Asia Pacific Telecommunications Insight - October 2012

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CONTENTS

Asia PacificTelecommunications INSIGHT

BMI’s monthly market intelligence, trend analysis and forecasts for the telecommunications industry across Asia Pacific

October 2012 Issue 77

Editorial Office:85 Queen Victoria Street,

London EC4V 4AB, UKTel: +44 (0)20 7248 0468

Fax: +44 (0)20 7248 0467www.businessmonitor.comwww.telecomsinsight.com

Regional focusExpect Slow LTE Growth In Emerging Markets ........................................................ 1

New ZealandStronger Vodafone NZ To Challenge TCNZ ................................................................................................... 2

Australia3G Still Relevant For VHA ...................................................................................... 2

Timor-LesteNew Licences To Introduce Competition ................................................................. 3

IndonesiaFoxconn Mulls Indonesia Factory ........................................................................... 4

PhilippinesDomestic Dominance Could Fuel Overseas Expansion ............................................. 4

MalaysiaFRiENDi Looks East .............................................................................................. 5

Thailand3G Auction On Track ............................................................................................. 6

VietnamResolve Skewed Competitive Landscape Before MNP............................................... 6

VietnamViettel Overseas Appetite Still Growing ................................................................... 7

CambodiaEmaxx-Excell Deal Long Over ................................................................................ 7

MyanmarStill A Major Risk For Entrants ............................................................................... 8

ChinaLenovo Makes Notebooks More Mobile ................................................................... 8

Private Investment For Chinese Telcos ................................................................... 9

China Telecom Eyes Future With Cloud Gaming .....................................................10

TaiwanEV-DO Upgrade To Boost APT ..............................................................................10

South KoreaVoLTE Launch Puts LTE In Mainstream ..................................................................11

Afghanistan3G Competition Heating Up ..................................................................................12

JapanVAS Leverages On Growing Mobile Data ................................................................12

IndiaVAS: Vital Revenue Driver ....................................................................................13

Aircel For Sale As Maxis Plans India Withdrawal .....................................................13

IndiaCable Digitalisation Behind Schedule .....................................................................15

BangladeshBangladesh Outlines 3G/4G Licensing Plans...........................................................15

Sri LankaUpgrade To Capitalise On Demand ........................................................................16

REGIONAL FOCUS

Expect Slow LTE Growth In Emerging MarketsIn light of growing demand for wireless broadband services and the abil-ity to spur growth in areas such as cloud computing, Philippine mobile operators Smart Communications and Globe Telecom are eyeing the launch of commercial LTE services in the near future, most likely before end-2012. The 4G service has been gaining traction in countries such as South Korea and Japan, but we do not expect the impressive adoption rate to be replicated in emerging markets. Instead, Indonesia's prediction that 4G will only see widespread adoption in 2014 is more in line with our view.

Smart Communications, which is already trialling LTE, sees com-mercialisation happening soon. The company is in the final stage of its network optimisation, which would give it more than 50,000km of fibre optic cables and the latest Single Radio Access Network, thereby providing backhaul to support its LTE services. BMI believes that it is important not to fully rely on the next generation LTE service to cope with data demand since the number of internet devices is expected to increase exponentially in the future. A robust and comprehensive fixed-line infrastructure would alleviate stress, particularly on spectrum, which is a scarce resource.

Meanwhile, rival Globe Telecom is ready to offer LTE services before end-2012 due to growing smartphone usage in the country. One of the main driving factors is China-made OEM sub-US$100 handsets, which has also spurred 3G adoption in China and other emerging markets.

Although Philippine operators do not publish 3G subscriber data, they provide figures on wireless broadband growth. At the end of March

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Strong Demand But Still Too SoonPhilippines Broadband Accesses By Technology (‘000)

Source: Operators, BMI

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Asia Telecommunications

www.telecomsinsight.com

New ZeAlANd

2012, there were about 3.303mn wireless broadband subscribers in the country, up by 24.7% year-on-year. By comparison, there were only 1.188mn fixed broadband subscribers, which increased by 11.2% over the same period. It is clear that mobile broadband services possess strong growth prospects. Besides tackling the issue of growing demand, LTE technology would also help operators use their spectrum allocations more effectively.

However, we do not see significant take-up for LTE services in the Philippines in 2013. Operators around the world are using a wide range of frequency bands to launch services, ranging from 700MHz to 2.6MHz. It is difficult for device manufacturers to cater to the broad range. Further, manufacturing costs remain high due to a lack of economies of scale.

BMI believes that 2014, as laid out by Indonesia's Ministry of Communications and Informatics, is a more realistic target. Despite strong growth in the Philippine mobile broadband market, it still represents a small portion of the total market. Indonesia is further behind, where most subscribers are using basic 2.5G GPRS data service instead of 3G. We believe that factors holding back growth in 3G will similarly plague the 4G sector.

Indonesia's conservative approach is also considering the impact on roaming, which could be a lucrative business for operators. How-ever, harmonisation in the South East Asian region is challenging due to a lack of coordination in previous allocations for services such as 2G, 3G and terrestrial TV. Given that the migration to digital TV in more countries in the region is only expected to complete in the next five years, which will then free up the 700MHz band, operators will continue refarming a range of frequencies to launch LTE services.

NEW ZEALAND

Stronger Vodafone NZ To Challenge TCNZVodafone New Zealand (Vodafone NZ) and Telstra announced on July 12 that they have reached an agreement for the sale of TelstraClear to the former for a cash consideration of NZD840mn (US$633mn). BMI reaffirms our view that the transaction is a good deal as Vodafone NZ will be in a better position to compete with Telecom Corporation of New Zealand (TCNZ) on multiple fronts while Telstra will be able to focus on restructuring its main Australian operation.

While Vodafone NZ is the country's leading mobile operator, it lags behind TCNZ in the fixed-line sector, particularly in terms of network infrastructure. The acquisition of TelstraClear fills the deficit, which will bolster Vodafone NZ's presence in the enterprise market, and allow the operator to offer a stronger telecoms solution in the retail sector. As previously highlighted, Vodafone NZ will have approximately 29% of the fixed broadband market, up from 13% before the acquisition, thereby closing the gap with leader TCNZ, which had 49% market share (as of June).

TelstraClear's sale price of NZD840mn well exceeded analysts' valuations, which ranged from NZD350-425mn, according to the Australian Financial Review. Telstra has announced that it will return about NZD490mn in cash to Australia via a pre-completion dividend, and it will be incremental to its previously stated guidance for excess free cash flow of AUD2-3bn.

In the past year, Telstra has been restructuring its operations in light of the changing Australian competitive landscape, driven by the country's National Broadband Network project. Telstra was the

first Australian mobile operator to launch LTE services, and it has been aggressively expanding into new high-growth businesses such as cloud computing and machine-to-machine, in addition to key overseas markets (India, Japan and Singapore).

The allure of New Zealand has been fading in light of the coun-try's limited growth potential and the distraction it has on Telstra's overall financial position. Additionally, the sale of AAPT’s con-sumer arm to iiNet by TCNZ in September 2010 meant that there is less incentive for Telstra to remain in New Zealand as a defensive mechanism.

The transaction is expected to complete in Q412, subject to the ap-proval by the New Zealand Commerce Commission, the Ministry of Business, Innovation and Employment and the Overseas Investment Office. While the acquisition means that there is one less player in the market, we still expect regulatory approval since Vodafone NZ will be able to better challenge TCNZ in the fixed telecoms industry.

AUSTRALIA

3G Still Relevant For VHAVodafone Hutchison Australia (VHA) has finally announced that it will launch 4G LTE services in early 2013, which will be almost one year later than Optus and two years after Telstra. Additionally, VHA will switch on its dual-channel HSPA+ 3G services in Sep-tember, which should help alleviate network congestions in light of burgeoning data demand. While rivals could benefit from their first-mover advantage, we believe that VHA is waiting for the LTE market to mature further (ie, cheaper tariff plans and more compat-ible devices) in order to target the mass market.

VHA has been struggling ever since its network succumbed to problems in early 2011. The operator lost 554,000 mobile subscrib-ers in 2011, and it reportedly lost another 120,000 in Q112. Parent company Vodafone has said that consumers' perception of VHA's network continues to suffer even though service issues happened more than one year ago, which is in line with our view that VHA could face difficulties in rebuilding consumer confidence.

The launch of HSPA+ services in September and LTE in early 2013 could restore some of the consumer confidence. Customers that require faster services could migrate to the newer networks, thereby reducing data demand on the existing 3G infrastructure. However, VHA still has to convince customers that upgrading to

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Mobile Fixed Broadband

Vodafone NZ TCNZ 2degrees Others

Equal FightNew Zealand Mobile And Fixed Broadband Market Shares (%), June 2011

Vodafone NZ’s fixed broadband market share includes TelstraClear’s 16%. Source: Commerce Commission

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TIMOr-lesTe

HSPA+ and LTE will be worthwhile and the networks will be more resilient to stress.

