Telekom Malaysia capitalising on its strengths-

Telekom Malaysia (TM), the largest fixed line service operator in Malaysia, has recently celebrated a major milestone by providing high speed broadband (HSBB) access to over 1 million premises within two years of its service launch. Launched in March 2010, the HSBB network that is being built in partnership with the Malaysian government has been acknowledged as one of the fastest and most cost-efficient network roll-outs in the world. By end-2012, TM’s HSBB service, UniFi, had attracted more than 517,000 active customers, exceeding its original target by 37 per cent. The operator had installed UniFi in 1.37 million premises by end-2012, surpassing its goal of 1.34 million premises. Further, TM’s HSBB project has played a key role in raising Malaysia’s stature in the Southeast Asian broadband space – such that the country now has the highest HSBB subscription rate in the region.

Forging a history of milestones

TM has come a long way since its establishment as the Telecommunications Department of Malaysia in 1946. It has charted a growth path marked by its corporatisation in 1987 and listing on the Bursa Securities in 1990 as a public listed company. Recently, it embarked on a mission to become Malaysia’s leading new-generation communications provider. In 1995, TM established its wholly owned subsidiary, TM Net, to provide internet services, as part of the Malaysia National Broadband Plan. With the launch of its Streamyx service in 2001, the company entered the broadband segment; in fact, until 2009, it was the only fixed line broadband provider in the country. Thus, it is evident that TM has played an instrumental role in supporting wireline and fixed broadband penetration in the country.

The year 2001 was significant in the company’s history for two reasons. First, it launched its CDMA-based fixed telephony service in Malaysia which later became the core business operation for the company, along with the broadband segment. In fact, the company went on to demerge its fixed and mobile services in 2008, to ensure its complete focus on the fixed-line-based businesses. The second reason was thevcompany’s foray into the submarine cable system business the same year.  TM launched its first submarine cable – the Asia Pacific Cable Network 2 – in 2001 with other global collaborators which bolstered its network’s international connectivity.

Later, in 2006, the company established another consortium to develop an undersea cable system  – the Asia–America Gateway – to connect Southeast Asia and the US (operationalised in 2009). Over the years, TM has continued to collaborate with other operators to launch new submarine cable systems. For instance, it completed the Batam–Dumai–Melaka cable in 2011 that connects Malaysia with Indonesia. In 2012, TM’s first private cable network, Cahaya Malaysia, which links Malaysia to Singapore, Hong Kong, Japan, and the Philippines, became operational.

Capping its long list of achievements was  TM’s public–private partnership with the Malaysian government to roll out the HSBB network. The 10-year contract required TM to provide access to 1.34 million homes by end-2012. The bulk of the cost of the project – RM 11.3 billion – came from TM, with the Malaysian government having invested only RM 2.4 billion for the first three years. In 2009, TM started readying its network to introduce HSBB services – it upgraded its entire core network infrastructure to the next-generation network. Thereafter, it launched the HSBB network in 2010. By leveraging this network, TM started offering Malaysia’s first triple-play retail service under the brand name UniFi. Over the years, the Streamyx and UniFi services have helped TM in achieving significant household broadband penetration in Malaysia. Currently, TM is Malaysia’s leading internet service provider, with a market share of 95 per cent. Its fixed line customer base stands at over 4 million.

The company also introduced its own IPTV service, HyppTV, as part of UniFi, which provides free and premium channels to UniFi subscribers, as well as services such as video-on-demand (VoD), multiplayer gaming, high speed internet access, and free voice calls. TM currently has over 110 channels comprising 17 free channels, 8 radio channels, 46 premium channels, 23 VoD genres, and 20 interactive channels.

Further, in a bid to enhance its internal capacity, TM has been transforming its legacy public switched telephone network into an all internet protocol (IP)-based core. The transformation towards an all-IP network will continue through 2018: by then, only a small percentage of access elements will still be on its non-IP infrastructure.

Stellar performance

The company is faring well, both in terms of operational and financial performance. While announcing the company’s 2012 full-year financial results, Z. Bina Mohd. Isa, Group Chief Executive Officer of TM, commented: “Overall, we have had a good year in 2012, with revenue growth outstripping the industry, and our highest since the demerger. We have made significant progress on our comprehensive action plan to position ourselves for our next stage of growth and profitability.”

