KUALA LUMPUR: While investors may have turned sceptical towards loss making WiMax player Packet One Networks Sdn Bhd (P1), its new strategic partner SK Telecom (SKT) believes there is much value in P1’s wireless business as a launchpad for SKT’s aspiration to expand regionally in Southeast Asia.  

Although still too early to say definitely, Ahn Hoekyun, P1 deputy CEO, chief strategy officer and SKT representative, says that either P1 or parent Green Packet could become part of SKT’s expansion plans in Southeast Asia later.  

“P1 is part of a much larger vision and strategy. P1, strategically positioned in Malaysia, is at the heart of the first of several regional telco clusters. Within the Southeast Asia cluster we are also targeting markets such as Indonesia, Thailand and Myanmar,” Ahn tells The Edge Financial Daily in an interview.

“We have a vision and a commitment to create multiple regional clusters of telcos in Southeast Asia, Europe and Central America, and this investment in P1 is the first tangible step towards that. P1 will certainly be involved in much of our follow-on strategy, either as a partner, or via its parent company, Green packet, as a solutions and device vendor,” he adds.

However, the details of SKT’s regional plans are still in the works, according to Ahn. Currently, SKT is focusing on beefing up P1 to be a leading wireless broadband provider in Malaysia. The decision to invest in P1, says Ahn, was due to the relatively low cost of entry into a growing market such as Malaysia.

“Why [invest in] P1 specifically? It fits our criteria for market entry. It offers a relatively low entry cost with an appropriate licence, a licence which allows us to evolve to become a full- fledged converged telco,” says Ahn.

SKT took up a 25.8% stake in P1 last July for US$100 million (RM303 million), making the South Korean telco the second largest shareholder of P1 after parent Green Packet.

Green Packet had last month deferred the date for its earnings before tax, interest, depreciation and amortisation (Ebitda) to turn positive to the end of this year from the previous target of 1QFY11. The reason cited was management’s strategic decision to enter aggressively into the nomadic broadband market segment and ramp up subscriber acquisition, which necessarily entails greater expenses, including advertising, marketing and promotional costs.

However, the deferment of its Ebitda target was not well received by the investment community, with at least one research house ceasing coverage.

For FY10 ended Dec 31, Green Packet’s revenue grew by 81% year-on-year (y-o-y) to RM394 million, on the back of strong growth in broadband services, solutions (software and devices) and alternative voice services. Pre-tax loss was marginally higher at RM209 million versus RM185 million a year earlier. The loss was due to a provision for impairment of assets and a share of losses in an investee company.

For 4QFY10, Green Packet’s registered a loss of RM15.2 million at the Ebitda level, representing a 73% y-o-y improvement. However, the loss increased 13% at the Ebitda level quarter-on-quarter due to higher spending for its advertising and promotion activities.

The group’s total debt stood at RM238.2 million while its cash and cash equivalents stood at RM172 million. Its share price has taken a beating on the local bourse, depreciating almost 50% from a year ago, closing yesterday at 63.5 sen.

Despite the losses, P1 CEO Michael Lai says that the focus this year will be on gaining market share, a vision that is also shared by SKT since their entry six months ago.

“Our focus with SKT coming in, is to invest in the future today. With their (SKT’s) experience, they told us to build our network as fast as we can and get as many subscribers as possible. This is because it’s cheaper to get a customer today than tomorrow. Just a few months after coming in, they have helped us strengthen and improve our WiMAX network, and work on customer care and customer acquisition,” he says.

This year, it plans to capture more of the nomadic broadband market that is controlled by leaders Celcom and Maxis. P1’s number of nomadic broadband subscribers grew three-fold last year to make up 24% of its subscriber base of 274,000 as of 4QFY10. Its mainstay of fixed broadband for homes, which pits it against incumbent Telekom Malaysia, takes up the remaining 74% of its subscriber base.

For this year, it is targeting a  64% increase in subscribers from 450,000 last year.

Ahn says the fast-growing nomadic broadband market in Malaysia makes SKT’s entry timely as it is helping P1 beef up its network for the market. For one thing, Ahn believes that 3G operators such as Maxis, Celcom and DiGi are seeing overcapacity in their networks, which is evidenced by the drop in the quality of voice calls.

“The landscape in South Korea is different. There, the market is so competitive and the people are so demanding that they can’t tolerate the slightest percentage of dropped calls or slow Internet speed. Malaysians are more tolerant and patient when it comes to their telco services. My voice-call experience in Malaysia has been quite bad with dropped call and intermittent coverage.

“When I was head of the wireless team at SKT in 2008, I was not allowed to sell more than 150,000 dongles for our network because we had to protect the core business which is voice. If we sold more, we knew we would see dropped calls and spotty coverage,” says Ahn.

Lai is confident of capturing more of the nomadic broadband market share, especially since its growth outpaced fixed broadband last year. He expects the new subscriber additions for P1 this year to be divided 60:40 between nomadic broadband and fixed broadband users .

According to Ahn, P1’s plans to transition to Long Term Evolution (LTE), the latest standard in mobile network technology, also bodes well for SKT, which is launching LTE in South Korea by mid-2011. The important thing, says Ahn, is working towards the goal of being a leading wireless player regardless of the technology.

P1 has also started venturing into the voice business with an introduction of fixed-line phones over broadband, with a possibility of offering mobile voice when it has reached around 80% of the population.

“We believe there is a market here as the world has changed. Voice calls are now mostly riding on IP (Internet protocol) networks. In the future, we will think about mobile voice when we have ubiquitous access to around 80% of the population. But voice for us is just another application on our IP-based network. If you come from the traditional voice world like the incumbents, it’s a big component. Our market would still be broadband,” says Lai.

P1 is looking at 65% coverage of the population by next year, for which it would have to spend RM1 billion in total for the network. The financing for this comes from SKT’s investment and vendor financing.

This article appeared in The Edge Financial Daily, March 8, 2011.