Better Late than Never, Taiwan Enters the 4G Era

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Taiwan’s 4G operators made up for lost time by rolling out their service in just about half a year after licensing. But competition is fierce, especially with some new players joining the fray, leading to intense pricing pressure. While consumers will be happy with both the rates and the fast transmission speeds, the high cost of the spectrum and infrastructure construction will make for tight profit margins for the operators.

By Timothy Ferry & Jens Kastner

The second half of the year brought great changes for Taiwan’s ditou zu or “heads-down clan,” as avid smartphone users on the island are aptly called. In May, government-invested Chunghwa Telecom Co. (CHT) launched 4G Long-Term Evolution (LTE) mobile services, enabling subscribers to transmit and receive much larger amounts of data in far less time than has been possible with 3G. Within weeks, Far EasTone Telecommunications Co. (FET), Taiwan Mobile Co., as well as newcomer Taiwan Star Cellular Co., launched their own 4G services, finally bringing Taiwan into the 4G services era.

The fourth generation standard for mobile telecommunications, 4G promises data transmission speeds of 1 gigabyte per second (Gbit/s), seven times faster than 3G. So while 3G offered consumers mobile web access fast enough for browsing and apps, 4G’s faster speeds will allow TV programs and movies to be easily and conveniently accessed on mobile phones.

“Since my smartphone uses 4G, I watch the TV news on it over the internet in real time, including during lunch and in my car after work,” says Taiwan Mobile President James Jeng. “It is much, much faster than 3G. Now everyone can watch movies while commuting on public transportation.”

The public response to the launch of 4G services has been highly favorable. By October 15 over 1 million users had subscribed and the total is set to reach 3 million by year’s end. That would be a 13% penetration rate after just some six months’ operation, the fastest such penetration in the world, according to CHT. South Korea, by contrast, saw only a 2-3% penetration rate in the first six months of its 4G launch in 2012.

While 4G is clearly attractive to consumers, however, whether it will be an equal boon to telecoms operating in the market is another question. Several factors may dampen the rate of return on investment, including the service’s late start, the highly competitive market, and uncertainty whether bandwidth will be sufficient to handle the expected volume of usage.

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At this year’s Information Month at the Taipei World Trade Center exhibition hall, visitors have the chance to test 4G’s transmission speed with a slalom simulator.

4G has been a long time coming in Taiwan. The island began developing a 4G industry as far back as 2005, but the government, through its Mobile Taiwan (M-Taiwan) initiative, ended up betting on an earlier technology – WiMAX – that wound up being largely supplanted by LTE. So while Taiwan quickly transitioned from auctioning LTE bandwidth in October 2013 to the start of operations this May, the auction took place long after such neighboring countries as Japan, South Korea, and Hong Kong had set up their 4G LTE systems. Japan’s system was established early as January 2010, with South Korea following in 2011 and even China beating Taiwan by five months with a January 2014 launch.

The lag did not merely keep consumers from enjoying movie-watching experiences while riding the subway, but also denied Taiwan the innovation and economic growth opportunities that 4G can provide. At a forum attended by government officials and telecom industry representatives this October, CHT president Shih Mu-piao described 4G service as a “locomotive” that drives the development of industrial innovation and applications, as well as the evolution of the Internet of Things. The Organization for Economic Co-operation and Development (OECD) has found that higher broadband transmission rates tend to spur higher GDP growth by making the society more efficient and creating telecom-related jobs.

The 4G spectrum auction itself was the subject of controversy. With its 393 rounds of bidding over 40 days and total proceeds of a whopping NT$118.65 billion (US$3.8 billion), the auction was unexpectedly fierce due to a large number of bidders. Besides the existing 3G operators of CHT, FET, Taiwan Mobile, and Asia Pacific Telecom Co., newcomers Ambit Microsystems Corp. and Taiwan Star won 4G spectrum allotments. Ambit belongs to OEM electronics king Terry Gou’s Hon Hai Group, while embattled instant-noodle giant Ting Hsin International owns Taiwan Star. As Asia Pacific is in the process of merging with Ambit, there will be five players in Taiwan’s 4G market, compared with the two or three players in most other countries.

Competing on price

With this many competitors, a price war was inevitable. CHT’s dominant swathe of broadband and early entry has made it the one to watch in terms of pricing. The company’s unlimited data plans, dubbed chi dao bao or “all-you-can-eat,” helped hook the first batch of 4G subscribers to two-year contracts. The approach has since been replicated by all the other players in the market, with most initially charging between NT$1000 and NT$1500 a month for the service.

“In late May, we launched two early-bird packages with flat rates and unlimited data plans for subscribers [of packages above a certain tariff],” says CHT’s Shih. “The other operators followed us with very similar packages and exactly the same timeframe and are now anxiously looking also at what Chunghwa does in terms of the flat rate programs’ possible termination.”

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Above, Chunghwa Telecom executives at the May 29 launch of CHT’s 4G service. Below, Far EasTone Chairman Douglas Hsu presides over a similar ceremony on June 3

 

Taiwan Mobile’s Jeng blames Taiwan Star, which offered its cheapest monthly flat rate for as little as NT$599, for the prolonged unlimited flat rates that have hit operators’ revenue stream hard. “They are doing exactly what 3G operator Vibo did five years ago,” he says, referring to Vibo Telecom Inc., which has not turned a profit since it began operation in 2005 and recently merged with Taiwan Star. “Entering a saturated market as a small player with lower prices did not work out then, and it will not work out now.”

High bandwidth costs, as well as steep network construction costs (CHT expects to spend up to NT$38 billion on network construction, according to media reports), are cutting into telecoms’ profits. Media reports in August quoted Lin Kuo-feng, president of CHT’s mobile business unit, as saying that “intensifying competition has made it an uphill job to recover the massive 4G investment.”

