TELECOMMUNICATIONS FOCUS
New challenges for telcos
Affin-UOB Securities, in its Investment Review of September 1999, sees data traffic and the Internet as the main revenue drivers in the next decade

From easy access to equal access
Since the introduction of equal access on Jan 7, only 77,000 of Telekom’s subscribers have signed up for it. This represents a mere 1.8 per cent of Telekom’s subscriber base. Even Telekom was bracing for greater competition and was expecting between 5.0 per cent and 15 per cent of its subscribers to sign up in the first year.
The economic downturn has been a blessing in disguise for Telekom. Many of the telcos are pre-occupied with getting their houses in order and have not had the opportunity and financial resources to launch full-fledged equal access marketing campaigns.
With equal access being a new concept in Malaysia, consumer education is important. Most-fixed line users are still not familiar with or aware of it, due to limited marketing campaigns.
Customers are also accustomed to thinking of fixed-line services as a monopoly, and may question the legitimacy of the new telcos’ offerings (a problem also experienced by new entrants in other countries). Furthermore, the inconvenience of having to register with the new telcos (and pay a deposit in certain cases), receive multiple bills and dial a three-digit prefix, is a deterrent.
What has been introduced is not really equal access, but easy access. Customers still have to register with the new telcos and dial a three-digit prefix. In an equal access environment, there is carrier pre-selection — that is, the customers decide which carrier they want for their long-distance calls — and all their long-distance calls will be routed through that carrier’s network without dialing any prefix.
Migration from easy access to equal access will start on Jan 1 next year and will take one year to complete. Only in 2001 do we expect more serious competition for Telekom from equal access.
We expect Telekom’s national long-distance market share to fall to 80 per cent by December 2002 from 95 per cent presently. Competition for international traffic started earlier with the issuance of international gateway licences some five years ago. Telekom’s share of international traffic is presently about 75 per cent. We expect this to fall further to 60 per cent by December 2002.
We expect Maxis Communications (formerly known as Binariang) to pose the greatest competition to Telekom. Maxis Communications has developed a strong brand name for its mobile business, which it is leveraging on, to market its fixed-line services. Evidently, Maxis has captured 60 per cent of Telekom’s subscribers that signed up for equal access.
Maxis was previously focused on building its mobile business. Having successfully built up a mobile subscriber base of 609,000, Maxis will now be investing more time and money on the lucrative, corporate fixed-line business. With the assistance of its foreign partner British Telecom, Maxis will soon be launching a range of innovative products for the corporate sector.

Downward pressure on tariffs
Although equal access has been slow to take off, there has been downward pressure on tariffs. The real inertia for users to switch carriers is pricing. The government has placed a discount cap of 20 per cent on tariffs, which is to Telekom’s advantage. Most of the new competing telcos are pricing their fixed-line services at, or close to, the floor pricing.
To fend off competition and cultivate customer loyalty, Telekom has also had to offer discounts on its services. Prior to the launching of equal access, Telekom introduced discount packages such as TM Family & Friends, which offersdiscounts of up to 12 per cent on long-distance national calls and 5.0 per cent on international calls. By January this year, when equal access was introduced, one million or 23 per cent of Telekom’s subscribers had registered for this package.
While attractive discounts can cultivate customer loyalty, revenues and margins will be affected if the lower revenue is not compensated by higher volume or lower cost.
We estimate that every 1.0 per cent reduction in national long-distance tariffs will reduce Telekom’s pre-tax profit by 2.0 per cent. This, however, assumes no increase in volume as a result of lower tariffs and that tariffs for all long-distance calls are reduced, which is more likely the worst case scenario. Due to the structure of interconnection pricing, competitors can only profitably compete on long-distance national calls exceeding 150km. For shorter distance calls of less than 150km, the interconnection payment to Telekom would exceed the tariffs charged to customers.
Nevertheless, the pressure from competition is already showing in Telekom’s recent performance. In the first five months of the year, Telekom’s national long-distance revenue fell 5.0 per cent despite stable call volume.
Other than domestic competition, Telekom also has to contend with global competition on international tariffs. Globally, international tariffs are on a downward trend. When it comes to the international call segment, Telekom not only has to contend with domestic competition, but also attractive pricing from call-back operators and other regional telcos seeking refiling/transit call volume. Over the longer term, technological advances will help to reduce cost.
To keep abreast with competition and falling call charges, Telekom is restructuring its network to reduce transmission cost. Through network restructuring, Telekom hopes to be able to reduce long-distance call charges within Malaysia to a flat 30 sen per minute by the end of 2000. This is indeed a tall order as long-distance rates presently range between 39 sen and RM1.95 per minute.

