Consolidation Coming for mobile industry: Etisalat’s Dumindra Ratnayaka

Etisalat Lanka's CEO Dumindra Ratnayaka, who retires end-March, talks of the fierce competition in the mobile phone industry, price wars and emerging opportunities.

By Echelon.

Published on February 17, 2014 with No Comments

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What’s Etisalat’s position in the industry today?
In terms of market share, we’re the third, with 4.5 million subscribers, slightly behind Mobitel. It’s difficult to give an accurate percentage because there is no regulator-set methodology to identify who is a subscriber. If you don’t use it for a month are you a subscriber? If you don’t use it for three months are you a subscriber? Or six months? Operators have their own norms of calculating subscribers. If you measure based on that we have about 28% of the market.

Research shows we have grown significant market share over the last three years. So have the bottom two, because naturally being at the bottom you can only grow somewhat, and the top two have actually lost share. In terms of voice subscribers, which is the measurement used today, the market is saturated. There’s hardly any new growth coming into the market. So there’s severe competition. The market is growing rapidly in the data area on internet penetration, specifically because of the availability of coverage. All five operators provide 3G coverage at various levels and also the fact that smart phones that came in the last one and a half to two years have changed the whole internet landscape completely. Today, a smart phone demands an internet connection and the user gets used to the facility, simply watching maybe YouTube, getting on to Facebook and understanding the power and value of the internet.

That has helped to drive the internet market and that’s where we are focusing today specifically because that’s a very infant market at the moment. But on the other hand operators are also in a dilemma because pricing as a result of over-competition is very, very low. In fact, in data pricing I think we’re most probably the lowest in the whole world. In voice pricing we are within the lowest 10.
This makes it a challenge to have a decent return on your data investments which are far more investment-hungry than voice investments because the data 3G and 4G work on very high frequencies, requiring a higher density of cell sites to give decent coverage and decent data suites to consumers, who demand data suites like streaming without interruption and buffering.
As an industry we’ve been discussing this with the regulator. We need to bring in some sanity because it is very, very important that operators are encouraged to invest. If investment gets stalled or held back because of poor returns, then overall, finally it is the country that suffers.
If the returns were better there would have been far more investments than what we see today. If you take data, the availability of high speed data is very limited. All the operators may be covering 35-40% of the island. But the population is far more distributed. If we are happy to say we cover the cities, I don’t think that’s right because everybody has a right to high speed data, not only people who live in cities. Something has to be done to give a decent return on investment.
Whereas when you take voice investments, when the initial and bigger voice investments were done which resulted in coverage of the whole island, the voice rates were far higher, maybe three times higher than what they are today. Today the voice rates are at two rupees; four years ago it was at six rupees. That’s when the bigger investments came, so there was bigger return seen at that time.

What needs to be done? Introduce a floor price?
The good thing about a floor price is that, when voice floor prices were introduced, there was some outcry especially from consumers saying this is not going to help consumers, but we saw all operators starting to make money again because the price war stopped. And that money has gone back into investments. So that return with better revenue growth and profitability resulted in operators investing. Even the heavy 3G and 4G investments started coming into the country as a result. A floor price may be a solution in a situation where operators compete with each other fiercely to get market share. The challenge is, I have always believed, before we focus on someone else’s customers, we must go after fresh customers.
There are so many people who don’t have data. That requires not lower pricing, but teaching people the value of the internet. Because if you look at the time when only voice was available, we only needed to provide coverage for people to start using mobile phones. That’s because we never had to teach people how to talk – they always had someone not close to them that they had to talk to.
When it comes to data and the internet, knowledge of the value of the internet is very limited. Sadly most of the publicity has only been on the bad side of the internet, such as porn sites being blocked. Not much coverage is given to sites that provide information and help students. I recently read of a very young girl who did very well in her studies and her parents attributed her success to the fact that they gave her open access to the internet. It’s better to teach children why they must not go into bad sites rather than block their access completely. We’ve discussed this with the regulators. It is the responsibility of not only operators but of the government to educate people of the value of the internet. Two things we’ve done help in that sense. Our Book Hub project. We went into e-books not to make big money by selling books – in fact to-date we’re not breaking even on that project. But it’s an amazing tool because people download and read books anytime they want and it’s cheaper than buying a paperback. But more importantly we know Sri Lankans do read a lot, if you take the number of publishers we have in an island of 20 million people, publishing local language books not sold overseas. So we wanted to use that as a way to show the value of the internet.
To use Book Hub you need to have a device and you need an internet connection. We introduced Web ‘Patashala’ to teach children to use the web, to give parents a reason why they should get internet and see its value. You can give tools and products to make them understand that the internet is good. Today even to check your spelling you type it on the web – that’s how much you depend on the web. The younger generation is aware but does not have access. Price is not the reason why people are not using the internet. It’s lack of awareness of its value.We’re doing a project with Sarvodaya called the Android Village Hub where we take devices like tablets to villagers and teach them to use the internet that’s been amazingly successful. These homes on average download 250 to 500 MB a week. That’s a large amount. It’s not using Facebook. They read newspapers, browse Wikipedia, in some homes they say they taught children the English alphabet. Gone are the days you need to buy an expensive computer to access the internet. You can do it with an Android tablet or cheap smart phone.

