Those high mobile EBIDTA margins? Sinful, says MCMC chairman

• Flip side of high operator margins are poor Quality of Service, low innovation
• Mechanism to ensure dominance does not have negative impact on competition

The pandemic has brought into sharp focus the challenges rural dwellers in Malaysia face in terms of mobile connectivity, especially mobile broadband. The many examples on social media of rural students seeking out stronger signals, sometimes at risk of life and limb, to follow school lessons or do homework, have given a face to what, hitherto has been a casual phrase thrown about – “digital divide” – by politicians, bureaucrats, journalists and social activists in describing the problem.

The main organs of government such complaints come to roost, the Ministry of Communications and Multimedia and its key arm, the Malaysian Communications and Multimedia Commission (MCMC) have over the past year been quick to intervene to help rectify matters.

The most recent being where a student had to sit by the roadside with his tablet to get video access. MCMC officials who visited the student’s home along with the unnamed mobile operator responsible for coverage in that area, realigned and strengthened the signal to his house to ensure he can experience video smoothly. Yet mobile players will tell you that this realignment simply means that someone else is now getting poorer service in that area.

And in another example of poor service in a rural area in Trengganu, the telco operator, Celcom, was instructed to roll out 4G coverage in the area asap which was only getting 3G quality service. This more lasting and effective intervention will help 1,000 residents from three villagers from October onwards. It was not revealed how the operator would fund the additional capex though the chances are that the Universal Service Provision (USP) fund would be tapped to help Celcom fund this build-out. (Celcom did announce accelerating a network upgrading and optimising exercise in Dec 2020 involving 4,700 network sites, of which 51% are in rural areas though it is unclear if this particular site was earmarked.) 

The bottom line here is that, irrespective of the remedy taken by the MCMC, inadequate capital investment by the mobile operators has led to such a situation where there is poor to nonexistent mobile broadband service in many rural areas in Malaysia.

And yet, the issue of poor rural mobile broadband service should also not lull us into thinking that urban connectivity is good enough. It is not, as a just released study on Penang Internet Connectivity based on 131 respondents by the Penang Institute clearly shows. The table below shows results for mobile network speed and user experience at home (which has become the new office) where 67% expressed dissatisfaction with the speed they were getting versus 27% who were satisfied.

All this against a decade long backdrop where the three listed mobile operators in the country, Celcom Axiata, Digi and Maxis Bhd all earn a globally enviable EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization) margin. It is no surprise that the Chairman of the MCMC, Dr Fadhullah Suhaimi (pic, below), describes the telco EBIDTA which averages 40% as being “sinful margins” and broadly hinting that the three listed telcos have put shareholder returns ahead of customer experience.

Fadhullah made the comment during a media briefing to some English medium journalists last week, specifically when addressing a question on whether the MCMC will approve the merger between Celcom Axiata and Digi and on his opinion on whether such a merger was needed. The fear being that this will lessen market competition and lead to poor(er) service and rising prices.

He also threw back a question, “Do you think there is enough competition in China, or South Korea, where there are three players. Or inother markets which have three or four at max players?”

He also shared that the MCMC was already looking at market competition and other issues with a market study launched that will be made public. The study was launched prior to news of the merger but takes on heightened importance now. “Any assessment on competition will be taken by way of the study which will be ready in Q2 2022.”

The looming merger, of which the three parties involved, Axiata Group Bhd, Telenor Asia Pte Ltd and Digi.com Bhd recently announced that they have successfully concluded the due-diligence exercise will now move to the stage of government approval with MCMC and Fadhlullah playing a key role.

Fadhlullah points out that a core principle of the Malaysian economy is premised on a free market philosophy but one that is tampered by laws on competition. “It is important to have free market dynamics while as regulator, we have the right to tamper to ensure the market remains healthy, dynamic and competitive,”

Pointing to the quality of service (QoS) of 4G in Malaysia, Fadhlullah asks why speeds for South Korea’s 4G run north of 35MB. “When you do a deep dive, you realize that each of the three telcos has the right size spectrum, coupled with a policy of high investment which then results in high QoS.” But for Malaysia, he acknowledges, “We do not have the right amount of spectrum given, nor investments done and as a result you get hit by poor QoS.”

Read also: MCMC Chairman: ‘No more Ali-Baba business’

Reinforcing his point he notes that in South Korea financial journalists do not hail the EBIDTA margins of the telcos. “No one cares. People talk about the high innovation and services in the market.” Contrast this to Malaysia which is known as the country with the best telco EBIDTA margins. “That is why, for mobile, I always say those are sinful margins,” he bluntly says, adding that Malaysians have to ask, “If we want to go down the path of having good services and high investments, do we still need a fragmented market?”

On concerns that the merger will clearly create a dominant player with 19 million customers (almost double of the next largest player), with revenue of US$2.98 billion (RM12.4 billion) and with the largest amount of spectrum, Fadhlullah says that within the existing MCMC rules, there is a mechanism to ensure dominance does not have a negative impact on competition. The issue of spectrum is not so simple with Fadhlullah pointing out that the spectrum from Celcom and Digi is supporting a lot of customers and a sizeable MVNO (Mobile Virtual Network Operator) market as well.

“We cannot say anything yet. Let us wait for the business plan. Give us time.”

On the issue of timing he points out that there have been 9 to 10 such large mergers, globally with the longest taking 22 for regulatory approval (in the UK) but generally it takes between six to eight months, which is the period he expects MCMC to take once it receives the business plan.

“Give us a bit of space to match the business plan against a series of parameters we have to ensure competition remains healthy without dominance.”