Indonesia as Case Study for Asian Fibre
There has been significant growth of late in investment in telecommunications fibre. Aside from meeting altered patterns of demand, the experience of the Covid pandemic accentuated the key role of broadband telecommunications in all industrial and commercial sectors. Fibre is the bedrock technology of broadband telecommunications. It is so in its own right, and also in that it provides the internal pipelines that allow broadband mobile to function.
Fibre investment has featured in access networks, in backbone networks and in submarine cables. Interest has been attracted from established infrastructure funds and from pension funds. Digital infrastructure, in this as in other areas, including towers and datacentres, has emerged as a dedicated asset class. It is against this that previously universal business models have come under scrutiny. Important changes are afoot, and, indeed, are evident in advanced markets.
Fibre Operators by Type, Disaggregation
Technical advances, together with regulatory considerations and emphasis on specific investment strategies have given rise to levels of disaggregation and fragmentation across the fibre sector. Some organisations opt to focus on asset ownership, some on infrastructure operation, and some on service provision. Some combine two, and some combine all three. Stating this succinctly.
- Level 1 Operations encompass infrastructure ownership and basic management and maintenance
- Level 2 Operations encompass infrastructure management and provision of network-centric services
- Level 3 Operations encompass delivery of comprehensive ISP Services, including OTT
Level 1 infrastructure owners primarily focus on expanding network coverage, with key metrics being premises passed and, to some extent, premises connected. Level 2 service providers need expertise in network design and engineering. Level 3 ISP operators must possess insights into B2B and B2C demand and market segmentation.
Historically, fibre operators were vertically integrated, and operated across all three levels. Commercial, financial and engineering logic have now given rise to disaggregation. The engineering skills necessary at levels one and two are different to those required at Level Three. This situation prompts operators to question their competitive edge and whether they have the necessary skill sets for their selected sectors. For instance, a highly skilled network manager does not need the same economies of scale as a commercial provider of standard ISP services. This poses questions for large operators about their ability to compete effectively across all three levels. Questions are posited for smaller operators regarding the adequacy of their skills for their selected sectors. Established players may need to revaluate their business models radically. Elements of this are in evidence at this time. We are seeing the emergence of InfraCos focused on infrastructure management, and possibly ownership, and of ServiceCos, which, in the limit, may not own any telecommunications infrastructure themselves. The competitive outlook has changed radically, as, indeed, have the metrics of economic returns achievable.
Fragmentation and Consolidation
The fibre industry has thus exhibited substantial fragmentation in various regions. While it would be an exaggeration to state that fibre design and engineering are simple, barriers to entry are typically much lower than to take one example, those that present in the mobile sector.
Europe has seen numerous fibre mergers and acquisitions, with more anticipated. In the UK alone, there are over 100 active fibre operators. Most of these operators do not benefit from economies of scale, and their technical and commercial capabilities vary significantly. As a result, consolidation and withdrawals are bound to happen, and, indeed, have commenced.
The Indonesian telecommunications market overall has exhibited innovation and leadership with respect to competitive paradigms. This was notably the case with respect to towers, and is now the case with respect to fibre. The Indonesian fibre sector has attracted considerable attention, with at least 20 active fibre operators. The domain of activity is considerable. At the upper market end, Telekom Indonesia and Icon boast 160k and 152k active connections respectively. At the lower end, there are smaller players with fewer than 1k connections each. The sector exhibits various fibre models, including operators at all levels of the fibre industry hierarchy. As the market develops, and inevitable ferment ensues, businesses need to revaluate strategies. Both consolidation and market exits are in prospect.
Such revaluation is already taking place in Indonesia, and it is anticipated to continue. This process is also expected to generate new paradigms for other regions in Asia.
Investor Perspectives – Separating Winners from Losers
Matters of importance to investors include construction costs, end-user connection expenses, targeted sectors, unique selling propositions, and investment goals. Not least, accurate perspective on operation skills is also required. Insight into all of these is essential to determine whether a company presents a viable acquisition prospect, a potential candidate for consolidation, or indeed merits any investment whatsoever.
Investor sentiment in emerging or 'sunrise' markets – such as the fibre sector – can become clouded by rapid early-stage growth and overly optimistic projections. This is clear in the UK, where an ambience of 'FOMO' - Fear of Missing Out - has influenced some investment decisions. Similar situations can be observed in Germany and with certain smaller Indian telecommunications companies.
Expanding on matters of investment assessment, specific issues that need to be considered include:
- What are the construction costs required to pass an adequate number of premises?
- What are the final costs involved in connecting premises to the network ?
- Which sectors are being targeted i.e., B2B, B2C, FTTH, fibre to towers, or fibre to datacentres? Each has unique capex and operational structuring requirements.
- What are the organisation's claimed unique selling points, and how valid are they? Do the executives possess adequate competitive knowledge?
- Do the executives have appropriate expertise and experience in relevant sectors? What is the operating model, and is it durable ?
- Ultimately, what are the investment objectives? If a sale is planned within 3-5 years, specific challenges arise that are vastly different to those of long-term investments.
Naturally, the due diligence process highlights the importance of matching investment opportunities with investor profiles. Some investors require more guidance than others in assessing core drivers and business or operating models. While certain investors can draw on their past experiences, others cannot. Additionally, some may have dedicated resources for technical analysis, whereas others may not.
Paul Carpenter, Partner, Hardiman Telecommunications, will be moderating a panel session at TMT M&A Forum APAC 2023 (May 10, Singapore) on the theme of Fibre Investment Strategies in Asia. Speakers on the session includes key leaders from Singtel, Protelindo, Airtel Business and Xenith IG.
Over 70 speaker in total are announced with 200+ senior digital infrastructure dealmakers attending. See the full agenda here
Stasis, Evolution and Discontinuities
A major and important backdrop is understanding that, in the telecommunications sector is rarely linear. Instead, it undergoes transformative changes in response to significant disruptions and discontinuities. Currently, the main drivers include those discussed in this paper, and, most importantly, the ongoing disaggregation that is already impacting past and present business models. Indonesia is to the fore in these areas, and may provide a reference model for other SEA regions forward.
---oOo---
Enda Hardiman is Managing Partner of Hardiman Telecommunications Ltd., a consultancy specialised in strategy, due diligence and valuation globally. Established in 1997, Hardiman Telecommunications operates from facilities in London, Hong Kong and Singapore. Recent fibre assignments include due diligence assessments, digital transformations, strategy planning and valuation in Europe, in Africa, in India, in South East Asia and in the Middle East.