Are there too many players in the mobile phone market?
Yes. Five is too many for a 20 million population. Growth is slow because the market is saturated. It is not the growth we saw in voice subscribers two years ago.

Is Etisalat going to acquire Airtel’s operations here?
That’s speculation.

Would you be looking to grow through acquisitions?
I can’t comment on that because that’s a decision of the shareholders rather than me as CEO here. What I can say is that consolidation should happen. Consolidation will help the industry. We’ve seen consolidation starting with Dialog’s acquisition of Suntel. It is happening slowly.

What’s holding back number portability?
The regulator did investigate number portability. I think what’s holding it back is the cost. Number portability is a hugely costly exercise which either has to be absorbed by the operator or passed to the subscriber. Would you change your network keeping the number if you have to pay Rs10,000 to do that?
And operators are challenged in terms of profitability with the pricing that we have. Look at operators who declare their profits, at their top line revenue and bottom line profits, and look at percentage of profitability and think whether it’s interesting considering the investments. Revenue-profitability ratios are good if you’re not investing. But consider the amount of investments involved. People get confused when they see big numbers, absolute numbers. But one must look at the ratios.

What is profit as a ratio of revenue and investment as a percentage of revenue?
What percentage of revenue must you put back as investment? Then you suddenly start asking whether you want to do this (number portability). In such a scenario can operators afford to pay a $100 per subscriber? And how many customers are really demanding number portability? Will that percentage pay back that cost of investment? And it’s not only the initial cost. There’s subsequently quite a high maintenance cost to make it work. Those are the issues the regulator considered. The regulator really did not issue a final determination on number portability.

What are the trends in key parameters like minutes of usage per subscriber and revenue per minute? Are they improving?
They are not changing much. Average revenues, average MOUs are almost flat. That’s common in a saturated market and in a market where pricing is almost fixed because of the floor rates.
Growth is coming in data. How do you improve profitability? Obviously one way is to bring in cost efficiencies. In a saturated market how you sell and market yourself is different. I said data prices are low but I did not say data prices are not profitable. Again it’s up to the operator how to package and market it.
Do you want to bring it down to a level where it’s unprofitable? Then obviously you’re committing suicide, right?
You can use different technologies. For example, data, unlike voice, uses mostly international bandwidth. Say, if you access YouTube, their servers are not here in Sri Lanka – it’s like if all voice calls are like international calls. So we have to pay quite a high sum for international bandwidth.
But then you can have buffering techniques, you can have equipment to buffer locally what is commonly used, saving you international connections. There are many ways you can optimise your costs and improve your profitability. Even with that, paybacks are challenged. Better paybacks would have led operators to invest more freely which benefits the country.

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How is data use growing? Its share of revenue?
Right now for all operators data revenues are still in the range of about 10% or less of their total revenues. But it’s growing very steadily and the biggest contributor to that is the smart phone which has become a device where people can conveniently access the internet.

But is the penetration of high-end smart phones wide enough?
You don’t need high-end smart phones. You get smart phones for less than Rs10,000 which do the same thing. This is the value of Android. We banked on Android.
Now there are three eco-systems in smart phones. First is Apple and iOS which is a high-end device aimed at a niche market of affluent people.
Then came Android which is open source, open platform. Many phone manufacturers adopted it. So you do get phones for the very high-end like the Samsung S3s and S4s which are highly priced and very fast, and you get the low-end – below $100 – phones which are also fast and good because the chipsets they use are almost as good as what the Samsungs use. They are not quad processor but single processor but fast enough to watch TV, to browse the internet.
And now the Windows devices are there with Nokia which also has high- to low-end devices. Then there are the European, Korean and Chinese manufacturers. The Chinese make very good devices at almost half the price of other brands or even less.
It’s especially the low-end, low-priced smart phones that are driving the smart phone market.
Growth comes not from individuals increasing their usage but from the number of people walking into data usage everyday, which is very high. The enabler is the phone.