VHA's HSPA+ and LTE networks are forward-looking and in preparation for the future. However, 3G will not become irrelevant in the near future as the technology is more than suffice to meet most customers' near-term needs. The importance of 3G and VHA's emphasis on this technology can be seen from the operator's efforts to improve its network. According to VHA, it has spent AUD1bn on revamping its existing 3G network, and it also signed a memorandum of understanding with Optus in May to expand their existing network sharing agreement, which would enhance coverage and potentially halt subscriber loss.

As LTE matures, 3G services would become increasingly more affordable, and VHA could target the medium-to-lower end of the consumer spectrum. This would fit VHA's pricing strategy, unlike Telstra, which typically places on premium because of its wider network coverage.

TIMOR-LESTE

New Licences To Introduce CompetitionThe government of the Democratic Republic of Timor-Leste has an-nounced the award of two new telecommunications licences, ending the monopoly of Portugal Telecom-owned Timor Telecom. The two licences have been issued to Viettel Global Investment and PT Telekomunikasi Indonesia International (Telin). BMI expects the competitive dynamic introduced by the licensing of new operators to benefit consumers. However, given the small size of the market, we consider Timor-Leste to hold limited potential for operators.

The government initially awarded the licence to Digicel Pacific Limited, which has considerable experience operating in developing small island markets across the Caribbean, and Telin. Digicel had committed to launching GSM and 3G services to cover 91% of the population within four months.

However, it was announced on July 11 that Digicel has withdrawn its application without providing a reason. According to the tender process rules in the Request for Applications of April 12 2012, the applicant with the next highest score would be awarded the licence. In this case, it was Viettel, which had scored 0.5 points less than

Digicel out of 100 points.Viettel is committed to provide initial GSM and 3G coverage of

93% of the population and 95% in the next three months. Meanwhile, Telin has committed to launching services in under six months, with GSM and 3G access for 94% of the population.

Given Viettel's experience in emerging markets and Telin's ex-perience in Indonesia through sister company Telkomcel, we have a positive outlook for the commencement of services in Timor-Leste.

Portugal Telecom reported it had 616,000 subscribers in East Timor at the end of March 2012, up 16.8% y-o-y. Based on this figure, East Timor had a mobile penetration rate of just over 53% in Q112. BMI forecasts penetration will rise to over 58% at YE16, a forecast we previously upgraded when the end of Timor Telecom's monopoly was announced in April 2012. With the majority of Timor-Leste's population likely to have the option to choose between three mobile providers by Q113, BMI expects competition to change dynamics in the market.We expect the introduction of competition will benefit consumers through both lower prices and service innova-tion. Timor Telecom reported EBITDA margin of 55.7% in Q112, which is high for mobile markets, and indicates there is significant potential for downward movement in prices with the introduction of competition. In terms of service innovation, with all three providers expected to offer 3G mobile broadband services by Q113, the data market has strong growth potential from a reasonable base – Timor Telecom reported 17.7% of mobile service revenue derived from Q112 data.

Meanwhile, the government of Timor-Leste is also considering benefits beyond the consumer market–with ICT service availability to medical clinics, schools, agricultural management and other social areas outlined as an important benefit.

BMI shares the Timor-Leste government's outlook for the contribution of competition to social goals and consumer welfare. However, we believe that, with a population of just 1.154mn in 2011 (albeit expected to reach 1.6mn by 2016), potential financial rewards are limited. Financial reward will also be limited by low incomes–with GDP per capita of US$777 in 2011.

However, both new operators have experience of operating suc-cessfully in markets with similar incomes, geography and scale and as such are well positioned to maximise potential benefit from real growth in private consumption over the medium term, which BMI forecasts to average 7.5% 2012-2020.

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Number of Cellular Mobile Phone Subscribers ('000)

Number of Mobile Phone Subscribers/100 Inhabitants (RHS)

Limited Opportunities Despite LiberalisationTimor-Leste Mobile Market Forecast, 2009-2016

f = BMI forecast. Source: BMI, ITU, Portugal Telecom

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Trying To Halt The DeclineAustralia Subscriber Growth By Operator (‘000), 2009-2011

March and September data for Telstra and Vodafone Hutchison Australia are estimates. Source: Operators, BMI

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INdONesIA

INDONESIA

Foxconn Mulls Indonesia FactoryGiven the rising labour costs in the Chinese market, Foxconn is considering opening a new factory in Indonesia investing US$10bn to create a tech hub in the country. Indonesia is an attractive destina-tion, given its strategic location for shipping products to the rest of the world and its high domestic consumption which will create a strong local market. However, BMI believes the country's outdated infrastructure and unreliable power supply may cause problems for the company.

As the Chinese economy continues to expand, wages are rising rapidly, at double digit percentages for a number of years. French bank Nataxis estimates that within four years, the country's wages could match those of the US. This means that the country is becom-ing less competitive as a manufacturing hub and companies such as Foxconn are considering other countries as potential factory bases.

While the company has attempted a number of tactics to mitigate the effect of this rise on operating costs, such as using automated systems, where possible, and moving factories inland where labour is cheaper, the rises are slowly eating into profit, and hence the company is pursuing options for international expansion. It currently uses approximately 10,000 robots in routine assembly tasks in its production and has plans to expand this to 1mn. BMI believes that such tactics may be a sound way to avoid rising wage costs and may help it avoid the negative press associated with poor working conditions in China, which continues to blight the company.

BMI believes the Indonesian market has potential for Foxconn, given its strong domestic demand for electronics and huge market size: the country has the fourth largest population in the world. The country's producers association revealed that sales of consumer electronics reached IDR3.1bn in 2011 and is expected to rise to US$11.6bn by 2014 according to local analysts. Given this fast growth in consumption and the fact that Indonesia is fast becoming a manufacturing hub, BMI believes Foxconn will be keen to begin operations there.The company has considered opening a small fac-tory and later scaling up capacity, which we believe is a good tactic. Given strong domestic demand, it will be easy to scale up production as and when required. Also, given Indonesia's location, it would be easy to export to other markets in Asia and worldwide.

However, BMI cautions that the outdated infrastructure and poor power connectivity may pose problems for Foxconn. The country's poor infrastructure has been a challenge for manufacturers as slug-gish bureaucracy, low levels of government funding and high cor-ruption limit development of the PPP market, which the government has attempted to promote since 2005. BMI believes there needs to be more government reforms, such as facilitating the application and award of licences to roll out infrastructure projects.

However, as investors see China reaching saturation point, more companies will focus on Indonesia. There are steps in the right direction, which indicate that infrastructure is improving, with an’infrastructure bank' to finance projects to be established in 2013. However, BMI believes Indonesia still remains far off from becoming the consumer electronics hub we see in China.

PHILIPPINES

Domestic Dominance Could Fuel Overseas ExpansionAlthough the Philippine Long Distance Telephone Company (PLDT) has denied a media report that it is in discussion to acquire TV stations in Indonesia or Vietnam, BMI believes that it is still a possible scenario in the future as it would provide the country's largest telecoms operator additional revenues from alternative geo-graphical and sectorial markets, especially if it successfully invests in GMA Networks.

GMA Networks is the Philippines' second-largest TV broad-caster, and discussions between the firm and PLDT to strike a deal have taken place in the last decade with no success due to pricing disagreements. While PLDT already owns a stake in third-ranked TV 5, acquiring a part of GMA Network would match the telecoms operator's strategy of bolstering its content portfolio, thereby helping PLDT shift away from its traditional business model of providing basic telecoms services and countering the threat of over-the-top (OTT) service providers.

GMA Networks has confirmed that discussions with PLDT are ongoing and an agreement has not been reached (as of mid-June). However, PLDT is confident that a deal will be forged by end-2012 and the price tag would be less than the PHP100bn (US$2.3bn) mark

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Mobile Fixed-Line BroadbandGlobe Telecom PLDT

Firm Grip On The Telecoms Market

PLDT’s subscriber figures include Digitel. Source: Operators, BMI

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Growing MarketIndonesian Consumer Electronics Sales, Exports and Domestic (US$mn)

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MAlAysIA

previously mentioned by GMA chairperson.GMA Networks and TV market leader ABS-CBN reportedly

account for 60% of the Philippines' audience share with TV 5 in a distant third. Assuming that PLDT succeeds in acquiring GMA Networks, the combined market share of GMA Networks and TV 5 should top the market, thereby forming a duopoly with ABS-CBN as the second-ranked provider. While PLDT chairperson has said that it remains to be seen if the government would approve the acquisi-tion, a repeat of PLDT's purchase of Digital Telecommunications Philippines, which resulted in a duopoly in the mobile industry, with PLDT controlling 70% market share (see’ PLDT-Digitel Deal Approval, Conditions Mildly Dent PLDT's Dominance’, October 28 2011 ), is highly possible given the lack of an adequate and effective competition law in the country.

