Industry Overview

10. INDUSTRY AND ECONOMY OVERVIEW 10. INDUSTRY AND ECONOMY OVERVIEW
Frost 6-Sullivan Malaysia Sdn Bhd (522293WI Suite E-08-15, Block E, Plaza Mont’ Kiara. 2 Jalan Kiara, Mont’ Kiara, 50480 Kuala Lumpur, Malaysia. Tel: +603.6204.5800 Fax: +603.6201.7402
The Board of Directors www.frost.com TM International Berhad Level 42 North Wing Menara TM Jalan Pantai Baharu 50672 Kuala Lumpur Malaysia
11 April 2008 Dear Sirs EXECUTIVE SUMMARIES AND OVERVIEW OF OTHER KEY REGIONAL MARKETS OF ECONOMIES OF THE INDEPENDENT MARKET RESEARCH REPORT FOR TM INTERNATIONAL BERHAD (“TM INTERNATIONAL” OR “COMPANY”) We, Frost & Sullivan Malaysia Sdn Bhd, have prepared (i) the Executive Summaries of the Mobile Telecommunications Market in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, and Singapore; and (ii) the Overview of the Mobile Telecommunications Markets in Other Key Regional Markets (collectively referred to as the “Report”), all of which have been prepared for inclusion in the Prospectus of TM International in relation to the listing of TM International on the Main Board of Bursa Malaysia Securities Berhad. We are aware that this Report will be included in the Prospectus and we further confirm that we are aware of our responsibilities under section 214 of the Capital Market and Services Act, 2007. This research is undertaken with the purpose of providing the following: (i) an overview of the mobile telecommunications industry in the key markets in which TM International and its existing and proposed subsidiaries (‘TM International Group”) operate;
(ii) an overview of the mobile telecommunications industry in other key regional markets in which the TM International Group operates; and

(iii) an overview and outlook of the economies of certain countries in which the TM International Group has operations. Bangalore Bangkok Beijing Bogoto Buenos Aires CapeTown Chennai Delhi Dubai Frankfurt Kolkata Kuala Lumpur London Melbourne Mexico City Mumbai NewYork Oxford Palo Alto Paris San Antonio Sao Paulo Seoul Shanghai Singapore Sydney Tokyo Toronto 143 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN

 

1. EXECUTIVE SUMMARY OF THE MOBILE TELECOMMUNICATIONS MARKET IN MALAYSIA 1.1 Industry/Market Segmentation With a mobile penetration of 85.9% as of December 31,2007, the mobile market in Malaysia is close to saturation. Malaysia’s mobile subscriber growth saw a year­on-year increase of 19.9% in 2007 compared to a decline of 0.3% in 2006. This was largely due to the prepaid registration exercise initiated by the Malaysian Government. Prepaid subscription grewyear-on-year by 20.7% in 2007 over 2006, while postpaid subscription grew by 16.0%. As of December 31,2007, there were 23.3 million mobile subscribers in Malaysia compared to 19.5 million subscribers as of December 31, 2006. It is expected that the total mobile subscriber market will sustain positive growth to reach 28.8 million subscribers by 2012. Mobile subscribers are expected to grow at a compound annual growth rate (“CAGR”) of 4.3% between 2007 and 2012. Figure 1.1 provides details on mobile subscribers and mobile penetration in Malaysia from 2003 to 2007. Figure 1.1: Total Mobile Subscribers and Mobile Penetration (Malaysia), 2003-2007
2003  2004  2005  2006  2007  Mobile penetration 1  43.9%  57.1%  74.7%  73.0%  85.9%  Total Mobile subscribers (‘000) (incl. 3G subscribers)  11,004  14.597  19,511  19,454  23.330  No. of 3G subscribers (‘000)  .  .  68  407  1.538  Postpaid subscribers (‘000)  2,493  2,540  2.890  3.358  3,895  Prepaid subscribers (‘000)  8.511  12.057  16.621  16,096  19,435  Proportion of prepaid subscribers  77.3%  82.6%  85.2%  82.7%  83.3%
Source. Frost & SuI/Nan Prepaid subscribers made up 83.3% of total subscribers as of December 31, 2007 and this represented an increase over 2006. In 2006, prepaid subscriber growth declined and this was due to the mandatory requirement for registration of prepaid subscribers as of December 31, 2006 and an increased emphasis on postpaid services. Higher data usage and the implementation of mobile number portability (“MNP”), which enables mobile subscribers to retain their mobile telephone , Mobile penetration refers to the percentage of total mobile subscribers against the country’s population. Country population is proVided by Frost & Sullivan. Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 144 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
numbers when changing from one mobile network operator to another, are expected to result in the migration of premium prepaid subscribers to post-paid packages. Collectively, Maxis Communications Berhad (“Maxis”) and Celcom (Malaysia) Berhad (“Celcom”) surpassed one million 3G subscribers by the end of 2007. At 1.5 million subscribers this represented 6.6% of total mobile subscribers, indicating a slow take up of 3G services since its launch in 2005. The last two years, 2006 and 2007, saw the growing intensity of the Malaysian mobile market’s competitive landscape with the entry of new market players, technology and the launch of convergent services. In February 2006, the Malaysian Communications and Multimedia Commission (“MCMC”) awarded two additional 3G licenses to two non-mobile operators namely; the fixed and broadband service provider, Time dotCom Bhd (“Time dotCom”) and pay TV operator, MiTV Corporation Sdn Bhd (now known as U Telecom Media Holdings Sdn Bhd) (“U Mobile”) to create a more competitive environment. Since then the ‘U Mobile’ brand was launched in November 2007 with a pre-launch program of its Mobile Live TVTM service. Meanwhile, Time dotCom entered into an agreement with DiGLCom Bhd (“DiGi”) in November 2007 for DiGi to acquire the exclusive use of Time dotCom’s 3G spectrum. The MCMC approved the transfer of Time dotCom’s 3G licence to DiGLCom late January 2008 and DiGi has expressed its plans that it will launch 3G services in the second half of 2008. DiGi, with its strong track record and experience and U Mobile’s new brand and planned innovative business models are anticipated to provide more choices to Malaysian consumers and pose significant competition to Maxis and Celcom. Both Maxis and Celcom launched High-Speed Downlink Packet Access (“HSDPA”) services in 2006, positioned as a wireless broadband alternative. HSDPA is an upgrade of 3G networks delivering higher data transfer speeds and capacity. In 2006, Celcom’s 3G network was upgraded and Celcom was able to provide HSDPA services, offering customers mobile broadband access with data speeds of up to 3.6 Mbps while in September 2006, Maxis launched HSDPA targeting the high-growth residential broadband sector in Malaysia. As the Malaysian mobile market is close to saturation, and as a consequence is showing signs of slow down in growth, a characteristic of mature markets. Competition amongst the operators to retain current subscribers is expected to intensify as they compete to reduce churn by acquiring subscribers from other networks. Further, with the impending introduction of MNP, churn is expected to be fairly intense in the first few months of operations. Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 145 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FRO S T & SULLIVAN

Chart 1.1 shows the historical and forecast for Malaysia’s mobile subscriber base between 2003 and 2012. Chart 1.1: Total Mobile Subscribers and Growth Rates (Malaysia), 2003·2012 _Total Subscribers (‘000) -+-Growth rate 35,000 40% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Mobile subscriber CAGR (2007-2012): 4.3% Note: All figures are rounded; the base year is 2007. Source: Frost & Sullivan Chart 1.2 shows the historical and forecast revenues for the mobile market in Malaysia between 2003 and 2012. Chart 1.2: Total Mobile Revenues and Growth Rates (Malaysia), 2003·2012 _Total mobile revenue -+-Growth rate 25,000 25% ‘2 o ~ 20,000 ::;: !!S
g: 15,000 <: Q)
> Q) 0:: 10,0002 :c o ::;: (ij 5,000
“5 >­o
Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost &Sullivan 2008 146

10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
Segmentation of telecommunications services in Malaysia can be summarized in the following diagram. The mobile market is defined as full mobility services which indude 2G and 3G services. Eventually, the introduction of Worldwide Interoperability for Microwave Access (‘WiMAX”) players into the market provides an alternative. WiMAX is an alternative wireless technology for providing wireless data services over long distances. However it is likely that the initial services will be restricted to limited or nomadic wireless services, thus Frost & Sullivan has categorized this service as part of fixed services. For the purpose of this report, historical data for Malaysia was derived based on publicly disdosed subscriber base of mobile operators in the market. Chart 1.3 depicts the market segmentation of telecommunication services in Malaysia. Chart 1.3: Market Segmentation ofTelecommunications Services in Malaysia Telecommunications sefVices
, –~—, I I I I I, , II ,———–, Source: Frost & Sullivan 1.2 Key Industry Participants There are a total of five key industry participants that operate in the mobile space in Malaysia. In 2007, Maxis, Celcom and DiGi remained the three leading mobile operators in Malaysia. Maxis and Celcom launched 3G services in 2005, while DiGi is providing mobile broadband services over Enhanced Data Rates for GSM Evolution (“EDGE”). The other two participants are 3G licensees who have yet to commercialize their services, namely the fixed and broadband service provider, Time dotCom and pay TV operator, U Mobile. U Mobile has an agreement with Celcom where Celcom provides domestic roaming services to U Mobile. The Government of Malaysia has also issued four WiMAX licenses in the 2.3 GHz band to YTL E-Solutions, Packet One Networks, Asiaspace Dotcom (Peninsular Malaysia) and REDtone-CNX Broadband (Sabah and Sarawak). In late November Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost &Sullivan 2008 147 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
2007, the Government of Malaysia announced it will withdraw licenses to operate within the 2.5 GHz and 3.5 GHz spectrums over a five-year period as the market is too crowded. The companies with no customers or very few customers will have their licenses immediately withdrawn, while the companies with a significant customer base will be given advance notice of withdrawal of spectrum. There is also a strong potential for MVNO growth in the Malaysian market. A MVNO is a company that provides mobile phone service but does not have its own frequency allocation of the radio spectrum, nor does it have the entire infrastructure required to provide mobile telephone service. The first two such companies are set up by REDtone International Bhd, namely REDtone Mobile Services and Merchantrade Asia Sdn Bhd which are hosted by Celcom. The former targets the enterprise customers within the postpaid segment while the latter addresses the wide opportunity with foreign workers in Malaysia. The Malaysian low bUdget airline Air Asia is also making its foray into telecommunications with plans to set up an MVNO called TuneTalk to provide affordable telecommunications to users while XOX Com Sdn Bhd is expected to launch in the first half of 2008, bringing the total number of MVNOs to four in 2008. 1.3 Market Share Analysis As of December 31, 2007, Maxis is the largest mobile operator in Malaysia leading with more than 9.7 million subscribers followed by Celcom and DiGi with 7.2 million and 6.4 million subscribers, respectively. Maxis remained the leading mobile service provider as of December 31, 2007 as measured by subscribers and mobile revenue. DiGi also made significant gains in 2007 with its innovative and well­targeted products and promotions. Its total subscriber market share grew from 27.3% in 2006 to 27.5% in 2007. Celcom’s market share declined slightly to 30.9% as of December 31, 2007 compared to 31.2% as of December 31, 2006. Collectively, Maxis and Celcom have surpassed the one million mark in terms of numbers of 3G subscribers as of December 31, 2007. U Mobile launched its services with a market trial as of December 31, 2007 while the Time dotCom-DiGi tie-up, as first announced in November 2007, is expected to begin operations in the second half of 2008. Nevertheless, both new 3G operators will be building up their network coverage and 3G subscriber base, and are not expected to pose a significant threat to the existing players in the short term. (This part of the page is intentionally left blank) Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 148
10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
DiGi’s success in gaining substantial market share between 2003 and 2007 underscores its marketing might, and innovative strategy in acquiring subscriber base. Coupled with its financial strength and support from DiGi’s holding company Telenor, DiGi will add significant vaiue to Time dotCom’s existing spectrum. Beset by its late entry and lack of presence in the mobile market, U Mobile has a more challenging business case on hand to turn its 3G launch into a profitable business. Chart 1.4 depicts mobile operator market share by mobile subscribers in Malaysia in 2007. Chart 1.4: Mobile Operator Market Share by Subscribers (Malaysia), 2007
30.9% Source: Frost & Sullivan Chart 1.5 depicts mobile operator market share by mobile revenues in Malaysia in 2007. Chart 1.5: Mobile Operator Market Share by Revenues (Malaysia), 2007 DiGi Source: Frost & Sullivan Independent Maricet Fresearch forMobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, cambodia, SingaporeandOtherKeyFregionalMarkets © Frost & Sullivan 2008 149 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
A combination of factors will continue to help sustain the growth in mobile subscribers and revenues for the mobile market in Malaysia. The increasing importance of mobility and the falling prices of mobile handsets will reach out to a wider demographic especially the younger segments. Moreover, increased competition and innovation with regards to mobile services plans are expected to further stimulate higher number of mobile subscribers in a household. The Government of Malaysia is also a strong driver for increasing broadband penetration in the country and launched the MylCMS 886 framework lNhich is a four-year plan aimed at boosting the growth of the local ICT industry, and to bolster its competitiveness globally. Under the MyleMS 886 framework, the Government of Malaysia is targeting household broadband penetration to reach 50% by the end of 2008, and 75% by 2010. Mobile broadband can, in the long term, become the much sought after killer application for mobile operators. The introduction of less expensive tariff with innovative mobile plans and service bundles will improve the likelihood of users browsing for mobile content. There is also a strong trend of flat rate data plans that have successfully shown improved premium content adoption. The tightening of regulatory conditions of subscription services in 2006 is also positive for the industry as a 1Nh01e, as industry transformation and effective regulation is likely to create a healthy competitive environment for committed industry participants in the long term. In November 2007, the Ministry of Energy, Water and Communications (“MEWC’) initiated a review of the current regulatory framework on spam in Malaysia and intends to map a recommended approach and propose necessary regulatory changes in addressing spam in Malaysia, inclUding the drafting of relevant legislation. 1.4 Industry Challenges Revocation of Frequency Spectrum Bandwidth Spectrum allocation is a scarce resource in Malaysia. The Government of Malaysia regulates frequency and bandwidth allocation and mobile operators must obtain a license for each of the mobile services offered and also for utilization of frequency. To cite an example of the importance of the resource, in November 2007, the Government of Malaysia announced a move to withdraw the 2.5 GHz and 3.5 GHz broadband spectra assigned to service providers that have yet to roll out their services despite having been allocated the spectra. The reasons for the proposed withdrawal ‘Nere that 3.5 GHz spectrum interferes with satellite services and some operators ‘Nere not using the allocated spectra. The spectra, if withdrawn, could be better utilized to facilitate provision of services by other providers. While this poses Independent MaricetFresearch for Mobile Telecommunications Marl<ets in Malaysia, IndonesIa, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyFregionalMarkets © Frost & Sullivan 2008 150 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
a low risk to established market participants, changes in law and regulations pertaining to the optimal usage of spectra in future may affect the business operations. Network Ownership MVNOs face risks associated with network ownership such as cost efficiencies and availability of netlJvork as the MVNOs do not own their own netlJvorks. Therefore, having strong partnerships and agreements are crucial to successful MVNO operations. For example, REDtone’s tIJvo setups namely REDtone Mobile Services and Merchantrade Asia Sdn Bhd which are hosted by Celcom. The former targets the enterprise customers within the postpaid segment while the latter addresses the wide opportunity with foreign workers in Malaysia. U Mobile also has an agreement with Celcom to provide domestic roaming services to extend its netlJvork reach amid the emphasis for wide netlJvork coverage as a basis of competition. TuneTalk and XOX Com Sdn Bhd make up tIJvo other MVNOs intended for launch in 2008. Slow Growth in a Saturating Market The overall mobile market is dose to saturation at a mobile penetration rate of 85.9% as of December 31, 2007 and has shown a decline in revenue growth. Hence mobile operators are shifting their focus into improving provision of mobile data services to counter dedining voice revenues, to improve overall average revenue per user (“ARPU”). ARPU is expected to improve with the increase in returns from 3G services. However, ARPU growth will continue to decline within the near term as price reductions remain the focus of competition. Higher Prepaid Subscriber Base Proportion in Malaysia Malaysia’s prepaid subscriber base of 19.4 million accounted for 83.3% of total subscribers as of December 31, 2007 and will continue to be a dominant part of the local cellular market. Prepaid users are typically teenagers and young adults that have low spending power. This may not be positive to improving mobile revenues, whereas bundling and flat rate plans associated with postpaid plans may improve ARPU. Postpaid plans which are designed to address the higher spending segment and recurring customers has contributed to the lower adoption of postpaid plans. Mobile Number Portability in 2008 MNP is a service enabled by mobile operators to promote competition and enhance customer choice in the mobile market. It is perceived as an effective tool to eliminate customer “stickiness” resulting from an attachment to a mobile number Independent Marl<et Research forMobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 151 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
or perceived premium attached to a prefix, as may be the case in Malaysia. In September 2005, the MCMC issued a public inquiry paper on the implementation of MNP in Malaysia. The implementation of MNP is expected to create heavy subscriber churn in most markets within the first three months of implementation and may disrupt revenues for operators that are less able to manage customer loyalty. It is anticipated that the existing service providers will intensify their marketing campaigns and revisit their customer churn management programs to design new offerings in an effort to keep their customers loyal. This is likely to continue even after the implementation of MNP and will stimulate competition. In December 2007, the MCMC announced a pilot launch in Klang Valley to begin in April 2008 followed by a nationwide launch in August 2008. The appointment of a consortium to operate and manage the MNP clearing house indicates that Malaysia will take a centralized approach to MNP that is similar to that which has been implemented in Hong Kong. WiMAX as an A1temative Wireless Technology WiMAX can mitigate the problem of the local loop unbundling by providing competitive service providers with an alternative last mile solution. However, high customer device cost and limited availability of mobile WiMAX handsets/embedded laptop devices are amongst the biggest market restraints. Another challenge lies with the backhaul to carry the traffic back to the core netmrk. The four new WiMAX players will need to build a robust core netmrk to cater for the high bandwidth data traffic. It is likely that the initial services will be restricted to limited or nomadic wireless services and thus have little impact in the medium term. 1.5 Barriers to Entry The mobile telecommunications industry is subject to high entry barriers due to its capital intensive nature, scarce spectrum allocation, the need for wide netmrk coverage and the over-erowded nature of the industry. Nevertheless, the Malaysian Government has awarded extra 3G licenses to Time dotCom and U Mobile in February 2006, and announced four new WiMAX licensees. The market is highly competitive and is reaching saturation. With the introduction of new market entrants, the Malaysian mobile market will see further competition that is anticipated to focus around price wars and innovative 3G services. As 3G uptake is low at approximately 5.9% this still leaves room for the new players to maneuver. Independent Maricet Fresearch forMobile Telecommunications Marl<ets in Malaysia, IndonesIa, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyFregionalMarkets © Frost & Sullivan 2008 152 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
1.6 Relevant Laws and Regulations The MCMC is the regulator for the converging communications and multimedia industry and its key role is in the regulation of the communications and multimedia industry based on the powers provided for in the Malaysian Communications and Multimedia Commission Act (1998) and the Communications and Multimedia Act (1998). Pursuant to these Acts the role of the MCMC is to implement and promote the Malaysian Government’s national policy objectives for the communications and multimedia sector. The Communications and Multimedia Act (1998) also provides for the establishment of a Universal Service Provision CUSP”) Fund to enable roll out of services in areas identified for USP. This intends to pool the resources of the telecommunications industry to promote the widespread availability and use of network services and or applications services throughout Malaysia by encouraging the installation of network facilities and the provision of services in underserved areas or for underserved groups within the community. In this respect, all telecommunications operators are required to contribute 6% of weighted revenues for USP development. 1.7 Supply Conditions All three major mobile operators have been increasing investments in expanding GSM network coverage. In terms of GSM network coverage, Celcom has covered about 98.5% of the population while DiGi and Maxis are estimated to have covered 95%. Maxis and Celcom has also continued investments into 3G network expansion by upgrading their base stations to HSDPA. With the indusion of U Mobile and the Time dotCom-DiGi alliance, more investments are planned for providing improved network coverage for 3G. The reliance of mobile operators on multiple vendors continues and the presence of all major telecommunications vendors is strong in Malaysia. Given the availability of multiple equipment vendors in the telecommunications space and the importance of volume to the vendors, no single vendor has sole control over the industry. As for handsets, the increasing demand and supply of feature-rich handsets at various price points and shorter handset replacement cydes are expected to open up a larger market for higher­value mobile data applications. (This part of the page is intentionally left blank) Independent Marl<et Research forMobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 153 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
MVNOs on the other hand are subject to risks to supply conditions in terms of network ownership and therefore will need to consider effective partnerships. Spectrum allocation is a scarce resource in Malaysia. The Government of Malaysia regulates frequency and bandwidth allocation and mobile operators must obtain a license for each of the mobile services offered and also for utilization of frequency. 1.8 Demand Conditions Demand for mobile services is still on the rise and while the market is near saturation there remains growth potential through introduction of new products and services. Price competition in the postpaid and prepaid segments has contributed to subscriber growth, however this has resulted in slower ARPU growth. There has been a sharp reduction in voice call rates for postpaid plans whilst new packages and innovative plans introduced in order to attract new postpaid subscribers. It is anticipated that there will be more significant migration of prepaid users to postpaid services which is likely to accelerate as a result of the removal of anonymity due to prepaid registration and the narrowing gap between prepaid and postpaid call charges. Overall, postpaid subscriber growth is expected to yield double-digit growth in the next few years. The mobile data segment is beginning to contribute positively to mobile operator revenues and is set to grow even further as demand for premium content and other mobile data services increase. 1.9 Reliance and Vulnerability to Imports Generally, the telecommunications industry in Malaysia is dependent on imports for the majority of its network components as most of the network equipment cannot be sourced locally. The mobile network operators rely on a number of leading international mobile network equipment vendors to provide network equipment and facilities. Other established suppliers in the market are able to supply comparable network equipment. Nevertheless, operations can be adversely affected if the required supply of equipment or services is not met in a timely manner. The provision of telecommunication services in Malaysia is not susceptible or vulnerable to imports such as competition from overseas service providers. Such activities are regulated and must be provisioned by locally licensed service providers. (This part of the page is intentionally left blank) Independent Maricet Fresearch forMobile Telecommunications Marl<ets in Malaysia, IndonesIa, Sri Lanka, Bangladesh, cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 154 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN

 

1.10 Product Substitution The threat of product substitution arises from other businesses which are able to provide mobility services via a different technology or business model. Two immediate technologies are expected to be introduced in the near future in the mobile services market, namely mobile VolP and WiMAX. VolP is the transmission of voice through the Internet or packet-based networks. It is anticipated that there will be little near term impact from the new WiMAX licensees and from third party mobile VolP service providers. Pricing remains the main focus of competition, particularly in voice minutes and prepaid starter packs.
1.11 Market Size and Growth Forecast In 2007, the Malaysian mobile communications market saw a growth in mobile subscribers of 19.9% over 2006 which totaled 23.3 million. It is expected that the total mobile subscriber market will reach almost 28.8 million by 2012 growing at a CAGR of 4.3% between 2007 and 2012. The three major mobile operators, namely Maxis, Celcom and DiGi reported total mobile revenues of about RM17,143 million in 2007, a growth of 14.1% over 2006. All three mobile operators maintained vibrancy in the market with the launch of a number of innovative and new products and services in 2007. Mobile operator revenue is anticipated to grow at a CAGR of 5.1% from 2007 to 2012 to generate RM21,941 million by 2012. The increasingly saturating market and a dominant prepaid user base are challenges faced by the Malaysian mobile market. With the mobile market dose to saturation, mobile operators need to shift their focus into improving the provision of mobile data services to counter dedining voice revenues, to improve overall ARPU. It is also anticipated that with the potentially higher value returns from 3G services will help improve the ARPU. Prepaid users are typically teenagers and young adults that have low spending power. The lower adoption of postpaid plans is due to lack of disposable income to accommodate higher priced postpaid services. A combination of factors will continue to sustain strong growth in the number of mobile subscribers and revenues for the mobile market in Malaysia and address the challenges mentioned above. The increasing importance of mobility as a lifestyle and the availability of cheaper mobile phones will enable accessibility to better mobile services and higher subscriber growth. The introduction of MNP is also expected to promote competition and enhance customer choice in the mobile Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 155 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
market. However it will also pose a challenge to operators in terms of maintaining a healthy ARPU. The deployments of HSDPA and WiMAX networks are also expected to playa significant role in the country’s broadband expansion plans, which will subsequently spur the popularity of mobile broadband services. HSDPA broadband currently offers greater affordability and mobility advantages compared to the existing ADSL broadband services. 1.12 Prospects for Industry Players Mobile operators need to shift their focus to the provision of mobile data services to counter declining voice revenues, to improve overall ARPU. However, Frost & Sullivan believes that for the near term, ARPU growth will continue to decline as lower tariffs will still be the focus of competition. As Malaysia’s prepaid subscriber is and will continue to be a dominant part of the Malaysian mobile market, this is a challenge to increasing mobile revenues as the prepaid target segment has a lack of disposable income to accommodate postpaid plans that were designed for higher spending customers in mind. With the mobile market reaching saturation levels, mobile operators are looking for options to expand their business and to grow and maintain ARPU levels. 38 services is anticipated to be the next area for competition considering 38 subscribers represented only 5.9% of total mobile subscribers in 2007. With the fall of 38 handset prices and availability of cheaper handsets, proliferation of handsets will drive the mobile market. Further, mobile operators will also be looking to migrate the predominantly prepaid market to postpaid subscribers. Other areas of positive development include the introduction of mobile broadband, mobile data, mobile TV and video services and MNP. In Malaysia, prospects for the mobile telecommunications industry are service convergence and triple play (provision of voice, data and video services) as the market is already saturated and will need this as the next stage for growth. (This part of the page is intentionally left blank) Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 156 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN

1.13 Overview and Outlook of Economy 1.13.1 Overview of Malaysia’s Economy in 2007 Robust domestic demand, driven by strong private consumption spending and investment activities, raised real GDP growth to 7.3% in the fourth quarter of 2007. Overall, the economy expanded by 6.3% in 2007 led by domestic demand. On the supply side, the robust performance was attributed to the increase in Services and Manufacturing sectors. Growth performance of the services sector continued to be strong by registering 9.1% in the fourth quarter of 2007. Private consumption expenditure grew by 11.1% supported by high disposable income due to strong commodity prices, salary increment in the public sector and stable employment market. The nationwide year-end sales had also encouraged consumer spending.
1.13.2 Outlook of Malaysia’s Economy in 2008 Robust domestic demand and a projected improvement in exports of electrical goods are expected to sustain the economy’s momentum into 2008. Consumer spending will again be the main driver of growth, supported by increases in incomes. Public investment is expected to remain strong as projects are rolled out under the Ninth Malaysia Plan. The Government of Malaysia budget announced in September 2007 puts economic expansion at 6.D-6.5% in 2008. The Economist Intelligence Unit’s GDP forecast for the real GDP growth in Malaysia is now expected to slow to 5.5% in 2008. The budget projects that growth will accelerate from 2007 levels in agriculture, construction, manufacturing, and oil and gas; and slow only slightly in services from this year’s fast pace. Inflation next year is forecast to stay at around 2.5%. This prediction would need to be raised if the Government further phased down fuel subsidies or implements a goods and services tax (uGST’). The main risks to the above outlook are increasing energy costs and a significant slowdown of the United States economy, which would hurt exports. (This part of the page is intentionally left blank) Independent MaricetFresearch for Mobile Telecommunications Marl<ets in Malaysia, IndonesIa, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyFregionalMarkets © Frost & Sullivan 2008 157 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FRO S T & SULLIVAN
Chart 1.6 depicts the real GDP growth for Malaysia from 2002 to 2008. Chart 1.6: Real GDP Growth (Malaysia) 2008e : 2007 2006 2005 2004
7.2 2003 2002
Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost &Sullivan 2008 158 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
2. EXECUTIVE SUMMARY OF THE MOBILE TELECOMMUNICATIONS MARKET IN INDONESIA 2.1 Industry/Market Segmentation Indonesia is one of the fastest growing mobile markets in Asia Pacific, having grown its subscriber base by a CAGR of 49.7% between 2003 and 2007. Despite the huge demand potential in the country, the Indonesian mobile market is highly competitive and is dominated by three main players, namely PT Telekomunikasi Selular (“Telkomsel”), PT Indosat Tbk. (“Indosat”), and PT Excelcomindo Pratama Tbk. (“XL”), which provides an extensive range of services. The local mobile market comprises predominantly prepaid users, which accounted for over 95% of its total subscriber base as of December 31, 2007. Due to the disproportionately large prepaid segment and high price sensitivity, the ARPU in Indonesia is among the lowest in Asia Pacific at Rp.78,000 (US$8.32). Figure 2.1 provides details on mobile subscribers and mobile penetration in Indonesia from 2003 to 20072• Figure 2.1: Total Mobile Subscribers and Mobile Penetration (Indonesia), 2003· 2007 2003  2004  2005  2006  2007  Mobile penetration 3  7.9%  12.6%  19.1%  25.9%  37.3%  No. of subscribers (‘000)  18,511  30,036  46,260  63,660  92,864  Proportion of prepaid subscribers  92.4%  93.6%  94.9%  95.4%  >95.0%
Source. Frost & SullIVan Segmentation of telecommunications services in Indonesia can be summarized in the following diagram. Frost & Sullivan defines the mobile market as full mobility services which include 2G and 3G services. While fixed wireless access provides an alternative but limited mobility to wireless mobile services, Frost & Sullivan has categorized this service as part of fixed services, consistent with industry definition. Fixed wireless services is a limited mobility communication service that enables call rates similar to fixed-line charges. As such, the number of mobile subscribers in Indonesia indicated in this report does not include fixed wireless customers of PT Telkom’s ‘TelkomFlexi’, Indosat’s ‘StarOne’ and PT Bakrie Telecom’s (“Bakrie Telecom”) ‘Esia’. Historical data for Indonesia was derived based on publicly disclosed subscriber base of mobile operators in the market. 2 Total mobile subscriber and mobile penetration numbers for Indonesia as of December 31, 2007 Is derived based on estimates based on secondary research and publicly disciesed subscriber base of Telkomsel, Indesat, XL and Mobile-8. 3 Mobile penetration refers to the percentage c:J total mobile subscribers against the camtry’s population. Country population is provided by Frost & Sullivan. Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 159 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
Chart 2.1 depicts the market segmentation of telecommunication services in Indonesia. Chart 2.1: Market Segmentation of Telecommunications Services in Indonesia
I I I 1 I I 1 1 1 I1  1  Source: Frost & Sullivan  2.2  Key Industry Participants  The key industry participants  are  Telkomsel, Indosat and  XL,  which  collectively  accounted for 94.6% of total mobile subscribers in Indonesia as of December 31,  2007. The Tier-2 competitors consist of three smaller mobile operators namely, Code Division Multiple Access (“COMA”) mobile operator PT Mobile-8 Telecom Tbk  (“Mobile-8”), PT Sampoerna Telekomunikasi Indonesia (“Sampoerna”) and greenfield operators such as PT Natrindo Telepon Selular (“NTS”), PT Hutchison CP  Telecommunications (“HCPT”), and PT Smart Telecom (“Smart Telecom”). Bakrie  Telecom is also growing significantly with its fixed wireless COMA services.  2.3  Market Share Analysis  Telkomsel, a subsidiary of PT Telekomunikasi Indonesia Tbk (“PT Telkom”) is the  largest mobile operator in Indonesia, accounting for 51.6% of total mobile subscribers  as of December 31,2007. This is followed by Indosat (26.4%) and XL (16.6%). The  remaining 5.4% market share comprises Sampoerna, Mobile-8 and new operator  HCPT which  was launched in March 2007. Smart Telecom and NTS have since  commercially  launched  mobile  services  in  September 2007  and  October 2007  respectively.  The entry of NTS, HCPT and Smart Telecom has raised the number of players in the  mobile space  to eight. Nevertheless, due to their initial shortcomings of network  coverage and a zero subscriber base, the presence of NTS, Smart Telecom and  HCPT is not expected to pose much of a threat to the existing players. While HCPT
Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 160 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d)
FROST & SULLIVAN
and NTS have also been awarded two out of the five 3G licenses, they will find it difficult to compete with the three main players that have stronger leverage in migrating users and networks to 3G given their wider network coverage (which in return allows for more competitive intra-network rates) in Indonesia and solid financial position. There is little service differentiation among operators, given the low ARPU­yielding market and high prepaid dominance. Through the provision of fixed wireless services based on CDMA technology, Bakrie Telecom’s ‘Esia’ services has been growing substantially by more than doubling its subscriber base by the end of 2007 to 3.8 million from 1.5 million in 2006. Despite the limited mobility offered by fixed wireless services, the competitive pricing offered by product and services from Bakrie Telecom point to the high potential of success of fixed wireless services in the Indonesian telecommunications environment. In terms of the breadth of services offered, the Telkom group and Indosat offer a full range of telecommunications services, induding fixed-line, fixed wireless, GSM, 3G, satellite and internet services. Chart 2.2 depicts mobile operator market share by mobile subscribers in Indonesia as in 2007. Chart 2.2: Mobile Operator Market Share by Subscribers (Indonesia), 2007 Others  Telkomsel  Indosat  5.4%  51.6%  26.4%
Note: Others include Sampoerna. Mobile-8 and HCPT. As of December 31, 2007. Smart Telecom’s mobile subscriber base is regarded as insignificant while NTS has yet to launch their mobile services. Source: Indonesian Mobiie Operators, Frost & Suiiivan Several factors are expected to drive the robust growth of Indonesia’s mobile telecommunications market. The present low mobile penetration, the lack of fixed-line infrastructure and the anticipated price competition resulting from the entry of new players are expected to spur demand for mobile services. With major cities already experiencing mobile saturation, the reduction in cost of entry-level handsets is expected to enhance affordability particularly in rural areas and lower-end segments of the market. Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 161 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
2.4 Industry Challenges Regulatory Risks Through the Ministry of Communication and Information Technology of the Republic of Indonesia (“MoCI”), the Indonesian Government exercises regulatory povver over the Indonesian telecommunications market in areas such as interconnection charges, spectrum allocation, and issuance of new licenses, anti-trust laws and foreign equity ownership of local operators. Foreign Ownership In August 2007, the Indonesian Government issued a new presidential decree that imposes restrictions on foreign ownership in Indonesian telecommunications companies depending upon the type of business pursued by the company; e.g. restrictions on a new mobile and fixed-line operators to a maximum of 65% and 49% respectively. Different restriction thresholds are applicable depending upon whether the business pertains to telecommunication network or services. Although the existing restrictions do not apply to the investment approvals obtained by companies before they came into effect, there is no assurance that (i) they will not be amended to apply retrospectively; and (ii) the governmental authorities implementing the restrictions will not apply the restrictions retrospectively. The Government of Indonesia is also discussing the possibility of restricting activities and foreign ownership in certain businesses in the telecommunications sector. Currently, the mobile operators with foreign ownership in excess of the 65% stake are, among others, XL and NTS. Telekom Malaysia Berhad (“TM”) has a 67% stake in XL, while Maxis and Saudi Telecom Company, collectively, hold a 95% stake in NTS. Interconnection To promote healthier competition, telecommunication operators shifted from interconnection rates that were previously set by revenue sharing agreements to a new cost-based structure with effect from January 1, 2007. Under the new scheme, the operator of the network on which calls terminate would receive interconnection fees based on a formula stipulated under the regulation. This means that operators will charge for calls, based on the costs of carrying such calls. The previous interconnection structure benefited the bigger telecommunications operators due to their higher economies of scale resulting from higher volumes of voice calls. With the new structure implemented, interconnection fees can no longer be fixed based on revenue sharing agreements and will have to be based on cost which are offered by each telecommunications provider in Indonesia. No assurance can be given that the interconnection fees will not change to the disadvantage of mobile operators. Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 162 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
Competition Competition takes several forms in Indonesia’s mobile environment, namely, pricing, netmrk coverage, quality of calls, the variety of services offered and the threat from alternative modes of wireless services. Indonesia’s competitive landscape was further intensified with the entry of new competitors, HCPT, Smart Telecom and NTS, which have recenUy launched their mobile services. Mobile operators also face increased competition from fixed wireless service providers with the latter gradually encroaching into the mobile space. Fixed wireless service providers are able to provide limited mobility at the price of fIxed-line service. This alternative service has been gaining ground over the years, given the launch of aggressive promotions and, in 2006, fixed wireless service providers were given national operating licenses. Pioneered by PT Telkom under then brand name ‘TelkomFlexi’ in December 2002, fixed wireless access is also provided by PT Bakrie Telekom’s ‘Esia’ and Indosat’s ‘StarOne’. High Chum Rate Churn rate or customer attrition results in the loss of revenue from subscribers which have switched or terminated their subscriptions. High churn rate, particularly in the prepaid segment, lNOuld have a material impact on operator’s future performance. Declining ARPU Due to intensifying competition, declining ARPU adds to the risk of mobile operators, which constantly face pricing pressure from alternative VolP services (the transmission of voice through the Internet), particularly in the 100 and prepaid segment. Emerging New Technologies The telecommunications industry is susceptible to technology changes. This may require significant changes to the mobile operators’ business model, development of new products and substantial investments in next-generation infrastructure to accommodate growth in its business and the adoption of new technologies and services. A next generation network (“NGN”) is a packet-based netlNOrk where service-related functions are independent from the underlying transport-related technologies. Dependence on Infrastructure The providers of mobile services are highly reliant on network quality and coverage. Any failure of network, server or transmission can result in major operational disruption, affecting the ability to retain or attract new subscribers which may adversely affect the financial performance of mobile operators. The risk of natural Independent Maricet Fresearch for Mobile Telecommunications Marl<ets in Malaysia, IndonesIa, Sri Lanka, Bangladesh, cambodia, Singapore andOtherKeyFregionalMarkets © Frost & Sullivan 2008 163 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
disasters in Indonesia contributes to the risk profile of mobile operators. To remain competitive, mobile operators face possible huge expansion plans given the fast growing subscriber base in Indonesia. Any failure to accommodate growth in network expansion will impact mobile operators. 2.5 Barriers to Entry The mobile telecommunications industry is subject to high entry barriers due to its capital intensive nature, scarce spectrum allocation, the need for wide network coverage, and the over’i;rowded nature of the industry. Nevertheless, regulatory reforms which have expanded the operating licenses of fixed wireless service providers to nationwide coverage and the allocation of additional 3G licenses have lowered regulatory entry barriers to the telecommunications industry in Indonesia. 2.6 Relevant Laws and Regulations Through the MoCI, the Indonesian Government has extensive regulatory authority and supervisory control over the telecommunications market in Indonesia. Recent reforms have attempted to create a regulatory framework to promote competition and accelerate the development of telecommunications facilities and infrastructure. The Indonesian Government retains the right to amend the terms of telecommunication licenses at its discretion. It also has the right to issue new licenses and regulate frequency spectrum allocation, which would change the competitive landscape of the telecommunications industry. In February 2006, the Indonesian Government awarded three additional 3G licenses to Telkomsel, Indosat and XL, on top of the two licenses previously issued to newcomers, HCPT and NTS. The Indonesian Government also requires telecommunications operators to pay a concession license fee of 1% of their respective gross revenues. The regulator controls the tariffs set by the mobile operators, initially specifying the formula of price ceilings however in 2006 MoCI changed the formula to floor price. The Indonesian Government is currently drafting new regulation on tariffs. which will only regulate the ceiling price. In a recent ruling by the Business Competition Supervisory Commission (“KPPU”) in November 2007, Indonesia’s biggest mobile operator Telkomsel was fined Rp.25 billion for charging excessive tariffs and was asked to reduce tariffs by at least 15%. The KPPU also launched an investigation into alleged price-fixing of tariffs for mobile phone text messages by eight of the country’s mobile operators as it had found evidence of arrangement between the companies involved. Under Indonesian law, the Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 164 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
KPPU is required to complete the second stage of the investigation within 60 days, although this has been extended for an additional period of 30 business days. The investigation is still in progress and we expect a decision to be rendered in May 2008. The Indonesian Government also prohibits operators from abusing a dominant position in practices such as dumping, predatory pricing, cross-subsidies. In November 2007, Singapore’s state investment company, Temasek Holdings (”Temasek”), was charged by the Business KPPU for its cross ownership in two of Indonesia’s leading mobile operators and was ordered to sell off its stakes in one of the two operators within two years. Temasek owns a 56% stake in SingTel, which has a 35% stake in Telkomsel. Meanwhile, Temasek’s wholly-owned Singapore Technologies Telemedia, owns 41.9% of the second-largest mobile company, Indosat. In August 2007, the Indonesian Government issued a new presidential decree that imposes restrictions on foreign ownership in Indonesian telecommunications companies depending upon the type of business pursued by the company; e.g. restrictions on a new mobile and fixed-line operators to a maximum of 65% and 49% respectively. Different restriction thresholds are appiicable depending upon whether the business pertains to telecommunication network or services. Although the existing restrictions do not apply to the investment approvals obtained by companies before they came into effect, there is no assurance that (i) they will not be amended to apply retrospectively; and (ii) the governmental authorities implementing the restrictions will not apply the restrictions retrospectively. The Government of Indonesia is also discussing the possibility of restricting activities and foreign ownership in certain businesses in the telecommunications sector. Currently, one of the foreign companies with excess of 65% foreign ownership in a mobile operator is TM, which has a 67% stake in XL. As part of the Universal Service Obligation (“USO”), all telecommunications network operators and service providers are required to contribute towards providing universal telecommunication facilities and infrastructure or other forms of compensation. In this respect, all telecommunications operators are required to contribute 0.75% of gross revenues for usa development. 2.7 Supply Conditions Mobile services in Indonesia are typically provided by mobile network operators themselves, where the MVNO concept is not prevalent in the local industry. Amid the anticipated market growth in the industry, mobile operators are expected to undertake Independent Marl<et Research forMobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 165 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
heavy expansionary plans in the next three years to build base stations and roll out 3G network coverage nationwide. Spectrum allocation is a scarce resource in Indonesia. The Indonesian Government regulates frequency and bandwidth allocation and mobile operators must obtain a license for each of the mobile services offered and also for utilization of frequency. To conform to international standards, the Indonesian Government has assigned the 1900 MHz frequency spectrum for IMT-2000 and 3G network. As a result, fixed wireless services, which previously operated in this frequency spectrum, have been reallocated to the 800 MHz spectrum. In 2006, the Indonesian Government also issued three additional 3G licenses on top of the existing two licenses. Figure 2.2 sholNS the spectrum allocation of three major mobile operators in Indonesia as at end of 2006. Figure 2.2: Spectrum Allocation for Telkomsel, Indosat and XL in Indonesia Telkomsel  Indosat  XL  Launch of services  May-95  Nov-94  Oct-96  2G license (frequency bandwidth for GSM 900 & 1800)  2×30 MHz  2×30 MHz  2×7.5 MHz  3G license (frequency bandwidth for 2 GHz)  2x5MHz  2x5MHz  2x5MHz  License (coverage)  Naionwide  Nationwide  Nationwide
Source. ITRB, XL Meanwhile, in terms of supply of network equipment, given the availability of multiple equipment vendors in the telecommunications space and the importance of volume to the vendor, no one vendor has sole control over the industry. 2.8 Demand Conditions While the Indonesian mobile market is showing robust growth, further potential exists with a mobile penetration rate of approximately 37.3% as of December 31, 2007. Meanwhile, subscriber penetration for fixed-line services in Indonesia is still very low, estimated at approximately 4.4% as of December 31, 2007. The lack of fixed-line infrastructure and the increasing preference for mobility are expected to accelerate the pace of fixed-ta-mobile substitution effect where more users are expected to adopt mobile services over flXed-iine services. With major cities experiencing mobile saturation, the reduction in cost of entry-level handsets is expected to spur affordability particularly in rural areas and lower-end Independent Maricet Fresearch for Mobile Telecommunications Marl<ets in Malaysia, IndonesIa, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 166 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
segments of the market. Given this, mobile subscriber base in Indonesia is expected to grow at a CAGR of 11.5% from 2007 to 2012, to 160.3 million users and a mobile penetration of 60.5% by 2012. Figure 2.3 shows the historical and forecast for Indonesia’s mobile subscriber base between 2003 and 2012. Figure 2.3: Total Mobile Subscribers and Growth Rates (Indonesia), 2003·2012 Year  Mobile Penetration  Total Mobile Subscribers (‘000)  Growth (%)  2003  7.9%  18,511  .  2004  12.6%  30,036  62.3%  2005  19.1%  46,260  54.0%  2006  25.9%  63,660  37.6%  2007  37.3%  92,864  45.9%  2008  46.5%  117,380  26.4%  2009  53.2%  136,044  15.9%  2010  57.8%  149,648  10.0%  2011  60.0%  157,130  5.0%  2012  60.5%  160,273  2.0%
SoIree. Frost & Sullivan 2.9 Reliance and Vulnerability to Imports Generally, the telecommunications industry in Indonesia is dependent on imports for the majority of its network components as most of the network equipment cannot be sourced locally. The mobile network operators rely on a number of leading international mobile network equipment vendors to provide network equipment and facilities. Other established suppliers in the market are able to supply comparable network equipment. Nevertheless, operations can be adversely affected if the required supply of equipment or services is not met in a timely manner, The provision of telecommunication services in Indonesia is not susceptible or vulnerable to imports such as competition from overseas service providers. Such activities are regulated and must be provisioned by locally licensed service providers. 2.10 Product Substitution The threat of product substitution arises from other businesses which are able to provide the mobility services via a different technology or business model. In Indonesia’s mobile market, the biggest threat to the industry is fixed wireless technology. Although the growth rate of fixed wireless subscribers has lagged behind mobile subscribers in the past, the upgrade from regional to national licenses will put Independent Maricet Fresearch for Mobile Telecommunications Marl<ets in Malaysia, IndonesIa, Sri Lanka, Bangladesh, cambodia, Singapore and OtherKey Fregional Markets © Frost & Sullivan 2008 167 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
them in direct competition with mobile service providers that will be competing for the same potential subscriber base in suburban and rural areas. Except for full mobility, fixed wireless currently offers all the major capabilities and value-added services of mobile services such as SMS and ringback tones. Other product substitutions include mobile VolP and WiMAX. While the issue on WiMAX licenses has yet to take place in the Indonesian context, the potential issuance of WiMAX licenses to new entrants could affect the competitive landscape. 2.11 Market Size and Growth Forecast The local mobile market continued to experience robust growth in 2007 as subscriber base grew by 45.9% compared to the previous year reaching 92.9 million. Net additions in 2007 amounted to of 29.2 million users. Likewise, mobile revenue has been growing at a very rapid pace, reaching Rp.75,991 billion in 2007, up by 39.6% from Rp.54,454 billion in the corresponding period for the previous year. Chart 2.3 shows the historical and forecast for Indonesia’s mobile subscriber base between 2003 and 2012. Chart 2.3: Total Mobile Subscribers and Growth Rates (Indonesia), 2003·2012 _ Total Subscribers (‘000) -+-Growth rate 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Mobile subscriber CAGR (2007-2012): 11.5% Note: Allfigures are rounded; the base year is 2007. Source: Frost & Sullivan The mobile subscriber base in Indonesia is expected to grow at a CAGR of 11.5% from 2007 to 2012, against a mobile penetration of over 60.5% by 2012. Meanwhile, market growth in terms of revenue is expected to grow at a slower pace, as a result of price competition. Mobile revenue is envisaged to expand at a CAGR of 12.1 % to Rp.134,635 billion in 2012. Increasing numbers of users adopting mobile services over fixed-line services, greater mobile penetration into rural areas and the availability
Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 168 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN

of lower-priced mobile handsets are likely to further stimulate demand growth. It is also anticipated that the increasingly competitive and innovative cellular service packages offered by the new mobile players NTS, HCPT and Smart Telecom will be a good driver for subscriber growth. Chart 2.4 shows the historical and forecast for Indonesia’s mobile revenues between 2003 and 20124. Chart 2.4: Total Mobile Revenues and Growth Rates (Indonesia), 2003-2012 _Tolal mobile revenue -+-Growth rate 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Mobile revenue CAGR (2007-2012): 12.1% Note: All figures are rounded; Ihe base year is 2007. Source: Frosl & Sullivan 2.12 Prospects for Industry Players There is still ample growth in the Indonesian mobile market, given its low penetration rate and the lack of fixed-line infrastructure. While the three major mobile operators have launched 3G mobile services, voice and SMS services would continue to be the biggest applications on the mobile platform. The prepaid segment is expected to remain a key growth driver of mobile revenues in the next five years as mobile operators turn to rural markets and younger segment of the market to grow subscriber base. Price competition will continue to persist in view of new market entrants, which would likely affect blended ARPU. As network coverage and breadth of services would be a key basis of competition apart from pricing, the three largest mobile operators (Telkomsel, Indosat and XL) are in a good position to capitalize on the growth potential in Indonesia’s mobile market. 4 Total mobile revenues for Indonesia as of December 31, 2007 is derived based on estimates based on secondary research and eublicly disclosed subscriber base c:J Telkomsel. Indosat. XL and Mobile-8. Independent Marl<et Research for Mobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 169 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
2.13 Overview and Outlook of Economy 2.13.1 Overview of Indonesia’s Economy in 2007 On the back of strong exports and higher consumer spending, the Indonesian economy continued to gain momentum in the first three quarters of 2007. For 2007, the country recorded a GDP year-on-year growth of 6.3%. Key factors driving this growth include rising household consumption and exports. The supply side has also demonstrated adequate response to increased demand. Indonesia’s overall economic performance in 2007 shovved heartening results with growth at 6.3%, the highest annual growth rate since the 1997 crisis. This is a major achievement, especially in view of the formidable challenges confronting the economy in 2007 brought on by the subprime mortgage crisis in the United States that has plunged international money markets into turmoil, as well as soaring world oil prices. Year-on-year inflation slovved very slightly to 6.59% in 2007 compared to 6.6% as at end of 2006. Nevertheless, the economy is expected to face several challenges which could moderate its growth, such as the prolonged rise in crude oil prices that could spur inflation and the anticipated slowdown in United States economy -a major importer of Indonesia’s products. 2.13.2 Outlook of Indonesia’s Economy in 2008 Indonesia’s central bank, Bank Indonesia, recently revised its projection for GDP growth from 6.2%-6.8% for 2008. This was mainly attributed to the continued high levels of permanent components in Indonesia’s inflation, attributable among others to: (i) lack of significant improvement in capacity and economic productivity, (II) susceptibility of inflation to movement in volatile foods and public expectations, (iii) relative lack of deepening of Indonesia’s financial market and (iv) considerable excess liquidity. Domestic inflationary pressure mounted in response to escalating international oil and food commodity prices. CPI inflation reached 1.77% (m+m) in January 2008, representing an annual rate of 7.36%. This is explained mainly by volatile foods inflation and core inflation driven by high commodity prices, the vveakening in the rupiah in early January 2008 and slightly increased inflation expectations compared to the previous period. (This part of the page is intentionally left blank) Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 170 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
Chart 2.5 depicts the real GDP growth for Indonesia from 2002 to 2008. Chart 2.5: Real GDP Growth (Indonesia) ,——————————————1 2008e , ,6.8 I ————————————~ 2007
6.3 2006 2005 2004 2003 2002
00 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 Real GCP growth % Note: 2007and 2008numbers areestimates andprojections of Indonesia’s Government. Source: CenITal Statistics Bureau (BPS), Asian Development Bank (ADB) (This part of the page is intentionally left blank) Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost &Sullivan 2008 171 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
3. EXECUTIVE SUMMARY OF THE MOBILE TELECOMMUNICATIONS MARKET IN SRI LANKA 3.1 Industry/Market Segmentation The mobile market in Sri Lanka has expanded very rapidly due to the significant contribution from foreign investments. As of December 31, 2007, mobile subscriber base in Sri Lanka grew by 47.5% compared to 5.4 million in 2006, increasing total number of subscribers to 8.0 million. As of December 31, 2007, mobile subscriber penetration reached 38.1%, an increase of 12.0 percentage points from 2006. Figure 3.1 provides details on mobile subscribers and mobile penetration in Sri Lanka from 2003 to 2007. Figure 3.1: Total Mobile Subscribers and Mobile Penetration (Sri Lanka), 2003·2007 2003  2004  2005  2006  2007  Mobile penetration 5  6.9%  10.9%  16.4%  26.1%  38.1%  No. of subscribers (‘000)  1,393  2,211  3,362  5,413  7,983  Proportion of prepaid subscribers  nla  nla  80.0%  87.3%  89.5%
,Source. Telecommunications Regulatory CommISSIOn ofSri Lanka (TRCSL), Frost & SullIVan The Sri Lankan mobile market is largely dominated by the prepaid segment, with prepaid subscribers accounting for 89.5% of total subscriber base in 2007. Due to the disproportionately large prepaid segment and high price sensitivity, the ARPU in Sri Lanka is quite low at Rs.719.6 (US$6.93). Segmentation of telecommunications services in Sri Lanka can be summarized in the following diagram. The mobile market is defined as full mobility services which indude 2G and 3G services. While fixed wireless access provides an alternative but limited mobility to wireless mobile services, Frost & Sullivan has categorized this service as part of fixed services, consistent with industry definition. As such, the number of mobile subscribers in Sri Lanka indicated in this report does not include fixed wireless customers. Historical data for Sri Lanka was derived based on publidy disclosed subscriber base of mobile operators in the market. (This part of the page is intentionally left blank) 5 Mobile penetration refers to the percentage of total mobile subscribers against the country’s popuiation. Country population is !”ovided by Frost & Sullivan. Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 172 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
Chart 3.1 depicts the market segmentation of telecommunication services in Sri Lanka. Chart 3.1: Market Segmentation of Telecommunications Services in Sri Lanka
I  1  1  1  I  1  1  1  1  1 1  1  Source:Frost & Sullivan  Mobile subscriber base in Sri Lanka is expected to grow at a CAGR of 15.0% from  8.0 million in 2007 to reach approximately 16.1 million in 2012, driven by its large  addressable market, increased affordability of prepaid plans and a conducive  regulatory environment for telecommunications operators.  Mobile revenue in Sri Lanka has been expanding at a rapid pace; total mobile  revenue grew by 22.2% in 2007 compared to the previous year, increasing the  revenue to Rs.46,302 million in 2007, against a subscriber base of 8.0 million. Sri  Lanka’s mobile revenues are expected to further grow at a CAGR of 8.2% from  2007 to 2012 to reach Rs.68,751 million in 2012.  Sri Lanka’s mobile market will benefit from the local Government initiatives aimed  at providing mobile communication across rural areas within the near-to-medium  term. The prepaid segment is expected to fuel the expansion of the current  subscriber base, as the availability of cheaper micro-reloads enables the rural  population to experiment with mobile services.  (This part of the page is intentionally left blank)
Independent Marl<et Research for Mobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 173 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FRO S T & SULLIVAN
Chart 3.2 depicts the mobile subscriber and growth rates in Sri Lanka from 2005 to 2012 Chart 3.2: Total Mobile Subscribers and Growth Rates (Sri Lanka), 2005-2012
_ Total Subscribers (‘000) ~Growth Rate 18,000 70.0% 2005 2006 2007 2008 2009 2010 2011 2012 Year Mobile subscriber CAGR (2007-2012): 15.0% Note:AllflfJUfeSarerounded; thebaseyear is 2007. Source: Frost & SullA/an Chart 3.3 depicts the total mobile revenues and growth rate in Sri Lanka from 2005 to 2012. Chart 3.3: Total Mobile Revenues and Growth Rates (Sri Lanka), 2005-2012 80,000 ‘2 70,000~ 60,000 …. ‘” ~ !!l-50,000 ~ ~ ~
40,000 ~ 30,000 .!!'” ~ :c 0 20,000 :;; 1<i 10,000’0 I­2005 _ Total mobile re\€nue ~Growth Rate 45.0010 40.0010
35.0010 30.0010 ~ 1;j 25.0010 .r: 20.0% l ‘”e Cl15.0010 10.0% 5.0% 0.0% 2006 2007 2008 2009 2010 2011 2012 Year Mobile revenue CAGR (2007-2012): 8.2% Note: All figures are rounded; the base year is 2007. Source: Frost & SullA/an (This part of the page is intentionally left blank) Independent Marl<et Research for Moblte Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 174 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
3.2 Key Industry Participants As at end 2006, Sri Lanka had four mobile operators, namely, Dialog PLC (Dialog), MobiTei (Pvt) Ltd. (MobiTel), Tigo (Private) Limited (Celltel Lankarrigo), and Hutchison Telecommunications Lanka (Pvt) Limited (Hutch Sri Lanka). A new entrant, Bharti Airtel, is set to bring the number of mobile operators in Sri Lanka to five. The new player is expected to begin from scratch and compete with the other four existing mobile operators in Sri Lanka, each with their own network infrastructure in place and a subscriber base. However, given that mobile penetration was low at 38.1% in 2007, there remain opportunities for industry participants to expand their subscriber base. Bharti Airtel intends to launch 2G and 3G services by September 2008. Bharti Airtel will also leverage the expertise of Singapore Telecommunications Ltd, who is a stakeholder in Bharti Airtel, in rolling out 3G services. 3.3 Market Share Analysis Dialog, Sri Lanka’s biggest mobile operator by subscriber base in 2007, obtained a 3G license and was the first operator in South Asia to introduce 3G services in August 2006. In the same year, Dialog recorded the highest subscriber net additions of 0.98 million from 2005. Dialog’s aggressive expansion involves coverage and capacity expansion of its GSM mobile network, expansion of its International Gateway infrastructure and the entry into other sectors across all regions of Sri Lanka. Meanwhile, MobiTel, Tigo, and Hutch Sri Lanka have consistently grown their subscriber base between 2005 and 2007. Competitive tariff changes across mobile operators had been fairly moderate throughout 2007 as the salient focus had been for the mobile operators to expand network coverage as well as migrate to global system for mobile communication (“GSM”) networks. In an effort to increase its prepaid subscriber market share, MobiTeI, which is also a 3G contender, had introduced a new prepaid tariff plan in March 2006, which offered calls to any network at Rs.5 throughout the day. This resulted in a dramatic increase in MobiTeI’s prepaid subscriber base, which was the smallest in 2005, as it grew by 256.1 % to achieve 0.7 million subscribers in 2006. Hutch Sri Lanka has also been associated with the provision of more innovative mobile communication means to the rural communities through the ‘SimPhony Payphone Network’ systems. Essentially, the service, without mobile handsets, utilizes Hutch Sri Lanka’s network connections as well as the payphone concept to allow subscribers access Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 175 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
to value-added services (“VAS”) such as voicemail, SMS, missed call alerts, and
caller identification through special public phones. Chart 3.4 depicts mobile operator market share by mobile subscribers in Sri Lanka in 2007.
Chart 3.4: Mobile Operator Market Share by Subscribers (Sri Lanka), 2007 Dialog Telekom Hutch Sri Lanka 53.4% 14.3%
Note: As at end 2007, Sharti Airtel has yet to launch its mobile service. Source: Frost & Sullivan Factors such as low mobile penetration and the lack of fixed-line infrastructure will serve as an impetus for rapid growth in the Sri Lankan mobile market. Cheaper prepaid packages and reduction in cost of entry-level handsets are expected to enhance affordability within the rural areas and lower-end segments of the market. 3.4 Industry Challenges Economic, Political and Social Considerations The mobile operator’s business, prospects, financial condition and profitability may be affected by the development of the economic and political environment in Sri Lanka like other companies in this sector. Any adverse development in the political situation, economic uncertainties or changes in the regulatory environment could materially and adversely affect the business activities and financial performance of the mobile operator: These risks include poliUcal instability, inflaUonary pressure, currency fluctuations terrorist activities and vulnerability to natural disasters. Internal security is a major concern for the ruling Government of Sri Lanka, and US$1.5 billion was appropriated for 2007’s defense budget. However, prolonged unrest spurred by poliUcal factions in several areas within the country remains a considerable factor amongst foreign investors from commitUng larger investments Independent Marl<et Research forMobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 176 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
to develop mobile telecommunication infrastructure as well as to expand coverage at a more rapid pace. Regulatory Risks The Sri Lankan Government had issued the National Telecommunication Policy (“NTP”) in 1994 with objectives that induded the provision of telecommunications facility on demand, achievement of universal service in all villages, and cost-based tariffs. The TRCSL was established under the Sri Lanka Telecommunication (Amendment) Act No. 27 of 1996. The regulator exercises power to recommend grant licenses, establish general framework of licensing, spectrum allocation, interconnection charges, and facilitate new entrants and changes to the industry’s competition structure. Any changes by the regulator in its laws and regulations could adversely affect a mobile operator’s financial condition or results of operations. High Chum Rate Churn rate or customer attrition results in loss of revenue from subscriber which have switched or terminated its subscription. A higher churn rate, particularly in the prepaid segment, would have a material impact on operator’s future performance. Declining ARPU Global trends dictate a dedining trend in mobile ARPU. Although Sri Lanka still possesses much room for growth given a mobile penetration rate of 38.1 % in 2007, the market faces similar dedining trend for ARPU within the medium-term due to intensifying competition, both internal and external. Emerging New Technologies The telecommunications industry is susceptible to technology changes. This may require significant changes to the mobile operators’ business model, development of new products and substantial investments in next-generation infrastructure to accommodate growth in its business and the adoption of new technologies and services. The effect of emerging and future technological changes on the competitiveness of mobile operators’ business cannot be accurately predicted. There can be no assurance that technologies employed by the operator will not become obsolete or be subject to competition from new technologies in the future. Dependence on Infrastructure The providers of mobile services are reliant on network quality and coverage. Any failure of network, server and transmission can result in major operational disruption affecting the ability to retain or attract new subscribers which may adversely affect the financial performance of the company. While mobile operators Independent Marl<et Research forMobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 177 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
in Sri Lanka own their network infrastructure, the risk of natural disasters contributes to the risk profile of mobile operators. To remain competitive, mobile operators are also burdened by the need for extensive expansion plans given the fast growing subscriber base in Sri Lanka. Any failure to accommodate growth in network expansion could also have an adverse impact on the company. Increased Levy on Mobile Phones An increased levy on mobile handsets from the initial 2.5% to 10.0% represents a major setback to the country’s GSM and COMA mobile markets. One of the basic requirements for mobile services to thrive is to ensure a vast dissemination of handsets. The four-fold increase in levy may become burdensome for the majority of the population, threatening adverse implications such as a less bullish mobile subscriber growth in the near term. Instilling Partiality for 3G Services within a Low-Teledensity Market In 2006, Sri Lanka embraced commercial 3G services when mobile penetration rate stood at only 26.1 %. Across Southeast Asia, with the exception of Indonesia which rolled-out Wideband Code-Division Multiple Access (‘WCDMA”) networks in 2006 at less than 30% penetration in the country, most countries have only launched the service when penetration was well above 45%.The major restraints for 3G services across the Asia Pacific have been the relatively expensive mobile handsets and low mobile data consumption. The conditions necessary for a significant 3G service uptake in Sri Lanka indude unconventional service price points, more granular target market strategies, and more attractive service bundles and packages. Increasing Threat from Fixed Wireless Services Prepaid services offered through COMA fixed-wireless provides limited mobility communication with similar rates to fixed-line charges. In Sri Lanka, they consist of fixed-line players such as Suntel, Lanka Bell, and Sri Lanka Telecom. TRCSL had issued both Suntel and Lanka Bell with an allocation in 800MHz spectrum in 2005, whilst Sri Lanka Telecom received its license in 2006. This can put them in direct competition with mobile service providers that will be competing for the same potential subscriber base in suburban and rural areas. Except for full mobility, fixed wireless access currently offers all the major capabilities and value-added services of mobile services. Potential subscribers in rural areas with low incomes and less need for mobility may be more attracted to fixed wireless packages that offer lower tariffs. In August 2007, Dialog launched its new fixed wireless network (on COMA 450MHz) through its subsidiary, Dialog Broadband Networks, in response to the increasing competition within the wireless local loop (‘WLL”) space. CDMA Independent Marl<et Research forMobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 178 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
450MHz services are known to offer numerous benefits for enabling fully mobile or fixed WLL services to cover an expansive geographic area in a cost effective manner. 3.5 Barriers to Entry Mobile telecommunication has become one of Sri Lanka’s high growth market sectors in recent years. The local Government is relying on contributions from this sector to fund the country’s development as well as to gradually reduce its dependency on the textile trade. Hence, barriers to entry have been significantly reduced to encourage both the inflow of foreign investments and construction of mobile infrastructure across the country. General sentiments toward foreign participation in the mobile sector remain very encouraging. To illustrate the favorable conditions within this industry, TRCSL, in 2006, made an exception in issuing a 3G license to a fifth mobile operator (Sharti Airtel was subsequently appointed) at US$4 million. This was a US$1 million less than the initial price paid for 3G licenses on the 2 GHz band. The move was meant to attract another experienced mobile operator into the market, thereby ensuring sufficient competition for 3G services to thrive locally. Spectrum allocation had also been deployed on a first-eome, first-serve basis and the market requires spectrum realignment due to the increasing number of industry participants and the initial lack of standardization when issuing spectrum. Conditions remain conducive to growth for new participants entering the mobile telecommunication market in Sri Lanka within the near-to-medium term. The shift to protect the interest of local participants will gradually take place when basic mobile infrastructure is readily available across the country and when mobile saturation moves into the 60% to 80% bracket. 3.6 Relevant Laws and Regulations The TRCSL is a regulatory body set up to oversee the recommendation of grant licenses, establishment of general framework for licensing, spectrum allocation, interconnection charges, and facilitation of new entrants and changes to the industry’s competition structure. The regulatory body was established under the Sri Lanka Telecommunication (Amendment) Act No.2? of 1996 to boost competition within the industry by promoting the widespread availability and use of network services, induding underserved areas or for underserved groups within the community. Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 179 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
3.7 Supply Conditions The mobile operators are expected to roll-out their expansion plans for 3G network coverage over the next 2 to 5 years. Leading mobile operator, Dialog, has been permitted to carry out 3G network trials since 2004 and has a planned investment of US$150 million within the country over the next 2 years. Dialog’s aggressive expansion involves coverage and capacity expansion of its GSM mobile network, expansion of its International Gateway infrastructure and the entry into other sectors across all regions of Sri Lanka. Overall, the mobile operators in Sri Lanka are granted more fleXibility in terms of business opportunities, compared to the more rigid conditions elsewhere in Asia Pacific. TRCSL had also been cautious about service domination by anyone party, by maintaining healthy competition through the indusion of specific participants at certain junctures. 3.8 Demand Conditions Essentially, Sri Lanka’s mobile subscribers are sensitive to price hikes. The prepaid segment holds the majority of total subscriber count (89.5% in 2007) and its industry outlook is to remain prepaid indined. However, the degree of price sensitivity may not be as severe as initially anticipated, as other factors, such as availability of wider network coverage, have shown to have a greater impact over lower tariffs on subscriber additions. Networks with smaller coverage and which require more time to mature are compensated with more competitively-priced service offerings by the relevant mobile operators, whereas the bigger mobile operators which possess better coverage and network stability are in a position to retain a higher margin. The total mobile subscriber base in Sri Lanka is expected to grow rapidly at a CAGR of 15.0% from 2007 to 2012. It is also expected that churn rates will gradually increase during this period, as operators compete in tariff changes to capture market share. 3.9 Reliance and Vulnerability to Imports Generally, the telecommunications industry in Sri Lanka is dependent on imports for the majority of its network components as most of the network equipment cannot be sourced locally. The mobile network operators rely on a number of leading international mobile network equipment vendors to provide network equipment and facilities. Other established suppliers in the market are able to supply comparable network equipment. Nevertheless, operations can be adversely Independent Marl<et Research forMobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 180 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
affected if the required supply of equipment or services is not met in a timely manner. The provision of telecommunication services in Sri Lanka is not susceptible or vulnerable to imports such as competition from overseas service providers. Such activities are regulated and must be provisioned by locally licensed service providers. 3.10 Product Substitution The threat of product substitution arises from other businesses which are able to provide mobility services via a different technology or business model. An imminent threat to Sri Lanka’s current choice of wireless technology is WiMAX. WiMAX licenses had been issued to fixed-line incumbent, Sri Lanka Telecom Limited, and Dialog and in January 2007, Dialog launched the WiMAX pilot in 6 areas across the country (Hambantota, Matara, Galle, Kurunagala, Anuradhapura, and Polonnaruwa). Commercial mobile services will remain a more favorable service to consumers within the near-to-medium term. WiMAX services could potentially affect the competitive mobile landscape when compatible WiMAX handsets become widely available and affordable and when service price points become more competitive. 3.11 Market Size and Growth Forecast Mobile subscriber base in Sri Lanka is expected to grow at a CAGR of 15.0% from 8.0 million in 2007 to reach approximately 16.1 million in 2012, driven by its large addressable market, increased affordability of prepaid plans and a conducive regulatory environment for telecommunications operators. 3.12 Prospects for Industry Players There is still room for growth in the Sri Lankan mobile market, given its low mobile penetration rate. The prepaid segment is expected to remain a key growth driver of mobile revenues over the next five years as mobile operators turn to rural markets to grow their subscriber base. On top of competing on network coverage and breadth of services, frequent tariff changes are expected to take place within the market, which would in turn affect blended ARPU. Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 181 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
3.13 Overview and Outlook of Economy 3.13.1 Overview of Sri Lankan Economy in 2007 Sri Lanka’s GDP grew by 6.5% for the year 2007. This was a slightly slower growth rate compared to the previous year’s 7.4%.The major reason for the decrease in growth is attributed to unrest in the north and east of the country as well as the lack of rainfall causing a decline in agricultural harvest. Agriculture contributed 11.9% to the country’s economy in the first half of 2007. The growth is mainly attributed to valued-added agricultural products such as rubber and livestock. Undesired weather conditions also caused a drop in the hydroelectricity and total industrial sector growth. The industrial sector contributed 27.7% whilst the service industry contributed 60.4% to Sri Lanka’s GDP within the first half of 2007. Growth from service sector was attributed mostly to wholesale and retail trade. The indirect effects from weather conditions in Sri Lanka are believed to have an insignificant impact on the mobile telecommunication service sector. 3.13.2 Outlook of Sri Lankan Economy in 2008 Sri Lanka’s 2008 budget has a heavy military component, with a planned budget increase of 20% from the previous year. The budget will be used to manage the civil war currently on-going within the country. Other items on the budget proposal indude import levies upon motored vehides, wide screen TV and other luxury good. Infrastructure levy places a 10% tax on mobile phones, which is likely to cause an adverse effect to the industry in the medium term. The Government is also set to introduce incentives for foreign investors by offering a five-year tax break for investment projects that value over Rs.5 million and employ 50 or more people. (This part of the page is intentionally left blank) Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 182 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
Chart 3.5 depicts the real GDP growth for Sri Lanka from 2002 to 2008. Chart 3.5: Real GDP Growth (Sri Lanka), 2002-2008
2008e : 6.0 2007e 2006 7.4 2005 2004 2003 2002
IndependentMarl<et Research forMobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 183 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
4. EXECUTIVE SUMMARY OF THE MOBILE TELECOMMUNICATIONS MARKET IN BANGLADESH 4.1 Industry/Market Segmentation The cellular industry in Bangladesh has been witnessing year-on-year growth of well over 100% in the past few years. The market has grown at a rapid pace of 99.9% CAGR between 2003 and 2007. As of December 31,2007, there were 35.1 million total mobile subscribers6. At a penetration rate of 23.4%, there still remains a huge room for growth considering its population size and economic growth. Factors contributing to this growth include deregulation of the telecommunication sector, low levels of teledensity, inadequate fixed phone infrastructure, and high competition following the entry of new operators and massive foreign direct investments by telecom giants. The local mobile market comprised predominantly prepaid users, which accounted for more than 93.3% of its total subscriber base as of December 31, 2007. Due to the disproportionately large prepaid segment and high price sensitivity, the ARPU in Bangladesh is among the lowest in Asia Pacific at BDT266.9 (US$3.9). The prepaid segment is expected to remain a key growth driver of mobile revenues in the medium term, from 2008 to 2012, as mobile operators turn to rural markets to grow subscriber base. Figure 4.1 provides details on mobile subscribers and mobile penetration in Bangladesh from 2003 to 2007. Figure 4.1: Total Mobile Subscribers and Mobile Penetration (Bangladesh), 2003-2007 2003  2004  2005  2006  2007  Mobile penetration 7  1.6%  3.4%  6.7%  14.4%  23.4%  No. of subscribers (‘000)  2.200  4,836  9,672  21,279  35,153  Proportion of prepaid subscribers  93.5%  94.0%  94.3%  94.2%  93.3%
Source. Bangladesh TelecommUnicatIOn Regulatory CommiSSIOn (BTRC’, Frost & SullIVan” • Total mobile subscriber and mobile penetration numbers for Bangladesh as of December 31, 2007 are from Frost & Sullivan and theBTRe. 7 Mobile penetration refers to the percentage ci total mobile subscribers against the country’s population. Country population is provided by Frost & Sullivan.
Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost &Sullivan 2008 184 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
Segmentation of telecommunications services in Bangladesh can be summarized in the following diagram. Frost & Sullivan defines the mobile market as full mobility services which include GSM and COMA mobile services. While fixed wireless access provides an altemative but limited mobility to wireless mobile services, it is categorized as part of fixed services. Fixed wireless service providers which are gaining popularity include Dhaka Telecom Limited, WorldTel Bangladesh Ltd. (“WorldTel”), Bangladesh Telecom Umited (“BTL”) and others. For the purpose of this report, historical data for Bangladesh was derived based on publicly disclosed subscriber base of mobile operators in the market as well as estimates from other secondary sources. Chart 4.1 depicts the market segmentation of telecommunication services in Bangladesh. Chart 4.1: Market Segmentation of Telecommunications Services in Bangladesh ,.—­—–. I I I I I Mobile Services I (full mobility) I I I II11
Source: Frost & Sullivan (This part of the page is intentionally left blank) Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 185 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
4.2 Key Industry Participants Despite the high growth, competition is intense among the country’s six mobile operators. As of December 31, 2007, GrameenPhone Ltd. accounted for approximately 46.9% of the country’s mobile subscribers, with competition coming from (in order of subscriber size): Sheba Telecom (Pvt.) Ltd (“Banglalink”) which is wholly owned by Egypt’s Orascom Telecom;TMIB; Warid Telecom Bangladesh (part of UAE-based Abu Dhabi Group) (‘Warid Telecom”); Pacific Bangladesh Telecom rOtyCell”, Singapore Telecom is a stakeholder); and TeleTalk (a unit of domestic fixed-line incumbent Bangladesh Telegraph and Telephone Board (“BTTB”». All operators offer GSM services apart from CityCell which runs a CDMA network. 4.3 Market Share Analysis The largest operator is GrameenPhone with approximately 16.5 million subscribers as of December 31, 2007. Grameenphone is the dominant operator in the marketplace dwarfing its competitors in terms of both subscriber base and revenues. Chart 4.2 depicts mobile operator market share by mobile subscribers in Bangladesh as of December 31, 2007. Chart 4.2: Mobile Operator Market Share by Subscribers (Bangladesh), 2007 Telelalk Banglalink, 20 1% GrarreenR10ne Ltd, 46.9% SOtrce:BTRC, Frost & Sullivan The industry witnessed its first round of price competition after Egyptian Orascom acquired Sheba Telecom and launched the Banglalink brand in February 2005. By December 31, 2007, Banglalink, with 7.1 million subscribers, had become the third largest operator as a result of its aggressive pricing strategy and fast network rollout.
Independent Maricet Fresearch for Mobile Telecommunications Marl<ets in Malaysia, IndonesIa, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyFregionalMarkets © Frost & Sullivan 2008 186 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
As of December 31,2007, GrameenPhone, Banglalink and TMIB had market shares of 46.9%, 20.1 % and 20.4%, respectively and accounted for approximately 87.4% of total mobile subscribers in the country. The mobile market has a mobile penetration of approXimately 23.4% as of December 31,2007 and the country’s large population of 150 million still offers a huge room for growth. Moreover, the lack of fixed-line infrastructure and the increasing preference for mobility are expected to accelerate the pace of fixed-to-mobile substitution effect in the country. The rural areas also remain largely untapped. Mobile operators are carrying out aggressive marketing campaigns in such areas and are launching more affordable prepaid packages to capture the suburban and rural users, fuelling the overall mobile subscriber growth in the country. Foreign investment has been a major driver that has been fuelling the growth of the mobile market. Foreign operators, in collaboration with local partners, have been working to overcome entry barriers. Intense competition for market share among the top three mobile operators has resulted in a price war. Lower call rates have benefitted consumers, fuelling growth in the first-time user market. Handset prices have also come down due to increased volume of sales, resulting in a significant decrease of overall expenditure of subscribers. 4.4 Industry Challenges Low ARPU Market; Largely Prepaid Users The Bangladesh mobile market is a low ARPU market v.tlere prepaid services dominate. As of December 31, 2007, 93.3% of the total mobile subscribers were prepaid users. Moreover, pricing pressure due to increasing competition from new players, coupled with the growing popularity of prepaid packages have had an impact on blended ARPU over the years. The reduction in blended ARPU is expected to persist, as the mobile operators reach out to rural segments in their efforts to gain market share. High prepaid subscriber concentration and low-yielding ARPU also indicate the users’ low propensity to spend on premium content applications. Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 187 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
Inexpensive Handsets Dominate the Market The ultra-low end segment of the phone market is growing rapidly where handsets cost less than BDT2,047 (US$30) each. Lack of affordability of advanced end-user devices is restraining the growth of data intensive content and applications. General Packet Radio Service (“GPRS”) usage as well as content downloads are low due to lack of storage space in the low cost handsets. Users with Low Education and Literacy Proper education relating to new technology is crucial in emerging countries as the consumers in these nations are ambivalent about new technology. Hence, the immense prospects and benefit of mobile services should be communicated to them. Even though the growth of the mobile industry is rapidly increasing, the market remains to be largely voice-<:entric. Mobile data services revenue barely contributes to the overall mobile revenues. One of the main reasons for this is the low SMS usage, especially among those who reside in rural areas who are not accustomed to using the Romanised characters of their mobile key pads. Regulatory Risks There are several regulatory issues which are hindering the growth of the mobile industry: Evolving Spectrum Frameworlc With the rapid growth of mobile subscription in Bangladesh, the industry is concerned with spectrum availability in the future as well as methodology and quantum of spectrum allocation. Most of the valuable spectrum, the radio frequencies that enable wireless communications, is currently occupied by various Governmental agencies, mainly for defense purposes. Due to lack of spectrum space, operators are not able to increase their capacity despite growing demand. High Taxes The possibility of increased taxation and duty to the mobile sector cannot be discounted in the run-up to the annual National Budget. Bangladesh has one of the highest taxes on mobile services in South Asia. For instance, Subscriber Identity Module (“SIM”) Value Added Tax (“VAT”) is BDT800. This is diverting resources away from the mobile communications sector towards other sectors. Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 188 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
Unfair Competition Due To Ucensing Policies and Asymmetric Regulation There are several policies in Bangladesh that create an environment of unfair competition due to licensing polides and asymmetric regulation. Private PSTN operators have been able to provide limited mobility service encroaching on mobile operators’ territory. Natural Disaster Risks Bangladesh, by virtue of its geography, is very vulnerable to natural disasters. Natural calamities, such as floods, tropical cydones, tornadoes, and tidal bores occur almost every year. Recentiy, in November 2007, the country was hit by one of the deadliest cyclones. The strong winds battered the national power grid which resulted in a subsequent power outage for almost two days. However, the telecommunication networks were less affected than expected as most mobile operators seemed well­equipped either with backup batteries or generators to keep their network base stations running. Declining ARPU Due to intensifying competition, declining ARPU adds to the risk of a mobile operator. Entry of new operator Warid Telecom in May 2007, will further drive down average prices. According to Grameenphone, its revenue growth has been recently hit by increased competition and lower call charges. As of September 30, 2007, its ARPU decreased by 29%, year-on-year, primarily due to decreasing average prices. Future Threat from Fixed Wireless Services Currently, even though fixed wireless operators offer basic voice services using mobile technology and enjoy a lenient taxation regime, fixed wireless operators are not being able to compete directly with mobile operators as they are prohibited from offering mobility under the terms of their license. However, a threat to the industry may arise if the number of fixed wireless service providers increases. Services provided by fixed wireless service providers such as Dhaka Telecom Limited are already gaining popularity as an alternative for fixed services offered by incumbent BTTB. (This part of the page is intentionally left blank) Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 189 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
4.5 Barriers to Entry The mobile telecommunications industry is subject to high entry barriers due to its capital intensive nature, scarce spectrum allocation, the need for wide network coverage and the over-crowded nature of the industry. Nevertheless, regulatory reforms expanding operating license of fixed wireless service providers and the allocation of additional licenses for interconnection exchanges (“ICX”) and International Gateway (“IGW”) licenses have lowered regulatory entry barriers to the telecommunications industry in Bangladesh. However, BTRC has barred foreign companies including existing majority foreign-owned cellular operators from applying for licenses under the ILDTS Policy, such as ICX and IGW. 4.6 Relevant Laws and Regulations The BTRC is the independent regulatory body. The objective of the commission includes issuing license to operators, managing of the radio frequency spectrum, controlling tariffs and promoting effective competition in the telecommunication sector. Even though BTRC’s prime objective is to promote healthy growth in the industry, some of its policies are severely hampering the level playing fields in the telecom sector, especially for the mobile industry. A major issue is the spectrum allocation in the country. Most of the valuable spectrum is being occupied by various Govemment agencies for defense purpose and mobile operators’ allocated spectrum spaces have not been increased to match their growth. Hence, the mobile operators are not being able to increase their capacity even though the demand is there. Two other major regulatory challenges are issues concerning taxation and interconnection charges. High taxes have been levied on this industry and, ultimately, the consumer pays. Operators subsidies most of the taxes including VAT on SIM. However, VAT on call charges are passed on through to the customer. Currently, the interconnection system seems to greatly favor the less productive fixed-line services while harming the more productive mobile industry depriving the mobile operators of their revenues. In July 2007, the BTRC implemented an interim tariff regulation on the maximum and minimum tariffs charged by mobile operators while in the process of formulating a comprehensive Tariff Regulation’ in consultation with the industry. These decisions cover tariff and marketing promotions. Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 190 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
There are also restrictions on the mobile operators’ handling of international calls. Until recently, only BTTB was allowed to operate an international gateway. The BTRC awarded three international gateway (IGW), two interconnection exchange (ICX) and one international internet gateway (JIG) licenses to six companies on February 25, 2008. Subsequently, BTRC also awarded the IGW, ICX and IIG licenses to the incumbent BTTB on March 25, 2008. 4.7 Supply Conditions To address the low ARPU but growing market, it is imperative for operators to minimize costs and expand their coverage faster and in a more cost-effective way. Thus vendors, in order to target emerging markets, remain focused on providing ‘Low Cost of Ownership’ for operators. For instance, Ericsson has been heavily marketing their Ericsson Expander, a technology which enables mobile operators to reduce both their capital expenditures and operating expenditures by reducing number of sites. In emerging markets such as Bangladesh, while consumers and operators want handsets that meet specific perfonnance requirements exceeding expectations for quality, reliability and design, price of the handset remains the biggest hurdle to mobile phone ownership. To address such a market, handset vendors are taking initiatives to provide decent quality mobile phones that cost less than BDT2,047 (US$30) a piece. 4.8 Demand Conditions The mobile market in the country is still in its growth stage, with a mobile penetration of approximately 23.4% as of December 31, 2007. Bangladesh’s large population of 150 million offers a huge room for growth. Moreover, subscriber penetration for fixed­line services in Bangladesh is very low, less than 1.0% (as of December 31,2007). The lack of fixed-line infrastructure and the increasing preference for mobility are expected to accelerate the pace of fixed-to-mobile substitution effect in the country. Rural markets which house more than 80.0% of the country’s population are still largely untapped. In the near tenn, mobile operators, who are already carrying out aggressive marketing campaigns in such areas, are expected to launch more affordable prepaid packages to capture the suburban and rural users fuelling the overall mobile subscriber growth in the country. Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 191 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
4.9 Reliance and Vulnerability to Imports Generally, the telecommunications industry in Bangladesh is dependent on imports for the majority of its network components as most of the network equipment cannot be sourced locally. The mobile network operators rely on a number of leading intemational mobile network equipment vendors to provide network equipment and facilities. Other established suppliers in the market are able to supply comparable network equipment Nevertheless, operations can be adversely affected if the required supply of equipment or services is not met in a timely manner. The provision of telecommunication services in Bangladesh is not susceptible or vulnerable to imports such as competition from overseas service providers. Such activities are regulated and must be provisioned by locally licensed service providers. 4.10 Product Substitution The threat of product substitution may arise from other businesses which are able to provide the mobility services via a different technology or business model. In Bangladesh’s mobile market, a threat to the industry may arise from fixed wireless services if their number increases. Currently, even though WLL operators offer a cellular service using CDMA and enjoy a comparatively lenient taxation regime, they are not being able to compete directly with mobile operators as they are prohibited from offering mobility under the terms of their license. (This part of the page is intentionally left blank) Independent Maricet Fresearch forMobile Telecommunications Marl<ets in Malaysia, IndonesIa, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyFregionalMarkets © Frost & Sullivan 2008 192 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
4.11
Market Size and Growth Forecast Chart 4.3 shows the historical and forecast for Bangladesh’s mobile subscriber base between 2003 and 2012. Chart 4.3: Total Mobile Subscribers and Growth Rates (Bangladesh), 2003-2012 _Total Subscribers (‘000) -+-Growth Rate 70,000
140% 60,000 120% a 50,000 100%a a ‘-‘ $Q) 40,000 80% i”‘” .Q ‘” ~Q; .Q30,000 60% e (9″5 .Q ‘” 20,000 40% (f)” 10,000 20% 0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Mobile subscriber CAGR (2007-2012): 12.4% Note: Allfigures are rounded; the base year is 2007. Source: Frost & Sullivan The high growth cellular industry in Bangladesh has been witnessing year-on-year growth of well over 100% in the past few years, from 2004 to 2006. As of December 31, 2007 there were 35.1 million total mobile subscribers at a mobile penetration rate of 23.4%. Bangladesh is expected to reach 63.1 million subscribers by 2012 growing at a CAGR of 12.4% and increasing the country’s mobile penetration rate to 37.8%. The Bangladesh mobile market has huge potential given its relatively low mobile subscriber penetration and low fixed teledensity. Increasing competitive pressure to drive down prices and reducing entry-level handset costs would fuel demand from first time users. The prepaid segment is envisaged to continue driving mobile revenues, which would gradually increase in proportion alongside greater penetration into rural markets. The number of mobile phone subscribers in (This part of the page is intentionally left blank) Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 193 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
Chart 4.4 shows the historical and forecast revenues for the mobile market in Bangladesh between 2003 and 2012. Chart 4.4: Total Mobile Revenues and Growth Rates (Bangladesh), 2003·2012 _Total Mobile Revenue (BDT Million) -+-Growth Rate
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Mobile revenue CAGR (2007-2012): 14.6% Note:Allfiguresarerounded; thebaseyear is 2007. Source: Frost & Sullivan In 2007, the profit margins of all the mobile operators in Bangladesh were impacted by the large fines they had to pay after haVing been accused of being involved in illegal VolP businesses. BTRC fined Grameenphone BDT1.68 billion (US$24.5 million), CityCell BDT1.50 billion (US$21.9 million), AKTEL BDT1.45 billion (US$21.1 million), and Banglalink BDT1.25 billion (US$18.2 million) for illegal VolP trade. 4.12 Prospects for Industry Players The Bangladesh mobile mar1<et has huge potential given its relatively low mobile subscriber penetration and low fixed teledensity. Mobile revenue in Bangladesh has been growing at a very rapid pace, reaching BDT76.0 billion in 2006 and growing by 18.7% to BDT90.2 billion in 2007. It is expected that mobile revenues will grow at a CAGR of 14.6% between 2007 and 2012 to reach BDT178.2 billion at the end of the forecast period. Increasing competitive pressure to drive down prices and reducing entry-level handset costs would further fuel demand from first time users. The prepaid segment is enVisaged to continue driving mobile revenues, which would gradually increase in proportion alongside greater penetration into rural mar1<ets. Despite the high growth, Independent Marl<et Research for Mobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 194 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
competition among the existing players is high. The market is bracing itself for even stiffer competition with the launch of the sixth mobile operator. For new players, they would have little option but to offer attractive priced packages and lure customers with low prices in order to compete with existing players. 4.13 Overview and Outlook of Economy 4.13.1 Overview of Bangladesh’s Economy in FY2007 GDP grew by 6.5% in FY2007. The economic performance continued to remain strong, driven by improved domestic and external demand. The growth is fuelled by a dynamic garment sector, acceleration in private consumption, and a record increase in overseas workers’ remittances. The industry sector continued to maintain robust performance because of steady growth in export-oriented manufacturing. The services sector, especially the mobile market, experienced strong growth in line with rapid growth in the overall industry. Sharp growth in manufacturing continued. According to ADS, output of medium-sized and large manufactUring enterprises expanded by 11.2% during the first seven months (July-January) of FY2007 compared with the same period in FY2006. The increase in production was broad-based covering both export and domestic market­oriented enterprises. The output of small-scale manufacturing also registered strong performance; during the first half of FY2007 production increased by 11.2% compared to the same period of FY2006. Although growth in manufacturing is encouraging, production is hindered due to infrastructure bottlenecks, particularly power shortages. The spiralling price hike of essentials is currently the biggest pressure on the economy. Lack of institutional monitoring mechanism, information gap among different stake holders, increased production cost of domestic commodities, too many market intermediaries, dislocation in market structure due to anti-corruption drives and increased transportation costs are the major causes behind the creeping price inflation. 4.13.2 Outlook of Bangladesh’s Economy for 2008 The ADS anticipates GDP growth to be below 6.0% in FY2008, compared with 6.5% in FY2007, because of the recent natural disasters that has affected the country. Further there is a slowdown in extemal demand for garments. According to the ADS, the economic prospects will depend on post-flood and post-cyclone rehabilitation, Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 195 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
recovery of the garment sector, and political stability in the lead-up to the general elections scheduled for the end of 2008. The severe cyclone of mid-November 2007 added to the uncertainty for economic prospects. The budget deficit in fiscal year 2007/08 (July-June) is expected to rise to the equivalent of 5.2% of GDP, compared with an official target of 4.2%. In light of the latest inflation data the Economist Intelligence Unit has revised up its inflation forecast for 2008 to 8.7%, from 8.0% in its January report. Chart 4.4 depicts the real GDP growth for Bangladesh from 2002 to 2008. Chart 4.4: Real GDP Growth (Bangladesh) FY2008e : FY2007e FY2006 FY2005 FY2004 FY2003 FY2002

