Malaysia Telecom Brief

By Ken Zita





he
in
techno
T
Malaysian government has been heavily engaged
industrial policy for telecom and information
logies. Network services were liberalized in the
early 1990s under the nationalistic and closely managed
economic policies of the former Prime Minister, Tun
Dr.Mahathir Mohamad. Mahatirs detractors view these
early stages of market opening as being characterized by
an opaque regulatory environment that favored political
supporters, heavy restrictions on foreign investment, and
protection of the incumbent state-controlled network
provider, Malaysia Telekom. The Asian financial crisis
of 1997-1998 ushered in a new era of market
transformation. The government engineered a dramatic consolidation of the telecom services
market but simultaneously introduced an institutional framework for progressive policy reform.
The creation of an independent policy and regulatory body, the Malaysian Communications and
Multimedia Commission (MCMC), has brought a new dimension of transparency and public
accountability to technology sector administration.
Contents
Political and Economic Brief 3
Economy 3
Telecom Policy Environment 5
Telecom Sector Restructuring 6
MCMC 9
Telecom Market Environment 11
Mobile Market 12
Telekom Malaysia 14
Maxis 15
Digi 15

Large, state-funded infrastructure and training projects are a trademark of the governments New
Economic Policy (NEP). The Malaysia Multimedia Super Corridor (MSC) Malaysias answer
to Silicon Valley was crafted from textbook strategies for best practices in industrial planning
and latest generation communications infrastructure. While the MSC is an impressive
demonstration of the possible, the success of its
infrastructure development efforts has thus far been
discrete: programs aimed at increasing ICT usage and
promoting an e-society have yet to ignite widespread
adoption of broadband services and applications
throughout Malaysian society. Broadband penetration
today stands at less than 1 percent, a glimmer of
national ambitions. The government is formulating a
new National Broadband Plan to extend high-speed
access and content services nationwide and deepen
innovat
ion and
investm
ent in
new
Key Indicators
Malaysia
Population^ 25.58million
GDP# $248 billion
GDP real growth*# 7.0 percent
GDP per capita $14000 2004
Literacy 94percent
Phone lines* 4.5 million
Telephone density* 17.2 million
Mobile phones* 14.46 million
Mobile penetration
rate*
55.9percent
Sources: CIA Factbook, US Department of State,
#: Bank Negara Malaysia (Malaysian Federal Bank)
*: MCMC, ^:Malaysia Department of Statistic
Network Dynamics Associates
Ken Zita is President of Network Dynamics
Associates (www.ndaventures.com), a technology
consulting firm active in nearly 40 countries. Dr.
J ohn Ure, an NDA senior consultant, contributed
to this brief.
Network Dynamics Associates LLC www.ndaventures.com
Malaysia 2


services.

Of late the private sector has placed its bets only on mobile, including 3G, but more robust
broadband infrastructure is required for a modern information ecosystem to take hold. Many are
looking toward WiMax and IP local services, and greater unbundling of the local loop, to spark
the next phase of services growth.
Political and Economic Brief
Malaysia is a constitutional monarchy, nominally headed by the Yang di-Pertuan Agong
("paramount ruler"), and customarily referred to as the king.
1
Kings are elected for 5-year terms
from among the nine sultans of the peninsular Malaysian states. The king is also the leader of the
Islamic faith in Malaysia. Executive power is vested in the cabinet led by the prime minister who
must be a member of the majority party. The United Malays National Organization (UMNO) has
been the dominant political force since Malaysia's independence in 1957. Until 2003, the country
was led by Tun Dr. Mahathir Mohamad, who served for 22 years as prime minister, longer than
any other democratically elected leader in power anywhere in the world.

Dr. Mahathirs apparent successor had been Anwar Ibrahim, who was dismissed and accused of
immoral and corrupt conduct in September 1998. Although Anwar was convicted on both charges
in 1999 and 2000, the trials were viewed as seriously flawed and Anwar was eventually freed in
September 2004 after overturning his immoral conduct conviction. Mahathir replaced Anwar in
1999 with Dato' Seri Abdullah bin
Ahmad Badawi, who became Prime
Minister in 2003. Abdullah won an
overwhelming victory in March 21,
2004 general elections, with Barisan
Nasional, a coalition partner of UMNO,
winning 199 of 219 seats in the lower
house of parliament. UMNO itself won
110 seats. PAS, the Islamist party, was
reduced to six seats in parliament (from
42 in 1999) and lost control of the state
of Terengganu, a conservative
stronghold; it still leads in Kelantan.
Economy
The Government of Malaysia seeks to make the leap to a knowledge-based economy and achieve
developed country economic status by 2020. At independence Malaysia inherited an economy
dominated by rubber and tin. In the 40 years since its economic record had been one of Asia's
best. The economy sustained growth averaging almost 8 percent annually through the 1980s and
mid 1990s, and saw diversification into a variety of high-tech sectors. Manufacturing grew from
13.9 percent of GDP in 1970 to 30.9 percent in 2003, while agriculture and mining, which
together accounted for 42.7 percent of GDP in 1970, dropped to 8.7 percent and 7.2 percent,
respectively, in 2003. Malaysia is one of the world's largest exporters of semiconductor devices,

1
This section excerpted from the U.S. Department of State: http://www.state.gov/r/pa/ei/bgn/2777.htm
Network Dynamics Associates LLC www.ndaventures.com
Malaysia 3


electrical goods, and appliances, and the government has ambitious plans to make Malaysia a
leading producer and developer of high-tech products, including software. Malaysia is a major
destination for outsourcing after China and India.

