On one hand, Sri Lanka’s fixed broadband penetration leaves
much to be desired, with only a small portion households being served by fixed copper
broadband, and an even smaller portion of the served households adopting ADSL. Whether
fixed wireless (especially newly emerging 16.e WiMAX) will prove successful is unclear
because these technologies/services are only just entering the market. However mobile
broadband has stepped in to fill the void – Sri Lanka has the second highest level
of mobile broadband penetration in South Asia (only behind Maldives, a much richer
country) and it has the lowest prices. Though overall adoption is still low, mobile
broadband is experiencing phenomenal growth. Many factors contributed to this success,
as discussed below.
However, the path
for continued growth for mobile broadband is far from certain, given the
socio-economic conditions of the country and competitive dynamics between operators.
These factors
are discussed in the following section.
6.1 What worked
6.1.1 Early availability of 3G spectrum
The Sri Lankan
regulator was one of the first in the Asian region to make 3G spectrum available
back in 2004 when it authorized its use for testing. By 2006, this spectrum was
allocated for commercial use to all operators at a charge of around USD 5 million.
Not only was 3G spectrum made available at the time, but was thereafter available
to any operator who paid the same price. This eliminated “land-grab” type behavior
that would have been otherwise created by a one-off spectrum auction and enabled
operators to enter the 3G market when it made most sense to them – based on their
assessment of trade-offs between early entry vs. waiting for the right time in their
capital investment cycle. Though the government arguably lost potential income through
this allocation method, it did make spectrum available on a non-discriminatory basis
to all operators, and at a relatively low price. Once the primary barrier to mobile
broadband investment was removed (i.e. spectrum was made available), operators were
quick to invest. Dialog launched South Asia’s first commercial 3G network in 2006*
and other Sri Lankan mobile operators have followed suit. Availability of 3G spectrum
and 3G services is in sharp contrast to the situation in many of Sri Lanka’s neighbors,
most notably India which did not allocate it till until 2010.
Sri Lanka is keeping
up this track record, and has made spectrum available for LTE networks, which are
currently being tested by two operators.
6.1.2 Innovations by operators
The second key
driver of mobile broadband stems from dynamics of an extremely competitive mobile
industry in Sri Lanka. Market entry has been liberal with a relatively high number
of operators. Once the market got beyond the duopoly situation, and disruptive third
and fourth operators entered, serious competition set in, driving down prices. In
order to maintain margins and grow the market, operators could not continue to “cream
skim” (service the rich or those at the top of the socio-economic pyramid who have
high ability to pay) but had instead to reach the masses and the poor. The operators
innovated by moving towards a high volume, low cost network business model characterized
by, a) outsourcing of network operations, leading to significant reduction in network
costs, b) sharing of passive and active infrastructure, without regulatory obligation,
further reducing operational costs, c) eliminating credit risk and cost of printing
invoices by offering pre-paid service, d) catering to variable incomes of the poor
by enabling extremely small re-charge amounts on pre-paid services (as low as USD
0.50 top-ups) and e) even eliminating scratch cards used for topping-up pre-paid
services by moving to electronic re-charge, saving more costs. This business model
is characterized by extremely high network utilization and low Average Revenue per
User (ARPU) and has enabled those at the bottom of the socio-economic pyramid to
become mobile voice and SMS users.*
The same model
is now being extended to mobile broadband. Faced with high competition in voice,
operators are moving to other services, and data is the first target. While many
rich or some middle classes households may have access to copper wire (and therefore
ability to get ADSL connections), most other do households do not. Therefore wireless
is the only option for many. Operators are meeting the demand with reasonably priced
HSDPA dongles (at under USD 50 per dongle) and data plans (unlimited plans ranging
from USD 4 to USD 27 per month). By enabling pre-paid top-ups, operators are eliminating
the need for a monthly contract, further removing barriers to entry by those on
low or irregular incomes. And by targeting students (e.g. Dialog offered them HSPA
dongle and package discounts of up to 50% in the early days) they have managed to
capture early adopters.
Sri Lanka has
also traditionally been a leader in mobile telephony in South Asia and often the
first to launch innovative new networks and applications. Dialog was the first 3G
operator in South Asia and Mobitel the first 3.5G. This trend continues today –
HSPA was first launched in South Asia by Dialog and Mobitel was first with HSDPA
and HSUPA. At least 2 operators are running LTE trials at the time of writing, with
plans to invest and launch LTE within 1 – 2 years. The mobile operators are on a
constant innovative cycle, by matching each other’s investments into faster, more
cost-efficient technologies in each iteration.
