Telecommunication Sector: Moving towards Free Competition
Vipada Mavichak
Executive Summary
• Thailand’s telecommunication sector is transforming from state monopoly to
free competition.
• The sector needs to be fully liberalized by 2006 following Thailand’s commitment to the World Trade Organization (WTO).
• Some of the issues that the government is working on include the establishment of the independent regulatory body; the National Telecommunication Commission (NTC), the privatization of TOT and CAT, the conversion of concession contracts and the introduction of interconnection charge.
• Despite the absence of fully liberalized market, competition already exist in some parts of the sector, for example, the mobile phone and the internet industries; therefore, benefiting consumers the variety of products increases while prices are falling.
• For the mobile phone sector, competition now is focused on prepaid services as well as data and non-voice products. From state monopoly to free competition
Thailand’s telecommunication sector has evolved from state monopolistic sector in the past. The two main state-owned enterprises responsible for providing telecom services comprised of the Telephone Organisation (TOT) and the Communication Authority of Thailand (CAT). Private sector has taken part in providing telecom services in an early 1990s by being granted BTO (Build-Transfer-Operate) concession contracts mainly from TOT and CAT in response the rapidly growing domestic demands at the time. Today, to create level playing field, the government realises that the market structure of the telecommunication sector needs to be adjusted. TOT and CAT can no longer hold their regulatory functions (as concessions issuers) as they will become the private operators in the market soon after the process of corporatisation and privatisation has been accomplished. Thailand is a member of the WTO. It is also committed to the World TradeOrganization (WTO) to liberalise the telecommunication sector by 2006. As a result,the government has to find the solutions for many unsolved issues before the deadline approaches.
A long-awaited regulator
According to Thailand’s constitution, a specific independent authority, which is called the National Telecommunication Commission (NTC), is to be set up to regulate the telecommunication sector. The organization’s main responsibility is to establish rules and regulations to govern an increasing competition in the market. This includes rules on qualifications of the operators, licenses issuances, operating conditions, fees, tariff structures, and consumer rights. However, the success of the establishment of NTC has been delayed due to diverse opinions among related parties. Now the list of the selection committee is being considered by the senate house. If the selection committee is born, the further process of selecting the Commission’s member will be able to proceed after being stagnant for some time.Once it is established, the NTC will immediately take charge of several challenging tasks, for example, the introduction of number portability and the replacement of the current access charge system with the enforcement of the new interconnection charge scheme. The number portability is the universally accepted concept. According to the Federation Communications Commission, the telecommunication regulator of the USA, the number portability means “a service that provides residential and business telephone customers with the ability to retain, at the same location, their existing local telephone numbers when switching from one local telephone service provider to another.” Number portability is one of the mandatory services that the telecommunication operators normally provide to their customers in developed countries where effective telecommunication regulations are well-established. In the case of Thailand, the concept is yet to be imposed. But when the NTC is set up, the concept should be transformed into the real implementation to benefit telecommunications users in the country. For the interconnection charge, the issue can be said to be more urgent and at the same time more complicated due to different access charges conditions ofexisting concession contracts, which is seen by some operators as a main obstacle to a fair competition in the current market. Despite the absence of the NTC at the moment, the attempt to set up the interconnection charge scheme has been undertaken by the Information and Communication Technology Ministry (ICT Ministry) as the government realise the significance of the regulatory improvements of Thailand’s telecommunication sector. The Post and Telegraph Department was assigned by the ICT Ministry to study the possible rate structure of the interconnection charge among telecommunication service providers. It also held several discussions with private operators, which helped them to reduce the differences of their stances on the issue. The conclusion has been mutually reached but the ICT Minister, Mr. Surapong Suebwonglee, decided to wait for theconfirmation of the NTC before starting the implementation of this new interconnection charge scheme. The privatization of telecom state-owned enterprises
In addition to the NTC establishment, the telecommunication sector of Thailand also needs the same level playing field to achieve a free and fair competition among telecommunication operators. As a result, the current market structure has to be reformed. TOT and CAT have to give up their regulatory power to become solely telecommunication service providers.
