A few years ago, the government announced plans to take affordable broadband island wide and rolled out a 100Gbps high-speed broadband network with optical fibre – the gold standard for fixed broadband data transmission in terms of speed, bandwidth and reliability – funded and operated by state-controlled telco SLT, promising an open access network.

A single strand of fibre can deliver broadband speeds up to five times fourth generation wireless broadband speeds. A cable containing several strands of fibre is laid underground in a ring that allows two-way travel, preventing data loss if the network breaks at any point and offering high resistance at low cost.

SLT has invested nearly $1.3 billion over a decade on expanding and upgrading infrastructure including the optical fibre network, which is 25,000km in length (that’s a kilometre of optical fibre cable for every 2.6sq km), and is still expanding in anticipation of the data boom that is already here with everyday things like smartphones, electronic appliances, vehicles and buildings linked over the internet. But this network is SLT’s dumb pipe.

A dumb pipe refers to a telco’s broadband network that only generates revenue from data consumption. When people access this network for value -added content like movies from Netflix, Google or Amazon Video, these content providers earn a lot more revenue than the telco whose role is limited to moving around data. Also, when people talk to and message friends on Skype and WhatsApp, the telco forgoes revenue had the calls or messages gone through its own telecommunication network.

Telcos world over maintain high capex, constantly expanding or upgrading telecommunication and data infrastructure, and are challenged by independent value-added content providers who are eating into legacy voice, messaging and data revenues. Telcos respond to the revenue drain challenge in different ways, from collaborating with these content providers to developing unique customer experiences to defend their territories.

SLT has an extensive optical fibre network or dumb pipe, but unlike most telcos elsewhere, it wants to make it a monopoly.

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LT was awarded a 10-year National Backbone Network (NBN) operator license in 2013 and has converted all its backhaul fixed telephone copper cable network with fibre optic cables through the government’s ‘i-Sri Lanka’ fibre optic backbone project, which was launched in 2011. At the time, SLT already owned a 14,500km fibre optic network. The entire project was funded by SLT, which at the same time upgraded its network to next generation technology – voice is now digitalized across its network, blurring the distinction between data and voice.

The adoption of next generation network technology will enable SLT to converge its fixed and mobile networks, so that customers receive one bill for fixed, mobile and broadband services. However, the regulator does not permit bundling of fixed and mobile services into one business unit.

SLT now has a 25,000km fibre optic cable network and its all backhaul. With this network, SLT is able to provide end users 20Mbps broadband speeds via copper telephone wires, and Wi-Fi and speeds can be increased to 100Mbps with a direct fibre optic line. The telco is capitalizing the fibre optic network to provide enterprise data solutions, cloud and internet protocol television Peo TV.

The game changer for SLT is rolling out optical fibre direct to homes and offices, most of which are already part of its legacy copper wire telephone network.

SLT’s monopoly status in the high capex fibre network space is thanks to government control via a 49.5% stake in the company. Maxis Berhad, an ICT firm incorporated in Malaysia, holds a 45% stake through its subsidiary Dutch-incorporated Global Telecommunications, and the balance 5.5% is publicly traded in the Colombo Stock Exchange where the telco is listed.

SLT claims it will allow other telcos to use the broadband network to transmit data traffic to individual consumers and businesses. Its 2015 annual report claims the fibre backbone has enough bandwidth to service all customers including those of every other telco in the industry.

But the crucial question is, who will decide at what price other operators gain access to the backbone? Capex is high at Rs13 billion and SLT will want pricing for open access to other operators to translate into decent returns. Also, it is in SLT’s best interest to be the first to roll out products to gain a firm foothold in the market. Its strategy is to take fibre direct to homes because most businesses are already connected to SLT’s fixed line network.

SLT, however, is jealously guarding its dumb pipe rights as the country’s only NBN licensee. Listed mobile operator Dialog Axiata PLC (CSE: DIAL) is independently expanding its fibre optic network, backhauling its existing wireless network, and using wireless technology to link the last mile between tower and end user, but only SLT can directly connect end users to the national backbone network with fibre.

In its 2015 annual report, SLT says it continues to lobby the telecommunications regulator against other operators building their own fibre optic networks and drawing last mile fibre optic connections without a valid license.

SLT has also invested in global internet connectivity on three fibre optic submarine cables linking Southeast Asia, the Middle East and Western Europe, and two other cables linking with India and the Maldives. SLT generated considerable revenue from other telco operators who needed to access these cables, which were gateways to the rest of the world, before these operators linked up with similar global networks themselves.

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ccording to Fitch Ratings Lanka, margins from data are comparably lower than what SLT and Dialog still make on voice. The two will still have to invest heavily in fibre and 4G/LTE wireless technology to stay in the game, but as Over The Top content eats into their voice, messaging and television revenue streams, margins will continue to shrink.

