This article summarizes the main points of discussion of our latest edition of Delta Talks, our TMT-focused podcast. In this episode, Vinod Nair, Senior Managing Director at Delta Partners, spoke with Suresh Sidhu, CEO at EdgePoint Infrastructure and former CEO of Asia’s leading towerco, E.Co, about the future of the connectivity and infrastructure in the ASEAN region.

Question 1:
What are some of the opportunities or challenges that you see ahead for Telecom service providers in Asia, particularly Southeast Asia?

The first word that always comes to mind when I think of mobile or telecoms in general in Southeast Asia is ‘exciting’. It has always been exciting, and I think it will continue to be exciting.

The excitement isn’t always a positive thing because mobile operators have had to navigate a pretty rapidly changing environment, not just at a domestic competitive or regulatory level, but also the emergence of the digital ecosystem, The biggest shift in our industry was initially underestimated by telecom players because they were still set very much in a mindset of service provider.

One of the positive developments of the last few years is that now telecom operators understand the digital landscape much better. There were initial attempts from them to try and become the next digital company, but probably experience has shown that this has been very difficult for telecom operators to do so. However, the more successful telecom operators have managed to navigate the digital shift, either by tagging on to the right partnerships or enabling the digital experience.

I think an opportunity for telecom operators is to make sure that they are seen as the preferred digital service provider, both by consumers and OTT players. And how to maximize value accrual as a service provider versus digital brands.

The second opportunity is on enterprise 5G. There are a clear number of use cases that are interesting, but it also means that operators need to move beyond pure connectivity to be more solutions oriented. You already see that with players like Maxis and others, acquiring SIS and other sort of enablement platforms for cloud in order to better serve customers. I believe that’s another shift that will happen, and it will be positive if executed well. The more existential question for operators is how much they do themselves and how much do they work and share with competitors or other partners in the telecom value chain.

Question 2:
Mobile network operators still require a huge amount of capital and 5G will bring another round of massive capital expenditure, but the returns just don’t seem to be attractive enough for a lot of investors. In most markets, the market leader has attractive returns, while the second, third or fourth operator have clear difficulty to obtain a sufficient return on invested capital.
Do you believe that the model fundamentally seems to be based on high CAPEX without sufficient returns to justify continued investments?

MNOs have moved on from treating CAPEX necessarily as new CAPEX, but rather describing a significant part of that as replacement CAPEX. There’s a high cost associated to maintaining the same market position, if you don’t invest, you tend to suffer from it.

There’s really no choice but to do 5G, and it will come at elevated costs due to interlink reasons to the spectrum bands and the sites needed. If 5G is successful, then an additional opportunity / constraint would be the significant needs for greater capacity in all the locations. I don’t think it’s going to be possible for an operator to do this entirely on their own, unless it covers a privileged position in the market in terms of market share.

Moreover, the amount of spectrum available in ASEAN is also reasonably constrained. I think without a cooperation model it will be extremely difficult to acquire the required spectrum. Unless as an operator, you can grab either a committed significant already pre-existing share or some access to considerable amount of fiber in the ground, or the ability to leverage a significant network of existing sites. Typically, these three things tend to go together with one operator.

Question 3:
We’re starting to see a lot more consolidation in the service provider industry. Recent cases in Indonesia, in Malaysia, and if you look more broadly across the region, you’ve had markets like India, where a lot of operators have stepped out of the market. But on the other hand, you still hear about new operators entering, the Philippines is a good example.
Do you foresee a lot more consolidation? Do you think some of the markets have historically had too many operators and that number needs to come down?

They’ve had many operators, but they all seem to have somehow survived and there seems to be reasonable public acceptance of those companies as well. However, the investment required by 5G is large for players that cover the number three or four in the ranking. These players will be forced to step into a partnership, whether that partnership is a full merger, a shared network, or some kind of co-build. Which ones will be more or less effective? It will depend by the country and the context the player would be in.

When I think of what the situation will look like in a few years, there are probably going to be multiple brands, because one thing operator seemed to have done reasonably well is to create a niche for each of their core brands. And that means something to a certain segment of the population.

