Telecom Market Spotlight: AsiaTelecom Market Spotlight: Asia

Light Reading's Market Spotlight falls for a second time this year onto Asia (for the first, see Top 10 Telecom Markets: Asia). The aim is the same: to see, with the aid of 12 months' additional market data, how the region has fared this year, and to look at a couple of interesting growth stories. (For Europe, see Telecom Market Spotlight: Europe II.)

As before, one of those is IPTV, although it still faces challenges in many markets, but its role as a major growth driver of Asian telco revenue over the long term is clear from Figure 1. Pyramid Research notes that circuit-switched voice is already starting to decline in the region, and expects that broadband revenue growth in Asia-Pacific as a whole will fall into single digits by 2012. This leaves telcos scrabbling for a new potentially high-growth segment – no prizes for guessing which.

This will have considerable consequences for the operators, as Charles Moon, author of the recent Pyramid Research Telecom Insider "IPTV in Asia-Pacific: Profit Picture Fuzzy, but Momentum Building," from which Figure 1 is taken, stresses.

"As content procurement becomes increasingly important, IPTV is effectively forcing telcos to become more like media companies," he says.

The other area – mobile gaming, which is also leading operators into new content-oriented territory – is new. Gaming looks set to become yet another major driver to the phenomenal Asian take-up of mobile as the mobile world transits away from voice to broadband data applications.

In its July 2009 Report "Mobile Gaming in Emerging Markets – Five-Year Forecast and Impact Analysis," Pyramid Research argued that revenues for the global gaming market would continue growing rapidly to reach over $80 billion in 2014, and that mobile-gaming would be the fastest growing segment of this market, at over 16 percent CAGR.

"Mobile gaming has made astonishing growth over the past few years, at over 50 percent CAGR between 2005 and 2008," says Jan ten Sythoff, author of the report. "The region contributing the most new users was Asia-Pacific, mainly in emerging markets – China and India – as well as in Japan."

As Figure 2 shows, of the top five markets globally for mobile-games downloaders, three were in Asia.

Spotlight data

Most of the table data is supplied by Pyramid Research , a market research and advisory service company acquired by Light Reading Communications Network. Pyramid analyzes and forecasts demand for communications and media services, applications, networks, and devices in more than 100 countries, with a strong focus on emerging markets.

Future editions of the article will update, replace, or extend the data tables as appropriate.

Here's a hyperlinked contents list:

— Tim Hills is a freelance telecommunications writer and journalist. He's a regular author of Light Reading reports.

Next Page: Markets, Services & Definitions

Following the earlier Top 10 Telecom Markets: Asia, this Spotlight is limited to the following markets:

Limited is perhaps a misnomer, as these markets now encompass about 50 percent of the world's population.

Services
The Tables are limited to the following telecom services:

They include both business and residential customers. Services supplied exclusively to businesses, such as leased lines, are excluded.

Subscribers and service per-population penetrations
Penetration (calculated in various ways) is a measure of adoption of a telecommunications service in a country, and is generally used as a comparative measure of network development with other countries or to compare the different adoption rates of similar service offerings. The per-population penetrations in this report are calculated by dividing the total number of subscribers (or users in one case), both business and residential, by the mid-year population of the country concerned.

This article looks at the per-population penetrations for:

Narrowband subscriber lines: Defined as a subscriber line with a transmission speed less than or equal to 128kbit/s. Includes plain old telephone service (POTS) or publicly switched telephone network (PSTN), basic rate interface (BRI) ISDN connections, and low-speed fixed wireless connections.

Broadband subscriber lines: Defined as a subscriber line with a transmission speed greater than 128 kbit/s. Includes primary rate interface (PRI) ISDN connections, xDSL connections, cable modems, fiber connections, high-speed fixed wireless connections, and other broadband access technologies such as satellite and power line.

IPTV/Video subscriber lines: Includes all subscribers receiving video content (either broadcast or VoD) through IPTV set-top boxes (STBs), and primarily through ADSL or fiber broadband access lines. All IPTV STBs are accounted for, regardless of the revenue model (pay-TV, VoD-only, or broadcast channels only), and include hybrid set-top boxes (such as IPTV/Digital Terrestrial Television). The key criteria are the nature of the broadband access line used and the IPTV set-top box. This category does not include video streaming over the Internet, or any form of TV programming streamed over the PC.

Mobile subscribers: Number of registered mobile accounts (prepaid or postpaid) as a percentage of the population.

Revenues
All revenues are retail and exclude VAT (value added tax). Revenues are calculated on a bottom-up basis from their various components, as follows:

Data sources
All data in the Tables are sourced from Pyramid Research, which operates an ongoing and phased program of country research and data collection. Figures for 2009 are estimates released as part of Pyramid's third-quarter 2009 Forecast Release in September 2009. Revenues are given in U.S. dollars, converted at the average exchange rate for the year concerned.