The Government has taken an active role in guiding the nation's economic development.
Malaysia's New Economic Policyfirst established in 1971, sought to eradicate poverty and end
the identification of economic function with ethnicity. In particular, it was designed to enhance
the economic standing of ethnic Malays and other indigenous peoples (collectively known as
"bumiputeras" in Bahasa Malaysia). Rapid growth through the mid-1990s made it possible to
expand the share of the economy for bumiputeras without reducing the economic attainment of
other groups. One controversial NEP goal was to alter the pattern of ownership of corporate
equity in Malaysia, with the government providing funds to purchase foreign-owned
shareholdings on behalf of the bumiputera population. In J une 1991, after the NEP expired, the
government unveiled its National Development Policy, which contained many of the NEP's goals,
although without specific equity targets and timetables. In April 2001, the government released
its "National Vision Policy" for 2001-2010, which seeks to refocus the economy toward higher-
technology production. In 2004, the government announced plans to revamp the government-
linked corporations (GLCs) to improve performance and gradually reduce the states stakes in
them.

The economy rebounded well after the 1997-
1998 Asian financial crisis. It expanded 5.3
percent in 2003 and 7 percent in 2004, driven
by solid growth in manufacturing and services.
Growth for 2005 is estimated to reach 6
percent. This positive outlook, according to
PriceWaterhouseCoopers, is based on strong
domestic demand and continued export
performance. Export growth in 2005 is
expected to be tempered by macro tightening of
monetary policies across major economies.
2

The United States continues to be one of the largest sources of new investment in Malaysia and is
its largest trading partner. In 2003, bilateral trade between the United States and Malaysia totaled
$36.4 billion, of which $10.9 billion was composed of U.S. exports to Malaysia. Malaysia was
the United States' 10th-largest trading partner and its 10th-largest export market for manufactured
goods. The cumulative value of U.S. private investment in Malaysia exceeds $20 billion, 60
percent of which is in the oil and gas and petrochemical sectors with the rest in manufacturing,
especially semiconductors and other electronic products, according to an American Chamber of
Commerce 2003 survey. In 2003, the Malaysian Government approved $574 million in new
manufacturing investment by U.S. companies, with the bulk in the electronics and electrical
sectors.

Malaysia's population of 25.5 million (2004) continues to grow at a rate of 1.7 percent per
annum; about 33.2 percent of the population is under the age of 15. Malaysia's population

2
http://www.pwcglobal.com/extweb/indissue.nsf/docid/9f9936ad03b6fbcfca256f0f0005db03
Network Dynamics Associates LLC www.ndaventures.com
Malaysia 4


comprises many ethnic groups, with the politically dominant Malays comprising a majority. By
constitutional definition, all Malays are Muslim. About a quarter of the population is Chinese,
who have historically played an important role in trade and business. Malaysians of Indian
descent comprise about 7 percent of the population and include Hindus, Muslims, Buddhists,
Telecom Policy Environment
Malaysias strategy for the telecom sector, mirroring that of overall industrial planning, has been
guided by Vision 2020: the national goal of achieving developed country status by the year 2020.
The government has adopted a big project approach aimed at supporting its goal. The
Multimedia Super Corridor, or MSC, that stretches south of Kuala Lumpur to the new KL
International Airport, the creation of Cyberjaya as the center of the MSC, and Putrajaya as the
new seat for Central Government offices are all examples of large and multi-sector initiatives
designed to attract international IT and multimedia companies to Malaysia and improve domestic
skills and capabilities. Each has involved careful integration of state spending, latest generation
infrastructure, and public education and awareness programs aimed at raising technology literacy.
Billions of dollars have been invested in a supply push commitment to world-class
infrastructure. So far, however, the marquee development projects and attendant applications
initiatives for e-education, e-health, e-government and e-commerce have not led to widespread
diffusion of ICT innovation in Malaysian society at large.

