Feisty Hutch

Sri Lanka’s smallest telecom operator counts its losses and quietly plans for a silent revolution that could dethrone the princes of the sector.

By devan daniel.

Published on July 06, 2015 with No Comments

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Hutchison Telecom Lanka (Hutch) Chief Executive Thirukumar Nadarasa firmly believes Sri Lanka’s telecom sector will soon see a reordering of its market players. Hutch is the smallest mobile telecommunication operator in a market comprising five players, but Nadarasa is unfazed by the competition. But just when the telcos were putting a difficult period behind them, the government pulled the rug from under their feet. With heavy investment costs and the lowest tariffs anywhere in the world (in absolute terms), the government’s new taxation policy for the telecom sector is punishing. Nadarasa is very concerned, but he is optimistic that Hutch will ride the 3G broadband wave to the top of the industry, even surpassing competitors who have upgraded their networks to 4G. Feisty!

What was the potential Hutch saw in the Sri Lankan market and how far has the company come in realizing its goals? Is there scope for further growth?
Hutch entered the Sri Lankan market in 1997 and we saw great opportunity, even though there was still a civil war in the country. During the course of the 18 years we have been in Sri Lanka, Hutch has remained steadfast, continuing to operate and provide affordable mobile services to the people.

Hutch launched GSM services in Sri Lanka in 2004 and introduced 3G services in 2012. We are very excited that the industry is going through its next phase of evolution from voice to data. If we go back in mobile history; in the late nineties, Celltel was the premier operator, offering nationwide analog mobile services. Then Dialog, the first GSM operator, came along and though there were initial struggles with handset costs and availability they were able to catapult themselves into the number one position which is where they are today. I see a similar paradigm shift occurring today, where the industry is going through an evolution once again. As we embrace new 3G technology, it could result in a shuffle in the market order once again, providing more opportunity to operators in the telco industry.

I must add that although 3G has been around in Sri Lanka for about nine years, we have only really seen a change in the adoption of 3G in the past 18 to 24 months. We have seen a sharp increase in usage mainly due to the influx of affordable 3G handsets and the introduction of applications such as facebook and YouTube which make 3G more relevant to users. With the 3G market really taking off in the past 24 months, Hutch has deployed one of the largest 3G networks in Sri Lanka, covering all the districts of the country. This again shows our continued commitment to Sri Lanka, we are still very confident and positive about the opportunities in this country and that is why we have made a considerable investment in 2012 in deploying a 3G network. We are ‘extremely’ well positioned to take advantage of the current rapid growth of the 3G service uptakes and we hope that this will be the wave that would give us an edge in the telecom industry.

But other players have already launched 4G broadband?
Sometimes industry technology jargon overtakes the debate of what people really need. Let me explain. The move from 2G voice to 3G data was a paradigm shift and 2G data was barely enough to check your email. The shift from 3G to 4G however is merely moving from ‘high-speed’ data to ‘higher-speed’ data. In most markets 4G is deployed when 3G capacity is exhausted, which is not yet the case in Sri Lanka. 4G is not dramatically different, people are presently happy with the speeds they are getting with 3G. Another issue is that there is only a handful of applications in the world that actually require 4G data speed. What’s more, 4G devices are still expensive, a rich man’s toy and out of the reach of the masses. Thus I feel that 4G is really not the need of the hour, and therefore I am not too concerned about deploying 4G right now. On the other hand, 4G operators in Sri Lanka are not promoting 4G for handheld devices, rather only for fixed home and office use. At Hutch our approach is different; we want to deliver what the mobile market wants. When the applications that require 4G are available and when 4G-compatible handheld devices are more affordable to the masses, then we will deploy 4G. There is no major cost involved because once you have 3G it’s only an upgrade that is required to move to 4G.

