Why the M1 - City Telecom Partnership Is Front Runner for NGNBN OpCo

Singapore's Next-Gen NBN OpCo RFP was released earlier this month. The race is much more open for the OpCo than the NetCo because of the lower barriers to entry and lower capital investments involved. However, despite this, I think that the only bid that truly makes sense for the NGNBN OpCo is the City Telecom - M1 consortium.

1. The operational separation is extremely onerous for the wireline incumbents, and severely dilutes the attractiveness to StarHub and SingTel.

One of the requirements of the OpCo is that it has to be operationally separated from its affiliates. This means that OpCo has to:

• Operate in all respects on a standalone basis, separate from affiliated downstream operating units
• Be located in separate premises
• Independently formulate & make own decisions on its assets and commercial policy
• Not allow its affiliated downstream operating units to have unequal influence on the formulation of commercial policy, and access to commercial information or customer confidential information
• OpCo’s Board of Directors, Management and employees not to have responsibilities in any Affiliated Operator

All these requirements will mean that an incumbent like StarHub and SingTel will have to incur significant duplication of manpower and will have to come up with a different brand name for its OpCo's operations, which might in turn compete with or overlap with its non OpCo operations. In short, Operational Separation significantly restricts their flexibility in the allocation of resources and human talent across the OpCo & RSPs.

A much less onerous option for the wireline incumbents would be to simply set up separate integrated OpCos which would have no such operational separation requirements and which could be a simple extension of existing business units. Such business units would move much faster into the market and be operationally ready.

2. A non-incumbent challenger without any sort of cooperation from existing market players faces significant market and demand risk.

Firstly, a Greenfield entrant into the OpCo space faces a significant degree of risk because his OpCo grant depends largely on meeting adoption targets. Furthermore, the incumbents like SingTel and StarHub could migrate their customer base away from the NBN OpCo to their own OpCos once the five-year exclusivity is over, thereby seeking to kill the NBN OpCo, or thereby severly harming its business case.

Secondly, Bidders with a higher risk outlook will seek to be compensated for this risk with the possibility of higher returns through higher ICO prices. However, the attractiveness of ICO prices is weighted very highly in the evaluation criteria. This puts prospective bidders in a fix. In order to be profitable, the greenfield OpCo will need to win some kind of reasonable margin from his operations. However, he is contrained by the ICO evaluation and regulation plus the fact that the iDA is trying to bring about "attractive ICO prices."

These factors, amongst others, make it highly unattractive for any prospective greenfield bidder with no demand guarantee (e.g. Axia, Zitius etc.)

3. This leaves the M1 - City Telecom (CTI) consortium as the only sensible bid.

A City Telecom - M1 partnership goes a long way in circumnavigating the challenges mentioned above.

Firstly, M1 has a substantial mobile customer base in Singapore, and will be looking towards the NGNBN as an opportunity to provide fixed line services to prevent customer churn and to attract new customers. With a stake in the OpCo, M1 will ensure that its services run over the NBN OpCo, thus significantly enhancing the business case of the OpCo.

Secondly, M1 has no significant wireline operations in Singapore. This means that the operational separation is no where as onerous to M1 as the incumbents. Furthermore, with City Telecom taking a major stake in the OpCo and contributing significant manpower and operational expertise to the OpCo, this greatly relieves the need for M1 to create duplication of manpower - the OpCo business does not cannibalise or compete with M1's current core competencies. In contrast to the incumbents, the Operational Separation requirements are a relative non-issue to M1/CTI.

Conclusions

Neil Montefiore must therefore be an optimistic man. Because for a long time now, SingTel and StarHub have been attacking M1's market share because of the small telco's lack of fixed-line offerings.

I certainly hope Neil realises that he has a very real opportunity here and makes the best of it. Consumers would all benefit from genuine extra competition and from someone who appears to have a genuine understanding of what is really going on.

M1, CTI & StarHub vs SingTel in Singapore's Next Generation National Broadband Network (NGNBN)

A. Next Generation National Infocomm Infrastructure

The Next Generation National Infocomm Infrastructure (Next Gen NII) is Singapore’s new digital super-highway for super-connectivity. It will entrench Singapore’s Infocomm hub status and open the doors to new business and social growth for the country. Next Gen NII comprises complementary wired and wireless networks to ensure Singaporeans enjoy seamless connectivity.

The wired broadband network or Next Generation National Broadband Network (Next Gen NBN) will deliver ultra-high broadband symmetric speeds of 1Gbps and above, to all homes, offices and schools, while the Wireless Broadband Network (WBN) will offer pervasive connectivity around Singapore.

B. Next Gen NBN (NGNBN) RFP Launch

The IDA, on 11 Dec 2007, released the Request-For-Proposal (RFP) to all interested parties to submit their bid to design, build and operate the passive infrastructure layer of the Next Gen NBN.