Eventually, PLDT could dominate both the Philippine telecoms and broadcasting industries, and BMI believes that this would pave the way for the firm to expand overseas with its enlarged scale and greater experience. Investing in another telecoms operator is the traditional model and could be seen as the more conservative ap-proach, but at present, the content market presents stronger growth potential. Consequently, we believe that it is possible that PLDT could look to invest in the broadcasting industries of Indonesia and Vietnam as growing affluence and improving connectivity would spur demand for content. The prospects are not limited to the broadcasting industry as other OTT services such as SMS over IP are becoming increasingly lucrative.

MALAYSIA

FRiENDi Looks EastMiddle Eastern mobile virtual network operator (MVNO) FRiENDi will launch services in Malaysia by the end of 2012. FRiENDi will partner with sovereign wealth fund Kumpulan Perangsang Selangor Berhad (KPS) to roll out services. Following its merger with MVNO Virgin Mobile, FRiENDi announced plans to expand services in the Middle East, North Africa, Sub-Saharan Africa and South Asia. BMI believes Malaysian mobile network operators (MNOs') receptive approach to MVNOs makes it a good market in which to begin operations in the region.

Malaysian MNOs have not treated MVNOs as a threat to their main business, unlike operators in other markets. MVNOs can serve as a useful addition to a mobile market, boosting competition while allowing MNOs to focus on new services, mobile content and up-grading networks. Malaysian MVNOs vary from low-cost options such as Happy Prepaid and Tune Talk while XOX and Merchantrade focus on foreign workers in the country. With more than 10 MVNO licences already in the country, BMI believes FRiENDi has selected a good market in which to start operations. While the market seems a little crowded, FRiENDi's long experience in offering services as an MVNO should see it find success in the Malaysian market.

KPS has invested in the mobile market through its subsidiary Perangsang Telco Sdn Bhd, which has entered into a partnership agreement with FRiENDi, Samena Telecom Limited and Ceres Tel-ekom Sdn Bhd through a 30% equity stake in Ceres. The company's entry into the Malaysian market can be immediate as Ceres already holds the licences needed to launch services. FRiENDi believes there is still significant opportunity to take a leadership position in Malaysia's MVNO sphere, stating both the FRiENDi and Virgin Mobile brands would be used in the launch.

Outside Malaysia, BMI believes the Thai market offers signifi-cant opportunities for FRiENDi, given the lower mobile penetration rate and smaller number of MVNOs in the market. However, much like Malaysia, the mobile market is already highly competitive. FRiENDi's experience should again hold it in good stead in Thai-land and, if welcomed by MNOs in the market, could bring more subscribers into the market.

While Pakistan, Bangladesh and India offer significant growth opportunities, regulatory difficulties will likely make these countries more difficult for service launches. In Pakistan the price of an MVNO licence increased from US$10,000 to US$5mn in October 2009, which only served to dissuade companies from entering the market as an MVNO. With low potential returns and a difficult political and business environment, the relative low risk and investment of launching as an MVNO was successfully removed by the increased price. Meanwhile, India's new regulations for the telecoms market includes introducing MVNOs into the market, but BMI does not expect licences to be made available in the near term and there is not yet any confirmation on when the National Telecom Policy will be enforced. Regulations in Bangladesh could also prove prohibitive.

Indonesia's mobile market has eight active operators and no cur-rent MVNOs. With growth expected to remain strong in the market, MVNOs could be important in ensuring lower cost services continue to meet subscriber needs. However, Tune Talk has already hinted it would be interested in entering the Indonesian mobile market, which could suggest a gradual opening up to new operators.

BMI believes FRiENDi and Virgin Mobile's experience in offering mobile services as MVNOs make them well suited to of-fering services in new markets. While Malaysia's market is already competitive, we believe the companies have a strong outlook as they expand services outside the MEA region.

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Opportunities For ExpansionMobile Penetration (%)

f = BMI forecast. Source: BMI, operators, regulators, World Bank (ITU)

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THAILAND

3G Auction On TrackThe much-delayed 3G auction in Thailand looks set to happen in October given the certainty provided by the empowered National Broadcasting and Telecommunications Commission (NBTC), al-though a last-minute postponement, similar to the one that happened in September 2010, could not be ruled out. BMI believes that the launch of 3G services will be a major boost to the three main mobile operators as well as the broader economy given the benefits to related industries such as consumer electronics and value-added services.

At present, the NBTC is still in the midst of finalising the details. Latest developments involve a revision to the spectrum cap for an operator from 20MHz to 15MHz and a potential increase in the re-serve price from THB4.5bn to THB6bn per 5MHz block. The total amount of spectrum up for grabs remains at 45MHz. Additionally, the regulator is considering requiring licence holders to roll out 3G services in all major city centres by March/April 2013 and allowing full licence fee repayment after five years instead of three.

The reduction in spectrum cap should prevent two operators from dominating the nascent market. Under the previous proposal, one of the licence holders could end up with only 5MHz of 3G spectrum while the other two control a combined 40MHz. By limiting each operator to 15MHz, we should see a balanced competitive land-scape. However, we continue to see the existing three operators – Advanced Info Service (AIS), Total Access Communica-tion (DTAC) and TrueMove – securing the spectrum given that strong presence in the Thai mobile market and current efforts to roll out 3G services by collaborating with the state-owned operators. Foreign operators are allowed entry, although we believe that the three well-established players and complicated regulators would deter interest. For example, the issue on foreign dominance has resurfaced and took effect in late July. Voluntary acceptance of the law has been made a prerequisite for any company that wishes to participate in the 3G auction.

AIS, DTAC and TrueMove are all currently offering 3G services, although only TrueMove discloses its operational results. At the end of June, the operator reported 2.029mn 3G subscribers, up from 1.119mn in March and 494,000 in December 2011. In addition to the strong growth momentum, TrueMove had a greater proportion of postpaid subscribers (1.268mn) than prepaid (760,000). Both 3G prepaid and postpaid ARPU are higher than that of 2G, which

is testament to the technology's higher revenue-generating ability. TrueMove reported 3G prepaid and postpaid ARPU of THB134 and THB615 respectively to give a blended ARPU of THB469. By comparison, its 2G service had a blended ARPU of THB90. The significantly lower ARPU is due to a greater proportion of 2G prepaid subscribers and the fact that 2G ARPU was only THB71.

VIETNAM

Resolve Skewed Competitive Landscape Before MNPVietnam's Ministry of Information and Communications (MIC) has announced that it plans to implement mobile number portability (MNP) in the country from 2014 in order to empower consumers and pressure operators to improve service quality. While BMI agrees with the fundamental benefits that MNP brings, we struggle to see the scheme realising the potential rewards based on the existing market situation.

Although the MIC started drafting the MNP guidelines in late 2010, details about the scheme remain scant. However, the ministry announced at the end of May that all mobile numbers will be centrally managed by its telecoms department instead of being partially managed by each network provider. The MIC claimed that the central numbers management method is being applied by as many as 70 countries worldwide.

Introducing MNP in Vietnam has the potential to slightly level the competitive landscape and provide a much-needed boost to the increasingly marginalised smaller operators – GTEL Mobile, S-Fone and Vietnamobile. The three firms account for about 5% of Vietnam's mobile market while state-backed operators Viettel, MobiFone and VinaPhone control the remaining 95%. Giving con-sumers the option to switch providers while retaining their mobile numbers could encourage subscribers of Viettel, MobiFone and VinaPhone to migrate to smaller operators, especially if smaller operators introduce competitively priced or tailored packages.

However, this scenario may not play out nicely. Firstly, we have seen MNP schemes in countries such as India, Thailand and China receive muted response due to factors such as slow porting process and the fact that subscribers own multiple prepaid SIM cards. Sec-ondly, larger operators could intensify the competition by matching

Viettel37%

MobiFone29%

VinaPhone29%

VimpelCom3%

Vietnamobile2%

S-Fone0%

MNP To Have Limited ImpactVietnam Estimated Mobile Market Share, June 2012

Source: VimpelCom, BMI

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Pent-Up Demand Spurring GrowthTrueMove 3G Subscriber Growth (‘000)

Source: True Corporation

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smaller operators' strategies, which is a relatively easy move given their significantly larger scale.

