Laudable Performance

An overall teledensity at 45.6%, indicates that the market could reach
saturation in the near future. With mobile penetration alone at 40%, the mobile
services market carries great significance, be it in Sri Lanka or any other
country. The mobile services market has been growing exponentially for the past
few years, with mobile subscribers growing at 50-60% year-on-year. However,
since 2007, growth rates have moved downwards and the mobile market faces a high
probability of saturation by 2012.

Apart from the mobile services market, the telecom sector is also fuelled by
the CDMA (code division multiple access) market which is also experiencing
increased penetration. The current penetration of CDMA is around 6.7% next to
mobile.

Market Overview

Like any other telecom market in the world, Sri Lanka faces very much the
same problem of competition eating into the ARPUs of all operators. Currently,
commencement of operations by Indian operators such as Reliance and Airtel is
expected to fuel this competition further. However, with the introduction of 3G
and WiMax, the Sri Lankan market should be able to improve on its ARPU, provided
core applications are developed on these technologies. At present, 3G and 3.5G
are mainly used in video calling and messaging. Hence, to be able to reap
complete benefits from 3G, the presence of killer applications is necessary.

Another challenge faced by the industry is lack of strong regulations, to
direct the market players in terms of processes and the way these processes are
executed. Presence of strong regulations could enable a level playing field for
all players, which would in turn pave the way for healthy competition.

All in all, there are four operators in Sri Lanka that provide complete
telecom services in the region ranging from fixed services to data offerings
such as MPLS, leased lines, etc.

SLT (Sri Lanka Telecom) and Dialog are considered as the major players in the
market with SLT focusing on fixed line and data services and Dialog on mobile
services. However, both the players have diversified to cover the entire gamut
of telecom services. Suntel and Lanka Bell focus on the fixed wireless and data
services markets.

SLT has introduced services such as Metro Ethernet and 3G while Dialog has
been one of the forerunners of WiMax in the Asia Pacific. While SLT has a strong
brand presence, Dialog is perceived as a more reliable and customer friendly
brand.

The players that exhibit maximum growth by virtue of their aggressiveness
would be Dialog and Suntel. Though SLT has a strong market presence it is yet to
capitalize on the same to grow aggressively.

Apart from these telecom service providers, there exist other companies that
only cater to a particular market. These include companies such as SLT-Mobitel,
Dialog, Hutchison, Tigo.

The fixed services market in Sri Lanka, like several other countries, is
dependent on CDMA for its growth. While the fixed teledensity in Sri Lanka is
around 11.3% the fixed line teledensity alone stood at only 4.5%, whereas WLL
(Wireless in Local Loop)/CDMA connections stood at 6.7%. CDMA was introduced in
Sri Lanka in 2005 by Lanka Bell. Considering the fact that the penetration level
is already at 3%, the growth is expected to be enormous.

When comparing the existing top four players, SLT is an incumbent where fixed
line services are concerned. On the other hand, Suntel is a player that focuses
on the enterprise segment while SLT and Lanka Bell focus on the retail and rural
segments. Suntel's profits are commendable as it targets the enterprise market
while Lanka Bell is yet to completely reap the benefits as it targets mass
markets. However, each of the players mentioned above, including SLT, provides
CDMA based fixed services.

With most telecom markets undercutting on price to lure more customers, SLT
has been able to offer the lowest price as it is with any fixed line operator.
However, with decreasing growth of fixed line services, SLT has slowly started
offering CDMA based services. One of the main reasons for declining fixed line
connections is the lead time that is required to procure a connection.
Additionally, infrastructure plays an important role in the slowdown of adoption
rates of fixed line services.

CDMA as a wireless service is catching up with the rural markets thereby
prompting all operators to offer it as a product offering so that they do not
lose out on revenue from those services.

A CDMA connection costs around $180 to $120 and is considered more cost
effective than a fixed line connection. The prices of SLT are the lowest, pegged
at approximately $120. The pricing schemes of SLT and Lanka Bell are the lowest
as they cater to the mass market; these companies are considered to have the
most robust pricing strategies.

The mobile services market, like most countries in Asia Pacific, is highly
competitive characterized by a high churn rate. In Sri Lanka mobile penetration
stood at 40% with around 8 mn subscribers.

Technology leadership and supremacy in the value added services (VAS) space
continued to be the strategy of Dialog's service proposition. Dialog is the most
highly branded mobile services provider in Sri Lanka. With a base of nearly 4.2
mn subscribers, Dialog has a 53% market share and enjoys the first mover
advantage as far as mobile telephony is concerned. Dialog is also considered a
pioneer in technology as it was one of the first providers to introduce 3G
services. It is also a forerunner for WiMax technologies. While most countries
are still hesitant to deploy WiMax for commercial use, Dialog is one the first
few companies in the Asia Pacific region to deploy WiMax.

Dialog has seen a dip in its profit margins in the current year, which could
be attributed to its investment toward the capital expenditure of advanced
services such as 3G and WiMax. It has expanded its footprint across Sri Lanka
with over 1,000 base stations within its GSM network. It has even rolled out 3G
services by adding 300 3G base stations. It is the first company to introduce
e-banking facility in association with NDB Bank, Sri Lanka.

