11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT 11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT ~-….•Decide with Confidence The Board of Directors XOXBhd Suite l1.1A, Level 11, Menara Weld, 76, Jalan Raja Chulan, 50200 Kuala Lumpur.
EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (“EXECUTIVE SUMMARY”) FOR XOX BHD (”XOX” OR THE “COMPANY”) TIlls Executive Summary has been prepared for inclusion 1n the Prospectus to be dated 24I1Ar 2011 pursuant to the listing of XOX on the ACE market of Bursa Malaysia Securities Berhad. This research is undertaken with the purpose of providing an overview of The Mobile Virtual Network Operator Industry in Malaysia. The research methodology includes both primary research, involving in-depth interviews with pertinent companies, as well as secondary research such as reviewing press articles, periodicals, government literatures, in-house databases, Internet research and online databases. Dun & Bradstreet (D&B) Malaysia Sdn Bhd (“D&B Malaysia’,) has prepared this Executive Summary in an independent and objective manner and has taken all reasonable consideration and care to ensure the accuracy and completeness of the Executive Summary. In addition, D&B Malaysia acknowledges that if there are significant changes affecting the contents of the Executive Summary after the issue of the Prospectus and before the issue of securities, then D&B Malaysia has an on-going obligation to either cause the Executive Summary to be updated for the changes and, where applicable, cause the Company to issue a Supplementary Prospectus, or withdraw our consent to the inclusion of the Executive Summary in the Prospectus. The Executive Summary is highlighted in the following sections.
TAN SZE CHONG Managing Director 11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cont’d)
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EXECUTIVE SUMMARY 1.1 THE GLOBAL ECONOMY In 2010, the global economic recovery continued, albeit at an uneven pace, after exiting from the sharpest post-war economic contraction in the second half of 2009. The recovery accelerated in the first half of the year due to inventory restocking, continued policy suppon as well as the low base effect, but the momentum tapered off in the second half as these temporary factors waned. To some extent, growth prospects in the advanced economies in 2011 will be supported by recent policy stimulus in the US and Japan, underscoting the governments’ concerns that growth in private sector demand may not be sufficiently strong to sustain economic activity. An emerging feature of the global economy in the post-<:risis petiod is that global growth is increasingly dependent on the emetging economies. While the emetging economies account fot about a third of global GDP, they have contributed more than two-thirds of global growth in recent yeats, highlighting the growing importance of emerging economies as the new growth centres. However, changing growth dynamics have brought about new challenges to the emerging economies, following the shift in global short-tetrn capitL! flows from the advanced
economies to the emerging market economies. In the US, the prospects are for a continued expansion in economic activity, underpinned by a new round of fiscal policy stimulus, easy monetary conditions, and a gradual revival in private consumption. In addition to the anticipated positive impact of these measures on private sector demand, the underlying private consumption is also expected to be supported by a gradual improvement in the job market, rising personal incomes, longer working hours and the higher equity prices that will contribute towards increasing the net worth of households.
11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cant’d) ~
Decide with Confidence The prospects of a gradual growth in the advanced economies coupled with a more moderate demand from the emerging economies are expected to slow the pace of expansion in global trade in 2011. Of significance, global trade will continue to be increasingly driven by the emerging economies, particularly Asia. Intra-regional trade in Asia would remain strong, benefiting from the robust domestic demand in the region. Table 1: Global Real GDP Growth, 2002-2011′ l\lotes: ‘I< = Indicate! member countries ‘!f the Eum OTtO (AUJtria, BeJgiJlm, Cypms, Finland, Prance, Germa’!Y! Greece, Ireland, Itafy, l…JJxembourg, /I.1afta, Netherlands, Portugal. Slovak &pub/!f, S/IWenio, Spain) e=’ estimate
f= forec4!t Source: Bank Negara Malaysia, MiniJtty o/’Finance 1.2 THE MALAYSIAN ECONOMY Following the strong performance in 2010, the Malaysian economy is projected to grow at between 5% and 6% in 2011, supported mainly by continued expansion in domestic demand. Whilst external demand is expected to moderate in 2011, the growth contribution of net exports would tum around to be positive amid a larger trade surplus on sustained commodity exports to the Asian region. Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cont’d)
Decide with Confidence Domestic demand is expected to maintain a strong growth momentum, driven mainly by a robust expansion in private sectOt activity. Private consumption will be supported by favourable labour market conditions, higher disposable incomes and sustained consumer confidence. Private investment is expected to remain strong and contribute favourably to growth. This will be supported by capital spending by the domestic-oriented industries given the high levels of capacity utilisarion and positi,’e business confidence, as well as the implementation of key initiatives announced by the government under the ETP. Meanwhile, the public sector will remain supportive of growth, with higher capital spending projected in the second half of 2011. This is attributable mainly to the implementation of new projects and the acceleration of ongoing projects to promore private sector activity. Table 2: Annual Change in Real GDP by Sector, 2002-20ll’ (2000 prices)
Agriculture 2.9 6.0 4.7 2.6 5.4 1.4 4.3 0.4 1.7 3.4 Manufacturing 4.1 9.2 9.6 5.3 7.1 3.1 1.3 -9.4 11.4 5.7
4.4 6.1 4.1 -1.3 -2.7 2.0 -2.4 0.2 2.0lvfining -3.8 Construction 2.3 1.8 -0.9 -1.8 -0.5 4.7 4.2 5.8 5.2 5.4 Services 5.8 4.2 6.4 6.7 7.3 9.6 7.4 I 2.6 6.8 5.9 j,Vole,;: e = elfin/ale J=10″””1 SOllnt: Ba”k Negam AtlalayJia, Minittty ofFi”a,,~e
11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cant’d) ~
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1.3 THE SERVICES SECTOR IN MALAYSIA The services sector will remain the largest contributor to growth, driven by the domesticoriented sub-sectors, particularly wholesale and retail trade, finance and insurance, and communication. The wholesale and retail trade sub-sector is expected to continue to register a robust performance, supported by higher private consumption amid favourable labour market conditions as well as the expansion of new retail stores and hypermarkets. The sub-sector is also expected to benefit from higher tourist arrivals, particularly from the high-income countries. Growth in the finance and insurance sub-sector is expected to remain strong, driven mainly by the finance segment, as bank lending would continue to grow in tandem with higher consumer spending and business expansion activity. The anticipated increase in capital market activity would contribute favourably to the fee-based income of banking institutions. Similarly, the outlook for the communication sub-sector is expected to remain robust. The telecommunications industry would be driven by the non-voice segment, as demand for mobile data is expected to benefit from the rising popularity and affordability of smart phones amid a proliferation of new devices and intensified competition among service providers. Growth will be further supported by wider roll-out of high-speed broadband, wireless broadband services and continuous initiatives by the government to promote the adoption of broadband services in the rural areas. Growth in the trade-related sub-sectors is protected to be more moderate, reflective of the slower growth outlook in external demand. In the transport and storage sub-sector, the expected moderation in cargo-related services would be partly offset by the resilience in the passenger-related segment, in line with projected higher tourist arrivals and increased domestic tourism activities.