00 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 Real GOP growth % Source: Industry Sources, Asian Development Bank (ADS) (This part of the page is intentionally left blank) Independent Marl<et Research forMobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 196 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
5. EXECUTIVE SUMMARY OF THE MOBILE TELECOMMUNICATIONS MARKET IN CAMBODIA 5.1 Industry/Market Segmentation Cambodia is one of the fastest growing mobile markets in Southeast Asia, having grown at a CAG R of 41.1 % between 2003 and 2007. However, as of December 31 , 2007, subscriber base was less than 2.5 million, with a corresponding mobile penetration rate of 17.3%, is a sign that the country’s mobile sector has lagged behind that of neighbouring countries. Despite the huge demand potential in the country, the Cambodian mobile market is dominated by three main players, namely CamGSM Company Umited (“MobiTel”), Cambodia Shinawatra Co., Ltd. (“Camshin”) and Telekom Malaysia International (Cambodia) Co., Ltd (“TMIC”). Although Applifone Company Ltd. (“Applifone”) was granted licenses in 2006, it launched its GSM services under the brand name “Star-Cell” only on October 25, 2007. Currently it offers services only in Phnom Penh and Koki. The anticipated entry of new players such as Altimo Telecommunications Holding (“Altimo”) (Russia), Cambodia Advance Communications Co. Ltd (“CADCOMMS”), SK Telecom (South Korea), and VieUel Mobile (Vietnam) will lead to increase competition and is likely to drive growth via lower tariffs and increased mobile coverage. Figure 5.1 provides details on mobile subscribers and mobile penetration in Cambodia from 2003 to 200fl. Figure 5.1: Total Mobile Subscribers and Mobile Penetration (Cambodia), 2003­2007 2003  2004  2005  2006  2007  Mobile penetration 9  4.7%  6.5%  8.4%  11.4%  17.3%  No. of subscribers (‘000)  619  862  1,138  1,578  2,456  Proportion of prepaid subscribers  98.1%  97.8%  96.9%  97%  96.9%
Source: Frost & Sullivan 8 Total mobile subscriber and mobile penetration numbers for Cambodia as of December 31,2007 is derived based on publicly disclosed subscriber base of mobile operators in the market, and secondary research sources. 9 Mobile penetration refers to the percentage of total mobile subscribers against the country’s population. Country population is provided by Frost & Sullivan.
Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 197 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
The local mobile market comprised predominantly prepaid users, which accounted for approximately 97% of its total subscriber base in 2007. Due to the disproportionately large prepaid segment and high price sensitivity, the ARPU level in Cambodia stood at approximately US$10. Segmentation of telecommunications services in Cambodia can be summarized in the following diagram. The mobile market is defined as full mobility services which include 2G and 3G services. While fixed wireless access provides an altemative but limited mobility to wireless mobile services, Frost & Sullivan has categorized this service as part of fixed services, consistent with industry definition. Fixed wireless services is a limited mobility communication service that enables call rates similar to fixed-line charges. Camshin and Camintel SA CCamintel”) are key providers of such services. For this purpose, historical data for Cambodia was derived based on publicly disclosed subscriber base of mobile operators in the market. Chart 5.1 depicts the market segmentation of telecommunication services in Cambodia. Chart 5.1: Market Segmentation ofTelecommunications Services in Cambodia
1I II II 1I 1I 1I II II II
Source: Frost & Sullivan The Cambodian mobile market experienced a good growth with the addition of 0.8 million new subscribers in 2007. Mobile subscriber base in Cambodia is expected to grow at a CAGR of 20.2% from 2007 to 2012, against a penetration of 39.7% by 2012. The acceleration of fixed-to-mobile substitution, increasing mobile network coverage and increasing competition from greenfield operators is likely to stimulate future growth (This part of the page is intentionally left blank)
Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 198 5,200  50%  a  a a  40%  ‘-‘  Q) ‘”  3,900  ‘”  .0  30% :6  Q; .0 “B  2,600  ~ e (9  ‘” .0  20%  ”  (f)  1,300  10%

10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FRO S T & SULLIVAN
Mobile revenue in Cambodia has been growing at a very rapid pace; revenue charted a 33.7% growth in 2007 compared to the previous year, increasing the revenue to US$239.3 million in 2007, against a subscriber base of 2.5 million. Cambodia’s total mobile revenues are expected to grow at a CAGR of 17.7% from 2007 to 2012 to reach US$541.0 million in 2012. Chart 5.2 depicts the mobile subscriber and growth rates in Cambodia from 2003 to 2012. Chart 5.2: Total Mobile Subscribers and Growth Rates (Cambodia). 2003-2012 _Total Subscribers (‘000) -+-Growth rate 6,500 60% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Mobile subscriber compound annual growth rate (CAGR) (2007-2012): 20.2″,1, Note: Ai/ figures are rounded; the base year is 2007. Source: Frost & Sui/ivan (This part of the page is intentionally left blank) Independent Marl<et Research for Mobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 199 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN

Chart 5.3 depicts the total mobile revenue and growth rate in Cambodia from 2003 to 2012. Chart 5.3: Total Mobile Revenues and Growth Rates (Cambodia), 2003-2012 _Total mobile revenue -+-Growth rate 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Mobile revenue compound annual growth rate (CAGR) (2007-2012): 17.7% Note: Allfigures are rounded; the base year is 2007. Source: Frost & SuI/ivan 5.2 Key Industry Participants The key industry participants are MobiTeI, Camshin and TMIC, which collectively accounted for 99.1 % of total mobile subscribers in the country as of December 31, 2007. This year is likely to see four potential new operators enter the market: Altimo, CADCOMMS, SK Telecom, and Viettel Mobile. Together with Applifone, AZ Com, and Cambodia Mobile Telephones (Camtel), these operators are likely to form the Tier-2 market and are expected to stimulate growth in the market. 3P Networks Inc. from the United States is currently negotiating with the authorities for a significant frequency spectrum acquisition to offer services in Cambodia. It will be difficult for such high numbers of operators to be viable in a small market like Cambodia and there may be some consolidation in the mid to longer term. (This part of the page is intentionally left blank) Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 200 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
5.3 Market Share Analysis The Cambodian mobile market is moderately competitive and is dominated by three main players, namely MobiTel, Camshin and TMIC. Basis of competition includes pricing, quality and coverage of network, brand identity, and the breadth of value­added services offered. As of December 31, 2007, MobiTe/, Camshin and TMIC accounted for 67.3%, 19.1 % and 12.7% of total mobile subscribers in the country respectively. Competition in the market is expected to intensify with potential new operators backed by foreign investors offering services in 2008. Chart 5.4 depicts mobile operator market share by mobile subscribers in Cambodia in 2007. Chart 5.4: Mobile Operator Market Share by Subscribers (Cambodia), 2007 othersTMIC 0.9%127%
Source: Frost & SuI/Alan Several factors are expected to drive the robust growth of Cambodia’s mobile market. The present low mobile penetration, the lack of fixed-line infrastructure and the anticipated price competition resulting from the entry of new players are expected to spur demand for mobile services. The reduction in cost of entry-level handsets is expected to enhance affordability particularly in rural areas and lower-end segments of the market. (This part of the page is intentionally left blank) Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 201 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
5.4 Industry Challenges Weak Country Fundamentals and Legal System Concerns Although the success of the mobile market can be attributed to the Cambodian Govemment’s liberalization of the market to foster both private and foreign investment as well as competition, the high prevalence of corruption and bureaucracy threatens to discourage foreign investment. According to the 2006 Transparency International’s Corruption Perceptions Index (“CPI”), Cambodia attained a score of ‘2.1’ out of a maximum score of ’10’, thus signifying Vvidespread corruption. The fact that the average time required to set up a new enterprise is 95 days reflects the arduous bureaucratic process that could potentially undermine the Cambodian Government’s efforts to entice foreign investors. Another factor that foreign investors need to be wary of is that according to Global Insight Rating, Cambodia obtained merely a CCC+ rating for sovereign risk, suggestive of an extremely high payment risk. This factor can adversely impact the capital raising potential of any entity aiming to invest in Cambodia. Also, from a foreign investment standpoint, the legal environment can be described as tenuous at best. It is marked by a weak rule of law, prevalent corruption and political overlay. It also lacks the levels of transparency and consistency needed to foster a favorable environment for a new entrant in telecommunications. Thus, the legal system poses yet another impediment to the Cambodian Govemment’s efforts towards promoting foreign direct investment. Prepaid Dominated Price Sensitive Market Prepaid services have risen in popularity in Cambodia, more so than postpaid services. As of December 31, 2007, approximately 97% of the mobile subscribers were prepaid users. The fact that the average income per capita stood at only US$480 (at the end of 20071°) means that Cambodians in general lack spending power and remain price sensitive to services. As a result, a majority of the subscriber base is limited to utilizing basic services. This is likely to thwart revenue growth potential. (This part of the page is intentionally left blank) 10 The World Bank Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 202 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
High Chum Rate Churn rate or customer attrition results in loss of revenue from subscriber which have switched or terminated its subscription. A higher chum rate, particularly in the prepaid segment, would have a material impact on operator’s future performance. Churn rates may become a greater concern for Cambodian mobile operators once the potential new entrants start offering service and attractive prepaid packages. Declining ARPU Like most other emerging markets, the Cambodian mobile market is dominated by the incumbent operator MobiTe!. In an effort to capture a greater share of new subscribers, Camshin and TMIC have started to offer attractive prepaid packages. The market is poised for a price war with the arrival of new entrants in the form of Altimo, CADCOMMS, SK Telecom and Viettel Mobile, effectively resulting in a drop in ARPU. The reduction in blended ARPU is expected to persist, given the reach to rural segments and the increased competitive pressure. Alternative Voice Services In the last couple of years Cambodia experienced growing popularity and investment in VolP services. As cheap VolP calling cards become widespread across the country, it is likely to pose a challenge to mobile calling rates. Telecommunications firm 3P Networks Inc. from the United States is currently in the final stage of negotiations with the Cambodian Government to acquire licences in order to implement cost effective telecommunication solutions in Cambodia. Government Concern Over 3G Video Calling Video calling has caused concerns that it would enable the distribution of adult content in Cambodia and will not be allowed to be provisioned by mobile operators. This came as a blow to the plans of MobiTel’s 3G deployment plan. As per the regulatory stand, MobiTel had to drop the video calling feature from its 3G services launch in 2007. Such a regulatory restriction is likely to hold back innovative services. Emerging New Technologies The telecommunications industry is susceptible to technology changes. This may require significant changes to the mobile operators’ business model, development of new products and substantial investments in next-generation infrastructure to accommodate growth in its business and the adoption of new technologies and services. The effect of emerging and future technological changes on the Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 203 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
competitiveness of mobile operators’ business cannot be accurately predicted. There can be no assurance that technologies employed by the operator will not become obsolete or be subject to competition from new technologies in the future. Dependence on Infrastructure The providers of mobile services are reliant on network quality and coverage. Any failure of network, server and transmission can result in major operational disruption affecting the ability to retain or attract new subscribers which may adversely affect the finandal performance of the company. To capture a bigger share of the growth market, Cambodian mobile operators are burdened with imminent network expansion in the suburban and rural areas. Any failure to accommodate growth in network expansion could also have an adverse impact on the company. 5.5 Barriers to Entry The mobile telecommunications industry is subject to high entry barriers due to its capital intensive nature, scarce spectrum allocation, prerequisites for telecommunications licenses, the need for wide network coverage, and the over­crowded nature of the industry. Despite its inability to make substantial investments, the cambodian Govemment has been quite proactive in allowing private players to offer mobile services. Apart from World Trade Organization (“WTO”) accession, The Cambodian mobile industry has been quite successful in getting investments from other countries, particularly Sweden, Singapore, Thailand, Norway and Malaysia. Removal of market entry barriers has improved telecommunication access in general in Cambodia. More investments in the mobile market are antidpated from South Korean and Vietnamese operators, and Russian investors. In 2007, Essar Global Limited from India also expressed willingness to launch GSM-based mobile services through a joint venture with a local company. 3P Networks Inc. is currently negotiating license to launch services in the country. Strong competition has led to emergence of competitive strategies like prepaid cards being provided for as little as US$5. Moreover, significant tariff declines have been seen in last few years. Independent Marl<et Research forMobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 204 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
5.6 Relevant Laws and Regulations The Ministry of Post and Telecommunications of Cambodia (“MPTC”), plays the role of policy maker and regulator of the telecommunication industry. In addition, the Govemment of Cambodia is also a shareholder of the corporatised incumbent Telecom Cambodia (TC). TC operates (i) telecommunication networks and services by radio, satellite, optical fiber, sub-maline cable for the purpose of telephone, facsimile, data transmission, internet, and private leased circuit; and (ii) television transmission services. TC is under the technical administration of the MPTC and the finandal administration of the Ministry of Economy and Finance. Therefore, there is often a conflict of interests in favor of the state sector. For instance, in 1998, the MPTC had issued a regulation banning VolP services that offers oversee calls at very low costs as the service would reduce the state revenue from the telecom industry. There was no update on this until 2003 when AZ. Communications, signed a Business Cooperation Contract (“BCC”) Vvith the MPTC to exclusively offer international telecommunication services in Cambodia based on VoIP. Invariably, a license issued by the MPTC is required to own a mobile or fixed network as well as to provide services. As there is not any legal provision goveming these licensing procedures, according to a study by Economic Institute of Cambodia, the decision of the MPTC on whether a licence should be issued, on the basis of the necessity for development of a network, infrastructure, the expected coverage, the customer base and so on, seems to be obscure and discretionary. It was pointed that contracts signed between the MPTC and private operators generally form restrictions on market entry. For instance, some years ago, a contract signed between the MPTC and Telstra, an Australian firm, for the establishment of an international gateway stated that no new gateways could be built. The International Telecommunication Union (“ITU”) also worked for some time Vvith the MPTC on restructuring the telecom sector. The Cambodian Govemment developed a draft of the country’s first telecommunications master plan. Drawn up with assistance from the ITU, it aimed to boost telecommunications services. Various recommendations have been made by consultants and international organisation suggesting that the commercial functions of the MPTC should be separated from its regulatory functions, or even that the commercial segment of the MPTC should be privatised. Such separation appears to be imminent, and an Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 205 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
independent body called the Telecommunications Regulatory of Cambodia will be created to regulate the industry. Mobile service providers typically operate under a 35-year cellular concession granted by the MPTC. There is a multitude of spectra available, namely GSM900, GSM1800, CDMA450, and AMPS800. Fearing the use of 3G services that may lead to the spreading of pornographic images, the MPTC has barred video phone features in 3G services. Emerging from years of war, Cambodia has put into place a very liberal and open marKet to lure foreign investment into Cambodia. The Cambodian Government’s receptiveness to foreign investment and its liberalization of the telecommunications sector have paved the way for tremendous investment opportunities in the telecommunications sector, as demonstrated particularly by the advent of numerous foreign-owned mobile service providers in the country since 1993. Cambodia can be regarded favorably by foreign investors from a taxation perspective. The Cambodian Govemment offers tax incentives to promote foreign investment, such that while the typical corporate tax rate is 20%, a substantially discounted tax rate of 9% is imposed on foreign-owned enterprises. 5.7 Supply Conditions Considering the very low mobile penetration level in the country, the Cambodian mobile market is poised for continuing growth. However, in order to capture the potential growth in the untapped low ARPU rural market, operators are expected to undertake heavy expansionary plans in the next two to five years to build base stations and expand 3G network coverage. For example, leading mobile operator, MobiTel, in September 2007, awarded a US$150 million contract to A1catel-Lucent to expand its network coverage into the rural areas. In November 2007, TMIC unveiled a plan to invest US$150 million to upgrade networK capacity and add 500 base transmitter stations in the next 2 years. Greenfield operator Viettel Mobile has also unveiled a US$30 million investment plan towards infrastructure. Other potential new entrants are expected to make similar investments in the next two to three years. However, consistent with other emerging markets which are dominated by low ARPU prepaid users, mobile operators are required to expand their networK coverage quickly in a most cost effective manner. Thus vendors, in order to target such emerging marKets, remain focused on providing ‘Low Cost Ownership’ for operators. For instance, Ericsson has been heavily promoting their ‘Expander’ solution that Independent Marl<et Research forMobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 206 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
enables mobile operators to reduce both their capital expenditure and operational expenditure by redudng the number of sites. 5.8 Demand Conditions The mobile market in the country is still in its growth stage, with a mobile penetration rate of 17.3% as of December 31,2007. For the same period, subscriber penetration for fixed-line services in Cambodia remained stagnant at one of the lowest penetration rates in the world, at approximately 0.3%. The lack of fixed-line infrastructure and the increasing preference for mobility are expected to accelerate the pace of fixed-to­mobile substitution effect where more users are expected to adopt mobile services over fixed-line services. Figure 5.2 provides details on mobile subscriber and growth rates in Cambodia from 2003 to 2012. Figure 5.2: Total Mobile Subscribers and Growth Rates (Cambodia), 2003-2012 Year  Mobile Penetration  Total Mobile Subscribers (‘000)  Growth (%)  2003  4.7%  619  – 2004  6.4%  862  39.4%  2005  8.4%  1.138  32.0%  2006  11.4%  1,578  38.7%  2007  17.3%  2,456  55.6%  2008  23.2%  3,342  36.1%  2009  28.6%  4,197  25.6%  2010  33.5%  5,018  19.6%  2011  36.9%  5,621  12.0%  2012  39.7%  6,165  9.7%
Mobile subscriber compound annual growth rate (CAGR) (2007-2012): 20.2% Note: Allfigures are rounded; the base year is 2007. Source: Frost & Sullivan Only about one fifth of the Cambodian population lives in urban areas, where the majority of early mobile users tend to reside. Amid growing expansion of Cambodia’s operators, approximately 90% of the population is covered by mobile infrastructure. Mobile operators are expected to launch more affordable prepaid packages tied with handset subsidies to capture subscribers in the suburban and rural areas fuelling the overall mobile subscriber growth in the country. The subscriber base is expected to expand at a CAGR of 20.2% from 2007 to 2012 attaining a penetration level of 39.7% at the end of 2012. Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 207 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
Considering Cambodia’s relatively low GOP per capita, the current blended ARPU level of sub US$10 suggests that the average Cambodian spends a very high percentage (approximately 30%) of their monthly income on mobile services. Hence, the Cambodian mobile market is likely to remain price sensitive however will experience a significant drop in ARPU as adoption increases. Churn rates are expected to gradually increase, as operators, especially greenfield operators, indulge in competitive tariff changes to capture market shares. 5.9 Reliance and Vulnerability to Imports Generally, the telecommunications industry in Cambodia is dependent on imports for the majority of its network components as most of the network equipment cannot be sourced locally. The mobile network operators rely on a number of leading intemational mobile network equipment vendors to provide network equipment and facilities. Other established suppliers in the market are able to supply comparable network equipment. Nevertheless, operations can be adversely affected if the required supply of equipment or services is not met in a timely manner. The provision of telecommunication services in Cambodia is not susceptible or vulnerable to imports such as competition from overseas service providers. Such activities are regulated and must be provisioned by locally licensed service providers. 5.10 Product Substitution The threat of product substitution arises from other businesses which are able to provide the mobility services via a different technology or business model. Teledensity is at a very low level and with the accelerating fixed-to-mobile substitution happening, there appears to be no imminent threat of product substitution within the Cambodian mobile sector. There have been some attempts to use fixed wireless technology such as COMA-based WLL terminals as access means to improve fixed-line situation in the country. Camshin, the leading service operator in this segment, had apprOXimately 5,000 subscribers using this service as of December 31, 2006. Though such technology has been quite successful in other emerging markets such as Indonesia, it has yet to gain much momentum in Cambodia. Camshin has since migrated all its COMA 450 users to GSM in April 2007. Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 208 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
Other product substitutions include mobile VolP and WiMAX. VolP is the transmission of voice through the Internet while WiMAX is an altemative wireless technology for providing wireless data services over long distances. AZ. Communications was the first service provider in Cambodia to offer intemational telecommunications services based on VoIP. Viettel Mobile has also invested in offering VolP services in Cambodia. In August 2007, TMIC launched its VolP services. Internet Service Providers in the country are taking initiatives to make cheaper VolP calling cards widespread across the country. WiMAX has been launched by VolP service provider MediaRing Ltd. A1timo has acquired a 90% stake in Sotelco, a Cambodian WiMAX service provider who also holds GSM900/GSM1800 license, in view of launching mobile services. However, so far there have been no major commitments by major operators. 5.11 Market Size and Growth Forecast The local mobile market continued to experience robust growth in 2007 as subscriber base grew by 55.6% (0.88 million net subscriber addition) to reach 2.5 million compared to the previous year. Mobile revenue has also been growing at tandem with subscriber base growth, reaching US$239.3 million as of December 31, 2007, registering a 33.7% year-on-year growth. The mobile subscriber base in Cambodia is expected to grow at a CAGR of 20.2% from 2007 to 2012, against a penetration of over 39.7% by 2012. Meanwhile, market growth in terms of revenue is expected to grow at a slower pace as a result of declining ARPU due to anticipated competition. Mobile revenue is envisaged to expand at a CAGR of 17.7% to US$541.0 million in 2012. Continuous subscriber growth would emanate from the acceleration of more users adopting mobile services over fixed-line services, greater mobile penetration into rural areas and the availability of lower-priced mobile handsets are likely to further stimulate demand growth. It is also anticipated that the increasingly competitive and innovative cellular service packages offered by the new mobile players Altimo, CADCOMMS, Camtel, SK Telecom and VietteJ Mobile will be a good driver for subscriber growth. (This part of the page is intentionally left blank) Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 209 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
5.12 Prospects for Industry Players There is ample potential for growth in the Cambodian mobile marKet, given its low penetration rate and the lack of fixed-line infrastructure. While the three major mobile operators virtually control the subscriber base, new entrants are likely to find rural areas more attractive in their attempts to gain subscribers. Though 3G mobile services (without video telephony) have been launched in Cambodia, voice and SMS services continue to be the biggest applications on the mobile platform. The prepaid segment is expected to remain a key growth driver of mobile revenues in the next five years as mobile operators turn to rural marKets and younger market segment to grow subscriber base. With potentially four new entrants in the market by 2008, the mobile market in Cambodia is set for stiff competition. Antidpated price competition is likely to adversely affect operators’ blended ARPU. As network coverage and breadth of services would be a key basis of competition apart from pridng, the three largest mobile operators (MobiTel, Camshin, and TMIC) are in a good position to capitalize on the massive growth potential in Indonesia’s mobile marKet. Considering the potential new entrants in the marKet, the Cambodian mobile marKet would possibly have ten operators by the end of 2008. Such a competitive situation may not be viable in a small market like Cambodia and the market may undergo some consolidation in the mid to longer term. 5.13 Overview and Outlook of Economy 5.13.1 Overview of Cambodia’s Economy in 2007 On the back of healthy agriculture, tourism, construction and garment sectors, the Cambodian economy continued to gain momentum in 2007. According to Cambodian Ministry of Economy and Finance’s most recent update, the economy was estimated to grow by 8.5% while inflation is expected to remain low. Although this pace of economic expansion is still impressive, it marks the end of Cambodia’s recent period of double-digit growth. This slow down can be attributed to comparatively poor export performance in the fourth quarter of 2007. The country experienced slow down in the garment sector due to competition from lower-eost producers, including Vietnam, which was inducted in the World Trade Organization (‘WTO”) in January 2007. Domestic economic activity remained upbeat underpinned by rising rural incomes, by increased inflows of FOI as the economy Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 210 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
becomes more commercially oriented and as oil exploration attracts investment and by higher Cambodian Govemment capital spending on the back of an improved revenue performance. Though, farm output continued to expand. considering increasing food prices in recent months (in November 2007, food prices were up by 17.7% year-on-year) and surge in fuel prices, inflation rose to an annual average of 5.9% in 2007. 5.13.2 Outlook of Cambodia’s Economy in 2008 An important contributory factor is that economic growth has been narrowly based on clothing and tourism, both of which are urban focused with limited linkages to the rural economy. On the assumption that the country fails to overcome the fundamental challenges of widening its manufacturing base and reducing its reliance on garment
exports, it is likely that growth will experience a downward shift. The garment industry continues to suffer from relatively low efficiency levels, and over the next two years, following the planned lifting of current restraints on China’s garment exports to the US and the EU, Cambodia’s exporters could struggle to cope with a stronger competition from China. Nevertheless services, and particularly tourism, will continue to thrive, helping to support solid overall growth in the next few years, while improvements in productivity underpin forecasts for steady growth in the agricultural sector, assuming that favourable weather continues. The construction sector is also expected to remain highly active. Though the outlook remains upbeat, Ministry of Economy and Finance projects a GDP growth of 7% for 2008. However, looming oil prices rise coupled with a potential increase in import-led inflation and global economic slowdown is likely to accelerate inflation to an average of 7.4% in 2008. However, as supply-side pressures ease in 2009, with domestic fuel prices set to drop back in tandem with the projected fall in global crude oil prices, inflation is likely to decelerate. (This part of the page is intentionally left blank) Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 211 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FRO S T & SULLIVAN
Chart 5.5 depicts the real GDP growth for Cambodia from 2003 to 2008. Chart 5.5: Real GDP Growth (Cambodia), 2003-2008 I——————–~ 2008e I 17.0 1-I 2007e 2006 2005

13.4 2004
2003 2002
0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 Real GCPgrowth % Source: Kingdom ofCambodia Ministry ofEconomy and Finance, Asian Devebpment Bank (ADB) (This part of the page is intentionally left blank) IndependentMarl<et Research forMobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost &Sullivan 2008 212 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
6. EXECUTIVE SUMMARY OF THE MOBILE TELECOMMUNICATIONS MARKET IN SINGAPORE 6.1 Industry/Market Segmentation With a penetration rate of 122.5% as of December 31, 2007, the mobile services market in Singapore can be considered as one of the most saturated markets in Asia Pacificl1 . Although the market has reached saturation, subscriber growth grew substantially in 2007 at a rate of 21.1% to 5.6 million. This was due to the influx of foreign workers and a robust growth of the prepaid segment. Prepaid subscribers, which accounted for 46.3% of total mobile subscribers in Singapore, grew by 45.3% over the same period. Figure 6.1 provides details on mobile subscribers and mobile penetration in Singapore from 2003 to 2007. Figure 6.1: Total Mobile Subscribers and Mobile Penetration (Singapore), 2003­2007 2003  2004  2005  2006  2007  Mobile penetration 12  83.1%  91.1%  97.8%  105.2%  122.5%  No. of subscribers (‘000)  3,477  3,861  4,256  4,639  5,619  No. of 3G subscribers (‘000)  – – 132  884  1,701  Proportion of prepaid subscribers  28.2%  32.3%  35.6%  38.7%  46.3%
Source: IDA, Frost & Sullivan Total 3G subscribers in Singapore had reached 1.7 million as of December 31, 2007, accounting for 30.3% of total mobile subscriber base. All three mobile operators, Singapore Telecom Mobile Pte Ltd (“SingTel Mobile”) -a subsidiary of Singapore Telecommunications Ltd (“SingTel”), StarHub Mobile Pte Ltd (“StarHub”), and MobileOne Ltd (“M1”), view 3G as a new opportunity to grow their ARPU. It is expected that the total mobile subscriber market would reach 6.7 million by 2012, growing at a CAGR of 3.6% between 2007 and 2012. (This part of the page is intentionally left blank) 11 Tetal mobile subscriber and mobile penetration numbers for Singapore as of December 31, 2007 are from the Infocomm Development Authority (“IDA”) and mobile operators in Singapore. 12 Mobile penetration refers to the percertage of total mobile subscribers against the country’s population. Counby population is provided by Frost & Sullivan.
Independent Mamet Research for Mobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 213 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
The launch of HSDPA services by M1 in December 2006 heralded a new competitive landscape for the mobile telecommunications market in Singapore. HSDPA is an upgrade of 3G networks delivering higher data transfer speeds and capacity. SingTel Mobile subsequently launched its HSDPA commercial trial service. StarHub, on the other hand, skipped the HSDPA-only launch and went straight for a launch of two-way High-Speed Packet Access (“HSPA”) service nationwide, the first operator to do so in Southeast Asia, in August 2007. The Infocomm Development Authority (“IDA”) had introduced a 10-year master plan, Intelligent Nation 2015 (“iN2015”), to introduce its citizens into the digital age, comprising complementary wired and wireless networks with super high access speeds and seamless connectivity. The seamless connectivity offered under the iN2015 masterplan would mean that demarcation between wireless (mobile) and wired (fixed-line) services would become less apparent over time. As a result, an operator no longer provides only mobile services but also wireless broadband access, which enables pure mobile operators such as M1 to expand its competitive opportunities into the residential broadband market. Segmentation of telecommunications services in Singapore can be summarized in the follOWing diagram. The mobile market is defined as mobility services, which indude 2G and 3G/3.5G services as well as mobile broadband offered over the HSDPA network. While pre-mobile WiMAX service was introduced in March 2006 by QMax (a joint venture between ISP Qala Singapore and digital audio player manufacturer Creative Technology), only limited services are available. WiMAX is an alternative wireless technology for providing wireless data services over long distances. Given this, fixed WiMAX is categorized as part of fixed services. For this purpose, historical data for Singapore was derived based on publicly disclosed subscriber base of mobile operators in the market. (This part of the page is intentionally left blank) Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 214 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN

Chart 6.1 depicts the market segmentation of telerommunication seNices in Singapore. Source: Frost & Sullivan The mobile market in Singapore has experienced moderate growth rates in terms of subscriber base, mainly as a result of market saturation. Subscriber base grew at a CAGR of 12.7% between 2003 and 2007. Total mobile subscriber based as at end of 2007 stood at 5.6 million, against a market penetration of 122.5% compared to 4.6 million subscribers and 105.2% mobile penetration as of December 31, 2006. The mobile subscriber base in Singapore is projected to grow at a CAGR of 3.6% between 2007 and 2012. Subscriber growth is envisaged to emanate from the prepaid segment which caters to the lower-end market as well as the influx of foreign workers. Total mobile revenues are anticipated to grow at a CAGR of 6.2% from 2007 to 2012 to reach SGD3,942 million by 2012. Revenue growth is likely to stem from a combination offactors; namely, a bigger addressable market resulting from the growth in population base and the emergence of mobile broadband services, and greater emphasis for value-added seNices and convergent services. (This part of the page is intentionally left blank) IndependentMarl<et Research forMobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 215 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FRO S T & SULLIVAN
Chart 6.2 depicts the mobile subscriber and growth rates in Singapore from 2003 to 2012. Chart 6.2: Total Mobile Subscribers and Growth Rates (Singapore), 2003-2012 _Total Subscribers (‘000) -+-Growth rate 8,000 25% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Mobile subscriber CAGR (2007-2012): 3.6% Note: All figures are rounded; the base year is 2007. Source: Frost & Sullivan Chart 6.3 depicts the total mobile revenue and growth rate in Singapore from 2003 to 2012. Chart 6.3: Total Mobile Revenues and Growth Rates (Singapore), 2003-2012 _Total mobile revenue (SGD million) ~Growth rate 4,500 20% 18%”2 4,000 ~ 16%:E 3,500 0 14%Cl 3,000 Q)!!!. 12% “§Q) 2,500<: ” Q) 10% J:: j> Q) 2,000 08% i30:: j!l 1,500:;; 6% 0 :;: 1,000 4%(ij “0 500 2%I­0 0%

Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost &Sullivan 2008 216 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
6.2 Key Industry Participants Being a developed industry catering for a small population base, the local mobile market has reached certain stability in tenns of competition. Emphasis of competition has gone beyond pricing, and more importantly, is heavily placed on network quality, breadth of value-added services, and service convergence. There are three mobile operators in Singapore; SingTel Mobile, StarHub and M1, which ail own 3G licenses. SingTel and StarHub are full service providers, offering services ranging from mobile to fixed-line, broadband and pay TV. M1, on the other hand, only offers mobile services but has recently entered into the residential broadband segment with the deployment of its HSDPA mobile broadband services. SingTel SingTel Mobile via SingTel provides a full range of services in mobile, fixed, data communications, Internet, Pay TV, IT and consultancy, and satellite. It recently entered into the Pay TV foray in Singapore, with the launch of its IPTV (Internet Protocol Television) service (branded by SingTel as “mioTV”) in July 2007, bringing an end to the long-time monopoly foothold of cable TV provider, StarHub. Being a new service, SingTeI’s mioTV’s subscriber base is still small as compared to that of StarHub’s Pay TV. However, mioTV holds immense potential for growth considering the level of interactivity and empowerment it offers. SingTel commands a market leadership in mobile, broadband and fixed-line services. Despite operating in a highly saturated mobile market, the company managed to increase its mobile subscriber base by nearly 31.8% year-on-year growth in 2007, to 2.3 million. As part of its bundling strategy to retain customers, SingTel introduced its ‘Generation mio’ plan which signed up 55,000 customers at the end of 2007. The mio plan is a service bundling strategy for fixed-line, mobile and broadband services, and most recently introduced IPTV and home monitoring solutions via telephone lines. To remain competitive, SingTel also unveiled a number of strategies including launching unlimited VoIP, the ‘360’ suite that targets enterprises ranging from small to medium-sized enterprise, to large organizations with a comprehensive suite of services, and mioTV. Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 217 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
StarHub StarHub is the second largest mobile operator in Singapore, having surpassed M1’s market share in early 2005. It is a full service provider that offers telecommunications and entertainment services over the mobile, cable, broadband and fixed platforms. StarHub pioneered the bundling strategy in Singapore through its ‘Hubbing’ plans, with the aim of improving customer retention and increasing ARPU through cross­selling of services. At the end of 2007, there were 755,000 households that subscribed to at least one of its services, grov.;ng by 1.6% over 2006. In the Wireless@SG front, StarHub has entered into a roaming arrangement with QMax (one of the three service providers for Wireless@SG), which effectively enables StarHub’s customers to have access to all Wireless@SG locations. M1 M1 holds a Facilities-Based Operations (“FBO”) license, and Telecommunications Dealers’ Class Ucense issued by IDA and Intemet Access Service Providers Class License (MDA Registration) issued by the Media Development Authority (“MDA”). However, unlike SingTel and StarHub v.tlich plays in the v.;red broadband, fixed-line and pay TV space, M1 is mainly a mobile operator and only recently it began offering wireless broadband services branded as M1 Broadband via its HSDPA network, in December 2006. Until recently, Singapore’s broadband access market has been limited to a few major participants, most of whom were using either asymmetric digital subscriber line (“ADSL”) or cable. In December 2006, M1 launched its new broadband service that is not based on either ADSL copper wire or cable, but on a wireless technology HSDPA, which is commonly labelled as 3.5G. The initial data access speeds of up to 3.6 Mbps is being offered within the central business district, and up to 1.8 Mbps for the rest of the island-state. With HSDPA, M1 gains a new entry into the residential broadband market which is likely to pose a threat to the wired broadband business of incumbent SingTel and StarHub in the long run. M1’s move into the broadband space signals its goal to compete seriously in the home, office and mobile broadband environment, with its prospects improving further with speed upgrades over its HSPA network. M1 has also launched an innovative video sharing service in January 2007 called MeTV. MeTV will allow users to upload their video clips via MMS and the owners will be paid by M1 every time someone views their clips. Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 218 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
6.3 Market Share Analysis Chart 6.4 depicts mobile operator market share by mobile subscribers in Singapore in 2007. Chart 6.4: Mobile Operator Market Share by Subscribers (Singapore), 2007 SingTelM1 41.4%27.3%
Slarhub 31.3% Source: Frost & Sullivan As of the end of 2007, the market shares of the SingTel Mobile, StarHub and M1 were 41.4%, 31.3% and 27.3%, respectively. SingTel Mobile has successfully acquired more net subscriber additions compared to its peers, following their aggressive quadruple play strategies of bundling fixed-line, mobile, pay TV and broadband services under a discounted price plan. 6.4 Industry Challenges Regulatory Risks The Singapore Government regulates the telecommunications industry via IDA. The IDA is responsible for planning and implementing various telecommunications master plans, and overseeing IT standards, policies, guidelines and procedures for the Govemment. Its main purpose is to encourage effective competition in the telecommunications market. While regulatory risk remains with regard to spectrum allocation, issuance of new licenses and implementation of new policies, it is moderated by IDA’s technology neutral stance and its policy of allowing market forces to dictate when setting its policies and regulations framework. Independent Maricet Fresearch for Mobile Telecommunications Marl<ets in Malaysia, IndonesIa, Sri Lanka, Bangladesh, cambodia, Singapore andOtherKeyFregionalMarkets © Frost & Sullivan 2008 219 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
In addition to IDA’s regulatory framework, TV broadcasting services offered over the mobile platform would also come under the scrutiny of the MDA. The MDA has a dual-function role of promoting growth of the media industry and managing content to protect core values and safeguard oonsumers’ interests. Competition Competition in Singapore’s mobile telecommunications market has intensified, given its high market saturation and Singaporean Govemment’s iN2015 masterplan which would reduce demarcation between the wireless (mobile) and wired (fixed­line) telecommunications market. SingTel and StarHub, which hold significant market share over wired broadband services, are expected to face competitive pressures from new wireless broadband access (“WBA”) entrants and M1’s mobile broadband HSDPA services. Mobile Number Portability An enhanced version of MNP for fixed-line and mobile services was proposed for implementation that will enable users to switch between teleoommunications service providers and retain full use of their existing numbers and services. As MNP will provide users with the convenience to easily change operators, mobile operators would face increasing competitive pressure to retain customers and reduce churn rates. Nevertheless, in view of the advanced development of Singapore’s mobile market and the present ‘call forwarding’ option in place, the impact of MNP is expected to be fairly moderate. The proposed implementation at the end of 2007 did not proceed as planned and currently there have been no updates as to when this will take place. Emerging New Technologies The telecommunications industry is susceptible to technology changes. This may require significant changes to the mobile operators’ business model, development of new products and substantial investments in next-generation infrastructure to accommodate growth in its business and the adoption of new technologies and services. A NGN is a packet-based network where service-related functions are independent from the underlying transport-related technologies. The effect of emerging and future technological changes on the competitiveness of mobile operators’ business cannot be accurately predicted. There can be no assurance that technologies employed by the operator will not become obsolete or be subject to competition from new technologies in the future. Independent Marl<et Research forMobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 220 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
Dependence on Infrastructure The providers of mobile services are highly reliant on network quality and coverage. Any failure of network, server and transmission can result in major operational disruption, affecting the ability to retain or attract new subscribers which may adversely affect the financial performance of mobile operators. To remain competitive, mobile operators are also burdened by new infrastructure deployments or network expansion to meet increasing bandwidth requirements. 6.5 Barriers to Entry The mobile telecommunications industry is subject to high entry barriers due to its capital intensive nature, scarce spectrum allocation, the need for wide network coverage and the competitive nature of the industry. Nevertheless, new regulatory policies such as the issuance of new WBA licenses, the iN2015 program and the Singaporean Government’s decision not to restrict ownership of mobile TV licenses have lowered regulatory entry barriers to the telecommunications industry in Singapore. 6.6 Relevant Laws and Regulations The Singapore Government regulates the telecommunications industry via IDA. The IDA is responsible for planning and implementing various telecommunications master plans, and overseeing IT standards, policies, guidelines and procedures for the Singaporean Government. Its main objective is to encourage effective competition in the telecommunications market. Taking a technology-neutral standpoint, IDA also monitors market developments and regulatory measures for the local telecommunications sector, ensuring relevant and effective policies and regulatory frameworks in line with the dynamic global trends. Some of the recent plans by the IDA that would have major implications on the local mobile telecommunications industry include:­New Licenses for WBA Spectrum To increase Singapore’s broadband offerings and enhance competition in the broadband market, the IDA issued six WBA spectrum rights in the 2.3 GHz and 2.5 GHz frequency bands in May 2005. The six licenses were awarded to inter-touch Holdings (Singapore) Pte Ltd, M1, Pacific Internet Corporation Pte Ltd, Qala Independent Maricet Fresearch forMobile Telecommunications Marl<ets in Malaysia, IndonesIa, Sri Lanka, Bangladesh, cambodia, SingaporeandOtherKeyFregionalMarkets © Frost & Sullivan 2008 221 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
Singapore Pte Ltd, Singapore Telecom Mobile Pte Ltd (a subsidiary of SingTel), and StarHub. WBA licensees must offer services within 18 months for the 2.5 GHz spectrum, and within 36 months for the 2.3 GHz spectrum. The introduction of convergence services would present new opportunities as well as threats to existing mobile operators in Singapore. iN2015 The IDA had introduced a 1Q-year master plan, known as the Intelligent Nation 2015, to introduce its citizens into the digital age, comprising complementary wired and wireless networks with super high access speeds and seamless connectivity. The wired broadband network or NGN network will deliver ultra-high broadband speeds of 1Gbps and above, to all homes, offices and schools, while the wireless broadband network will offer pervasive connectivity around Singapore. The iN2015 masterplan will involve close cooperation between the public and private sector. As part of the iN2015, the Wireless@SG program will provide an island-wide free wireless connectivity at speeds of up to 512 Kbps. Three companies have been selected by the IDA to set up the Wireless@SG infrastructure. SingTel, iCELL Network Pte Ltd, and QMax Communications Pte Ltd will be spending approximately S$100 million over a period of two years in deploying the technology, of which S$30 million will be covered by IDA. The iN2015 program will see new entrants and intensify competition in the broadband sector. For mobile operators that do not currently own a fixed broadband business, iN2015 would present a new market opportunity for them. Mobile Number Portability An enhanced version of MNP for fixed-line and mobile services was proposed for implementation that will enable users to switch between telecommunications service providers and retain full use of their existing numbers and services. The new system will replace the existing call-forwarding solution introduced in 1997, used to retain numbers after a change of operators. Until now, number portability has been simply a call forwarding solution by which users’ calls to their old mobile numbers are merely routed to the new ones. This means contacts have to be informed of the switch to avoid confusion. Currently, the IDA has suggested the introduction of a centralized database of all local mobile phone numbers and their corresponding service providers in order to achieve ‘true’ MNP, which will not require users to get a new number. As MNP will provide users with the convenience to easily change Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 222 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
operators, mobile operators would be compelled to implement strategies to encourage customer loyalty to retain customers and reduce churn rates. Nevertheless, in view of the advanced development of Singapore’s mobile market and the present ‘call forwarding’ option in place, the impact of MNP is expected to be fairly moderate. The proposed implementation at the end of 2007 did not proceed as planned and currently there have been no updates as to when this will take place. Media Development Authority (MDA) Heralding the emergence of convergent services, the MDA also exercises regulatory power over TV broadcasting services offered on the mobile platform. The MDA has a dual-function role of promoting growth of the media industry and managing content to protect core values and safeguard consumers’ interests. It recently proposed a new regulatory framework that would issue up to four new licenses to operators for broadcast-based services, which may result in the three existing major operators coming under the purview of MDA’s new licensing framework. Under the proposed framework, mobile TV services would be regulated by the same TV Programme Code that regulates content and there will be no license fees for at least the first five years. The Singaporean Government has also decided not to restrict ownership of companies that want to offer television services for mobile phones. The MDA is currently conducting a public consultation to obtain feedback on the Authority’s proposed policy and regulatory framework for mobile TV services. 6.7 Supply Conditions Suppliers of mobile operators comprised multiple parties inclUding mobile network operators (to provide infrastructure to MVNOs; the Singaporean Govemment (for spectrum allocation and operating licenses) and telecommunications equipment vendors (to supply the infrastructure to mobile network providers). Mobile services in Singapore are typically provided by mobile network operators themselves, where the MVNO concept is not common in the local mobile industry. Meanwhile, spectrum allocation is a scarce resource. The Singaporean Govemment regulates frequency and bandwidth allocation and mobile operators must obtain a license for each of the mobile services offered and also for utilization of frequency. In 2005, the Singaporean Govemment issued new WBA licenses to six companies. Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 223 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
Given the availability of multiple equipment vendors in the telecommunications space and the importance of volume to the vendor, no one vendor has sole control over the industry. 6.8 Demand Conditions With a penetration rate of 122.5% as of December 31, 2007, the mobile services market in Singapore can be considered one of the most saturated markets in Asia Pacific. Although the market has reached saturation, the number of mobile subscribers grew substantially at a rate of 21.1% to 5.6 million. This was due to the influx of foreign workers and the robust growth in the prepaid segment. The mobile subscriber base in Singapore is expected to grow at a CAGR of 3.6% between 2007 and 2012. Subscriber growth is envisaged to emanate from the prepaid segment which caters to the lower-end market as well as the influx of foreign workers. Total mobile revenues are anticipated to grow at a CAGR of 6.2% from 2007 to 2012 to reach SGD3,942 million by 2012. Revenue growth is likely to stem from a combination of factors; namely, a bigger addressable market resulting from the growth in population base and the emergence of mobile broadband services, and greater emphasis for value-added services and convergent services. 6.9 Reliance and Vulnerability to Imports Generally, the telecommunications industry in Singapore is dependent on imports for the majority of its network components as most of the network equipment cannot be sourced locally. The mobile network operators rely on a number of leading intemational mobile network equipment vendors to provide network equipment and facilities. Other established suppliers in the market are able to supply comparable network equipment. Nevertheless, operations can be adversely affected if the required supply of equipment or services is not met in a timely manner. The provision of telecommunication services in Singapore is not susceptible or vulnerable to imports such as competition from overseas service providers. Such activities are regulated and must be provisioned by locally licensed service providers. Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 224 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
6.10 Product Substitution The threat of product substitution arises from other businesses which are able to provide the mobility services via a different technology or business model. In Singapore’s mobile market, the two immediate threats are VolP (the transmission of volce through the Internet) and new WBA licensees (including WiMAX deployment). Nevertheless, poor commercial readiness for mobile WiMAX and the lack of viable business plans have been the key obstacles for the rest of the license holders to launch commercial WBA services. 6.11 Market Size and Growth Forecast The mobile market in Singapore has experienced moderate growth rates in terms of subscriber base, mainly as a result of market saturation. Subscriber base grew at a CAGR of 12.7% between 2003 and 2007. Total mobile subscriber base as at end of 2007 stood at 5.6 million, against a market penetration of 122.5% compared to 4.6 million subscribers and 105.2% penetration as of December 31, 2006. The mobile subscriber base in Singapore is expected to grow at a CAGR of 3.6% between 2007 and 2012. Subscriber growth is enVisaged to emanate from the prepaid segment which caters to the lower-end market as well as the influx offoreign workers. 6.12 Prospects for Industry Players Emphasis of competition has gone beyond pnclng, and more importantly, is heavily placed on network quality, breadth of value-added services, and service convergence. SingTel and StarHub are full service providers, offering services ranging from mobile to fixed-line, broadband and pay TV. M1, on the other hand, only offers mobile services but has recently entered into the residential broadband segment with the deployment of its HSDPA mobile broadband services. The iN2015 masterplan is expected to change the competitive landscape of the telecommunications industry in Singapore, where the demarcation between wireless (mobile) and wired (fixed-line) solutions would become less apparent over time. Essentially, the emergence of mobile broadband would expand the addressable market opportunity for the mobile industry, particularly for mobile operators that do not currently own a fixed broadband business. The introduction of mobile broadband services over HSDPA networks is expected to expand the addressable market for Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 225 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
mobile operators and to tap on the residential broadband market. In line with the increasing need for further market segmentation, mobile operators are tuming to value added services such as addressing the high growth enterprise market and non-SMS segments for other revenue streams. 6.13 Overview and Outlook of Economy 6.13.1 Overview of Singapore’s Economy in 2007 Singapore economy maintained its robust expansion, expanding by 7.7%, compared with 8.2% in 2006. Robust growth was recorded across most industries notably in the non-IT industries and asset market-related activities. Financial services and tourism performed strongly, driven in part by buoyant economies throughout the sub-region. Construction activity surged, supported by a boom in high-end apartment buildings as well as new office and retail projects and two large integrated casino resorts. For 2007 as a whole, the manufacturing sector grew by 5.8%, easing from the 11.9% growth reached in 2006. Further, amidst the buoyant domestic economic conditions and the recent rise in global oil and food prices, MAS has projected consumer price index (“CP!”) inflation to register at 1.5% to 2.0% for 2007. 6,13.2 Outlook of Singapore’s Economy in 2008 The Singapore economy is expected to expand by ~% in 2008. Forecast for the Singapore economy was revised downwards slightly to 4-6%, from 4.5-6.5% previously. CPI inflation came in at 2.1% in 2007; it is forecast to rise to 4.5-5.5% in 2008. Inflationary pressures have risen since the seoond half of 2007 and are expected to persist in 2008 given high global commodity prices, as well as firm wage and rental costs domestically. For the first half of 2008, headline CPI inflation is projected to rise to about 4.5% on a year-on-year basis on account of the GST hike, as well as the base effects of lower energy and car prices in the first half of 2007. (This part of the page is intentionally left blank) Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 226 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FRO S T & SULLIVAN
Chart 6.5 depicts the real GDP growth for Singapore from 2003 to 2008 Chart 6.5: Real GDP Growth (Singapore), 2003-2008 2008e : 2007 2006 2005 2004 8.8 2003
0.0  1.0  2.0  3.0  4.0  5.0  6.0  7.0  8.0  9.0  10.0  Real GOP grow th %  Source: Monet’*}’ Authority ofSingapore
Independent Mamet Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost &Sullivan 2008 227 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
7. OVERVIEW OF THE MOBILE TELECOMMUNICATIONS MARKET IN OTHER KEY REGIONAL MARKETS 7.1 Mobile Telecommunications Market in India13 India’s mobile industry is one of Asia’s fastest grmving mobile markets -with the number of subscribers growing at a CAGR of over 69.2% between 2003 and 2007. GSM is the most widely used standard, accounting for more than 71% of total subscribers as of December 31, 2007. However both GSM and CDMA are entrenched platforms, with GSM’s higher share arising from its early adoption. Most operators are exclusively GSM or CDMA operators; however Bharat Sanchar Nigam Limited (“BSNL”), Mahanagar Nigam Telephone Limited (“MNTL”) and Reliance Communications Limited (“Reliance”) utilize both standards. The market is intensely competitive, with at least six operators in most circles. On a pan-India basis, the largest cellular companies are Bharti Airtel Limited (“Bharti”), Reliance, BSNL and Vodafone Essar. Market share differentials between these top four operators are narrow and together they accounted for 74.0% of the market as of December 31, 2007. Though pan-India mobile penetration is still low at 21.0% as of December 31,2007, penetration in the metros (which account for around a quarter of total industry subscribers), is higher, averaging approximately 55%. The focus of growth has now shifted to the Category Band C circles (mainly suburban and rural), where penetration is still largely in single figures. Intense competition has spurred regular tariff innovations by the larger operators, which have effectively served to expand the addressable market. The Indian mobile market saw introduction of new micro-prepaid and lifetime-validity plans in 2006. Such plans met with strong retaliatory offers from other industry players and have now become a standard industry product. (This part of the page is intentionally left blank) 13 For this purpose, historical data for India was derived based on publicly disclosed subscriber base of mobile operators in the market and verified against the regulatory body’s (TRAil published statistics. Independent Marl<et Research forMobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 228 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
The Indian mobile market comprised predominantly of prepaid users, which accounted for approximately 88.0% of its total subscriber base as of December 31, 2007. Due to the disproportionately large prepaid segment and their high price sensitivity, the ARPU in India is around Rs 315 (US$7.65), among the lowest in Asia Pacific. The prepaid segment is expected to remain a key growth driver of mobile revenues in the next five years as the next wave of subscriber growth is likely to be from the rural markets. 7.1.1 Market Drivers Low Market Penetration The Indian mobile market is still in its high growth stage. In 2005, mobile penetration was merely 7.0% and in 2006, this grew to 13.7%. In a short span of two years, this had grown to approximately 21.0% as of December 31, 2007. Following 2007, mobile subscriber base in India is expected to grow at a CAGR of 20.1 % from 2007 to 2012, to 583 million users and a mobile penetration of over 49% by 2012. Network Expansion to Capture Untapped Rural Market Penetration of wireless technologies remains high (averaging 38%) in India’s urban areas compared to its rural regions, where approximately two-thirds of the Indian population resides. As of December 31, 2007, the urban teledensity had grown to more than 60.0%, compared to rural penetration of little more than 57.5%. Growth in the Category A, Band C circles are anticipated to accelerate as mobile operators expand their networks into these areas. With increasing competition, mobile operators are expected to launch more affordable prepaid packages to capture the rural areas. This is envisaged to fuel mobile subscriber growth in the country in the medium term. Regulatory Changes and Reforms Indian telecom sectors have grown rapidly since reforms were initiated in the early nineties. In November 2005, the cabinet approved an increase in the FDI ceiling to 74% from the previous level of 49%, signalling enhanced access to capital for operators. Since the announcement, the Vodafone Group, and Malaysian operators Telekom Malaysia Berhad and Maxis Communications Berhad, have invested in Indian operators, in Vodafone Essar, Spice Communications Limited (“Spice”) and Aircel Cellular Limited (“Aircel”) respectively. Prior to these, there was significant investment from Singapore players, namely Temasek Holdings in Tata Teleservices Independent Marl<et Research forMobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 229 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
and SingTel in Bharti. On the recent deadline for application for new licenses Department of Telecommunications (DoT) has received over 180 applications filed by 15 companies including foreign players such as AT&T. After a long wait, in October 2007, the Indian Govemment announced that it is likely to auction 3G spectrum, and will allow foreign players to participate in the bidding. Issuance of Licences to New Players The competition in the Indian teiecom space is expected to increase manifold with the Indian Government issuing telecom licences to new players, beginning with Datacom Solutions Pvt. Ltd., Idea Cellular Ltd. and Swan Telecom Pvt. Ltd. A total of 120 licences would be distributed among nine companies, including Unitech Infrastructures Pvt. Ltd., Spice Communications Ltd., Shyam Telelink Ltd., Loop Telecom Pvt. Ltd., Nahan Properties Pvt. Ltd. and S Tel Ltd. that were issued letters of intent on January 10, 2008. However, these companies will have to apply for spectrum and wait in queue for the radio frequencies to be allocated. The DoT is currently assessing the spectrum availability in each circle, besides continuing negotiations with the defence ministry to get spectrum vacated at the earliest. Spice received four Unified Access Services (“UAS”) licenses for the Maharashtra Service Area, Andhra Pradesh Service Area and Haryana Service Area on February 29, 2008 and the Delhi Service Area on March 3, 2008 pursuant to the respective license agreements with the Department of Telecommunications (DOT), India. Spice will now be entitled to 4.4 MHz of GSM spectrum per drde, subject to availability. Spectrum has yet to be allocated to Spice for these four licenses. As the competition increases in the GSM segment with the entry of new players, mobile tariffs are likely to fall in the coming months. Falling Cost of Handset Ownership More than 85% of the Indian mobile subscribers are highly price sensitive prepaid users, with low blended ARPU of less than US$8 per month. The reduction in cost of entry-level handsets is expected to spur affordability rates, particularly in rural areas and lower-end segments of the market. For customers switching from the COMA to GSM platform or vice-versa, switching handsets will be the key cost factor which may be subsidised by operators in a bid to attract customers. In February 2008, Spice unveiled the “People’s Phone”, a new handset model which comes without a screen and priced below US$20 targeting the rural markets in India. Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 230 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
Mobile Number Portability in 2008 MNP enables mobile subscribers to retain their mobile telephone numbers when changing from one mobile network operator to another. MNP is set to be introduced in Indian market initially in the metro circles in April 2008 followed by a phased rollout in Category Band C circles. All Unified Access Service License (“UASL”) operators will be required to implement MNP. This is likely to spur subscriber growth on back of improved affordability due to expected price wars. However, pan-India MNP implementation is likely to take about 12-18 months and therefore its impact is likely to be staggered over this period. Introduction of 3G Services and Broadband Wireless Access (BWA) According to a press release from the Telecom Regulatory Authority of India (“TRAI”) in September 2006 (press release no. 9212006), 3G services are to be permitted in the 2.1 GHz band and BWA services in 2.5 GHz. Initial allocation for BWA spectrum will be to existing UASL and category A ISPs. 3G license is likely to be granted through a controlled, simultaneous ascending e-auction. Commercial launch is expected to be in first half of 2008. This is likely to solve the network congestion problem faced by the service providers and the additional spectrum available would make them more competitive in providing VAS improving their non­voice revenue. Acceleration of Fixed-to-Mobile Substitution and Declining Tariff The fixed-line service sector has registered a decrease of over a million users throughout 2007, bringing down the total number of subscribers to 39.3 million as of December 31, 2007. The lack of fixed-line infrastructure and the increasing preference for mobility are expected to accelerate fixed-to-mobile substitution effect in the country. Launch of ‘One India Plan’ tariffs and the drop in per minute tariff in 2006 also boosted the preference for mobile services over fixed-line services. The ‘One India plan’, removes the distinction between fixed-line tariff and mobile tariff and thus makes the tariff ‘technology independent’. Tower Sharing to Become Mandatory The Indian Government has decided to make it mandatory for telecom operators to share their passive infrastructure such as towers to lower the cost of offering services. At present, operators are sharing their infrastructure on an ad-hoc basis. If the initial trial in Delhi and Mumbai is successful, infrastructure sharing will be made mandatory across the country. TRAI is also conducting a consultation on the issue, including Independent Marl<et Research forMobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 231 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
allowing the operators to share active infrastructure. Once implemented, this could potentially lead to significant capital expenditure savings that could be passed on to the subscribers. This could potentially be instrumental in increasing mobile penetration, especially in the rural areas. Mobile Commerce Kicks off in India Recently, Bharti has entered into agreements with some of India’s leading banks ICICI bank, HDFC bank, SBI, Corporation bank and also with financial services major VISA to offer three specialised services; Mobile Money Transfer (MMT), postpaid bill payment and prepaid recharge. Bharti Airtel customers will also be able to make payments over their mobiles for air, rail and movie tickets. Bharti plans to roll-out cash­to-cash money transfers by the end of 2008, but will require separate regulatory clearances before they can offer this service. This initiative is likely to help usher in a new era of mobile based payments in India, more particularly person to person fund transfers, Government open to Mobile Virtual Network Operators (MVNO) Amid controversy over the Tatas’ deal with British company Virgin for offering value­added telecom services, the Indian Government has now started allowing MVNOs in India. In February, 2008 Virgin iaunched youth-focused services in India through telecom operator Tata Teleservices. This business model could potentially be adopted by other foreign players to enter the Indian market without haVing to deal with spectrum issues and enable such companies to target very niche segments. 7.1.2 Market Restraints High Regulatory Charges India’s telecoms industry is burdened by regulatory charges which are arguably the highest in Asia Pacific. The various levies include licence fees, Access Deficit Charges (“ADC”), spectrum charges and service taxes. However, the regulatory burden on the sector has declined significantly over the last few years, with the phased reductions in ADC and subsequent removal of ADC. For example, ADC on domestic calls will be eliminated from April 2008 onwards. ADC on international calls to India will also be halved from April 1 to end of September 2008, after which it will be phased out. (This part of the page is intentionally left blank) Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 232 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
Declining ARPU While subscriber growth remains as strong as ever, declining ARPU is causing repeated disappointment at the top line for operators. Pricing pressure, particularly on voice calls and the growing popularity of prepaid packages have impacted blended ARPU over the years. The reduction in blended ARPU is expected to persist, given greater incremental subscriber share from rural segments and the increased competitive pressure especially once MNP is introduced. Increasing Prepaid Subscriber Share As of December 31,2007, more than 85% of total mobile subscribers in India used prepaid packages. With increasing rural penetration, the portion of prepaid customers in the subscriber base continues to increase. This has resulted in a majority of the subscribers being restricted to basic voice services. This trend is likely to hold back potential revenue growth. Signs of Decline in Minutes of Usage (“MoU”) Typically, incremental subscribers in India have lower usage. At the same time, existing customers are not increasing usage fast enough to compensate for lower­usage incremental customers to maintain the average MoU. With greater momentum in new subscriber addition is likely to restrain MoU growth. New subscribers, especially in the rural areas, have lower affordability and hence could negatively impact the revenue and profitability of mobile operators. Non-voice Revenues yet to Pick Up In India, revenue from non-voice services as a percentage of mobile revenue which is one of the lowest in Asia Pacific, has continued to decline since 2006. It is likely that due to low voice tariffs in India, adoption of non-voice services would take some time. Cutting Down Internal Roaming Charges In January 2007, the TRAI ordered a wholesale cut in internal roaming charges for customers who travel across India between different operator licensed areas or circles. In addition to lowering the cost of voice calls, the order required that receiving SMS while roaming be free of charge. India’s mobile operators will not be able to charge any type of fixed or recurring charges for accessing roaming facilities. The Tariff Order was set to result in reductions in roaming tariffs ranging from 22% to 56%. While this is good news to subscribers, mobile operators may face an adverse financial impact when the changes are implemented. Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 233 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
National ‘Do Not Call’ (NDNC) Registry Becomes Operational The NDNC has become operational from October 12, 2007. Up to November 2007, approximately 20,900 telemarketers have applied for registration with the DoT. Since then, a total of more than 380 million telephone numbers have been uploaded in the NDNC database by the various telemarketers for scrubbing which means that these numbers are not accessible to telemarketers. Out of this list, a total of 24.2 million numbers were in the category of ‘Do Not Call’ numbers which these telemarketers are not allowed to call. As the NDNC trend catches up with more and more subscribers registering with NDNC, revenues of telemarketing companies and indirectly revenues of the service providers would be affected adversely. The service providers may also lose the revenues that they could eam from mobile marketing. 7.1.3 Market Size Throughout 2007, the Indian mobile market continued its growth momentum, achieving net additions of over 84 million users, which amounted to a total mobile subscriber base of 233.6 million as of December 31, 2007. Mobile subscriber base in India is expected to grow at a CAGR of 20.1 % from 2007 to 2012, achieving a penetration of 49.2% by 2012. While subscriber growth would gradually slow down as the market saturates, a combination of factors such as acceleration of fixed-to-mobile substitution, expansion of rural market coverage, increasing competition resulting in the introduction of innovative cellular service packages and the falling costs of entry level handsets is likely to stimulate future growth. Figure 7.1 provides teledensity and penetration rate indicators of the four circles A, B, C and Metro in India. Figure 7.1: Wireless and Wireline penetration and Teledensity (India), 2007 Circle  A  B  C  Metro  TOTAL
Population DEC 2007 (E)
334,434,032 502,564.646 246,548,290i I 58,321,046 1,141,868,014 Wireless Total including WLL (F)  Wireline Subscriber Base  Wireless penetration  Wirellne penetration  Teledensity  84.109.374  14,077.350  25.1%  4.2%  29.4%  84,802,897  13.826,852  16.9%  2.8%  19.6%  23.238.890  3,648.050  9.4%  1.5%  10.9%  41,473,873  7,700,120  71.1%  13.2%  84.3%  233,625,034  39,252,372  20.5%  3.4%  23.9%
Source. TRAI, Frost & SullIVan IndependentMamet Research forMobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 234 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FRO S T & SULLIVAN
Chart 7.1 and Figure 7.2 show the historical and forecast for India’s mobile subscriber base between 2003 and 2012. Chart 7.1: Total Mobile Subscribers and Growth Rates (India), 2003-2012 _Tolal Subscribers (‘000) -+-Growth rale
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Mobile subscriber CAGR (2007-2012): 20.1% Note:Allfiguresarerounded; thebaseyear is 2007. Source: Frost & Sullivan Figure 7.2: Total Mobile Subscribers and Growth Rates (India), 2003-2012 Year  Tetal Mobile Subscribers (“000)  Growth (%)  2003  28.533  2004  48,013  68.3%  2005  75,947  58.2%  2006  149,620  97.0%  2007  233,625  56.1%  2008  313,535  34.2%  2009  388,445  23.9%  2010  462,620  19.1%  2011  525,220  13.5%  2012  583,020  11.0%
Mobile subscriber CAGR (2007-2012): 20.1% Note: All figures are rounded; the base year is 2007. Source: Frost & Sullivan Independent Marl<et Research for Mobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 235 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FRO S T & SULLIVAN
7.1.4 Revenue Forecast Chart 7.2 and Figure 7.3 show the historical and forecast revenues for the mobile market in India between 2003 and 2012. Chart 7.2: Total Mobile Revenues and Growth Rates (India), 2003-2012 _Total mobile revenue ~Growth rate