Broadband penetration remains extremely low at below 1 percent, a relatively small figure given
the energy and resources that have been committed to stimulating the sector. Competition in last
mile services has yet to take root. Telekom Malaysia still commands an estimated 97 percent of
access lines, showing the policy of managed competition for fixed services to be less than
effective. The private sector, meanwhile, has been seduced by the quick returns and ready market
for mobile services and invests almost nothing in last-mile access infrastructure. Competitive
network operators have also been deterred by government policies and high barriers of entry
favoring the incumbent. Competition policy and unbundling, for example, are at a relatively
basic stage considering the sophistication and maturity of the local telecoms marketplace.
The government and MCMC declare a preference for establishing an enabling environment and
a light touch in guiding regulatory priorities. The light touch is a recent development and
applies chiefly to peripheral issues, not to those that have the power to transform Malaysias
carefully calibrated status quo. Difficult economic policy questions such as unbundling (and
supporting alternative carriers and access methods generally) are not codified in concrete action.
MCMC is routinely engaged in painstaking consultation with the private sector regarding core
issues
3
, though operators just as routinely seek to avoid any policy that can be perceived as
meddlesome interference. In some respects MCMC is in a difficult position: it seeks to advance a
social agenda but must negotiate with the powerful private sector to affect change. Government
energies are thus often placed on helpful but softer development issues such as capacity building,
vocational training and public awareness, in parallel with other bodies such as the Multimedia
Development Corporation. Because soft programs address the human component of
technological change they are clearly important. Until the core macroeconomic issued is
addressed, achieving development milestones will prove a challenge.


3
http://www.cmc.gov.my/Admin/FactsAndFigures/Paper/PC%20Report%20ECAN.pdf
Network Dynamics Associates LLC www.ndaventures.com
Malaysia 5


MCMC has begun a review of the National Broadband Policy. According to the Ministry of
Energy, Water and Communications, the goal is to ensure approximately 1.3 million broadband
connections by 2006 (5 percent penetration) and 2.8 million connections by 2008 (10 percent
penetration). Less clear is how the targets will be attained. Several high-profile application
projects are hoped to stimulate adoption, particularly in sectors where the government has a
principle management role. According to former Minister of Energy, Water and
CommunicationsDatuk Amar Leo Moggie: "The government's usage of broadband will be huge
like [in] the health industry and the application of e-government. So once you install the capacity,
there is a good chance to use and expand it. So there must be a combination between the
government and industry." Among the key vertical market programs being supported:
Government Departments at the Federal, State and Local Level - Approximately 900
government departments at 22,000 offices will utilize 84,000 broadband connections by
2006.
Schools - The SchoolNet program, completed in 2004, linked 10,000 schools and five
million schoolchildren.
Universities and Research Institutions - Research institutions and public universities will
be provided with 74,000 broadband connections while the Malaysian Education and
Research Network (MYREN) is planned to reach the Korea and Trans Eurasian
Information Network, among other research networks.
Hospitals and Clinics - Approximately 4,000 hospitals and clinics are expected to be
fully wired.
Libraries - More than 1,700 broadband connections will be provided to connect
approximately 800 libraries.
Community Centers. Broadband connections will be expanded to all Internet community
centers in most towns.

Given the right political support and incentives, policymakers may be able to look beyond
programmatic policy pushes (and obvious obstacles to broadband demand, such as content
restrictions), and focus on improving high-speed local access at affordable rates. The greatest test
will be to enable alternatives to Telekoms significant market power.
Telecom Sector Restructuring
Restructuring of the telecom sector began in 1984 with the creation of Syarikat Telekom
Malaysia (STM) as a state run telecommunications monopolist incorporated as a separate entity
from the then Ministry of Energy, Posts & Telecommunications (MEPT). In 1990 Telekom
Malaysia was partially privatized through a listing on the Kuala Lumpur stock exchange.
Telekoms largest shareholder after listing was PNB (Permodalan Nasional Berhad). PNB was set
up in 1978 as an instrument of the Governments New Economic Policy to promote share
ownership in the corporate sector among the Bumiputera: people of the soil or native Malays as
opposed to Malaysians of Chinese, Indian or other ethnic descent. The firms monopoly formally
ended in 1993 with the licensing of Time Telecommunications, part of the Time Engineering
Group, which was in turn part of the Renong Group, the industrial arm of the ruling political
party, UMNO. While market reform had indeed begun, the state and ruling political apparatus
Network Dynamics Associates LLC www.ndaventures.com
Malaysia 6


played a heavy role in managing the timing, scope and role of a nationalist vision for the telecom
sector. Industrial policy and political policy were thus firmly wedded together as in other
important areas of the economy.

Throughout the 1990s licenses for paging, cellular mobile, telephone call boxes, satellite
communications, value added services and fixed line networks were issued, albeit in a largely
opaque manner. Requests for licenses frequently by-passed the J abatan Telekom Malaysia or
J TM (the Department of Telecommunications) under the MEPT, going directly to the Prime
Ministers Office, with the J TM periodically not informed of licensing decisions until after the
fact. Many notable political allies and personal associates of UNMOs leadership were successful
at obtaining licenses.

