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.

SingTel, Starhub & M1: Analysts' Reactions to the Next-Gen NBN OpCo RFP

CIMB

Operational Separation requirements could significantly dilute the attractiveness of the OpCo to the incumbents.

• Operational Separation significantly restricts their flexibility in the allocation of resources and human talent across the OpCo & RSPs

There is “little incentive for bidders to offer sharply lower ICO prices to what incumbents are charging.”

• Greenfield entrant into the OpCo space faces a significant degree of risk because his OpCo grant depends largely on meeting adoption targets.
• 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.

NGNBN is essentially neutral for the telcos and downside is limited.

Credit Suisse

For incumbents, outcome looks neutral at best...

• At OpCo level it would be easier for infrastructure builders to drag their feet in truly offering open access.
• Receipt of OpCo licences for SingTel and StarHub would be unlikely to change the competitive dynamics materially.

… and more probably materially negative

• Additional player into the OpCo space willl begin chasing the existing broadband revenue pool.

Continue to prefer M1

• Upside potential since M1’s leased line costs could fall and it could defend cellular market share by becoming an RSP.

NGNBN OpCo RFP Released: OpCo to be "Operationally Separated," Receive Maximum of $250m Grant

The IDA yesterday released the RFP for the NGNBN OpCo (see here for more info about the NGNBN). One of the key features of the RFP is that the NGNBN OpCo is to be "Operationally Separated" from other entities. In comparison, it was earlier announced that the NetCo was to be "structurally separated." The following compares the two types of separation (click for full images).

The following are the key features of the Operational Separation Requirements of OpCo as released yesterday to the public, amongst other details:

Next Gen NBN OpCo shall be independent from its downstream affiliated operating units, including the following:

• 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’sBoard of Directors, Management and employees not to have responsibilities in any Affiliated Operator
• All remuneration and incentive schemes for the OpCo’sBoard of Directors, Management and employees not to be linked to the performance of Affiliated Operator(s)
• Ensure compliance with Operational Separation Requirements through the maintenance of a comprehensive governance manual, monitoring against a set of Operational Separation Performance Indicators, & appropriate reporting to the Monitoring Board (Source: IDA)
  

Key issues in the OpCo/NetCo separation

How will the government ensure that the costs of NetCo structural separation and OpCo operational separation do not outweigh the benefits to the economy from the separation? The government has said that the end goal in this NGNBN project is to have a "vibrant RSP market," and that the next gen infrastructure will provide "non-discriminatory prices and conditions." Yet it is not clear that these end goals necessitate the onerous layers of legislation and compliance requirements that structural and operational separation of the NetCo and OpCo respectively will require.

The IDA is also offering a grant of up to $250m to the winning OpCo bidder. This grant is ostensibly the carrot to entice private investment into this sector and to offset the OpCo separation requirements. And will it be enough?

In view of the multiple compliance requirements that the NGNBN will impose on incumbents, the best option for the incumbents (Starhub & SingTel) is to refrain together from participating in the NGNBN RFPs, and in the mean time invest in their own broadband infrastructures to compete the NGNBN out of business. Starhub would go ahead with its DOCSIS 3.0 investments (just like Comcast has just released) and SingTel would roll out its own FTTx infrastructure. With their entrenched customer base and bundling strategies, they would easily out-compete the NGNBN operators and retain their duopoly status. In contrast, participating in the NGNBN artificially introduces a competitive (and possibly unsustainable) market structure in addition to onerous regulatory requirements.

It will be interesting to watch the developments of this space and see how things develop.

[Click here for official information on the OpCo RFP release (Press release/Presentation Slides/Speech etc)]