6.1.3 Creating the ecosystem: e-Sri Lanka
We highlighted
earlier the e-Sri Lanka initiative funded by the World Bank, Government of
Sri Lanka and several other agencies. As an integrated, cross-sector ICT-enabled
development program, e-Sri Lanka created extremely high expectations in the
country. Seven years after it started, a number of the projects are still being
implemented and others have been abandoned. However, most stakeholders agree that
the impact of e-Sri Lanka is not in the individual pieces, but rather the
holistic eco-system it envisioned, and that even activities that are as-yet-completed
contribute to that eco-system and general sense of “excitement” about ICTs created
by the program.
6.1.4 Tax relief
Sri Lankan consumers
have been plagued with high taxes on their telephone bills. Given the ease of collecting
taxes through the telecom operators, it was common for the government to impose
a variety of taxes, and sometimes taxes on taxes, on phone services, both mobile
and fixed (besides VAT, a Nation Building Tax, an Environment Levy, etc.). As a
result, Sri Lankan consumers were paying roughly 31% tax on their phone bills. This
is in addition to the corporate taxes (and other levies such as spectrum fees) paid
by the operators themselves. In November 2010*,
the government made drastic changes to the tax structure and, effective from 2011
imposed a reduced, flat tax of around 20% on phone consumers. This was a laudatory
action – now instead of only getting browsing-time of 70 rupees on every 100 spent,
consumers get 80 rupees of browsing-time (operators do not think the reduced taxes
would result in the consumers reducing the total amount they spend each month).
It is hoped that this will increase consumption of mobile services including mobile
broadband.
6.2 Challenges
Though Sri Lanka
has achieved much and looks poised to continue its growth, operators face major
competitive challenges and there are several areas of regulatory concern.
6.2.1 Reaching the mass market
Compared to fixed,
mobile broadband is enjoying high growth in Sri Lanka. However, unlike mobile voice
(which enjoys 82% SIM penetration), mobile broadband reaches far less than 10% penetration
(counting all types of terminal devices – phones (“small screens”) to computers
(“big screens”)*).
LIRNEasia (2008*)
shows that over 88% of Sri Lanka’s poorest citizens (those at the bottom of socio-economic
Pyramid (BoP)) in both urban and rural areas are telephone users (primarily mobile
phone). 73% of the BoP also owned a phone (again, primarily a mobile phone). However
the same survey shows that only 3.2% of the BoP had used the Internet, that 74%
had heard of the internet but never used it and worse yet that 23% had never heard
of the internet.
Mobile broadband
has a long way to become a mass-market technology in Sri Lanka. The industry claims
that 10% – 15% penetration of big screen mobile broadband – i.e. a mobile internet
dongle connected to a computer- is possible at current prices without too much effort.
Up to that point the mobile operators are still serving mostly early adopters, or
those who do not need much convincing about the utility of high speed Internet access
(i.e., those that are already aware of the Internet, use it at the office, probably
have the funds to even get an ADSL connection to their home, and need a mobile dongle
for convenience or personal use). But after that market is saturated (which will
happen soon), a truly “new” market, of users who are not convinced about the utility
of broadband has to be reached. This will eventually include those at the BoP with
low ability to pay. But with prices already relatively low (“unlimited” packages
range from USD 4.50 – 27*,
depending on when the Fair Usage Policy (FUP) becomes active*
with majority of users spending around USD 10 per month; or limited pre-paid broadband
is about USD 3 per GB*),
there is likely not too much room for prices to continue dropping. Operators worry
that increased mobile broadband competition will result in behavior similar to that
in the mobile voice space where price reductions were so drastic that operators
requested regulatory intervention (in the form of floor prices for interconnection),
claiming that their viability was threatened. Even if this does not happen, EBITDA
margins for mobile broadband is already low, making it harder to justify the investment
needed to move to 4G island-wide.
Even if the operators
can continue with these margins and invest, the bigger question of reaching untapped
markets or having to “create” the market (of those as yet unconvinced about the
utility of broadband) is the true challenge for the sector. According to some operators,
not only is the utility something users need be educated about, but fear of the
negative impacts of the Internet is also a barrier that has to be crossed.
It appears that
operators are already acting. For example, the days of “unlimited” data packages
are gone. Now the operators are clearly advertising FUPs or publishing the additional
charges when the monthly data limit is reached. Others are offering “minute-based”
plans – i.e., pre-paid plans where the users buy credit and are then able to use
the Internet for a certain number of hours or minutes. This is because it has been
shown that for an average pre-paid user, the minutes spent online is easier to keep
track of and make more “sense” of than how much data was downloaded. Some operators
are willing to engage in rural awareness building, and to offer mobile broadband
dongles that come pre-loaded with content-screening software (with parental controls
for what content is viewable, for example) and they think this will help bring some
reluctant users into the market.