11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cont’d)
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1.4 INTRODUCTION Mobile telecommunications services wete fitst introduced in Malaysia in 1985, witb tbe first mobile system using analogue technology. Since tben, tbe government has granted a number of licences to private secror telecommunication operators in an efforr to develop tbe country’s telecommunications industry and infrastructure. As a result, tbe industry has transformed from a monopolistic regime witb Telekom Malaysia’s monopoly over mobile, fixed line and international telephony services to the current more transparent and more liberalised structure, promoting increased competition. Witb new phone activations increasing exponentially, tbe limits of analogue were quickly being realised. Digital technology lets significandy more people use their phones witbin a single coverage area. It also has a capability of combining and transporting multiple forms of communications media, including audio, text, da~ music. video and other formats. The physical patbway can use one or mote transmission merlia, such as copper/coaxial wire, optical fibre, rligital broadcast, satellite or rarlio spectrum. The telecommunications industry is characterised by huge fixed, sunk and irreversible investments, which makes it a high risk business undertaking. The situation is further exacerbated in tbe cellular industry by successive generations of new technology. Cellular operators are faced witb a situation where even before recouping the investments in tbe current infrastructure, they are fot:ced invest in new generation networks, which makes investment in cellular infrastructure recurrent. As a result of tbis phenomenon, service”based competition is increasingly gaining prominence in tbe cellular industry as compared to facilities-based competition, as tbe former is a way in which cellular operators can tecoup tbeir investments. In order to facilitate and promote service-based competitions, regulators around tbe world are increasingly placing more emphasis on issues such as infrastructure-sharing and domestic roarrung. Dun & Bradstreet (O&B) Malaysia Sdn Bhd © 2011 11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cant’d) ~
Decide with Confidence The MCMC believes that the promotion of the J\;fVNO industry will increase the level of competition that will result in lower prices and innovarive service offerings that will ultimately benefit end users. A MVNO purchases wholesale airtime on an exiting wireless network and provides its own branded wireless communications services to customers. Originally, the MVNO model began overseas in the form of prepaid wireless services. However, in recent years, MVNOs have adopted innovative pricing such as hybrid plans to best suit their target market segments. MYNOs are proving to be an effective way for the MNOs to acquire additional customers at virtually no cost. They are also able to create an incremental revenue stream through MVNOs which effectively market and offer differentiated services to specific market segments, an area which would require a dedicated commitment of time and resources if the MNOs were to do it on their own. On the other hand, an MVNO enjoys an advantage of a relatively low-cost entry path to the mobile market, without the huge capital outlay on frequency spectrum and network infrastructure. An MVN0 is expected to take responsibility in three (3) core areas of operations, namely: • Customer acquisition;
• Customer management (customer service, fraud management etc); and
• Service provisioning.