In 2012, TM’s revenue grew by 9 per cent from RM 9.15 billion in 2011 to RM 9.99 billion. This was not only the company’s best performance since the demerger in 2008, but also exceeded those of its competitors in the industry (highlighted in Figs 1 and 2). This achievement has to a large extent been made possible due to successful implementation of the Performance Improvement Programme (PIP) that the company launched in 2006. Since then, PIP has been executed in different phases to ensure sustainable growth of the company.

Further, TM was able to meet all its headline key performance indicator targets set for 2012:

  • Exceeded its revenue growth target of 5 per cent: 9 per cent;
  • Achieved normalised earnings before interest, depreciation and amortisation margin of 32 per cent; and
  • Scored more than 72 on the customer satisfaction index, surpassing the global average score of 68.

Over the years, internet and data services have emerged as the new platform of growth for TM: the segment’s share in the operator’s total revenues increased from 36 per cent in 2009 to 46 per cent in 2012. In fact, this increase has to a large extent offset the continuous decline in voice services: revenue contribution from voice services decreased from 47 per cent in 2009 to 37 per cent in 2012. Meanwhile, the operator has continued to maintain its leadership position in the broadband segment: its customer base reached 2.07 million by end-2012. Moreover, the growth rate of UniFi subscriptions has been phenomenal: it recently crossed the half-million mark, within three years of the service launch, making it one of the fastest service uptakes across the globe.

Navigating an increasingly competitive landscape

Despite its dominance, TM faces rising competition in the broadband space. The surge in the uptake of wireless broadband services and the emerging preference for data access on the go are posing serious threats to the company’s business. Further, with several operators starting to offer broadband-for-home products, Malaysia’s broadband space is likely to become even more competitive in 2013. The recent partnership between Maxis and Astro may make a dent in TM’s broadband market share (currently over 50 per cent) should the former offer its services at competitive rates and with richer content. According to industry analysts, based on the current IPTV bundles offered on Maxis’s fibre, an existing DTH Astro subscriber with a TM fibre broadband subscription could get better value by switching to the Astro-Maxis IPTV and Maxis fibre broadband bundles.

Nonetheless, TM is confident about its position in the HSBB-for-premises market: the operator believes that its first-mover advantage in this space and its well-established customer base will shield it from any major competition. While the company does expect its market share to get eroded by 10–20 per cent in the medium to long run, it is a trend that is not uncommon in other hypercompetitive markets worldwide. Such a development would largely be a reflection of rising fibre penetration in Malaysia, rather than the declining competitiveness of TM.

In a bid to gain an edge over its fixed line competitors, TM has started introducing more value-added services to its current packages. Analysts from RHB Research (which tracks TM’s performance) note that HSBB competition from Maxis should not be a key area of concern for TM. Currently, Maxis’s pricing for fibre plans is still higher than that of TM, which has constrained Maxis’s fibre subscriber growth. Also, TM’s ownership of the countries last mile connections further limits competition to mostly urban agglomerations.

As for competition from wireless broadband, rather than a challenge, TM considers it to be an opportunity. The company has a ubiquitous fibre network, which serves as the best medium for wireless backhaul, and thus TM can share its network with other wireless operators, which face severe traffic congestion in their mobile networks. However, the company’s declining voice revenues remain a major issue, as TM has not been able to arrest the trend. Industry analysts believe that TM’s success in the fixed broadband segment could have resulted in cannibalisation of its voice revenues, as data speeds and delivery offered through the latter have improved.

Other potential risks include:

  • Wireless emerging as a strong substitute for wireline broadband services, which can have a bearing on the company’s income;
  • Low returns from the HSBB project, as the government will not be co-investing any further amounts; and
  • Higher content costs for IPTV service due to increased competition.

 

Capitalising on its strengths

Going forward, TM is extremely bullish on its HSBB and UniFi services: it will explore new frontiers of growth in these domains in the future. It will also aim to boost its offerings to its small and medium enterprise customers with services such as cloud computing, data centre management, disaster recovery, and enhanced communication. Given the company’s strong performance and ubiquitous fibre reach, as well as the increasing adoption of broadband services by consumers, TM should continue to dominate Malaysia’s fixed broadband space.