6.2.2 The language barrier
Sri Lanka uses
three languages – Sinhalese, Tamil and English. The majority of Internet traffic
is for content hosted overseas, in the English language. Except for government websites
and several newspapers, there isn’t sufficient local content in local languages;
certainly not content that is dynamic and varied, in the way English content is.
Tamil content (though not Sri Lanka specific content) is at least widely accessible
on the Internet thanks to the presence of the large Tamil-speaking population in
South India. There is of course a blossoming Sinhala language blogosphere in Sri
Lanka – however the readers and bloggers are often the
young and educated
and many could read English content anyway. There are few websites other than newspaper
sites for a Sinhala-only speaker, or a Tamil-only speaker who wants locally relevant
content. As a result, the non-English-speaking citizenry appear to be kept out of
the Internet.
Figure 12 Actual download speeds (kbps) per US$, 2009
(Source:
LIRNEasia)
This key challenge
has to be addressed if the operators are to move beyond the low penetration levels
they currently have in mobile broadband. The technical groundwork has been laid
with the adoption Unicode Sinhala fonts.
On the other hand,
one could argue that the language barrier is increasingly insignificant – even children
of some non-English speaking parents are conducting their basic education in English
as a result of the government introducing the option of English medium education.
This is the generation that will drive Internet adoption (by convincing their parents
to purchase Internet subscriptions). Therefore perhaps over time the importance
of local language sites may become less important.
6.2.3 Regulating broadband quality
The budget telecom
business model yields exactly what the name implies – low prices, but also low quality.
Actual throughput delivered to the user is less than what is promised. Compared
to users in North America, Sri Lankan broadband users receive less value for their
money (as measured by actual experienced throughput per USD spent) as seen in Figure
12.
The quality of
service issue has caught the attention of the TRCSL since 2010. It now carries out
its own tests and is about to enact regulation regarding minimum quality standards.
One form the regulation may take is setting a minimum speed that must be
met at all times at all locations. This is technically possible on a mobile network
– the operator has to add extra capacity so that the required speed is experienced
at all times, irrespective of whether 1 user or 500 users are connected. However
the result would be an expensive network that provides optimum performance. This
is not feasible for networks that are run to optimize network load factors and keep
costs to a minimum. Alternatives are needed. One possibility would be to require
average speeds (for the country or a particular geographic area) allowing
operators to make the decisions on where to increase capacity to meet the average
target. Light regulation could also be pursued where operators offer quality-differentiated
pricing. There is sufficient competition in the market to encourage operators to
differentiate themselves in such ways.
6.2.4 Special dispensation for the telecom sector
As noted, the
government of Sri Lanka reduced the tax consumers pay on mobile services recently.
At the same time, the government exempted the telecom operators from Value Added
Tax (VAT). When this announcement was made suddenly, operators who had just ordered
multi-million dollars worth of equipment were faced with a situation of not being
able to claim back the VAT on their purchase. This is perhaps a one-time occurrence.
However the broader question is why the telecom sector should be specially targeted
(even in this “helpful” way, as deemed by the government). It seems that instead
of giving the sector special favorable (or unfavorable) treatment in relation to
other sectors, what’s more appropriate is to provide a stable and predictable regulatory
and policy regime. Given the high level of competition, most other issues would
then be taken care of by the market.
6.3 Has Sri Lanka achieved enough, given favorable conditions?
Sri Lanka has
an adult literacy rate of over 90%, and has benefitted from a strongly supported
ICT4D program over the past seven years (e-Sri Lanka). Both Internet supply
(through telecenters, national backbone networks, mobile broadband) and demand (through
the development of e-government and other applications, creating awareness, capacity
building) have been addressed as part of the e-Sri Lanka program. Therefore,
it is reasonable to expect that Sri Lanka should achieve more in ICT connectivity
and adoption than other developing countries that did not receive such targeted
ICT funding and attention.
Vietnam provides
a sharp contrast. In 2002, Sri Lanka and Vietnam had similar internet penetration
rates. But between 2002 and 2009, Vietnam increased its Internet penetration by
a factor of 14, while Sri Lanka only did so by 7. By 2009 Vietnam’s intent penetration
was more than twice as much as Sri Lanka’s. In the World Economic Forum Network
Readiness Index (NRI)*,
Vietnam’s ranking was 17 spots below Sri Lanka in 2002; by 2009 Vietnam was 18 positions
ahead. One would have also expected Sri Lanka to gain on its neighbors. But in 2009,
Sri Lanka’s NRI was behind India and just ahead of Pakistan.
Viewed in this
light, it appears Sri Lanka should have been performing better, even with the toll
of the 30-year ethnic war.