The country’s plan to deploy 5G under a single wholesale network (SWN) via state owned entity, Digital Nasional Bhd (DNB), has attracted much debate since early 2021. Given the potential loss of control of 5G rollout, spectrum ownership and lower profitability, the SWN model has failed to gain sufficient support from the existing mobile network operators (MNOs). The MNOs are pushing towards a dual wholesale network (DWN), arguing it creates a more competitive business model to ensure continuous investment and innovation of products and services. The government is expected to announce the Cabinet’s decision soon on its 5G plan. Our take is that the DWN will be favoured over SWN in order to garner support from incumbents and to avoid further delays to 5G rollout as the availability of high-speed and reliable internet connection is critical for digital transformation in driving Malaysia’s future economic growth. However, given limited avenues to monetize on 5G services in the early years of deployment, we retain our Neutral rating on the sector. TM remains our top pick as we believe it should benefit from the growing demand for fiber leasing and data centre solutions in Malaysia.

• Immediate cost advantage but... Clearly, the key argument for SWN is that it is more cost effective to roll out 5G by removing additional costs of network duplication (i.e. fewer sites and sharing of passive infrastructure). However, the absence of a competitive wholesale market structure could potentially create inefficiencies in the medium to long term due to the lack of economic of scope and incentives to continuously invest and innovate at both the wholesale and retail levels. As a single 5G network operator, DNB could only offer a narrow range of wholesale product while the MNOs will be less incentivized to differentiate and compete at the retail level as every player has the same access to a single network. This would also lead to the delinking of 4G and 5G service provisions, which may result in end users having to pay for higher retail prices due to lack of economies of scope. We also note that under the SWN model, the absence of competitive pressure to deploy 5G network in a timely manner could also raise the risk of cost overrun.

• Digital divide between urban and rural areas. Although the SWN model may solves issues with urban-rural divide as it could accelerate deployment of 5G into semi-urban and rural areas despite them being economically unviable, this agenda may not necessary be acceptable to its investors, which the government has yet to be identified at this stage. The Ministry of Finance (MoF) stated that the implementation of 5G through DNB will not involve public funds. Hence, if it involves private funds, there could still be risk that DNB may not be able to invest heavily in these unprofitable areas. Under the DWN model, conditions for the award of 5G spectrum can be imposed on the MNOs, compelling them to invest in the rural areas. Currently, the MNOs have already pledged to support the JENDELA initiatives to improve and enhance nationwide connectivity.

• Proposal for the establishment of DWN. Last month, four MNOs – Celcom Axiata, Digi, Maxis and U Mobile – have recommended that the government allows the DWN model involving DNB and a consortium of MNOs. Earlier on, the commercial launching of 5G which was scheduled to take place in December 2021 was delayed, primarily due to the MNOs’ unwillingness to sign long-term wholesale agreements with DNB. Arguably, in the immediate term, the MNOs should see an increase in free cashflow under the SWN model as they are not required to spend on 5G-related capex but this benefit may possibly be offset by the potential downside risks in the medium to long-term (which we have discussed earlier i.e lack of economies of scope, absence of competition leading to higher wholesale prices, reduced innovation and ability to provide services to cater for end-user needs). Based on the MoF’s estimates, the country’s 5G infrastructure and equipment cost amounts to RM12.5bn if it is done via DNB alone. Including financing, spectrum and other costs, the total deployment cost (over 10-year period) is estimated at RM17bn. A DWN model would mean doubling of the country’s 5G deployment costs to RM30-35bn. Although the DWN model comes with a costlier 5G deployment, a more competitive landscape should lead to lower cost in the long run.

• Impact on the telcos. Regardless which model the government chooses, monetizing 5G services would be a challenge in the initial years, in our view. Under the SWN model, telcos may be required to pay upfront wholesale fees to DNB while under the DWN model, high capex cost in 5G deployment would translate to higher depreciation, spectrum, maintenance costs etc. In terms of adoption rate, it is likely to be slow. Undoubtedly, the proliferation of the Industrial Revolution 4.0 and the Internet of Things would mean every single device and lifestyle will be connected through 5G. With 5G, bandwidth will expand, latency will reduce and thus, increasing the reliability, security and quality of services. However, in order for 5G to make business sense, a complete eco-system is required. At this juncture, the required eco-system is still lacking.

Source: PublicInvest Research - 15 Mar 2022