This article first appeared in The Edge Malaysia Weekly on May 29, 2023 - June 4, 2023

GOING by the exchanges on 5G in parliament last Tuesday, the cabinet wants consumers to be the biggest winners in the transition from a single wholesale network (SWN) to a dual network structure once Digital Nasional Bhd (DNB) completes its accelerated 5G rollout to cover 80% of populated areas by year end, from about 60% now.

To make consumers the largest winner, the government needs to make sure that retail prices for 5G internet coverage will still come at half the price of current 4G services — which is one of DNB’s promises under the so-called SWN “monopoly” that is not profit-driven and the government has effective control over.

Prime Minister Datuk Seri Anwar Ibrahim told parliament on March 23 that 5G prices to consumers “must be set at a low level, as we ensured under DNB”.

Both Communications and Digital Minister Fahmi Fadzil and Deputy Minister Teo Nie Ching have separately said that wholesale price per gigabyte (GB) offered by the second network (Entity B) cannot exceed that of the current tariff under DNB, whose wholesale price to telcos is RM30,000 per Gbps a month, or 13 sen per GB.

Policymakers need to know that under a dual network structure, faster 5G speeds at half the price need a firm commitment on 5G retail pricing because it cannot be guaranteed by getting mobile network operators (MNOs) to promise that wholesale price per gigabyte at the second network (Entity B) will not be more expensive than what DNB charges as the SWN.

That is because whoever owns DNB’s network has 80% population coverage for 5G and will not need to buy wholesale capacity from the second network, rendering the latter’s wholesale access pricing irrelevant. Wholesale price for the second 5G network is simply “transfer pricing” for MNOs that can offer both retail and wholesale services — meaning the MNO-owner of the second network will be basically “selling” wholesale capacity to itself, as it is also the one offering retail 5G services.

This is different from retail-only MNOs being price-takers when buying wholesale access from DNB, which does not offer retail service.

Though details on Entity A (which will house DNB) and Entity B (which will build a second 5G network from early 2024) still need to be hammered out between the government and MNOs, Anwar confirmed in parliament on May 23 that when the transition to dual network takes place, both Entity A and Entity B will offer both wholesale and retail services.

Under the SWN, there is no need to spell out low retail prices for 5G services because prices will naturally be forced lower by competitive pricing from MNOs that do not already own an extensive 4G infrastructure network and can offer 5G retail services to consumers at prices lower than 4G services without having to worry about cannibalising revenues and profits from their existing customers.

That is possible because DNB, as the sole “monopoly” 5G network that is not profit-driven, was able to cut the cost of generating 5G coverage to 13 sen/GB versus 50 sen/GB — allowing all players the chance to offer 5G retail services at RM1/GB, or half the RM2/GB that 4G services are being sold at, thus levelling the playing field for smaller MNOs.

So, it is no surprise that YTL Communications Bhd (Yes) was the first to sign up to DNB’s 5G network, followed by Telekom Malaysia Bhd (TM), which is in a unique position, given that the 5G rollout will require its fibre capacity.

The larger mobile operators, known collectively as CDMU (Celcom, Digi, Maxis and U Mobile), were clearly lobbying for a second 5G network before the previous administration set a deadline to sign up for equity and wholesale access to DNB’s network under a SWN structure last year. Maxis Bhd — which is still the country’s most profitable operator and was the country’s largest mobile operator before the CelcomDigi merger — is the only one of six MNOs (five post-CelcomDigi merger) that have yet to sign a 5G access agreement with DNB.

At its annual general meeting (AGM) on May 18, Maxis CEO Goh Seow Eng told shareholders that it was “working with DNB and the ministry on the access agreement”, considering the transition to two 5G networks. Goh also told shareholders that Maxis “looks forward to playing a more direct role in the country’s 5G implementation, leveraging its expertise, resources and existing infrastructure”.

Having agreed to the larger MNOs’ lobby for dual 5G network, the government needs to ensure that consumers get fast 5G internet at low prices without the government having to foot a huge subsidy bill.

There is a real danger of the government (read: public and taxpayers’ money) ending up footing a huge bill at DNB, if policymakers do not play their cards right in transitioning to the 5G dual network structure.

Previously, the government held all the good cards without forking out any money or taking on debt because DNB was the only party given 5G spectrum and allowed to build the super highway to be shared by all MNOs at the same wholesale pricing.

The SWN means MNOs have no choice but to buy capacity from DNB if they want to offer 5G and the government is able to own the 5G infrastructure being paid for with securitised cash flow from MNOs paying for 5G wholesale access. There was already a compromise when the government agreed to allow MNOs to take up to 70% equity (65% post-CelcomDigi merger) in DNB.

