Mobile phones are all the rage in Taiwan, with over 29 million devices in use in a society of 23 million people, according to research by Berkshire Hathaway’s Business Wire. That market penetration of 127% compares to what Statista calculates to be just 81% in the United States. Nearly all of Taiwan enjoys 4G network coverage, and the International Telecommunications Union (ITU), the global industry organization, anticipates that 5G technology will be introduced to the market as early as 2020.
Mobile internet access employs invisible radio signals transmitted to and from mobile phones, but substantial infrastructure is needed to support those transmissions. As the demand for higher data transmission rises, so does the amount of infrastructure required. Larger volumes of data transmission also necessitate the use of higher frequencies, but higher frequencies degrade faster, requiring more base stations to ensure adequate coverage.
Third-generation (3G) mobile phone networks required double the number of base stations compared to 2G, and 4G doubled that again. According to National Communications Commission (NCC) data, Taiwan currently has nearly 80,000 base stations owned by its major telecoms. Far EasTone is in the lead with 23,493 4G base stations, followed by Chunghwa Telecom with 20,944 and Taiwan Mobile with 20,680. The remainder belong to Asia Pacific Telecom (7,518) and Taiwan Star (7,026).
The transition to 5G will mean an even greater number of transmission towers, putting pressure on Taiwan in several ways. First, notes Jason T. Wang, managing director of Cypress River Advisors: “Only so many tower sites are available,” and there have been many alleged cases of telecoms installing transmission equipment in rented apartments in violation of the law and putting neighbors at risk. Long-term exposure to high doses of radio waves – which are a form of radiation – is considered a health hazard.
Further, as radio frequency is a finite resource, it can command very high prices when bid on. Taiwan recently held its latest spectrum auction, which saw each of the major players spend hundreds of millions of New Taiwan dollars to ensure that their cell towers have exclusive access to certain bandwidths to ensure effective signals and data transmission.
And these infrastructure costs continue to rise amidst gradually diminishing returns. All of the telecoms in Taiwan enjoy enviable profit margins of over 30%, but industry observers (and many of the companies themselves in their financial statements) note that the margins are being maintained despite lowered revenues through cost-cutting measures rather than growth.
Rates for 4G connectivity are low and companies are being outcompeted by OTT service providers such as LINE and Skype in voice and text transmission. “At present, the monthly fee for a 4G plan with unlimited data is just NT$699 (about US$23), and the revenues of the three major telecom operators in Taiwan are declining,” says Kelly Hsieh, research director for Taiwan analytics firm Trendforce.
Cellular coverage can be augmented by the use of small cells such as picocells and microcells. Picocells can be installed in large indoor areas like shopping malls, offices, or train stations, and have a range of about 200 meters. Microcells have a range of under two kilometers and can be installed in traffic lights and road signs.
But while these kinds of cells are cheaper than a large-scale macrocell with a normal range of 20 kilometers, they still suffer from the same problem: backhaul networking.
Backhaul refers to the network that connects all the different radio cells. Most of the network is comprised of fixed-line fiber optic cables that transmit data between the backbone network and the cells. Building and operating such a network can be costly, and in Taiwan the carriers have relied on onetime state-owned monopoly Chunghwa Telecom for their fixed-line backhaul needs.
“As 5G triples the number of towers and they all need backhaul fixed-line service, then your backhaul costs are equivalent to fixed-line operator’s costs,” says Wang. “So do you run the line yourself for the last mile or do you use Chunghwa Telecom’s line?”
Chunghwa Telecom owns 92% of the residential fixed lines and 98% of the “trunk lines” that connect the cell towers. This gives the company enormous leverage over its mobile peers, despite the liberalization of the market over the past 20 years. Despite laws requiring Chunghwa Telecom to remain neutral in providing access to its network to the other operators, industry insiders are skeptical.
The other two major telecoms have both attempted to enter into the fixed-line business, but Chunghwa Telecom’s dominance was too great and neither has made much progress. The draft of the new Telecommunications Management Act calls for special regulations for “significant market providers,” but Wang is skeptical that these regulations will suffice, and he calls for Chunghwa’s fixed-line backhaul to be spun off from its mobile and other business.
“Chunghwa Telecom needs to unbundle the backhaul fixed-line and broadband,” states Wang, admitting that this is a bold statement as Chunghwa is a state-affiliated company firmly under the control of the government.
“Structural separation is a really a big issue for Chunghwa,” says Arthur Shay of the Shay and Associates law firm, noting that previous NCC commissioner Howard Shyr “had the intention of reforming and separating the fixed-line business but had no support from the government.”
Wang sees this unbundling of the fixed line backhaul as crucial to ensuring that the local telecom sector can drive down costs as it faces increasing competition. “The laws must specifically state that the market for [backhaul] fixed-line will be opened up. It’s happened everywhere else in the world – and will drive backhaul costs down.”