

In late June 2002, B.K. Jole (Jole), strategy and business director, Telenor Asia Pte Ltd (Telenor), was reviewing the firm's positioning in Asia. Entering the Asian market in 1998, Telenor Mobile, the mobile arm of Telenor ASA, Norway, followed a niche investment strategy to acquire controlling stakes in mobile operators in Bangladesh, Thailand and Malaysia. The firm focused on building market share in each country and maintaining free cash flows for each joint venture. Telenor evaluated each investment opportunity on a stand-alone basis. With varying degree of deregulation, income distribution, market size and wireless penetration, there was little commonality among markets in Asia. Although Malaysia and Singapore markets were in some ways quite different, their voice and data traffic offered common ground to harness operational synergies and expand, but there were several reasons for concern. Regional markets had undergone dramatic change in the wake of a long wave of policy reforms and competition had become fierce. New technologies threatened to shorten the economic life of existing infrastructure and consumer preferences appeared to be changing so rapidly that market segmentation was nearly impossible. Concerned about the medium-term outlook for Asia, Jole wondered whether the practice of evaluating Asian markets and opportunities on stand-alone basis would be sustainable. He was reviewing several options that would enhance market share for DiGi, the joint venture in Malaysia, and thinking through potential market entry choices for Singapore. In the mature Singapore market, Jole could lease capacity and operate as a mobile virtual network operator, establish a joint venture, enter a strategic alliance or simply ignore it. In Malaysia, how could Telenor increase its market share? Would the emerging trend toward mobile data services play a role? And, were these opportunities somehow interlinked?

Associate Professor A. Lee Gilbert of the Nanyang Business School and D. G. Allampalli of The Asian Business Case Centre prepared this case. It is based on interview with key personnel from Telenor Asia Private Limited. As the case is not intended to illustrate either effective or ineffective practices or policies, the information refelcts the authors’ interpretation of events and serves merely to provide opportunities for class discussion. The authors gratefully acknowledge research contributions of Joakim Melby Olsen, Camilla C B Ringvold, Sting Wiig Sorenson and Katherina Vestbo of the Norwegian School of Management BI, Norway.

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In late June 2002, B.K. Jole, strategy and business media messaging (MMS) and third-generation (3G) director of Telenor Asia Pte Ltd, was reviewing his mobile might create new opportunities for existing medium term strategy for Asia. There were several operators to offer value-added services, but also reasons for concern. Regional markets had raised customer expectations. A 2001 Goldman undergone dramatic change in the wake of a long Sachs report on European mobile operators warned wave of policy reforms. New technologies that 2G late entrants and 3G start-ups could fail to threatened to shorten the economic life of existing deliver adequate returns if their market share infrastructure. Consumer preferences appeared to slipped.2 Concerned about the medium-term outlook be changing so rapidly that market segmentation for Asia, Jole wondered whether the practice of was nearly impossible. Entering the Asian market evaluating Asian markets and opportunities on in 1998, Telenor Mobile, the mobile arm of Telenor stand-alone basis would be sustainable. He was ASA, Norway, acquired stakes in mobile operators wondering on the several options, particularly, entry in Bangladesh, Thailand and Malaysia and followed choices for Singapore and expansion in Malaysia. a niche investment strategy for internationalization. For the Singapore market, Jole had many choices: It sought to acquire a large stake in small telecom lease capacity and operate as an "MVNO", establish operators, and evaluated each investment a joint venture, enter a strategic alliance or simply opportunity on a stand-alone basis. Their strategy to ignore it. And in Malaysia, how could Telenor focused on building market share and maintaining increase its market share? As he browsed a student free cash flows. With varying degree of deregulation, interns project report on consumer preferences for income distribution, market size and wireless mobile data services, he knew he had to decide penetration, there was little commonality among soon: the industry analysts and the press meet to markets in Asia. Although Malaysia and Singapore announce half yearly results was just four weeks markets were in some ways quite different, their away. voice and data traffic might offer common ground to harness operational synergies and expand. INTERNATIONALISATION OF TELENOR The Malaysian market still had growth potential in basic mobile services, but it had become extremely Telenor ASA, formerly known as Norwegian Telecom competitive. With 14 percent market share, DiGi (Televerket), was a nationalised public enterprise was in third place. Perhaps, the Singapore market in Norway whose origins dated to 1855. For over a might complement the mobile business in Malaysia. century, it offered domestic and international The two nations shared a colonial history, and just telecommunication services and enjoyed monopoly as many families had members living in the other, status. The end to its historic monopoly began when and many firms operated across the busy border. the government deregulated the sale of telephone However, the Singapore market was mature and sets in 1988. Around that time, Jole recalled, Telenor relatively saturated. Following its "big bang" ASA began restructuring its domestic and liberalisation in early 2000, an industry shake out international operations in preparation for going was underway. Virgin Mobile had entered as a public, which was completed in 1994. By then, mobile virtual network operator (MVNO), through a international operations were regrouped to establish joint venture with SingTel, but was unable to gain a Telenor Mobile. Its monopoly in Norway ended in foothold in the market, and exited within a year. 1994 with the introduction of a second mobile StarHub had merged with Singapore Cable Vision, operator. By 1998, many new telecom operators and was moving toward mobile data services as a received licenses and the home market was source of differentiation. The future of M1, the only crowded with four to five operators and over 20 mobile operator without fixed-line services, was service providers. unclear though its 800 base stations were 3G ready.1 As the home market matured, Telenor ASA looked Throughout the region, mobile subscriber profiles, overseas for growth, and initially entered markets usage behavior and expectations had changed that were liberalising and closer to home. In the mid- dramatically. The industry experienced high "churn" 1990s, it invested in many European mobile as subscribers shifted from one operator to another operators: Germany, Ireland, Greece and Hungary. in search of new features or lower prices. Highly They subsequently sold these to realise substantial publicised new technologies, such as IPv.6, multi- gains. The firm also evaluated opportunities in Latin

1 3G- ‘Third Generation’. 2 Goldman, S. (2001, November 26). Equity Research, European Telecom, AsiaCase.com Page 3 the Asian Business Case Centre ABCC-2003-007

America but did not invest because it perceived local He believed that Telenor ASA bought a high value- culture and language as far different from home, creating asset at a reasonable price as compared and viewed the regulatory regimes as unpredictable. to the escalating prices of mobile assets in Europe. While their initial internationalisation push lacked a At the end of 2001, Telenor had built a portfolio of clear strategy, their opportunistic approach bore fruit. mobile businesses in Asia.

