Telekom Malaysia First Half 2018 Earnings Down 14%

Telekom Malaysia Berhad financial results for the first half of the year ended 30 June 2018 show a decline in voice, data and other telecom revenue. That is an issue most telcos globally wil have to deal with as well.  

Telekom Malaysia posted revenue of RM5.78 billion year-to-date, 2.7 percent lower from RM5.94 billion in the corresponding period last year. In part, one might argue, that results from market saturation.  

Group Reported Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) for the first half of 2018 was RM1.61 billion as compared to RM1.80 billion in the first half of 2017 mainly due to the lower revenue.

Stripping off non-operational items, such as unrealized forex loss on trade settlement, group normalized EBITDA was 13.9 percent lower, at RM1.60 billion.

Group EBIT for first half of 2018 was RM444.5 million as compared to RM560.9 million in the first half of 2017.

Stripping off some non-operational items, including foreign exchange loss on international trade settlement, normalised EBIT stood at RM433.0 million.

“The first six months of 2018 has been very challenging for us, from rapid developments in the market to increasing regulatory pressures,” said Datuk Bazlan Osman, Telekom Malaysia Group CEO.

In the second quarter, group revenue stood at RM2.94 billion, lower by 1.5 percent year over year.

Group EBIT stood at RM248.9 million, lower by 3.2 percent, year over year.

On a normalized basis, EBIT was lower by 25.6 percent year over year, dropping to RM226.4 million from RM304.5 million in the second quarter of 2017.

In fact, at least think a major wave of consolidation lies ahead, caused at least in part by spectacular change in revenue sources. And much of that change is driven by changes in the value of access.

Massive consolidation, reducing the number of global tier-one carriers by about 90 percent is what some believe is coming.

As Line Between Platform and Publisher Blurs, We Need More Freedom for All

It is not so easy these days to clearly and unmistakably delineate what a “platform” is and what “media” is. Facebook says it is a “technology” company, not a media company. And Facebook execs sometimes have said the difference is between telling stories and building tools.

Others might point out that business models sometimes play a role. “Media” companies sometimes have business models based on business-to-business sales (advertising or content or products) and sometimes on business-to-consumer subscriptions, or a mix of those models.

It is not so clear that one can delineate based on revenue model. Amazon is a commerce platform, but also makes revenue selling advertising, and that role seems to be growing. And one might argue that Facebook’s hosting of a platform for people to communicate is akin to the communications platform provided by AT&T or Verizon, where end users supply their own content.

In principle, a platform is supposed to be content- and content-creator-agnostic, allowing end users to produce content that the platform then distributes.

“Publishers,” on the other hand, make their own decisions about what content to create or distribute. Publishing is not classically about “user generated” content, but “professionals creating content.”

So telcos and social media outlets are both platforms. And platforms are not responsible (legally) for the content that is posted.

Publishers, on the other hand, do create or curate content, and are responsible, but with the major caveat that publishers also have free speech rights in terms of their content. They are not “regulated” as common carriers, for example.

Everything has gotten fuzzier, and the lines between the two roles are less clear and the actual activities undertaken by platforms are fusing with content creation as well. And some entities already seem to be hybrids. Firms such as BuzzFeed, Huffington Post, Bleacher Report and so forth combine “professional” and “user generated” content.

And that poses new problems. If it becomes less possible to clearly separate platform from publisher, and if the roles use different regulatory models (unregulated for data services or traditional publishers; a bit of regulation for broadcasters, radio, cable TV; heavily regulated common carrier (telcos), when those industries fuse, we have to figure out which model to apply.

And the fundamental choices always are “more or less.” We can use the lighter-regulation approach to all, or the heavier-regulation to all. And that is where, in the U.S. policy framework, “freedom of the press” plays a key role.

Some might approve of greater restrictions on freedom of expression, typically for “good reasons.” Some might argue we can clearly separate when the platform model makes sense, and when the publisher model makes sense, even when those are co-mingled roles.