Thirdly, the Vietnamese mobile industry's competitive landscape could undergo significant changes in the next two years. The Viet-nam Posts and Telecommunications Group, parent company of MobiFone and VinaPhone, has proposed merging the two mobile operators in order to comply with a change in business law. A possible outcome is a merged entity that has strong competitive advantage such as more than 50% of the mobile market share and extensive telecoms infrastructure. This in turn could drive smaller operators closer to the brink of exit. South Korea's SK Telecom has already withdrawn investment from S-Fone while Russia's VimpelCom followed suit in April. Without the support of foreign investors, S-Fone and GTEL Mobile could face the same fate of as EVN Telecom, which struggled to generate profitability and was taken over by Viettel in early 2012, much to the disappointment of EVN Telecom's 3G partner Hanoi Telecom.

Consequently, the worst case scenario would be a duopoly in the Vietnamese mobile market, and we foresee MNP to have limited impact on consumer choices.

VIETNAM

Viettel Overseas Appetite Still GrowingA strong foothold in the Vietnamese telecoms market has allowed Viettel to continue on its global expansion plan. The operator, which already has a presence in Mozambique through a joint venture Mo-vitel, is eyeing the African region in light of low telecoms penetra-tion rates. With its low-cost business model, expertise in emerging markets and strategic expansion, BMI believes that Viettel is on track to fulfil its ambitious overseas foray.

Viettel announced in February that it plans to expand to three or four new markets with a total population of 100mn. It envisages that it will have 190mn subscribers outside of Vietnam by end-2012. The operator is one of the largest players in the Vietnamese telecoms market with 40.5% mobile market share, 21.2% 3G market share and 22.3% fixed-line market share. However, it faces strong competition from the Vietnam Posts and Telecommunications Group, which owns VinaPhone and MobiFone. Further, subscriber growth in the Vietnamese telecoms sector has slowed in light of market satura-

tion, and the transition to more expensive services such as 3G and postpaid subscriptions has been lower than expected.

Viettel, which currently has operations in Cambodia, Laos, Haiti, Peru and Mozambique, has fared well in its overseas expansion. The operator is among the market leaders in Cambodia and Laos due to its tactic of providing extensive network coverage and aggres-sively priced tariff rates. This model has been replicated in other emerging markets such as Mozambique, where Viettel announced that it intended to provide 95% network coverage just one year after securing its licence. The operator appears to have met a significant proportion of this target as its statement in May revealed it had laid 12,600km of fibre optic cables (70% of total) and built 1,800 base stations (50% of total).

Armed with the experience of operating in an African market, it is a natural progression for Viettel to expand into other similar countries in the region. According to an interview, Viettel Global has said that Sub-Saharan countries have an average of 140km fibre optic cable per 1mn people, which is one seventh of the global mean. Viettel would bring significant investments into a country's network infrastructure while spurring service adoption by introducing greater competition. This means that governments would be receptive to its entry, which opens up many opportunities in the African region.

BMI believes that there were 547mn mobile subscribers in Africa at the end of 2011, and we expect this number to increase to 860mn by 2016, representing a compound annual growth rate of 9.5%.

CAMBODIA

Emaxx-Excell Deal Long OverDigital Star Media’s planned acquisition of Cambodia's GT-Tell, which operates under the brand Excell, collapsed in February, al-though this news has only just come to light. While this development is a blow to the mobile market given its overcrowded landscape, BMI reaffirms that the short-to-medium outlook would not have been promising even if the deal had gone through, as Digital Star Media had planned to focus on 4G technologies.

In July 2011, the Phnom Penh Post reported that Digital Star Me-dia, which operates under the brand Emaxx, was in talks to acquire GT-Tell for an undisclosed sum. Digital Star Media planned to offer both WiMAX and LTE services in the Cambodian market, and it believed that the country's only CDMA operator would complement its strategy in terms of technological advancement. Digital Star Media originally planned to purchase GT-Tell's 28 mobile towers in all 24 Cambodian provinces.

It was revealed in January 2012 by Digital Star Media's then-CEO Frank May that the company was still conducting the due diligence process. No reasons were given for the subsequent collapse in February. Regardless, we would have maintained our view that the Cambodian market is not ready for next generation mobile technolo-gies, much like many emerging markets in the region.

While data from Cambodia's Ministry of Post and Telecommu-nications as well as mobile operators suggest that the penetration rate has exceeded 100%, the market still exhibits signs of relative immaturity. For example, we believe that majority of subscribers are using prepaid subscriptions and that 3G is still an underused and expensive service. Theoretically, WiMAX and LTE are ideal for bringing internet access to a large proportion of the population in a cost-effective manner. However, BMI believes that there is a lack of demand necessary to make Digital Star Media's plan commercially viable in the near term.

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Opportunities GaloreAfrica Mobile Subscriber Forecasts (‘000), 2010-2016

f = BMI forecast. Source: Regulators, operators, BMI

8



MyANMAr

4G-compatible mobile devices have yet to reach the required number to reap economies of scale, partially due to the wide range of frequencies used. The situation in Cambodia is further exacerbated by language and cultural barriers, and a lack of awareness of the benefits of internet accessibility.

Digital Star Media has not disclosed its strategy following the unsuccessful acquisition of GT-Tell. The operator could continue focusing on WiMAX, although the technology is being increasingly marginalised on the global scale. Mergers and acquisitions are still a possibility, but BMI believes that it is more likely Digital Star Media now becomes a target for a larger mobile operator such as Smart Mobile or Metfone.

Meanwhile, the outlook for GT-Tell continues to look unsus-tainable in the long term. Besides being the only CDMA opera-tor, local media reported that its subscriber base has stagnated at around 40,000 (BMI estimates that GT-Tell had 42,000 mobile subscribers in March). By comparison, market leader Metfone saw its subscriber base double between March 2011 and March 2012 to 8.2mn, although we caution that the number could be inflated through the inclusion of inactive accounts. We continue to see a need for consolidation in the Cambodian mobile market, and highlight the benefits of merging networks and services. In June, Smart Mobile announced that its subscriber base has crossed the 3mn mark, an achievement that we believe was aided by the acquisition of previ-ously TeliaSonera-owned Applifone (marketed as Star-Cell) in December 2010.

MYANMAR

Still A Major Risk For EntrantsMyanmar announced in July that it is working on a reform plan to bring affordable telecommunications services that are on par with international standards. It is also looking for consultants to facilitate the industry liberalisation process, which would in turn open up the market to interested foreign companies. While the Myanmarese tel-ecoms market harbours significant long-term growth opportunities in light of years of isolation, BMI holds firm to our view that there is too much uncertainty at the moment, which poses myriad risks.

The minister of communications, posts and telegraphs, Thein Tun, has announced that state-owned telecoms operators Myanmar Post and Telecommunication and internet service provider Yat-anarpon Teleport are planning to form joint ventures with local and international firms, which is in line with our view previously stated

in our special report. Having a local partner is important because the international community has little knowledge about the Myanmarese business practices and consumer preferences, in addition to helping to reduce bureaucratic red tape.

However, selecting a competent local partner in a frontier market is a challenging task. The monopoly of Myanmar Post and Telecom-munication and Yatanarpon Teleport means that there is a lack of options for international players. Further, Investor protection and general legal framework are also particularly lacking in Myanmar, even when compared with potential’peer' states such as Vietnam, Cambodia, and Laos. Given the catatonic state of Myanmar's legal system, it would be extremely difficult to prevent unwanted transfer of technology and/or intellectual property to a local partner that may be inclined to break contract.

The ministry has highlighted it is drafting a new communica-tions law, which should address some of the legal and regulatory concerns. However, the robustness of legislation and the govern-ment's willingness to enforce laws are separate issues, especially for the latter considering the problem of cronyism, corruption, and government and political agendas, which are particularly prevalent in emerging economies.

BMI expects telecoms operators that have vast experience op-erating in emerging markets to have the greatest chance of creating a profitable business in Myanmar. These would include companies such as Vietnam's Viettel, which has presence in Cambodia, Laos, Peru, Haiti and Mozambique, and Telekomunikasi Indonesia, which recently acquired a mobile licence in Timor-Leste. We expect less interest from operators in developed countries such as Telenor, Vodafone and Axiata, many of which have suffered setbacks in emerging markets recently due to regulatory uncertainties and intense competition.

CHINA

Lenovo Makes Notebooks More MobileChinese consumer electronics manufacturer Lenovo has announced it will provide wireless access for consumers who use its Think-Pads. The company's 3G-enabled notebooks will be able to access Lenovo's Mobile Access services, providing global wireless access for consumers. Mobile Access will be available in nine European

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Significant Barriers To Realising PotentialMyanmar Mobile And Broadband Subscriber Forecasts (‘000), 2009-2016

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Metfone, 8,200

Excell, 42hello, 1,978

Mfone, 414

Beeline, 1,078

Cambodia Advance

Communications, 90

Mobitel, 2,600

Smart Mobile, 2,400

Unsustainable SituationCambodia Estimated Mobile Market Subscriptions (‘000), March 2012

Only Beeline and hello provided March 2012 data. Source: MPTC, operators, BMI

9



ChINA

countries and the US with prepaid and postpaid options available to subscribers. With mobile broadband continuing to grow quickly, BMI believes the vendor's response to the trend is apt, and will help the company's strong growth continue.

