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DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained. September 2012 Issue 76 Asia Pacific Telecommunications INSIGHT BMI’s monthly market intelligence, trend analysis and forecasts for the telecommunications industry across Asia Pacific

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

Editorial Office: 85 Queen Victoria Street, London EC4V 4AB, UK Tel: +44 (0)20 7248 0468 Fax: +44 (0)20 7248 0467 www.businessmonitor.com www.telecomsinsight.com Australia Asia Telecommunications

operators are eyeing the domestic 3G market, and we believe that launching localised services will not only encourage consumers to AUSTRALIA sign up for data services, but also lessen the threat of OTT providers. Site Sharing To Boost VHA’s Private Companies Cannot Do It Alone The Asia Cloud Computing Association (an organisation compris- and Optus’s Networks ing firms such as Alcatel-Lucent, Cisco, Dimension Data Asia Vodafone Hutchison Australia (VHA) and Optus signed a bind- Pacific, Rackspace and Telstra International) announced a Cloud ing Memorandum of Understanding in May to expand their current Readiness Index in September 2011, which ranks 14 Asian countries. network joint venture agreement, which would lower the cost to The index looks at criteria and conditions required for the successful challenge the resurgence of mobile market leader Telstra. This implementation and uptake of cloud computing technology through development chimes with BMI’s core view that telecoms opera- 10 key attributes, which affect how products and services can be tors would seek network-sharing opportunities in spite of intense offered, delivered and consumed by the market. competition due to the benefits. Developed countries scored well due to strong underlying infra- Resurgent Telstra Is Cause For Concern structure (quality of broadband and power grid as well as interna- Australia Mobile Subscribers By Operator (‘000) tional connectivity) and an environment conducive for businesses 14,000 and cloud developments (for example, regulatory conditions, data 12,000 protection policy, government prioritisation and business efficiency index). While emerging markets generally fared poorly in several of 10,000 these aspects, the situation could be improved if the governments 8,000 are able to provide more support in addition to efforts from the private sector. 6,000 Despite their relatively low readiness, BMI believes that the 4,000 growth potential in emerging markets should attract companies to Telstra invest in the technology. The Asia Cloud Computing Association Optus 2,000 reckons that worldwide spending on cloud services is expected to Vodafone Hutchison Australia 0 10 11 10 11 10 10 11 11 09 10 11 10 11

reach US$150bn by 2014, and the spending on cloud computing is ------Apr Oct Apr Oct Jun Jun Feb Feb Dec Dec Dec forecast to reach 30-40% of IT budgets by 2013. While the gov- Aug Aug ernments in emerging Asia are starting to create a cloud-friendly Source: Operators, BMI environment, the progress often hampered by slow policy reform and a lack of coordination with the private sector. 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 International Data Broadband Government Power Internet Business Global ICT Index Rank Conditions Connectivity Protection Quality Prioritisation Grid Filtering Efficiency Risk Develop- Score Policy Quality Index ment Japan 8.7 9.0 10.0 8.0 8.2 9.0 10.0 6.8 6.5 8.4 85 1 Hong Kong 7.5 9.0 10.0 6.4 8.4 9.2 10.0 9.3 5.0 8.4 83 2 South Korea 8.7 7.0 10.0 9.0 8.6 8.4 7.5 6.4 8.0 8.8 82 3 Singapore 10.0 9.0 6.0 5.6 9.4 8.9 7.5 8.9 8.0 8.3 82 4 Australia 10.0 6.0 8.0 5.3 6.6 8.0 10.0 8.1 8.0 7.7 78 5 Taiwan 6.2 8.0 10.0 5.4 7.3 8.2 10.0 7.8 5.0 7.7 76 6 New Zealand 7.5 4.0 10.0 5.3 8.7 6.9 8.7 7.5 6.5 8.2 73 7 Malaysia 7.5 6.0 6.0 4.7 8.8 7.6 10.0 6.5 5.0 6.3 68 8 China 8.7 9.0 2.0 4.9 5.2 7.0 6.2 6.3 5.0 5.7 60 9 India 6.2 6.0 6.0 4.7 6.6 4.1 7.5 5.9 2.0 4.2 53 10 Thailand 5.0 5.0 2.0 5.0 4.1 7.6 7.5 6.6 2.0 5.7 51 11 Indonesia 7.5 4.0 6.0 4.6 4.3 4.8 8.7 3.3 2.0 5.0 50 12 Vietnam 7.5 5.0 4.0 4.5 3.5 4.8 3.7 5.0 5.0 5.5 48 13 The Philippines 5.0 5.0 2.0 4.6 3.7 4.5 7.5 5.1 2.0 5.4 45 14 Source: Asia Cloud Computing Association

2 www.telecomsinsight.com New Zealand Asia Telecommunications

(US$405,505) construction cost. Optus has announced that the expanded deal with VHA will bolster its new mobile sites by about Equal Fight 960, thereby strengthening its 3G and 4G networks. Meanwhile, New Zealand Mobile And Fixed Broadband Market Shares (%), June 2011 VHA will have approximately 1,800 new sites (after incorporating 120% Others 2degrees 400 Optus sites, the 500 new shared sites and 900 sites from its 3 TCNZ Vodafone NZ mobile network). The new agreement is subject to the Australia 100% Competition and Consumer Commission's approval, but we do not 80% expect any opposition. BMI previously reported that Telstra finished 2011 strongly 60% by gaining 1.699mn mobile subscribers (see 'Telstra's Recovery

On Track’, February 10), which dwarfed Optus's net addition of 40% 444,000 and VHA's net loss of 554,000, and we believe that the network-sharing agreement highlights the two companies' intent to 20% catch up with Telstra. There are several benefits arising from the closer cooperation 0% between the second- and third-ranked mobile operators. Firstly, the Mobile Fixed Broadband two companies will be able to bolster their 3G network coverage and Vodafone NZ’s fixed broadband market share includes TelstraClear’s 16%. Source: Commerce Commission better challenge Telstra, which has the widest network in Australia. At present, smartphones and tablet computers that depend on 3G In the past year, Telstra has been restructuring its operations in connectivity are the main revenue drivers for the Australian telecoms light of the changing Australian competitive landscape, driven by industry. It is necessary for operators to ensure that they have suf- the country's National Broadband Network project. Telstra was ficient network capacity and coverage to cope with the burgeoning the first Australian mobile operator to launch LTE services, and it data demand to prevent loss of the revenue opportunity. Secondly, has been aggressively expanding into new high-growth businesses Telstra has taken a lead in the 4G market by rolling out commercial such as cloud computing and machine-to-machine, in addition to LTE services in September 2011. Sharing telecoms infrastructure key overseas markets (India, Japan and Singapore). should accelerate the efforts of VHA and Optus to deploy their own The allure of New Zealand has been fading in light of the coun- 4G services. Thirdly, cost savings should allow the firms to channel try's limited growth potential and the distraction it has on Telstra's capital into areas that could boost revenues. VHA is already burdened overall financial position. Additionally, the sale of AAPT's consumer with a hefty network upgrade bill following complaints about poor arm to iiNet by TCNZ in September 2010 meant that there is less network performances. Similarly, Optus slashed 750 jobs, almost incentive for Telstra to remain in New Zealand as a defensive 8% of its total workforce, in early May to improve efficiencies. mechanism. The transaction is expected to complete in Q412, subject to the ap- proval by the New Zealand Commerce Commission, the Ministry of NEW ZEALAND Business, Innovation and Employment and the Overseas Investment Office. While the acquisition means that there is one less player in Stronger Vodafone NZ To the market, we still expect regulatory approval since Vodafone NZ Challenge TCNZ will be able to better challenge TCNZ in the fixed telecoms industry. Vodafone New Zealand (Vodafone NZ) and Telstra announced INDONESIA 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 transac- Telkom's Pacnet Bid May Not tion is a good deal as Vodafone NZ will be in a better position to compete with Telecom Corporation of New Zealand (TCNZ) on Yield Expected Results multiple fronts while Telstra will be able to focus on restructuring Telekomunikasi Indonesia (Telkom) has reportedly submitted its main Australian operation. a bid for submarine cable operator Pacnet as the Indonesian firm While Vodafone NZ is the country's leading mobile operator, looks to reinvest profits generated from its domestic telecoms busi- it lags behind TCNZ in the fixed-line sector, particularly in terms ness. While acquiring Pacnet should boost Telkom's international of network infrastructure. The acquisition of TelstraClear fills the recognition among other benefits, we are concerned about Telkom deficit, which will bolster Vodafone NZ's presence in the enterprise gaining significant exposure to the submarine cable industry, which market, and allow the operator to offer a stronger telecoms solution is experiencing intense competition and declining prices. in the retail sector. As previously highlighted, Vodafone NZ will Telkom is a dominant player in the Indonesian telecoms market have approximately 29% of the fixed broadband market, up from with strong market positions in the mobile, fixed-line and broadband 13% before the acquisition, thereby closing the gap with leader sectors. Through its subsidiary Telekomunikasi Selular (Telkom- TCNZ, which had 49% market share (as of June). sel), Telkom has about 40% market share in Indonesia's mobile TelstraClear's sale price of NZD840mn well exceeded analysts' industry. While the mobile penetration rate has almost reached valuations, which ranged from NZD350-425mn, according to the 100%, we believe that the market still possesses substantial growth Australian Financial Review. Telstra has announced that it will opportunities with prepaid being the main form of mobile subscrip- return about NZD490mn in cash to Australia via a pre-com- tion. Furthermore, 3G services have yet to gain traction, and mobile pletion dividend, and it will be incremental to its previously stated operators are stepping up efforts to spur adoption. Telkom reported guidance for excess free cash flow of AUD2-3bn. that Q112 revenues from mobile and internet services increased by www.telecomsinsight.com 3 Timor-Leste Asia Telecommunications