Are the networks sophisticated enough to offer fast, 4G speeds to all these people?
Why do you need fast, 4G networks to offer fast speeds to all these people? You don’t need 4G speeds to browse the internet. On average, you need only 1.5Mbps to watch an HD (high definition) streaming video. If you select an HD video from YouTube they will give it to you at 1.5Mbps if your network can support it without buffering. You will have peaks and falls.
But if you reduce the resolution of that video you’ll see the data rates falling because YouTube controls what they put out. Because you don’t need 1.5Mbps to watch it at low resolution. Otherwise their servers will get overloaded. If you’re browsing normal internet sites you don’t even need those speeds because you’re reading while it’s downloading. You need high speed if you’re sharing, where you share an internet router in office with six or seven people. That’s what 4G is actually supposed to cater to. Today, like when 3G was launched, there are no applications that demand such high speeds.
They got created and then people started using them. So in future there’ll be applications and products created to use even faster speeds. So 4G will become sort of a standard thing.
Today what matters for the country – 4G speeds that you may not really need or to use that money to improve our coverage and give people who don’t have access to data, access to data? You’re not going to put 4G in Dehiattakandiya where you don’t even have 3G. If you invest on 4G you put it on top of your 3G, in Colombo, catering to a niche market of people who think they need 4G because they have a device which is 4G capable but really don’t use 4G.
You give a decent 3G network with decent speeds and give that coverage to areas which don’t have it, the country will benefit more. I think the regulator made a mistake by allowing 4G investments in this country. We don’t need 4G. India doesn’t have 4G.
Or you can improve existing services. Right now we’re challenged even in 3G. Because 3G is done at a higher frequency the penetration is very low. Voice 2G is done at a lower frequency, 900 MHz; it goes anywhere. So when we provide 3G coverage it penetrates far less into buildings. So you’ll find in your phone you have full bars to take a voice call inside your home but when you go to browse speeds are low.
That’s not because the network is bad in providing you high speeds but because the signal is weak. When the signal is weak there are errors in data, which cause you to have a slower speed. So what’s important is to improve the coverage.
Then as operators we are challenged. For, to give you that coverage we need to spend a lot of money. In other countries, in Europe for instance, too you find indoor 3G reception is bad. And they tell the customer to buy an indoor unit at $250 to improve coverage inside homes.
For us in Sri Lanka that’s a challenge – to ask a customer who buys a connection from us to invest $250 on a device to keep inside his home.

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Could sharing infrastructure help?
It could. And it’s happening. There are two types. Passive sharing which is happening at quite a rate now among operators, where we use passive equipment like the towers, the site, electricity. Today of all new towers, 90% we share. Active sharing is two operators using the same equipment. But it’s not that easy. There has to be a certain level of co-operation and regulation that promotes it because when people start sharing the active area there could be all sorts of issues.
But I see in the next one or two years a lot of active sharing will also happen simply because operators are challenged to give a decent payback to shareholders. In that scenario operators are forced to adopt these methods to improve profitability and payback.

Why has Etisalat not got into mobile banking?
We have the intention and indirectly we are in it. But directly we are not in it because we strongly believe there’s no need for each and every operator to launch their own mobile commerce systems.
The whole system operates on very thin margins – it’s like credit cards. The commission on transactions is 2.5% or less. Banks make money on interest, not on 2.5%. For us operators there’s no interest. So we have to make money on 2.5% or less.
I believe operators must have shared platforms like network sharing which will bring efficiencies and volumes that will benefit everybody. We will not have our own system in the short term.
We prefer to give the customer the choice. We are going to connect with Dialog’s eZ Cash and Mobitel’s mCash. And if a bank-led model which is also possible under our law comes, we will connect with that. These connections are being evaluated by the Central Bank. Approval is expected in the first quarter of this year.

How’s the App Zone doing?
Very well. If you ask, are you making many millions out of it, no. We have over 400 developers on it and it’s growing every day. On average, they make about Rs5-10,000 a month. But the top guy is making over Rs400,000 a month. About seven of them have gone into having their own companies.
Started with one app. Now they’ve started recruiting people for software development. One guy is selling software in the Maldives and Japan. The whole idea was to create entrepreneurs and we’re doing that. And I’m very happy. That’s why when we launched it we said developers can have 70% of the money; we took only 30% which we shared with the software vendor, hSenid, who gave it free. It’s being heavily used. Many Sri Lankan developers have now got apps in Google.

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