To best understand the current consolidated market structure, some history is helpful. In the early
and mid 1990s a total of six additional mobile wireless licenses were issued in addition to
Telekoms 450 MHz Nordic system already in place:
1) Mobikom, a joint venture involving Telekom and Sapura Holdings, a company chaired by
Shamsuddin, a close associate of - Prime Minister Tun Dr. Mahathir Mohamad, received
licenses for 800 MHz and GSM1800;
2) Celcom, owned by TRI (Technology Resource Industries Sdn Bhd) and headed by
Tajudin Ramli, with close ties to the Renong Group, received a 900MHz license;
3) Maxis, the mobile arm of Binariang (which had received a license to launch Malaysias
first satellite, Measat, and to offer broadcasting and Internet services), and owned by T.
Ananda Krishnan, one of Malaysia's richest people and a close associate of Dr. Mahathir;
4) Mutiara Swisscom (later renamed Digi), backed by Malaysian tycoon Vincent Tan; while
5) Sapura Digital, and
6) TimeWireless each received GSM 1800 PCN licenses.

The governments method for handing out licenses led to what is now an obvious result:
oversupply. Seven networks are clearly too many for a population then of about 20 million. The
first to be absorbed was Sapura Digital (STW, or Syarikat Telefon Wireless), which was merged
into Time Wireless to become TimeCel. The parent company, Time Telecom was renamed
Time.dotcom. Others quickly followed as the Asian financial crisis took its toll.

The 1998 suspension of currency convertibility left TimeCel and Celcom deeply in debt. To
manage the crisis the Government turned to the countrys pension funds, but only after rejecting a
life saving bid from Singapore Telecom in 2000 for Time.dotcom. As a consequence about $65
million of the Employees Pension Fund (EFP) was used to buy Time.dotcom shares. An IPO in
2001 designed to enable Time.dotcom to retire its debt was only 25 percent subscribed and
pension fund money was again used as share prices collapsed, provoking a threat by Malaysias
trade unions to picket the funds headquarters. Finally, in December 2002, Maxis stepped in to
buy TimeCel for about $300 million.

Celcoms route out of the crisis was to raise a $375 million Eurobond in 1999 but defaulted on
payments in 2002. To prevent the threat of foreign creditors seizing the companys assets, the
Network Dynamics Associates LLC www.ndaventures.com
Malaysia 7


Government used another pension fund, Pengurusan Danaharta Nasional, to redeem the Eurobond
for $494 million. Telekom Malaysia was then used to make a hostile takeover bid for TRI as
Tajudin Ramlis political influence waned. In 2002-2003, a share swap was arranged between
TM Cellular, Telekoms renamed mobile cellular business, and Celcom, effectively merging the
two.

Following the financial crisis and the competitive woes of the large field of players, the
government aggressively encouraged rationalization of the sector. Three services providers
emerged, a structure that remains in place today. Telekom acquired Time.dotcom and Celcom.
Maxis acquired TimeCel. Telenor increased its minority position in Digi to effective control.
Each consolidated mobile operator has its own trunk networks and international gateway.

Consolidation of Malaysian Mobile Market, 1992-2002

TM Cellular
Celcom
MobiKom
Digi
Maxis
Sapura
Time
TM Celcom
TM Celcom
TimeCel
Maxis




Digi.Com







Although Maxis and Digi have the right to offer fixed line services, neither have chosen to do so.
Telekom still commands 97 percent of the fixed line market though it effectively halted major
expansion of the copper last mile.
4
The universal emphasis on the mobile network has left the
traditional access network strategically forgotten a trend that has complicated the slow pace of
adoption of consumer broadband.

What in Malaysia is called the universal service provision (USP) has fallen to Telekom.
Competition in fixed line services began in the early 1990s and, in 2001, the MCMC opened the
way for any operator to become a designated network in the provision of services to underserved
areas. Unfortunately, the history of interconnection in Malaysia is a textbook case of how
dominant operators use their market power to thwart competition.
5
The first commercial
agreement between Celcom and Telekom Malaysia had Celcom pay the full PSTN rate and was
required to bear the costs of setting up the points of interconnection.


4
See MCM A Report on Public Consultation on Effective Competition in the Access Network 18 November 2003 at:
http://www.mcmc.gov.my/facts_figures/papers/discussion/ViewFAFPaper.asp?cc=227993&pt=678845
5
J ohn Ure (2000) Malaysia: Interconnection Case Study for the ITU at
http://www.trp.hku.hk/e_learning/pdf/case_study_my.pdf and
http://www.itu.int/osg/spu/ni/fmi/Mobile_interconnection_Malaysia.ppt#11

Network Dynamics Associates LLC www.ndaventures.com
Malaysia 8


With such a lopsided playing field, the policy of unbundling network elements takes on special
significance. MCMC has been slow to push for unbundling in part due to pressure from
Telekom, in part because Maxis and Digi have been almost one-dimensionally focused on
mobile. Neither has shown interest in fixed line networks. With political pressure rising to
improve broadband members of Parliament openly ask why broadband penetration is 100 times
higher in Korea than Malaysia unbundling would seem a natural step as a market-priming
initiative. So far MCMC and the government have been slow to act.

