SingTel's OpenNet Wins NGNBN NetCo Bid; Biggest Loser to be StarHub

OpenNet recently won the NetCo segment of the NGNBN. The consortium comprised Canada's Axia NetMedia, and Singapore's SingTel, SPH and Singpower Group. Although it might have been painted as a close "two-horse" race, I doubt if there were ever any questions as to who was going to win the bid. With the government putting up $750m to fund the NGNBN NetCo passive network, it could not afford to place its bets on the Infinity network, which would have faced stiff, cutthroat competition from SingTel, had the latter not won the tender.

And now that SingTel's consortium has won the bid, the long term outlook for StarHub doesn't look pretty. StarHub's franchise lies with its cable network and its strong programming line-up. It keeps customers and prevents churn by using its exclusive cable infrastructure to tighten its stranglehold on the telecoms market with strong triple & quadruple play packages.

But with the advent of the new NGNBN structure, StarHub will see this competitive advantage starting to erode. The open-access fibre infrastructure gives SingTel the advantage now. Despite holding only a 30% stake in OpenNet, SingTel has a huge revenue-share stake in OpenNet's revenues, due to its lease structure agreement with the newly-formed infrastructure company.

Furthermore, we can expect SingTel to move swiftly to rollout the new infrastructure and to start selling next-gen services in this market. The competition will force StarHub to lower prices on its cable franchise in order to prevent churn to the new SingTel fibre offerings. But that will be difficult, considering SingTel's assault on Starhub's cable network, most recently exemplified by MioTV's win of the Champions league broadcast rights.

Add to that SingTel's stranglehold and dominance over international internet gateways coming into Singapore (just try accessing youtube at peak hours over starhub and singtel, and you'll see the difference), and StarHub's cable internet is likely to suffer in the long run.

With the prospect of pricing pressure and heightened competition, Starhub doesn't look like the best stock in Singapore's telecom landscape. Furthermore, the company is almost exclusively focused in the Singapore market, unlike SingTel which has diversified investments in emerging markets overseas. Starhub will have to move quickly to reinvent itself in the light of latest developments, or it may continue to see its stock decline.

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[IDA] Selects OpenNet Consortium as its Network Company

By Anshu Shrivastava
TMCnet Contributing Editor

Axia NetMedia has announced that Infocomm Development Authority of Singapore (IDA) has selected the OpenNet consortium as its Network Company (NetCo).

As per the contract, OpenNet will provide passive fibre grid services for Singapore's Next Generation National Broadband Network (NGNBN).

Back in May, the company announced it entered into an agreement creating the OpenNet consortium. This OpenNet proposal is for the rights to provide passive fibre grid services throughout Singapore. The second is for the rights to provide the active Real Broadband services over the fibre grid.

At present, Axia has a 30 percent interest in OpenNet, while SingTel, Singapore Press, and SP Telecommunications taking up the remaining interest with 30 percent, 25 percent and 15 percent share, respectively.

“OpenNet's approach is future-proof with no compromises from either the technology or business structure perspectives for the passive segment of the network,” said Art Price, chairman and CEO at Axia NetMedia.

He also said in a statement that Axia now has references for the best in class next generation network (NGN) solutions for rural, regional and metropolitan communities. Based on open access no conflict principles, OpenNet plans to create the NGN solution.

According to the company, a key component of the solution involves OpenNet acquiring access to existing infrastructure through usage fees that vary with the market adoption of OpenNet's services.

OpenNet expects to complete the agreement contracting process with the IDA as planned, within the next seven months and expects that the Singapore-wide fibre grid will be completed by June 2012.

The company believes that when completed, OpenNet will provide Singapore with a “truly open, better and faster fibre-to-the-home network.”

This announcement is the first part of IDA's RFP process for a complete NGNBN. IDA said that the second part is the provision of active broadband services over the fibre grid.

SingTel, Starhub & M1: A Comparative Analysis

(Z74 = SingTel, CC3 = Starhub, B2F = M1)

SingTel

Singapore Telecommunications Limited, together with its subsidiaries, provides services and solutions in fixed, mobile and data communications, Internet, IT and consultancy, and satellite.

