Dear policymakers and other concerned parties in Malaysia,
We note with great interest the recent public correspondence between the CEO of Digital Nasional Bhd (DNB), Ralph Marshall, and Dr Ong Kian Ming, Member of Parliament for Bangi and assistant political education director for the Democratic Action Party.
In his most recent correspondence, Dr Ong asked 10 questions in an open letter to the mobile network operators (MNOs) in Malaysia. In view of this being an open letter we would like to offer some views on the matter based on our many years of experience working for both network operators, regulators, and major vendors to the industry.
Some of the questions posed by Dr Ong were directed explicitly at the CEOs of the existing MNOs so we do not comment on these questions, at least until Dr Ong receives the answers that he is looking for. However, we feel able to offer comments on the questions from Dr Ong numbered 4, 6, 7, 8 and 10, as follows:
4) As a public policymaker that is interested in narrowing the urban-rural divide and as a former deputy minister for the Ministry of International Trade and Industry (MITI), I can see the attractiveness of a Single Wholesale Network (SWN) model led by a government entity that would push for speedier deployment of 5G into the semi-urban and rural areas despite the initial lack of demand. The rapid deployment of 5G, coupled with the existing plans to roll out 4G in a complementary manner by the MNOs will provide the impetus for jobs and investments to flow to lower cost semi-urban and rural areas in different parts of the country which would lead to an increased demand for 5G coverage and services. Would the industry players agree with this point of view?
If the existing MNOs wanted to cooperate with each other, they would already have developed rural coverage based on shared networks. This is the case in many other countries around the world. The impetus for developing shared rural coverage in countries such as the UK has been a combination of government intervention and MNO recognition that such a shared network provides the most cost-effective solution.
Clearly, the MNOs have not collaborated to do this and so the argument speaks for itself: it requires government intervention.
6) One of the key arguments put forth by DNB is that the MNOs should focus on competing based on service offerings rather than the speed and connectivity of their networks under 5G as data and data access are increasingly being commoditised. From my own understanding, there has been little innovation, especially in terms of value-added services for the SMEs and the manufacturing sector. If the MNOs are freed up from having to focus on the 5G rollout and are “forced” to compete based on service offerings, wouldn’t this lead to a more innovative mobile telco landscape, for businesses as well as individual consumers?
Well, yes, this is exactly what the existing MNOs are afraid of. We have been active in the telecommunications industry for 40 years and can support the observation of MNOs fostering little innovation in services. This was especially evident in Europe with the auctioning of 3G spectrum around 2000 where absurd valuations were placed on spectrum by the MNOs. These valuations were based on forecasts of tremendous new revenues from data services which then failed to materialise. More accurately, these revenues failed to materialise for the MNOs, as start-up businesses from Silicon Valley have demonstrated very well that revenues from mass-market data services can yield enormous value — a situation that has prompted complaints from MNOs
The truth is that the MNOs are really operators of utility services. They fund the development of telecommunications infrastructure but the network innovation we have all seen over the past few decades comes from the major equipment manufacturers and a constellation of smaller industry players providing specialist equipment, software, and services. The MNOs resist the emergence of a SWN precisely because this will inevitably lead to a situation where the costs of traffic on the SWN will be more competitive than on their existing 4G infrastructure; the investments they already made would no longer be able to make profits by simply selling undifferentiated data services. The prospect of them genuinely needing to become innovative service providers must be frightening indeed, and to them it must seem an existential threat. However, the interests of Malaysia are best served by forcing this change. Malaysia needs the benefits of diverse and innovative service offerings that can be provided from the new 5G network technology and is best served by the existing MNOs transforming themselves to provide this rather than them clinging to the increasingly obsolete business model of competitive provision of undifferentiated commodity data service.
7) Last year, DNB claimed that it would have 500 5G enabled sites by the end of 2021 for “delivery” to the MNOs as proof that it can deliver on its promise of a speedy 5G rollout plan. At the same time, DNB’s CEO points to the regular reporting and updating on the progress of its 5G rollout plan on its website. Is the industry satisfied with the progress which DNB has made with regards to the rollout of 5G infrastructure? Are there any areas of possible concern which policymakers should know about vis-à-vis the current deployment of the 5G network thus far under DNB?