Potential for tariff re-balancing
Telekom’s ability to price itself competitively is limited by the tariff structure for local calls.
Telekom’s domestic long-distance and international services are presently subsidising the local service. The last tariff re-balancing was in June 1996, in which timing of local calls was introduced, the monthly rebate cut from RM13 to RM3, international tariffs reduced and the peak hours for national long-distance calls extended. Telekom has been pushing for another tariff re-balancing to raise the cost of local calls further, while reducing the cost of long-distance and international calls.
Due to the sensitivity of the issue, we are not likely to see any tariff re-balancing until after the next general election, and until the economy is back on its proper footing. Furthermore, another utility giant, Tenaga Nasional, is also waiting for a tariff review. One could argue that Tenaga is in greater need of an electricity tariff review, given its high gearing.
Telekom is the major beneficiary of any tariff re-balancing. The local service, which has not been opened to competition, accounts for 13 per cent of Telekom’s revenue. Telekom would be able to compete more effectively on its national and international long-distance services if there is an increase in the local call tariff. We estimate that a 10 per cent increase in local call tariffs will increase Telekom’s pre-tax profit by 4.0 per cent (assuming volume falls by 5.0 per cent as a result of the tariff hike).
A reduction or withdrawal of the present RM3 rebate would be an added bonus. We estimate that a complete removal of the rebate would increase Telekom’s FY2000 pre-tax profit by 8.0 per cent.

Synergies from foreign alliances
Margin erosion on traditional telephony services is inevitable. To sustain earnings, operators have to move on to value-added products, and innovative packaging of services. This is where telcos with foreign partners may have an edge.
Foreign partners can provide technical expertise, experience from operating in other competitive markets and financial backing. Foreign partners would also have a range of ready products and services that can easily be adapted to the local market. It would take a local telco longer to develop such products from scratch.
For example, Digi Swisscom successfully launched the first pre-paid mobile service in Malaysia in January 1998 ahead of its competitors with the help of its foreign partner then, Swisscom (which developed the Sicap technology that Digi Swisscom is utilising for its pre-paid service). Maxis will soon be launching the Concert voice and data services, products that were developed by Maxis’ partner British Telecom.
With telecommunications becoming very much a global business, it is also important to have strategic alliances with key global or regional players. Even British Telecom and AT&T, two global giants, found it necessary to join forces. In Asia, British Telecom has been on an acquisition trail and now appears to be on its way to becoming a powerhouse in this region.
The increasing presence of global players in Asia is a threat to incumbents such as Telekom. Through global or regional alliances, telcos can extend their global reach and hopefully capture more corporate network business from multinational corporations.
Another synergy from having a foreign partner is the routing of international traffic through the local telco’s gateway, both for calls terminating in the country as well as for refile to other countries.
For example, with British Telecom’s involvement in Maxis and StarHub (Singapore’s second full-service provider), StarHub will be able to terminate calls transiting in Singapore through Maxis. Singapore is said to be a major refiler of calls to Malaysia — that is, international calls terminating in Malaysia are routed through Singapore (because of cheaper rates).
The Malaysian government recognises the need to have foreign participation in the local telecommunication industry, and has raised the foreign shareholding limit for local telcos to 61 per cent (to be reduced to 49 per cent after five years). Presently, three foreign telcos have a presence in Malaysia — British Telecom and MediaOne through Maxis, and Deutsche Telecom through Technology Resources Industries. Another foreign telco, Swisscom has just withdrawn its investment in Digi Swisscom.

Data and Internet: Future earnings drivers
Over the longer term, worldwide data traffic is expected to eventually exceed voice traffic as depicted in the chart on Page 36.
The Internet is driving a lot of the growth in data traffic. Internet traffic is said to be doubling every 100 days. The International Data Corporation (IDC) expects the value of transactions over the Internet in Malaysia to grow exponentially from US$3.3 million in 1997 to US$271 million in 2001.
Data and Internet revenues are still very small in Malaysia. Telekom’s data revenue is mainly represented by leased line revenue, which accounted for 7.0 per cent of Telekom’s revenue in 1998.
Data and Internet revenues will however grow rapidly in the coming years. Even in 1998, when the country was in a recession, Telekom’s leased line revenue grew by 6.0 per cent.
Over the past 1 1/2 years, the number of Internet subscribers in Malaysia has doubled to about 460,000.
Telekom alone has 341,000 Internet subscribers and is now the single largest Internet Service Provider in Southeast Asia. Telekom targets to increase its subscriber base further to 500,000 by year-end and one million by the end of 2000. This will provide a ready customer base for Telekom’s future launches of value-added services.
Although multimedia revenue accounts for only 1.0 per cent of Telekom’s current revenue, we expect growth in the initial years to be strong, from firstly increasing Internet subscriber base and later on, from content fees on value-added services. Telekom expects the multimedia business to account for 30 per cent of revenue by 2004.