• Wireline services include cable-based and satellite-based fixed telecommunications network services, such as domestic and IDD services, leased lines, data communications, lease of satellite capacity, Inmarsat, and Internet services.
• Wireless services comprise mobile telecommunications services, such as cellular and paging services, and sale of handsets and pagers.
• Information technology and engineering services portfolio consists of information technology consultancy, systems integration, and engineering services.
• Other businesses include subscription television; technical and management consultancy services; ownership and chartering of barges; provision of storage facilities for submarine cables and related equipment; billing services; IT disaster recovery services; operation and maintenance of fibre optic network between Brisbane and Cairns; research and development of software; and managing and operating a call centre for telecommunications services.

Singapore Telecommunications provides its services to corporate and consumer markets primarily in Singapore and Australia. The company was founded in 1879 and is headquartered in Singapore, Singapore. Singapore Telecommunications Limited is a subsidiary of Temasek Holdings (Private) Limited.

SingTel also has extensive overseas investments in Mobile operators around Asia. These include Bharti Airtel of India and Telkomsel of Indonesia.

Starhub

StarHub, Ltd., an info-communications company, provides a range of information, communications, and entertainment services over its fixed, cable, mobile, and Internet platforms for residential and commercial customers in Singapore.

• Mobile services include 3G that enables users to make video calls and 3.5G that offers broadband Internet access over mobile phone; mobile voice services; mobile data services, including video downloads, Web SMS, MMS animation and wallpapers, MMS retrieval centre, Disney mobile, mobile ESPN premiership, and themes, as well as call, MP3, and true tones; green prepaid card; and roaming services.
• Cable TV services comprise operation of news, movies, entertainment, sports, music, and education channels.
• Broadband services include mobile and home broadband access, as well as other Internet services; and fixed network services comprise voice, data, Internet, and wholesale services for businesses.
• StarHub offers online value-added services, such as online music portal; email and broadband content filtering service, family access network, and anti-virus email scan services; data/Web storage services; corporate portal and IP-VPN solutions; and content creation and development solutions.

It is also involved in the sale of customer premise telecommunication equipment. The company was incorporated in 1998 and is based in Singapore, Singapore. StarHub, Ltd. is a subsidiary of Asia Mobile Holdings Pte., Ltd.

MobileOne

MobileOne, Ltd. provides cellular mobile communications services in Singapore. It provides

• a range of mobile voice and data communications services over its 2G/3G/3.5G network.
• international call services to mobile and fixed line users; and wireless broadband Internet services to home, office, and mobile users.
• a range of mobile voice, nonvoice, and value-added services on its cellular network and as an operator.

It has a network of operator-owned retail shops (M1 Shop) and operator-appointed distributor outlets in Singapore. As of December 31, 2007, MobileOne operated approximately 13 M1 shop outlets, as well as an e-shop, which sells mobile phones and accessories online. The company also had approximately 1,535,000 mobile customers comprising 856,000 postpaid customers and 679,000 prepaid customers.

In addition, it involves in the research and development of mobile telecommunications product and services, as well as provision of after sales support and customer services. MobileOne has a partnership with Vodafone to provide a range of wireless business products and solutions, as well as has a joint venture with PLDT (SG) Retail Service Pte, Ltd. to provide prepaid mobile services. The company was founded in 1994 and is headquartered in Singapore, Singapore.

Financials

The following is a comparative financial analysis of the three companies:

Profitability:



As can be seen SingTel has the highest margins whereas Starhub has the highest profitability ratios. However, SingTel has contributions from associates above the EBITDA line, so this skews the results.

Leverage & Multiples:



SingTel has the strongest leverage ratios. However it is also the most expensive, compared to M1 which is the cheapest stock, and has the highest yield.

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)]

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]

When "Competition" is Bad for Consumers: SingTel, the UEFA Champions League and the Economics of PayTV in Singapore

It has recently been reported that SingTel has won the rights to broadcast the UEFA champions league ("SingTel's UEFA coup a boon for fans?") on its new payTV offering, Mio TV, competing the programming rights away from ESPN Star Sports which broadcasts on Starhub's Cable TV.