In November 1997, the government approved a “Master Plan for Telecommunications Development”. According to the plan, TOT and CAT were to become private companies through the corporatization and privatization process.All of the concessions contracts that they both held would be converted into licenses. However, the privatization process has been delayed for some time due to some regulatory uncertainties on key issues, one of which is the framework of concession contracts conversion scheme. The other is the right business model for TOT and CAT when the two become private companies. Both issues, nevertheless, are very much interrelated; therefore, making the matters more complicated to be solved.
Despite some regulatory uncertainties, TOT and CAT were finally corporatized in 2002 and 2003 respectively. The next step for both is to undergo the privatization process. But before TOT and CAT can be privatized, all the concession contracts between the two state owned enterprises and private telecommunication operators have to be converted into licenses. The first draft of conversion scheme was proposed by TDRI, hired by the government at the time, but it was rejected by private companies for the reason that the scheme would result in heavy financial burden on them. The second proposal came from Intellectual Property Institute of Chulalongkorn University, which was also aborted later due to protests from public
which said the proposal was biased towards private companies’ benefits. The latest proposals are the results of the studies conducted by financial advisers of TOT and CAT. From the TOT’s side, the proposals come from Siam Commercial Bank Securities, Morgan Stanley and also from the group of its financial advisers. The proposals from CAT’s side come from BT Securities and Asset Plus. All the proposals have already been submitted to the ICT Ministry. The conclusion should be coming out very soon after the strengths and weaknesses of each proposal are properly evaluated. As for now, before any conversion process can take place, a part of concession fees that private companies have to pay CAT and TOT is transformed into
excise tax payments following the initiative of the ICT Minister since last year. It should be noted that the stagnation of concession contracts conversion process also reduces the likelihood that TOT’s and CAT’s shares will be listed in the stock market soon since it is nearly impossible to tell the asset values of both state owned enterprises as long as the result of the contracts conversion process is still unclear.Apart from the uncertainty of contracts conversion process, a proper business model for TOT and CAT is another issue that catches public attention. Earlier this year, Mr. Surapong Suebwonglee, the ICT Minister, initiated the idea of merging the two state owned enterprises before listing the shares in the stock market with the assumption that the value of the newly merged company will be boosted. However, the idea did not materialize in the end due to the preferences of both companies to workindividually. Therefore, the strategy had to be adjusted. The most likely solution is to set up a holding company to formulate the overall policy for TOT and CAT as well as to hold certain shares of both; therefore TOT and CAT will become subsidiaries of this holding company.
Current competitions in the market
Despite the imperfect competition of Thai telecom sector, it is undeniable that increasing participation from private companies has brought some competitive element into the markets. This phenomenon is obvious especially among the mobile phones operators and the internet providers. As a result, users can benefit from more various kinds of services with the falling prices from increasing numbers of mobile phone operators. For the mobile phone sector, at the end of 2003, the total number of mobile phone subscribers has reached 22 million people, a 22% increase from the total number of subscribers in 2002. However, all the mobile phone operators seem to acknowledge a slower growth rate in terms of number of subscribers from now on. The trend signifies that the centre of the competition now will shift from increasing market share to providing more customised products in order to increase their revenue from the services. The competitive environment in Thai telecommunication sector has intensified because of new market entries of international telecommunication companies. Orange, a giant European telecommunication operator, had expanded its services in Thailand by joining Telecom Asia of the CP Group in order to provide mobile phone services under the new company called TA Orange. Though it had to compete with the already well-established companies like Advance Info Service and DTAC, the company has still been able to capture 8.2% of the market share within two years after the launch of its services. However, earlier this year, TA Orange revealed some unexpected news that their foreign partner, Orange, decided to pull back their investment in the company by selling its 819 million shares (around 39%) at the price of one baht per share back to the CP group. Even after departure of Orange, the board of directors of TA Orange have remained adamant that their financial status and performance will continue to be of highest standard. The company now is on the campaign to promote its services under the new name; True. Hutch is another newcomer in mobile phone sector. It is a joint venture between Hutchinson Wireless Multimedia Holding Limited and CAT Telecom Public Co. Its mobile phone service is operated on CDMA 1X technology, which has high capacities to serve multimedia and entertainment functions. However, the