This article first appeared in The Edge Malaysia Weekly on November 11, 2024 - November 17, 2024

THE award of the second 5G network to U Mobile on Nov 1 has kicked up a storm. Four bids were submitted, from CelcomDigi, Maxis, U Mobile and TM. Maxis, for instance, once widely seen as the frontrunner, is seeking to talk to the Malaysian Communications and Multimedia Commission (MCMC) on what exactly were the winning criteria. Others are calling for more transparency on the selection process. 

This is missing the forest for the trees. 

The fact is that all the telcos lobbied hard for a second 5G network. They all agreed to the closed-door selection process by submitting their bids, knowing full well that there would be one winner and three losers. Hence, their cries of lack of transparency now do not look genuine. But yes, the losers should be very worried. As the winner, U Mobile will now be both spectrum-network infrastructure owner and sell directly to consumers and enterprises.  This would be the same case if Maxis or Celcom-Digi had won.   

Now that MCMC has made its decision,  the telcos which wanted but failed to get the second network — Maxis and Celcom-Digi — will have to buy from either Digital Nasional Bhd (DNB) or U Mobile. In other words, U Mobile will have a tremendous advantage over the other telcos. As CIMB Securities puts it, “U asked for it, U got it!” U Mobile’s win will, in all likelihood, help it get the valuation it seeks when it goes for a listing. According to investment bankers, U Mobile is targeting a RM10 billion valuation.

For the Malaysian public, unless you are a shareholder,  does it really matter which telco won the bid? All the telcos are profit-maximising private entities.  Owning the spectrum-network infrastructure will allow a  telco to be a gatekeeper, to dictate terms and prices in the wholesale market and, by extension, keep out many would-be competitors in the retail market. This was what happened in previous 3G/4G mobile markets. Infrastructure, rather than pricing, service or innovation, became the competitive advantage. The resulting lack of competition meant these telcos can maintain fat margins and profits, generating huge cash flows to pay dividends to their own shareholders instead of spending more on capex to improve the network. This is at the expense of Malaysian consumers. This is a fact, supported by Malaysia’s relatively higher 4G data package pricing and lower service quality compared with regional and global telcos.

We need greater clarity on the terms for the second 5G network. Critically, will it be a standalone (SA) 5G network,  is there a strict timetable for rollout and what are the repercussions if the deadline is not met? Or will U Mobile be allowed to  simply leech off DNB’s 5G infrastructure while it chooses the areas and timing to deploy 5G based on demand? What is the minimum standard on quality of service, for example, connection speed, coverage and availability? Will prices be regulated, as DNB’s are?

These are the pertinent questions for all Malaysians, far more so than why U Mobile beat the other three telcos. Why? Because ultimately, the government, and therefore every Malaysian, remains on the hook for what will happen to DNB — whether it is profitable or loss-making. That’s why clarity and transparency is important to each and every one of us.

DNB is a government-led initiative, first mooted under MyDIGITAL — the Malaysia Digital Economy Blueprint — that was launched in early 2021. It successfully rolled out 5G under the Single Wholesale Network (SWN) structure to 80% of the population in less than three years, well within the stipulated time frame. Indeed, the record rollout speed was one of the fastest in the world. For perspective, it took the private sector telcos six years to breach the 80% coverage for 4G, because they had to wait for sufficient demand to justify the costs. That led to a digital divide between the richer urban and poorer rural areas.

Thanks to DNB’s speedy rollout, Malaysia leapfrogged most of its Asean peers in 5G coverage, from the bottom of the heap back in 2020/21. Malaysians are now enjoying high-speed data connectivity at lower prices than 4G.  Our 5G data speed is among the fastest in the world, according to a survey by Ookla, a global leader in connectivity intelligence.

DNB has already contracted RM8.1 billion, of which RM3.3 billion has been spent, to roll out the 5G network. Total costs are estimated at RM16.5 billion over 10 years (see table). It had a financially viable business plan. That’s why it was able to get funding from private banks. However, the government’s decision to abandon the SWN will now have a negative financial impact on DNB. That’s a no-brainer. The only uncertainty is the extent of the damage, depending on the terms for the second network.

For one, DNB’s revenue will be lower (now that there are two wholesale sellers instead of one) and the speed will be lower due to the reduced spectrum allocation (reassigned to the second network). There will be higher costs. DNB must write off RM900 million of equipment already installed that could only operate in the spectrum frequency previously reserved for it but now assigned to the second 5G network. Plus, it would have to spend additional capex much earlier (due to the reduced spectrum) as densification costs to deliver on its minimum speed commitment. The fixed cost already invested in the rollout and additional future capex due to the policy change will hurt earnings and cash flow — possibly even pushing it into the red or, worse, bankruptcy.

Let us summarise the situation in very simple layperson terms. It matters not to Malaysians who wins the bid for the second 5G network. The only beneficiaries are their shareholders — and Huawei and ZTE, the most likely equipment suppliers. But what happens to DNB is of critical importance to all of us.

Right now, it is impossible to analyse the exact impact without greater clarity. Currently, CelcomDigi, Maxis, U Mobile and YTL Power International collectively hold a 65.1% stake in DNB. The government retains the remaining 34.9%. U Mobile will pull out after its win. Once the second network is operational, the other remaining telcos have the option to leave or stay invested. But if DNB becomes far less profitable with a low return on investment (ROI) or is loss-making, will any of the telcos opt to stay invested and assume the loss? Make no mistake, ultimately, DNB’s obligations will fall back on the government — and therefore, all Malaysians.

A government-owned DNB is not a monopoly — it is an agnostic wholesale operator that provides equal access on equal terms to all telcos, creating a competitive free market environment to the benefit of all consumers and enterprises. The pricing under the access agreements is transparent. The SWN cost of 11-13 sen per GB is cheaper than the 4G cost of about 45-55 sen per GB. DNB’s lower costs led to cheaper data packages for consumers, as we now see.

DNB had a financially viable business model, which is underscored by its ability to raise funding from private banks. It would have been cash flow-positive by 2025, with an estimated IRR (internal rate of return) in excess of 8% and worth an estimated RM16 billion to RM20 billion to Malaysians.

DNB’s rapid and successful deployment of 5G nationwide was instrumental in attracting over RM160 billion of digital investments into the country. Malaysia is now one of the fastest-growing data centre hubs in the world. The speed of its rollout catalysed more rapid improvements in the entire ecosystem, including the last-mile connectivity, the solutions and the use cases. The high speed and ultra-low latency achievable by 5G networks will be the key driving force for innovation and productivity enhancements — ensuring the country stays globally competitive and supportive of the ringgit and future investments.

If the second network is also to be a SA, and even if it only needs to invest half of this amount (due to existing infrastructure and so on), the total costs that will be passed on to consumers must mean higher prices. The cost to build one shared SWN is  lower than the aggregate cost to build two parallel 5G networks. And when higher total costs are divided by the same demand base — the number of mobile subscribers in the country — prices that will be charged to consumers will be higher. That is just mathematics.

This government decided to change the industry structure from an SWN to Dual Network. To use a simple analogy, the government built all the roads connecting towns and villages at a high cost. The private operator is now allowed to build toll roads to the major towns (and collect all the revenue) and gets to access and use all the government roads for its customers.

Will this decision lead to a worse outcome for Malaysians in terms of price and service quality? Can it send DNB into financial ruin instead of getting a valuation of RM20 billion? We think so, but we hope it will not for the sake of the country.  And if it does happen, this government will have to be held accountable. 

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