Lenovo's network will see it become a mobile virtual network operator (MVNO), offering wireless services without owning the network on which it operates. Local network operator partners have not been announced. However, Lenovo's new service will be launched in partnership with Macheen, which will provide the mobile broadband platform for Mobile Access. As Lenovo is not a mobile operator, the partnership allows it to concentrate on its own area of expertise, leaving network and cloud services to Macheen.

Lenovo's largest sales are in the notebook sector, and the com-pany continues to gain over half its sales and revenues from these products. However, the growing importance of mobile devices such as smartphones and tablets to the company seems to have led it to push a strategy of wireless connected devices. BMI believes the 3G-enabled ThinkPad proved popular in markets where it has launched, although we believe the company would have seen great success with the service in emerging markets.

Lenovo's plans for the products seem squarely targeted at the corporate market, with the vice president and general manager for the ThinkPad business unit highlighting the need for corporate customers to stay connected anywhere and at any time. Although Lenovo talks about consumers also using the Mobile Access product, we believe the company aims to appeal to business users that wish to be con-nected regularly. However, BMI believes that the usage allowance may be restrictive for some business users, with the 3GB heavy usage limit over a month in Europe seeming low for customers that may be used to unlimited data usage. We believe the product aims to be an additional form of connection for enterprise users, rather than a user's sole broadband connection, allowing for downloading

of large documents and potentially streaming bandwidth-heavy content. However, the prices are competitive and allow a degree of flexibility that will suit many users.

BMI welcomes Lenovo's move to provide customers with 3G broadband products. The initial roll-out is in the US, UK, France, Germany, Ireland, Italy, Austria, Belgium, Denmark and the Neth-erlands.

Private Investment For Chinese TelcosChina's Ministry of Industry and Information Technology (MIIT) has announced plans to allow private investment in the country's telecoms industry. The move could be the biggest shake-up to the industry since telecoms operators were merged by government decree in 2008. With control of telecoms companies to remain in state hands, BMI does not expect the market's trajectory to change significantly, but we believe private investment may prove a boost to competition.

The MIIT requires that state-owned companies must hold the largest shares in the companies if private investment is to be allowed. Potential investors will also be required to have a registered capital of at least CNY2bn. With China's telecoms industry, particularly broadband and mobile services, expected to see continued strong growth, BMI expects there to be strong interest in acquiring a slice of China's largest telecoms operators. However, limits on foreign ownership of China's telecoms companies remain in place.

Since the three main telecoms companies were merged to be multi-service players in 2008, the Chinese telecoms market has been largely stable. Operators have taken advantage of the apparent unending demand for mobile services, reporting strong growth and increasing interest in new services such as 3G and mobile broadband. With continued potential for growth, there have been few changes to the market's dynamics, as operators have found new subscribers to take up services with a growth rate that has slowed only slightly.

These factors make the telecoms market an attractive prospect for investors. While any company hoping to gain access to the telecoms market will not have a controlling stake in operations, the continued growth prospects make good investment sense in current conditions. A lack of control over operations could prove a disincentive for some players, but BMI expects the telecoms players' strong financial performance to be enticing.

The Xinhua News Agency reports an MIIT official as saying that the pace of enacting regulations will be sped up and new measures will be introduced to encourage private capital to enter the market with the aim of providing a good environment for competition. While BMI believes that new regulations could help encourage investors, the state retaining control of these companies remains a negative point for the industry. As more details of how private companies will be able to enter the market and any possible improvements

Notebooks56.5%

Desktops33.4%

Mobile Internet and Digital Home

5.0%

Other5.1%

Portable Devices Demand Mobile ConnectivityLenovo Volume Sales By Device, FY2012

Source: Lenovo

LENOVO'S MOBILE ACCESS PRICINGUSA UK Europe

Download limit Price (US$) Download limit Price (GBP) Download limit Price (EUR)

30 minutes 100MB 1.95 40MB 0.69 100MB 3.99

1 day 250MB 8.95 250MB 1.99 250MB 4.99

1 month (moderate) 2GB n/a 2GB 13.99 500MB 14.99

1 month (heavy) 6GB n/a 7GB 24.99 3GB 39.99

n/a = not available. Source: Lenovo, ZDNet

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TAIwAN

to competition are released, we will consider improving China's Industry Risks score. However, at present, we see little real change to the market's outlook.

China Telecom Eyes Future With Cloud GamingChina Telecom and Taiwan-based fixed-mobile convergence appli-cations provider Ubitus announced in June that they have formed a partnership to deliver cloud gaming services to internet-connected TVs in China. BMI believes that there are several important factors that could bring success to this collaboration, which include China Telecom's fixed broadband market leadership, local regulations pro-hibiting gaming consoles and strong demand for internet-connected TVs in China.

Unlike 3D TVs, which have suffered languid consumer demand due to factors such as limited content and poor viewing experience, internet-connected or smart TVs are more well received as consum-ers can combine multiple online services (for example, social media and online videos) on a single platform. Under China's policy for fixed-mobile convergence, the Chinese internet-connected TV mar-ket is expected to expand to 53mn by end-2013, and cloud gaming is another feature that could help spur demand for internet TVs.

We have recently seen major TV manufacturers establishing partnerships with cloud gaming service providers. In early June during the Electronic Entertainment Expo conference, Samsung Electronics signed a deal with Gaikai to stream gaming titles written for Sony’s PlayStation 3 and Microsoft’s Xbox 360 to its smart TVs, thereby eliminating the need for consumers to pur-chase separate dedicated gaming consoles. Similarly, OnLive announced at the same time that it was adding LG Electronics’ smart TVs to the number of platforms that could run its cloud-based gaming system.

Cloud gaming carries out the processing and video rendering in the cloud, which is then streamed to users, thereby removing the need for a gaming console. This method of bringing gaming to Chinese consumers could become a lucrative business as Chinese regulations prohibit the sales of consoles such as the PlayStation, although units are available through the grey market. Ubitus' GameCloud platform will be launched on October 1, and we expect China Telecom to enjoy exclusivity.

China Telecom is the country's largest fixed broadband provider

with 81.45mn subscribers at the end of April. The operator is cur-rently in the midst of deploying the world's largest fibre optic network and it plans to grow its fibre broadband subscriber base to 100mn by 2015. Although most of the intensive processes are handled in the cloud, high-speed broadband connectivity is still required to deliver a seamless and low-latency cloud gaming experience to consumers. Consequently, we believe that China Telecom is well placed to help drive development in the cloud gaming market.

As cloud gaming eliminates the need for consumers to purchase a gaming console, thereby reducing cost, the combined cost of an internet-connected TV and high-speed broadband connection could still be beyond the reach of majority of the consumer market. The cloud gaming market is also still at its infancy, and at the current stage where quality such as frame rates and response time are inferior to console gaming, we do not expect serious gamers to be swayed.

TAIWAN

EV-DO Upgrade To Boost APTAfter repeated delays, Asia Pacific Telecom (previous Asia Pacific Broadband Wireless) announced in June that its new CDMA2000 1xEV-DO mobile broadband service will be launched on October 1. BMI believes the upgrade, as well as the potential introduction of attractive smartphone models, could help reverse the operator's declining 3G subscriber base, although there are limitations to its growth potential.

Asia Pacific Telecom is the only CDMA2000 operator in Taiwan, although it competes with Chunghwa Telecom, Taiwan Mobile, Far EasTone and VIBO Telecom in the country's overall 3G sec-tor. However, along with VIBO Telecom, Asia Pacific Telecom lags behind the remaining operators as they also offer 2G services. Asia Pacific Telecom reported 3mn 3G subscribers in April 2011, up from 2.6mn in June 2010, but it has seen limited growth since then. Instead, the operator said that its subscriber base declined to 3.05mn in June from 3.1mn in February.

The decrease in the number of subscribers has been attributed to the delay in rolling out its new EV-DO service, which is about one year behind schedule. As of March, Asia Pacific Telecom had upgraded more than 600 CDMA2000 to EV-DO, and another 2,000

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Outside Investment To Give Market A PushChina Telecoms Growth Forecasts (%)

f = BMI forecast. Source: BMI, MIIT

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sOuTh KOreA

are scheduled to be upgraded in Q312. According to Asia Pacific Telecom, the CDMA2000 1xEV-DO infrastructure gives the opera-tor a cost advantage over its rivals. In order to achieve 80% popula-tion coverage, Asia Pacific Telecom would need to deploy 2,500 base stations, while its W-CDMA counterparts would need to roll out 6,000-8,000 base stations. Additionally, Asia Pacific Telecom plans to partner with China's CDMA2000 mobile operator China Telecom to jointly procure handsets to further lower cost.