ENTRY INTO SOUTHEAST ASIA THE GLOBAL TELECOM INDUSTRY

In 1998, Telenor ASA looked to Southeast Asia. At The Telecommunications Services Industry included that time, when Jole joined the team in Singapore organisations that provide various types of to manage its overseas investments, witnessed an transmission services, including fixed-line and exodus of global telecom operators: AT&T, British mobile voice and data services. The long-term telecom (BT), Cable & Wireless and Deutsche trends affecting the industry stem mainly from the Telecom (DT). Entering Asia in the mid-1990s, these convergence of new digital technologies. Short term global operators were packing their bags by 2001. trends include severe financial crises associated Jole’s discussions with industry analysts revealed with over-capacity combined with destructive that several factors had influenced their decision to competition in many markets. Globally, the industry exit. First, he learnt that these operators had no was also adjusting to a change in regulatory regime, product focus. Second, their mindset was to build from state-owned monopolies to private ownership an empire in Asia and colonise the world again. in open and competitive telecommunications Third, most local partners preferred capital networks and services markets. From the subscriber investments and hands-off approach in perspective, visible trends included falling costs, the management involvement. According to Jole, "In emergence of value added services such as voice real-life, such an arrangement never works." Unable mail and Internet access, and a shift from fixed-line to earn the kind of return that the global operators to mobile as the dominant mode of use. In 1991, expected from Asia, they deserted. Jole knew Asia only one per cent of the world's inhabitants had a was tough ground, but prices of the region's telecom mobile phone. Ten years later, one in every six of assets were more attractive. the world's inhabitants (nearly 1 billion in number) had a mobile phone. By the end of 2002, the Telenor ASA made an acquisition spree. In 1996, it international telecommunication ITU predicts that made its first investment with Grameen Phone, a there will be more mobile phones than fixed lines in mobile market leader in Bangladesh. Later, in 1998, the entire world.4 it acquired 31 percent stake in DiGi, a mobile operator in Malaysia, which it eventually increased to 61 percent. In 2000, it made its third acquisition GLOBALISATION in Thailand when it bought 30 percent stake in the second largest mobile operator. Telenor Asia's CEO In many countries, the telecommunications said: sector shifted from a monopoly structure to a community of interest that included governments We viewed Thailand as a very and network operators, as well as equipment interesting market. It has less than 4 and service suppliers. The majority of the world's percent cellular penetration. There is not telecommunication services were now provided much competition and there is quite a by firms that were largely privately-owned. lot of growth potential there. It is the third In many cases, the lines of ownership crossed investment that we have made in Asia. national boundaries, reflecting the increasingly We are focusing on mobile in Asia. global nature of the industry. This trend Mobile is what we are best at. We are a was evident even before the World Trade long way from home here, but we have Organisation took any action to open local service lot of experience.3 markets.

3 Telenor Aims To Go On The Right TAC, Telecoms Deal Report, 2000. 4 Internet for a Mobile Generation, International Telecommunication Union, Geneva, 2002. Page 4 AsiaCase.com ABCC-2003-007 the Asian Business Case Centre

THE ONSLAUGHT OF TECHNOLOGY GPRS provided the always-on, higher bandwidth, data bearer mechanism and in association with more Harvard Business School professor Clayton M. powerful handsets, it was expected to provide the Christensen coined the term "disruptive foundation for the next generation messaging technologies" to describe those with the potential medium. MMS had roots in both SMS and Internet to create a paradigm-shift. The relentless standard e-mail. It took the best of both systems convergence between computing and and provided a mobile-optimised solution and eased telecommunications meant that technologies such integration with existing systems, applications and as short messaging services (SMS), multi-media more importantly, users. An advantage was that both messaging services (MMS), packet switching, mobile phone numbers and regular e-mail addresses optical networking and spectrum technology had the could be used when creating a message. In Release potential to alter the structure of the industry. 4 of MMS (stable from Q1 2001), messages consisted of text and attachments represented as By 2002, consumers had already experienced the multi-part MIME - the same way as an Internet e- benefits of SMS. Its impact took the industry by mail. Its appearance on the screen was dependent surprise and demonstrated the potential of the on the mobile handset at the moment, and varied messaging industry. However, interoperability was amongst vendors.5 This eased the interoperability pivotal to its success. With many new technologies of MMS with Internet e-mail systems. 3G on the horizon, the industry players hoped that data introduction could nip the potential of EMS and MMS services would hold a bright future for messaging in the bud unless its launch was delayed by industry. For example the higher capacity of regulatory interventions or technological glitches. extended messaging service (EMS) was expected Table 1 portrays projected roll-out schedule for to support applications for transmission of sound, fixed, wireless and satellite technologies until 2008.6 video and pre-defined animation so that value added services would enable operators to build customer Commenting on the potential of the two cardinal loyalty, reduce churn and hold market share. modes of telecommunication, Dave Molta, senior Similarly, GPRS with throughputs ranging from 5.8 editor, Networking Computing said: Kbps to 54.8 Kbps was expected to overcome the problem of scalability and low data transfer rate Make no mistake: Where conducted associated with SMS. media are available, fixed line will always provide better performance than The next generation mobile messaging solutions wireless. But if your site isn't serviceable were currently standardised to provide many new by traditional broadband services, features that could not be delivered using EMS. wireless can be a great solution.7

Table 1: Projected Rollout of Data Services Technologies

S/N Type of Technology Medium Term Long Term 1 Wireless or cellular GSM II W-CDMA W-TDMA UMTS WiFi Bluetooth WiMax 2 Fixed Fiber in the Loop FTTH PONs 3 Satellite Broadband Ka mmWave/very high band systems capacity broadband

Source: Adapted from Beardsley S.C. and Evans, L.A. (1998). Who will connect you? The McKinsey Quarterly, (4) p21.