However, Dialog still maintained a healthy monthly ARPU of $5.6 for the year
2007.

Domestic revenues consisting of prepaid and post-paid subscribers are the
major contributors to overall revenues of approximately 81%. Its prepaid segment
has contributed 48%, and registered growth of 38% over the previous year. It has
also introduced VAS services like color SMS and SMS morphing, breaking news
alerts, mticket, SMS direct, mobile TV, D2D share credit, push mail-connect.

Mobitel, the mobile arm of SLT since 2002, is not far behind. With a market
share of nearly 18%, Mobitel is slowly trying to gain market share through the
introduction of 3.5G (HSDPA) high-speed downlink packet access services through
its sub brand M3. The speed on download link is as high as 14.4 Mbps and uplink
is around 1.9 Mbps. The introduction of 3.5G services is not only to provide
broadband services to its users but also 3G products such as video calling,
video messaging, mobile TV, push-mail etc. at a monthly cost of $4 to the
subscriber. The ARPU of Mobitel remained at $3.85 for 2007 which would be
sustained by its exclusive range of 3G products.

Tigo is another upcoming service provider that has been involved in a
branding exercise post its acquisition by Millicom Technologies. Formerly known
as Celltel, Tigo has undergone a radical brand building exercise to give it a
fresh lease on life. It targets the younger audience and has introduced several
prepaid schemes to cater to this segment. The ARPU of Tigo has remained around
$4, in line with its low priced schemes, to make it affordable for youngsters.
Tigo has not been as aggressive as other players in adopting advanced wireless
services and is yet to catch up in the race to improve its ARPU.

Although Hutch has maintained a healthy market share of 14%, the presence of
this player in Sri Lanka has been fairly undermined. Hutch reached the 1mn
customer mark in September 2007 and has grown at a decent rate since it started
its operations in 2004.

Hutch like most players focuses more on pre-paid customers, in fact, atleast
90% of its customers are pre-paid. The ARPU was around $3 and is seen to be the
least profitable of all players. However, with a goal to cover 80% of the
population by 2008-09, the company has started to spread its operations
island-wide.

Data services is another important market. SLT is a leading data services
provider and this could be attributed to their access to nearly 1.4 mn
households. Within the data services market it controls 80% of the market
because of its strong ADSL connectivity throughout the island nation. SLT
provides a varied gamut of services for enterprise and residential customers at
attractive rates. By owning the landing station for cable such as SEA-ME-WE 4,
SLT commands the data services market with its various service offerings ranging
from leased lines to MPLS/IP VPN (multi-protocol label switching internet
protocol virtual private network) to Metro Ethernet.

SLT is transforming itself from a traditional telecom provider to a provider
of global Internet protocol solutions. As a part of this transformation it is
overhauling its network architecture, to include IT system integration and
business service portfolio expansion SLT has deployed a wide spectrum of
technologies such as IP-MLPS which are needed to enable the optical fiber
network to host a NGN (next generation network). It enjoys a good brand presence
in the rural and urban regions and can leverage on its brand strength to provide
innovative products and solutions. SLT has been a pioneer as far as Metro
Ethernet is concerned delivering high quality speed to its customers.

The data services arm of Dialog, Dialog Broadband Networks (DBN) played a
lead role in the “capability” extension by launching two wireless access
networks architected to deliver fixed line and BWA (Broadband and Wireless
Access) services. DBN Launched CDMA fixed line, and WiMax Broadband Networks,
respectively, generating immediate revenue growth of 42 and 36%, on adjacent
quarter-on-quarter and year-on-year basis, respectively. Dialog has also
launched a satellite-based pay television service; Dialog Television (DTV) has
made substantial inroads in the establishment of pay TV category in the ICT and
infotainment landscape. It has also invested in laying down a fiber-optic
transmission networks and microwave backbone radio connectivity for establishing
a nationwide foot print.

Suntel as a provider focuses more on the enterprise segment and has been
offering focused data services based on companies needs by verticals. Suntel is
making inroads by offering a diverse portfolio of services and thereby trying to
position itself as a one-stop shop for enterprises from all verticals.

Lanka Bell is more focused on data services for the retail segment. Although
Lanka Bell provides enterprise products, it is yet to specialize on these
services as its counterpart Suntel.

Lankacom is a relatively smaller player that has niche services only in the
data and managed services segment. VSNL Lanka, although a smaller player,
contributes significantly to the international market. Apart from providing data
services to international players, VSNL Lanka also offers international voice
minutes to carriers. Even though VSNL's contribution to the local data services
market may be not significant, its role in the international market is
commendable.

Conclusion

The Sri Lankan telecom market is quite advanced in terms of technologies
deployed considering the fact that many countries in the subcontinent are yet to
adopt 3G and WiMax technologies. With penetration levels touching 50%, the path
to capturing the remaining 50% would not seem as daunting, provided that the
economy does not decline. Assuming that the current situation prevails, and that
the inflation is brought down from 23.8% to below 15%, the market would not face
barriers in its path to reaching 100% penetration.

Nanditha Krishna

vadmail@cybermedia.co.in

The author is sr.research analyst, ICT Practice Frost & Sullivan— South Asia
& Middle East