According to the Minister for Information, Communications and the Arts, Dr Lee Boon Yang, the Next Gen NBN is envisioned to offer pervasive and competitively priced ultra high-speed broadband connectivity to business users at the workplace as well as to Singaporeans at home, schools and learning institutions and other premises.

The Next Gen NBN is expected to be available nationwide by 2015, although consumers can begin to look forward to a range of new and exciting Next Gen Services such as high-definition video conferencing, telemedicine, Grid Computing-on-Demand, security and immersive learning applications on the Next Gen NBN from about 2010.

The list of qualified consortium leads for the Next Gen NBN RFP is as follows:
1 Alcatel-Lucent Singapore Pte Ltd
2 Axia NetMedia Corporation
3 BT Singapore Pte Ltd
4 City Telecom (H.K.) Limited (Replacing Hong Kong Broadband Limited)
5 Nippon Telegraph and Telephone West Corporation
6 Nokia Siemens Networks Singapore Pte Ltd
7 Singapore Computer Systems Limited
8 Singapore Telecommunications Limited
9 SP Telecommunications Pte Ltd
10 StarHub Ltd

C. StarHub, CTI and M1

Hong Kong's City Telecom (CTI) and Singapore's M1 and StarHub (CMS Consortium), on 20th March 2008, signed a Memorandum of Understanding (MoU) to jointly form a consortium to design, build and operate the passive infrastructure network capable of delivering ultra high broadband speeds for Singapore. The consortium will jointly submit a bid that will meet all the criteria for the Infocomm Development Authority of Singapore’s Request-for-Proposal (RFP) for the Network Company (NetCo).

This important development effectively narrows down the field to two key bidding consortiums for the NetCo layer of the Next Gen NBN:
i. SingTel and its financial partners
ii. CTI, M1 and Starhub (CMS Consortium)

The other bidders do not have a serious chance in winning the NetCo layer:

1. SingTel's position as incumbent fixed-line operator and its islandwide telecom infrastructure puts it in pole position to roll out the island wide fibre-optic network. It has the experience, deep knowledge, financial pockets and incentive to roll out the fibre infrastructure in the most economically efficient manner that does not duplicate existing infrastructure and requires the minimum construction of new ducts.

2. If the NetCo contract were to be awarded to a player (players) other than SingTel, there is a very high probability that SingTel would then embark on deploying its own fibre-optic network to compete directly with the NGNBN.

• The SingTel entity operating the next gen network would be a vertically integrated beast (from infrastructure operator through to Retail Service Provider) that would not be subject to open access obligations and that would have the speed of execution of an independent, single corporation (rather than a cumbersome regulated consortium).
• SingTel would be able to cherry pick the best and most profitable areas to roll out its network first in order to get a head-start ahead of the NGNBN operators as it is not tied to rollout obligations as stated by iDA
  
• SingTel would not be obliged to make its network infrastructure available to the NGNBN operator, potentially driving civil costs much higher for the NGNBN NetCo.
  

3. It thus follows that any non-SingTel consortium winning the NetCo will have to be a strong, credible force that will be able to take on the SingTel beast in head-on competition and yet be able to survive. The newly formed consortium of CTI, M1 and StarHub fits this bill.

• CTI will bring its experience of operating a fibre network in Hong Kong to the table.
  
• StarHub will bring its deep knowledge & experience with the residential cable networks. It will also bring a strong customer base of payTV subscribers to the table.
  
• Both Starhub & M1 will bring their mobile subscriber base to the table and be able to market a new bundled service incorporating the next-gen services of the NGNBN network.

4. Other players do not stand a realistic chance.

• Any winner of the NetCo layer other than the CMS Consortium will probably be squeezed to death by SingTel, unless the CMS consortium is somehow roped in at the OpCo layer without being awarded the NetCo. This is highly unlikely.
  
• Any independent winner of the OpCo layer that operates with open access without SingTel at the NetCo layer (e.g. Axia) will be absolutely crushed by SingTel, which would have a massive customer base to build its own Next Gen offering and no open access obligations.

D. Conclusions

Thus, it looks like the NGNBN is gradually evolving into a two-horse race. Despite the government's grand plans to create open access and to encourage a vibrant RSP market as well as promote competition along various parts of the telecommunications value chain, the economics of telecoms networking means that a multi-player industry structure looks unsustainable and that the current duopolistic structure will remain, with minor players along the RSP fringe.

I am personally open to considering arguments as to how the NGNBN will allow a third major player into the wireline telco landscape in Singapore. However I remain very skeptical of the possibility of a three-way (or multi-way) fight.

[Update: the NBN OpCo RFP has been released]