5 Keith Kellett and Alex Linde, (2001), EMS, MMS & The Future of Mobile Messaging -A White Paper, MAGIC. 6 Beardsley, S.C., & Evans, L. A., (1998), Who Will Connect You?, The McKinsey Quarterly, No. 4, pp21. 7 Molta, Dave, (2001), The Survivors Guide to 2001:Mobile and Wireless Technology, Network Computing, 11 December. (http:// www.networkcomputing.com/1125/1125mobile1.html). AsiaCase.com Page 5 the Asian Business Case Centre ABCC-2003-007

Not all technologies had disruptive potential. Some These led to usage growth, subscriber churn and did not fit well into the traditional market segments lower profitability. One survey indicated that the used by the industry: household, small medium average revenue per minute of mobile telephone enterprises (SME) and corporate customers. use in the US fell 31 percent between 2000 and Therefore, technology choice depended upon the 2001.8 As capital commitments increased, size of the target market, what the operators profitability suffered and earnings came under understood about subscriber needs and preferences, pressure. According to McKinsey, the industry community norms, regulatory requirements, industry EBITDA (earnings before depreciation, interest, tax standards, and the level of economic development. and amortisation) margin declined from 42 percent The high fixed costs for new infrastructure meant in 1997 to 27 percent in 2001. Operators responded that scale was an important source of sustainable along four lines: re-organising businesses around advantage for facilities-based operators. customer segments, improving operational execution, finding new ways to differentiate their products, services, and brand, and new managerial DEREGULATION and leadership approaches.9 10 Mobile usage had increased: J.D. Powers & Associates estimated 422 Deregulation of the telecommunication sector had MOUs in 2001, an increase of 32 percent from 320 significant impact on the evolution of both fixed and a year earlier.11 Competition within the mobile data wireless markets. An initial mad rush for wireless sector had developed successfully, as evidenced licenses drove bids for wireless spectrum to by the array of dynamic services, service packages, unrealistic levels in some markets. Reeling under and pricing plans available to consumers from a the resulting debt burden, competition for market variety of providers. share within and between fixed and mobile service providers became fierce. This trend, coupled with Europe excess capacity, drove prices for basic services below cost in some markets. Over the long run, The European Council of Telecommunications operators had to innovate to survive. Ministers set January 1, 1998 for complete liberalisation of voice telephony with a goal to make The major markets, North America (dominated by the union "the most competitive and dynamic the US), Europe, and Asia had very different knowledge - based economy in the world.12 A characteristics. European Commission (EC) study found that aggressive competition had resulted in lower prices, United States service expansion and spurred technological advances. With the auctioning of wireless spectrum from 1994 to 1996 by the US Federal Communications Europe's telecom boom forced incumbents to Commission (FCC) deregulation began anew in the commit huge capital outlays for new mobile licenses. US. The industry moved from duopoly to oligopoly From 2000 to 2002, telcos in Germany and United with new entrants (Sprint), competitors new to the Kingdom spent US$46 and US$36 billions industry (Omnipoint) and attackers - wireless respectively for 3G-mobile licenses, which incumbents such as AT&T, AirTouch, Bell Atlantic amounted to an average capital investment of and NynexMobile - who purchased spectrum to US$1,000 per subscriber. Without the technology compete in regional markets. As a result, per minute to use these licenses or breakthrough products such wireless call tariffs declined from over US55¢ to as pre-paid telephone cards to attract new groups around US40¢ from 1993 to 1997. The attackers of mobile phone users, these telcos faced slow offered attractive promotions, leading to price wars. revenue growth, which made it difficult to service

8 Federal Communications Commission 9 Scott Arnold, et. al, (1998), "Winning in Wireless," The McKinsey Quarterly, No. 1, pp. 24-26 10 Paul Kagan Associates, Inc., (2001), 'Wireless Customers Using 60% More Minutes than Two Years Ago - Not Always On Plan,' Wireless Market Stats, 11 September, at 4 (based on carriers' reported MOUs); and Paul KaganAssociates, Inc., (2000), 'Minutes Up By 28% in Quarter; Acquisition Costs Continue Decline,' Wireless Market Stats, Aug. 14, at 6. 11 J.D. Power and Associates, (2001), 'Wireless Phone Penetration Among U.S. Households Climbs Above 50 Percent As More First- Time Subscribers Enter the Marketplace,' News Release, 26 September, 2001 (based on survey responses from 14,492 households in 25 of the largest U.S. markets); and J.D. Power and Associates, (2000), 'Wireless Usage Continues to Climb as Flat-Rate Pricing And Free Minutes Become More Prevalent in the Marketplace,' News Release, 26 September. 12 Europe Business News, (2001), 'Impressive Gains on Telecom Deregulation Bolster EU's Confidence in Developing New Economy.' Page 6 AsiaCase.com ABCC-2003-007 the Asian Business Case Centre