This would allow Asia Pacific Telecom to target more cost-conscious consumers and those who have yet to make the transition to smartphones. The operator plans to procure 1.1mn handsets in 2012, of which 20-30% will be smartphones. Further, Asia Pacific Telecom was negotiating a deal with Apple to sell a CDMA variant of the iPhone, and BMI believes that this could become a reality in the near future given that China Telecom secured an agreement to sell CDMA iPhones in China in February. However, this is de-pendent on Asia Pacific proving that its network can cope with a surge in data use.

Due to its smaller scale when compared with the likes of Chun-ghwa Telecom and Taiwan Mobile, as well as a different mobile technology, it would be difficult for Asia Pacific Telecom to become the market leader in terms of subscriber. The operator also recognises the limitations as it envisages 4mn 3G subscribers in 2014. However, the strategy of targeting the low-to-middle segment of the market could still profitable.

SOUTH KOREA

VoLTE Launch Puts LTE In MainstreamTwo of South Korea's mobile operators, SK Telecom and LG Up-lus, launched high definition (HD) voice services on their new LTE networks on August 8. The launch puts the two operators among the first in the world to offer voice over LTE (VoLTE), sharing the accolade with US operator MetroPCS. LTE rollouts have so far been concentrated on offering high-speed mobile broadband services, with voice services provided over older 2G or 3G infrastructure. BMI notes that the announcement is another boost to the South Korean telecoms market, maintaining its position as a global innovator.

Unsurprisingly the first mobile handset on SK Telecom's network to offer VoLTE calls will be from fellow South Korean company

Samsung, over the latest of its Galaxy S smartphone range. While LTE-enabled handsets have been available for some time, calls are routed over older infrastructure, which operators will eventu-ally want to retire. With the majority of South Korean subscribers using 3G infrastructure, shutting down these networks is a far-off prospect. However, VoLTE offers consumer benefits such as higher quality calls and reduced time to connect calls, providing a better experience for subscribers on the service that is still fundamental to mobile telecoms services.

Since the end of 2011, South Korea's mobile operators have begun reporting their subscriptions by technology. The market's penetra-tion rate reached 110% at the end of 2011 and BMI forecasts slow steady growth in subscriptions over our five-year forecast. Data from operators show the market adds few new subscribers each quarter, but what is changing is the choice of technology. Given that all three operators have launched LTE in South Korea, it is a good market to observe the change in subscriber behaviour. Although we only have technology generation data for three quarters, there is already an emerging trend in the market.

Early adopters, who would have been among the first to sign up to 3G services when they were launched, have quickly moved to LTE services. This has led to a decline in 3G subscriptions in the market, as 2G connections remain more stable. That is not to say 2G connections will not decline, with KT having reported an 81% decrease in 2G subscriptions in the H112, and LG Uplus no longer providing 2G services to its subscribers. SK Telecom remains the largest provider of 2G services, but connections fell below 6mn in June 2012 and will continue to decline. Operators are keen to retire their 2G networks, in order to reuse spectrum and also cut operating costs from maintaining different infrastructure.

3G remains by far the dominant technology in South Korea and BMI does not forecast this declining rapidly. The cost of ownership for 4G remains high as operators seek to capitalise on those subscrib-ers keen to acquire the latest high-speed services and are willing to spend to have access to the newest products. BMI expects price competition and new services will be key to encouraging continued growth in 4G over the long term, but believes many subscribers will remain happy with their 3G connections while prices for LTE are high and the range of devices limited.Although we do not expect VoLTE to change the rate of 4G growth in South Korea's mobile market in the near term, we believe it will be considered a positive development among the early adopters of LTE in the market, and should boost operators' reputations for offering the latest technolo-

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Positive Growth ExpectedTaiwan 3G Subscriber Forecast, 2009-2016

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AfghANIsTAN

gies. Ultimately, we believe services and content combined with the right pricing will be the greatest drivers behind LTE growth.

AFGHANISTAN

3G Competition Heating UpThe Afghanistan Telecom Regulatory Authority (ATRA) awarded the country's second 3G licence to MTN Afghanistan on June 20, three months after rival Etisalat launched its network. More licences are expected to be awarded with remaining mobile opera-tors expressing interest, according to the regulator. BMI believes that the added competition should provide a much-needed boost to the country's telecoms industry, particularly in lowering the cost of accessing the internet.

The ATRA invited bids for 3G licences in August 2011 but dis-qualified potential new entrants Sahar 3G, Toseye Eatemad Mobin and Shezai Tel USA as they were deemed to have failed to meet the requirements. Sequentially, the licences are to be awarded to exist-ing GSM operators, namely Etisalat, MTN Afghanistan, Afghan Wireless Communications (AWCC) and Telecom Development Company Afghanistan (Roshan), as per the approval of the min-isters' committee for the telecoms sector and 3G tender conditions. Both licences that have been awarded cost US$25mn each, and the price is expected to be the same for Roshan and AWCC.

MTN Afghanistan expects to launch 3G services by mid-July, although BMI believes that coverage would be limited. At launch, Etisalat's 3G services were only available in Kabul, but the opera-tor expanded coverage into Jalalabad in June. The rapid commer-cialisation of 3G services indicates that operators have already been upgrading their equipment and networks. If the ATRA awards the remaining two licences in the near future, we expect commercial 3G services from all four operators by end-2012, which presents an upward risk to our Afghanistan 3G subscriber forecast.

We believe that the existing high prices for internet services will provide significant demand for 3G. According to the Ministry of Communication and Information Technology, the internet price for 1MB of data per month fell by 67% from 2011 to 2012 but remains a prohibitive US$300. During this period of time, the number of internet users increased from 1mn to 2mn. Meanwhile, Etisalat's 3G plans vary from AFN499 (US$10) a month for 1GB of data (smart-phone) to AFN899 (US$19) for 4GB of data (USB dongle). Given a level playing field–each 3G licence costs US$25mn and individual operator's market share is about 22-29%–we expect competitive 3G pricing, which would further spur adoption.

At present, we forecast 1.146mn 3G subscribers in the country at the end of 2016, up from 50,000 in 2012. However, the potential large-scale availability of affordable 3G services could result in rapid subscriber growth. That said, development is dependent on opera-tors being able to expand their networks, a situation complicated by doubts surrounding the country's security.

JAPAN

VAS Leverages On Growing Mobile DataThe increasing adoption of smartphones and mobile data plans, as evident from NTT DoCoMo’s announcement in June that it has secured 3mn LTE subscribers, is posing a direct threat to mobile

operators' traditional voice and SMS businesses with the availabil-ity of over-the-top substitutes. Constant expansion of value-added services (VAS) are therefore necessary to ensure that operators are able to extract more value from the technological capabilities of modern mobile devices and the connectivity provided by their mobile networks.

NTT DoCoMo reported 2.923mn LTE subscribers at the end of May, up from 2.225mn in March, and this number crossed in the 3mn mark on June 13. So far, the growth trajectory has been promis-ing in light of the mobile market leader's first-mover advantage and technology-savvy Japanese consumers, and we expect the momen-tum to accelerate with increasing coverage and the availability of more compatible handsets.

NTT DoCoMo's mobile data ARPU has exceeded voice ARPU since the quarter ended March 2011. In the quarter ended March 2012, the operator reported a data and voice ARPU of JPY2,700 and JPY,1980 respectively. However, the replacement has not been perfect as NTT DoCoMo's blended ARPU continues to trend lower, reaching JPY4,680 in the first quarter of 2012, down from JPY4,760 in the same period in 2011.

In order to better monetise its mobile data service, NTT DoCoMo has been expanding its VAS portfolio. The latest attempt will see NTT DoCoMo increase its stake in Tower Records Japan from 42.1% to 50.3%. Tower Records Japan gained independence from its now-bankrupt parent Tower Records in 2002, and it is now sell-ing CDs and DVDs through 89 stores in Japan. By turning Tower Records Japan into a subsidiary, NTT DoCoMo aims to integrate its subscriber base of 60mn subscribers and mobile portals with Tower Record Japan's online business.

Tower Records Japan previously partnered with Napster to cre-ate a joint venture offering consumers an online music streaming service. However, the collaboration was shut down in 2010 after the companies struggled to recoup the cost needed to maintain the service. NTT DoCoMo has announced that it aims to strengthen Tower Records Japan's online sales of CDs and DVDs, and other e-commerce business in addition to in-store sales, but we believe that a foray into the online streaming music is a possibility.