This seems like good news to consumers - the prospect of increased competition might cause pay TV prices to drop. Indeed, the TODAY article continues to make the following comments:

And with three pay-TV broadcasters — the third being StarHub CableVision — now battling to bring English football and Uefa action to Singaporeans, fans are cheered at the prospect of improved content and lower subscription prices.

Said wealth manager Kelvin Tan, 28: "This should lead to more competitive rates. For a long time, there was only one player (ESPN Star Sports) in the market and viewers paid for a product that sometimes delivered a less-than-satisfactory standard of coverage."

However, these comments are misleading and demonstrate a lack of understanding of pay-TV economics; indeed, the propect of greater "competition" in the pay-TV market results in higher prices for consumers and greater inconvenience. Let me explain:

1. "Competition" causes the cost of programming rights go up, and this higher cost translates into higher retail prices for the consumer.

It is no secret that the three-way bidding for the English Premier League football broadcasting rights between SingTel, ESPN and StarHub caused the price of the programming to go up. StarHub eventually won the bidding war but was unable to keep the retail prices of the EPL programming constant, because the cost of its content had risen significantly. As a result, subscribers saw the amount they paid for the content go up.

Competition for the programming rights causes prices to go up simply because the content rights owner is able to exert its monopoly power over the programming and play the bidders off against each other in order to drive prices up. In contrast, if there were only one bidder at the table, that bidder would be able to exert counter-monopsonistic bargaining power in order to keep the cost of programming to a minimum. If the single bidder then passed this cost savings on to consumers, consumers would benefit with power prices than in a competitive bidding situation.

But in a three-way bidding war, the cost of programming always goes up, and the retail price of the programming can never be lower than in the case of a single payTV provider. This is even more aggravated when we have a player like SingTel in a 'must win' situation, trying to break into the pay TV market in Singapore. Such a player is willing to bid for the content at a non-profitable price in order to break into the market, thus sending the cost of content much higher than it should be.

2. Consumers now have to subscribe to multiple pay TV services (and pay more) to get the same content as before.

Die-Hard football fans who want to watch both the EPL and the Champions League now have to subscribe to BOTH Starhub CableVision AND Mio TV in order to get their entertainment, whereas before when ESPN was broadcasting the Champions League, a consumer only had to subscribe to ONE plan.

Now I don't care how much either payTV operator lowers prices, the NET COST to the retail consumer is definitely going to be higher if he subscribes to both plans than if he subscribed to just one plan. The reason is simple: the consumer now has to pay BOTH to rent the Cable infrastructure that Starhub has rolled out AND he also has to pay to rent the IPTV infrastructure that SingTel has rolled out. This is because the main cost of deploying payTV networks is the cost of deploying the communications infrastructure to the home of the consumer.

The marginal cost of distributing extra content over the same infrastructure is very low (close to zero). However, the cost of building an alternative infrastructure is, well, just about doubles the cost to the consumer. The consumer is unable to enjoy the benefits of economies of scale that would be available to him via a single payTV operator and his cost of programming goes way way up.


3. So What's the Solution?

If competition results in higher costs (and thus higher retail prices) than a monopoly (in this case this is an industry structure of a natural monopoly), yet consumers feel that they are not getting the best prices and best services through the monopoly, the solution is not more competition but better regulation. Regulatory bodies like consumer watchdogs and the Infocomms Authorities should step in to regulate the final prices and the quality of service in order to ensure that consumers are not short changed and that payTV operators get a fair return on investment.

But competition at the broadcast part of the value chain is definitely bad, it drives the cost of programming up. This is because the real monopoly - the monopoly over the program rights - is not broken by the introduction of competition at the distribution end of the value chain.

For me, the news of SingTel winning the rights to the Champions League is definitely bad news because in slightly over a year's time, I will not be able to catch the CL at home without paying significantly more than I currently am for my football entertainment.

Hence, I find it rather weird that people like Kelvin Tan and the writer of the TODAY article think it is good for them. This is a clear case where a company like SingTel has been able to hoodwink consumers without doing much.