You say there could be a reordering of industry players. How likely is it that this would actually happen?
It will happen, but it is a question of time. It depends on which operator is able to adapt to the new reality of broadband data instead of legacy voice. This kind of reordering has happened before, with Dialog overtaking Celltel with GSM, so there is a precedent. The challenge is to make a business deliver good returns despite offering the lowest data tariffs in the world. Conventional wisdom may say it is impossible. But I believe it is a question of adapting and I am quite optimistic that Hutch is well positioned to grow by focusing on 3G at this stage. We are now moving to the next level where people are more concerned about the quality of broadband speeds on smart phones and other mobile devices. In the next three to four years a majority of voice communication will move away to nonnumber based communication like Skype, Viber and Whatsapp. We are well positioned to ride this wave to cater to this need. Although Hutch has been quiet for some time, we are on a steady journey and we will remain true to the promise we make.

June 2015 Press Quality-107And why has Hutch been quiet?
For more than five years since 2007 the industry was in turmoil. A new player, Airtel, entered and disrupted the market with very low tariff offers. Everyone lost market share as well as revenue with even the big players reporting losses. This period was particularly bad on smaller players. Everyone was struggling to find their space and move forward. Rates fell to extremely low levels. Finally the regulator stepped in and established a floor rate and gradually stability returned to the market and the bigger operators started reporting profits. In the interim, two years ago our management showed its continued commitment to Sri Lanka and approved investment to deploy a nation-wide 3G network and we are today seen and recognized as one of the best 3G players in the market. Hutch Lanka’s parent is the Hong Kong-based, Fortune Global 500 company Hutchison Whampoa. However, the Sri Lankan operation does not seem to be doing too well. A recent Fitch Ratings report says, “Smaller, loss-making telcos including Hutchison Lanka and Airtel Lanka may consider exiting the industry as most of their revenue is pre-paid. Market leaders Dialog and Sri Lanka Telecom could acquire the smaller operators to reduce price-based competition and consolidate spectrum assets. Sri Lanka’s telco market is one of the most overcrowded markets in the world, with five mobile operators serving a population of 21 million”.

What’s your take on this and has the parent company been able to recover its investments in Sri Lanka and is there scope for more investment?
Hutchison Whampoa is a Global Fortune 500 company and as I said before we are also a very patient investor, and not a fly night operation, where we come in, look, and when things are not going right we don’t jump out with our parachutes. We arrived in the country during a 30-year civil war and I believe that shows our perseverance and commitment to the country and we have a very strong parent company that will help sustain us during difficult years.\

When will Hutch make profits again?
We will see a turnaround this year. I am quite positive that we would break even this year and be firmly established in the data broadband segment within the industry. I want Hutch to be the challenger in the mobile broadband services and I am optimistic that we can achieve this.

The government proposed a Rs250 million one-off tax and also proposed that the 25% telecom levy should not be recovered from consumers. What kind of impact will these proposals have?
We appreciate the fact that the government has national priorities and requirements. We have been through difficult situations before. We have been through a civil war, and we always endured. But we are concerned about the tax proposal.

We are an infrastructure business. We invest a huge amount of money upfront and we plan to recover the investment over a period of 15 to 20 years. We take a long term view and make various assumptions about our cash flow to help us recover investments over a period of time.

A one-off tax may not be a big issue and it does not greatly affect the long term investment recovery plan.

But any recurring cost like the 25% telecom levy has a bigger impact on our cash flow and destabilizes investment recovery plan.

Presently the mobile industry offers the lowest tariffs in the world, so mobile services are very affordable to everyone. Telecom service costs are not a major burden on the people today.

This can have severe implications on the future of the industry. Who is going to invest in upgrading and expanding to 4G infrastructure development? The government is sympathetic towards our concerns and the industry is working on a compromise with the government.

aHutch is perceived to be the smallest player in the Sri Lankan market, was this a conscious strategic approach, or because things didn’t go according to plan and why?
Due to the changing industry environment and circumstances, such as the competitive entry of Airtel, the telecom industry here has gone through cycles of profit and loss. We have not always been a loss making company, we were profitable sometime back, but unfortunately because the market environment has evolved it has impacted all telecoms, in particular the smaller operators.

Hutch is very patient and we are here in Sri Lanka for the long haul. We are prepared to wait for the right time and the right opportunity. Being small should not be the criteria to determine the future or profitability of a company; one should look at our history and our parent company’s commitment to Sri Lanka among other things.