debt. As wireline generated nearly 70 percent of total Asia gross cash flows for most incumbents, it was a major cash cow. Yet, these incumbents had to find the A history of national rivalry and closed markets capital needed to expand data and wireless capacity, meant that the 'Asian Market' did not exist, in the the most promising growth areas. sense of a 'European Market' or 'North American Market' in telecommunications. Initiation of 3G The exuberant telecom growth of the 1990s saw services were far ahead of most of the rest of the incumbents leverage their infrastructure advantages world in Japan and the Republic of Korea, partly to gain market share. However, as deregulation and because operators were not required to pay the new technologies opened infrastructure and markets confiscatory fees for spectrum that were imposed to new contenders, it ceased to be a sustainable by many European governments. Some Asian source of competitive advantage. For incumbents, countries are among those on the United Nations survival in a competitive market required attention list of Least Developed Countries (LDCs) and are to operational factors such as effective marketing, far from needing or introducing advanced services. customer service, and rapid development of new Cultural differences also played a major role. In products and services. In addition, they needed deep Japan, NTT DoCoMo and other operators have had pockets to capture the wireless growth potential, as enormous success with limited Internet wireless it would cost tens of billions euros to buy even a 5 service, especially DoCoMo's popular i-mode. In percent share of the European mobile market. Korea, a mania for financial information, on-line purchases and Internet games skyrocketed that Excess Capacity and Poor Financial Performance market to the top of the global list in wireless Internet usage. Mobile communications are now growing Since March 2000 the industry had lost more than rapidly in China, and the sheer size of this market $1 trillion in market value. Over the past two drove the development of advanced mobile data decades, telecom firms constructed more than 90 services. million miles of fiber-optic cables at a cost of some $30 billion. Up to 90 percent, by some estimates, of As growth tailed off in Europe and North America, that capacity remained "dark" or unused. Wholesale many telcos moved to Asia in search of growth in capacity prices plummeted and capital spending the late 1980s when the telecom deregulation turned weak. Companies like Global Crossing, began, but it gained momentum only in the late Williams Communications, and others sagged under 1990s. Most Asian nations opened the value added the crush of huge debt loads from the high costs of cellular and paging services before allowing network development. The telecom industry was at competition in long-distance, international and fixed- the centre of the collapse of technology shares in line services. It was the largest and most lucrative late 2000 and 2001 that led to global economic telecom market. Commenting on Asia, Telstra's Mr. recession. The increased level of competition Platt noted that Asia "only covered about one quarter continued to depress average revenue per of the world - five time zones - but it contained 50 subscriber, or ARPU. By mid-2001, the total debt percent of the world's population, some 3 billion held by eight largest European telcos amounted to people."13 $240 billion, double the 1999 figure. Reeling under this burden, European telcos faced intense pressure By 2002, Asia was a patchwork of liberalisation: to restructure or consolidate. The result was a flurry Australia, New Zealand, Hong Kong and Singapore of mergers and acquisitions, and the emergence of were fully opened; Cambodia, Taiwan, Thailand and new and less capital-intensive business models such Korea were opened extensively to local and foreign- as mobile virtual network operators (MVNO). With owned operators. With tremendous potential for deregulation, basic services became commodities. growth (See Table 2.) and telecom assets priced Thus, the choice of technology and new services attractively, Asia was driving the future global became potential sources of sustainable competitive growth. advantage. For example, Internet access provided new opportunities for businesses -- from small Although the region made rapid strides, there were offices to large enterprises -- as well as a new many challenges ahead. Inter-connectivity was a revenue source for service providers. problem in many countries. One of the greatest

13 Asia Spreads Its Wings, (1996/1997), International Business, December, pp.34 AsiaCase.com Page 7 the Asian Business Case Centre ABCC-2003-007

Table 2: Growth Potential for Asia’s Telecom Industry

(Figures indicate share in the world) 1990 2000 2010 Services Asia- Rest of the Asia- Rest of the Asia- Rest of the Pacific World Pacific World Pacific World Fixed 23 % 490 million 33% 905 million 46% 1.5 billion Mobile <1 million 7.70 million 170 million 490 million 1.1 billion 2.2 billion (13%) (35%) (50%)

Source: Martyn, W. and Uimonen, T. (2000/2001). Asia to drive telecom growth. Infoworld. P32B. challenges was billing - widely considered as the 664 in Q202 but the EBITDA had remained around competitive hub of service providers. It was billing the 35 percent mark. Between Q201 to Q202, the that enabled telcos to differentiate service packages EBITDA had declined from 37 to 35 percent.14 This and imprint the company's brand and personality trend set him thinking about developing tactical or on its products. Billing also served as a major strategic alternatives either for individual markets obstacle to managing higher volumes and the or for the Asian portfolio. Two thoughts occurred to introduction of new products and mobile data his mind: entry into mobile content business or services. mobile data service. With the setting up of Djuice, an Internet mobile portal, in December 2000 in Mobile penetration was all set to increase as Thailand and Malaysia, Jole had already moved operators resolved the billing problems with tactically. Although too early for comment, the innovations. Users in developing countries had Internet portal did not evoke a great response in no easy access to credit that was needed to sign Malaysia. As regards to the second, he was still up for a fixed-line or mobile telephone. The advent toying with the assessment of the potential, choice of prepaid calling cards attracted new users to of markets and entry mode. In March 2002, DiGi the industry. This was a boon for mobile operators announced the integration of network and who previously could not provide access to those infrastructure with Technology Research Industries whom they considered to present credit risks. This (TRI). resulted in a huge increase in the number of mobile users in developing and least developed countries that could now afford to have telephone MOBILE DATA SERVICES (MDS) service. According to the US FCC, Mobile data service (MDS) was the delivery of non-voice information to TELENOR IN ASIA a mobile device and included everything from paging messages to web access on a mobile phone Telenor ASA was pleased with Jole's achievements to e-mail delivery. Mobile data providers and their in Southeast Asia. Of the ten million subscribers corresponding devices were classified into three that the internationalisation had contributed to its general categories: (1) mobile telephone operators business by the end of Q202 (June 2002), 6.4 million offering services primarily on mobile telephone subscribers were from Asia. In addition, the handsets, (2) providers of mobile data access to successful turnaround of Malaysia's DiGi within a handheld PDA devices and laptop computers, and year after its acquisition in 1999 was another (3) paging carriers offering services on pagers and significant achievement. But the market in Malaysia two-way messaging devices. Recently, the types of had changed over the last two years as competition mobile data services available on mobile data had increased. He was not happy looking at the devices have become increasingly similar. These revenue and EBIDTAmargin data for Malaysia. Over include paging, SMS, web access, e-mail and the last six quarters from Q101 to Q202, subscriber corporate server access, location-based services, numbers, ARPU and revenue figures had confirmed and short-range data transmissions. During the past a clear trend: an increase in the first three quarters year, many mobile telephone carriers deployed but a decrease in the last three quarters. Revenue advanced wireless service network technologies had gone up from NOK 583 million in Q101 to NOK such as cdma2000 1xRTT and GPRS and the

