5G evolution and pinky promise: Back to the past, except worse …. Why?

We can understand the telcos’ vehement opposition to the SWN. The oligopolistic market had been very good to their bottom lines, where limited competition kept profitability high. The telco business is a veritable cash cow, enabling them to reward shareholders with huge dividends over the years (see Charts 1 to 3). They would obviously want to protect this status quo. The rationale behind the Cabinet’s decision, on the other hand, is confounding to us. Let us be crystal clear about what this decision means:

• The Cabinet has decided to abandon the SWN and change to a duopoly (a Dual Network model is a duopoly); and
• There is no enhancement or transition from the SWN because the second 5G network is not a wholesale network, as it is also allowed to provide retail sales and services to individual consumers and enterprises. 

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For easier comprehension, we have depicted the evolution of the Malaysian mobile telecommunications market from the past (3G/4G) to the present (5G SWN) and the intended future.

The Past (3G/4G): An oligopolistic market

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In the past, spectrums were given virtually free to the handful of telcos (such as Maxis, Celcom-Digi, U-Mobile, YTL and TM). By virtue of their ownerships of the network infrastructure, these telcos became gatekeepers — they were able to dictate prices, terms and conditions that created an effective barrier to entry for all other players without their own networks.

These private sector telcos are necessarily profit-optimising (we would not expect otherwise). The result was limited competition and choices in the retail market, high prices for consumers (see Chart 4) and low-quality services (see Chart 5) while shareholders made excess profits. Malaysian telcos are among the most profitable in the world (see Chart 6).

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The Present (5G): Dismantling the oligopoly for free competition in retail market

The 5G SWN effectively broke the oligopoly of the profit-optimising telcos (mobile network operators) under 3G and 4G. The SWN is owned by the government and managed by an agnostic operator, DNB. DNB sells wholesale to all telcos and other network service providers or solution providers and they, in turn, tailor their products and pricing to compete for end-consumers, individuals and enterprises, based on differing strategies and target markets. This opens the retail market to free competition and, since no telco owns the infrastructure (no telco will have an unfair advantage), it will be a level playing field — ensuring the best options, in terms of pricing and innovative products, for consumers.

By sharing out the costs of just one infrastructure, it also means faster rollout and the lowest prices for consumers. Case in point: The telcos had planned to begin 5G rollout in 2024 and only gradually in areas as and when they became financially viable. Remember, it took them six years to breach 80% coverage for 4G. There are still limited 5G use cases currently, but its availability is critical for enterprises, as digitalisation will drive future investments and growth. An SWN also ensures optimal use of spectrum, a scarce and precious national resource.

The Future: From oligopoly to free market competition to … duopoly

Under the Cabinet’s new directive, Malaysia will switch from a 5G SWN model, yes, but not to an enhanced Dual Network model. Rather, the telecommunications industry will become an effective duopoly market. This would be a big step backwards for the country — except it is even worse. This conclusion is derived from details of the tender documents for the second 5G network issued by the Malaysian Communications and Multimedia Commission (MCMC) on July 1, 2024.

Now, there will essentially be just two options for consumers (down from five major telcos in 4G): telcos using 5G network 1 (DNB); or telcos that own 5G network 2. Worse, the second 5G network is NOT a wholesale network that will enhance system resilience and provide redundancy, as widely narrated. That was only a red herring. The second network is now also allowed to sell directly to end-consumers and enterprises. In effect, it is no different from the 3G/4G telcos, which were given spectrum and built out their own networks in the past.

While the second 5G network is required to be a standalone network architecture, there is no timeline for a nationwide rollout. Therefore, what will happen is that the telcos will build out coverage in selected locations as and when there is sufficient demand to justify the capital expenditure (capex). Remember, the telcos’ first and foremost objective is to maximise profits for shareholders. Make no mistake, they will be cherry-picking. We saw this happen during 3G and 4G rollouts where small towns and rural areas had poor or no connectivity for years, lagging behind big cities.

Given that DNB has already rolled out nationwide, it is almost certain that the second network will leech off the former’s standalone infrastructure (since there is a requirement for the sharing of network and infrastructure between the two) where it has no coverage. As such, there is no urgency for the second network to roll out widely or quickly.

Indeed, the minimum standard on quality of service — DNB is committed to providing 100Mbps connection speed at cell edge — is glaringly absent for the second network operator nor is there a minimum capacity of the network. In other words, it will not be a full standalone infrastructure, at least for some time yet.

Furthermore, DNB’s price is regulated by MCMC to ensure the lowest prices to consumers, whereas selling prices for the second network operator only need to be “reasonable”. This imbalance in capacity and capability, financial obligations and potential profitability means DNB is surely being set up to fail. The question is why? DNB belongs to all Malaysians.

Conclusion

What is very clear is this: Malaysia has evolved from being an oligopolistic market (that is, controlled by the few giant telcos by virtue of their ownerships of the infrastructure) to being a retail market open to free market competition (by shifting ownership of the infrastructure to a government-owned, agnostic wholesale operator, DNB) and, ultimately, with the recent Cabinet decision, to becoming a duopoly marketplace that is eerily similar to the past, except it will most likely be much worse.