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%. TIMOR-LESTE With a strong position in the Indonesian telecoms industry, it is no surprise that Telkom would look to overseas markets and inor- New Licences To Introduce ganic growth for more revenue-generating opportunities. Telkom wanted to purchase Cambodian mobile operator CamGSM but Competition cancelled the plan reportedly due to differences in valuation. BMI The Government of the Democratic Republic of Timor-Leste has an- believes that acquiring another telecoms operator would be one of the nounced the award of two new telecommunications licences, ending more conservative means of expansion as it leverages on Telkom's the monopoly of Portugal Telecom-owned Timor Telecom. The expertise, but potentially attractive targets in South East Asia are two licences have been issued to Viettel Global Investment and PT limited. Frontier markets such as Myanmar hold significant long- Telekomunikasi Indonesia International (Telin). BMI expects the term prospects but they carry equivalent risks. competitive dynamic introduced by the licensing of new operators to benefit consumers. However, given the small size of the market, Domestic Business Fuelling Expansion Ambition we consider Timor-Leste to hold limited potential for operators. Telkom Financial Results (IDRbn), 2010-2012 19,000 3,500 The government initially awarded the licence to Digicel Pacific Limited, which has considerable experience operating in develop- 18,500 3,000 ing small island markets across the Caribbean, and Telin. Digicel 18,000 2,500 had committed to launching GSM and 3G services to cover 91% of 17,500 2,000 the population within four months. However, it was announced on 17,000 July 11 that Digicel has withdrawn its application without providing 1,500 16,500 a reason. According to the tender process rules in the Request for 1,000 16,000 Applications of April 12 2012, the applicant with the next highest score would be awarded the licence. In this case, it was Viettel, 15,500 500 which had scored 0.5 points less than Digicel out of 100 points. 15,000 0 10 11 10 11 12 10 11 10 11 Viettel is committed to provide initial GSM and 3G coverage of ------Jun Jun Mar Mar Mar Dec Dec Sep Sep 93% of the population and 95% in the next three months. Meanwhile, Telin has committed to launching services in under six months, with Revenue Net Profit RHS GSM and 3G access for 94% of the population. Given Viettel's ex- Source: Telkom perience in emerging markets and Telin's experience in Indonesia through sister company Telkomcel, we have a positive outlook for Pacnet owns the EAC-C2C submarine cable network that spans the commencement of services in Timor-Leste. 36,800km between Hong Kong, China, South Korea, Japan, Taiwan, Limited Opportunities Despite Liberalisation the Philippines and Singapore. Pacnet's network was extended across Timor-Leste Mobile Market Forecast, 2009-2016 the Pacific Ocean via the EAC Pacific, which connects Chikura, Ja- 900 70 pan to Los Angeles and other Points of Presence in the US. In April 800 2011, Pacnet expanded its network reach to Chennai, India through 60 700 the i2i cable system. The firm is also expanding its data centre and 50 cloud business, and it announced in May that it will triple the capac- 600 40 ity of its data centre in Sydney over the next year. 500 Telkom's CEO has said that the firm aims to invest in fibre 400 30 300 optic cables in order to improve connection speeds and it is open 20 to mergers and acquisitions. BMI believes that Pacnet would fit 200 10 the bill, and acquiring the submarine cable operator would raise 100 Telkom's profile in Asia Pacific. Further, the submarine cable busi- 0 0 2009 2010 2011 ness is highly related to the telecoms industry. However, the two 2012f 2013f 2014f 2015f 2016f businesses are distinct, and Telkom does not have prior experience Number of Cellular Mobile Phone Subscribers ('000) LHS Number of Mobile Phone Subscribers/100 Inhabitants RHS operating a submarine cable network. Telkom could allow Pacnet to maintain full autonomy but it would defeat the purpose of gain- f = BMI forecast. Source: BMI, ITU, Portugal Telecom ing full ownership. It is common for telecoms operators to invest in submarine cable Portugal Telecom reported it had 616,000 subscribers in Timor- networks, but they tend to form a consortium to reduce costs and Leste at the end of March 2012, up 16.8% y-o-y. Based on this figure, risks. The entry of telecoms operators has also increased international Timor-Leste had a mobile penetration rate of just over 53% in Q112. bandwidth, resulting in declining prices. Like the telecoms sector, BMI forecasts penetration will rise to over 58% at YE16, a forecast the submarine cable market is capital-intensive, and Telkom could we previously upgraded when the end of Timor Telecom's monopoly suffer as it tries to grow the two businesses. 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 consum- ers through both lower prices and service innovation. Timor Tel- ecom reported EBITDA margin of 55.7% in Q112, which is high