Next Page: Market Spending

Tables 1 and 2 show that, in U.S. dollar terms, Asia's telecom service providers have largely shrugged off the global recession. While this is, of course, partly an exchange-rate effect caused by the decline of the dollar against some local currencies (although some, such as the South Korean won, have fallen considerably against the dollar, and so have had an opposite effect), it is also due to the continuing growth in the take-up of telecom services in the region, detailed on the next page.

Table 1 ranks the markets in the group by (estimated) spending in 2009 on the following categories of telecom services:

Table 2 does the same, but for 2008 and using updated figures where necessary to those of Top 10 Telecom Markets: Asia.

Table 1: Asia** Telecom Markets by Service Revenues, 2009

Table 2: Asia** Telecom Markets by Service Revenues, 2008

Overall, in U.S. dollar terms, the region's total fixed and mobile revenues increased by 7 percent in 2009. China, India, and Japan all managed double-digit percentage increases in the teens; the biggest decline was by South Korea, also in the teens. But the order of ranking of the individual markets has remained virtually unchanged, with Japan, China, India, South Korea, and Taiwan dominating the top five positions.

The huge importance of mobile to the region is emphasized by the overall 9 percent increase in total mobile revenues compared to the 3 percent increase in total fixed revenues. In China and India, for example, mobile revenues were up by 15 percent and 22 percent, respectively, while fixed revenues increased by only 3 percent in China and were flat in India.

Tables 3 and 4, which give in U.S. dollars the per-population total fixed and mobile revenues for the various markets, tell a similar story. Vietnam's position is interesting as being well above the bottom two and likely to be the result of its high mobile penetration. (See Tables 5 and 6, next page.)

Table 3: Asia** Telecom Markets by Annual Total Fixed + Mobile Revenues Per Population 2009, $

Table 4: Asia** Telecom Markets by Annual Total Fixed + Mobile Revenues per Population 2008, $

Next Page: Market Penetration

One of the points of per-population penetrations is to help to give a picture both of the state of telecom market development and of its future potential. Low figures suggest lots of scope for building up infrastructure and standard services, while high figures suggest scope for service innovation.

Tables 5 and 6 give the per-population service penetrations for narrowband, broadband, and mobile services for 2009 and 2008, respectively. It is clear that in most markets narrowband is already declining or effectively stationary – unsurprisingly, the largest relative falls were in South Korea and Japan, both markets being highly penetrated by broadband and mobile. (See Table 7.) Interestingly, Indonesia posted a huge positive relative increase of 24 percent (that is, penetration change expressed as a percentage of the 2008 penetration), followed by Vietnam at 9 percent, as both markets are growing from a low base. Indonesia's growth in narrowband penetration can be attributed to current fixed wireless deployments.

Table 5: Telecom Markets by Service Per-Population Penetrations, 2009

Table 6: Asia** Telecom Markets by Service Per-Population Penetrations, 2008

Table 7: Asia** Telecom Markets by Relative*** Service Per-Population Penetration Changes, 2009

But, in broadband and mobile, Asian telecom has had a broadly good year in 2009, and penetrations have continued to climb.

Indonesia and Vietnam topped also the broadband relative penetration changes for essentially the same reason as for narrowband. It is very clear that the region divides into two lists of almost equal length: the highly penetrated Singapore, Japan, China Hong Kong, Taiwan, and South Korea that is beginning to run out of growth, and the fast-growing lightly penetrated Indonesia, Vietnam, Malaysia, India, Philippines, and Thailand.

Mobile is somewhat similar, with some markets approaching saturation, but the potentially huge China and India are still trailing in the per-population ranking by a considerable margin.

Next Page: Mobile & Mobile Gaming

Embracing over one third of the world's population, China and India potentially form one of the big key markets for mobile gaming. Both have huge and growing numbers of mobile subscribers, and videogaming is already a very big market in China (where there is a booming industry, driven mainly by cybercafes and the popularity of multiplayer online games), while it is now beginning to take off substantially in India.

China
China will have about 770 million mobile subscribers by the end of 2009 after adding over 80 million during the course of the year. Behind this huge increase lie continuing government efforts to spread telecom services, an improving economic background, and falling prices as a result of growing competition introduced by the government's radical restructuring of the mobile operators in mid-2008 as part of the process of issuing the long-awaited 3G licenses. This led to the beginning of widescale network rollout during 2009.

"As in other markets, the launch of 3G networks is important to the growth of mobile gaming, because they enable faster downloads. But, in China, fast networks are extra important because they unleash the full opportunity for multiplayer mobile gaming, a key part of the Chinese gaming scene," says ten Sythoff. "And the number of Chinese handsets with gaming capabilities has also grown hugely, in part because they have become increasingly available since China Mobile and China Unicom started to use Java and BREW technologies to provision value-added services."

