Saturday, May 01, 2004

MIERSCOPE: Broadening the reach of broadband

By Lim Chze Cheen

THE advent of broadband services is about to reduce that frustrating “world wide wait” we have been experiencing with the traditional dial-up Internet access. While today's broadband offers significant improvements over the dial-up Internet access, it is still not fast enough to unleash the full capabilities of new and high quality applications. Nevertheless, the deployment and adoption of broadband services in Malaysia, despite being at a nascent stage, are growing and will likely grow exponentially.

A glance at the Malaysian Communications and Multimedia Commission's (MCMC) statistics indicates that the number of broadband subscriptions grew from 19,302 in 2002 to 110,406 in 2003 with the digital subscriber line (DSL) being the reigning broadband technology. Incidentally, the International Data Corporation (IDC) has projected a 2002-2007 compound annual growth rate (CAGR) of 40 per cent for Malaysia, to surpass the broadband subscriber base of 500,000 in 2007. As at June 2003, the broadband penetration rate in Malaysia stood at 0.21, which is low in comparison with South Korea (23), Japan (eight), United States (eight), and the European Union (five).

Not surprisingly, falling prices and differentiated service offerings will continue to drive the strong demand for broadband access. To remain competitive in an increasingly global economy, the commercial sector in Malaysia largely relies on instantaneous high-speed data communication, which is vital to many business functions, ranging from Customer Relationship Management (CRM) to Supply Chain Management (SCM) to Enterprise Resource Planning (ERP) to data warehousing. As for the average Malaysian home users, this will open up a whole new horizon for Malaysians by offering them greater online capabilities and higher quality at reasonable prices.

Indeed, we have seen the evolution of the Internet from a publicly-funded, narrowband, research network into one that is more market-driven and commercial based. Convergence, deregulation, and e-commerce have also spurred investments to increase the capacity and capabilities of the Malaysian Internet infrastructure at all network levels. Yet the fact remains that the broadband infrastructure is not yet widespread, let alone ubiquitous, the relative costs of deployment remain high compared to narrowband, access is limited in certain areas, and the adoption rates remain low relative to availability. The main problem really is in the "last mile". Simply, the "last mile" is the physical barriers to the companies providing Internet services (from a central switching office to homes and businesses). Since it is the most expensive part of the telecommunications network, it will not be possible for new entrants to have a ubiquitous network such as those of the incumbent in the short to medium term.

So what can the regulator do to resolve the "last mile" problem and ensure that broadband capabilities are deployed on an expedited basis? First, the impending broadband policy could make broadband a national priority with the Government making the commitments to achieve the goal of broadband for all in Malaysia. To realise this, the Government needs to encourage investments in broadband networks, wireline or not. For a network to be successful, it needs to be ubiquitous. And ubiquity is the key to increasing value in broadband because the value of a network is closely linked to the number of customers using it. But the problem is the development of always-on networks poses risks to even the largest companies, given the significant up-front financial investment required to achieve a goal of ubiquitous broadband and the evolution of the industry structure.

Furthermore, network investments may not go hand-in-hand with competition. If a policy creates ample opportunities for entrants to use the incumbents' network facilities, it might dampen investment in new facilities due to the so-called "free-rider" problem.

Although competition and efficiency can be obtained through the application of detailed regulation, where the incumbent is instructed to behave in a particular way, in practice most regulatory regimes allow dominant firms considerable discretion over prices and investment decisions. There may be good reasons for this, not least the fact that the managers in dominant firms are likely to be better informed about supply and demand conditions in the industry. Thus, for deregulation to be successful, competition should not be a goal in itself but rather a means to achieve the principal purpose that everyone benefits from broadband.