Personally, as hard as it might be, I’d argue for greater freedom for all. That is a better framework than “less freedom for all.”

Asia is Next Big Netflix Challenge

For over-the-top video subscriptions, Asia is the next big challenge for big global providers, as Asia has been the growth engine for mobile generally, and is the big opportunity for mobile internet access and new Internet of Things apps and services as well.

Netflix’s penetration of subscription OTT video users in Asia-Pacific will increase from 11.8 percent in 2017 to perhaps to 14.3 percent in 2020, says eMarketer.

Local content remains a big challenge in countries where English is not the main language.

Asia  is home to one of the most competitive OTT over the top video markets in the world, eMarketer notes, with subscriber growth rates in 2018 of possibly 35.2 percent.

In India, high prices and a lack of localized content on OTT platforms have deterred adoption. Both Netflix and Amazon Prime Video primarily provide content in English and Hindi.  In 2018, only 1.7 percent of internet users in India will watch Netflix.

In Japan, Netflix launched in September 2015 and amassed more Japanese titles than U.S. titles on its platform. Yet subscription OTT penetration in Japan has reached only 16.0 percent of internet users, eMarketer notes.

In Western Europe, though Netflix still is growing, it is reaching a point of near saturation, as might be the case in the United States as well.

source: eMarketer

If nothing else, Netflix has changed strategy for other big content owners and distributors, creating a new imperative to expand globally.

More Competition Coming in U.S. Internet Access Market

To the extent that cable TV industry fortunes now rely on internet access revenues, and to the extent that new competition emerges from 5G fixed wireless, that growth engine is exposed.

“We see 5G fixed wireless broadband as the biggest existential threat to broadband providers (by far),” say equity analysts at Cowen. Assume, for example, that T-Mobile US actually throws significant effort at 5G fixed wireless, and gets anywhere near its goal of 10 million accounts by about 2024.

“That would be a large majority of the entire cable industry’s broadband adds over the next six years,” Cowen analysts say.

Verizon, for its part, is targeting 30 million or perhaps 35 million homes passed, in metro markets where it has lots of fiber (places where XO has big footprint, for example) and outside its legacy fixed network territory.

That suggests Verizon could wind up competing most with AT&T, Comcast and Charter. Making a further assumption that in its chosen markets it will be Comcast and Charter that have the most market share, and already have the greatest share of faster-speed accounts, that logicall suggests the cable competitors might be at more risk than AT&T or CenturyLink.

You might argue that the telcos generally sell lower-speed services, so their customers would be most at risk from a fixed wireless entry by Verizon or T-Mobile. But most of those customers already could have switched to cable providers, were internet access speed the big consideration.

What might be the case is that customers of slower-speed telco services think those services are good enough, when bundled with other telco services, to inhibit switching behavior.

source: Cowen

Verizon has significant metro fiber in 17 of the top “NFL” U.S. markets where it is not the incumbent.

Assuming the cable competitor in those markets has 45 percent share, IComcast could have 2.1 million homes exposed to loss, about (eight percent of its base).

Charter might be at risk to share loss of perhaps 1.1 million homes, about 4.7 percent of its base.

Assuming a 25 percent Verizon take rate when it enters those new markets, perhaps two percent of Comcast customers and one percent of Charter customers could go to Verizon. That might be a manageable loss.

T-Mobile US might take a different tack. T -Mobile expects to become a viable in -home broadband alternative especially in rural areas. The carrier believes it will, by 2021, it provide data rates in excess of 100 Mbps to 66 percent of the U.S. population, reaching coverage of up to 90 percent by 2024.

T-Mobile US execs have suggested that a service offering 100 Mbps would be a competitive alternative for perhaps 19 percent  of the population. By 2024, as much as 35 percent to 45 percent of the U.S. population might be candidates for a mobile substitute product.