4 www.telecomsinsight.com Malaysia Asia Telecommunications

for mobile markets, and indicates there is significant potential for a good market in which to start operations. While the market seems downward movement in prices with the introduction of competition. a little crowded, FRiENDi's long experience in offering services In terms of service innovation, with all three providers expected to as an MVNO should see it find success in the Malaysian market. offer 3G mobile broadband services by Q113, the data market has KPS has invested in the mobile market through its subsidiary strong growth potential from a reasonable base – Timor Telecom Perangsang Telco Sdn Bhd, which has entered into a partnership reported 17.7% of mobile service revenue derived from Q112 data. agreement with FRiENDi, Samena Telecom Limited and Ceres Meanwhile, the government of Timor-Leste is also considering Telekom Sdn Bhd through a 30% equity stake in Ceres. The com- benefits beyond the consumer market, with ICT service availability pany's entry into the Malaysian market can be immediate as Ceres to medical clinics, schools, agricultural management and other social already holds the licences needed to launch services. FRiENDi areas outlined as an important benefit. believes there is still significant opportunity to take a leadership BMI shares the Timor-Leste government's outlook for the position in Malaysia's MVNO sphere, stating both the FRiENDi contribution of competition to social goals and consumer welfare. and Virgin Mobile brands would be used in the launch. However, we believe that, with a population of just 1.154mn in Outside Malaysia, BMI believes the Thai market offers signifi- 2011 (albeit expected to reach 1.6mn by 2016), potential financial cant opportunities for FRiENDi, given the lower mobile penetration rewards are limited. Financial reward will also be limited by low rate and smaller number of MVNOs in the market. However, much incomes – with GDP per capita of US$777 in 2011. However, like Malaysia, the mobile market is already highly competitive. both new operators have experience of operating successfully in FRiENDi's experience should again hold it in good stead in Thai- markets with similar incomes, geography and scale and as such are land and, if welcomed by MNOs in the market, could bring more well positioned to maximise potential benefit from real growth in subscribers into the market. private consumption over the medium term, which BMI forecasts While Pakistan, Bangladesh and India offer significant growth to average 7.5% 2012-2020. 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, MALAYSIA which only served to dissuade companies from entering the market as an MVNO. With low potential returns and a difficult political FRiENDi Looks East and business environment, the relative low risk and investment of Middle Eastern mobile virtual network operator (MVNO) FRiENDi launching as an MVNO was successfully removed by the increased will launch services in Malaysia by the end of 2012. FRiENDi price. Meanwhile, India's new regulations for the telecoms market will partner with sovereign wealth fund Kumpulan Perangsang includes introducing MVNOs into the market, but BMI does not Selangor Berhad (KPS) to roll out services. Following its merger expect licences to be made available in the near term and there is not with MVNO Virgin Mobile, FRiENDi announced plans to expand yet any confirmation on when the National Telecom Policy will be services in the Middle East, North Africa, Sub-Saharan Africa and enforced. Regulations in Bangladesh could also prove prohibitive. South Asia. BMI believes Malaysian mobile network operators Indonesia's mobile market has eight active operators and no cur- (MNOs') receptive approach to MVNOs makes it a good market in rent MVNOs. With growth expected to remain strong in the market, which to begin operations in the region. MVNOs could be important in ensuring lower cost services continue Opportunities For Expansion to meet subscriber needs. However, Tune Talk has already hinted it Mobile Penetration (%) would be interested in entering the Indonesian mobile market, which 180 could suggest a gradual opening up to new operators.

160 BMI believes FRiENDi and Virgin Mobile's experience in offering mobile services as MVNOs make them well suited to of- 140 fering services in new markets. While Malaysia's market is already 120 competitive, we believe the companies have a strong outlook as they 100 expand services outside the MEA region.

80 60 THAILAND 40 Malaysia Indonesia Thailand Bangladesh 20 3G Auction On Track, Outlook India Pakistan 0 Remains Uncertain 2009 2010 2011 2012f 2013f 2014f 2015f 2016f The 3G licence auction in Thailand is gradually approaching reality f = BMI forecast. Source: BMI, operators, regulators, World Bank (ITU) after the National Broadcasting and Telecommunications Commis- sion (NBTC) announced in mid-June further details such as a rough Malaysian MNOs have not treated MVNOs as a threat to their reserve price for the spectrum. However, the convoluted nature main business, unlike operators in other markets. MVNOs can serve of the Thai telecoms industry means that it is difficult to predict as a useful addition to a mobile market, boosting competition while the outcome of the auction, which is scheduled for Q412, and the allowing MNOs to focus on new services, mobile content and up- potential impact. grading networks. Malaysian MVNOs vary from low-cost options The NBTC believes that the reserve price for each of the nine such as Happy Prepaid and Tune Talk while XOX and Merchantrade blocks of 5MHz spectrum will start from THB4bn, which is in line focus on foreign workers in the country. With more than 10 MVNO with the benchmark of THB12.8bn for 15MHz of spectrum set by licences already in the country, BMI believes FRiENDi has selected its predecessor, the National Telecommunication Commission. Each www.telecomsinsight.com 5 Vietnam Asia Telecommunications

participant can potentially secure a maximum of 20MHz of 2.1GHz with the fundamental benefits that MNP brings, we struggle to see spectrum during the simultaneous ascending-bid auction. Under the scheme realising the potential rewards based on the existing the new draft information memorandum, the NBTC has removed market situation. the N-1 rule, which would have resulted in the cancellation of the Although the MIC started drafting the MNP guidelines in auction if there were only one bidder. late 2010, details about the scheme remain scant. However, the ministry announced at the end of May that all mobile numbers will Attractiveness Hindered By Uncertainties be centrally managed by its telecoms department instead of being Asia Pacific Telecoms Risk/Reward Ratings Q312 partially managed by each network provider. The MIC claimed that the central numbers management method is being applied by Industry Rewards as many as 70 countries worldwide. 70 60 50 MNP To Have Limited Impact 40 Vietnam Estimated Mobile Market Share, June 2012 30 Telecoms Country Vietnamobile 20 Rating Rewards 2% 10 S-Fone 0 VimpelCom 0% 3%

VinaPhone Viettel 29% 37% Industry Country Risk Risks

Thailand Regional Average

Source: BMI

Thailand is one of the last countries in Asia Pacific that has yet MobiFone to auction 3G licences. While we believe that the market is more 29% than ready for 3G services, previous attempts to issue licences have Source: VimpelCom, BMI been primarily foiled by political wrangles and complications aris- ing from concessions between private and state telecoms operators. Following the collapse of the 3G auction in September 2010, True Introducing MNP in Vietnam has the potential to slightly level and CAT Telecom modified their concession agreement to allow the competitive landscape and provide a much-needed boost to the former to introduce 3G services. However, the deal has been the increasingly marginalised smaller operators: GTEL Mobile, deemed illegal by the NBTC as the regulator decided that it was in S-Fone and Vietnamobile. The three firms account for about 5% violation of the Frequency Allocation Act. Consequently, a series of of Vietnam's mobile market while state-backed operators Viettel, amendments to the contract such as stipulating that CAT Telecom MobiFone and VinaPhone control the remaining 95%. Giving is solely responsible for spectrum control must be made. consumers the option to switch providers while retaining their The existing concession-based telecoms model in Thailand is mobile numbers could encourage subscribers of Viettel, MobiFone resulting in a high degree of uncertainty for operators. Spectrum will and VinaPhone to migrate to smaller operators, especially if smaller be returned to the regulator for reallocation, and it is still unclear what operators introduce competitively priced or tailored packages. the competitive landscape will become, thereby potentially prevent- However, this scenario may not play out nicely. Firstly, we have ing operators from competing aggressively for the 2.1GHz spectrum. seen MNP schemes in countries such as India, Thailand and China Further, the Asia Pacific market is transitioning towards 4G services, receive muted response due to factors such as slow porting process and Thai operators are caught right in the middle where launching and the fact that subscribers own multiple prepaid SIM cards. Sec- 3G services now may not have the desired long-term outlook. While ondly, larger operators could intensify the competition by matching BMI acknowledges that the NBTC is trying to implement reforms smaller operators' strategies, which is a relatively easy move given in the market, immediate drastic changes are unlikely. Although their significantly larger scale. there is pent-up demand for 3G services among Thai consumers, Thirdly, the Vietnamese mobile industry's competitive landscape we do not expect strong interest from foreign operators due to the could undergo significant changes in the next two years. The Vietnam lack of clarity on rules and regulations within the telecoms sector, Posts and Telecommunications Group, parent company of MobiFone especially on the issue of foreign ownership. 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 VIETNAM more than 50% of the mobile market share and extensive telecoms infrastructure. This in turn could drive smaller operators closer to Resolve Skewed Competitive the brink of exit. South Korea's SK Telecom has already withdrawn investment from S-Fone while Russia's VimpelCom followed suit in Landscape Before MNP April. Without the support of foreign investors, S-Fone and GTEL Vietnam's Ministry of Information and Communications (MIC) has Mobile could face the same fate of as EVN Telecom, which strug- announced that it plans to implement mobile number portability gled to generate profitability and was taken over by Viettel in early (MNP) in the country from 2014 in order to empower consumers 2012, much to the disappointment of EVN Telecom's 3G partner and pressure operators to improve service quality. While BMI agrees Hanoi Telecom.