Foreign companies are entitled to acquire up to 30 percent equity stake in existing fixed line
operations, an investment ceiling codified as part of Malaysia offer to the WTO. Previously,
foreign interests were required to follow a complex formula of selling down a potential majority
share after five years. The 2004 change of leadership at UMNO, with Dato Seri Abdullah
Badawi succeeding Dr Mahathir as Prime Minister, opened a related chapter. Temasek Holdings,
Singapores state-run investment arm, was allowed to purchase 5 percent of Telekom Malaysias
shares, a move widely interpreted as lessening of friction between the two regional rivals.

MCMC
The Malaysian Commission for Multimedia Communications (MCMC)
(http://www.cmc.gov.my/) was established as an independent regulator by the Communications
and Multimedia Commission Act of 1998, replacing the J TM. An Industry Forum among
operators was established at the same time to encourage self-regulation wherever possible.
Despite having difficulties recruiting sufficient expertise in its early stages, the MCMC has
matured and has made significant progress promoting transparency and regulatory consistency.
The MCMCs mandate extends to cover the convergence of telecom, IT and TV.

The 1998 Act proscribes 10 policy objectives that reveal the governments overall strategic
objectives for the information and technology sector, and specifies goals for its managed-market
approach to social engineering: The national policy objectives for the communications and
multimedia industry are:

(a) to establish Malaysia as a major global center and hub for communications and
multimedia information and content services;
(b) to promote a civil society where information-based services will provide the
basis of continuing enhancements to quality of work and life;
(c) to grow and nurture local information resources and cultural representation that
facilitate the national identity and global diversity;
(d) to regulate for the long-term benefit of the end user;
(e) to promote a high level of consumer confidence in service delivery from the
industry;
(f) to ensure an equitable provision of affordable services over ubiquitous national
infrastructure;
(g) to create a robust applications environment for end users;
Network Dynamics Associates LLC www.ndaventures.com
Malaysia 9


(h) to facilitate the efficient allocation of resources such as skilled labor, capital,
knowledge and national assets;
(i) to promote the development of capabilities and skills within Malaysia's
convergence industries; and
(j) to ensure information security and network reliability and integrity.
6

The MCMC may be regarded as more of a promoter of the communications and multimedia
industry than a regulator in the traditional sense.
7
The continued close ties between Government
and Telekom on the one hand, and Telekoms dominance on the other, really leave no other
choice for MCMC. While the MCMC has asserted the importance of anti-competition clauses in
Telekoms license and has assumed quite strong powers to impose fines, the preferred approach is
industry self-regulation no small matter when the state remains a significant shareholder in
Telekom.
8


Spectrum management comes directly under the MCMC.
9
According to an MCMC consultation
paper in 2000, most of the 900 MHz spectrum was used as GSM networks covered about 90
percent of the population, while 60 percent of the 1800 MHz spectrum was used by PCN
networks covering around 35 percent of the population. The shift to broader band data services
using GPRS and EDGE technologies were expected to exhaust the frequency allocations.
Reviewing spectrum assignment for 3G networks, the MCMC takes the view that duplication of
investment at the network facilities level does not promote efficient allocation of resources.
10
As
network equipment requires being imported the MCMC sees this as another reason for limiting
facilities building, and the potential of the MVNO (mobile virtual network operator) model to
provide choice, competition and stimulation to the local content industry. The other major scarce
resource is numbering, and the MCMC is in charge of national numbering plan (alphanumeric)
and electronic addresses (alphabetical).

Licensing has been separated into four horizontal markets to distinguish vertical layers of
activities. Within this breakdown, three licensing categories -- individual, class and exempt --
apply depending upon the degree of regulation considered necessary. Oddly, PSTN and cellular
mobile network service providers have separate classifications, contradicting the MCMCs
strategic policy to license services rather than technologies. The four horizontal categories are:

Network facilities providers (NFP) own basic fixed line infrastructure and require
individual (NFP1) licenses. In niche markets they require just a class license and none
is required to provide private networks or content production studio facilities.

6
http://www.msc.com.my/cyberlaws/ACT percent20588 percent20- percent20Communications percent20and
percent20Multimedia percent20Act percent201998/a0588s0003.htm
7
ITU Regulatory Workshop: Broadband, The Case of Malaysia, 29 April 2001, can be found at:
http://www.itu.int/osg/spu/casestudies/#asia along with similar studies.
8
See Ure (TRP) Interconnection from Mobile to Fixed: The Case of Malaysia for ITU, November 2000 at:
http://www.trp.hku.hk/e_learning/pdf/case_study_my.pdf
9
For Malaysias frequency allocations and a discussion of allocations for digital terrestrial TV see
http://www.cmc.gov.my/Admin/FactsAndFigures/Paper/dttb-TV.pdf
10
MCMC Concepts and Proposed Principles on the Implementation of IMT-2000 Mobile Cellular Service in Malaysia,
10 November 2000 http://www.cmc.gov.my/Admin/FactsAndFigures/Paper/Imt_2000.pdf
Network Dynamics Associates LLC www.ndaventures.com
Malaysia 10