Another point I would like to make is that there has been a lot of speculation in the past year or two about consolidations and mergers in the mobile market between various operators. As the market matures and the penetration level exceeds hundred percent, consolidation is an option. But people should understand that consolidation in the telecom industry is not as easy as one might think. We are operating in an infrastructure heavy industry, where all five mobile operators have developed and invested in nationwide infrastructure. Therefore when it comes to consolidating that infrastructure it’s not so simple. I think it is important that when people are commenting on mergers and consolidations in the telecom industry, they need to understand the inherent difficulties involved.

As an industry we are already sharing infrastructure, such as towers, so there is less need to build new towers and it lessens the burden on the operators. We have also been sharing distribution networks; the same shop on the street sells all our products. So you could say we are all very much into this concept of sharing as a way to be able to deliver the lowest broadband tariffs in the world. We believe it is very important and the regulator has also been very encouraging in promoting this concept.

Another example that I could give you on how we work together, without the duplication of infrastructure would be on how we have partnered with Dialog for their eZcash and Mobitel for mCash, there is no point in all of us setting up our own mobile money systems. So, we are very much into sharing to enable us to provide the country with one of the most affordable tariffs in the world, also delivering a sustainable business giving return-on-investment for all the operators.

Any numbers to show growth in mobile, broadband clientele each year since Hutch entered the Sri Lankan market, or the investment to set up the 3G network?
Hutch is a 100% privately owned company and as such we are not in a position to disclose any numbers to the public, however since the launch of our 3G services in 2012, we have been pleased with the growth rates we have achieved in the market.

Another point I would like to make is that the broadband penetration in Sri Lanka is still less than twenty percent and there is still tremendous opportunity out there for all the mobile broadband operators. Something important to understand is that mobile broadband is very different to mobile voice and I sincerely believe that the country needs all the available capacity of all five 3G operators in Sri Lanka to satisfy the future demand for broadband services.

Let me explain this a bit further, for mobile voice there are only 20 million people, and when you take only the adult population into account the numbers would reduce to around 15 million, meaning you can only sell 15 million voice connections. So there is an upper cap for how much you can sell on voice.

Therefore having five operators fight over 15 million customers is tough. When it comes to mobile broadband it is a completely different situation as every individual may have three to four devices that use broadband and each device will be consuming different amounts of data depending on the application.

Therefore in my opinion, this country will need the capacity of all five operators to satisfy the broadband needs of all the people of Sri Lanka and frankly one or two operators may not be enough to meet that need. That is why I am not particularly concerned that there are four other competitors in the market. I don’t view them as competitors. We will need all the players to pull together to address the needs of the nation without having to fight each other.

What are the challenges facing Hutch?
What many people here don’t realize is that Sri Lanka has one of the lowest mobile broadband tariffs in the world, not merely within the region but in the whole world. The Sri Lankan consumer is extremely lucky that they get one of the most affordable broadband services today. And as such, I don’t get any complaints saying that your cost or tariffs are too high and I can’t afford your service. I feel it is important that everyone recognises this as a key benefit that the regulator and the industry have passed on to the consumer.

However this has become one of our key challenges too since we are deploying advanced nationwide infrastructure, importing equipment to do so at dollar prices. We have to recover these investments with one of the lowest tariffs in the world. I believe this is something that the people and the government need to understand, they need to see how they can support us. The industry has delivered on its part to the people, with nationwide 3G service at the lowest rates in the world. We have done the job.The consumer has a choice in network, price and coverage. We need the government and people to support us to continue to provide a high quality service. I’d say this is the key challenge we are facing.

Hutch and the industry are offering the most affordable broadband data services in the world, which is the number one requirement of the Sri Lankan consumer. Apart from this, Hutch has offered a broad portfolio of data products. We have not given consumers one product that fits all, as you would see from our portfolio of products over the last two years. We have developed a whole range of products that address various needs, from the student, who can’t afford to buy too much data at a time to the heavy user who needs to download large amounts of data; where we offer them low rates at night with off peak offers.

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