6 www.telecomsinsight.com Philippines Asia Telecommunications

Consequently, the worst case scenario would be a duopoly in the Eventually, PLDT could dominate both the Philippine telecoms Vietnamese mobile market, and we foresee MNP having limited and broadcasting industries, and BMI believes that this would pave impact on consumer choices. 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 ap- PHILIPPINES proach, but at present, the content market presents stronger growth potential. Consequently, we believe that it is possible that PLDT Domestic Dominance Could could look to invest in the broadcasting industries of Indonesia and Vietnam as growing affluence and improving connectivity would Fuel Overseas Expansion spur demand for content. The prospects are not limited to the Although the Philippine Long Distance Telephone Company broadcasting industry as other OTT services such as SMS over IP (PLDT) has denied a media report that it is in discussion to acquire are becoming increasingly lucrative. 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 CAMBODIA largest telecoms operator additional revenues from alternative geo- graphical and sectorial markets, especially if it successfully invests in GMA Networks. Emaxx-Excell Deal Long Over GMA Networks is the Philippines’ second largest TV broad- Digital Star Media's planned acquisition of Cambodia's GT-Tell, caster, and discussions between the firm and PLDT to strike a deal which operates under the brand Excell, collapsed in February, al- have taken place in the last decade with no success due to pricing though this news has only just come to light. While this development disagreements. While PLDT already owns a stake in third-ranked is a blow to the mobile market given its overcrowded landscape, TV 5, acquiring a part of GMA Network would match the telecoms BMI reaffirms that the short-to-medium outlook would not have operator's strategy of bolstering its content portfolio, thereby helping been promising even if the deal had gone through, as Digital Star PLDT shift away from its traditional business model of providing Media had planned to focus on 4G technologies. basic telecoms services and countering the threat of over-the-top In July 2011, the Phnom Penh Post reported that WiMAX opera- (OTT) service providers. tor Digital Star Media, which operates under the brand Emaxx, was in talks to acquire Cambodia's smallest mobile operator, GT-Tell, Firm Grip On The Telecoms Market for an undisclosed sum. Digital Star Media planned to offer both Operator Market Shares By Segment (%) WiMAX and LTE services in the Cambodian market, and it believed 100% that the country's only CDMA operator would complement its 90% strategy in terms of technological advancement. Digital Star Media 80% originally planned to purchase GT-Tell's 28 mobile towers in all 24 70% Cambodian provinces.

60% Unsustainable Situation 50% Cambodia Estimated Mobile Market Share, March 2012 (‘000) 40%

30% Smart Mobile, 2,400 20%

10%

0% Mobitel, 2,600 Mobile Fixed-Line Broadband Globe Telecom PLDT Metfone, PLDT’s subscriber figures include Digitel. Source: Operators, BMI Cambodia 8,200 Advance Communicati ons, 90

GMA Networks has confirmed that discussions with PLDT are Beeline, 1,078 ongoing and an agreement has not been reached (as of mid-June). Mfone, 414 However, PLDT is confident that a deal will be forged by end-2012 hello, 1,978 Excell, 42 and the price tag would be less than the PHP100bn (US$2.3bn) mark previously mentioned by GMA chairperson. Only Beeline and hello provided March 2012 data. Source: MPTC, operators, BMI GMA Networks and TV market leader ABS-CBN reportedly account for 60% of the Philippines' audience share with TV 5 in It was revealed in January 2012 by Digital Star Media's then-CEO a distant third. Assuming that PLDT succeeds in acquiring GMA Frank May that the company was still conducting the due diligence Networks, the combined market share of GMA Networks and TV 5 process. No reasons were given for the subsequent collapse in should top the market, thereby forming a duopoly with ABS-CBN as February. Regardless, we would have maintained our view that the the second-ranked provider. While PLDT chairperson has said that Cambodian market is not ready for next-generation mobile technolo- it remains to be seen if the government would approve the acquisi- gies, much like many emerging markets in the region. tion, a repeat of PLDT's purchase of Digital Telecommunications While data from Cambodia's Ministry of Post and Telecommu- Philippines, which resulted in a duopoly in the mobile industry, nications as well as mobile operators suggest that the penetration with PLDT controlling 70% market share, is highly possible given rate has exceeded 100%, the market still exhibits signs of relative the lack of an adequate and effective competition law in the country. immaturity. For example, we believe that majority of subscribers www.telecomsinsight.com 7 Myanmar Asia Telecommunications

are using prepaid subscriptions and that 3G is still an underused system, it would be extremely difficult to prevent unwanted transfer and expensive service. Theoretically, WiMAX and LTE are ideal of technology and/or intellectual property to a local partner that may for bringing internet access to a large proportion of the population be inclined to break contract. in a cost-effective manner. However, BMI believes that there is a The ministry has highlighted it is drafting a new communica- lack of demand necessary to make Digital Star Media's plan com- tions law, which should address some of the legal and regulatory mercially viable in the near term. concerns. However, the robustness of legislation and the govern- 4G-compatible mobile devices have yet to reach the required ment's willingness to enforce laws are separate issues, especially number to reap economies of scale, partially due to the wide range for the latter considering the problem of cronyism, corruption, and of frequencies used. The situation in Cambodia is further exacerbated government and political agendas, which are particularly prevalent by language and cultural barriers, and a lack of awareness of the in emerging economies. benefits of internet accessibility. Significant Barriers To Realising Potential Digital Star Media has not disclosed its strategy following the Myanmar Mobile And Broadband Subscriber Forecasts, 2009-2016 unsuccessful acquisition of GT-Tell. The operator could continue 1,000 25 focusing on WiMAX, although the technology is being increasingly 900 marginalised on the global scale. Mergers and acquisitions are still 800 20 a possibility, but BMI believes that it is more likely Digital Star 700 Media now becomes a target for a larger mobile operator such as 600 15 Smart Mobile or Metfone. 500 Meanwhile, the outlook for GT-Tell continues to look unsus- 400 10 tainable in the long term. Besides being the only CDMA opera- 300 tor, local media reported that its subscriber base has stagnated at 200 5 around 40,000 (BMI estimates that GT-Tell had 42,000 mobile 100 subscribers in March). By comparison, market leader Metfone saw 0 0 2009 2010 2012f 2013f 2014f 2015f 2016f its subscriber base double between March 2011 and March 2012 to 2011e 8.2mn, although we caution that the number could be inflated through Number of Cellular Mobile Phone Subscribers ('000) LHS Number of Broadband Internet Subscribers ('000) RHS the inclusion of inactive accounts. We continue to see a need for consolidation in the Cambodian mobile market, and highlight the e/f = BMI estimate/forecast. Source: BMI, ITU benefits of merging networks and services. In June, Smart Mobile announced that its subscriber base has crossed the 3mn mark, an BMI expects telecoms operators that have vast experience op- achievement that we believe was aided by the acquisition of the erating in emerging markets to have the greatest chance of creating previously TeliaSonera-owned Applifone (marketed as Star-Cell) a profitable business in Myanmar. These would include companies in December 2010. 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 MYANMAR less interest from operators in developed countries such as Telenor, Vodafone and Axiata, many of which have suffered setbacks in Still A Major Risk For Entrants emerging markets recently due to regulatory uncertainties and Myanmar announced in July that it is working on a reform plan to intense competition. bring affordable telecommunications services that are on par with international standards. It is also looking for consultants to facilitate JAPAN the industry liberalisation process, which would in turn open up the market to interested foreign companies. While the Myanmarese tel- ecoms market harbours significant long-term growth opportunities in Amazon To Launch Prepaid 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. Internet The minister of communications, posts and telegraphs, Thein Amazon is to launch a prepaid internet service in Japan before the Tun, has announced that state-owned telecoms operators Myanmar end of Q212, according to Japanese business journal Nikkei. The Post and Telecommunication and internet service provider Yatan- company will sell SIM cards with 500MB data usage for US$25 a arpon Teleport are planning to form joint ventures with local and month, becoming the first company to offer such a service in Japan. international firms, which is in line with our view previously stated BMI believes the service will be popular in the Japanese market, in our special report. Having a local partner is important because the which reports buoyant mobile internet growth. Further, it gives an international community has little knowledge about the Myanmarese indication of the changes we expect to see in Amazon's global of- business practices and consumer preferences, in addition to helping ferings throughout 2012. to reduce bureaucratic red tape. Amazon will use the MVNO model to deploy services. It is However, selecting a competent local partner in a frontier market expected to partner with Japan Communications (JC), which uses is a challenging task. The monopoly of Myanmar Post and Telecom- NTT DoCoMo's 4G LTE network. Despite JC seeming to refute munication and Yatanarpon Teleport means that there is a lack of claims in a press release, BMI believes this is unlikely to indicate the options for international players. Further, Investor protection and rumours are false. It is common practice in Japan to refute claims of general legal framework are also particularly lacking in Myanmar, a product launch if such news is leaked prior to an official announce- even when compared with potential 'peer' states such as Vietnam, ment. The vagueness of JC's press release seems to suggest that the Cambodia, and Laos. Given the catatonic state of Myanmar's legal launch is not just a rumour.

