P1 plans 4G launch next year to challenge Big 3

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PACKET ONE NETWORKS (M) SDN BHD (P1) — now backed by strong shareholders and a big war chest —  plans to launch 4G LTE services as early as next year to battle the Big Three mobile operators, namely Maxis, DiGi and Celcom.

“You should expect us to launch mobile services and issue mobile numbering. We will be a full-fledged mobile operator that will provide fixed-wireless, nomadic and mobile broadband. It will be very similar to the existing mobile players, but we will provide more services,” P1 CEO and managing director Puan Chan Cheong tells The Edge in an interview.

The launch essentially means the transition of P1 from a fixed-wireless broadband provider to a mobile telecommunications player.

Puan says going forward, the new P1 will be a mobility arm of Telekom Malaysia Bhd (TM), as the mobile offering by P1 will complete TM’s vision to be a converged service provider.

It is worth noting that TM used to control mobile operator Celcom, but demerged the unit in 2008 to focus on its high-speed broadband business (HSBB). The demerged unit that houses Celcom and other regional mobile operations then went for a separate listing on Bursa Malaysia and is now known as Axiata Group Bhd.

“TM’s decision to have undivided focus on fixed broadband led it to become the market leader. With P1 as a strategic addition, TM is now ready to provide mobility solutions to its customers,” says Puan, who is also the founder of Green Packet Bhd, a substantial shareholder in P1 together with TM and South Korea’s SK Telecom Co Ltd (SKT).

According to Puan, P1 is currently reviewing its product brand name to better reflect its new ambitions in the mobile business. The current brand is too closely associated with WiMAX and fixed broadband, its main offerings all these years.

To recap, TM, Green Packet and SKT had, in March 2014, established a partnership framework for the three parties to jointly invest in P1.

Under the partnership framework, TM will initially invest up to RM560 million, RM350 million of which will be invested in P1 via the subscription of shares, while the remaining RM210 million will be invested in Green Packet via newly issued bonds, which may be exchanged for Green Packet’s stake in P1 in the future.

TM now controls a 55.3% stake in P1, while Green Packet has 31.1% and SKT, 13.6%.

Worth noting is that P1, a market challenger to the Big Three, has been struggling in recent years, especially after the launch of the triple-play UniFi service by TM, and 4G mobile Internet with voice, dubbed Yes, by YTL Communications Sdn Bhd, which is part of the YTL Power International Bhd.

In 2013, despite generating Ebitda of more than RM40 million on the back of RM300 million in revenue, P1 still reported a net loss of more than RM100 million, mainly due to the depreciation of assets and amortisation cost.

It is difficult to see how P1 can start registering net profit in the coming years, given the heavy capital expenditure that it needs to roll out LTE, or Long Term Evolution, an industry standard for 4G.

“It is not that we don’t have a breakeven timeframe but there is no point talking about it if we are not meeting our short to medium-term targets. Now, we want to focus on building our LTE network,” says Puan. The three parties will further invest RM1.65 billion for P1’s LTE rollout and operations over the next few years, he adds.

In the past six years, P1 had invested RM1.3 billion to expand its 4G WiMAX coverage to 60% of Malaysia’s population, and had enjoyed a high subscription rate and the largest market share from 2008 to 2010.

But in the subsequent years, P1 started to face the double-edged sword of UniFi affecting its bread and butter fixed wireless home broadband sales, and inability to fully evolve into a mobility player with WiMAX technology. This was because the ecosystem halted due to stronger industry support for the adoption of LTE.

“It was P1’s most difficult time,” Puan says. He adds, however, that the past is over and P1 is now ready to move forward.

“The competition days were great as it gave TM and P1 the vigour to push the market to where it is today, with 67% household broadband penetration. We joke about the past and our colourful history provides for interesting conversations that surprisingly bind the teams closer together,” he says of the current partnership with TM, which used to be P1’s fiercest competitor.

Describing P1 as a “raw gem with huge potential”, Puan says the runway is not long and it needs to start preparing now to meet its target of launching LTE services by 2015 and 2016.

TM currently has a strong 2.3 million customer base, while P1 has 500,000 subscribers.

With the backing of TM, Puan says, P1 will have the immediate advantage of cross-selling its products and gaining access to TM’s customer base and distribution channels.

“The partnership is both strategic and opportunistic. TM will be funding some capital into P1 over the next two to three years to roll out the LTE network and services. At the same time, we will leverage SKT’s expertise as well as P1’s existing customer base and its 2,000 LTE-upgradeable WiMAX sites,” he says.

He points out that in Malaysia, while the mobile penetration rate is at 140% and smartphone penetration rate at 65%, the LTE penetration rate is still at an infancy stage of less than 10%. In other words, it is not too late for P1, a Johnny-come-lately, to make its entry into the mobile market by launching LTE services.

“[We are witnessing] the revolution of technology. It is the first time telcos meet with the Internet. It is the first time a telco network is built for data,” he says.

For now, P1 will maintain its WiMAX network, but will soon upgrade to LTE.

“Both WiMAX and LTE networks are 4G technology. We are migrating our subscribers to LTE and once the migration is completed, naturally we will turn off the WiMAX network,” Puan explains.

As for Green Packet, it has not been profitable since 2007, registering a net loss for six consecutive years from 2008 to 2013. It continued to be loss-making in the first six months of 2014, after changing its financial year-end from Dec 31 to June 30.

Boosted by the divestment of part of its equity stake in P1, Green Packet posted a net profit of RM121.62 million for the first quarter ended Sept 30, 2014 (1QFY15), as the group gained RM152.68 million from the dilution of interest in its subsidiary, to an associate stake.

Puan says Green Packet will now reposition its growth strategy to focus on software and devices, and the communications business. Nevertheless, at the end of the day, it will still be the potential of P1 that its shareholders yearn for, after so many years.

To be fair, Green Packet may now have a better chance of success than in the past given that the company, which has a market capitalisation of only RM223 million, is no longer fighting a lone battle with the big boys, but now has TM as the big brother at the forefront of P1.

This article first appeared in The Edge Malaysia Weekly, on December 1 - 7, 2014.