However, the network itself may be partially owned or JV-shared. Perhaps, two players may merge but retain the two brands. Hence the range of options of how the actual network service will be delivered will vary quite considerably according to the partnership models. Operators are still in a position today to frame the way they want to take the opportunity. For instance, a full merger, complete end-to-end shared networks, is clearly the easiest way to understand things, but I’m not sure it’s the only way to achieve one’s goals.

Question 4:
The full spectrum of models of cooperation may range from, on one hand, simply sharing some passive infrastructure, to, on the other, doing a more comprehensive sharing agreement, potentially including active infrastructure or achieving a full-merger.
Do you think this is a journey from one extreme to the other, already started? Conversely, do you think there are parts of this model which are better suited than others? How do you think this may play out?

I think generally it is a journey from on one end to the other, and many people have already started it. However, the timeframe is compressed, hence it is not easily predictable if this process will leapfrog in the coming two or three years. Depending on how you define it, we could say that passive infra, e.g. towers, dark fiber, and elements like the physical part of the network, will largely be subject to a 100% sharing model, collocation model or partnership model. It doesn’t make sense otherwise, particularly today, since the setup cost of a site is determined by the cost of commodities like steel and cement, for which prices are rising.

I’d say that you always want to start with passive (when it comes to partnerships). And I would also believe that in the coming landscape, 100% of the passive is run outside the core network, whereas it is less predictable what will happen moving toward the other extreme of the range, up to 100% active. Will it be 100% active? Maybe. Maybe not. What is likely is that no single shared network may be able to serve all needs of all people in all countries, so there may have to be multiple models.

What’s interesting, then, is what’s in between and whether there will be more hybrid models that will appear between the full passive and the full active. Again, country situations, starting positions of operators, and incentives to cooperate and collaborate vary. Several factors are going to play a role in determining the outcome. But the simple message is probably that more shared infrastructure, particularly in the passive, will show up.

Question 5:
Where do you draw the boundaries on what you can or should share?
How do you draw this line of how much am I willing to share with my competitors on the service end of the business? And what do I want to retain in house in order to maintain my differentiation?

It’s very hard to generalize. I think it’s driven by two things: your economics and your perception of the world. Economics may be some sort of hard fact, but your perception of the world and your belief in your strategy is another. The simple answer is that commercial matters drive an infrastructure play. Of course, the ideal scenario is to have 100% of all infrastructure or have an operator to provide all the power infrastructure. But that choice is surely up to the operator to design and decipher. It will come down to sort of a commercial view at the MNO level as to what’s best fit for the long run. If you’re smaller and have less cash and less advantage economics, you’re going to favour a much more aggressive set of sharing. If you are a bigger operator, then I think you’re going to have more opportunities to chart your own path.

If I were a regulator, I’d want to try and make sure that the playing field was able to accommodate creating the best competitive dynamic in the market as well. I think ASEAN regulators have generally shown an attitude of sort of gently guiding countries and operators to solutions that add value over time. It’s very difficult to sort of put a line in the sand today, but there will be, I think, across ASEAN, some examples of very successful standalone 4G/5G MNOs.

And then there will be examples of shared network for 100% active sharing models where two or three operators are working together trying to achieve something of similar weight, similar impact as a standalone operator. Three or four years from now, I think the ability to create your own 5G network using more standard components is probably going to be much bigger than it is today. Therefore, if you are a technically skilled company, that’s still an option.

I think that these discussions are often a little too mired in A or B: there are people who can do something extremely different. There may well be some sort of OTT version of networks that could come in and kind of enable smaller niche players to be successful as well.

Question 6:
Do you see 5G driving that sort of willingness to share or even think out of the box more clearly?

We’ve been through 3G, 4G, and everyone talked about sharing before. And what’s happened is relatively high degrees of passive sharing, but all other kinds of elements have been largely managed by the operator. Networks have not also been that flexible for sharing. But the world is at a stage of more open architecture type solutions that allow things to happen, so I think 5G is the catalyst for more sharing. I’m not saying that everything will get shared, but that there will be a much greater degree of sharing, and there will be perhaps more infrastructure companies providing support to the operators, and new models for active infrastructure sharing.

I think the key – is a nimble and agile, respond to the changes, especially in the tech, which I think are going to be significant.