14 TelenorAsia Private Limited, (2001), Presentation to Press. Page 8 AsiaCase.com ABCC-2003-007 the Asian Business Case Centre

industry started to grow.15 Estimates of the number playing games from its servers, access to the of mobile Internet users at the end of 2001 ranged latest news and music, and e-commerce. It's between 8 to 10 million,16 up from 2 to 2.5 million at subsidiary SingTel Mobile (SM) had extensive the end of 2000.17 Many mobile data operators had cellular experience: the firm started mobile begun upgrading their networks to allow for faster services on analog technology in 1988, introduced data access speeds and more advanced services.18 GSM 900 in 1994, and GSM 1800 the following As of March 2002, four nationwide mobile telephone year. SM employed about 600 people and had operators were offering mobile Internet access at 800 base stations supporting its mobile networks. speeds generally ranging from 25-60 kilobits per Being an incumbent attacker, SM positioned itself second ("kbps"), with maximum bursting rates up aggressively in the MMS market. It announced to 144 kbps for at least one carrier, in some portion that a specified number of MMS messages were of U.S. counties covering approximately 181 million allowed free to its subscribers.22 It also planned people.19 In addition, many handheld personal digital to convert unused SMS into free MMS messages. assistant ("PDA") devices20 now provided for It kept the competitors guessing by not revealing connection to the mobile Internet. the price of MMS services. Speculation was rife that it would peg the price of a MMS message to that of a SMS, which was charged at S$0.05 per THE SINGAPORE SCENE message. However industry analysts were of the opinion that consumers could expect the service Singapore Telecommunications Ltd. (SingTel), to cost about 10 (S$ 0.50) to 20 (S$1.00) times MobileOne Asia Pte Ltd (M1) and StarHub provided the SMS price.23 mobile services in Singapore. In June 2002, SingTel had a market share of 1.5 million subscribers, M1 In June 2002, SingTel launched the market's first with 1 million subscribers was in 2nd position and corporate MDS.24 For a monthly fee of S$28, StarHub with more than 507,000 subscribers was in BizLive, its MDS corporate customers received the third position. reports from Reuters newswire on their mobile phones with access to six channels on world, Singapore Telecommunications Ltd business, technology, sports and entertainment news, as well as stock quotes, and information on Originally a government-owned monopoly operator, markets and companies. GPRS users could choose SingTel dominated both the voice and data services to receive headlines, complete news articles, ticker markets. On the voice front, it provided local and information or full stock quotes. Announcing the international voice circuits, supported by directory service, Lim Chuan Poh, SingTel's executive vice- assistance. On the data side, SingTel provided president for corporate business, said: International Leased Lines, Local Leased Lines, Video Conferencing, Frame Relay, International BizLive is not just another news and Virtual Private Networks, Packet Switching and information service for mobile users. VSAT. It added island wide ADSL coverage, which Unlike the others, it has the unique enabled subscribers to surf the net at speeds of up capability of allowing users to customise to 5.5 Mbps21 and provided access to various their information requirements quickly multimedia services including video-on-demand, and with ease.

15 For purposes of this case study, "advanced wireless services" is used to describe the next-generation mobile network technologies of GPRS and cdma2000 1xRTT (also referred to as "cdma2000 1X" or "1xRTT"). This term is used because there is debate in the industry as to which next-generation mobile network upgrades constitute "3G." Third Generation, or "3G," generally refers to high-speed advanced mobile data services and the next generation of technologies - beyond current 2G technologies- that will make such services possible. 3G speeds are expected to reach 2 megabits per second ("Mbps") from a fixed location, 384 kbps at pedestrian speeds, and 144 kbps at travelling speeds of 100 kilometers per hour. 16 FCC Section II.B.1.a, Mobile Data Domestic Developments, and note infra. 17 FCC Section II.B.1.a, Mobile Data Domestic Developments, infra. 18 See Section II.B.2.a, Mobile Data Mobile Telephone Sector, infra. 19 See Section II.B.1.a, Mobile Data Domestic Developments, infra. 20 The terms "PDA," "handheld," "handheld PDA," and "handheld device" are used interchangeably. 21 Mega Bits Per Second. 22 SingTel subscribers, depending upon their subscription plan got 360 to 700 SMS free. 23 Tan, O.B., (2002), Mutlimedia Messages Will Be Free, The Straits Times, 24 June. 24 Business Times (2002), SingTel launches Corporate Mobile Data Services, 5 June. AsiaCase.com Page 9 the Asian Business Case Centre ABCC-2003-007

MobileOne (M1) StarHub

MobileOne was formed in 1994 and obtained its Formed in 1997, the StarHub consortium combined mobile license in 1995. It was a consortium of two the considerable resources of two global government-linked companies (Keppel Group and telecommunication giants, Nippon Telegraph and the Singapore Press Holdings, each owned 35 Telephone (NTT) and British Telecommunications percent) and two overseas telecom firms (the (BT) with a local government-linked firm, Singapore remaining 30 percent was owned equally by Cable Technologies Telemedia (STT). According to & Wireless and Hong Kong Telecom). Within a few StarHub management, the new firm acquired both weeks of the April 1, 1997 launch of its GSM 900 fixed and mobile licenses because it predicted a network, M1 captured a spectacular 10 percent demand for seamlessly integrated communications share of the local market, which rose to 20 percent services. In 2002, it extended network capability by the end of 1997 and 30 percent in the following through a merger with the cable television firm year. M1 provided paging services and to date, it Singapore Cable Vision (SCV). operated only in Singapore. STT, a telecommunication arm of diversified M1 showed profit in its second full-year operation. Singapore Technologies (ST), was the largest Its current strategy focused on building share technology-based local conglomerate with through promotional marketing and strengthening core businesses in technology, engineering, customer relationships, mainly by emphasising infrastructure, property and finance. Active in the service quality rather than price. It intended to attract local and regional telecommunications arena, its an older, more loyal subscriber base. As has become stake was estimated at S$800 million. Its wide- common in mature markets, Singapore operators ranging interests included cable television, Internet, subsidised mobile terminals to attract new mobile data, mobile satellite, paging, GSM cellular subscribers. In February 1999, the rivalry services, satellite uplink/downlink and trunked degenerated into an impromptu skirmish. SM mobile services. With counterparts in China and announced price cuts and free calls, and after M1 Thailand, STT was a member of the Asia Pacific responded by matching its new terms within hours, Mobile Telecommunications Satellite project which SM offered a new loyalty program that was not yet aimed to deliver both voice and data services approved by the regulators, resulting in a public through telecommunications satellite by 2000. STT warning from regulators. M1 offered international also provided knowledge of local market conditions. calling service from land lines as well as mobile. It Despite a late start, its ST SunPage managed to also offered MMS and had tied with vendors for capture more than 120,000 Singapore paging MMS-enabled phones. According to CEO Neil customers. Montefiore, M1 invested around S$ 3 to 4 million and hoped to increase the current revenue per StarHub's other partner, NTT invested heavily in the customer per month from S$60 to S$65 by 5 to 10 overseas carrier businesses with a focus on Asian percent. M1 expected that MMS-enabled phone markets. It had extensive knowledge of 3G (W- take-up rate to be around 15 percent in the first CDMA) technology for high-resolution video and year.25 As an interim move, M1 deployed Nokia high-speed Internet connections as well as voice technology to increase mobile data speeds to more and fax service at speeds of up to two megabits per than 100 kbps. According to Montefiore, second (Mbps) through its subsidiary, DoCoMo. "Singaporeans are very fast adopters of text and data services. In February of this year, M1's network Consumer behavior carried the world's highest number of text messages per customer." This traffic, at more than three Singapore was relatively advanced in the adoption messages per day, was partly due to the M1 alliance of mobile communication. With over 70 percent with Citibank, which delivered mobile banking penetration and 100 percent interoperability, low services via SIM2 capabilities on a Startac mobile priced SMS had created a phenomenal growth of phone issued to banking clients. messaging services. The national average touched