NTT DoCoMo's existing mobile portals would ensure that a new online music service would have a slimmer cost structure as well as an instant target audience of 60mn (NTT DoCoMo's mobile subscriber base comprises entirely of 3G and 4G subscribers). NTT DoCoMo could also widen its target audience by ensuring that the service is compatible across several platforms such as Android and

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Growth Could AccelerateAfghanistan 3G Subscriber Forecast, 2009-2016

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INdIA

iOS in order to generate revenue from subscribers of KDDI and Softbank.

Tower Records Japan's brand awareness and working relationship with music labels should help prevent a similar fate as the venture with Napster. However, NTT DoCoMo and Tower Records Japan are still up against established players such as Apple and Amazon. BMI believes that the key would be a seamless integration between the music service and subscribers' mobile devices.

INDIA

VAS: Vital Revenue DriverIndia's mobile value-added services (VAS) market is expected to reach INR332.8bn (US$6bn) in 2013, according to the Internet & Mobile Association of India (IAMAI), which reaffirms the need for operators to expand their product portfolio and adapt to the growing trend of declining voice service usage.

In collaboration with the e-Technology Group (a specialist unit of IMRB International), the IAMAI reckons that India's mobile VAS market will grow by 32% in 2012 to reach INR260bn before increasing by another 28% in 2013. At present, mobile VAS ac-count for 27% of Indian operators' ARPUs. However, using trends seen in other countries as a benchmark, we expect the percentage to increase mainly due to the adoption of mobile internet services. Voice ARPUs, which have been declining due to aggressively priced tariff rates, will be hit with a double whammy as customers opt for alternative forms of communication such as social networking. Ac-cording to IMRB, voice services are envisaged to contribute INR64 towards operators' ARPUs in 2012, representing 73% of the total, down from 87% in 2009.

The IAMAI report has broadly separated mobile VAS into current and emerging. The former comprises services related to astrology, entertainment and cricket, and consumers are familiar with these due to the ease of accessing the popular information. Meanwhile, emerging comprises healthcare, education, governance and bandwidth-intensive applications such as video and games. As smartphone and 3G adoption in India are being held back by myriad factors such as regulatory and cost, emerging VAS will only gain traction in the future.

According to IMRB estimates, caller ring back tones (CRBT) account for the bulk of VAS at 27%. However, it was not revealed if it represented a percentage of revenue or usage. SMS-based VAS

was second with 17% due to the dominance of feature phones in the Indian mobile market. News (14%) and reverse CRBT (5%) made up the remaining parts of current VAS pie.

As the VAS market grows, operators will increasingly face the issue where over-the-top content providers direct revenue straight from customers. This is being played out in countries such as South Korea where mobile VoIP services cannibalise on network operators' voice revenue. Additionally, the growing popularity of smartphones will also see operators competing with companies such as Apple and Google, providers of operating systems and application platforms. The likes of the App Store, Google Play and Research In Motion’s App World again channel revenue away network providers.

However, Indian operators can avoid being marginalised by partnering with promising VAS providers and develop a revenue- and cost-sharing business model. Attractive exclusive content, as well as streamlined transparent billing, would be important to build brand loyalty in an intensely competitive mobile market, in addition to spurring demand for mobile data services, the next key revenue generator. Localised content and interfaces are equally vital in an industry where majority of customers are English-speaking. This is particularly true in rural India, where there is a deficiency in basic services such as banking and information (for example, prices on crops and weather forecasts).

Aircel For Sale As Maxis Plans India WithdrawalMalaysia-based Maxis Bhd is reportedly considering selling its

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Growing ImportanceVoice And VAS ARPU Contribution (INR) And VAS By Service (below)

CRBT, 27%

SMS-Based, 17%

News, 14%

Reverse CRBT, 5%

Mobile App, 10%

Games, 8%

Education, 7%

Health, 7%

Governance, 5%

f = IMRB forecast. Source: IMRB – I-CUBE

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More VAS To Capitalise On DataNTT DoCoMo LTE Subscriber Growth, 2010-2012

Source: NTT DoCoMo

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INdIA

74% stake in Indian mobile network operator Aircel, as political, economic and regulatory pressures begin to weigh on the business' performance and India becomes a less convivial prospect for foreign investors. Russia-based Sistema has been named as a potential buyer, but that company – along with other interested parties – also faces the prospect of being peremptorily thrown out of the Indian mobile market and may be unwilling to risk further investment at a time when the country's regulatory regime remains fluid and highly politicised.

At the end of 2005, Maxis and the Reddy family acquired a con-trolling stake in Aircel from Indian entrepreneur C Sivasankaran for US$1.08bn. Under Maxis' ownership Aircel has grown to become the seventh largest mobile network operator in India, although as of Q112 its 64mn subscribers gave it a market share of just 7%. Its 2G/2.5G GSM/GPRS networks are operated in all of the country's 23 telecoms’circles' and its 3G licences give it direct access to 13 circles. It also holds 4G broadband wireless access licences that grant it entry into eight circles.

The Indian telecommunications industry has become a highly politicised environment for foreign investors after the government reviewed the 2G and 3G licensing procedures employed by the

previous administration and discovered irregularities in the numer-ous processes. The most serious of these was a seemingly arbitrary method of calculating the value of spectrum and alleged agreements between the then-communications minister, existing industry players and new entrants over the awarding of unused 2G spectrum. Many of the new entrants that gained spectrum in the 2008/09 auctions have had their licences annulled and will be required to submit fresh bids for that spectrum using revised pricing benchmarks that will add hundreds of millions of dollars to state coffers. Much of this has happened with the bare minimum of consultation with the affected operators, which now risk losing all of their accumulated investments.

Aircel has less exposure to this situation than newcomers such as Telenor, Etisalat and Sistema Shyam, as many of its licences were awarded before the period under review. However, with India's new National Telecom Policy still being determined, it could yet be hit by significant retrospective bills for the spectrum and licences it holds. At the same time, Mr Sivasankaran has taken the opportunity to complain that he was pressured to sell Aircel to Maxis by a former minister, Dayanadhi Maran, who allegedly arranged for Maxis to make a quid pro quo investment in a satellite TV company owned by the Maran family. The Central Bureau of Investigation is reviewing

these deals, and the outcome is far from certain given the current government's obsession with uncovering any instances of the former regime's alleged transgressions.

The government has also summarily revoked operators' 3G roaming agreements, saying that the deals infringe the terms of their licences and favour the operators' revenue-earning potential at the cost of prices paid by consumers. As none of India's 3G operators has a nationwide licence, this sudden change in policy prevents the cost-effective rollout of 3G across India and will likely make 3G commercially unviable, despite strong demand for advanced mobile broadband services. In order to ensure a steady stream of new 3G customers, operators are slashing tariffs, compounding the problem still further.

Newcomers Telenor, Etisalat and Sistema have appealed the decision to revoke their licences, but their appeals have not moved the government, which sees revised spectrum pricing as a golden opportunity to extract more cash from one of the country's most vibrant industries. All three could be persuaded to rescue Aircel, which has some appealing features such as a large customer base, pan-India licences that are unlikely to be rescinded, steady ARPU despite competitive pricing and access to the fixed broadband market through the Dishnet Wireless subsidiary. Furthermore, Aircel was the second fastest-growing mobile operator in India in 2011, according to data from the Telecoms Regulatory Authority of India (TRAI).

While BMI would not rule out offers from any of these opera-tors, we think it highly unlikely that they would risk investing in the company given the highly fluid and increasingly opaque regu-latory environment, and the increasingly overzealous government interference in an industry that has thus far grown rapidly thanks to free-market principles. Of the three named companies, we believe Telenor is the most likely to rescue Aircel as it has the necessary

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Strong Growth ExpectedIndia VAS Market Forecast, 2009-2013

f = IMRB forecasts. Source: IMRB

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Bharti Airtel Reliance CommunicationsVodafone Essar IDEA CellularBSNL TataAircel

Too Many Minnows Swimming With The Big FishForecast – Subscriber Growth By Operator (‘000)

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Loop HFCL S Tel Etisalat

f = BMI forecast; Source: BMI

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INdIA

financial resources and was performing relatively strongly prior to the revocation of its licence earlier this year.

At stake is a significant presence in a market that will continue to grow rapidly despite political scandals and business manoeuvrings. BMI forecasts that India's mobile subscriber base will grow from 893.8mn in 2011 to 1.138mn by 2016. Aircel's subscriber base is expected to rise from 61.6mn in 2011 to 81.3mn by 2016, account-ing for 7.1% of the market. Its share of the market could double if it were combined with Telenor's existing subscriber base and network resources. Sistema and Etisalat would add very little to the business by comparison.