Network service providers (NSP) can offer cellular mobile network services, broadcast
distribution services, access and space services with an individual license (NSP1)
while niche markets are covered by a class license. Private networks are exempt.
Applications service providers (ASP) can provide voice and data services over the
PSTN, such as calling card services, or over cellular mobile networks, and can provide
public payphone services with an individual license (ASP1). ASPs can provide
Internet services, audiotext and messaging services with a class license and electronic
transactions services, web hosting and related services without a license.
Content application service providers (CASP) need an individual license to provide
satellite subscription TV and terrestrial free-to-air TV, and no license to provide
Internet content services. No class licenses have been issued to CASPs.
As of year-end 2004, there were 181 individual licensees, out of which 37 were Network
Facilities Providers (NFP), 34 Network Service Providers (NSP), 90 Applications Service
Providers (ASPs) and 20 Content Applications Service Providers (CASP). There are also 209
class licensees: 29 NFPs, 29 NSPs and 151 ASPs.

The MCMC has adopted modern good practice by issuing standard licenses together with special
provisions for individual licenses, and is transparent about cost-recovery annual licensing fees,
charging 0.5 percent of annual gross turnover or RM50,000 (about $13,000), whichever is
greater.

NFPs, NSPs and ASPs with turnover greater than RM500,000 contribute 6 percent of annual
service revenues to a universal service fund, which the MCMC estimates is equivalent to 2
percent of the gross turnover. Included in the scope of universal service provision is Internet
access. Services with regulated tariffs, which means local call charges, new services yet to
establish themselves, and CASPs are exempt, while revenues from cellular mobile and
international roaming services weighted 0.5.
Telecom Market Environment
Only three major companies -- Telekom Malaysia, Maxis and Digi -- offer public telecom
services following the Governments encouragement of sector restructuring and the absorption of
fixed line operator Time.com and mobile operator Celcom into Telecom Malaysia, and of mobile
operator TimeCel into Maxis. Although all three have licenses to provide fixed line services,
Maxis and Digi are focused almost entirely upon mobile cellular leaving PSTN investment to
Telekom Malaysia. Fixed lines have fallen from their peak of 4.6 million in 2Q 2003 to under 4.5
million in 2004. Although the
Ministry has mandated the
rebalancing of tariffs, which should
increase the incentive to provide
local services, the substitution of
mobile for fixed lines means
investment in fixed lines is likely to remain predominantly from Government-owned Telekom
Malaysia. Until recently TM has been slow to upgrade its network to broadband, despite the
governments push to build a broadband society. Since 2002 the total number of broadband

Network Operators in Malaysia
Company License
Telekom Malaysia Fixed; Mobile 450, 800, 900, 1800 MHz
Maxis Fixed; Mobile 900, 1800 MHz
Digi Fixed: Mobile 900, 1800 MHz
Network Dynamics Associates LLC www.ndaventures.com
Malaysia 11


connections of all kinds has risen from
19,000 to over 200,000 though still
accounting for only miniscule market
penetration, especially for residential
customers. Over the same period cell
phones have risen from 9 million to 13
million, national penetration rate of just
over 50 percent. Growth has been fueled
by pre-paid subscribers.

Source: MCMC
Mobile Market
Malaysia is Southeast Asia's third-most developed mobile market, with 13.1 million cellular
phone users at the end of September 2004, accounting for about 52 percent of the country's 25
million people. Maxis is the mobile leader, with about 41 percent share, followed by Celom with
38 percent and Digi, with about 21 percent. Total value of
the market in 2004 was estimated at approximately $3.5
billion. The sector has seen compounded annual subscriber
growth rates of 20-30 percent every year since 1998 and
subscriber growth has predictably begun to slow. Merrill
Lynch believes that Malaysia may reach saturation levels of
around 60-65 percent by the end of 2005, while UOB-Kay
Hian Securities forecasts mobile phone penetration to peak
around the fourth quarter of 2006 at nearly 70 percent.
MCMC estimates that 76 percent of users are pre-paid (Maxis
79 percent pre-paid; Digi 99 percent pre-paid).

Voice services dominate the mobile market today. There are signs that consumers are
increasingly willing to embrace basic mobile data services: SMS has recently begun to take off
with its adoption in the youth market segment. Analyst reports found that Malaysia ranked J apan
and the Philippines in terms of high usage and high interest for advanced mobile services
strictly speaking, demand is for SMS services as 3G is not widely deployed. GPRS and
multimedia messaging services provide patchy coverage and networks have not been uniformly
upgraded to handle higher data speeds.
Maxis
41%
Celcom
38%
Digi
21%