8 www.telecomsinsight.com Japan Asia Telecommunications

Growth Continues through 2012. The government is enacting fiscal tightening and as Mobile Internet Subscribers 2009-2012 the yen depreciates, there is less potential for consumption growth 104,000 2.5% No. of Mobile Internet Subscribers ('000) in the market, which will provide an obstacle for expansion. 102,000 % chg q-o-q RHS 2.0% 100,000 1.5% 98,000 Flicker Of Opportunity For 1.0% 96,000 94,000 0.5% Japan's Smart TVs 92,000 0.0% Japanese consumer electronics manufacturers have had a rough time 90,000 -0.5% recently. A generally bearish view of the country's manufacturers is 88,000 a far cry from the strong reputation previously held by the likes of -1.0% 86,000 Sony, Panasonic and Toshiba. The yen continues to appreciate and 84,000 -1.5% newcomers from South Korea, China and Taiwan have also made 09 10 11 09 10 11 09 10 11 09 10 11 12 ------their impact felt. However, new data on sales of smart TV sets – a Jun Jun Jun Mar Mar Mar Mar Dec Dec Dec Sep Sep Sep new segment of the AV market – show that Japanese manufacturers Source: BMI, Operators are keeping up with their rivals, which BMI believes could suggest an opportunity to turn around flagging businesses. The leak also suggested that the SIM cards would be compatible Japan's largest consumer electronics OEMs have struggled to with unlocked smartphones and tablets using iOS, Android and keep up with innovative newcomers that have successfully built other operating systems, in addition to the Kindle. This could be an their brands in both developed and emerging markets. Major indication that Amazon is aiming to increase outreach of its Kindle Japanese electronics manufacturers Sony, Sharp and Panasonic ebook, which it has yet to launch on the Japanese market. reported financial losses, with Sony's JPY457bn (US$5.7bn) FY The Amazon share price has been following a downtrend over 2012 loss, its fourth straight financial year without profit. As BMI the past month, as poor profit margins deter investors. However, highlighted before, several factors have affected these companies' revenue continues to rise, as the company seems intent on growth ability to turn around their businesses. The yen's continued strength at the expense of income. Further, the ambiguity over its strategy makes devices from Sony, Sharp, Panasonic and their peers more is causing alarm among some investors. However, it enjoys a soar- expensive and less competitive, particularly when newcomers from ing PE ratio (over 175), which maintains investor interest, and its China have lower costs and accept reduced margins to get their growth strategy is likely to pay off in the medium term once market products to market. share is secured. Despite the disadvantages facing Japanese manufacturers, data Will Performance Improve? from NPD Display Search's quarterly report on smart TV shipments, Amazon Share Price (US$) Japan reports the highest percentage of smart TVs in overall TV 260 shipments. In Q112, 36% of all TVs shipped to Japan were smart 240 TVs, considerably higher than the global average of 20%. Japanese 220 consumers are forward looking, expecting the latest innovations, 200 which has helped drive the demand for smart TVs. Sales of smart

180 TVs in regional peer China were around 30% but this is largely

160 driven by the strength of local manufacturers such as Skyworth,

140 Konka, Changhong and TCL. Sony was the strongest brand in

120 Q112, according to the NPD's report, but not considerably higher

100 than Skyworth.

80 While Chinese brands perform well in their home market, they do not yet have the international recognition of Japan's major ven- 60 09 09 10 10 11 11 12 09 10 11 09 10 11 09 10 11 12 10 11 12 ------dors. Although newcomers such as LG Electronics and Samsung Apr Oct Apr Oct Apr Oct Apr Jun Jun Jun Jun Feb Feb Feb Dec Dec Dec Aug Aug Aug Electronics, both based in South Korea, have gained significant ground, BMI believes the Japanese vendors still have some cur- Source: BMI , Bloomberg rency in their brands. Asia News Networks reports that Japanese brands are trusted among Indian consumers 'to deliver quality' and BMI believes there is still potential for growth in the mobile BMI believes the companies must build on this in other markets to internet market, which Amazon can capitalise on. The country is regain their position. highly receptive to new technology, which bodes well for the release While the data suggests a more positive outlook for Japan's of the prepaid SIM cards and also for the future success of the Kindle OEMs, we do not believe the companies are out of the woods yet. ebook. ARPUs are among the highest in the Asia-Pacific region and We maintain our view that fundamental problems still need to be ad- the potential for LTE expansion is high. dressed, particularly innovation and distinctiveness in their products. However, BMI believes there are a number of issues which Nevertheless, the companies retain some of their earlier reputation Amazon will have to contend with when entering the Japanese mar- for quality, building on this to regain their position as innovators will ket. The mobile internet market is highly competitive and ARPUs go a long way to making Japanese consumer electronics companies are falling, while bureaucratic obstacles may limit the potential for fierce global competitors once more. expansion. Further, macroeconomic factors may limit the potential for Ama- zon expansion, as private consumption looks set to remain anaemic www.telecomsinsight.com 9 South Korea Asia Telecommunications

