Saturday, March 15, 2003
Does size really matter?BY ABDUL MAJID ABDULLAH
Why has there been a push to consolidate the telecommunications industry, not just in Malaysia but also around the world? Are bigger and fewer players necessarily better?
THE evolution of the telecommunications industry has seen a paradigm shift where the focus is now on cellular. As technology advances, we find that mobile phones are migrating from a voice only machine to an information tool.
With the functions available today, a mobile phone is not just a tool of communication – it is also a PDA (personal digital assistant), an Internet browser, a payment channel and a data transmitter etc. Mobile phones have become a necessity and a lifestyle.
While the mobile telecommunications industry globally is seeing advancement on the technology front, in Malaysia we are experiencing an industry that is consolidating.
Seven operators were awarded licences to build and operate their own networks. Now with the latest round of proposed mergers, the industry could end up with three major players.
It is expected that the consolidation will make the industry more cost-effective, primarily by avoiding the duplication of costly infrastructure, which wastes valuable resources and under-utilises capacity.
But what does the consolidation really mean? Will the telecommunications mergers in the pipeline achieve the objectives behind the government’s call to reduce the number of players? Let us look at the proposed merger of TM Cellular and Celcom as a case in point.
Both TM Cellular and Celcom operate on the GSM platform that will afford the combined entity considerable scope in terms of network infrastructure optimisation. This is expected to result in enhanced service coverage and quality for customers. The strongest synergistic benefit from the merger is the combined 42MHz of spectrum in the dual band 900 and 1800 MHz ranges.
The two networks are complementary – Celcom’s 900 MHz is more suited for coverage of a wide area but its capacity is less, while TM Cellular’s 1800 MHz is ideal for densely populated areas as it has a higher capacity.
With the proposed merger, the enlarged entity will be able to capitalise on the best of both worlds and support a large number of new subscribers without having to invest in additional capacity-related infrastructure.
The combined network would be able to offer existing and new value-added services over a greater area, hence providing a better value proposition to subscribers. In fact, the enlarged entity will be among the first to offer dual band services based on the GSM 900 and GSM 1800 standards to approximately 95 per cent of Malaysia’s populated areas as defined by the Malaysian Communications and Multimedia Commission (MCMC).
Why does size matter? For a mobile telecommunications company to be cost effective and to maximise on its infrastructure and capacity, it needs to achieve a critical mass.
This magic number is derived based on cost versus the size of the market, the number of subscribers as well as the average revenue per unit (ARPU). At the end of the day, it’s a numbers game.
When you have a bigger share of the market, that is, more subscribers, you can do more at a lower cost, especially with value-added services.
As an illustration: A mobile operator has 3 million customers and it rolls out a new feature or service that generates additional revenue of RM10 per subscriber.
This would ideally translate into an increase in revenue of RM30 million. The cost to rollout the service would be quite static, so if your subscriber base were bigger then the cost averaged to each customer would be less.
The resulting entity for the merger between TM Cellular and Celcom will have a subscriber base of more than 3 million and enjoy approximately 40 per cent of the market share – becoming the largest cellular player in Malaysia.
Looking at the bigger picture, there is another benefit that while not tangible, is important nonetheless. If an overseas investor were to look for a cellular partner locally, the norm would be to explore opportunities with the number1 player. So size and market position do matter.
Reducing duplication of resources
Will consolidation of the cellular sector improve the players’ ability to compete in the increasingly competitive Malaysian mobile telecommunications market going forward? The focus at this stage of the merger process is on reducing capital and operating expenditures.
On the cost front there is an opportunity with mergers such as this to realise significant savings through the reduction of overlap and redundancies. Examples of cost synergies include lower customer and marketing costs due to sharing of services.
Beyond merger and acquisition activity, mobile service providers have to look at enhancing profitability. Given the strong mobile penetration growth, ARPU enhancement now represents one of the key mechanisms to increase profitability and revenues.
The cellular sector has enormous potential if international markets are used as a benchmark. In Malaysia, the cellular penetration rate is still relatively low at approximately 33 per cent of the population, compared with over 70 per cent in countries like Norway. Analysts are of the opinion that the cellular sector will continue to grow at around 10 to 15 per cent over the next couple of years.
Some of the growth will come from the extension of coverage to rural areas and new subscribers. But more important is the potential of the prepaid niche and the urban young. The prepaid market, which comprises mainly the youth segment that accounts for more than 40 per cent of the Malaysian population based on Census 2000, will be the early adopters of technology and data usage.
The trend we have seen is fixed voice moving towards mobile voice. As an example, 250 billion SMS text messages were sent worldwide in 2001, generating USD35 billion in revenue. The new trend is towards non-voice services such as messaging or SMS and is expected to continue into the future.
What the Malaysian mobile telecommunications sector will have to do is to look in detail at the specific activities and value-added services that will drive usage and revenue. The telecommunications industry worldwide is evolving with the introduction of new technologies. The future is no longer just about voice but about multimedia data services for mobile communications.
l Abdul Majid Abdullah is vice-president of Corporate Strategy and Planning, Telekom Malaysia Bhd