Operators have been taking their time with 3G it is now running into a three-year saga
blaming both handset availability and soft market demand for the pace. 2005 is meant to be the
year when operators make the transition from pilot to commercial deployment. Telekom and
UMTS Sdn Bhd, a Maxis subsidiary, were awarded IMT-2000 frequencies through a beauty
contest in 2002 and began pilot operations in 2004. Each company received 2x15MHz paired
plus 1x5MHz unpaired spectrum, good for 15 years. The fee for the frequencies was RM 50
million ($13.2 million), or about $1.80 per population, a figure perceived as a government gift to
hasten introduction of new services. It is also a sign of an explicit policy to concentrate
investment in infrastructure rather than spectrum. Reports estimate that Telekoms rollout will
cost just over $1 billion while UMTS is expected to invest $920 million over the next 10 years.
Network Dynamics Associates LLC www.ndaventures.com
Malaysia 12



The MCMC is expected to solicit new bids for the two remaining 15 MHz blocks of 3G spectrum
this year, again managed through a beauty contest. Companies that failed to secure licenses in the
first round as likely to participate: Time dotCom Bhd and DiGi.Com Bhd have expressed
interest. E-Touch Sdn Bhd was
another unsuccessful bidder. It is
unclear as to whether the government
will open the bidding process to
foreign firms or, for that matter, to
investors from outside of the
telecommunications sector. One
approach reportedly being considered
is to stimulate financial investments in
spectrum and infrastructure
independent of operations. In 2004, the government was encouraging the creation of mobile
virtual network operators (MVNO) but the policy produced little traction.
Malaysia 3G Frequency Assignment
Spectrum per license 2x15MHz paired spectrum plus
1x5MHz unpaired spectrum

Frequency bands


Telekom Malaysia
1950MHz 1965MHz
2140MHz 2155MHz
2020MHz 2025MHz
Maxis/UMTS
1935MHz 1950MHz
2125MHz 2140MHz
2015MHz 2020MHz

Despite Malaysias big project approach to infrastructure development, the country has been slow
to develop broadband networks in the local loop. Several national trunk and submarine optical
fiber networks exist, and companies can access fibers from Fiberail as well as from the electricity
grid and from Time Engineering along the national highways. Telekom, however, has been slow
to invest in ADSL for residential purposes and SDSL for corporate business users. Cable TV
network, Mega TV (Cableview Service SBD BHD) has so far been unable to compete because it
uses broadcast MMDS technology rather than interactive cable. The slow development of
broadband has been in part due to the Ministrys hesitation over a policy of unbundling the local
loop to allow other service providers access to customers, a process still under consultation in
2004 when an Access List of network elements that should be unbundled on a commercial basis
was issued.

Where Malaysia has pushed ahead is in the use of wireless local loop (WLL), in rural areas using
CDMA technology that can offer data speeds of 144 kbps and thereby access to Internet as well
as voice services. In 2004 the Government set aside RM800 million ($200 million) in 2002 for
rural systems in 86 districts. As of 2004 Telekom had WLL capacity close to 200,000 though
only 10 percent take up; it introduced pre-paid cards to encourage take-up among lower income
users. Installation cost was RM50 and calling charges the same as for fixed line phones.
AtlasOne was also licensed, in 2001, to provide WLL to provide towers and wireless transmitters
for broadband access and services.

The ITU estimates the two leading ISPs, TMNet and J aring (Mimos) control around 90 percent of
the dial-up Internet access market, Maxis and Digi being two other important ISPs.
11
J aring is
managed by MIMOS Berhad, the Malaysian Institute of Microelectronics Systems. It will invest
about $52 million in 2005 to expand broadband connectivity services nationwide. In mid 2004
J aring purchased a non line-of-sight wireless access platform from Soma Networks, with which it
expects to migrate its nearly 800,000 dial-up customers to broadband. J aring hopes to secure
10,000 broadband subscribers on its my015 service by the end of 2005, beginning in Kuala

11
See http://www.itu.int/asean2001/reports/material/MYS percent20CS.pdf p.20
Network Dynamics Associates LLC www.ndaventures.com
Malaysia 13


Lumpur, Klang Valley, J ohor Baru and Penang, and reach 500,000 users by 2008 which J aring
estimates as 30 percent share of the broadband access market. It will offer corporate customers
speeds up to 12 MB per second, as well as a range of retail VoIP service packages.

Telekom Malaysia
Telekom Malaysia is the undisputed powerhouse in the national telecom sector. It has a
nationwide full service network born from its period as the national monopoly and covers all
services areas. It still carries the national universal service obligation. The companys fortunes
remain linked to voice, which still accounts for 82 percent of total market revenue. IDC forecasts
that fixed line voice services will fall -2 percent over the next several years, which may be
conservative given anticipated pricing pressure from VoIP. IDC believes that data services
revenues will grow 7 percent from 2003 to 2008, fed chiefly by traditional leased lines, IP-VPN
and MPLS services.
TMs advantage -- its effective monopoly over fixed line services, including broadband and
Internet access services -- has also been its weakness as there is little pressure from domestic
competitors to innovate. Now the pressure comes from falling international revenues and
Malaysias commitments to the WTO to open its market and create an independent regulator.
TMs strategy is falling in line as it plans a migration to Next Generation Network, the bundling
of domestic services such as telephony and Internet access, and a restructuring of its services into
wholesale and retail divisions.

