Pushback on DNB-led 5G reflects impending change in industry status quo

This article first appeared in The Edge Malaysia Weekly, on November 15, 2021 - November 21, 2021.
Malaysia hopes to achieve 80% 5G coverage by end 2024, putting the country ahead of most Asean peers

Malaysia hopes to achieve 80% 5G coverage by end 2024, putting the country ahead of most Asean peers

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LAST Wednesday (Nov 10), Reuters ran a report headlined “No takers for Malaysia’s 5G plan as major telcos balk over pricing, transparency”, claiming that none of Malaysia’s major mobile operators had agreed to use the government-owned 5G network even though initial 5G rollout had been planned for December.

As a matter of fact, Digital Nasional Bhd (DNB) had demonstrated to the media that very day that its 5G Multi-Operator Core Network (MOCN) had successfully integrated with five mobile operators.

Calling the article inaccurate the following day, DNB said negotiations on pricing would begin only after an applicable reference access offer (RAO) document, which forms the basis for DNB’s entering into commercial agreements with licensees seeking access to the 5G network, is finalised. DNB expects the RAO to be finalised by month-end, with approval from the Malaysian Communications and Multimedia Commission (MCMC).

“We will be able to sign up the telcos only after the publication of the RAO. It is thus clear that DNB has sought no sign-up nor expects the mobile network operators (MNOs) to sign anything until after the RAO is published,” DNB’s statement read.

Noting that the stock prices of all listed telcos have outperformed the broader FBM KLCI since the government announced the formation of DNB and its 5G mandate on Feb 18, DNB also refuted claims that telcos would end up being less profitable by leasing 5G capacity and could end up paying more than they would have if they rolled out 5G on their own, when taking into account contingency costs to ascertain their desired network quality.

DNB chief operating officer Dushyan Vaithiyanathan had earlier told Reuters that the plan would cost only RM16.5 billion, about half of the RM30 billion to RM35 billion that it would cost carriers to build separate 5G infrastructure themselves, by avoiding duplication. He also said DNB is working closely with MCMC to put in place stringent guidelines that would ensure fair pricing and a smooth rollout.

Ensuring that there will not be excess profits at DNB is positive for telecom operators and necessary to deliver what the structure promises to do for the country.

No retail ambition, vested interest

Asked about fears of DNB being a competitor to its customers, DNB CEO Ralph Marshall tells The Edge that “DNB does not harbour any retail ambitions whatsoever”, is not licensed to undertake retail services and can only provide wholesale services to persons licensed under the Communications and Multimedia Act 1998. “DNB is therefore not able to reserve any 5G capacity for itself other than to provide wholesale 5G capacity to licensees.”

For those familiar with industry goings-on, however, the fact that news of serious dissent had taken nine months to emerge in public is perhaps more surprising than there there is pushback from the industry on how the government wants telecoms infrastructure development to happen going forward.

“We are talking about [contracts worth] billions. Of course, there are vested interests … many who don’t want the status quo to change and not necessarily because they are concerned about service quality or have the end-customer’s interests at heart. There are always people who would want spectrum to continue being given out cheaply to them and we know not all of them actually build a network,” an industry observer says.

Leveraging vendor financing and the fact that it is the only party with 5G spectrum in Malaysia, DNB, which is 100%-owned by Minister of Finance Inc, will own 5G infrastructure that is essentially being paid for using securitised cash flow from its customers, the country’s mobile operators that will be using DNB’s 5G network to offer 5G services to end-users.

This means the eventuality that mobile operators will no longer able to differentiate themselves on network quality but will have to compete on service quality and product differential to retail and enterprise customers will occur even sooner than thought. This is already happening globally as the industry matures and players start sharing network infrastructure to cut costs.

In Malaysia, telecom operators had become more open about sharing “passive” infrastructure such as tower structures in recent years but have not been as keen to share “active”, or the dynamic electronic part of core network, infrastructure. The sharing of active infrastructure already takes place in countries such as the US, Australia and New Zealand.

Structural change

As flagged by The Edge in March, a multi-billion-dollar question is whether DNB’s infrastructure sharing model for 5G would hasten the carving-out of telecoms infrastructure by incumbent mobile operators to third-party infrastructure managers such as Axiata’s tower unit edotco. This is so that more value can be derived upfront for shareholders, since network-sharing will be an eventuality if next-generation spectrum is no longer to be given out to operators. If done well, this approach could even boost near-term valuations for sellers, if indeed more money can be freed up for dividends. (See also “Government’s 5G SPV plan may hasten structural changes to telecoms industry”, The Edge, Issue 1359, March 1, 2021.)

The question about impending structural change is also implied, albeit in a different manner, in the Reuters article, in which an unnamed source said non-5G network assets would be worth a lot less by 2030 when the majority of network utilisation would be on 5G rather than 4G, which is prevalent today. The source argued that telco shareholders would be hurt as valuations fall over time, owing to limitations of a legacy network.

While telecoms operators have hitherto owned their mobile network infrastructure, they have had experience selling broadband services with wholesale capacity bought from Telekom Malaysia Bhd’s high-speed broadband (HSBB) network — proof that profitable retail and enterprise services can be built by third parties that do not own the network infrastructure provided that wholesale pricing is well-regulated to ensure fair access to all players and no-excess profits by the asset owner.

Astro Malaysia Bhd, which is also making good profits, also does not own the satellite that it has used to offer direct-to-home pay-TV service in the past 25 years.

Will 5G still go live in December?

DNB has clarified that it is still working with operators towards a December rollout in Putrajaya, Cyberjaya and selected areas in Kuala Lumpur, despite expecting long-term commercial agreements with licensees to be concluded early next year. Its vendor, Ericsson, has already secured RM800 million financing to facilitate the early phases of 5G rollout, pending the signing of commercial agreements between DNB and its customers.

The fact that Khazanah Nasional Bhd is the major shareholder of Axiata — which wholly-owns Celcom (M) Bhd, which is in the process of working out a merger with Telenor ASA-led Digi.Com Bhd — means that at least two of the Big 3 telecom operators are likely to step up once pricing issues are hammered out, an observer says. Maxis Bhd, which prides itself on being a technology leader and already offers 5G roaming to customers abroad, is unlikely to risk the inability to offer its customers in Malaysia 5G services.

Apart from the Big 3, Telekom Malaysia and U Mobile Bhd’s network have also integrated with DNB’s network. Network integration with a sixth operator is currently underway.

The plan is to achieve 39% coverage by end-2022, 73% by 2023 and 80% by end-2024, with full-fledged 5G capabilities and the super-fast connection necessary to power more sophisticated next-generation intelligent machines and enable businesses to fully digitise operations to move up the global value chain. The targeted coverage by 2024 stands to put Malaysia ahead of most Asean countries except Singapore, which aims to have two nationwide networks and at least 34% 5G penetration by 2024. DNB needs to deliver on its potential, alongside the operators it was set up to assist, for Malaysia to move forward more quickly.

 

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