LG Electronics may have a first-mover advantage with its early SOUTH KOREA focus on LTE. However, we believe that rival manufacturers are waiting for the technology to mature, which is largely pegged to LG’s First-Mover Advantage the availability of the necessary spectrum. For example, several operators in Asia Pacific are refarming existing spectrum such as May Not Last 1800MHz while waiting for the country to complete the transition LG Electronics announced in end-May that global sales of its LTE to digital TV, which will free up spectrum in the 700MHz frequency smartphones have reached 3mn units, which positioned the firm band. Once companies are able to launch the same product in mul- among the frontrunners in the nascent LTE market. While this should tiple markets (without the need to modify them to work on differ- provide a much-needed boost to the South Korean manufacturer's ent LTE networks), LG Electronics's upper hand could be quickly stuttering mobile business, the competitive landscape will quickly eroded, especially if market leaders Samsung Electronics and Apple intensify as the global LTE industry matures and rival handset mak- try to convince existing users of their products to upgrade. ers ramp up their LTE device portfolio. Despite the growing potential, not all device manufacturers have TAIWAN 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 EV-DO Upgrade To Boost APT Motion, Sony, HTC and LG Electronics have struggled in light of After repeated delays, Asia Pacific Telecom (previously Asia the strong competition. Pacific Broadband Wireless) announced in June that its new BMI previously reported that the focus on the infant LTE handset CDMA2000 1xEV-DO mobile broadband service will be launched market puts LG Electronics in a good position as more LTE net- on October 1. BMI believes the upgrade, as well as the potential works are coming online. Besides sales from North America and introduction of attractive smartphone models, could help reverse the Japan, LG Electronics's domestic market also played a vital role operator's declining 3G subscriber base, although there are limita- as all three mobile operators have launched LTE services. At the tions to its growth potential. end of April, there were 4.850mn LTE subscribers in South Korea, according to IT Statistics of Korea, up from 1.191mn in December Positive Growth Expected 2011. During this period, the number of 3G subscribers declined Taiwan 3G Subscriber Forecast, 2009-2016 from 44.334mn to 41.794mn. 30,000 140 LG Electronics expects to expand its LTE market presence to 20 25,000 120 countries by end-2012. A key factor to support its strategic emphasis 100 on the 4G technology is LG Electronics's ownership of 23% of ap- 20,000 proximately 1,400 LTE patents filed worldwide, according to the 80 15,000 manufacturer citing a report from Jefferies & Company. 60 10,000 40 Early Emphasis On LTE Yielding Results 5,000 LG Handset Unit Financial Results (KRWbn), 2010-2012 20

4,000 100 0 0 Sales

Operating Profit RHS 50 2009 2010

3,500 2012f 2013f 2014f 2015f 2016f 2011e

0 Number of 3G Phone Subscribers ('000) LHS 3,000 Number of 3G Phone Subscribers/100 Inhabitants RHS -50 2,500 e/f = BMI estimate/forecast. Source: NCC, Operators, BMI -100 2,000 -150 1,500 Asia Pacific Telecom is the only CDMA2000 operator in Taiwan, -200 although it competes with Chunghwa Telecom, Taiwan Mobile, 1,000 -250 Far EasTone and VIBO Telecom in the country's overall 3G sec- 500 -300 tor. However, along with VIBO Telecom, Asia Pacific Telecom

0 -350 lags behind the remaining operators as they also offer 2G services. Asia Pacific Telecom reported 3mn 3G subscribers in April 2011, Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112 up from 2.6mn in June 2010, but it has seen limited growth since Source: LG Electronics then. Instead, the operator said that its subscriber base declined to 3.05mn in June from 3.1mn in February. While BMI agrees that LTE-compatible handsets are the future, The decrease in the number of subscribers has been attributed more conventional 3G mobile devices are still the main growth and to the delay in rolling out its new EV-DO service, which is about revenue driver. For example, Samsung Electronics announced in one year behind schedule. As of March, Asia Pacific Telecom had February that it has sold 20mn Galaxy S II units since April 2011, upgraded more than 600 CDMA2000 to EV-DO, and another 2,000 and the device's successor similarly does not feature LTE capability. are scheduled to be upgraded in Q312. Although a larger battery has allowed Apple to introduce an LTE According to Asia Pacific Telecom, the CDMA2000 1xEV-DO iPad, the company could not offer the high-speed connectivity glob- infrastructure gives the operator a cost advantage over its rivals. In ally as mobile operators launch LTE on a wide variety of frequencies order to achieve 80% population coverage, Asia Pacific Telecom ranging from 700MHz to 2.6GHz. would need to deploy 2,500 base stations, while its W-CDMA

10 www.telecomsinsight.com China Asia Telecommunications

counterparts would need to roll out 6,000-8,000 base stations. interfaces are also linked to Baidu's cloud-based services, which are Additionally, Asia Pacific Telecom plans to partner with China's expanding rapidly and include mapping and location-based services, CDMA2000 mobile operator China Telecom to jointly procure music and video content, gaming, social networking, advertising and handsets to further lower cost. news. In many ways, Baidu mirrors global search giant Google and This would allow Asia Pacific Telecom to target more cost- has sought to replicate its success in the connected device market conscious consumers and those who have yet to make the transition with a proprietary operating system linked to all of its services and to smartphones. The operator plans to procure 1.1mn handsets in features. 2012, of which 20-30% will be smartphones. Further, Asia Pacific While Google-developed Android products are slowly enter- Telecom was negotiating a deal with Apple to sell a CDMA variant ing the Chinese smartphone market, their impact is blunted by the of the iPhone, and BMI believes that this could become a reality fact that Google services are heavily censored and restricted at the in the near future given that China Telecom secured an agreement delivery end of the service supply chain, rendering them slow and to sell CDMA iPhones in China in February. However, this is de- ineffective in accessing specific content and applications. This is why pendent on Asia Pacific proving that its network can cope with a many Chinese still prefer Windows and Nokia Symbian handsets. surge in data use. Gartner estimates that Nokia handsets accounted for 23% of the Due to its smaller scale when compared with the likes of Chun- Chinese smartphone market in Q411 and Samsung accounted for a ghwa Telecom and Taiwan Mobile, as well as a different mobile further 28% with its Windows and Bada-powered phones. technology, it would be difficult for Asia Pacific Telecom to become Apple's iPhone is very popular among the more affluent, youthful the market leader in terms of subscriber. The operator also recognises sections of urban society, but availability is relatively limited and the limitations as it envisages 4mn 3G subscribers in 2014. However, the high cost of the handset means that it will remain unaffordable the strategy of targeting the low-to-middle segment of the market for the vast majority of consumers. Gartner estimates that Apple could still profitable. 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 CHINA Windows and Android-powered phones, but these offer only limited connectivity to locally optimised services, solutions and applications. Baidu's New Smartphone A This is where Baidu hopes its new offering will score over its rivals and how it can outmanoeuvre consumer electronics giant Lenovo, Safe Bet which is also pushing into the smartphone market after dominating Baidu, the leading Chinese internet search engine, has launched a the personal computer segment. new smartphone powered by its proprietary cloud-centric operating Ostensibly, Baidu's latest foray into the smartphone market is system (OS). The low-cost, sub-US$150 handset will be sold through more compelling than its earlier, lacklustre partnership with Dell. China Unicom and, thanks to its deep connectivity with Baidu's And, with its significant existing online user base, the Baidu smart- online search, location and entertainment services and applications, phone has every chance of becoming a leading force in the market, should mirror the success of international rivals touting the Google very quickly, BMI believes. 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 China Telecom Eyes Future global and local rivals alike. With Cloud Gaming Baidu Taking On The Giants China Telecom and Taiwan-based fixed-mobile convergence appli- China Smartphone Market Share By Vendor, Q411 cations provider Ubitus announced in June that they have formed a Others HTC 5% partnership to deliver cloud gaming services to internet-connected 3% Nokia Apple 23% TVs in China. BMI believes that there are several important factors 9% that could bring success to this collaboration, which include China Telecom's fixed broadband market leadership, local regulations pro- hibiting gaming consoles and strong demand for internet-connected Huawei TVs in China. 15% 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 consum- ers can combine multiple online services (for example, social media Samsung ZTE 28% 13% and online videos) on a single platform. Under China's policy for Sony fixed-mobile convergence, the Chinese internet-connected TV mar- Ericsson 4% ket is expected to expand to 53mn by end-2013, and cloud gaming Source: Gartner is another feature that could help spur demand for internet TVs. We have recently seen major TV manufacturers establishing part- nerships with cloud gaming service providers. In early June during The Changhong H5019 is a Foxconn-manufactured touchscreen the Electronic Entertainment Expo conference, Samsung Electronics device that sports cloud-based voice and handwriting recognition, signed a deal with Gaikai to stream gaming titles written for Sony's potentially putting it on a par with high-end offerings such as Apple's PlayStation 3 and Microsoft's Xbox 360 to its smart TVs, thereby iPhone and Samsung's Galaxy smartphones. However, these user eliminating the need for consumers to purchase separate dedicated www.telecomsinsight.com 11 India Asia Telecommunications