On this note, since networks impinge on public and private property and they represent important national infrastructure, the Government might contemplate building community networks through State Governments, like what the Swedish city of Stockholm did. However, we need to tread carefully here, as the former Federal Communications Commission (FCC) chairman William Kennard reminds us "the Information Superhighway will not work if there are 30,000 different technical standards or 30,000 different regulatory structures for broadband. The market would be rocked with uncertainty; investment would be stymied". If community networks are to be built, there is a need to streamline the rules and regulations between the federal, state and municipal governments to avoid bureaucratic red tape.

Instead of direct investment in the networks by Governments, another possible strategy would be to establish partnerships between various stakeholders, much like the CivicNet, a partnership between the city of Chicago and several private sector companies. Strategic alliances, particularly on the wireless front, may also be formed locally and/or internationally. Maxis, for example, has joined four other operators in the Asian wireless broadband alliance, to enable inter-operability of wireless fidelity (Wi-Fi) roaming throughout Asia.

Then there is the issue of incentives for hastening broadband deployment. Taking cue from the South Korean and Japanese experiences, supply side financial incentives would be useful to stimulate broadband deployment. These include tax incentives, soft loans, matching grants, digitisation of Government services (our e-government initiatives).

It is important to note that the supply side incentives should cover all aspects from in-frastructure to services to content develop-ment.

A particular area where such supply side financial incentives would prove helpful is in the wireless broadband market. The emergence of wireless technologies offers an effective and complementary solution to carriers and users to break through the broadband limits set by costs, regulation, legacy networks and technical shortfalls. Some of the wireless options include personal communications service (PCS), local multi-point distribution system (LMDS), multi-channel multi-point distribution system (MMDS), Wi-Fi, digital electronic messaging service (DEMS), worldwide inter-operability for microwave access (Wi-Max), 3G, and very small aperture terminals (VSAT).

The venture into wireless technologies by the new entrants or non-incumbents can be viewed as a natural answer to the "last mile" problem. But why wireless? First of all, cable is not a viable option in Malaysia, unlike the United States, among other countries. Second, wireless solutions are easier to deploy and cost much less. Moreover, wireless operators do not need to negotiate with the incumbent telecommunications company and co-locate their DSL equipment in the incumbent's central office. And the introduction of industry standards for wireless applications proves to be essential. The beginning of global and domestic telecommunications deregulation, which opens up the industry to a host of new players, also drives the broadband wireless boom. Accordingly, the MCMC has initiated a deregulation process in recent years for both licensed and unlicensed bands to support the wireless application.

As such, many existing players and new entrants flocked to the wireless solutions, especially Wi-Fi as a key to unlock the "last mile" or the "last few hundred metres" problem. To name a few, TMnet offers Wi-Fi through its wireless local access network (WLAN) product, Hotspot while Time dotCom and Maxis through Zone and Utopia respectively, alongside independent WLAN service providers like Airzed Networks. In addition, Time dotCom has also unveiled the Webbit programme that operates on the licensed 2.6GHz spectrum radio band, which is basically the MMDS of which Time dotCom and AtlasOne (2.5GHz) have been awarded the licences. Licences for the provision of higher frequency fixed wireless systems like LMDS, Wi-Max and DEMS have yet to see any takers in view of the costs involved.

Equally important are the demand side incentives. According to IDC's 2003 annual survey of small and medium businesses (SMBs), Malaysian SMBs' uptake for broadband services is 21 per cent, which is lower than the average of 52 per cent for the AsiaPacific (excluding Japan) region. As such, demand side incentives, which are operatorneutral measures, such as tax relief for private investment on broadband-related equipment, non-recurring incentive for broadband subscriptions, etc. are essential to encourage the uptake of broadband services by consumers and businesses.

Malaysia has begun its long journey to providing broadband connectivity to every household. Remember: speed matters. The broadband wagon is moving fast and what is known as broadband today may be narrow-band tomorrow. Thus, a broadband vision with the commitment to see through it via a comprehensive broadband policy and action plan is what we need to bring broadband to all.

The writer is a senior research officer with the Malaysian Institute of Economic Research (MIER)

nst 01/05/2004

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