Looking at fixed wireless, T-Mobile US estimates it could provide service to 9.5 million households early on. By 2024 T -Mobile expects to be able to reach 52 million rural residents with a fixed wireless solution.

source: Cowen

Some who decry the lack of competition in the U.S. internet access space might be surprised to see growing competition, at scale, when 5G arrives. Google Fiber once was thought to be a catalyst for such competition. Now it appears Verizon and possibly T-Mobile US will assume that role.

Sometimes it takes scale to disrupt a market.

Consumer Behavior Changes as Cost Changes

Data per bit has huge business model implications that will be more obvious in the 5G era. Consumption of video is the biggest new design issue for mobile networks, since video

is the app that requires the most capacity.

And it should be obvious by now that when access costs fall--either to a fixed price for unlimited usage, a fixed price for “what you typically use” levels, or even close to zero, as in the use of public Wi-Fi, behavior changes.

That was true for AOL when it switched from usage-based dial-up access to “unlimited” access, and is true in the era of public Wi-Fi as well. Big usage allowances mean consumers are willing to use Netflix and other streaming services. But, up to this point, such offers were hard to support on mobile networks, simply because cost per bit on most mobile networks has been an order of magnitude higher than on cabled networks.

But the principle remains: people consume more data, and especially video content, when they do not have to worry about the cost of doing so.

And that is why 5G will be revolutionary. It will, in a growing number of instances, break the traditional cost barrier that has prevented mobile access from becoming a full substitute for cabled (fixed) network internet access.

source: Nokia Bell Labs

Since video arguably is the app with the most-stringent revenue per bit profiles, especially when the internet access provider earns no direct revenue from enabling video access (ISP supplies access bandwidth and usage, but no direct video app revenue), the ability to supply lots of bandwidth for video is a prerequisite for any wireless access platform competing with cabled networks.

Voice and messaging arguably have the highest revenue per bit profiles (possibly as high as dollars per gigabyte) with web browsing somewhere in between (cents per gigabyte).

General purpose internet access arguably has the “best” combination of revenue and cost, though even there a cabled network might earn (retail prices) less than US$1 per gigabyte. Mobile bandwidth  generally costs $5 to $8 per per gigabyte (retail prices), lower than the $9 to $10 it cost in 2016 or so, for popular plans, and less than that for plans containing higher amounts of usage. Higher usage plans might feature costs per gigabyte closer to $3.

That is an internal business model issue for any mobile operator. But more than that is going to change in the 5G era.

source: Bell Labs

If you assume the mobile network cost of delivering a gigabyte will drop 50 percent or more from 4G to 5G, fueled by new spectrum, use of shared and unlicensed spectrum and small cells, then the cost of using a gigabyte of “mobile” access will be closer to the cost of using a gigabyte of “fixed” access, especially on an “actual consumption” basis.

And that is going to open up many new use cases where mobile is a substitute for fixed access. Customers who routinely work from multiple locations, especially on the go, might already find mobile is a functional substitute for fixed access. As prices continue to fall, a greater number of consumers will find their own use cases can be supported with with a fixed or mobile access plan.

If you assume mobile access costs, especially in fixed mode, reduce costs by up to an order of magnitude, then the wireless 5G option might well become a full functional substitute for a cabled network access service.

And that means, for the first time in industry history, that mobile or wireless platforms will be able to compete close to directly against fixed and cabled networks as suppliers of consumer internet access.

Cost Per Bit

Data per bit has huge business model implications that will be more obvious in the 5G era. Consumption of video is the biggest new design issue for mobile networks, since video

is the app that requires the most capacity.

And it should be obvious by now that when access costs fall--either to a fixed price for unlimited usage, a fixed price for “what you typically use” levels, or even close to zero, as in the use of public Wi-Fi, behavior changes.

That was true for AOL when it switched from usage-based dial-up access to “unlimited” access, and is true in the era of public Wi-Fi as well. Big usage allowances mean consumers are willing to use Netflix and other streaming services. But, up to this point, such offers were hard to support on mobile networks, simply because cost per bit on most mobile networks has been an order of magnitude higher than on cabled networks.