gaming consoles. Similarly, OnLive announced at the same time Augere is backed by France Telecom and private equity firms that it was adding LG Electronics's smart TVs to the number of such as Harbinger Capital, New Silk Route and Vedanta Oppor- platforms that could run its cloud-based gaming system. tunity Fund. Through its subsidiary Augere (Mauritius), the firm Cloud gaming carries out the processing and video rendering in secured 20MHz of broadband wireless access (BWA) spectrum in the cloud, which is then streamed to users, thereby removing the need Madhya Pradesh during the June 2010 auction, and it had announced for a gaming console. This method of bringing gaming to Chinese plans to soft launch TD-LTE services under its Zoosh brand in consumers could become a lucrative business as Chinese regulations Madhya Pradesh and Chattisgarh in early Q212. Augere displayed prohibit the sales of consoles such as the PlayStation, although units its commitment by becoming one of the first BWA licence holders to are available through the grey market. Ubitus's GameCloud platform contract a network vendor after selecting Ericsson in October 2011. will be launched on October 1, and we expect China Telecom to Augere is an unfortunate victim as it was not implicated in the enjoy exclusivity. 2G licence scandal that affected companies such as Bahrain Tel- ecommunications, Telenor and Etisalat, some of which have exited Cloud Gaming Complements Leadership the Indian telecoms industry. Back in February, BMI had expected China Telecom And China Unicom Fixed Broadband Subscribers (‘000) limited collateral damage from the cancellation of 2G licences with the greatest impact on companies in directly related sectors. For example, telecoms towers firmViom Networks would lose 20-21% 90,000 of its tenancy if Telenor withdraws its investments. China Telecom China Unicom 80,000 However, the negative effects have spilled out after the Indian

70,000 government and regulator failed to swiftly resolve the issues. Instead, we have seen the authorities place a high price on the 2G re-auction 60,000 and try to revive the Vodafone tax case, which were detrimental to 50,000 domestic and foreign investor confidence. 40,000 According to Augere CEO Lars Henrick Stork, through an in- 30,000 terview with the Economic Times, the firm's investors have been 20,000 ruffled by the 2G scandal, in addition to the repeated delay in the 10,000 unveiling of the New Telecom Policy, which was scheduled to be

0 announced in 2011. As a result, its investors have halted funding. 10 11 10 11 10 11 10 11 12 ------Assuming that Augere follows up on its divestment plan, we Jun Jun Mar Mar Mar Dec Dec Sep Sep expect alternative BWA licence holders, namely Bharti Airtel, Source: Operators 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 China Telecom is the country's largest fixed broadband provider Augere's exit sends out further warning signs to the Indian govern- with 81.45mn subscribers at the end of April. The operator is cur- ment with more capital outflow as a real possibility. rently in the midst of deploying the world's largest fibre optic network India Was Leading In Early 2011 and it plans to grow its fibre broadband subscriber base to 100mn by Asia Pacific Telecoms Risk/Reward Ratings Q312 2015. Although most of the intensive processes are handled in the 80 cloud, high-speed broadband connectivity is still required to deliver Indonesia China 70 a seamless and low-latency cloud gaming experience to consumers. India Consequently, we believe that China Telecom is well placed to help 60 drive development in the cloud gaming market. 50

As cloud gaming eliminates the need for consumers to purchase 40 a gaming console, thereby reducing cost, the combined cost of an 30 internet-connected TV and high-speed broadband connection could still be beyond the reach of majority of the consumer market. The 20 cloud gaming market is also still at its infancy, and at the current 10 stage where quality such as frame rates and response time are inferior 0 to console gaming, we do not expect serious gamers to be swayed. Risk Risks Country Country Industry Rating Country Country Industry Rewards Rewards Telecoms

INDIA Source: BMI

Industry To Suffer From Continued Due to the convoluted nature of the telecoms mess in India, a quick resolution within by end-2012 is unlikely, especially when Regulatory Uncertainties the government remains undecided on key issues. A white paper The collateral damage arising from the Indian telecoms regula- on 'black money' has been published by the Indian government, tory debacle has widened after Augere has reportedly decided to which noted that the 'Vodafone tax case provides an instance of the withdraw from the market due to difficulties in raising funds. The misuse of corporate structure for avoiding the payment of taxes'. drawn-out investigations and contentious measures to resolve issues This indicates that the government will continue pursuing Vodafone have not aided investor confidence. Worryingly,BMI believes that (and possibly other foreign firms involved in similarly structured the situation will continue to cast a shadow on the sector in 2012. mergers and acquisitions) for lost taxes. However, the government

12 www.telecomsinsight.com India Asia Telecommunications

has not provided immediate clarity on the issue after it postponed data services but, like its peers, consumer adoption has been below the implementation of measures to claw back taxes owed by foreign expectations. Consequently, the operator followed Bharti Airtel, investors by a year from early May after backlash from the inter- IDEA Cellular and Vodafone India and have slashed tariff rates by national community. almost 62%. The price cut should spur consumer interest, although there is a risk that sustained subscriber growth in the nascent market Challenges Remain Ahead For would require a price war. Debt Is Still A Burden Reliance Communications As of March, Reliance Communication's net debt has grown to Reliance Communications has announced better-than-expected INR358.393bn, up from INR320.485bn in March 2011. The hefty financial results for the quarter ended March, which was a signifi- debt, a result of the 3G auction and roll-out, has been an ongoing cant improvement from previous quarters. However, the operator concern, especially when the operator has repeatedly failed to reduce continues to be laden with hefty debt, although it is planning to list the amount. its submarine cable assets in Singapore, in addition to negotiating a Part Of Reliance Infratel’s Appeal sale of its tower arm. BMI believes that the immediate outlook for Reliance Infratel’s Network Capacity And Useful Life the firm remains uncertain largely due to the regulatory uncertainty, India-East which is unlikely to be resolved in the near future.

India-West Finally Growth Reliance Communications Net Profit Middle East-East 18,000 150 Net Profit (INRmn) 16,000 Middle East-West % chg y-o-y RHS 100 14,000 Intra Asia 12,000 50 Trans-Atlantic 10,000

8,000 0% 20% 40% 60% 80% 100% 0 6,000 Utilised Unutilised

4,000 -50 India-East 2,000

0 -100 India-West 09 10 11 10 11 12 09 10 11 09 10 11 ------Jun Jun Jun Mar Mar Mar Dec Dec Dec Sep Sep Sep 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 Intra Asia higher than analysts' expectations as polled by Reuters. Similarly, the operator's net profit for the quarter exceeded analyst estimates Trans-Atlantic and grew by 96.7% to INR3.316bn, representing the first y-o-y 2015 2020 2025 2030 2035 increase since the quarter ended June 2009. The profitability improvement could be attributed to Reliance Source: Reliance Communications Communication's position as the second-largest mobile operator in India, and a surprise increase in the minutes of use (MOU). MOU In April, Reliance Communications received initial approval grew for the first time in five years to 227 minutes, up from 224 to list its submarine cable unit in Singapore, which is forecast to minutes the previous quarter, which is a particularly impressive feat raise US$1.4bn. The operator's submarine cable assets span across given that Indian mobile operators have been hiking voice tariff 68,000km, and have landing sites at 46 locations in 26 countries. rates. Reliance Communications also reported that its revenue of Further, an average of 80% of capacity on its network is available to INR0.44 per minute was among the highest in the industry for the be monetised with useful life ranging from 2022 to 2031. An initial last eight consecutive quarters. public offering (IPO) could take place in Q212 and proceeds would help alleviate pressure on the operator. Operations Still Struggling Meanwhile, Reliance Communications also has been trying to On May 28, the date that Reliance Communications released its offload its tower unitReliance Infratel, first through an IPO before latest financial results, its share price opened 3.4% higher than the turning to private equity firms. However, the plan to divest Reli- previous day. However, BMI believes that Reliance Communica- ance Infratel has been in place for about two years without success, tions remain vulnerable fundamentally. Due to strong competition although Reliance Communications has announced that it is waiting and price-sensitive consumers, the operator's ARPU dipped below for regulatory clarify from the government. 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 www.telecomsinsight.com 13 Bangladesh Asia Telecommunications

