Sunday 25 Feb 2024
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This article first appeared in The Edge Malaysia Weekly, on October 31 - November 6, 2016.


IT will soon be 10 years since the June 2007 launch of the first iPhone, the smartphone that transformed the telecommunications industry and spurred many new ways we now use our mobile phones. Having fast internet access anytime, anywhere has also come to pass in developed and developing cities where most people constantly have at least one mobile device within their reach.

Self-driving cars, washing machines that start operating when the electricity rates are at their cheapest and billboards that differentiate whether you are a man or a woman before showing you gender-specific advertisements are no longer works in progress. Virtual reality headsets already allow people to “travel” and have a 360° view of new places that their physical (and financial) abilities might never take them to.

Within the next decade, these innovations and many more could well be commonplace with the right ecosystem in place. Refrigerators that prompt you to buy milk and provide recipe suggestions based on the ingredients you have inside them are several years old in US test environments. With your permission and access to your e-wallet, these fridges can even buy milk and have it delivered in time for your morning coffee or muesli when supply runs out.

But digital innovation is not just about making people’s lives better and creating new ways of doing business. Nor is it just the telecoms and technology industries’ opportunity to rejuvenate sales and profit as they strive to win and keep customers.

What’s at stake is a country’s ability to remain competitive as the world undergoes the Fourth Industrial Revolution, which Professor Klaus Schwab, founder and executive chairman of the World Economic Forum (WEF), says goes beyond automating production and is characterised by the fusion of technologies that is blurring the lines between the physical, digital and biological worlds.

“It is disrupting every industry in every country. And the breadth and depth of these changes herald the transformation of entire systems of production, management and governance.

“The possibilities of billions of people connected by mobile devices, with unprecedented processing power, storage capacity and access to knowledge are unlimited. And these possibilities will be multiplied by emerging technology breakthroughs in fields such as artificial intelligence, robotics, the Internet of Things (IoT), autonomous vehicles, 3D printing, nanotechnology, biotechnology, materials science, energy storage and quantum computing,” Schwab writes in an op-ed in January, where he also outlined concerns about governments’ inability to employ and properly regulate these technological advances.

Consumers now have new opportunities for work and play, but there is also a need to equip the workforce with new skills, especially those whose jobs are at risk of being taken over by machines. Businesses are also forced to transform: Hotels and taxi companies are finding out quickly with the advent of Airbnb and ride-hailing services like Uber and Grab. Even before that, film and music companies were already contending with online piracy and are today looking for ways to monetise content online.

Among the many industry incumbents, at the forefront of the digitisation wave are telecommunication companies that have spent billions the past two decades building the enabling network infrastructure for fast internet connection on the go. They are faced with a quandary, now that mobile phone penetration rates are well above 100% and billions in lucrative long-distance phone calls and text messages are almost history — thanks to over-the-top (OTT) applications like WhatsApp, Skype and FaceTime that essentially piggyback on the telecoms network without spending to build them. In 2014, operators around the world reportedly lost US$14 billion in revenue because of a decline in voice and traditional messaging traffic.

Already, some experts see phone users having closer ties with the likes of Facebook and Google (think gmail account and your default search engine) rather than telecom operators. Yet, for as long as phones still need to run on the latter’s networks, the jury is still out.

Telcos can stay as a “dumb pipe” and continue providing the basic network or be a “smart pipe” and build new business advantages to seize growth opportunities in the digital space, including moving into adjacent service industries such as advertising, e-commerce and content delivery.

Japan’s SoftBank Group, which last week committed US$25 billion to a US$100 billion tech investment fund bearing its name, is the earliest and among the most aggressive in Asia. SoftBank is already reaping the benefits of the 32% stake in Alibaba Group it bought 16 years ago for a mere US$20 million. SoftBank still has a 28% stake in Alibaba after it sold US$8 billion worth of the stock recently.