INDIA

Cable Digitalisation Behind ScheduleThe Cable Television Networks (Regulation) Amendment Bill 2011, which was passed in December 2011, has the ambition goal of driving growth in the Indian market. A vital step involves the digitalisation of cable TV in four metros through the installation of set-top boxes (STB) in the first phase of the programme. However, unsurprisingly, companies are struggling to meet the July 1 deadline, and this delay could see rival technologies trying to fill the gap.

The bill proposes that cable companies in Delhi, Mumbai, Kolkata and Chennai convert their analogue systems to digital by July 1: thereafter, cities with more than 1mn population should be digitalised by March 31 2013 and the entire country by December 31 2014. The rationale behind the ambitious plan is to standardise the systems across the country while allowing companies to introduce new content and features such as high-definition programmes and video-on-demand. Further, the reform aims to improve transparency and allow the Telecommunication Regulatory of India (TRAI) to better regulate the industry. The TRAI estimates that the Indian government loses US$1bn a year in taxes due to under declaration by companies.

The reforms should theoretically boost consumer experience, level the playing field and help India fulfil its cable TV market poten-tial. Broadcasters would also receive a higher portion of subscription revenue as cable operators should no longer be able to under-declare the number of subscriptions, thereby reducing broadcasters’ reliance on advertisements. They could in turn focus on content creation. In addition, the proposed increase of foreign direct investment limit from 49% to 74% should attract international cable TV companies.

However, only 2.9mn digital STB out of the 12.5mn required have been installed in the four metros by mid-June, according to the Financial Express citing data submitted to the Ministry For Information and Broadcasting. Mumbai has the highest conversion rate at 47%, while only 12.5% of cable subscribers in Chennai have installed the digital STB. It is normal for reforms, especially major ones, in India to experience delays. In this case, BMI believes a variety of reasons such as a lack of consumer awareness, limited supply in STB and the time taken to install the equipment have contributed to the slow progress.

The overall delays in digitalising cable TV are also providing an opportunity for rivals such as direct-to-home (DTH) TV providers to grab pay-TV subscribers. Tata Sky is ramping up its advertising efforts to take advantage of the transition period to convince sub-

scribers to make a switch to DTH. Data from the TRAI indicate that DTH services are rapidly gaining traction, although we believe that cable TV will remain the dominant form of pay-TV subscription in India in the near-to-medium term. According to the TRAI, there were 44.21mn DTH subscribers registered with private service providers at the end of December 2011, up from 32.05mn in December 2010 and 19.10mn in December 2009

BANGLADESH

Bangladesh Outlines 3G/4G Licensing PlansThe Ministry of Posts and Telecommunications of Bangladesh has published a draft proposal concerning the auction of six combined 3G and 4G mobile services licences. With one licence likely to be reserved for state-owned Teletalk and another set aside for a new entrant, there will be a fight amongst the five existing mobile licensees for the four available concessions. While BMI forecasts strong 3G/4G market growth in Asia, we believe the Bangladeshi market is already overcrowded and that the relative expense of 3G will mitigate against a rapid return on investment by operators.

Combined 3G/4G licences will be valid for 15 years and can be renewed for five-year periods thereafter. A similar approach was taken with the existing 2G GSM licences although, as these were awarded at different times, some operators will face the prospect of renewing their 2G concessions sooner than others, adding to their in-vestment burdens. This may constrain some operators' financial bids.

A total of 50MHz is being made available through the auction process, with each licensee set to receive 2x10MHz. The reserve price has been set at US$30mn per MHz and bidders will be required to increase their bids in increments of US$0.5mn per MHz to a maximum of US$2mn per MHz as the auction progresses. If a new player wins a licence, it will be able to apply for a 2G GSM licence at a later date; a 30% discount will be offered as an incentive.

The licensing of 3G services in Bangladesh has been awaited with keen interest. Operators need more spectrum to deal with rising voice and data traffic and need to offset relatively low voice and SMS revenue with higher income from data services.

However, with the base price per MHz set relatively high and the cost of deploying all-new mobile broadband networks also set to be expensive, BMI believes operators will find it very difficult

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Delays Could Boost DTHIndia DTH Subscriber Growth, 2008-2011

Source: TRAI

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srI lANKA

© 2012 Business Monitor International. All rights reserved.All information, analysis, forecasts and data provided by Business Monitor International Ltd is for the exclusive use of subscribing persons or organi-sations (including those using the service on a trial basis). All such content is copyrighted in the name of Business Monitor International, and as such no part of this content may be reproduced, repackaged, copied or redistributed without the express consent of Business Monitor International Ltd.All content, including forecasts, analysis and opinion, has been based on information and sources believed to be accurate and reliable at the time of publishing. Business Monitor International Ltd makes no representation of warranty of any kind as to the accuracy or completeness of any informa-tion provided, and accepts no liability whatsoever for any loss or damage resulting from opinion, errors, inaccuracies or omissions affecting any part of the content.

scribers in the country at the end of March 2012, of which 711,000 were mobile subscriptions. Besides outnumbering the number of fixed broadband connections by almost two times, perhaps more important is the impressive growth momentum shown by mobile broadband. Back in September 2010, there were only 120,000 mobile broadband subscribers compared with 260,000 fixed broadband. Mobile broadband (294,000) overtook fixed broadband (280,000) in December 2010, and the gap between the two has been widen-ing since.

BMI expects growth in Sri Lanka's mobile broadband market to remain robust in light of the fact that all five mobile operators have launched 3G services, with Hutchison Telecommunication Lanka being the last in April. This would ensure strong competition, thereby keeping tariff rates for consumers low, which would continue driving the adoption rate. We forecast the number of broadband subscribers in Sri Lanka to reach 1.688mn by end-2012, with the bulk comprising mobile technology. Expanding network coverage and upgrades will provide impetus for the industry to reach 3.993mn subscribers at the end of 2016, representing a penetration rate of 18.3%.

While Etisalat's 3.75G network is prepared for LTE, we do not see a need to deploy 4G in Sri Lanka in the near-to-medium term. Due to a lack of bandwidth-intensive content, the high-speed capa-bilities of LTE would be wasted. Operators would most likely resort to lowering prices in order to attract consumers, and this would prolong the payback period. We believe that Etisalat's DC-HSPA+ network will be more than sufficient to meet demand of the average Sri Lankan consumer market.

to fully leverage the revenue-generating potential of their new net-works for many years.

We therefore caution operators against bidding excessively for the new concessions, though this may be inevitable considering that one existing player could lose out. Leading international players such as Telenor (Grameenphone) and Axiata are expected to protect their investments by bidding aggressively in the auction.

At stake is timely participation in a fast-growing segment of the Asian mobile market. With Japan's NTT DoCoMo and South Korea's SK Telecom each having signed up 4mn 4G LTE subscribers by late-July 2012, adding 1mn new LTE subscribers every six weeks, BMI has revised upwards its forecasts for growth in Asia's mobile broadband market.

With regards to 4G LTE, we forecast the number of accesses to grow from 2.944mn in 2011 to 35.222mn by the end of 2012, a y-o-y increase of 1,096%. By 2016, there will be 321.253mn LTE accesses in Asia, still some way behind 3.5G connections.

SRI LANKA

Upgrade To Capitalise On DemandEtisalat Sri Lanka has claimed to be the first mobile operator in South Asia to launch Dual Cell (DC)-HSPA+ technology, offering consumers speeds six times faster than alternative mobile broadband connections currently in the country. The upgrade positions the operator favourably in a booming Sri Lankan mobile broadband industry, which has been triggered by affordable tariff rates as well as constant efforts to improve network coverage and quality.

Etisalat has been forward-looking in its approach to seek revenue and subscriber growth in the relatively underdeveloped Sri Lankan telecoms market. The company launched the country's first LTE-ready 3.75G HSPA+ network, capable of data speeds up to 42Mbps, in May 2011, and the introduction of DC-HSPA+ is a natural evolu-tion that should bring better resource utilisation and efficiency for Etisalat. At present, Etisalat's 3.75G network covers major cities such as Colombo, Negombo, Kandy and Jaffna. Together with the launch of affordable smartphones and relevant value-added services such as mobile TV and video streaming, we believe that Etisalat is well positioned to capture a sizeable portion of the country's growing mobile broadband demand.

According to latest data from the Telecommunications Regula-tory Commission of Sri Lanka, there were 1.086mn broadband sub-

Analyst: Jianwei She

Sub-Editor: Mia Kilroy

Subscriptions Manager: Nuria Bernardez

Production: Reema Patel

Publishers: Richard Londesborough/Jonathan Feroze

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Lacklustre Fixed, Booming MobileSri Lanka Broadband Subscriber Growth (‘000)

Source: TRCSL

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

Documents

Asia Pacific Telecommunications Insight - October 2012