1.5 SERVICE DEFINITION Mobile service means a radio communications servIce between a mobile station and land station, or between mobile stations. Examples of this service are walkie-talkies, cellular mobile service, trunked radio service etc. 3G is a third-generation wireless broadband cellular network offering simultaneous delivery of voice and data. WiMAX enables delivery of wireless broadband services anytime, anywhere. However, WiMAX products can accommodate both fixed and mobile usage models. Dun & Bradstreet (D&B) Malaysia Sdn Bhd Ii;) 2011 11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cant’d) ~
Decide with Confidence There is no common and agreed defInition on what constitutes an MYNO. Regulatory bodies around rhe world have adopted various defInitions and different forms of regulatory intervention, depending on rhe extent to which an MYNO relies on rhe facilities of rhe MNo. The MCMC defInes an MYNO as an organisation that does not have assignment of 3G specrrum but is capable of providing public cellular services to end users by accessing rhe radio networks of one or more 3G spectrum holders. This defInition not only lowers rhe barriers to market entry but also provides flexibility to potential MYNOs to establish rheir own business models according to rheir fInancial capability. A MYNO is a wireless service provider that does not have its own network infrastructure. MYNOs have business agreements with rhe MNOs to lease rheir network spectrums and provide wireless services to subscribers under rheir own brand The MYNOs predominandy owns rheir customer bases. It leases rhe license spectrum from rhe MNO to service rhe subscribers and it maintains its brand separately from that of rhe MNO on whom it depends upon. 1.6 DIFFERING SEGMENTS A wide range of business models has evolved in the MYNO industry, from simple resellers and niche providers, to advanced value-added JlvrvNOs. The latter have full control over rhe SIM card, branding, marketing, billing and customer care operations, while some niche players may need the support of a mobile virtual network enabler (“MYNE”). In all cases, good MYNO models are built around cost control. Hence, a realistic demand and revenue business model is essential. Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cant’d) ~
Decide with Confidence A MYNO must provide the same services as a lYINO. That includes everything from logistics to customer contact centres. Most MVNOs don’t have the internal resources to supply all of the operations and support infrastructure. They typically employ a hybrid model in which infrastructure support is split between in-house systems and those of strategic partners, such as an MVNE. Most MVNOs employ both internal and external resources whereby some support functions are outsourced and others are managed in-house. MVNEs, which specialise in providing infrastructure and related services to MVNOs, offer the flexibility to leverage best-inclass solutions. Due to the initial stage of the MVNO market in Malaysia, the MVNE industry has not come into existence yet in Malaysia, unlike countries such as the US where the MVNO market is more established. As MVNOs fInd further areas of segmentations in the subscriber landscape to differentiare themselves, they have started to focus and invest in providing specifIc customised services for their target markets. In Malaysia, the MCMC has identifIed four (4) prevalent business models for the MVNO industry and the characteristics of each of these business models and the corresponding licensing requirements are discussed in further detail below. 1.6.1 Full MVNO A full MYNO is one that owns or provides network facilities and network services such as towers, mobile switching centres, HLR and cellular mobile services. A key feature that distinguishes a full MVNO from other business models is its ability to operate independently of the MNOs. Full MVNOs are able to secure their own numbering ranges, offer its own SIM card and have full flexibility on the design of the services and tariff structures. Full MVNOs are likely to require a network facilities provider (“NFP”) individual licence and / or a network service provider (“NSP”) individual licence for the network facilities and network services that they own or provide. In addition, full MVNOs will require an ASP licence in order to provide public cellular services to end users. 11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cont’d)
Decide with Confidence The main difference between a full MVNO and a MNO is that the former cannot sign international roaming agreements with the other MNOs in the overseas countries, as they are not recognised as a proper telecommunications company. This also applies to all the other types of MVNOs discussed below. 1.6.2 Enhanced Service Providers Enhanced service providers are those who do not own or provide network facilities but have the ability to secure its own numbering range, operate its own HLR and offer its owo SIM cards with its own mobile network code. They are dependent on MNOs for network facilities, as well as access to radio network. These service providers are still able to maintain some form of independence from MNOs as they are able to differentiate their products. Enhanced service providers may require NSP individual licence if they own or provide bandwidth services, cellular mobile services or mobile application services and an ASP licence to provide public cellular services to end users. 1.6,3 Enhanced Resellers Enhanced resellers are primarily distributors who resell services provided by MNOs. As with enhanced service providers, enhanced resellers rely on MNOs for access to the radio network and network facilities. The key feature that distinguishes enhanced resellers from enhanced service providers is that enhanced resellers do not h3\’e their own SIM cards. While they may still be able to offer their own branded packages, they will not be able to distinguish their services from their MNOs. Enhanced resellers are likely to carry out customer care and billing in-house. Enhanced resellers may require NSP individual licence if they provide banm.;dth services, cellular mobile services or mobile application services and an ASP licence for providing public cellular services. Dun & Bradstreet (D&B) Malaysia Sdn Bhd 0 2011 11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cont’d)
Decide with Confidence 1.6.4 Resellers Reselle~ merely resell subscription to end users. In most cases, reselle~ are completely dependent on MNOs for every aspect of service pro\~sion, billing and customer care. However, end users will not be able to make a distinction between resellers, other forms of MVNOs and MNOs. The MVNOs that operate as resellers are likely to require an ASP licence. Figure 1: Basic Structure of the Telecommunications Industry in Malaysia
——-,———‘• ..,.•• Sot”‘” D&B Mala)’sia. MCMC 1.7 SUBSTITUTE PRODUCTS There are no direct substitutes to telecommunications services as they are deemed essential in the modern business world. Voice over Internet protocol (“VolP”) is the tnulsrnission of voice through the Internet or packet-based networks. However, as the name suggests, it only competes with wireless voice services, and not data-centric services. Hence, ValP is not a direct substitute to telecommunications services. Similarly, for fixed telephony, which only compete on voice services and is not mobile. Dun & Bradstreet (D&B) MaJ.ys;. Sdn Bhd 0 2011 11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cant’d) ~
Decide with Confidence However, there are substitutes in terms of switching to different service providers. MNP is the ability for users to switch to a new mobile service provider, while retaining their existing mobile number. The main benefit of MNP is freedom of choice and the competition that it generates. Now a consumer is free to choose a n~~ mobile service provider without having to change to a new number. This means one can avoid the inconvenience of having to notify friends and associates that he !she has changed his /her number. Although MNP was introduced in October 2008, there has been very little impact on churn among operators. This is primarily attributed to the poor promotions surrounding MNP, which did not introduce plans that were attractive to convince subscribers to switch. 1.8 INDUSTRY PLAYERS AND COMPETITION As products, services and organisations converge, there is increasing potential to deliver value to niche markets, especially within the wireless space. The digitisation of content, advances in wireless 3G technology and slowing growth of the overall wireless market are a few of the factors driving companies to the MYNO industry. While challenges are present, a unique business model is of great importance to take on the strong incumbents and market competition. In this context, the diverse ethnic composition in Malaysia is a good prospect for more advanced segmentation. An MYNO is expected to create value addition to the customers, other than that which is already accomplished by the MNO. The provision of key differentiator services and marketing these services effectively to a strategically segmented market is the key determinant of success in the marketplace. Each successful MYNO must find a unique value proposition that distinguishes it from the MNOs and the other MYNOs. It is critical that the subscribers see the MYNO as a stand-alone brand of telecommunications services rather than as an extension of theMNO. Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cant’d)
Decide with Confidence There is not a unique success formula for MYNOs. Tn particular, they can draw on their experiences in positioning, branding, business case, market access and partnership. It is thus crucial for the new entrants to understlnd their core competencies as well as their competitive market dynamics, underlying opportunities, regulatory issues and demographic demands, in order to determine their unique positioning in the heterogeneous landscape. Merchantrade Asia’s business model, which is a reseller MYNO, is targeted at prepaid packages for foreign workers with competitive international direct dialling rates focusing on the IndoChinese and South Asian countries. Meanwhile, Tune Talk, which is an enhanced service provider MYNO, is focused on travellers and the lower household income group with prepaid voice and SMS packages. It has plans to expand into Singapore, Thailand and Indonesia. It has strong brand associations with well-known budget brands AirAsia, Tune Hotels and Tune Money. However, it only operates on the 2.5G platform. REDtone Mobile targets enterprise customers within the postpaid market segment, particularly the small and medium-sized businesses. It is based on the enhanced reseller l\.fVNO model. Lastly, Next Telecommunications Sdn Bhd focuses on foreign workers.