Across the Causeway, Singapore Telecommunications Ltd, which in 2012 set aside S$2 billion to ramp up digital investments, has spent more than half that sum to date, including US$321 million for its digital advertising platform Amobee in 2012 and US$770 million for cybersecurity unit Trustwave last year. It also invested in advanced analytics by buying DataSpark, mobile streaming service HOOQ and has a venture capital arm, Innov8, to explore digital innovations.

Apart from Trustwave, SingTel’s “Group Digital Life” investments are still a drag on its profit and are expected to record negative earnings before interest, taxes, depreciation and amortisation (Ebitda) of S$150 million to S$180 million for the current year ending March 31, 2017. Still, SingTel’s FY2015 profit in US dollar terms was still four times that of Malaysia’s regional telecom operator, Axiata Group Bhd. Similarly, SoftBank’s was nine times larger — allowing both players greater flexibility for sizeable acquisitions.


Balancing investments and returns

Axiata has a different strategy: “We have to invest in our digital future. There is no question about it — we have to do so for the growth and sustainability of our business. Our strategy focuses on integration with existing core business — either today or in the future,” says Tan Sri Jamaludin Ibrahim, Axiata’s president and CEO.

According to him, there are two components to Axiata’s transformation into a digital company. The first is the digitisation of its core processes such as e-care, real-time marketing analytics and network virtualisation, and these require a change in mindset and the upgrading of digital skills. The second component is to provide new services to expand Axiata’s core business such as mobile advertising, digital commerce and digital entertainment.

“Fortunately, digitisation of the core does not incur huge investments, but it does require a lot of effort. It is critical, and if done well, will even lower our future operating costs. We have started embarking on these initiatives, and in some markets, we are way ahead while in others, we are on a par with our competitors. We plan to be even more aggressive in the future,” Jamaludin says.

He admits that providing new digital services could involve significant investments as well as a long gestation period, depending on the extent and scope.

The latter may not sit well with financial investors, who, as experts at Citi Research puts it, “justify their investment by dividend yield arbitrage, network investment-driven growth recovery, or a combination of the two”. Still, these two investment strategies may have passed their peak: “We think that monetary policy and industry (technology and regulatory) cyclicality pose long-term fundamental challenges to both stories,” Citi Research’s experts write in a recent note.

Axiata is looking to balance the need to invest in its digital future and delivering returns to stakeholders as it transforms itself into a new-generation digital company.

“We strongly believe that we have to do both and are prepared to be ‘penalised’ in the short term. We have a strong conviction of what is best for Axiata’s future. Fortunately, all investors appreciate and support the digitisation efforts and the need to change to a digital mindset and skill set. And fortunately too, most of our investors support modest, thoughtful and strategically rationalised investments in digital services. We have adopted a modest investment policy to do this and have restricted our digital service investments to 2% to 5% of our total investment each year,” Jamaludin says.

That 2% to 5% works out to RM110 million to RM275 million (US$26 million to US$66 million), based on Axiata’s FY2016 capital expenditure guidance of RM5.5 billion. If distributed, it would be about one sen to three sen per share — an amount that financial investors can probably stomach.

So far, Axiata Digital Services had accumulated 28 brands, including its digital commerce ventures in Indonesia and Malaysia — elevenia and 11street — that collectively generated US$126.6 million gross merchandise value as at end-2015.  As at end-2015, Axiata Digital has focused investments in five key business verticals, namely digital advertising, e-commerce/marketplaces, mobile money, digital entertainment and education, disruptor models and OTT enablement platforms.

Elsewhere, Axiata’s operating units have seen strong usage growth for their mobile money ventures in Cambodia, Bangladesh, Sri Lanka and Indonesia. Axiata also has experience running a pay-TV service through Dialog TV in Sri Lanka. Among its new ventures in recent years, edotco — Axiata’s tower infrastructure business — has piqued investors’ interest as minimising network duplication is one way to cut cost and increase returns on investments.

Malaysia-centric telcos are also investing for the future.