Regulatory Risk Runs High The BTRC has rejected Citycell's requests to switch to GSM The ongoing regulatory debacle has not helped Reliance Commu- technology over the years. However, Citycell is undergoing a mobile nications. BMI has highlighted the growing collateral damage from licence renewal, and the new licence will be technology neutral, the Indian government's inability to quickly resolve issues, and it is thereby technically allowing Citycell to change from CDMA to possible that private equity firms in talks with Reliance Communica- GSM. Citycell's migration plan involves paying BDT7.5bn for tions could be increasingly concerned, especially when the prospect 5MHz of spectrum in the 1800MHz band while retaining 5MHz of of the tower sector is highly tied to the mobile market. spectrum in the 800MHz band for subscribers who refuse to make Reliance Communications has announced that the sale of Reli- the switch. As a result of the shift to higher frequency, Citycell plans ance Infratel will only proceed once the Department of Telecommu- to increase its number of base transceiver stations from 860 to 2,500. nications and the Telecommunication Regulatory Authority of India We do not expect significant resistance from the regulator, es- clear the issues on spectrum allocation and licensing guidelines. We pecially if Citycell pays its licence renewal fees (operators such as believe that given the contentious decision of setting a high price, Grameenphone are in disagreement with the BTRC over the dues). a resolution may not emerge in the near future. BMI believes that making the switch would bring Citycell to the same competitive landscape as its rival operators. However, oper- ating two separate networks is a costly and inefficient model. We BANGLADESH believe that this solution to prevent subscriber backlash is temporary, GSM Switch To Boost Citycell's but we eventually expect Citycell to fully migrate to GSM. Outlook AFGHANISTAN Pacific Bangladesh Telecom, which markets under Citycell, has an- nounced that it plans to spend BDT16bn (US$196mn) to switch from 3G Competition Heating Up CDMA technology to GSM due to continuous bad performances in The Afghanistan Telecom Regulatory Authority (ATRA) awarded light of technology limitations. The long-awaited change, assuming the country's second 3G licence to MTN Afghanistan on June that the operator receives regulatory approval, should help bolster 20, three months after rival Etisalat launched its network. More Citycell's outlook as it would allow subscribers of rivals firms to licences are expected to be awarded with remaining mobile opera- easily migrate to its network. tors expressing interest, according to the regulator. BMI believes According to the Bangladesh Telecommunication Regulatory that the added competition should provide a much-needed boost to Commission (BTRC), Citycell had 1.713mn subscribers at the end of the country's telecoms industry, particularly in lowering the cost of May, representing only 1.9% market share. Since launching services accessing the internet. in 2005, Citycell's mobile subscriber base has not exceeded the 2mn The ATRA invited bids for 3G licences in August 2011 but dis- mark and significantly lags behind larger rivals Grameenphone qualified potential new entrantsSahar 3G, Toseye Eatemad Mobin (38.412mn), Banglalink (25.252mn), Robi Axiata (18.733mn) and Shezai Tel USA as they were deemed to have failed to meet the and Airtel (6.667mn). requirements. Sequentially, the licences are to be awarded to exist- ing GSM operators, namely Etisalat, MTN Afghanistan, Afghan Citycell Not Keeping Pace With Industry Wireless Communications (AWCC) and Telecom Development Bangladesh Mobile Subscriber Growth By Operator (‘000) Company Afghanistan (Roshan), as per the approval of the min- 120,000 Teletalk isters' committee for the telecoms sector and 3G tender conditions. Citycell Both licences that have been awarded cost US$25mn each, and the Airtel 100,000 Robi Axiata price is expected to be the same for Roshan and AWCC. Bangladesh Grameenphone 80,000 MTN Afghanistan expects to launch 3G services by mid-July, although BMI believes that coverage would be limited. At launch, 60,000 Etisalat's 3G services were only available in Kabul, but the opera- tor expanded coverage into Jalalabad in June. The rapid commer- 40,000 cialisation of 3G services indicates that operators have already been upgrading their equipment and networks. If the ATRA awards the 20,000 remaining two licences in the near future, we expect commercial

0 3G services from all four operators by end-2012, which presents an 09 10 11 09 10 11 12 09 10 11 09 10 11 ------upward risk to our Afghanistan 3G subscriber forecast. Jun Jun Jun Mar Mar Mar Mar Dec Dec Dec Sep Sep Sep We believe that the existing high prices for internet services will Robi Axiata’s subscriber data differ from that of the BTRC. Source: BTRC, Operators, BMI provide significant demand for 3G. According to the Ministry of Communication and Information Technology, the internet price for CDMA is typically more cost-effective, and Citycell's 800MHz 1MB of data per month fell by 67% from 2011 to 2012 but remains spectrum is suitable for target sparsely populated rural regions. How- a prohibitive US$300. During this period of time, the number of ever, the technology can also become a disadvantage in emerging internet users increased from 1mn to 2mn. Meanwhile, Etisalat's markets. GSM consumers can easily switch providers by swapping 3G plans vary from AFN499 (US$10) a month for 1GB of data SIM cards without purchasing new handsets. By contrast, CDMA (smartphone) to AFN899 (US$19) for 4GB of data (USB dongle). phones are locked to one network, and the switching process requires Given a level playing field – each 3G licence costs US$25mn and cooperation of the old and new operators. Citycell's situation is individual operator's market share is about 22-29% – we expect further exacerbated by the fact that it is Bangladesh's only CDMA competitive 3G pricing, which would further spur adoption. 1x mobile operator. At present, we forecast 1.146mn 3G subscribers in the coun-

14 www.telecomsinsight.com Afghanistan Asia Telecommunications

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 de- pendent on operators being able to expand their networks, a situation complicated by doubts surrounding the country's security.

Growth Could Accelerate 1,400 Afghanistan 3G Subscriber Forecast, 2009-2016 3.5

1,200 3.0

1,000 2.5

800 2.0

600 1.5

400 1.0

200 0.5

0 0.0 2009 2010 2011 2012 2013f 2014f 2015f 2016f

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 © 2012 Business Monitor International. All rights reserved. Sub-Editor: Mia Kilroy All information, analysis, forecasts and data provided by Business Monitor International Ltd is for the exclusive use of subscribing persons or organi- sations (including those using the service on a trial basis). All such content is copyrighted in the name of Business Monitor International, and as such Subscriptions Manager: Nuria Bernardez no part of this content may be reproduced, repackaged, copied or redistributed without the express consent of Business Monitor International Ltd. Production: Barbara Fitzsimons, Reema Patel All content, including forecasts, analysis and opinion, has been based on information and sources believed to be accurate and reliable at the time of Publishers: Richard Londesborough/Jonathan Feroze publishing. Business Monitor International Ltd makes no representation of warranty of any kind as to the accuracy or completeness of any informa- www.telecomsinsight.com tion provided, and accepts no liability whatsoever for any loss or damage resulting from opinion, errors, inaccuracies or omissions affecting15 any part of the content. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.