XOX Merchanrrade Asia Sdn Bhd Tune Talk Sdn Bhd REDtone Mobile Sdn Bhd Next Tdecommunicanons Sdn Bhd November 2008 August 2007 End 2007 July 2008 2009 Prepaid subscribers, with a niche on the ethnic Chinese population Foreign workers from the IndoChinese and South Asian countries Youths, travdlers and foreign workers Small and medium-sized businesses Foreign workers Celcom Axiata Bhd Cdcom Axiata Bhd Celcom Axiata Bhd Celcom Axiata Bhd Maxis Bhd
Source: D&B lv[o!aysia 11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cant’d) ~
Decide with Confidence 1.9 POSITIONING In particular, XOx, which is an enhanced service provider, is positioning itself as a mobile operator paying its atrention on the prepaid subscribers, with the niche on the ethnic Chinese population in Malaysia, including Chinese visitors and students from overseas. XOX targers these segments by focusing its marketing and sales activities on them. For example, media advertising is focused on the Chinese television air times, newspapers and magazines. This is due to the fact that the business model is based on the MYNO concepr, in which an individual MYNO usually targets its own niche marker. Nevertheless, XOX does not inrend ro restricr itself from accepting other subscribers in the course of running its daily operations. In the conrexr of the value chain of the relecommunications industry, a M:\lO can be viewed as lying on the upstream portion while a MYNO is positioned on the downsrream side. To the average subscriber in the market, there is no difference between a MNO and a MYNO, bur rather the service offering. Besides competing with the other r-“fVNOs, XOX is also competing with the MNOs such as Digi.com Bhd and Maxis Bhd. Based on the target segmenrs of the other MYNOs, the MNOs such as Digi.com Bhd and Maxis Bhd are the nearesr competitors to XOX. 11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cont’d)
Decide with Confidence In the fourth quarter of 2010, prepaid subscribers accounted for 79.8% of total cellular phone subscribers in Malaysia, accoreling to the MCMC. Recognising the huge potential of the prepaid segment of the total subscriber market, XOX plans to leverage its strengths to tap it to its advantage, by convincing the existing subscribers to switch from their current mobile operators. Besides focusing its niche on the ethnic Chinese segment, XOX is also targeting businessmen and businesswomen involved in small businesses, blue collar workers, entrepreneurs, youths and college students. These potential subscribers either lack the supporting documents or a steady income to qualify for a postpaid subscription with the other mobile operators. This is also in line ,,~th XOX’s target market, i.e. the prepaid market. A boundary is drawn to separate the remaining subscribers in the prepaid segment who are mainly the foreign expatriate workers that do nOt generate much revenue. Basically, these are prepaid subscribers with higher elisposal incomes compared to the foreign expatriate workers. XOX does not intend to target the foreign expatriate workers, although it would accept them as subscribers if they are interested to be XOX’s subscribers. With its strong customer telationship processes, XOX plans to target these potential subscribers with a postpaid plan. This is the convergence bi1ling system, which incorporates the features of prepaid and postpaid into one account A convergence subscription plan will allow any subscribers to be offered a postpaid account ,,~th prepaid flexibility and convenience. Under this subscription plan, a credit limit will be ser, and which can be increased from time to time. The subscriber will be charged at a postpaid tariff, which is conventionally lower than a prepaid tariff. The subscriber will also be subjected to a minimum usage commitment fee per month. In the event the subscriber is unable to fully utilise the minimum usage commitment for any particular month, the subscriber will still need to pay in full the minimum usage commitment fee. However, the subscriber can transfer the unused minimum usage commitment into his prepaid account This balance could be utilised by the subscriber to make voice calls, SMS or other data services, but at a prepaid tariff. Similarly, if there is a default, the subscriber may also switch to become a full prepaid subscriber, by purchasing a prepaid card from the dealers. 11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cont’d)
