Connected to Growth – The Telecom Sector


Roshan Madawela - The Research Intelligence Unit


Underwater superhighway

In the latest of new initiatives launched by Sri Lanka Telecom (SLT) with the Maldivian Dhiraagu Telecom, an optical fiber submarine cable system linking Sri Lankan and the Maldives was inaugurated this week. It is expected that this new connectivity will further enhance economic and telecommunication growth in both countries.

Speaking at the inauguration ceremony the head of SLT claimed that the new US$ 20 million system would strengthen the bilateral tie-ups in the South Asia region. The Dhiraagu launch comes hot on the heels of commissioning the Bharat-Lanka optical fiber submarine cable system with Bharat Sanchar Ltd of India in October of this year. He added that the new connection with the Maldives will beef-up SLT’s point of presence in Hong Kong and will be a step forward for the firm to become a regional telecommunications facilitator. Already SLT has high bandwidth global connectivity to South East Asia, Middle East and Western Europe.

The new fiber optical cable connects Colombo with Male and spans 850 kilometers at a capacity of 10 gigabits per second. It enables Dhiraagu to be connected to the rest of the world via Sri Lanka whilst also enabling for a superhighway level bandwidth between Sri Lanka and the Maldives that can handle 150,000 calls simultaneously as well as offer services like cable TV. The new connection allows Maldives to access SLT’s International Private Circuit (IPLC), Internet Protocol Virtual Private Network (IP-VPN), Asymmetric Digital Subscriber Line (ADSL) and Internet Service Provider (ISP) and voice based internet services. Cable TV, interactive programmes, movies on demand and games are also expected to be introduced next year.

The Maldives link is expected to be followed-up with a similar submarine system connecting Sri Lanka and South Africa with the aim of tapping the African continent. Discussion are said to be ongoing in this regard according to sources at colombopage.com and LBO.

Looking back

Sri Lanka’s first experience with the Telecommunications sector commenced with the 1858 telegraphic circuit link between Galle and Colombo. For the next 120 years, the telecom facilities of the island were limited to government agencies, private companies and wealthy individuals. The phenomenal growth, both in terms of customer base and technology, that is associated with the telecommunications sector did not fully realize until post-1980.

Bartleets Mallory Stockbrokers (BMS) Research reports that the landmark changes in the sector took place in 1980 when the postal and telegraphs services were separated, in 1991 with the formation of the telecom corporation which was then transformed into a private enterprise in 1997 with the sale of a 35 per cent stake to Japan’s NTT. Sri Lanka telecom being the first to extend fixed line services in the island is estimated to have a current market share monopoly of between 85 - 88 per cent. Additionally, it also operates mobile telephony services under its subsidiary Mobitel (Private) Limited.

A landmark year for the sector was 2003 when the Telecommunications Regulatory Commission of Sri Lanka introduced wide ranging reforms. Foremost amongst these were the liberalization of the external gateway by granting 32 new licenses and the introduction of the ten digit numbering system in line with regional and international standards. SLT was forced to concede its monopoly status as part of the changes and by mid-2004 32 new licenses were issued to private players to operate external gateways. One consequence was that IDD call rates were reduced by 50 per cent since March 2003. Low rates also led to a record number of IDD units used in the follow-up period. SLT also launched several innovative products including the Passport Card in order to stay competitive. The prepaid Passport Card enables customers to make lower rate IDD calls from any phone.

Meanwhile, Dailog competes with Hutch and Celltell for market share in the fiercely competitive mobile sector. Whilst Dialog has the lion share of the market with over 60 per cent of the customer base secured, low market penetration leaves space for the others to expand further.


Phenomenal growth

Around the globe, the telecommunications industry has been growing at a rapid rate. Between 1975 and 2000, the sector’s contribution to global GDP had increased twofold from $20 to $40 trillion according to BMS Research. It is expected that the growth rate will continue at around 6.6 per cent up to 2011.

Telecommunication is Sri Lanka represent one of the fastest growing sector of the entire economy along with banking and the construction sector. Supported by reforms and spurred on by competitive forces, the total fixed and mobile subscriber base grew by over 25 per cent during the first two quarters of 2006 according to data from the Telecommunications Regulatory Commission. Of this growth, mobile subscribers increased by 26.25 per cent to reach some 4.3 million whilst the fixed access growth accounted for 21.64 per cent to reach just over 1.5 million subscribers. The explosion of CDMA technology in the market accounted for the larger part of the fixed line growth. Internet and E-mail subscriber levels also rose by 9.32 per cent during the first six months of 2006.

Statistics indicate that the market is dominated by the four mobile phone operators who collectively account for 67 per cent of subscriber base as at the end of 2004. The remainder is held by SLT and the two other wireless local loop (WLL) service providers Lanka Bell and Suntel. Demand growth in the Colombo metropolitan areas for fixed lines grew by six per cent during 2004 whist demand in the rural areas grew by seven per cent. As at end of 2004, the Colombo metropolitan area accounted for 44 per cent of the total fixed lines.

Nationally, overall fixed line coverage rose from 4.9 per cent in 2003 to 5.1 per cent in 2004. However, mobile phone usage has been rising at a much faster pace with 12.1 per cent growth in 2003 and 16.5 per cent growth in 2004.


Forecast

According to HNB Research, there aren’t too many downside risks for the sector in the coming years due to current low penetration levels that suggest room for further expansion. In this connection, the sector is less likely to be adversely affected by the macro-economic factors or even the threat of renewed conflict in the island.

Furthermore, the mobile unit of SLT, Mobitel returned to profit during the second half of 2006 having recovered its huge cost that were incurred in switching to GSM in 2003. This has added to the spike in profitability of the overall SLT operations for the year 2006. SLT is forecasting a 68 per cent rise in profit for 2006, well above analysts estimates.

Dialog hasn’t publicly released any forecast for the year but the Malaysian owned organization is also tipped to make significant gains in profitability this year. It is currently the largest listed company in the Colombo exchange with a market capitalization of some Rs.1.55 billion. Sector analysts are expecting further sustained growth in the Dialog’s prepaid network and a wider subscriber base to boost earnings this year. The firm has already trail blazed 2006 by becoming the first South Asian company to commercially introduce the 3G wireless communication technology as part of its expansion plans.

According to HNB Stockbrokers Research, Dialog Telekom is also expected to report a rise in profits of 37 per cent for 2006 totaling some Rs.9.6 billion. By comparison, Sri Lanka telecom is expected to report a rise of 48 per cent in its profits for 2006 of Rs.4.6 billion.

However, other commentators are sounding much more cautious. Analysts at Smith Stock Brokers have claimed that “Telecommunications is a fairly defensive sector in the current context of war fears which could lead to a slowdown in the economy”. Up to October this year, the Central Bank had upped its key policy rates by a total of 87.5 per cent points in order to limit inflation, consequently raising the cost of funds for many companies.

Nevertheless, the two principal players in the telecom sector have been instrumental in the upward movements of the Colombo stock exchange during 2006 and the trend is not expected to relent. Moreover, if we consider that mobile phone penetration in China is around 50 per cent despite an estimated 40 per cent of the people living on less than $2 per day, Sri Lanka’s current market penetration of just 19 per cent offers encouraging possibilities for sustained growth.

Copyrights (RIU 2006).