This article first appeared in Corporate, The Edge Malaysia Weekly, on May 9 - 15, 2016.

OVER the past five years, Maxis Bhd, DiGi.Com Bhd and Celcom Axiata Bhd have weathered the much-feared transition from voice to data while fending off their youngest rival, U Mobile Bhd. The fourth largest telecommunications company (telco) may have gained four million subscribers but this has made only a small dent in the incumbents’ margins.

Maxis, DiGi and Celcom still boast Ebitda (earnings before interest, tax, depreciation and amortisation) margins of 54%, 43% and 42% respectively, ranking them among the top six telcos in the world (with a minimum market capitalisation exceeding US$8 billion each) in this category. In fact, no other country on the list had more than one telco in the top 10.

This success, however, has also attracted challengers.And challengers could create trouble for the incumbents’ margins. Malaysia may be able to support four telcos for now but what about five or maybe even six?

Telekom Malaysia Bhd (TM) is expected to join the fray later this year as it tries its hand at quad-play. No date has been announced yet but the rebranding of its mobile arm from P1 to Webe was completed last month. The latter is expected to be a serious contender with TM’s balance sheet and infrastructure to back it up.

YTL Power International Bhd’s YES may be the sixth telco. While YES Communications Sdn Bhd has kept a low profile over the past two years, industry sources say the company has been gearing up to launch its own mobile services sometime this year.

Previously, YES was operating on 4G WiMax, a technology that did not gain traction outside the US. Since then, sources say, the company has overhauled its network to LTE in preparation for its venture into mobile 4G. Just like P1 before it came under TM, YES has been focused on mobile broadband services like its wireless internet dongles. When contacted, YES executives did not deny the company’s plan to launch its own mobile network.

On top of this, there are a number of mobile virtual network operators (MVNOs), like REDtone International Bhd, TuneTalk Sdn Bhd and XOX Bhd, in the telecommunications space. However, these are not considered direct competitors of telcos because they do not own their own infrastructure but lease space on the network from the telcos.

Note that U Mobile also has to rely on Maxis as its domestic roaming partner. However, U Mobile has its own network that is mostly based in the Klang Valley and other urban areas.

Despite such limitations, U Mobile has proved to be a thorn in the side of the incumbents.

“U Mobile has emerged as the market challenger over the past year. Its RM70 plan against Maxis’ RM158 plan offers higher data quotas and unlimited voice, clearly indicating the direction of competition in the Malaysian mobile segment. U Mobile has been able to increase its blended ARPU (average revenue per user) by attracting higher-paying new postpaid customers, but this has directly impacted the ARPU of the incumbents,” says Avinash Sachdeva, a senior analyst at Frost & Sullivan who covers Asia-Pacific.

U Mobile’s P70 plan offers 15GB of data for RM70 while the MaxisONE Plan 158 offers the same for RM158. It is worth noting that the latter was a response to U Mobile’s offering. Before the MaxisONE plans were launched, the telco offered only 2GB of data in its RM155 per month plan. Likewise, DiGi and Celcom have had to similarly offer substantially higher data to their customers over the past year to keep up.

“We are very happy to come in and disrupt the market,” U Mobile CEO Wong Heang Tuck tells The Edge with a big grin.

“As the latest entrant into the market, we have to be aggressive. But that doesn’t mean competing on pricing alone. It doesn’t mean that if you’re cheap, people will come to you. We also have to improve ourselves and not just compete solely on price,” he explains, playing down talk of a price war among the telcos.

For example, U Mobile last month launched unlimited video streaming for its postpaid customers.

For now, it seems that the incumbents can still defend their margins. However, this may come at the cost of market share.

Maxis learnt a painful lesson on how fickle consumers can be when they perceive better value elsewhere. As at March 31, its mobile subscribers had dropped by over one million to 11.29 million — the lowest in nearly five years. In the first quarter of the year alone, Maxis lost 400,000 subscribers as it found itself on the receiving end of a social media backlash for allegedly practising discriminatory pricing practices.

Interestingly, the company’s blended ARPU and margins rose in the first quarter to RM55 and 54% respectively (see chart).

“I don’t think we are the biggest beneficiary of that [Maxis social media backlash]. Celcom will be [the beneficiary]. We would have some of it. It’s the perception of the customers; that takes time to change,” says Wong.

“Rightly or wrongly, people still perceive us as having some network issues and not enough coverage but over the last few years, we have rolled out quite a number of sites. Hopefully, people’s perception will change. The fact that we’ve got new spectrum coming on board by next year, people would really feel the difference between us and the Big Three in terms of network quality,” he adds.

Recall that the Malaysian Communications and Multimedia Commission (MCMC) recently completed a spectrum re-farming where the spectrum allocated to the incumbents was reduced and sold to other players like U Mobile. Previously, U Mobile had to compromise on its network quality, especially in-building, because it only had the high frequency band — 2,600Mhz.

Wong says U Mobile will be able to turn on its new 1,800Mhz band and 900Mhz band by end-2016 and mid-2017 respectively. These lower frequency bands, which are better able to penetrate buildings, should drastically improve the quality of U Mobile’s network.

In a nutshell, the incumbents have to contend with not only two new entrants but also a stronger U Mobile.

While Webe will be seen as a new competitor in the industry, TM’s perspective is quite different, given its position as the incumbent for fixed telecommunications like broadband.

When asked if there is space for five telcos in Malaysia, TM writes: “We think so. But we are aware that the mobile network industry is a red ocean. The broadband space is full of competition not only from mobile operators, LTE operators and other high-speed broadband providers.

“We’ve started our journey intentionally, not wanting to be the No 5 in anything or ‘just another telco’. TM as a group aspires to be Malaysia’s true convergence champion, differentiating ourselves from the pack by providing a holistic convergence service.”

Just like U Mobile, TM also tells The Edge that Webe will prefer to compete on value rather than pure pricing.

Note that Webe relies on Celcom’s network for its extended roaming. The two are sister companies by virtue of Khazanah Nasional Bhd’s majority stake in TM and Axiata Group Bhd, Celcom’s parent. Webe has a decent spread of spectrum with the 2,300Mhz and 2,600Mhz bands, and also has access to TM’s 850Mhz band.

YES has only the 2,300Mhz and 2,600Mhz bands to work with, but it has an advantage — its own 4G network that covers around 85% of the population in Malaysia, which it claims is the largest in the country.

Yet, its total geographic coverage will still be less than that of the incumbents. But if YES concentrates its efforts on urban consumers, it should not have too much of a problem.

Overall, it appears that U Mobile, Webe and YES have some disadvantages when it comes to challenging the Big Three, particularly in network coverage. Still, the industry has seen what an aggressive entrant like U Mobile can do to the incumbents. What more another two?

“Most of the mature markets are supported by three players, maybe four at the most. New entrants in Malaysia will change the market dynamics and intensify the competition. New players will increase their freebies to attract new customers and retain existing ones — and will further hurt the service providers’ margins,” explains Avinash.

Wong says there is certainly enough space for four telcos but not more, unless the new entrants settle for very specific niches. “The latest re-farming is a good indication of this. The regulators give spectrum to only the four major telcos; we are fortunate to be one of them. From the allocation, you can see that it is more or less even.”

It remains to be seen which telcos will be left standing after the inevitable consolidation of the industry in a number of years. In the meantime, consumers can expect to enjoy more data with better speeds at more competitive prices.

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