Now that a second 5G network will be allowed from 2024, DNB is naturally worth less than the RM15 billion in equity and discounted cash flow value that Maybank Investment Bank ascribed to it as the SWN. Just how much less depends on whether the government can still get MNOs to pay for DNB’s 5G wholesale capacity even in commercially unfeasible areas if Entity B is free to build 5G network only in financially viable places while paying a token sum to access Entity A’s 5G network when and where it is deemed commercially feasible.

The government will end up subsidising 5G for the bigger MNOs if only smaller players such as Yes commit to buying 5G wholesale capacity from DNB (Entity A) while Entity B only pays a token sum to access its 5G network where necessary while reaping the benefits from building 5G only in lucrative places.

The potential downside to public finances is greater if the government decides to take away 5G spectrum from DNB (Entity A), thus increasing its network cost and reducing network efficiency — akin to splitting a six- or eight-lane highway into two smaller ones.

Even if the government does not take away 5G spectrum from DNB, it is no longer a level playing field for smaller MNOs that have fewer resources to compete on network infrastructure.

Can lower 5G prices be guaranteed under such conditions? Will it be through a government directive that MNOs cannot charge consumers more than RM1/GB for 5G services?

There must be clarity on these details before investors can correctly determine the valuation of telecom operators.

At its AGM on May 26, Axiata group executive director and CEO of telecommunications business Hans Wijayasuriya told shareholders that the company had “yet to receive details on how the new 5G policy will be implemented” and expected the details to be defined through a collaborative process to be worked out by the government and the MNOs. Axiata, he added, was not directly involved in the process, with its 33.1%-owned CelcomDigi Bhd undertaking most discussions and the development of a future roadmap for the dual network for 5G (Phase 2).

On May 23, CelcomDigi CEO Datuk Idham Nawawi told shareholders that it welcomed the government’s decision on the 5G dual network model with the termination of the previous equity process and looked forward to playing a “direct and active role” in 5G, leveraging its experience and resources. Riding on DNB’s network, CelcomDigi has extended free 5G access to both its postpaid and prepaid customers until year end.

“We do foresee that this change in terms of the 5G [dual network] model moving forward will bring a positive impact, not only to the company but also the market in general. Some of the details and how this is going to be done are still being worked out between the government and the industry. This is something that we will share [when] details on Entity A and Entity B are firmed up by the government,” Idham told CelcomDigi shareholders. He also reiterated that the previous agreement to take equity in DNB was “terminated to make way for the new equity process to take place” and clarified that “no payment has been made with regard to that equity process to DNB at that point in time”.

It was previously reported that the government had asked each of the six MNOs to pay RM200 million for an equity stake of up to 70%, with CelcomDigi’s combined equity in DNB reduced from 30% to 25%, and TM and Yes taking 20% each to leave 35% with the government via Minister of Finance Inc. The equity injection by these MNOs was on top of respective commitments (including from U Mobile) to take up 5G wholesale capacity from DNB over 10 years, which together gave the RM15 billion valuation for DNB. Both CelcomDigi and TM have since terminated the equity commitment. It is understood that access commitments are not cast in stone, even more so with the transition to the dual 5G network.

TM managing director and group CEO Datuk Imri Mokhtar told shareholders at its AGM on May 25 that it was “actively involved in discussions with the government and the industry on the implementation plans for Phase 1 and Phase 2, through the task force chaired by the government”. In the meantime, as the 5G access agreement remains in place, its Unifi Mobile and TM One customers continue to enjoy 5G services and solutions. In any case, TM mentioned the “sanctity of contract” with regard to the RM2 billion 10-year contract for leasing fibre infrastructure capacity to DNB for the 5G rollout.

YTL Communications and U Mobile are not publicly listed.

It is obvious that under the SWN, large MNOs will pay the hefty price tag because the government will own the 5G single network infrastructure “monopoly” paid for by the MNOs while making sure that consumers in commercially and non-commercially feasible populated areas get faster 5G internet coverage at half the price of 4G. Consumers also benefit because the government only seeks to cover the cost of building DNB’s 5G network, as seen by the low wholesale price.

Now that larger MNOs — which, naturally, have profit considerations as they need to deliver returns to shareholders seeking good dividends every year, if not every quarter — seem to have won the battle in getting the government to approve a dual 5G network structure, will the government end up picking up the tab since it says consumers will not be worse off? 

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