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Mobile revenue CAGR (2007-2012): 14.2% Note: AI/ figures are rounded; the base year is 2007. Source: Frost & Sui/Nan Figure 7.3: Total Mobile Revenues and Growth Rates (India), 2003·2012 Year  Mobile Revenue (US$ Million)  Growth (%)  2003  3.033  – 2004  4,923  62.3%  2005  7,759  57.6%  2006  11,221  44.6%  2007  17,594  56.8%  2008  22,587  28.4%  2009  26,577  17.7%  2010  29,872  12.4%  2011  32,243  7.9%  2012  34,112  5.8%
Mobile revenue CAGR (2007-2012): 14.2% Note: A/lfigures are rounded; the base year is 2007. Source: Frost & SuI/Nan Independent Mamet Research for Mobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 236 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FRO S T & SULLIVAN
Keeping pace with subscriber growth, mobile revenue in India has been growing at a very rapid pace, reaching US$17,594 million as of December 31,2007, against a subscriber base of 233.6 million. Mobile revenues are expected to grow at a CAGR of 14.2% from 2007 to 2012, reaching US$34,112 million. The Indian mobile market has huge growth potential given its relatively low mobile subscriber penetration and wire line infrastructure. Increasing competitive pressure to drive down tariffs and declining entry-level handset costs are likely to fuel demand from first time users. As operators are penetrating lower segments of the market, prepaid subscribers are expected to contribute a larger share of the growth. This is likely to affect mobile ARPU adversely in the near to mid-term. 7.1.5 Competitive Landscape Figure 7.4 details the competitive structure in India in 2007. Figure 7.4: Competitive Structure (India), 2007 Number of Companies in the Market 12 companies Types of Competition Highly Competitive Tiers of Competition Two Tier 1: 4 major pan-Indian operators; namely Bharti. BSNL, Reliance, Vodafone Essar Tier 2: 8 other operators; Tata Teleservices, Idea, Aircel, MNTL, Spice, BPL, HFCL, and Shyam Key End-User Groups Consumers/Business users Competitive Factors Price Brand identity Quality and coverage of network Breadth of value-added services Source: Frosl & Sullivan (This part of the page is intentionally left blank) Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 237
10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
7.1.6 Market Share Analysis Though the Indian mobile market is highly competitive, it is dominated by four pan-Indian players, namely Bharti, BSNL, Reliance and Vodafone Essar. As of December 31, 2007, these four players accounted for 74.0% of total mobile subscribers in the country. Public sector operators (BSNL & MTNL) contribute 17.1% of subscribers in the GSM segment while the others which are privately held mobile operators control 82.9%. As the Indian mobile market is dominated by a price sensitive prepaid segment, mobile operators compete fiercely on price plans and typically adopt similar cuts in tariffs when offered by a competitor. Other key basis of competition includes quality and coverage of network, brand identity, and the breadth of value-added services offered. Chart 7.3 depicts mobile operator market share by mobile subscribers in India in 2007. Chart 7.3: Mobile Operator Market Share by Subscribers (India), 2007 Others Reliance 7.7% 17.5% Tala Teleservi 9.3%
Bharti 23.6% • Others -Aircel, MNTL. Spice. BPL, HFCL. and Shyam Source: Frost & SuI/ivan Spice currently operates within the states of Kamataka and Punjab which represent two of the larger states within India in terms of mobile subscribers. It is the fifth largest mobile operator within Kamataka and the second largest mobile operator in Punjab14. The other major players within these circles indude Vodafone Essar, Spice, Bharti, Reliance, Tata Teleservices and BSNL. 14 Market share reference is based on Frost & Sullivan analysis ofTRAI published statistics. BSNL 15.8% IndependentMamet Research forMobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Suilivan 2008 238 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
7.2 Mobile Telecommunications Market in Iran15 Mobile services market in Iran has a large unmet demand, with shortage of phones and SIM cards and an overloaded network. The incumbent national GSM operator in Iran is Mobile Communication Company of Iran (“MCI”), the mobile arm of the Telecommunications Company of Iran (“TCI”), a state-owned telecom operator. Mobile penetration in Iran remains low compared to other countries in Asia but is growing rapidly, despite the constraints of the overloaded network and high import tariffs on mobile handsets. Growth has increased particularly since the launch of a second national operator, MTN Irancell Telecommunications Services Company (“MTN Irancell”), in September 2006, after a difficult path to launch. MTN Irancell is 49% owned by MTN Group Limited of South Africa. The Govemment of Iran is also planning to issue a license to a third national operator, to launch services in 2008. In February 2008, Russian operator MegaFon expressed its willingness to bid for the license when available. The other mobile service providers in the country are Taliya/ Rafsanjan Industrial Complex Islamic Cooperative Company (“RIC”), Mobile Telecommunications Company of Isfahan (“MTCE”) and Telecommunications Kish Company (“TKC”). Iran’s mobile penetration is quite low in comparison to other neighbouring middle­east countries. However, the number of mobile subscribers is fast catching up with Asia, having grown at a CAGR of 58.5% between 2003 and 2007. At the end of the first half of 2007, the mobile subscriber base in Iran has surpassed the number of fixed-line subscribers and is expected to maintain similar growth momentum in the near to mid term. 7.2.1 Market Drivers Low Market Penetration The Iranian mobile market is still in its growth stage, with a mobile penetration of approximately 29.9% as of December 31, 2007. Mobile subscriber base in Iran is expected to grow at a CAGR of 17.8% from 2007 to 2012, to 48.3 million users and a mobile penetration of 63.3% by 2012. ‘5 For this purpose, historical data for Iran was derived based on publicly disclosed subscriber base ci mobile operators in the market. and secondary resean::h sources. Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 239 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
Introduction of Competition and Network Expansion Iranian mobile market used to be a closed market prior to introduction of MTN Irancell, the second national operator, in September 2006. This has brought in certain competition in the market and there has been significant network expansion, thereby bringing services to a much larger population base than before. The Govemment of Iran is also planning to launch a third nationwide 2G/3G mobile operator in 2008. The third operator is expected to begin its operation in October 2008 following the expiry of the two-year exclusivity granted to the second nationwide operator. Introduction of Prepaid Services Prepaid services were first introduced by MTCE in 2002 and later followed by Taliya on a smaller scale with a limited rollout. Up to the end of 2006, almost all mobile users are on MCI’s postpaid services. Towards the end of 2006, a cheaper prepaid package was introduced by MTN Irancell, which consequently increased the pace of subscriber growth. In anticipation of further surge in the prepaid customer segment. MCI then introduced its prepaid subscription services in February 2007. Reduction in Cost of Ownership Introduction of new competitors in to the Iranian mobile market also resulted in a reduction in the connection and activation fees for new subscribers. With the Govemment of Iran encouraging handsets to be manufactured in the country, handset prices are expected to drop in the near term. The falling cost of mobile ownership is likely to spur signing up of first time users. Acceleration of Fixed-to-Mobile Substitution TCI remained the sole fixed-line provider and as a result of slow growth, subscriber base was estimated to be 23.6 million as of December 31, 2007. In 2007, when the fixed-line subscription grew by only a million users, the country added approximately 6 million new mobile subscribers. This suggests growing preference of mobile services over the fixed-line. This trend is expected to gain further momentum with mobile coverage expansion and operators’ reluctance to invest in fixed-line services. Interest from Foreign Entities Foreign telecom companies have shown significant interest in investing in the Iranian telecom sector. This was evident during the bidding of the second GSM licence with bidders from Austria (Mobilkom), Egypt (Orascom Telecom Holding), Germany (Deutsche Telekom AG), South Africa (MTN Group Limited and Vodacom Group Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 240 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
(Pty)), Turkey (Turkcell) and Qatar (Qtel). In February 2008, MegaFon which is Russia’s third-largest mobile phone operator, unveiled plans to set up a representative office in Iran and is considering making long-term investments in the Iran’s telecommunications sector. MegaFon may bid for Iran’s new national mobile telephony licence, which is widely expected to be made available later this year. Privatization in Telecommunication Sector In 2006, the Ministry of Communications and Information Technology announced plan that Privatization Organization would float the shares of Govemment-owned companies such as TCI in the Tehran Stock Exchange (TSE). In March 2007, TCI and its provincial affiliated companies received the Iranian Govemment’s permission to be privatized. TCI’s Infrastructure Telecom Company is expected to be detached from it and continue its activities as a part of the ICT Ministry. However, according to the current Foreign Investment Act, foreign companies seeking to purchase telecom shares are allowed to purchase up to 49% shares of the privatized company. It is widely anticipated that privatization is likely to accelerate the next phase of mobile subscriber growth in the country. 7.2.2 Market Restraints Network Expansion Challenge The award of a second national mobile licence to MTN Irancell and the planned issuance of a third licence in the near future, marked the Iranian Government’s seriousness to liberalise the telecommunication market further. However these efforts have been circumvented by a multitude of bureaucracy and inefficiency at the local Govemment level. This to some extent resulted in a slower approval process and delayed building of base stations and other necessary infrastructure to support the rapid expansion of mobile growth in the country. Incumbent’s Power Play Although. MTN Irancell managed to make inroads into Iran’s lucrative mobile market through aggressive pricing, advertising and distribution channels, progress has been relatively slow and well behind its original plan. On the other hand, the incumbent operator MCI was able to capitalise on its strength through corporate rebranding and rekindling of its subscribers’ emotional support, and has successfully introduced prepaid services as MTN Irancell. Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 241 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
Political Challenges for Foreign Investment The Government of Iran is also planning to launch a third nationwide 2G/3G mobile operator in 2008. The third operator is expected to begin its operation in October 2008 following the expiry of the two-year exclusivity granted to the second nationwide operator. Possible disruptions to growth are almost entirely political. Past developments, particularly over the award process of MTN Irancell’s license which underwent considerable delay, provides a good indicator of what to expect. In addition, the main MTN Irancell foreign shareholder MTN Group Limited finds the telecommunication’s regulatory environment challenging. The level of investment will depend to a reasonable degree of political and regulatory stability. Increase in Handset Import Tariff In May 2006, the Govemment of Iran increased the import tariff on imported handsets from 4% to 60%. This was to drive the domestic production of mobile handsets in Iran and indirectly to capture new technology for the country. The downside is that the subscriber growth will be severely affected should the Govemment of Iran fail to materialise its vision. 7.2.3 Market Size Total mobile subscribers in Iran reached 14.0 million as of December 31, 2006, growing by an increase of 60.9% over 2005. The Iranian mobile market continued its growth momentum in 2007, and with a total mobile subscriber base up to 21.3 million as of December 31, 2007. This translates to 29.9% mobile penetration in the country. The mobile subscriber base in Iran is expected to grow at a CAGR of 17.8% from 2007 to 2012, and reach a penetration rate of 63.3% to 48.2 million subscribers by 2012. While subscriber growth would gradually slow down as the market matures, a combination of factors is expected to help sustain the growth. The expansion of network coverage, the acceleration of fixed-to-mobile substitution, increasing competition in bringing down the cost of ownership, the introduction of innovative cellular service packages and the anticipation of a third national service provider in 2008 are likely to stimulate further growth. (This part of the page is intentionally left blank) Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 242 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FRO S T & SULLIVAN
Chart 7.4 and Figure 7.5 show the historical and forecast for Iran’s mobile subscriber base between 2003 and 2012. Chart 7.4: Total Mobile Subscribers and Growth Rates (Iran), 2003·2012 _Total Subscribers (‘000) __Growth rate
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Mobile subscriber CAGR (2007-2012): 17.8% Note: All figures are rounded; the base year is 2007. Source: Frost & Sullivan Figure 7.5: Total Mobile Subscribers and Growth Rates (Iran), 2003-2012 Year  Total Mobile Subscribers (‘000)  Growth (%)  2003  3.377  – 2004  4,271  26.5%  2005  8,716  104.1%  2006  14,022  60.9%  2007  21,300  51.9%  2008  29,400  38.0%  2009  35,600  21.1%  2010  40,400  13.5%  2011  44,615  10.4%  2012  48,272  8.2%
Mobile subscriber CAGR (2007-2012): 17.8% Note: Allfigures are rounded; the base year is 2007. Source: Frost & Sullivan Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 243 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d)
FROST & SULLIVAN
7.2.4 Revenue Forecast Mobile revenue in Iran has been growing at a very rapid pace, reaching US$2,066 million in 2007, representing a growth of 46.4% over 2006. Mobile revenues are expected to grow at a CAGR of 16.1 % between 2007 and 2012 to reach US$4,358 million. The current mobile subscriber penetration rate of 29.9% suggests there is great growth potential. Mobile revenue and subscriber growth is likely to accelerate given the fact that 56.0% of Iran’s population is under 25 years of age and the rate of growth of this number reaching working age is far more rapid than that of the population as a whole. With the highly likely entrance of a new player in 2008 and wider availability of prepaid services, the subscriber market is expected to have greater options when signing up for mobile services. Chart 7.5 and Figure 7.6 show the historical and forecast revenues for the mobile market in Iran between 2003 and 2012. Chart 7.5: Total Mobile Revenues and Growth Rates (Iran), 2003-2012 _Total mobile revenue ~Growth rate 4,500 60% ‘2 .2 ~ 3,600
m 40% -; 2,700 Qj ::J :J l’! <: J:: ~ Qj 0:: 1,800 ~ .£!20% Cl:c o ~ 900
co “5
>­2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 MobUe revenue CAGR (2007-2012): 16.1% Note: Allfigures are rounded; the base year is 2007. Source: Frost & Sullivan (This part of the page is intentionally left blank) Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 244 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FRO S T & SULLIVAN
Figure 7.6: Total Mobile Revenues and Growth Rates (Iran), 2003-2012 Year  Mobile Revenue (US$ Million)  Growth (%)  2003  442  – 2004  636  43.9  2005  960  50.8  2006  1,411  47.0  2007  2,066  46.4  2008  2,753  332  2009  3,374  22.5  2010  3,785  12.2  2011  4,101  8.4  2012  4,358  6.3
Mobile revenue CAGR (2007-2012): 16.1% Note: All figures are rounded; /he base year is 2007. Source: Frost & Sullwan 7.2.5 Competitive Landscape Figure 7.7 details the competitive structure in Iran in 2007. Figure 7.7: Competitive Structure (Iran), 2007 Number of Companies in the Market 5 companies Types of Competition Oligopoly Tiers of Competition Two
Tier 1: 2 national mobile operators; namely MCI and MTN Irancell Tier 2: 3 other smaller mobile operators; Taliya, MTCE, TKC.
Key End-User Groups Consumers/Business users Competitive Factors Brand Identity Price Quality and coverage of network Breadth of value-added services
Source: Frost & Sullivan (This part of the page is intentionally left blank) Independent Mamet Research for Mobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost &Suilivan 2008 245 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
7.2.6 Market Share Analysis Though competition at the national level was introduced in the form of MTN Irancell in 2006, the Iranian mobile market continues to be dominated by the incumbent MCI. In order to fend off competition in the form of cheaper prepaid packages by MTN Irancell, MCI restructured its corporate brands and new mobile packages. This, together with its already large network coverage, will help maintain MCI as the most appealing mobile service provider. Other areas of competition among the players includes quality and coverage of network, brand identity, and the breadth of value­added services. As of December 31, 2007, MCI controls 87.4% of the subscriber base, followed by MTN Irancell (6.8%) and Taliya (5.6%). Chart 7.6 depicts mobile operator market share by mobile subscribers in Iran in 2007. Chart 7.6: Mobile Operator Market Share by Subscribers (Iran), 2007 Others * Taliya MTN Irancell 0.2% 5.6% 6.8%
Mel 87.4% • Others -MTCE and TKC Source: Frost & Sullivan (This part of the page is intentionally left blank) Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 246 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
7.3 Mobile Telecommunications Market in Pakistan16 Mobile services were first offered in Pakistan in 1990 and despite the high costs, mobile services grew rapidly. The Government of Pakistan has on its part, launched comprehensive reforms to deregulate the telecom sector, overcome Pakistan’s low teledensity level, and increase usage of Information Technology to support the needs of a modern and fast growing economy. As a result, Pakistan today is one of the fastest growing mobile markets in Asia, haVing a CAGR of 137.8% between 2003 and 2007. In 2007, mobile operators together added over 42.4 million new subscribers, which is a new record for the country. Apart from the four existing mobile operators, growth of the mobile market in Pakistan has been spurred by the deregulation of the market in 2003 to include two new players. The four initial mobile operators include Mobilink GSM (“Mobilink”)(the market leader), Pakistan Telecommunication Mobile Ltd (“Ufone”), Paktel Limited (“Paktel”) and Pakcom Limited (“Instaphone”). The two new mobile operators -UAE based Warid Telecom (PVT) Ltd (“Warid Telecom”), of which a 30% stake was bought by SingTel, and Telenor Pakistan (100% owned by Norway-based Telenor ASA) -quickly attracted a GSM subscriber base that constituted about 18% of the market in the first two years of operations. In the last two years, all of the operators have made significant investment in expanding their network across the country. This, coupled with the falling call rates, reduction in activation charges for mobile phones from Rs.1,000 down to Rs.500 (US$16.5 down to US$8.3) with a plan to subsequently drop that charge completely and falling handset prices have driven up mobile penetration in recent times. 7.3.1 Market Drivers Deregulation Attracted Foreign Investments The Pakistan telecommunications sector has attracted large foreign investments after Pakistan’s deregulation law was passed in July 2003. This move resulted in major operators investing not only in exorbitant licensing fees but the move was also instrumental in building the telecommunications infrastructure of the country. The telecom sector in Pakistan accounted for 35% of the country’s total foreign direct investment (“FDI”) in 2007, which equalled US$1.8 billion. 16 For this purpose, historical data for Pakistan was derived based on publicly disclosed subscriber base of mobile operators in the market, and verified against the regulatory body’s (PTA) published statistics. Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 247 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
Market is in its growth stage Pakistan’s mobile subscriber base stood at 34.5 million as of December 31, 2006, representing a penetration rate of only 21.8%. However, a record breaking net subscriber addition in 2007 has resulted in the mobile penetration rate reaching 47.5% as of December 31, 2007. The mobile subscriber base in Pakistan is set to grow at a CAGR of 10.6% from 2007 to 2012 to reach 127.5 million users with a penetration rate of approximately 70%. Rural Market Still Largely Untapped Pakistan’s urban population constitutes only 30% of its 160 million citizens. More than half of Pakistan’s 50,000 rural villages have no access to telephone services. As operators eye the large portion of the untapped rural potential, efforts are being made to make mobile services more attractive to the rural markets by reducing tariffs. This effort has been complimented by the regulatory body relaxing some of the rigid regulatory policies. Move from Mobile Party Pays (MPP) to Calling Party Pays (CPP) While the uptake of the mobile market was rife with potential right from the beginning, it had not evidenced a high subscription rate because of the monopoly held by the state owned Pakistan Telecommunication Company Ltd (“PTCL”) that made it mandatory for the party receiving a call to pay for the incoming call. When this policy was converted by the introduction of Calling Party Pays (“CPP”) in December 2000, it made adoption of mobile services widespread and an affordable proposition to users. Declining Cost of Handset Ownership With the deregulation of the market and the increase in the number of operators, the consequent benefits to customers as a result have induded the reduced cost of handsets due to subsidies offered by the operators. This is a key driver especially when considering the large part of the rural market that is still untapped and lower segments of the market that are more price sensitive. Intensifying Competition Pakistan is now a level playing field for six mobile operators, who have made significant infrastructure investments. With the introduction of two new operators in 2005 to serve the growing needs of the market, there is now an impetus to maintain quality of service offerings and expand network coverage to capture the first time subscribers in the suburban and rural areas. Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 248 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
Migration from 7-8 Digit Mobile Subscriber Numbers In order to resolve the problem of frequent allocation of network access code to various mobile operators to meet the needs arising out of phenomenal growth in the cellular mobile sector, there has been talk of migrating mobiie numbers from seven digits to eight digits. Recently, the Pakistan Telecommunication Authority (“PTA”) has announced and published information about the schedule of the implementation plan. When implemented, this wiil create more capacity in the Numbering Plan to facilitate service providers to expand their customer base without haVing to introduce new access codes. Mobile Number Portability MNP was introduced in Pakistan in March 2007. Though initial market response has been slow, the service has become more popular of late. In order to increase customer loyalty, mobile operators are offering more competitive services, with better quality and more affordable rates. Acceleration of Fixed-to-Mobile Substitution Despite the fixed-line market in Pakistan expanding at a solid growth rate of 20% per year, teledensity remains low at less than 4%. The lack of fixed-line infrastructure and the increasing preference for mobility are expected to accelerate the pace of fixed-to­mobile substitution effect in the country. 7.3.2 Market Restraints Declining ARPU Pricing pressure on voice calls and the popularity of prepaid packages have affected blended ARPU over the years, moving steadily down from about US$13.9 In 2003 to US$5.3 in 2007. Mobile operators are scrambling to introduce better plans and Increase bundled offers to their subscribers resulting in this downward trend. This trend is expected to continue on the back of intensifying competition after MNP was introduced and growing reach to rural markets. This is likely to increase challenge for operators to maintain their profitability levels. Quality of the Service Issues Like other growth markets, Pakistan is facing the challenge to meet the overall quality of services offered especially with sudden upsurge in subscriber base. There has been a significant increase in the overall complaints in the sector. These complaints Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 249 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
relate to quality of service such as dropped calls and weak signals, non-transparent billing practices and the irregular issuance of mobile connections, are all reasons that could deter potential subscribers to take up services. Tax Considerations Steep taxes imposed on the telecommunication sector deter potential growth. The Govemment of Pakistan charges an activation tax of RS.500 (US$8.3) on every new connection in lieu of custom duty on mobile handsets. This tax is in addition to the withholding tax of 10% on mobile tariff, which is adjustable to income tax at the time of filing of tax retum. However, in the case of mobile services, most of the marginal mobile phone subscribers belong to lower income groups who are not liable to pay income tax. These charges unnecessarily burden the new subscriber. Political Instability Casts Shadow on Further Foreign Investment Recent political instability has further increased foreign investors’ perceived risk in Pakistan, resulting in many holding back on investment plans. A range of concems include security, law and regulations; this is despite the country’s economy growing at a fast pace over the past five years under President Musharrafs liberal economic polides. 7.3.3 Market Size The Pakistan mobile market continued its growth momentum in 2007, achieving net additions of over 42 million users, which amounted to a total mobile subscriber base of 76.9 million as of December 31,2007. Mobile subscriber base in Pakistan is expected to grow at a CAGR of 10.6% from 2007 to 2012, against a penetration rate of 70.3% by 2012. Subscriber growth rate is likely to slow down as the market saturates. However factors such as expansion of rural market coverage, increasing competition, innovative cellular service packages, acceleration of fixed-to-mobile substitution, and the falling costs of entry level handsets are likely to stimulate further growth. Independent Maricet Fresearch for Mobile Telecommunications Marl<ets in Malaysia, IndonesIa, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyFregionalMarkets © Frost & Sullivan 2008 250 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FRO S T & SULLIVAN
Chart 7.7 and Figure 7.8 show the historical and forecast for Pakistan’s mobile subscriber base between 2003 and 2012. Chart 7.7: Total Mobile Subscribers and Growth Rates (Pakistan), 2003-2012 _Total Subscribers (‘000) -+-Growth rate 130,000 180%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Mobile subscriber CAGR (2007-2012): 10.6% Note: All figures are rounded; the base year is 2007. Source: Frost & Sullivan Figure 7.8: Total Mobile Subscribers and Growth Rates (Pakistan), 2003-2012 Year  Total Mobile Subscribers (‘000)  Growth (%)  2003  2,404  .  2004  5,023  108.9%  2005  12,771  154.3%  2006  34.507  170.2%  2007  76,883  122.8%  2008  96,813  25.9%  2009  108,043  11.6%  2010  116,033  7.4%  2011  122,273  5.4%  2012  127,463  42%
Mobile subscriber CAGR (2007-2012). 10.6% Note: Allfigures are rounded; the base year is 2007. Source: Frost & Sullivan (This part of the page is intentionally left blank) Independent Marl<et Research for Mobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 251
10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
7.3.4 Revenue Forecast Mobile revenue in Pakistan has been growing in tandem with huge subscriber growth, reaching an estimated US$3,542 million in 2007, against a subscriber base of 76.9 million. Mobile revenues are expected to grow at a CAGR of 10.0% between 2007 and 2012 to US$5,709 million in 2012. Lack of wire line infrastructure is also likely to boost mobile adoption in the rural areas. Increasing competitive pressure to drive down tariffs and reducing entry-level handset costs are likely to fuel demand from first time users. As a result, revenue contribution of prepaid segment is likely to increase even further. This is likely to affect mobile ARPU adversely in the near to mid-term. Chart 7.8 and Figure 7.9 show the historical and forecast for Pakistan’s total mobile revenues between 2003 and 2012. Chart 7.8: Total Mobile Revenues and Growth Rates (Pakistan), 2003-2012 _Total mobile revenue ~Growth rate 6,000 120% ‘2 .2 100% ~ 4,800 m 80% -; 3,600 Qj ::J :J l’! <: Qj 60% J:: > 3:Qj 0:: 2,400 e Cl.£!40%:c o ~ 1,200 20%’5… 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Mobile revenue CAGR (2007-2012): 10.0% Note: Allfigures are rounded; the base year is 2007. Source: Frost & Sullivan (This part of the page is intentionally left blank) Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 252 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FRO S T & SULLIVAN
Figure 7.9: Total Mobile Revenues and Growth Rates (Pakistan), 2003-2012 Year  Mobile Revenue (US$ Million)  Growth (%)  2003  342  – 2004  600  75.2%  2005  1,251  108.6%  2006  2,028  62.1%  2007  3,542  74.7%  2008  4,690  32.4%  2009  5,224  11.4%  2010  5,512  5.5%  2011  5,648  2.5%  2012  5,709  1.1%
Mobile revenue CAGR (2007-2012). 10.0% Note: All figures are rounded; the base year is 2007. Source: Frost & Sullivan 7.3.5 Competitive Landscape Figure 7.10 details the competitive structure in Pakistan in 2007. Figure 7.10: Competitive Structure (Pakistan), 2007 Number of Companies in the Market 6 companies Types of Competition Highly competitive Tiers of Competition Two
Tier 1: 4 larger mobile operators; namely Mobilink, Telenor Pakistan, Ufone, Warid Telecom Tier 2: 2 smaller mobile operators; consisting of Instaphone and Paktel Key End-User Groups Consumers/Business users Competitive Factors Price Brand identity Quality and coverage of network Breadth of value-added services Source: Frost & Sullivan Independent Mamet Research for Mobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost &Sullivan 2008 253 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
7.3.6 Market Share Analysis Though there are six mobile operators offering services in the Pakistan market, the top four operators (Mobilink, Telenor Pakistan, Ufone and Warid Telecom) collectively control approximately 98% of the total subscriber. Telenor Pakistan and Warid Telecom have successfully managed to reduce the incumbent Mobilink’s dominance in the market after their introduction in 2005. Launch of MNP in the first quarter of 2007 has generated pressure on Mobilink and Ufone to hold on to their subscriber base. Competitive operators are trying to woo subscribers to switch by offering cheaper subscription package, enhanced value added services and better quality of services. In February 2008, under Section 30 of the Pakistan Telecommunication (Re-organization) Act, the PTA terminated the license of Instaphone on account of Company’s failure to pay its outstanding dues. Chart 7.9 depicts mobile operator market share by mobile subscribers in Pakistan in 2007. Chart 7.9: Mobile Operator Market Share by Subscribers (Pakistan), 2007
Source: Frost & Sullivan (This part of the page is intentionally left blank) IndependentMarl<et Research forMobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 254 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
7.3.7 Other Telecommunication Sectors in Pakistan Internet Services Public access to the Intemet has been available to users in Karachi since 1995. The incumbent PTCL began offering access in 1996 via the nationwide local call network. The proliferation of computers during the late 1990s has fostered Internet growth along with the Government of Pakistan’s 1998 decision to abolish multi­metering for calls to Internet Service Providers. Since the ruling military regime of General Pervez Musharraf took control of the country in October 1999, an aggressive IT policy has been pursued, aimed at boosting Pakistan’s drive for economic modernization. With a keen eye on the successful Indian software market, Pakistan has also been targeting the creation of an exportable software industry. One consequence of this was a substantial increase in the popularity of the Internet. There were an estimated 3.5 million Internet subscribers in the country in 2007. Currently around 2,419 cities are connected to the Internet. Chart 7.10 depicts total Internet subscriber growth in Pakistan between 2001 and 2007. Chart 7.10: Total Internet Subscribers and Growth Rates (Pakistan), 2000 ­2007 _Total Internet Subscribers (‘000) -+-Growth rate
2000 2001 2002 2003 2004 2005 2006 2007 So….ce: Pakistan Telecommunication Authority Internet service is becoming an integral part of life in Pakistan particularly in urban areas where a large portion of the populace is using it for different purposes. Most airlines including Pakistan International Airlines and Air Blue have started e-ticketing through the Internet to provide better and efficient services to its customers. The Independent Marl<et Research for Mobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 255 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
Internet is also being used for educational and entertainment purposes and its use for this purpose is increasing very fast The major reason for rapid growth of the service is the low cost of the service which make services affordable to poorer .segments of the population. Almost 70% companies are providing Internet services all across the country with the quality of service being monitored regularly by the PTA. Broadband in Pakistan Pakistan’s broadband market has been growing slowly despite the fact that the service has been available for almost five years. As of January 31, 2008, the PTA estimated there were approximately 128,689 broadband subscribers connecting to the Intemet using DSL technology. Total Intemet subscribers was 3.5 million as of December 31, 2007. Cost of services is the major reason behind this slow growth. For example, in India, a broadband service at 256kbps speed and 2.5GB download/upload limit per month is available for just US$8. In Pakistan the same package is available for US$24. PTA is striving hard to bring down the cost of providing broadband services in order to make them more affordable to low income groups. Currently, most of the services are being used by individuals at home or businesses while the share of education and Govemment departments remains quite low. A major development for the broadband market is the introduction of DSL services by the incumbent PTCL in Islamabad, Lahore and Karachi since June 2007. PTCL offered low tariffs for home users with free installation service. This has affected tariffs offered by other DSL operators as they have also lowered DSL tariffs in order to remain competitive. It is believed that such competition is likely to flourish in the broadband market. Besides PTCL and National Telecommunication Corporation (“NTC”), Wateen is the only Broadband Service Provider owning independent infrastructure. Other ISPs include Micronet, Cybernet, Multinet, Dancom, HRI, Nexlinx, CubeXS, Nayatel, Supemet, Telecard and COMSATS. Of the remainder, Wordcall stands as the only significant cable service provider in Pakistan, servicing Karachi and Lahore with cable internet access. Given the infrastructure backbone that is available and the entrepreneurial/managerial skills of the existing operators, it is expected that these operators will be able to drive the broadband market if provided a better environment and supported by conducive policies. Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 256 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
With nine operators offering DSL services in Pakistan, it seems that the main emphasis of these operators has been to cover urban areas, especially large cities; however it is expected that PTCL having the largest data network will soon start offering DSL services in smaller cities and towns. The current population of broadband subscribers in Pakistan is geographically dispersed and therefore not a single area appears to be sufficiently served. It is evident that even in major cities where infrastructure is comparatively better the broadband teledensity figure remains quite low. For instance, in Karachi and Lahore, although the total number of broadband subscribers is comparatively higher than other cities, the overall penetration rate is only 0.32% and 0.48% of population respectively, which implies that even the major cities of the country are not optimally served17. The situation in the rest of the country is even more dismal. No single city or region is properly served resulting in the total broadband teledensity of the whole country of 0.067%. The total number of broadband subscribers in 2007 in the entire country totalled 115,000 which is approximately half of the targeted figure of 0.2 million within the Broadband Policy. It is expected that steps taken by PTA in collaboration with industry players will ensure better and more economical broadband services in Pakistan. Deployment of fibre and WiMAX networks will help broadband proliferation particularly in rural areas of Pakistan. PTA estimates that total broadband subscribers in Pakistan will reach 5 million by 2010. WiMAX Services in Pakistan WiMAX networks and Wireless Broadband services have been commercially launched across the country, marking a new milestone in the Telecom sector of Pakistan. WiMAX is being pursued as an alternative broadband technology by most of the service providers in Pakistan. Commercial launch of WiMAX services offers subscribers the chance to make video calls and telephony through special handsets while callers will be able to see live video/picture of each other in addition to voice conversation. The users are likely to enjoy wireless broadband services and enjoy a significant improved Internet experience compared to dialup services. Pakistani operators are also aiming at providing broadband data solution for corporate users in Pakistan. 17 References taken from a study on broadband penetration in Pakistan carried out by the Ministry of Information Technology, Pakistan. hllp:/IWWN.moill.gov.pkl Independent Mamet Research for Mobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 257 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
Currently, Wateen Telecom commercially offers WiMAX services in most parts of the country. Mytel, a local operator in Peshawar, has also launched its commercial operation of WiMAX in Peshawar. On the same front, other Wireless Local Loop operators including Burraq, PTCL, Z-WLL and Cyber Internet are also deploying WiMAX networks. All of these operators are in their testing phase and will soon be able to offer commercial WiMAX services in the country. (This part of the page is intentionally left blank) Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 258 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
8. RESEARCH METHODOLOGY 8.1 Introduction Frost & Sullivan has refined its research methodology over many years of experience, having researched diverse markets in many different life cycles ­from the embryonic to mature. Frost & Sullivan’s reference publication, Industrial Market Engineering (Publication 5168-80), explains the research methodology in great depth. Frost & Sullivan’s Market Engineering system: Focuses on challenges, problems, and the needs of industry participants Is based on primary market research, and not on secondary or previously published ones Focuses on detailed, comprehensive, “bottom-up” data collection techniques Is based on measurements 8.2 Market Engineering Forecasting Methodology 8.2.1 Overview One of the most common questions that Frost & Sullivan receives from its clients is, ‘What is your forecasting methodology and how can I assess its level of credibility and accuracy?” This section on Frost & Sullivan’s proprietary Market Engineering forecasting methodology has been added to answer this question. This methodology integrates several forecasting techniques with the Market Engineering measurement-based system. It relies on the expertise of the analyst team in integrating the critical market elements investigated during the research phase of the project. These elements include: • Expert-opinion forecasting methodology
• Delphi forecasting methodology
• Integration of market drivers and restraints
• Integration with the market challenges
• Integration of the Market Engineering measurement trends

Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 259 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
• Integration of econometric variables
• Integration of customer demographics

The Market Engineering forecasting methodology is a seven-step system that maximises the credibility and accuracy of the forecasts. These are: 8.2.2 Market Engineering Research Process Completed The Market Engineering research process provides the navigational measurements of current market position and trends, which become the basis of the forecast. 8.2.3 Measurements and Challenges Analysed over Time Measurements and challenges are analysed over time to provide additional insights into their potential impact on the market size and development. 8.2.4 Identification of Market Drivers and Restraints At this stage, the analyst specifies the factors that will drive the market forward in terms of revenues and determines the elements that will inhibit growth. 8.2.5 Expert Opinion Integration Analyst Team The interview process includes a variety of industry experts: competitors and key customers. These experts’ opinions on the direction of the market are integrated with the data and analysis already created. 8.2.6 Forecasts Calculated At this stage, analysts collect the market data needed to create the initial forecast scenarios. Each scenario is assessed to determine the most probable outcome for the market size. For example, the forecasts are matched to the leading economic indicators and drivers for each specific industry. 8.2.7 Delphi Technique Integration, If Needed If data and forecast scenarios conflict, it becomes necessary to again discuss the market forecasts with the industry experts interviewed in the research process. 8.2.8 Quality Control within Research Department Once the forecasts are integrated into the market section, they are verified by the other team members in the industry research group (IRG), and the research director. The forecasts are also ensured for mathemakal accuracy and internal consistency by the final review preparation department and the editing department. Independent Marl<et Research forMobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 260 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
8.3 Strategic Significance of the Market Engineering Forecast The Market Engineering forecast can have a significant impact on the business in several areas. Therefore, it should be integrated into business planning, strategy development, and decision-making. 8.3.1 Judging Credibility and Accuracy of Market Engineering Forecasts Frost & Sullivan forecasts integrate the key elements that typically have an impact on market growth and size. No one can consistently make accurate forecasts, but market research has a proven track record in making accurate projections of market trends and growth rates. The key test of credibility is whether the analyst team had integrated all the critical elements of the market into the forecast. If all such elements are included in the analysis, then the forecast has strong credibility. The accuracy of a forecast to within a 10 percent range over a three-year period is not vitally important. What is important is that the overall trend be forecast correctly, because it drives the appropriate strategy and subsequent decisions. The Market Engineering forecasting methodology has consistently proved to be an accurate and reliable forecasting tool, particularly for high technology and industrial markets. All the currencies reported are specified in Malaysian Ringgit (RM), unless indicated otherwise. For the Singaporean market, the currencies are reported in Ringgit Malaysia (RM) as well. Over the last 40 years, Frost & Sullivan has had an impressive track record in forecasting emerging markets, new technologies, and shifts in existing markets. Unexpected events have significantly changed the marketplace, but these do not occur often, and they merely delay the development of the market, rather than destroy it. Frost & Sullivan always advise clients that its forecasts should not be the exclusive basis for decision-making at their companies. It should be an additional source of input and a support tool for their work in investigating the market and creating a winning strategy. In the final analysis, decision-making is based on the general trend of the forecast, not its absolute accuracy. Independent Marl<et Research for Mobile Telecommunications Marl<ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 261 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d) FROST & SULLIVAN
It is important to accurately determine the range of the forecast, as it will have the greatest impact on the investment or strategy decision. Typically, the decisions revolve around questions such as: • Should the company enter the market?
• Should the company increase or decrease its investment?
• Should the company improve its performance in the market?

These decisions do not require accuracy within a few percentage points. They require accuracy in the determination of the general trend category. All business decisions carry some risk. Market Engineering increases the probability that the decisions will be correct, but it does not eliminate all risks. (This part of the page is intentionally left blank) Independent Marl<et Research forMobile Telecommunications Marl<.ets in Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, Singapore andOtherKeyRegionalMarkets © Frost & Sullivan 2008 262 10. INDUSTRY AND ECONOMY OVERVIEW (cont’d)
Frost & Sullivan Malaysia Sdn Bhd (522293W) Suite E-08-15, Block E, Plaza Mont’ Kiara, 2 Jalan Kiara, Mont’ Kiara, 50480 Kuala Lum pur, Malaysia. Tel: +603.6204.5800 Fax: +603.6201.7402 www.frost.com
We have prepared the Report in an independent and objective manner and have taken all reasonable consideration and care to ensure the accuracy and completeness of the Report. We believe that the Report presents a true and fair view of the industry within the limitations among others, secondary statistics and primary research. The Report should not be considered as a recommendation to buy or sell the shares of any company or companies: Yours faithfully
Kavan Mukhtyar Partner Frost & Sullivan (Malaysia) Sdn Bhd Bang%re  Bangkok  Beijing  Bogota  Buenos Aires  CapeTown  Chennai  Delhi  Dubai  Frankfurt  Kolkata  Kuala Lumpur  London  Melbourne  Mexico City  Mumbai  NewYork  Oxford  Po/DAlto  Paris  San Antonio  SOD Paulo  Seoul  Shanghai  Singapore  Sydney  Tokyo  Toronto  263

 

 

Comments are closed