However, 3G-based mobile network gaming will not mushroom overnight, as the rollout of 3G networks is very much a work in progress. At the end of 2008, only 0.2 percent of all subscriptions in China were 3G, but Pyramid Research expects this to reach 14 percent by 2014. Nevertheless, Chinese mobile operators have long been betting on mobile gaming to generate revenue from value-added services and to stimulate mobile Internet usage, and there is a range of offerings using older technologies. Currently, China Mobile, which had about two thirds of mobile subscriptions at the beginning of 2009, controls about 80 percent of the mobile gaming market through its Moternet WAP platform.

China Unicom has a similar platform, but ten Sythoff points out that its WCDMA-based 3G network might give the company a future advantage as gaming services and handsets are better developed for this technology than for China Mobile's TD-SCDMA 3G network. China Telecom, the third mobile operator, is going for a premium mobile gaming offering on its EV-DO-based 3G network.

"From SMS-based games to the now more widely available downloadable games using BREW and Java technologies, the market is now moving toward mobile online games," says ten Sythoff. "We estimate the active mobile gaming user base reached 45 million at the beginning of 2009. The most successful mobile games so far have been core games, such as shooting games and role-playing games (RPGs), as well as card games. But the availability of multiplayer online role-playing games and casual games, which are the preferred types in gaming overall, is still limited."

He argues that a key development, for which 3G is necessary, will be bringing the successful wireline gaming market's free-to-play online model to the mobile platform. He points out that such games are preferred in China because they are interactive and social, and these attributes are strengthened by putting access to them in the pockets of gamers, which makes the gamers constantly connected to virtual gaming worlds and allows gaming to reach a wider audience. The free-to-play model also helps circumvent the market's endemic problem of game piracy, while producing streams of easy-to-handle small payments in an electronic environment, thus addressing barriers to adoption posed by other methods of payment.

One of China's leading mobile gaming developers, KongZhong, has already launched its first online mobile game, Tian Jie, in September 2008. This is a free-to-play multiplayer role-playing game with client software that can be downloaded from China Mobile's WAP platform. Users will, however, incur data network costs while playing it. By the launch date the beta version of the game had 2 million cumulative users, and by March 2009 it had 500,000 monthly active users.

India
Very broadly, India is enjoying a somewhat similar mobile market dynamic to China, but from a lower base. This is leading to an increase in mobile subscribers of about 160 million in 2009 -- a colossal figure and twice that of China.

But rollout of 3G networks, critical to future mobile gaming, is still very slow, and behind that of China -- some early 3G-type services started during 2009, though the formal licensing process is not due to conclude until the end of 2009. However, Pyramid Research expects the proportion of 3G subscribers to reach nearly 20 percent by 2014. Further, unlike China, India does not have an established gaming culture or industry, but ten Sythoff says that this is changing fast.

"Gaming, although still in its infancy, has in the past couple of years become one of the Indian entertainment market's booming areas," he says. "But links to the country's traditional cultural mainstays and main entertainment sources, Bollywood and cricket, are paving the way for gaming to become a part of the lives of a tech-savvy upper- and middle-class young generation."

The mobile phone is the main gaming platform, accounting for most of the players and revenue, because it is the first gaming-capable device owned by most middle- and lower-income young Indians. PC penetration, in contrast, is still very low, having reached only 9 percent of households at the beginning of 2009. Because India's cybercafe culture is less developed than that of China and other Asian markets, the PC cannot readily become the most popular gaming platform.

Nevertheless, India had about 15 million active mobile gamers at the start of 2009, for whom the top game content categories are cricket and Bollywood. Games based on TV shows are also becoming popular: Zapak and Indiagames, for example, have launched several games based on locally popular shows.

The major barrier preventing the market from moving forward faster is the limited capabilities of handsets, given the big installed base of low-spec devices for which gaming provision is difficult or requires a lot of customization. However, as 3G eventually becomes more prevalent, higher-end handsets such as smartphones will become more popular, and Pyramid Research expects them to account for over 20 percent of new sales in 2014.

ten Sythoff sees such growth being driven by gaming among new segments of the population – and people for whom free content and trials will be important – and by increasing adoption of higher-spec handsets. This move to better handsets, however, will be very gradual because of price sensitivity and the limited disposable incomes of many Indians. Games exploiting advertising (advergaming) will also be very important, as they deliver revenue from a different source.

Next Page: IPTV

As Tables 8 and 9 show, almost every major market in the region has now seen the launch of some type of IPTV service in the last few years, although with varying degrees of success so far. Nevertheless, the region increased the number of IPTV/video subscriber lines by over 60 percent in 2009 by adding about 3.7 million new subscribers. China, Japan, and South Korea (in that order) dominated this growth.