Question 7:
We’ve seen national broadband networks being rolled out in a few countries because the regulators, as well as the industry, perhaps decided jointly that it made sense to have a single network model. We’re starting to see the first signs of something like that in the mobile space as well.
Is that something that you think we will see more of a single wholesale network model and mobile as well? Or is that a difficult model to implement in a mobile context, given some of the spectrum challenges and other issues, unlike the fixed business?

I think it is more difficult to achieve such a single network model in a mobile environment, notwithstanding it has sense. It all depends on the national spectrum starting point: if the national starting point is relatively constrained, do you give it to one or two operators who would then drive the change but maybe keep 5G as a fairly exclusive product to themselves? Or do you try to democratize that by providing more open access to everyone? As a regulator, as a government, these are the things that one needs to think about. If there was abundance spectrum, I doubt we would be having this problem. However, particularly in ASEAN, we do have this constraint for the available, at least near-term/midterm available, spectrum for 5G.

I think there will be more examples of single wholesale networks, regardless of whether they can be super successful and sustainable or not. Maybe the only option in the long run, as various other spectrum options become available is unclear. The big argument is efficiency of allocating spectrum to multiple players. The regulator not getting involved in things like mergers and acquisitions and consolidations, so that they don’t have to dictate change, is a signal to the market to do it as it please. This is probably a fast way to get 5G going. Is it the long run the only way to deepen and entrench and to ensure that 5G innovation happens? That’s unclear. I think that’s maybe the big question mark on the single network model at the moment.

Question 8:
We’ve seen the historical success that tower companies have had when they first came out in markets like India and the rest of ASEAN. We’re now starting to see a lot of focus amongst some players on fiber, potentially on data centers.
What are your thoughts – how do you look at that infrastructure play opportunity without becoming a full-service provider? And what do you see is the attractive bits and the opportunities for both for players like you as well as some of the investors who are interested in that space?

You definitely never want to become a full-service provider, although I probably read these words at some point. It’s very important to understand your legacy and for you to stick to a clear focus about which part of the value chain you work within. And there are very peculiar differences between being a fiber player, being a data center player and being a tower player. I see a number of people trying to converge all of the three, but there are very large differences in operating capabilities and specialty skills that may make full convergence of those three into a single InfraCo quite difficult, at least in a three to five year period. Beyond that, owning them as a portfolio of investments is probably fine, makes a huge amount of sense: maybe intellectual synergies to be gained from all three. But I think what you do need to do, even though you’re a tower fiber or data center player, is just to be aware of the convergent element of infrastructure that you can play in as well. So I think for a TowerCo, you should be open to sort of looking at how fiber models can augment the business.

If an operator requires virtualized radio on their sites, I think we’d be open to some sort of discussion. The key is not to stray too far away from what you know and what you think you can deliver. But of course, you’ve also got to make sure that you don’t stay mined in some sort of ancient logic that makes you relevant to the customer, and their changing needs as well. Over the next three to five years, we’ll see TowerCo, data centre companies, FiberCo, still largely, with respect of the evolution, operate quite independently and be very clear subsectors of the telecom industry as they are now. But their ability to provide active or near-active or semi active, as I like to call it, solutions on their networks will probably increase. So we may see TowerCos perhaps do more shareable small cells. We may see FiberCos, do more shareable small cells hosting sort of micro networks for operators. That’s one example which worth exploring, or at least a path that operators would also find value in the InfraCos. But a full convergence of all infra elements so that we end up with integrated ServiceCos and InfraCos, I think, is a little unlikely for the time being.

Question 9:
When you look at the ASEAN region in the sector over the next five years, do you feel positive, or do you see some headwinds to navigate, or maybe some challenges that the industry still has to go through?

I’m super positive in spite of the huge headwinds I see ahead of us because I think there are large tailwinds for ASEAN as well. We’re just going to have to find our way through it. But I really believe that in ASEAN we’ve got the natural inventiveness, the persistence, and I think the curiosity to try and sort of create something unique. I believe that the future, indeed, is bright, and we’re just going to have to anyway, face it with a big smile, because there’s no point doing anything else.

 

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