Instead of an industry controlled by five giant telcos under 4G, Malaysia’s future 5G (as well as all subsequent generations — 6G, 7G and beyond) telecommunications market will end up being controlled by just two groups of telcos. This is because each new generation of mobile network technology (even if it has distinct architecture/technology) is used together with previous generations. In other words, there is a “layering”, in that they are built upon previous generations of mobile networks. In effect, we will be giving up an opportunity to reform the telecommunications industry into a competitive marketplace free of rent-seekers and instead condemning the nation into a duopoly marketplace. This means less competition. Prices for consumers must rise because of the additional capex for a second 5G infrastructure, and splitting the spectrum means less operational efficiency. How is this better for Malaysian consumers?

DNB is an important part of the Malaysia Digital Economy Blueprint (MyDigital), established in 2021. Its rapid and successful deployment of 5G nationwide was instrumental in attracting more than RM160 billion of digital investments in the country. Malaysia is now one of the world’s fastest-growing data centre hubs. By contrast, the telcos had initially planned to begin investing in 5G only this year.

Now, DNB is being set up to fail. As explained, there is an obvious imbalance in capacity and capability, financial obligations and potential profitability between the company and the second network operator. DNB, which is owned by the government — and therefore every Malaysian — had already invested huge amounts to roll out 5G nationwide. Its infrastructure will now give the second network a free ride. The second 5G network will not enhance system resilience and provide redundancy as claimed, since it will not be a standalone nationwide infrastructure, at least not for some time. That was only a red herring. The reality is that we are back to the old rent-seeking ways, giving valuable national asset (spectrum) for free to the private sector and profiting the select few, at the expense of all Malaysians.

Communications Minister Fahmi Fadzil recently gave a public assurance that telcos participating in Malaysia’s second 5G network will not pass on any costs to consumers. “We have commitments from all of the [telco] CEOs and there is no word on additional cost for consumers … This is promised to me, and we hold to that promise.” Do governments now accept “pinky promises”? Businessmen have made — and will no doubt continue to make — all sorts of promises to achieve their goals, whether it is to secure a contract, concession or service. Let’s be honest. How many have honoured them, especially when there were no consequences to broken promises? Go on, write real punitive costs into the contract.

Since it is a promise made to all Malaysians publicly, it behoves us also to publicly comment on the honourable minister’s promise. What will the government do if the “no additional cost to consumers” promise is broken by the telcos in the future? Will there be a clause in the licence to be granted to the second 5G network operator stating that the licence will automatically be cancelled if additional cost is imposed on consumers?

Second, we can guarantee the minister that there will be “additional cost for consumers”. For starters, DNB must write off RM900 million worth of equipment already installed that could operate only in the spectrum frequency previously reserved for it but that is now assigned to the second 5G network.

Under the Access Agreements with the telcos, DNB is committed to delivering a minimum speed of 100Mbps at cell edge. The reduced spectrum now available to DNB (because the second 5G network must be given this spectrum to operate) means that DNB must increase its investments by a further RM1.7 billion as densification costs in order to meet the 100Mpbs speed requirement. As demand for 5G rises, thus creating congestion, DNB must add on more radio sites much earlier because there is less spectrum. This cost will just keep adding up. Even if DNB is compensated with 100MHz spectrum in a different frequency band, it still must expend an additional RM1.8 billion on new radios.

Thus, setting up the second 5G network is already a cost to DNB. Besides taking a loss of RM900 million, it will have to spend an additional RM1.7 billion, at least, to deliver the agreed minimum speed soon, and this amount will only keep rising. Although the telcos have subscribed for shareholdings in DNB, they can also “put” it back (or sell it back) to the government. Therefore, DNB’s loss is a loss for each and every Malaysian. So, honourable minister, your promise of “no additional cost” is guaranteed to be broken as surely as the sun will rise tomorrow. Anyway, on behalf of Malaysians, we promise to closely monitor the wholesale price from DNB and the retail prices for consumers as well as quality of service (speed, availability, consumer experience and so on). And we will update and publish the statistics for full transparency on the impact of this decision on the Malaysian public. The proof of the pudding is in the eating.

The Malaysian Portfolio was up 0.8% for the week ended July 10, outperforming the FBM KLCI, which gained 0.2%. CCK Consolidated Holdings (+3.9%), Insas Bhd - Warrants C (+3.4%) and Insas (+2.6%) were the top gainers, while KSL Holdings (-3.1%), IOI Properties Group (-1.4%) and UOA Development (-0.5%) were the notable losers. Last week’s gains boosted total portfolio returns to 214.9% since inception. This portfolio is outperforming the benchmark index, which is down 11.6%, by a long, long way.

The Absolute Returns Portfolio gained 1% last week, lifting total returns since inception to 3.3%. US stocks performed well with shares for Home Depot (+3.2%) and DR Horton (+2.6%) recouping some lost ground while Singapore banks, OCBC (+2%) and DBS (+0.8%) continued to hit fresh all-time highs. The three losing stocks in our portfolio were Swire Properties (-1.7%), Airbus (-1.6%), and Tencent (-0.5%).

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