Exacerbating the problem is that unlimited flat rates invite abuse by subscribers who may connect around the clock and transmit huge amounts of data. Such behavior could cause a slowing down of the network, which in turn could deter new consumers from switching from 3G to 4G, as the promise of ever-higher speeds is what consumers are primarily seeking.

But even if chi dao bao schemes soon come to an end, the telecom sector is concerned that the 4G network will run into capacity problems in about three years. This calculation is based on the fact that currently only half of consumers use a mobile phone to access the internet, which suggests significant potential for growth in 4G subscriber numbers.

According to the National Communication Commission (NCC), the issue of looming capacity shortage will be partly remedied through a second 4G spectrum auction – covering the 2.6 megahertz band – at some point next year. But although local newspapers have reported that the central government has already included the NT$15 billion it expects to make from that auction in its budget, a significant obstacle remains to reaping such a windfall – the determination of existing WiMAX operators to hold onto the same spectrum.

“The WiMAX operators want to change their licenses to 4G LTE, instead of giving the spectrum back to the NCC,” explains CHT’s Shih. He worries that the WiMAX spectrum holders will bring their case to the courts, “and if they go to court, nobody knows how long the process will be, so we don’t understand how the NCC can possibly expect to hold that auction next year.” Taiwan Mobile’s Jeng adds that “WiMAX operators have been quite successfully lobbying the legislature, so it is all being turned into a big mess.” He says it would be best to postpone any plans for the 2.6 megahertz auction until the matter can be resolved.

NCC Vice Chairperson Yu Hsiao-Cheng has sought to calm the operators’ anxieties by stressing that the WiMAX licenses will soon expire, so that that their claims for the right to change to LTE licenses lack legal ground. The WiMAX operators hold six-year licenses that will expire at the end of this year or the beginning of 2015. Yu further notes that “besides the 2.6 megahertz spectrum, there will be 1.9, 2.3 and 3.6 gigahertz spectrum releases in the coming years,” which will provide additional 4G capacity to meet growth in demand.

4G over 3G Ookla Speedtest
A CHT demonstration shows the superiority of 4G over 3G in the speed of both downloads and uploads

Assessing the impact

Despite rosy forecasts by the OECD and other studies on how adoption of 4G can stimulate growth and innovation, not all experts are so optimistic about the potential impact of 4G for Taiwan’s economy. National Taiwan University economist Chen Tain-jy, a former head of the government’s Council for Economic Planning and Development (now the National Development Council), for one, considers the expectations for 4G to be overblown.

“The step from 2G to 3G did matter in macroeconomic terms, because that technological advancement was dramatic, enabling picture-sharing, free voice apps such as Line, and so forth,” he says. “But since the evolution from 3G to 4G merely entails higher data transmission speed, I don’t see 4G as having such impact, and I am not aware that it happened in Korea or in other countries that launched 4G earlier than Taiwan.” Chen questions the macroeconomic significance of ever faster movie downloads, adding that 4G – unlike the Internet of Things (IoT) – will not significantly boost orders for Taiwan’s electronics manufacturers and “will not make you read the newspaper faster either.”

Further, while many considered the delay in Taiwan’s entry into the 4G era to be detrimental, other observers believe that the delay was actually positive. “Because of the delay, Taiwan’s operators have been able to purchase related equipment and facilities at lower prices and use the 4G pricing models already adopted by many operators elsewhere worldwide,” says Richard C.T. Wong, an analyst with the Taipei-based Market Intelligence & Consulting Institute. “This is evidenced by the fact that Taiwan has been able to commercialize 4G services in just six months following the issuance of 4G licenses in November 2013.”

With all of the challenges facing 4G telecoms operators in Taiwan, experts are mulling where the market might be heading. Both CHT’s Shih and Taiwan Mobile’s Jeng consider that Taiwan Star will be a plausible candidate for a merger, especially since the company is currently subject to a consumer boycott against its parent company, Ting Hsin, over the firm’s role in the recent cooking-oil food safety scandal. Another new development is that Hon Hai’s Ambit is working out a deal with Taiwan Mobile allowing it to use the latter’s base station network for its own subscribers. Ambit reportedly is part of Hon Hai’s plan to escape the low profit margins in the contract manufacturing sector, with founder Terry Gou pursuing a longstanding dream of building a complete ecosystem encompassing Hon Hai’s mobile phone, PC, and TV manufacturing businesses on the one side and 4G and fixed line networks as well as the cloud on the other. As of press time, a proposed merger between Ambit and Asia Pacific Telecom (APT) has been held up by the NCC, but the “new APT,” as it is referred to in the media and by insiders, will likely begin offering 4G service in early 2015.

“Hon Hai’s entry will intensify the price war, as lower price plans are probably the only way for new entrants to grab subscribers in the first phase,” predicts Shih. “This is because neither quality-wise nor in terms of coverage could they possibly compete with the existing networks.”

NCC’s Yu rejects industry calls for the regulator to rein in the competition for the good of operators’ profitability, noting that the NCC regards the market as healthy so far.

The NCC approach is somewhat supported by a recent OECD report. It finds that OECD countries that have the fiercest competition also have “a higher likelihood of more competitive and innovative services being introduced and maintained.” Countering operators’ objection that increased competition reduces their profitability to dangerously low levels, the report does not recommend market consolidation but rather stresses alternative measures such as network sharing of the sort Taiwan Mobile and Ambit have agreed upon. Besides that agreement, Taiwan’s 4G operators are already sharing base stations in subway and train stations, airports, on Taiwan High Speed Rail trains, and other public places.

“Isn’t price war what the government and consumers love to see?” Yu asks. “Such competition brings about more investment, which translates into higher transmission speed and throughput, more service outlets, better services, and lower tariffs for consumers.”

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