Decide with Confidence Therefore, the convergence billing sysrem has the arrributes of flexibility, convenience and scalability. By rargeting the prepaid customers with the best of both prepaid and postpaid features, XOX hopes to differentiate itself from rhe other mobile operators in the market. This market segmentation and the corresponding product differentiation srrategy can assist to position XOX in the market. 1.10 MAR.KET SHARE MVNOs rypically compete with one another and the MNOs based on the unique services and products they offer to their target market segmenc In today’s burgeoning MYNO market, a number of lucrative market segments have become targets for MYNOs. However, the MYNO which is able to launch products and services most likely to be adopted by customers in the targer market based on their lifestyles and which are effectively branded and marketed, will gain a larger market share. The relecommunications industry in Malaysia is dominated by the big three (3) MNOs. Among these MNOs, Maxis Bhd has the largest number of subscribers and the highest revenues. Table 4: Key Figures of MNOs in Malaysia, 2009 and 2010
33.3Celcom Axiata Bhd 2ii.08.8 25.9 4,909.6Digi.com Bhd N.A 73.4 0.4N.A.U Mobile Sdn Bhd Notu: Tbejilf41t<i41 ,’a/emm”for aU ,be ;IINO,.n b,,,,don EYE 31/12/2009. Tben is _”uk ojp.bli,!>· tn/oilabk inform_ti.. on U Mobil, Sdn 8M N A. = Not APOilaM Souree: Companies’ annual reports, Companies Commission ojMaf’!Jsia, D&B l~1illaysi(J 15Dun & Bradstreet (O&B) Malaysia Sdn Bhd © 2011 11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cant’d) ~
Decide with Confidence There are a rotal of five (5) lVfVNOs, including XOX, operaring in Malaysia. In rerms of revenues for FYE 2009, XOX recorded the number four (4) position in the lVfVNO industry in Malaysia. In rerms of number of subscribers within the lVfVNO marker, XOX managed to achieve a market share of 20.1 % as at end 2010. In terms of revenue, its market share was 6.3% in 2009. Table 5: Market Share and Revenues of MVNOs, 2009 and 2010
Tune Talk Sdn Bhd 1,000,000 63.9 31/12/09 11,007.1 10.4 XOX 315,000 20.1 31/12/09 6,597.3 6.3 REDrone Mobile Sdn Bhd 150,000 9.6 31/05/09 577.4 0.6 Merchantrade Asia Sdn Bhd 100,000 6.4 31/12/09 76,092.6 72.1 Next Telecommunications Sdn Bhd N.A. N.A. 31/12/09 11,299.2 10.7
Notes: XOX “Ported rwenues’o/RM20.1 millionjor FYE 31/12/2010 RBDtone Mobile Sdn BM reported revtnn” ojRM2.3 millionjor FYE 31/05/2010 The nvenlle streamsfor Merrhantrade Aria Sdtl Bhd are derilltd]rom van’ouf businessu. MT/NO seroKe! accountedfor RIW58.5 million in F1E 31/12/09 There is a lack ofpubiic!J! aVt1t1ob/e inf()f’!1Ja/ion on thefifth AH/NO, Next Telecommunications Sdn Bhd. N. A. =l\lot Available Source: D&BJ.rfalqyda, Companies Commis.sion ofJ.r!alaysia, l’rlanagemetlt o/”XOX 16Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cant’d) ~
Decide with Confidence 1.11 LEGISLATIONS, INCENTIVES AND POLICIES 1.11.1 Legislations The MCMC was created pursuant ro the Malaysian Communications and Multimedia Commission Act (1998) as a new regulator for the communications and multimedia industry in Malaysia. At the same time, the Communications and Multimedia Act (1998) was passed, to fulfIl the need to regulate an increasingly convergent communications and multimedia industry. The Communications and Multimedia Act 1998 is based on the basic principles of transparency and clarity; more competition and less regulation; flexibility; bias towards generic rules; regulatory forbearance; emphasis on process rather than content; administrative and sector transparency; and industry self-regulation. The Act seeks to provide a generic set of regulatory provisions based on generic defInitions of market and service activities and services. The jurisdiction of this Act is restricted to networked services and activities only. The MCMC is also charged with overseeing the new regulatory framework for the converging industries of communications and multimedia. The Communications and Multimedia Act 1998 establishes a framework for the economic regulation of the communications and multimedia industries. The purpose of such a framework is to promote a consumer market which offers choice, quality and affordability, any-to-any connectivity, competition in markets and investments as well as innovation in the industry. L’nder the Act, the ownership or provlSlon of any network facilities, the provision of any network services, the provision of any application services, or the provision of any content applications services requires a licence. The regulatory framework provides for four (4) main categories of licences as follows: • NFP licence: for the ownership and provision of physical infrastructure used to provide communications services (for example, fIxed links and radio communication transmitters and links); 17Dun & Brndstreet (D&B) Malaysia Sdn Bhd © 2011 11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cant’d) ~
Decide with Confidence • NSP licence: for the provision of communications services over network facilities (for example, cellular mobile services and broadcasting distribution services);
• ASP licence: for the provision of application services by means of network services (for example, public switched telephone network, public cellular telephony and internet protocol telephony); and
• Content applications services provider licence: for the provision of content applications services (for example, satellite broadcasting and terrestrial free to air television).