25 M1 Sees Growth in Mobile Usage Despite Saturation, Business Times, (2002), 18 June. Page 10 AsiaCase.com ABCC-2003-007 the Asian Business Case Centre

85 SMS per month per user. Youngsters dominated for voice services had heated up and in a bid to the usage as 83 percent of the consumers were retain existing customers and build loyalty SM below 35. According to market research firm Meta offered a free second wireless line with a year's Group Inc, many operators around the world subscription free and monthly talk time of thirty expected it to contribute between 12 and 22 percent minutes. In other words, Singapore was headed for of total sales. Yet in 2002, share of SMS was only price driven competitive regime. With no 6-8 percent of total revenues, mainly because infrastructure, Telenor had to become either a virtual subscribers expected it free.26 operator like Virgin or enter strategic alliances with existing players. M1 was planning to go for an IPO To develop an account of consumer behaviour, a in the late 2002 but the capital market conditions survey was made of 292 existing mobile subscribers were not favourable, which might be an entry choice. between 15 to 40 years. Half of them had used MDS, at the least, once a month. Messaging services, such as, logos, pictures and ring tones were favourites THE MALAYSIAN SCENE among all age groups and the demand (frequency of use) was closely related to age; the youngest With solid economic growth and rising living used them most. Table 3 shows the proportion of standards, the Malaysian telecom market showed various messaging services downloaded by promise. Its per capita expenditure on Singaporeans. telecommunication services grew by 23 percent between 2000 to 2001. Mobile penetration was Of the total number of respondents, nearly 26 strong as subscriber numbers doubled every 18 percent used SMS, 33 percent made telephone calls months. By 2002, approximately 30 percent of and 41 percent used the Internet. For Singapore, Malaysians had mobile phone, in other words the study recommended movie-guide via SMS as 7,000,000 people. Of which, 53 percent had already a new push service and banking as a pull service used MDS. At an average volume of 24.9 messages for people aged 20 years and above. Cinema and per person per month, it ranked fifth in Asia.28 On event ticket reservation was a pull service that average, the Malaysian consumer had less income interested subscribers below 30. News was favourite than the Singaporean consumer, but their monthly for subscribers above 30 years old. Many mobile phone bill was the same. In other words, a respondents said they could see themselves higher percent of total spending was used on mobile downloading news and sports-results. Exhibit 1 phones. Another important feature of the Malaysian sheds light on the new services that were of interest market was the potential for voice traffic between to subscribers. Malaysia and Singapore, particularly for a cross- border city like Johor and other commercial cities. To Jole, Singapore offered a profound opportunity Its potential was expected to increase further when but the market was already crowded. Competition the regulators enforced interoperability.

Table 3: Messaging Services Downloaded by Singaporeans27

Service downloaded Singapore (%) (Once a month or more often) Ring-tones 42.3 Logos 37.9 Picture messages 27.8 SMS-chat rooms 18.4 SMS-jokes 18.3 Horoscope 11.3

26 SingTel 6%, M1 6%, StarHub 7%, Virgin Mobile 8%, (2002), 'Hotlines,' The Straits Times, 1 April). 27 Interns' survey, (2002), pp48. 28 Rao, M. (2001), 'Asian Mobile Operators Cash in on SMS Success, Internet Convergence,' MMS Summit, Singapore, 14 December. AsiaCase.com Page 11 the Asian Business Case Centre ABCC-2003-007

The Malaysian telecom market, crowded with five products for homes users included basic telephony, operators (See Table 4), was headed for cellular, card, Internet and data services. TM's consolidation. DiGi was working with Technology strategy focused on increasing market share in Resource Industries (TRI), a second largest phone cellular telephony. With nearly 2 billion Ringitt in company in Malaysia and announced in March 2002 cash, TM needed to be aggressive in building large that it would set-up a joint venture with TRI to bid scale operations. Recently, it pushed the takeover for the 3G license. Most analysts expected that the of Celcom, the second largest mobile operator in leading operator Maxis would absorb Time, ranked Malaysia despite serious objections from its fifth with five percent market share in due course.29 overseas partner Deutsche Telecom. It sold the mobile arm, TM Cellular to Celcom in return for its Table 4: Mobile Operators in Malaysia shares worth RM 1.68 billion. Secondly, it also bid and won a 3G license at the same price that of Operator Market Share (%) Maxis.33

Maxis 35% The telecom industry consolidation put DiGi in a DiGi 18% tight spot by creating two dominant players (Maxis Celcom 32% and TM) with larger market share and operational Time 5% scale. As a result, competition was likely to increase and shift further toward price based, which normally TM 10% affected the profitability and free cash-flows. It put DiGi under further pressure to develop new Maxis Communications (Maxis) strategies or enter the price-based competition.