But the principle remains: people consume more data, and especially video content, when they do not have to worry about the cost of doing so.

And that is why 5G will be revolutionary. It will, in a growing number of instances, break the traditional cost barrier that has prevented mobile access from becoming a full substitute for cabled (fixed) network internet access.

source: Nokia Bell Labs

Since video arguably is the app with the most-stringent revenue per bit profiles, especially when the internet access provider earns no direct revenue from enabling video access (ISP supplies access bandwidth and usage, but no direct video app revenue), the ability to supply lots of bandwidth for video is a prerequisite for any wireless access platform competing with cabled networks.

Voice and messaging arguably have the highest revenue per bit profiles (possibly as high as dollars per gigabyte) with web browsing somewhere in between (cents per gigabyte).

General purpose internet access arguably has the “best” combination of revenue and cost, though even there a cabled network might earn (retail prices) less than US$1 per gigabyte. Mobile bandwidth  generally costs $5 to $8 per per gigabyte (retail prices), lower than the $9 to $10 it cost in 2016 or so, for popular plans, and less than that for plans containing higher amounts of usage. Higher usage plans might feature costs per gigabyte closer to $3.

That is an internal business model issue for any mobile operator. But more than that is going to change in the 5G era.

source: Bell Labs

If you assume the mobile network cost of delivering a gigabyte will drop 50 percent or more from 4G to 5G, fueled by new spectrum, use of shared and unlicensed spectrum and small cells, then the cost of using a gigabyte of “mobile” access will be closer to the cost of using a gigabyte of “fixed” access, especially on an “actual consumption” basis.

And that is going to open up many new use cases where mobile is a substitute for fixed access. Customers who routinely work from multiple locations, especially on the go, might already find mobile is a functional substitute for fixed access. As prices continue to fall, a greater number of consumers will find their own use cases can be supported with with a fixed or mobile access plan.

If you assume mobile access costs, especially in fixed mode, reduce costs by up to an order of magnitude, then the wireless 5G option might well become a full functional substitute for a cabled network access service.

And that means, for the first time in industry history, that mobile or wireless platforms will be able to compete close to directly against fixed and cabled networks as suppliers of consumer internet access.

Connecting the Unconnected in Rural U.S.

Some 700,000 U.S. rural homes and small businesses will gain access to high-speed internet access for the first time through the Federal Communications Commission’s Connect America Fund Phase II auction, auction results released today show, and more than half of those 713,176 locations will have service available with download speeds of at least 100 megabits per second.

Connecting 700,000 homes in a nation with perhaps 138.3 million housing units, that might not sound like much. But the 250,000 most-isolated rural locations account for about half the estimated cost of connecting seven million U.S. homes in rural, hard to reach areas.

Of course, the most-isolated areas likely always will be among the best candidates for satellite or other wireless access platforms. Perhaps three million rural locations already buy satellite internet access.

That “cost to reach” logically implies that the great bulk of new investment under this program will support extension of service to new locations that are not the most-isolated, as that provides the greatest efficiency. In other words, service providers logically will connect the new locations in some proximity to current networks, rather than taking on the most-difficult, most-expensive areas .

According to plan, 53 percent of all homes and businesses served with support from the auction will have broadband available with download speeds of at least 100 megabits per second. Some 19 percent will have gigabit service available. And 711,389 locations—all but 0.25 percent—will have at least 25 Mbps service.

It appears a great many of the providers are ISPs using fixed wireless.  

Providers must build out to 40 percent of the assigned homes and businesses in a state within three years of becoming authorized to receive support. Buildout must increase by 20 percent in each subsequent year, until complete buildout is reach at the end of the sixth year.

The auction allocated $1.488 billion in support to be distributed over the next 10 years to expand rural broadband service in unserved areas in 45 states. A total of 103 providers will get funds.