Rumours of Telekom Malaysia deal to buy WiMAX king P1 don’t add up

By Tony Brown

Like most other people in the telecoms industry I do love a good rumour, there’s simply nothing better than working out the different reasons behind a rumoured deal and then wondering if there’s some magic angle that you’re missing, the link that makes the whole thing make perfect sense.

Well, I’ve spent much of the last week going over the speculation that Telekom Malaysia is planning a MYR1.8bn ($590m) swoop for the 61 per cent stake in local WiMAX player Packet One Networks (P1) owned by technology firm Green Packet and – so far at least – I am pretty stumped.

The driving force behind the rumours is pretty obvious, Green Packet reportedly wants to focus on its core technology business and get out of the operator market whilst Telekom Malaysia – having spun off Celcom as part of Axiata back in 2008 – has never hidden its desire to make a return to the mobile market.

Although Telekom Malaysia has pulled off a huge coup with the deployment of its 1.3 million FTTH High Speed Broadband (HSBB) network both on time and under budget the firm realises the dangers of being left on the sidelines as a fixed-line only operator, it knows that to keep pace with key rivals such as Maxis it needs to offer mobile services.

For its part, whilst denying it had received a bid for P1 from Telekom Malaysia, Green Packet management did release a statement saying, it was exploring possible strategies for P1, “Including the possibility of merger, consolidation, to sell a stake and other options to maximise shareholders’ value.”

The reality is different
The fact is though that it remains hard to see the value for Telekom Malaysia in buying into P1, the deal just does not add up.

Before we start let’s clear something up, P1 is one of my favourite companies in the region, they have done a brilliant job going from scratch to deploying 1,700 base-stations and reaching over 400,000 subscribers in a very competitive marketplace – and their CEO Michael Lai is indeed a gentleman and a scholar.

What’s more, it is not just myself who is an admirer of P1, South Korean mobile market leader SK Telecom is also a fan of the company and has built up a 28.2 per cent stake in the company since first investing in the operator back in mid-2010 when it paid $100m for a 25.8 per cent stake.

However, from a Telekom Malaysia point of view, acquiring P1 – even if it were at a bargain price – does not really make sense because of the fact that P1 is operating services in the TDD world – a fact that makes any acquisition something of a leap in the dark.

P1 was one of the first major WiMAX operators to announce that it would be de-camping to TD-LTE but the fact remains that even with major operators such as China Mobile and India’s Infotel Broadband Services backing TD-LTE – and despite the efforts of industry group the Global TD-LTE Initiative (GTI) – the technology remains very much in its infancy.

This means that if Telekom Malaysia took the plunge and bought P1 and decided to expand to a national TD-LTE network that the firm would be facing an uphill challenge because of the fact that the range – and price – of TD-LTE handsets and dongles would not match up competitively against those offered by rival 3G and FDD-LTE operators.

This is without even bringing into account the considerable capex that Telekom Malaysia would have to deploy to bring P1’s TD-LTE network up to the same coverage as that provided by the existing four 3G players, something that would be hugely expensive.

Moreover, from a competitive point of view it remains unclear what advantage Telekom Malaysia would garner by buying P1, even if it took the leap and built out a nationwide TD-LTE network, because by doing so all it would really achieve would be to create a fifth national mobile operator, competing with Maxis, Celcom, Digi.Com and U-Mobile – what would be the unique selling point of such an operator?

If Telekom Malaysia is not the White Knight, then who is?
If Telekom Malaysia is not the White Knight for P1 – and my bets are that it isn’t – then two questions remain unanswered, firstly, how does Telekom Malaysia actually regain a foothold in the mobile market? Secondly, what does the future hold for P1?
For the first question, if TM really wants to get back into the mobile market then its best option is to launch MVNO services with Celcom, there seems little need to actually go and buy another network operator.

Buying U-Mobile – or even third-ranked player Digi.Com – would be a costly deal and given the market landscape it is hard to see how Telekom Malaysia could really justify such an investment, especially when you take into account the maturity of the mobile market – unless either of the smaller operators become available at a bargain price.

Secondly, from P1’s point of view it clearly makes much more sense from a market perspective for the firm to try and reach a merger deal with fellow WiMAX player YTL Communications to form a single, national WiMAX/TD-LTE operator which could specifically target the specialist mobile broadband and DSL-replacement market.

The role model for such a merged P1-YTL operator is not hard to imagine, the management of both companies need only look northward to Japan and consider the considerable success of KDDI-backed UQ Communications to see how a ‘niche’ operator can succeed against bigger, stronger opponents and carve out a very good business for itself.

It always was a crazy idea for the Malaysian government to issue four WiMAX licenses, even the two operators that did finally launch services are fighting over too small a pool of subscribers, but a single, specialist WiMAX/TD-LTE player armed with 60MHz of spectrum and focusing mainly on providing mobile broadband services? That might just work.