The Communications and Multimedia Act 1998 contains provisions on licensing, general competition practices and regulation of access to services. The sections of the Communications and Multimedia Act 1998 dealing with general competition practices prohibit: • any conduct by any licensee which has the purpose of substantially lessening competition in a telecommunication market; • arrangements and practices which provides for rate fixing, market-sharing and boycott of a supplier or competitor; and
• mandatory tying or linking arrangements regarding the provision or supply of products
and services. 1.11.2 Incentives In view of the high technology and heavy capital invesrment prevalent in the telecommunications industry, the latter is dominated by foreign companies on the global scene. The government also encouraged foreign investors to provide the necessary capital investment and technological know-how and experience to promote the rapid development of the telecommunications industry in Malaysia. The government also indicated that it will allow foreign ownership in Malaysian telecommunications companies of up to 61 %, subject to the conditions that it may impose, provided that the ownership percentage of foreign investors is reduced to 49% within five (5) years of achieving the 61 % threshold. 11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cant’d) ~
Decide with Confidence 1.11.3 Policies Under the Tenth Malaysia Plan 2011-2015, the services sector will be liberalised under the ASEAN Framework Agreement on Services. In this context, further liberalisation will be undertaken for all 128 industries, including telecommunications, allowing at leasr 70% ASEAN equity ownership by 2015. In addition, the government will expand on its commitments made to the WTO in 1995 to liberalise 65 service industries, including the telecommunications industry. The Communications and Multimedia Act 1998 sets forth the national policy objectives for the communications and multimedia industries. These include but are not limited to: • establishing Malaysia as a major global centre and hub for communications and multimedia information and content services; • promoting a high level of consumer confidence in service delivery from the industry;
• ensuring an equitable provision of affordable services over a ubiquitous national
infrastructure; • facilitating the efficient allocation of resources; and
• promoting the development of capabilities and skills within Malaysia’s convergence
industries. The Communications and Multimedia Act 1998 prohibits a licensee from engaging in conduct which has the purpose of substantially lessening competition in any communications market in Malaysia. It also prohibits certain collusive arrangements for rate fixing, market sharing or boycotts. Furthermore, if the MCMC determines that a licensee is in a dominant position, it may direct the licensee to cease conduct which has or may have the effect of substantially lessening competition in the Malaysian communications market, and to implement appropriate remedies. The MCMC issued Application Information Package (“AlP”) Number 1 of 2002 pursuant to Regulation 8 of the Communications and Multimedia (Spectrum) Regulations 2000 and the Communications and Multimedia (Spectrum) (Amendment) Regulations 2001. Among the criteria that were outlined in the AIP on infrastructure sharing are as follows: Dun & Bradstreet (D&B) M>laysia Sdn Bhd © 2011 11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cont’d)
Decide with Confidence • sharing or allowing access to the use of airtime and network facilities with other licensees; and • maximising the use of existing network facilities including existing network capacity and capabilities, existing base station sites, backbone, raclio links, etc. to enhance sharing and reduce duplication of network facilities. Since the enactment of the Communications and Multimeclia Act 1998, MCMC has implemented initiatives to optimise the use of existing infrastructure by requiring the MNOs to provide a domestic roaming se”,,,ce between networks. Domestic roaming allows an operator to use the infrastructure of a ri\Tal operator to boost its service coverage and reception, so that customers can enjoy reception in areas where their own operator does not provide coverage, Network sharing between operators may also provide a solution to the network congestion currently faced by some operators. The MCMC has consistently encouraged the MNOs to share the industry’s infrastructure with a ,,,ew to preventing expensive duplication and under-utilisation of resources. Y.[oreover, the MCMC has allowed industry players ro make their own commercial arrangements with other operators, with minimal regulatory intervention, Under the new access regime, Ml’:Os may request infrastructure access on reasonable terms and conditions, and the access provider must provide access to its network facilities and services on an equitable and non-cliscriminatory basis. Where access is not granted, the MNO seeking access may notify and involve the MCMC. The purpose of an access regime is to ensure that all NFPs, NSPs and ASPs can gain access to the necessary facilities and services on reasonable terms and conditions. This is to encourage downstream activities to flourish, thus creating a more robust market environment, one that is able to offer consumers more choice and value· for-money services. Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cant’d) ~
Decide with Confidence The government has taken regulatory sreps to encourage the lvfVNO industry. The conditions for the award of the 3G license already provides for an lvIVNO service. It hopes to make mobile infrastructure available to all companies at a fair price. It realises that the entry of MYNOs into the market could further encourage competition and improve innovation. 1.12 DEMAND AND SUPPLY CONDITIONS Due to the spectrum constraint) there are a small number of wholesale companies, that is, companies that can set up and operate a telecommunications network. In return, the subscribers make decisions about which handset to buy, which tariff bundle ro sign up and the range of services to use. Successful MVNOs position their operations such that their customers do not clistinguish any significant differences in service or network performance, and yet offer some special affinity to their customers. Successful MVNOs will also be those that have ample financial resources and sound agreements with creclible MNOs to provide compelling services and a wide coverage area. MYNOs, in this way, can offer a product mix that incumbent MNOs cannot or have not been able to match. The major benefit to a traclitional MNO cooperating with a MYNO is the expanded customer base derived at a substantially lower or zero cost of acquisition. In this scenario, it is very much likely that incumbent MNOs will continue to embrace MYNOs as a means of deriving revenue to offset the enormous cost of building next-generation network capabilities. MVNOs will create a unique value proposition that allows for robust pricing while having little cornrnoditising effect on the overall wireless pricing. A MVNO is expected to create value adclition to the customers, other than that which is already accomplished by the MNOs. The provision of key differentiator services and marketing these services effectively to a strategically segmented market is the key determinant of success in the marketplace. Each successful MVNO must find a unique selling point that distinguishes it from the MNOs and the other MVNOs. It is critical that the consumers see the MVNO as a stand-alone brand of wireless services than as an extension of the MNOs. 11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cant’d) ~