service of Hutch now only covers the central region of Thailand as CAT has still preserved the right to provide mobile phone service through CDMA 1X technology in other parts of Thailand. Despite new challenged posed by foreign mobile phone companies, Advance Info Service (AIS) can still secure their dominant position in the sector by having 59.3% of the total market share at the end of 2003 with the total number of 13 million subscribers. The company’s total revenue last year reached 89, 492 million Baht, an 11.5% increase (y-o-y). The net profit of 2003 also rose 21% (y-o-y) to 18, 529 million Baht. The mobile service revenue has added a majority part of revenue from service and equipment rentals. Prepaid revenue in the last quarter last year also rose significantly due to higher average usage and a larger customer base. Second to the AIS is DTAC, whose market share is as big as 29.3% at the end of 2003. It has more than 6.5 million subscribers, 1.1 million of which were new subscribers last year. The company earned approximately 31, 781 million Baht as its total revenue in 2003. The figure suggested a slight drop from its total revenue in
2002. Yet its net profit still increased 24% (y-o-y) to 2,586 million Baht in the previous year.As mentioned earlier that the competition nowadays in Thai mobile phone sector has changed considerably. The popularity of the prepaid phone seems to outgrow the post-paid service. The growth rate of data and non-voice service is also exceptionally high. The diversity of customer demands leads the mobile phone operators to customise their service packages to match with requirements of each target group. In terms of paying scheme, the market seems to be clearly divided between post-paid and prepaid services. But whereas the demand for the former has seemed to reach its potential, the latter still enjoys high growth rate recently. It should be noted that of all 22 million mobile phone subscribers now, 81% of which, or 18
million subscribers, are the users under prepaid service scheme. So it is not a surprise that most of the mobile phone operators are now fiercely competing in the prepaid service market. Nevertheless, a dream of huge profits for these operators will not come as easily as one expected. One reason is that the average revenue per number of the prepaid phone ismuch lower than that of the post-paid service. AIS revealed that the averagerevenue per a post-paid number is more than 1000 Baht per month whereas one prepaid number approximately generated only 350 Baht per month. For DTAC, the revenue per a prepaid number was around 250 Baht per month, whereas a post-paid number can make more than 1000 Baht per month.The other reason that make the prepaid phone business more challenging comes from the fact that the phone companies have to pay great deal of subsidiesfor the handset for the first-time buyers without any certainty that the users willcome back and buy more credits for that number.However, experts agreed that a large profit is still obtainable if the operators can manage the tariff packages effectively enough. In addition to the voice services, data and other non-voice service is also another segment of the market that could become another source of profits for the mobile phone companies. According to AIS, although its income from data service currently accounted for 3% of the total income (most of which comes from SMS), it believed that data and non-voice service still has high growth potential. AIS forecasts the revenue from MMS will rise to 100 million baht in 2004. Last year AIS gained 20 million baht from its MMS. Recently AIS has joined with DTAC to allow their users to send MMS between two networks. This will cost the users of both networks 10 baht per each MMS. The agreement will mutually benefit both DTAC and AIS. DTAC is also expecting that the revenue from MMS this year could reach 50 million baht (rising from 18 million baht last year).
Conclusion
Its 2002 net profit was substantially reduced due to its 32.9 million baht loss from exchange rate transactions. Mattias Hommer and Andre Krause, “Getting prepaid plans to pay off”, Bangkok Post, 28 April 2004.
Telecommunication sector of Thailand will experience more changes within the next few years. The commitment to the WTO to liberalize the sector by 2006 will be the main driving force for the government to pursue further regulatory reforms. A slow process of the NTC establishment and TOT and CAT privatization has created some regulatory uncertainty for the sector, which negatively affects related parties. As a result, in spite of different approaches, TOT, CAT and private operators will have no other choices but they have to make a compromise among their themselves. The ICT ministry itself has also held several discussion rounds among itself, state-own telecommunication enterprises and private operators an attempt to break some regulatory deadlocks. The discussions often resulted in a further compromise among these parties. However, the real implementation of several issues such as a new scheme of interconnection charge still remains to be seen. Despite being only on a half way to fully liberalized market, some parts of the telecommunication sector of Thailand has already embraced a partial competition, for example, the mobile phone sector. With approximately 22 million subscribers last year, the total market share was occupied by three main operators; AIS, DTAC and TA Orange (or True as its current name). The competition has particularly intensified in prepaid services. Data and non-voice services are other areas where most operators see the opportunity for further income generating in the near future.