Maxis started operations in 1995 and aspired to be Competition the most preferred and successful Malaysian communication group. By 2001, it had over 2.3 Low entry barriers and technological obsolescence million subscribers with more than 30 percent share were major threats to the competitive advantage of the Malaysian wireless market. It was a leading offered by MDS to wireless operators. Anybody with brand with the highest ARPU of US$29, the lowest technology could set-up facilities on a rival churn rate, and an astonishing EBITDA of 35 percent operator's network and provide MDS. As of today, per annum.30 In 2001, Maxis' revenues exceeded economies of scale did not exist. Brand awareness RM 3 billion and reported a net profit in each of the was low. Therefore, competition might increase in last three years. Its revenue for the half year 2002 the future as both Maxis and TM had already entered increased to RM 1.8 billion, profit after tax was RM. the fray while implementing 3G. Maxis, having listed 494 million and EBITDA was RM 934 million. In mid- was looking for financing options and TM had the 2002, it was awarded 3G network license by the financial resources to implement 3G network before Malaysian Communications and Multimedia 2003. Of the three 3G licenses, the regulator had Commission (MCMC) at a fee of US$ 13 million.31 awarded only two licenses, one to Maxis and another Around the same time it was listed on the Kuala to TM. Technological superiority of 3G could render Lumpur stock exchange and looking for 2.5 technology based MDS obsolete. infrastructure investment opportunities.32 On the other hand, industry analysts also felt that Telekom Malaysia ( TM ) the 3G network was not likely to be ready before 2008/2009. Delays in licensing and implementation Incorporated in 1984, TM was Malaysia's state run of 3G were also reported from other countries. pioneer operator with a vision to be a world class Another factor that might impede was the roll-out telecommunications company providing total of new handsets that supported the new generation customer care. Its principal activity was technologies. As of 2001, only 2.8 percent of establishment, maintenance and provision of consumers had such handsets. Furthermore, only telecommunications and related services. Its current 20 percent of Malaysian respondents said they would

29 Jayasankaran S., (2002), Survival Tatic, ‘Far Eastern Economic Review,’March 28, pp. 49. 30 Matthew Montagu-Pooock. (2002), ‘Malaysia shines against the odds,’ Asianmoney, Jul. 31 Marshall S., (2002), ‘The Malaysian Model’ Communications International, September, pp. 37. 32 Maxis Communications Bhd, website. 33 The Straits Times, (2002) ‘Telekom Goes Ahead with Takeover of Celcom,’29 October. Page 12 AsiaCase.com ABCC-2003-007 the Asian Business Case Centre

upgrade within the next year, which indicated that agreements were structured unfavourably to deal there would not be great demand for more advanced with them at difficult times. Third, the reporting services and simple GSM and SMS-based mobile system was hierarchical and managers based in data services might serve the market's present Asia had to communicate with senior managers needs. The scenario would change if leading in Honolulu who would in turn report to decision operators like Maxis and TM subsidised the handsets makers. Therefore, management attention and and enticed the customers to upgrade. involvement in the joint venture (JV) was low. For Telenor, it was different because the head of Consumer behaviour Telenor Mobile was a member of its board. It helped them to solve issues and make investment A survey of the Malaysian market focused on 15 to decisions in less than 24 hours. It had only three 40 year-olds. The youth market was important layers between the CEO and the Head, Asia- because 61 percent of the Malaysian population was Pacific. It was critical for Telenor as most of its below 30 years of age, and the long-term potential partners were family businesses and did not report for the wireless market in this segment was strong. to any one and made decisions over the table. Also, young people tended to adopt new technology, Fourth, its involvement in the JV was also methods of communication and services. Half the different. The company worked with its local mobile phone users in Malaysia used MDS at least partner on a regular basis and spent an enormous once a month. Table 5 presents the proportion of amount of time and effort to build strong various messaging services downloaded by relationships. Some of it was built over 'thinking Malaysians. The demand potential for these services dinners.' They became a regular part of work to varied according to age, as presented in Exhibit 2. arrive at or revise decisions. In addition, at DiGi, an operational committee was set-up to deal with Table 5: Messaging Services day-to-day issues. Therefore, Telenor adopted a Downloaded by Malaysians different approach to Asia. Its philosophy of partnership and joint venture formation was Service downloaded Malaysia unique in the sense that it always looked for (Once a month or more often) (%) opportunity to add value to the partnership or Ring-tones 52.8 strategic alliance after acquisition of the control. Logos 43.1 Fifth, Telenor's strategy in the last few years was Picture messages 40.8 to hold majority stake in JVs and all efforts would SMS-chat rooms 45.1 be made to acquire controlling stake and achieve SMS-jokes 26.8 it eventually. Telenor insisted on controlling the Horoscope 15.5 stake in their joint ventures. Commenting on its philosophy, Mr. Jole said:

ALLIANCE LOGIC - THINKING DINNERS Although we insist on having controlling stake, the voting power was not used Telenor ASA was pleased with Jole's achievements to force or influence decisions on our in Southeast Asia. With the setting up of an Internet joint venture partners. We are aware mobile portal, in December 2000 in Thailand and that our partners are more influential Malaysia, he had already moved tactically. However, than we would ever become. We are the new Internet portal did not evoke a great only foreign guests in Malaysia. We response in Malaysia. Regarding the MDS issue, need to be very humble. This is one he was still assessing the revenue potential, choice reason why we are able to extend of markets, and entry mode. tremendous influence on our partners reason why we are able to extend Jole had learnt many lessons in the early stages of tremendous influence on our partners Telenor ASA's internationalisation in 1990. He had that the voting power or investment the benefit of working with a Goliath like BT in the cannot extend. development of overseas ventures in Germany and Sweden. In addition, Jole had observed the global It was so wedded to the policy of holding majority telecom operators enter and exit Asia and had learnt stake and if there was no path, then Telenor would many new lessons from their experiences. First, to start divesting. By 2002, Telenor had a portfolio of all those global telecom operators, the stakes in three operators (See Table 6), which contributed to Southeast Asia were quite small and the interest over 60 percent of number of international was minor. Second, some of the shareholders' subscribers for the parent company Telenor ASA. AsiaCase.com Page 13 the Asian Business Case Centre ABCC-2003-007