Telekom is aggressively looking in its regional backyard for growth, and to improve its standing
among equity investment analysts that have a dim view of the companys balance sheet. In a
flurry of investment announcements in early 2005, TM bought a 27.3 percent stake in Indonesia's
third-largest cellular-phone operator, privately-held PT Excelcomindo Pratama, for $314 million;
pledged $300 million for its Bangladeshi subsidiary Telekom Malaysia International Bangladesh
(TMIB) (Aktel); and acquired Multinet, a major ISP in Pakistan, for $11 million with a plan to
invest $100 million or more in a national fiber optic backbone. It is also known to be eyeing a 26
percent stake in the privatization of Pakistans state operator, PTCL, worth an estimated $1.4
billion, just as Malaysia and Pakistan are negotiating a bilateral free trade agreement. These
investments suggest an investment strategy that focuses, in part, on the Green Crescent of high-
growth Islamic countries. Telekom also placed $156 million into Idea Cellular, in India's fifth-
largest mobile company, in a joint deal with Singapore's ST Telemedia. The portfolio is
estimated to encompass a total mobile subscriber base of 11.3 million. The company maintains
that overseas operations contributed 29 percent to Telekom's 2003 earnings, though this is
projected to fall to 21-22 percent in 2004.

While pursuing Southeast and South Asia deals with gusto, Telekom is also purposely divesting
its portfolio in the African continent. Its excursion into this geography in the 1990s was due in
part to a national vision of become a significant economic leader in south-south trade. In
November 2004 Telekom announced its intention to exit South Africa's Telkom S.A., its largest
overseas deal, for $790 million. The company realized a net gain of about $210 million from the
sale, which it had pursued in partnership with SBC Communications Inc of the U.S. in 1997.
Other recent divestments in Africa include its 60 percent stake in Guineas Societe des
Telecommunications de Guinee (Sotelgui), in which it invested an initial $45 million in 1995, as
Network Dynamics Associates LLC www.ndaventures.com
Malaysia 14


well as its 60 percent position Telekom Networks Malawi (TNM). The company is reportedly
considering selling its 30 percent stake in Ghana Telecommunications Company, where it has
invested about $90 million and become embroiled with a nasty legal fight with the government.
Telekom earlier disposed of its stakes in India's Usha Martin and Thailand's Digital Phone
Company (now a unit of Shin Corp).
Maxis
Maxis has steadily built up its role to become Malaysias leading cellular operator by focusing on
its core business, adding 600 base stations during 2003. Although Maxis has a fixed line license it
operates only in Kuala Lumpur. In 2003 the company acquired an additional 25 MHz spectrum in
the 1800 MHz band and with a 3G license will be ready to launch the service by 2006. Another
aspect of the Maxis strategy is to grow the data segment of its cellular market, from 7 percent to
12 percent of its total 2002-2003 revenue, including information services and games as well as
SMS and ring tones.

Maxis invested $25 million (RM96 million) in 2003 on its fixed line corporate services, which
exceed 10,000 accounts. Maxis also offers corporate VSAT services and won a government
universal service contract to supply a community VSAT service to 224 libraries and clinics.
Maxis parent company owns Measat, Malaysias satellite. Maxis has withdrawn from the
unprofitable dial-up Internet market, looking to broadband services instead. Maxis also operates
an international gateway, although downwards pressure on IDD prices limits Maxis investment in
international services.
12

Digi
DiGi.com, the smallest of the major operators that is majority controlled by Telenor, is holding its
own in the face of its two bigger rivals. Its overall share has increased to about 21.5 percent as of
fourth quarter 2004, up from 20 percent in 2003. Since 2000, Digis largest shareholder has been
Telenor (Norway) providing the company with financial and technical stability. Digi as the
smallest of the three remaining mobile cellular companies has benefited from the sustained
growth in market demand for cell phones in Malaysia, and from being granted spectrum in the
900 MHz bandwave to complement its 1800 MHz frequency assignment. Digi targets the lower
end of the market with customer-friendly services, such as being the first to launch MMS services
and leading the way to simplify the number of calling zones in Peninsular Malaysia to two and in
Eastern Malaysia to four. Digi relies heavily upon a dealership network with 99 percent of its
users being pre-paid, placing the company under continuous pressure to lower prices and at the
same time maintain quality and innovative services. To achieve this Digi is placing a lot of
emphasis upon backend systems, efficient billing systems, CRM systems, and IN software. Digi
is using EDGE technology as a migration path to 3G. Digi, which has an international gateway,
is trying to build traffic from partnerships with applications service providers at home and abroad,
including pre-paid IDD cards with ring tones download features.


12
See http://www.maxis.com.my/personal/about_us/investor/annual_report/25Dec04_04.pdf
Network Dynamics Associates LLC www.ndaventures.com