Will 3G auctions finally happen in Thailand?

Regular readers will know that I am slowly working my way around the telecoms markets of SE Asia. Thailand has been a recent focus, culminating in a two-day trip to Bangkok to try to understand the market dynamics behind the recently announced 3G auctions.

The auction is reported to be for 45 MHz of spectrum in 5MHz lots in the 2.1 GHz band, with a simultaneous ascending bid process. Each operator will be capped at 15 Mhz of auctioned spectrum, and the reserve price for each 5 MHz lot will be US$142 million.

Whilst the political, regulatory and commercial background are all interesting perhaps the thing that most struck me during my visit was how hot my iPhone ran, how quickly the batteries ran down and how slow access to email (let alone other services) was. For a country that in many ways is one of the most developed in SE Asia, my personal user experience was that there is room for significant improvement in its telecoms infrastructure. As I learnt more about the market structure, the reasons for my experience became clearer. 

The IMF estimated that in 2011 Thailand (on a PPP basis) has a GDP of $616.783 billion, with GDP per head of $9,396, placing firmly in the middle-income bracket of countries. Transparency International’s 2011 corruption Perceptions Index ranked Thailand as the joint eightieth (of  182) with its peer group including Greece and Peru. 

The structure of Thailand’s telecoms market is singular. Thailand has two legacy state-owned operators: TOT and CAT. TOT started life as the body responsible for domestic fixed voice, with CAT dealing with international voice. These operators are (by international standards) relatively inefficient and as mobile penetration has increased have become progressively less material in the provision of service to end-users.

However, in a very Thai process, TOT and CAT licensed three non-state owned entities (AIS, DTAC and True) to use parts of the radio spectrum on a concession basis. The concession contracts allow the concession holder to use spectrum, but on the basis that they both share revenue and that their networks are constructed on a ‘build-operate-transfer’ model. TOT licensed AIS and CAT licensed DTAC and True. However, the total amount of spectrum licensed in this way is tiny by international standards and as mobile penetration and usage has increased all the networks are suffering congestion, making release of additional spectrum a priority for Thailand.

Thailand has now moved away from a system of spectrum allocation by TOT and CAT and that competency rests with the recently (2010) formed National Broadcasting and Telecoms Commission (NBTC). The NBTC’s predecessor previously tried to auction 3G spectrum, but the process was stopped by CAT, in a legal action that was eerily reminiscent of  legal challenges to auctions in other jurisdictions.

So, do I think that 3G auctions will finally happen in Thailand? Having spent time talking to a number of market participants and observers, the consensus seemed to be that it will all come down to politics – the formal process is almost a sideshow, and that whilst it was certainly worth tracking it would be rather foolish to reach conclusions about what would happen next based solely on the NBTC documentation.

BT accounts reveal fear of retrospective price adjustments

BT announced its annual results today.

Press comment focused on BT’s profit growth and the reduction in their pension deficit. However, both of those stories are not quite such good news for BT as might be supposed. Profit growth came from BT cutting costs faster than the fall in BT’s revenues – trends which are not exactly going to set the analysts’ models humming when plugged into DCF valuation models. BT’s pension deficit reduction was to a large extent driven by timing – not surprisingly it looks much better now than shortly after the 2008 market crash – and some commentators have suggested that BT has used some rather optimistic inflation assumptions in its deficit valuations modelling.

For me a bigger story was BT’s narrative that revenue growth would come from its (very capital-intensive) roll-out of fibre-optic access and associated services (such as BT Vision). With established competition from Virgin Media, the strong triple-play offering from Sky, potential new entrants such as Fujitsu and continued regulatory scrutiny there would seem to be significant implementation risk around this plan.

However, I always find that the most interesting sections of annual results are buried in the notes to the accounts. In note 11 (risks) BT says this about regulation:

“Communications industry regulation

Some of our activities continue to be subjected to significant price and other regulatory controls which may affect our market share, competitive position, future profitability and cash resources. Many of our wholesale fixed network activities in the UK are subject to significant regulatory controls. The controls regulate, among other things, the prices we can charge for many of our services and the extent to which we have to provide services to other CPs. In recent years the effect of these controls has required us to reduce our prices, although in some recent cases, prices have been allowed to increase in real terms.

Regulatory authorities may increase the severity of the price controls, extend the services to which controls apply or extend the services which we provide to other CPs. These controls may adversely affect our market share, our ability to compete and our future profitability and cash resources. Wholesale customers may also raise disputes with Ofcom, seeking lower prices on wholesale services which are not subject to direct price control.

Impact
In recent years, changes in price controls have required us to reduce our prices and in some instances to make payments in respect of retrospective price adjustments. Additional or more substantial regulatory price reductions could constrain our revenue growth. Regulatory actions may also indirectly affect us. For example, Ofcom has reduced the mobile termination rates that mobile network operators can charge to terminate calls on their network. There will be a stepped reduction in prices over four years starting from April 2011. This regulatory action will have a significant impact on future transit revenues in the UK and Europe.

We may be required to provide new services to wholesale customers on a non-discriminatory basis, increasing our costs and increasing retail competition. Disputes may result either in reduced revenue or increased costs going forward. We may also be required to make retrospective payments to CPs if it is ruled that past charging mechanisms we have applied have overcharged CPs. Appeals may change Ofcom’s decisions, which had originally been concluded in our favour.

Risk mitigation
We continuously monitor and review potential regulatory changes and disputes, and maintain a strategic dialogue with regulators and other key influencers on critical issues.[underlining added].

This is a very interesting statement in the light of BT’s recent loss in the PPC case in the CAT.

Fresh evidence may be introduced in telecoms appeals

Yesterday the Court of Appeal confirmed (in British Telecommunications Plc v Office of Communications [2011] EWCA Civ 245 , judgment of 10 March 2011) that there was no basis for restricting the introduction of fresh evidence into an appeal against a decision of Ofcom made pursuant to the Communications Act 2003.

The procedural point arose in one of the ‘Ladder Pricing’ appeals relating to non-geographic number termination rates (080) – see prior blog post for more detail on the substantive issue – when Ofcom objected to BT’s introduction of fresh expert economic evidence into the appeal. BT’s evidence in question had not been submitted to Ofcom by BT in the course of Ofcom’s first instance dispute resolution process, and Ofcom argued that either: (i) as a matter of statutory construction of the Communications Act; or (ii) as a general principle of common law, the fresh evidence should be excluded.

The CAT decided that BT could introduce fresh evidence at the CAT and Ofcom appealed that decision to the Court of Appeal. The Court of Appeal rejected Ofcom’s submissions, although it noted that there was not an unfettered right to introduce evidence, and that admissibility was at the CAT’s discretion. The question for the CAT was whether in all the circumstances that it considered that it would be in the interest of justice for new evidence to be admitted.

Against the increasing trend for Ofcom decisions to be appealed, this ruling may help to streamline Ofcom’s dispute resolution process as the parties will no longer feel compelled to argue every conceivable point before Ofcom to preserve their position on appeal, but instead will focus on the core issues for Ofcom to consider in what is (at least in theory) meant to be a swift process.