Table 8: Asia** Telecom Markets for IPTV, 2009

Table 9: Asia** Telecom Markets for IPTV, 2008

As examples of the varying operator experience with IPTV, Pyramid's Moon points to the contrasting fortunes of PCCW's IPTV service, now TV, (launched 2003) in Hong Kong and KT's IPTV service, Mega TV, (launched 2008) in South Korea.

"Now TV is generally considered the most successful implementation of IPTV globally because it quickly penetrated the saturated Hong Kong pay-TV market to become one of the largest players there in just under three years," he says. "This success rested on two things: developing the IPTV platform internally, and securing the most popular content. As subscribers use the service – initially surfing the free, but limited, channels – that second part of PCCW's strategy becomes more significant."

By doing its own development – spinning off the developer business unit as Cascade in 2003 – and sourcing CPE and other components of the network from vendors in mainland China to keep costs low, PCCW lowered the cost of subscriber acquisition significantly, and adopted a "seed and harvest" strategy of offering its set-top boxes and basic channel bundle to all its broadband subscribers at no cost.

For content, however, while sport plays a central part, PCCW has moved from an initial 23 channels to more than 150, and has proved adept at consistently increasing ARPUs among its paying customers, initially by offering limited channel packs that provided discounts for small bundles of channels (Mini Pack), and then through larger bundles (Value Packs), which include its strong sports offering. This approach has paid off handsomely, as ARPU has risen almost fourfold from service inception.

KT has not been so fortunate, as Mega TV has actually seen a decline in users since its official launch in late 2008 (it had operated as a limited VoD platform for a couple of years earlier). The basic problem according to Moon is that the service is insufficiently differentiated from its many competitors in terms of content.

"Free-to-air content is by far the most popular programming in South Korea, and it is available not only through all of KT's competitors, but also – by definition – for free from the terrestrial broadcasters. So the FTA channels are a must-have that bring no competitive advantage," he says. "And framing KT's difficulties with differentiation are the high penetration pay TV already has in South Korea and the clout of cable system operators. Pay-TV accounts actually exceed the total number of households, with cable TV enjoying about an 80 percent market share at year-end 2008."

Worse, one of KT's trump cards – a VoD library of 80,000 programs – is also available from its competitor SK Broadband.

Potential and challenges
Although many pay-TV markets in Asia are mature and well served by DTH satellite operators and cable operators, Moon is bullish that the addressable market for IPTV is potentially huge – well over $20 billion in 2014. But, as KT's experience has shown, the barriers to entry for the telecom operators remain high.

"There are challenges in three key areas: regulatory constraints, content, and technology costs," says Moon. "Typically, regulatory issues come first, then the mammoth challenge of valuing and procuring content along with technology issues – both of which can affect subscriber take-up and bottom lines."

One of the most glaring problems for Asian IPTV has been the lack of any regulatory framework, thus putting the service in a gray area, with neither the telecom nor broadcasting regulators having clear oversight. This has resulted in regulatory turf wars; meanwhile, service and network convergence has leapfrogged the regulatory frameworks established decades ago. Governments are now playing catchup, with countries such as China and South Korea integrating telecom and broadcasting policy-making into one entity.

Content has proved particularly difficult for operators coming from a telecom environment, and Moon points out that many seem willing to pay enormous amounts for content. Obviously, operators need a powerful differentiator to break into what in many cases is a mature and saturated pay-TV market, but he fears that they have generally lacked the media expertise to value content fairly. This has resulted in bids for content that, at least in the short term, make little commercial sense.

"For example, PCCW reportedly paid US$125 million for the right to broadcast English Premier League football (soccer) games for three years," he says. "A back-of-the-envelope calculation suggests that ARPU would need to rise by more than $5.00 just to support the additional content purchase – that would be an amount close to 20 percent of 2008 ARPU."

Extensive government and industry support for fiber networks and high fast-broadband penetration have put Hong Kong, South Korea, and Taiwan, for example, among the more successful Asian IPTV markets. So the technology challenge here is less on the network and more on the set-top box (STB) – essentially, the cheaper, the better.

"Having inexpensive STBs and passing the resulting savings to subscribers is very important in these markets," says Moon. "Although IPTV does provide far more functionality than most other broadcast platforms, there is currently little to differentiate Asian IPTV services from alternatives such as cable and DTH. Price, content, and service quality are still the major points of differentiation, and low-cost STBs remain the best strategy for increasing penetration quickly."

— Tim Hills is a freelance telecommunications writer and journalist. He's a regular author of Light Reading reports.

Back to Page One: Introduction