Policymakers should be reminded that the DNB 5G rollout is being conducted as cost efficiently as possible by hosting 5G technology onto existing MNO base station infrastructure. Naturally, doing this requires the cooperation of the existing MNOs and any third parties which already serve those MNOs. So policymakers should understand that any delays and difficulties that DNB faces is not necessarily of their own making. Resistance to the SWN is already evident from the alternative proposals they have made for a Dual Wholesale Network (DWN) model and there is little reason to believe that they would be enthusiastic in their practical support for the DNB SWN rollout.
8) Does the industry see any upsides in having DNB roll out the 5G network initially and giving an option for MNOs to buy stakes in DNB after a significant portion of the 5G network has been rolled out, let’s say by 2024? Would this lessen the concerns on the part of the MNOs that DNB would “abuse” its position as a monopoly and put unreasonable charges on the industry players for access to the 5G network?
So long as DNB provides fair and equal access to all operators wishing to use the SWN, the assurance that DNB will not abuse its monopoly position should be provided by an independent regulatory body. This body clearly needs to have the necessary powers and mandate to ensure that DNB is delivering on its “fair and equal access” mandate and should investigate any claims of abuse in a transparent and even-handed manner.
As we understand it, DNB proposes to price its wholesale network services based on cost recovery. This implies that there is no direct incentive for any of the existing MNOs to use capital for the purchase of a stake in DNB. Should they choose to do so we would suspect some intention to have DNB deviate from the “fair and equal access” mandate to somehow favour the use of their existing 4G network facilities from which they would then make profits. Alternatively, the intention might be to first assume control of DNB and then subsequently seek ways of reversing the “fair and equal access” mandate so that profits can accrue from the sale of simple 5G data service as an extension of their existing 4G services.
10) Would the MNOs prefer a DWN model compared to the current SWN model with another entity building and rolling out another 5G network? If so, what would be the proposed ownership structure and responsibilities of this DWN model? For example, would a consortium-led entity be allowed to complement/compete against DNB for the 5G rollout or would the ownership structure of DNB be changed so that there are TWO non-government entities given the responsibility of rolling out 5G in Malaysia?
Our understanding is that the existing MNOs have been active in fostering a DWN model as an alternative to the current SWN through DNB. In consequence, we would expect them to support the DWN proposal, but in a form that allows them to favour one operator over the other to their advantage.
Policymakers should be reminded that DNB has been established as a monopoly SWN operator that sets prices for its services based on cost recovery. In a DWN model, what would be the nature of the competition between the two wholesale providers? Assuming that technology is available to both parties – and there does not seem any reason to question this – then competition could only stem from differences in coverage or differences in wholesale prices. We exclude the possibility of significant capacity differences between operators (driven by spectrum availability) as we assume the government would not want to favour one wholesale operator over the other.
We have already mentioned that the coverage plans of DNB rely on the cooperation of existing MNOs in sharing their infrastructure. The competing wholesale operator would ideally not be owned in whole or in part by the existing MNOs otherwise this would create a conflict of interest. This, in turn could result in preferential treatment for one of the wholesale operators. If the two wholesale operators are both government entities, then the practical effect is likely to be that coverage hosted on shared MNO infrastructure would be similar and would offer no competitive advantage for one operator over the other.
In a sustainable competitive market, wholesale prices are likely to be linked to the underlying costs of the weakest operator. The weakest operator will be the one with the least market share as the volume of traffic is its most significant driver of cost. Although this is a rather simplistic view of wholesale service cost, this suggests that an operator with twice the traffic volume of the other, for example, would have unit costs which are roughly half that of the other. For the weaker operator to have a sustainable future, it must cover its costs. This would mean that the strongest operator pricing in a similar manner would make excessive profits by virtue of its market position. Our conclusion based on this view is that the market would suffer from excessively priced service and that Malaysia would be that much poorer as a result.
The above argument only holds if the wholesale operators cannot differentiate their wholesale service offerings. With 5G standalone we know that it becomes possible to do network “slicing” which, in practice, means being able to offer services with different service specifications. In this way, one operator could be more successful in serving a particular market niche than the other and could in consequence build up a dominant market share in that niche. Let us assume that each operator follows this approach and develops a sustainable portfolio of niche service offerings. The situation, then, would be that each operator becomes a monopoly provider for its portfolio of niche offerings. The consequence would be that the intention to foster a competitive supply of wholesale 5G services is effectively defeated.
The government of Malaysia is advised to stand firm in its declared intention to foster a SWN for 5G and address any concerns about monopoly provision through an effective regulatory body.