Sri Lankan Telecom: Trailblazer

Akanksha Singh
akankshas@cybermedia.co.in

Sri Lanka's telecom industry has been a trailblazer in the South Asian region, being the first to introduce latest technologies in the market-be it GSM (Global Standard for Mobile) telephony, CDMA (Code Division Multiple Access) fixed wireless telephone services, ADSL (Asymmetric Digital Subscriber Line) Internet access, GPRS (General Packet Radio Service) Internet access for mobile telephone, WiMax (Worldwide Interoperability for Microwave Access) broadband services, 3G (Third Generation) and 3.5G mobile communications and HSPA (High Speed Packet Access) mobile broadband Internet services. Sri Lanka now boasts of one of the most sophisticated telecommunications industries in the region, perhaps at par with many developed nations. With so many players, big and small, each one of them has found their niche in the ever growing pool of telecom. Competition has only led the way for development and advancement.

Sri Lanka' telcos are in line for a bonanza as the island nation experiences some peace now after nearly three decades of armed conflict. The telecommunications industry also had a significant impact on the economic and social trends in Sri Lanka as an improved ability to communicate-both within and outside the country and greater access to information have improved livelihoods, lifestyles and the quality of life of nearly all segments of the population.

Sri Lanka's telecom industry has grown at a breakneck speed last year after the restoration of peace. Over the past decade, telecom industry has been the fastest growing area of Sri Lanka's economy led by the mobile telephony segment. From only 256,655 subscribers in 1999, total telephone connections have rocketed to 14,095,346 in 2009, implying a compound annual growth rate of 34%. Consequently, composite telephone penetration has risen from just 5% in 1999 to 85% in 2009.

So, mobile telephony penetration has now reached around 45-48%. This leaves room for a further increase in mobile telephony penetration, especially at the lower-end of the market as economic growth accelerates and disposable income rises.

The technology available to consumers is at par with most developed nations, ranging from ADSL fixed wireline services to WiMax fixed wireless broadband access, GPRS mobile telephony Internet to HSPA mobile broadband Internet connectivity (both for mobile telephones and desktop/laptop computers).

According to V Ravishankar, CEO, Tata Communications Sri Lanka,“Sri Lankan telecom is much more advanced as compared to any other country in this region. 3G has been operational since 2007. Data usage through mobile connections has grown substantially.”

By the end of 2009, broadband Internet market comprised around 170,000 ADSL fixed wireline connections, 7,000 WiMax fixed wireless subscribers and 63,000 HSPA mobile units. Sri Lanka Telecom, being the only fixed wireline telecom operator, is the sole ADSL Internet service provider in the country.

Meanwhile, Dialog is the only telco currently offering WiMax fixed wireless Internet access, in addition to its HSPA mobile broadband Internet connectivity. However, Sri Lanka Telecom will start commercial operations of its own WiMax broadband network in the second half of 2010. Mobitel and Airtel are the other operators offering HSPA mobile broadband Internet access.

With the economy becoming stable, GDP is set to grow by over 7% per annum in real terms in the next few years, which is resulting in a high demand for telecommunication and data transmission services from business enterprises.

With so much of development and boom in this sector, it gave rise to another major problem which created a stir among telcos regarding their existence. It was the vicious tariff war that left almost all telecommunication service providers with losses over the past couple of years. In order to control this dangerous situation, telecom regulators of Sri Lanka had to create an equitable industry to promote new investments in infrastructure and technology.

Telecom Regulators' Support for Industry's Profitability

A vicious tariff war with the advent of new competition-both in mobile and fixed wireless segments-resulted in the erosion of telecom industry's profitability over the past two years. This combined with slow economic growth, less business volumes, increased inflationary cost pressures and unprecedented high levels of interest rates caused losses to almost all telecommunication service providers. The resultant financial strain has left little space for telecom companies (particularly smaller players) to re-invest in new technology and expand network capacity.

The TRCSL came into action to help stabilize the condition and took some major strong steps to improve industry profitability. In this respect, two crucial changes were made by the current regulatory regime as mentioned below.

Imposition of Interconnection fee: On June 1, 2010, TRCSL permitted telecommunication service providers to recover the cost of terminating voice calls and short messages (SMSes) originating from rival operators. A tariff of LKR 50 is to be paid on voice calls and LKR 15 on text messages. This will enable telecom companies to recover the cost of permitting other operators to use their networks/infrastructure as is the practice in most other countries. According to Anusha Palpita, director general, TRCSL, “TRCSL has imposed an interconnection rate to all operators to recover the cost of terminating voice calls and SMSes originating from rival operators, after conducting proper study. The interconnection rates are LKR 50 cents for voice calls and LKR 15 cents for SMSes for any network.

By imposing the floor rate and interconnection rates, TRCSL could control the anti-competitive behavior of some operators and stabilized the industry.”

Regulated Minimum Tariff Structure: Since July 15, 2010, TRCSL has also imposed a minimum tariff that would be levied by all telecommunications service providers on all voice calls and text messages. This floor price on calls and text messages was imposed to prevent destructive tariff wars (as that was witnessed from mid-2008 to mid-2009) between telecom operators. The imposition of this system of minimum tariffs was also to enable telcos to earn an adequate rate of return on invested capital, thus, providing free cash flow for investment in new technologies and network expansion.

According to Anusha Palpita, director general, TRCSL, “There is huge competition in the market. Considering the above situation, TRCSL imposed a minimum floor price for call charges and SMSes. This floor price would prevent undercutting call charges and SMS charges which existed from 2008 and 2009.”

“After the turbulent years of 2008 and 2009, operators are now settling in this year especially with the help of cost cutting measures, some innovative solutions and with the support of regulators. Price war has been minimized by the regulators to a great extent by introducing a floor price for local tariff, interconnection regime, etc,” says V Ravishankar, CEO, Tata Communications Lanka.

Recovering Telecom Sector Revenues

The severe price competition between telecom operators witnessed in 2008 and early 2009 against the backdrop of new competition, slow economic activity, high inflation and interest rates (which dented the spending power of consumers) caused a marked slowdown in revenue growth in the telecommunications industry in general and the mobile telephony segment in particular. On the flip side, cost pressures continued unabated, resulting in a severe erosion of industry profitability and free cash flows.

However, indications are that industry's activity levels are set to improve with the revenue parameters by the end of 2010. The key industry activity measure, ie, minutes of usage per subscriber per month, has already shown early signs of improvement in Q1 of 2010. Further, underpinned by acceleration of economic growth, revenue per minute is also recovering since Q1 of 2010. Looking ahead, it is likely that with a strong economic expansion, both key parameters of minutes of usage per subscriber and revenue per minute will continue to improve, thus driving industry recovery.

Sri Lanka's telecommunication service providers are headed for better times by the end of 2010 and it is likely that incumbent market leaders are set to reap the benefits of economic revival, underpinned by regulatory actions to preserve the industry vibrancy.