Decide with Confidence As the MVNO market continues to grow, it becomes imperative for a MVNO to market its services effectively. It is very important to reach the right audience at the right time and introduce them to the specific product offered by a participant. Customer fulfJlment is a key area detertnining the success of MYNOs in the marker. To justify the MYNO model and create a significant differentiating factor between the MYNOs and the MNOs, it is of critical importance that the MYNO develops a competitive pricing model. With the wireless voice services reaching optimum penetration levels, the space has opened up to various alternate opportunities for “NINOs, solution providers, content providers, MYNOs and others alike. This situation has given rise to most wireless service providers and MNOs to step into the arena of wireless data services and other differentiator services that could generate value addition to their business models and betrer services for their customers. The MNOs are being burdened with mounting debts due to the capital expenditure (“CAPEX”) spending for integrating into the 3G+ environment. The daunting challenge faced by MNOs at this juncture is to effectively segment their markets for offering services and efficiently marketing to these segments to ensure profitable uptake. While MNOs spend more time and money on the compelling services for the 3G network and technologies, the imperative task of devising partnerships with companies/brands that the public already know and trust is of pivotal importance. In this context, the maturing market is making wholesale an attractive revenue source to the MNOs. Even though the MYNO concept is a new entrant in Malaysia, it has managed to pick up a great deal of interest amongst the MNOs and subscribers. There is increasing competition among mobile operators for the same pool of users. As a result, there have been increased pricing pressures from all three main (3) network MNOs over the last few years, reducing postpaid and prepaid tariffs, which have levelled out. However, the price of prepaid starter packs have been reduced to a great extent, and the active validity period of prepaid SIMs had been extended. A new area of competition is in encouraging prepaid to postpaid migration. Due to increasing competition, there is a steady pace of prepaid to postpaid migration as a result of simpler and lower entry postpaid plans. Dun & B”,dstreet (D&B) Malaysia Sdn Bhd © 2011 11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cant’d) ~
Decide with Confidence Although the growth rate of postpaid and prepaid subscribers had slowed down from the early part of the decade, it was still expanding in the high teens in 2007 and 2008. This was also in line with the increasing penetration rate. The negative growth rate in 2006 was mainly due to the government’s directive to register all prepaid subsctibers on a nationwide basis. The penetration rate attained 116.6% in the fourth quarter of 2010. This penetration rate in Malaysia is not viewed as saturated yet, as Singapore and Hong Kong Special Administrative Region have achieved penetration rates of 143.6% in December 2010, and 180.1% in May 2010, respectively. Table 6: Performance of the Cellular Market in Malaysia (‘ 000)
2004 2,555 2005 2,925 2006 3,368 2007 3,905 2008 5,544 2009 6,265 2010
23Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cant’d) ~
Decide with Confidence The market size of the telecommunications industry in Malaysia was estimated at approximately RM18.9 billion in 2009, based on the latest financial statements of the various MNOs and MVNOs. Based on the projected number of 35.2 million subscribers in 2011, the industry growth rate is estimated at 6.3% in the sarne year. The ARPU for the main MNOs in Malaysia is illustrated below. Table 7: ARPU for the MNOs in Malaysia, as at Fourth Quarter 2010
Maxis Bhd Celcom Axiata Bhd Digi.com Bhd A’irerage RM34 RM38 RM44 RM38.7 RJ\;1108 RM91 RM85 RM94.7
Sourn: r….art”ou.I companies’ websites 1.13 INDUSTRY REUANCE AND VULNERABILITY TO IMPORTS In general, the telecommunications industry, including the MVNOs, is dependent on imports for the majority of telecommunications equipment. Radio transmission and switching machines are the key equipment for a mobile telecommunications network. The main investment lies with the equipment related to the radio transmission between handset and network, such as the base stations. There are a number of international telecommunications vendors providing network equipment and services. Hence, the MVNOs may be affected if the required equipment and services are not furnished in a timely manner. However, this situation is quite rare as the supply of network equipment and services is quite competitive in the market, due to the numerous equipment manufacturers in the market. Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cont’d)
Decide with Confidence 1.14 KEy GROwrH DRIVERS 1.14.1 Increasing Network Capacity 3G is a catalyst for the emergence of MYNas. An increasing number of users are expected to migrate to 3G, due to the highly attractive broadband access alrernatives from the service providers, besides the competitive pricing. The advance of 3G technologies also enables media and entenainment offers, thus allowing the service pro”riders to offer more customised services. Some segments of the population are willing to spend extra money for customised products and sefVlces. The MNOs are increasingly willing to host MYNas as they feel the pressure to monetise their huge capital investments on the network and spectrum, and to seek return on capital. In this context, MYNas can help operators utilise their infrastructure more efficiently, thereby expanding market share, addressing underserved market groups, and reducing subsctiber acquisition costs. All the MNOs have launched high-speed ,vireless networks. This has given a rise to the demand for wireless consumer data products. With the increasing and continuous expansion of 3G+ coverage by the MNOs, MVNOs which ride on the carrier networks will be expected to provide incremental and rich data experiences to subscribers. Looking forward, consumers are likely to expenence a gradual transition to the new 4G technology. Broadly speaking, it is a new way to use the airwaves, designed from the stan for the transmission of data rather than phone calls. To do that, it borrows aspects of the latest .generation of Wi-Fi, the short range wireless technology. For consumers, 4G means, in the ideal case, faster access to dara. For instance, streaming video might work better, with less sruttering and higher resolution. Multi-player video games may benefit too. 11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cant’d) ~