JOLE'S OPTIONS Lynch analysts believed that SMS would peak in 2004, when MMS would become the main platform The telecommunications industry, caught between for data and messaging services in the 3G the forces of globalisation and radical changes in environment. To Jole, these forecasts were core technology experienced a long cycle of crisis. extremely motivating to explore the introduction of The consulting industry that served it was bullish MDS. Having evaluated the previous market on the future of MDS. Ovum (2002)34 predicted that opportunities and investing on their attractiveness by 2005, the majority of 3G connections would be on stand-alone basis, he had to develop a strategy located in Asia-Pacific and in North America, where for sustaining market share, profitability and creating the Yankee Group (2002)35 reported that more than value for the stakeholders. 800,000 Americans are accessing financial information over their wireless devices, while half With low wireless penetration rates and high potential of these had actually completed wireless of the road warriors, Malaysia offered tremendous transactions. Triangle (2002)36 saw that MDS usage scope for MDS. With Telenor's high emphasis on per subscriber increase four-fold over a five-year profitability and free cash-flows, offering value added period from 8 services to 32 services per week by services, branding and product differentiation were 2007. And the non-profit UMTS Forum -- which some of the features that Jole felt were critical. At backs the UMTS 3G standard-- projected that 3G RM1 per service, MDS offered a huge potential. services would reap cumulative revenues of US$1 trillion worldwide by 2010, with data services On the other hand, Singapore was ripe for generating more revenue than voice, with the location-based MDS services. Gartner saw biggest opportunities in the Asia-Pacific. Merrill Singapore as a lead market. (See Table 7.) But,

Table 6: Telenor Mobile –Portfolio Companies in Southeast Asia (SEA)

Market Population Ownership Subscriptions Subscriptions Company (millions) (%) (000s) 2000 (000s) 2001 Bangladesh 131 46.41 191 461 Malaysia –DiGi 23.8 61.00 824 1.039 Thailand 61.2 40.30 1.043 2.738 Total Asia 2.418 4.241 Source: Telenor Asia Pacific Limited.

Table 7: An Analysis of Mobility Opportunities Projected Regional Perspective for Asia-Pacific

Cellular Future Growth Potential Sr. No Country Penetration MOBILITY APPLICATION 1 Hong Kong 50 + percent High High 2 Singapore 30 + percent Medium Medium 3 Korea Nearly 40 percent Medium High Taiwan 30 percent Medium High 5 Malaysia 10 + percent Low Low 6 Philippines Below 10 percent Low Low Indonesia Thailand China India

Source: Adapted from Kenshi Tazaki, director and principal analyst, Telecommunication Industry Services, Dataquest, Gartner Group Japan K.K., Workshop presentation on Wireless Internet in Asia Pacific.

34 http://www.ovum.com/ 35 http://www.yankeegroup.com/ 36 Triangle Consult, UK,. (2002), Consumer Mobile Data Services: Assessment, Forecast 2002-2007 & Commercial Recommendations for the European Market Page 14 AsiaCase.com ABCC-2003-007 the Asian Business Case Centre

Telenor needed infrastructure to offer these company that could deal with both the Singapore services in Singapore. He had many options for and Malaysian authorities, and this might present entry into Singapore: build, lease facilities, a major barrier. As the Malaysian market operate like a MVNO, establish a joint venture or consolidation gathered momentum, Jole had to enter into strategic alliances. M1 was reportedly decide on the options and his medium term up for sale. But it would be difficult to establish a strategies for Asia. AsiaCase.com Page 15 the Asian Business Case Centre ABCC-2003-007

EXHIBIT 1

MARKET SEGMENT AND DEMAND FOR NEW MDS IN SINGAPORE Age groups in Singaporeans interested in using new mobile data services (once a month or more often)

New mobile data services 15-19 20-24 25-29 30-40 Above 40 Banking services 42.6% 54.9% 67.3% 59.5% 55.8% Stock exchange 20.4% 20.9% 35.7% 38.1% 21.4% Foreign exchange rate 14.8% 18.7% 27.3% 31% 25.6% SMS-movie guide 63% 60.4% 55.4% 29.3% 20.9% Street directory 41.5% 49.5% 50.9% 41.5% 27.9% Taxi booking 27.8% 50.5% 51.8% 43.9% 23.3% Ticket reservation 53.7% 57.1% 58.2% 36.6% 16.7% Restaurant guide 25.9% 37.8% 37.5% 31.7% 20.9% Yellow pages 43.4% 42.2% 43.6% 46.3% 27.9% Sports results 48.1% 36.3% 36.4% 39% 23.8% SMS News 53.7% 50.5% 39.3% 63.4% 48.8% Mobile payment 51.9% 57.1% 50% 51.2% 32.6% Car park payment 20.4% 25.6% 40% 31.7% 16.7% Flight information 16.7% 22% 23.2% 26.8% 18.6%

EXHIBIT 2

MARKET SEGMENT AND DEMAND FOR NEW MDS IN MALAYSIA Age groups of Malaysian interested in using new MDS (once a month or more often)

New mobile data services 15-19 20-24 25-29 30-40 Banking services 39.1% 45.9% 68.8% 50% Stock exchange 17.4% 25.7% 50% 41.7% Foreign exchange rate 21.7% 31.9% 25% 25% SMS-movie guide 43.5% 53.4% 58.8% 27.3% Street directory 30.4% 46.6% 56.3% 33.3% Taxi Booking 26.1% 32.9% 25% 41.7% Ticket reservation 43.5% 43.8% 64.7% 16.7% Restaurant guide 26.1% 23.3% 37.5% 25% Yellow pages 43.5% 35.6% 31.3% 41.7% Sports results 43.5% 28.8% 41.2% 33.3% SMS News 39.1% 50.7% 58.8% 58.3% Mobile payment 47.8% 61.6% 75% 33.3 Car park payment 17.4% 24.7% 31.3% 18.2% Flight information 8.7% 30.1% 31.3% 33.3%

(The age-group finding the service most interesting are highlighted)