Running Converged Networks Is Costly; A View From Thailand

Mobile operator AIS to consolidate ownership in CS Loxinfo

Thailand’s largest mobile operator AIS announced this month it would spend $79M to buy a 56% stake in CS Loxinfo, an enterprise-focused fixed line operator. AIS is picking up 42% from a Thaicom subsidiary, as well as Singtel’s current 14% stake in CS Loxinfo.

The companies involved in this transaction already have ties. AIS’ parent company, Intouch Holdings, also owns 41% of Thaicom. But this deal is not simply a paper transaction. AIS has good reason to expect integration with CS Loxinfo will accelerate its fixed broadband efforts. AIS entered that market in early 2015, and had ~446,000 subs by June 2017, with an ARPU of 600 Baht/month. That’s over double AIS’ reported blended ARPU of 251 Baht for its mobile subscriber base. The company clearly wants to expand from this modest base.

Regulatory climate improving, bit by bit

AIS was launched in 1990. While a private company, it was set up as a “concession” of Thailand’s Telephone Organization of Thailand (TOT), one of Thailand’s two state operators at the time. AIS received a license, while TOT received a share of AIS revenues. This was a not a small exchange (and TOT did not enthusiastically give it up): AIS’ “regulatory fees” amounted to over 30% of total opex from 2007-2015. Concession fees have lowered dramatically since 2Q16 however, pushing regulatory costs to under 8% for AIS over the last 12 months. Other Thai operators have also enjoyed lower regulatory costs under the new regime, but AIS’ drop is significant.

The operator has other challenges, though.

Converging mobile & fixed

AIS was mobile only from the start. Like many operators only selling mobile services, AIS also built its own fiber backbone. During the last decade, this network’s reach spread further into cities, using both leased capacity and dark fiber. With the move to 4G mobile, the economic logic of AIS owning its own metro fiber resources has become stronger. (AIS is not the only one to have noticed this). Having some base of metro fiber surely helped AIS with its initial broadband launch in 2015. Scaling it has been costly though.

High network operating expenses

From 2007-13 or so, reported network operations expenses at AIS stayed in a fairly tight range: between 150-200 Baht per customer, per year. Expressed as a percent of total opex, network opex ranged from 5-10% in that same timeframe.  By both metrics, network opex began to climb in 2015, dramatically. Over the last 12 months (3Q16-2Q17), it reached just under 500 Baht per customer, per year (figure).

A primary reason for this shift is AIS struggling to manage the costs of its fixed broadband rollout, as many operators have. Prep for this rollout started in 2013-4. Once the service was available, the cost of on-site customer installs was likely higher than expected. Or simply high, period: the problem AIS ran into is not unique, and they likely expected it.

Truckrolls are costly everywhere

Thailand has loads of attractions, but a first-class wireline infrastructure is not one of them. State-run fixed operators, antiquated regulations, a challenging construction environment – there are many factors behind this. One result is a chaotic web of wiring, strung along nearly every utility pole in the country.

This is what AIS network engineers are now dealing with daily, as they extend fiber nodes and install service at customer premises. For a company used to dealing with thousands of base stations, not millions of customer premises, this is costly & time-consuming work.

CS Loxinfo has itself been providing fixed services in Thailand, for over 2 decades. Its reach is not vast, but Thailand’s fixed market has a small number of mostly small players – and CS Loxinfo is well known. Mostly for its leased line business, as these are still big in Thailand; CS has just under 6,000 leased lines in service. Also under its “ICT” business line, CS Loxinfo offers a range of data center services, and reports racks in service (554 as of June)

Network cost pressures lurk behind many mergers

Most mergers have many drivers, some tied to cost savings, others to expanding market opportunities, etc. The AIS-Loxinfo deal is no different; lowering network costs is one of many goals.

AIS has been #1 in Thailand’s mobile market for many years, but has only started going after fixed. Market acceptance of its “AISFibre” offering has been good, and the company has accelerated initial rollout plans. The company is in a bit of a land grab, though. Teaming up with CS Loxinfo might help accelerate the AIS broadband push without breaking the bank.