Decide with Confidence 1.14.2 Rising Demand for Wireless Data Services Wireless data services are creating a new phenomenon in the industry by generating customer growth and driving top-line revenues. Variaus data services, sucb as SMS, M1vfS, Internet access) ring tones, images, music, videos clips, and the like are continuing to expand their presence in the wireless landscape as more and more consumers are adopting these services in their daily wireless service usage. Wireless dara services are imporranr for MVNOs to drive the differentiation factor with which they esrablish uniqueness while also ensuring that they are not competing with tbe underlying MNO. As MVNOs have typically owned their customers and their loyalty, they have a distinct advantage of offering data services customised specifically for the market segment they are catering to. With the soaring market demand for wireless data applications, MVNOs have the opportunity to create and market differentiated dara services that are not offered by the MNOs. 1.14.3 Rising Population Malaysia has one of the largest population growth rates in the world. The population increased from 23.5 million in 2000 to 28.3 million in 2009, yielding a compounded annual growth rate (“CAGR”) of 2.1% during the period. Inevitably, an expanding population translates into a larger potential market for service providers in the telecommunications market. With the usage of cellular phones so ubiquitous, nearly every adult in the country would own one. 1.14.4 Increasing Affluence The per capira income in Malaysia has rose from RM13,333 in 2000 to RM23,381 in 2009, generating a CAGR of 6.5% during the period. The rising affluence of the general population would mean more disposal income and eventually, some portion of this would be directed into demand for telecommunications products and services. Telecommunications services have become a necessity in the modem world, in both tbe business and personal realms. 11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cant’d) ~
Decide with Confidence 1.14.5 Continuing Growth ofthe Telecommunications Industry The cellular phone industry is going through a revolution as handset technology advances. What started as a clunky voice-only device is now a sleek cellular phone with multiple functions such as cameras, global positioning system and MP3 players. These new feature-rich phones are able to achieve higher performance in a smaller space, with longer bartery life. Many cellular phones can roam seamlessly in several countries. Cellular phones have become both a status symbol and fashionable device to consumers. The product life cycle for cellular phones is also getting shorter, as consumers opt for more featurerich devices. Along with decreasing average selling prices, these factors boost the cellular phone replacement market. In addition, the mobile penetration rate has already surpassed 100% in some countries, as some consumers take a second connection for personal use. Global cellular phone shipments reached 1.1 billion units in 2009. The growing popularity of smart phones has also driven the overall cellular phone market. Some consumers are also turning in their older generation cellular phones and replacing them with smart phones. Smart phones fall under a category of cellular phones that provide advanced capabilities beyond a conventional cellular phone. 1.14.6 Declining Handset Costs Device manufacturers around the world are innovating and spending huge amounts on research and development to augment the wireless user experience. The promotion of the wireless device as the entertainment media and the induction of various wireless entertainment and multimedia services have motivated device manufacturers to in troduce high-definition mobile phones with multi-feature capabilities. This includes increasing functionality with camera, global positioning system, MP3 player etc. All these are happening in conjunction with the decline in the prices of handsets. Declining handset costs may also spur the growth of multi-device owners, ego an individual who has one phone for business and another for personal use. Dun & Bradstreet (D&B) Malaysia Sdn Bhd © 2011 11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cont’d)
Decide with Confidence 1.14.7 An Expanding Youth Consumer Segment The young adult market segment is considered to be the most untapped and a high growth oriented market. It is a fact that cellular phone users are getting younger and as a result, there are huge opportunities in this segment There is a high data usage by this segment, which sent many text messages, downloaded songs and generated heavy Internet traffic. Hence, data services have been the key services offered to attract customers in this segment. Wireless data applications such as SMS, MMS, wireless instant messaging, games, co=unity-based applications, music, and video downloads have been some of the most attractive data applications for the youth market 1.15 PROSPECTS AND OUTLOOK OF THE INDUSTRY The convergence of voice and data communications has enable subscribers to enjoy mobile games and social networking sites while using their cellular phones. This has encouraged many consumers in the younger age segment to spend more time using telecommunications services. The wireless data market is likely to ,vimess strong growth. Its impact is limited only by the finite coverage of spectrum and the ability of industry participants to deploy higher network standards. New technologies and approaches to the use of bandwidth will revolutionise wireless consumption and ensure that every last bit of the value is extracted. As a result, consumers are expecting more competitive access to the Internet, e-mail, and an increasing range of data services. The introduction of 4G system is expected to take place around 2011-2015. It will be capable of combining mobility with multimedia-rich content and high bit rates. In the coming years, network quality will simply become the primary criterion for differentiating products and services as MNOs and MVNOs place more emphasis on segmentation and marketing prowess. New segment-focused brands will create intense customer affiniry and loyalty, strong marketing, and expertly targeted services. Il’bolesale companies will fundamentally alter the economics of the wireless business in a positive way. 28Dun & Bradstreet (D&B) Malaysia Sdn Bhd «:> 2011 11. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCHER’S REPORT (Cant’d) ~
Decide with Confidence MYNOs, through their existing brand equiry and customer loyalry, have the abiliry to own a unique relationship with their customer base. This relationship plays a pivotal role io being a significant component of their successes io the MYNO market. Goiog forward, MYNOs are expected to play a crucial role io continuing to grow the mobile subscriber base. However, sustaioabiliry will be of key importance in the market. It is expected that only a few promising MYNOs having the financial and marketing power will continue to rule the market With effective market segmentation, compelliog products and services as well as efficient marketing, MYNOs can scale existing and upcomiog market opportunities in the country. With MNOs targeting a generic market with their voice and data services, MV:’olOs will be able to target specific market segments and provide customised services. This would create an acceptable level of competition in the wireless iodustry, thus keepiog a check on monopolistic attitudes and practices of the MNOs.