Thursday, April 9, 2009

Battle For Broadband Heats Up ...

Article from The Edge

WITH the market for fixed and cellular services seen to be near saturation — the Malaysian Communications and Multimedia Commission (MCMC) reported cellular penetration rate at 96.8% at end-2008 — telco players are looking to the broadband space for future growth.

Malaysia's household broadband penetration rate is lagging far behind that in neighbouring countries — estimated at just over 21% (or roughly 1.3 million subscribers) compared to over 100% in, say, Singapore. Clearly, the potential market is vast and remains largely untapped.

Lack of options, until now

The relatively low broadband penetration rate is very likely due, at least in part, to the limited options in terms of service providers. Currently, the only mass-market broadband service provider is Streamyx, a unit of Telekom Malaysia — primarily because of its near-monopoly in the fixed telephony market. The majority of high-speed Internet access is now delivered via copper telephone lines to homes.

This last-mile connection is a huge cost advantage and high barrier to entry for any new player. Until now. New technologies such as Worldwide Inter-operability for Microwave Access (WiMAX) and the third-generation of mobile communications technology (3G) offer customers a cost-effective alternative — wireless broadband. Access no longer needs to be tethered to traditional copper telephone lines — it can be delivered to homes wirelessly (fixed broadband) and portable (mobile broadband) via a Universal Serial Bus (USB) dongle.

We believe there is substantial pent-up demand for affordable and quality broadband service. The Internet is becoming an increasingly integral part of life — be it for work, communications, banking, buying and selling, gaming, entertainment, social networking or just staying abreast of global current affairs. We foresee that demand can only pick up pace over the next few years.

P1 well positioned to tap fixed broadband market

And we believe WiMAX licensee P1 (the service provider arm of Green Packet) is well positioned to capture a slice of this potentially lucrative market. The company is the first of the four WiMAX licensees to launch its broadband services in the country, in August 2008, under the brand name P1 W1MAX.

In particular, we see P1 as the primary competitor to Streamyx in the fixed broadband market segment. WiMAX is ideal for the growing number of homes that have no fixed telephone lines. Customers only require a WiMAX modem — signal is transmitted wirelessly from a nearby base station — which can be hooked up directly to a personal computer (PC) or multiple PCs/laptops via a regular router.

P1's rollout gathering steam

After some teething problems last year, P1 has ramped up its rollout programme. The first phase — under a turnkey contract to Alcatel-Lucent — is now slated for completion by 1H09 with the deployment of roughly 600 sites.

Last week, the company signed on a second equipment vendor, China's ZTE Corp, for the next phase of its rollout. P1 estimates it will have up to 700 sites by the end of this year and more than 1,000 sites by end-2010, at which time it will be providing 45% population coverage nationwide.

Subscriber acquisition has been growing at strong double-digit pace since the beginning of this year as more sites are commissioned. In particular, sign-up for the P1 Lite package has surpassed expectations — with a high take-up rate by existing dial-up customers upgrading to higher bandwidth. This underscores our belief that there is big pent-up demand for quality broadband in the country. At the current pace, P1 expects to sign up 250,000 subscribers by end-2009.

Convergence of voice and data

We may also be seeing the start of a trend where voice and data services coalesce.Celcom recently introduced its broadband wireless gateway, an all-in-one mobile router that allows subscribers broadband Internet access as well as voice telephony services. The difference is its telephony services are based on Voice over Internet Protocol (VoIP) and are thus, price competitive. Celcom offers 30 sen per minute voice calls nationwide under its two wireless gateway packages.

P1 will also be launching its own data plus voice bundled packages in the next few months. The second generation of WiMAX modems will have in-built Wi-Fi router and can be connected directly to a telephone. P1 already has inter-connect agreements with all the major telcos.

Merging fixed and mobile broadband

Additionally, P1 plans to launch its mobile broadband service in 2Q09. This will pitch the company in direct competition with telcos Maxis, DiGi and Celcom.Instead of a WiMAX modem in the house, customers will be able to access the Internet anywhere using a USB dongle. This setup is similar to the mobile broadband services currently offered by all three major telcos on their 3G networks.

Celcom is currently the largest mobile broadband player with the widest coverage, which the company estimates at over 71% of Malaysia's populated areas, while DiGi was the latest to enter the foray after launching its wireless broadband services last week. Still, P1 may have an edge. WiMAX is faster and, arguably, the more efficient technology for high bandwidth Internet access compared to 3G, which is primarily a voice platform with the capability to offer mobile broadband.

The WiMAX network is also relatively cheaper to rollout since it is based on open standards and non-proprietary. P1 estimates capital expenditure to total roughly RM450 million to achieve the 45% coverage target by 2010. By comparison, DiGi acquired its 3G spectrum from Time dotCom last year for nearly RM700 million. It plans to spend some RM400 million in rollout costs this year alone.

Quality likely to be the key

DiGi does not expect meaningful revenue contribution until 2010 when it has better coverage. The telco intends to control its subscriber numbers in step with rollout progress — to preserve the quality of service. It may yet be the winning strategy.

Anecdotal evidence suggests that most existing broadband subscribers are dissatisfied with their actual connection speed, which is currently offered on a best-effort basis and often falling well below advertised headline speed. Hence, a service provider that can offer quality service will have a formidable edge in the battle for not only new broadband customers but existing ones as well.


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