“We have a solid track record in moving fast and smart ahead of every industry cycle, and have an ambition to take a stronger position in the daily digital lives of our customers,” DiGi.Com Bhd CEO Albern Murty says, adding that “significant” investments are being made to deliver new digital services to enrich the user experience.

In June, Digi-X was set up to create standalone digital businesses, develop new business streams through acquisitions and investments, deepen digital partnerships and footprint in the start-up ecosystem as well as build and monetise digital platforms for the core business.

“Through [Digi-X], we have invested in a selected few start-ups, made headway and seen more opportunities in the financial services and Internet of Things (IoT) verticals. The deregulation of other industries going forward will also give us the opportunity to offer more M2M services to new customers,” he says, adding that DiGi also benefits from parent Norwegian Telenor ASA’s reach in 13 markets as well as investments such as New York-based ad tech company Tapad and Malaysia-based licensed money service business Prabhu Money Transfer.

Over at Maxis Bhd, group CEO Morten Lundal says the company “took a big step” towards new ways of working and digitalisation for businesses with its Vodafone partnership.

“By pairing our local market knowledge and leading high-speed data network with Vodafone’s Managed IoT connectivity platform, we are now offering enterprises world-leading IoT solutions to create smarter, more efficient businesses,” Lundal says.

“We are not basing our future on non-traditional income, we focus on a differentiated high-quality empowerment of our customers by leveraging internet. We will continue to develop our capabilities as we evolve to digitalise Maxis. Relevant to this is our ambition to be the preferred choice for partnership for any world-class solutions or service providers. We welcome all partners with mutual intent and look forward to delivering the best range of choices to our customers.”

Strong initiatives have also been taken by “convergence champion” Telekom Malaysia Bhd (TM), whose units have been chosen by at least Malaysian Resources Corp Bhd (MRCB) and Aspen Group to deploy connectivity and IoT smart solutions at selected real estate developments towards delivering that enhanced digital lifestyle for more Malaysians. Its unit, VADS Lyfe Sdn Bhd, for example, is also working with Cyberview Sdn Bhd on an IoT-based traffic-light system in Cyberjaya to help cut waiting time and improve traffic flow.

“TM is poised to promote smart services through the provision of IoT-enabled services and smart solutions for smarter living, smarter businesses, smarter cities, smarter communities and smarter nation, which encompass but not limited to smart safety and security, smart mobility, smart building management and tenant and citizen services. These are in line with our vision, To Make Life and Business Easier for a Better Malaysia. We also leverage our next generation network and ICT solutions to co-create an infrastructure and services that can boost the overall industries in Malaysia,” says group CEO Tan Sri Zamzamzairani Mohd Isa.

Commendable as these efforts are, it remains to be seen whether larger investments need to be made as the leaders of this new age speed ahead in deriving meaningful social and economic impact from new technologies.

Malaysia was not among top innovative countries with digital successes — Finland, Sweden, Norway, Singapore, Switzerland, the US and the Netherlands — where the WEF found to have a high rate of business ICT adoption as well as a top innovation environment.

Based on the Networked Readiness Index 2016 in the WEF’s Global Information Technology Report, Malaysia was ranked 31st of 139 (32nd of 143 in 2015) with 4.9 points versus 5.6 to 6 points for the top 15 countries. While Malaysia ranked 21st when it comes to regulatory and business innovation environment, the country ranked 73rd on the “readiness” sub-index because we were at No 46 on skills, 71 on infrastructure and 91 on affordability. Within the affordability pillar, Malaysia was ranked 110th on fixed broadband internet tariff and 45th on prepaid mobile tariff but first place when it comes to “internet and telephony competition”.  That could mean more pressure on local operators to provide better services for less money. Will this nudge industry consolidation? (see ‘Are conditions ripe for another Malaysian mega merger?’ on Page 69)

Rather than just delivering cheaper price points for consumers, what is needed to push Malaysia ahead is the realisation that holistic change is imperative as laggards will be swept aside.

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