As technology becomes cheaper and new generation upgrades like 5G wireless broadband technology are expected to roll out globally five years from now, consumers will demand more data. Internet of Things, smart fridges, lighting and home security systems will drive this demand. According to Fitch, as data revenues pick up, margins will continue to fall. The only way out of this is to build customer volume, but this can be a challenge.

In order to survive, telcos must build compelling customer experiences, price services competitively and focus on capital efficiency as against capital intensive expansion. SLT is introducing enterprise resource planning (ERP) and customer relationship management (CRM) systems to streamline processes and improve the customer experience.

Pacing out technology deployment is crucial. Before investments in 3G can be recovered, 4G is already here. Many towers here are still 2G configured because smartphone penetration is still below 25%. SLT’s aggressive fibre optic network expansion is bound to impact its margins, as most people don’t need 100Mbps speeds now anyway.

“Last mile connectivity is always the costliest,” an analyst covering the telcom sector said, not wanting to be named. “SLT’s direct-to-home fibre broadband product will be costlier than Dialog’s wireless broadband connection. Both will be backhauled fibre, only Dialog will go the last mile wireless and will be more affordable. SLT has the superior product, but do consumers need 100Mbps right now? This is the crucial question,” the analyst said.

The war for data customers will be on pricing, and there is no level playing field with SLT holding the keys to its own dumb pipe – the national backbone network (NBN). Competitors looking to access the NBN must do so at a cost that will make their offering still cheaper than SLT’s. This is why regulators in advanced economies like the US prevent anyone building too large backbone networks. In countries where asymmetries do exist, regulators step in to ensure pricing is fair. In Sri Lanka’s case, the regulator and the operator are both extensions of the government.

Broadband tariffs in Sri Lanka are among the lowest in the world, with entry prices under $5 thanks to competition. Voice tariffs are so low that the regulator, the Telecommunications Regulatory Commission of Sri Lanka (TRCSL), has a minimum floor rate just to prevent telcos going rock bottom to capture market share even though technologies make lower pricing possible. With SLT emerging as a monopoly, all this could easily change.

A couple of decades ago, SLT was a true monopolist in the fixed telephony sector. Consumers and SLT both suffered from the experience before the market opened to competition, liberating both. Today, it is emerging as a different monopolist.

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ileepa Wijesundera’s first day in a new job at Sri Lanka Telecom, one of only three listed companies in the country with a triple-A domestic credit rating, gave him an uneasy premonition about the challenges that lay ahead.

Wijesundera planned to live comfortably with his family in Sri Lanka after building a career in civil engineering and corporate management in North America and the Middle East over three decades across aviation, ports, and oil and gas exploration. He returned to Sri Lanka in 2014 intent on keeping away from the corporate world by taking on the occasional consultancy role to exercise his grey cells, and grow organic rice and vegetable on a 2.5 acre plot in the outskirts of Colombo where he spends most weekends. But the change in government in January 2015 changed all that.

In March that year, the SLT board appointed Wijesundera as chief executive for the group, which included the country’s leading fixed telecommunications services provider with 2.4 million subscribers and the country’s second-largest mobile telco Mobitel with 5.9 million subscribers.

[pullquote]“When you have spent your life in the corporate world, accepting challenges is like a cancer, it’s difficult to shake off. Even though I wanted to go in a different direction, the challenge at SLT was difficult to resist. You want to contribute, you want to change. Telecommunication is a different technology and it’s a new area for me. It’s a challenge and it bites you,” Wijesundera says[/pullquote]

He is no stranger to Sri Lanka’s hostile public sector environment, but still his first experiences at SLT made the challenges all the more poignant for him. It was close friend Foreign Minister Mangala Samaraweera who nudged him to consider the SLT position. Wijesundera served as chairman of the Sri Lanka Ports Authority when Samaraweera was minister in 2004/5.

“When you have spent your life in the corporate world, accepting challenges is like a cancer, it’s difficult to shake off. Even though I wanted to go in a different direction, the challenge at SLT was difficult to resist. You want to contribute, you want to change. Telecommunication is a different technology and it’s a new area for me. It’s a challenge and it bites you,” Wijesundera says.

After the usual introductions on the first day on the job, the new chief executive wanted to explore and took off on a stroll along the corridors of SLT’s sprawling headquarters in the very heart of Colombo Fort, Pettah, the country’s administrative, financial, transportation, trading and military hub.  No sooner than he got out of his office, two uniformed guards kicked their heels to attention. A few paces across the visitors lounge outside his office, Wijesundera got a jolt – the two guards were trailing him!

“What’s going on here?” he asked, a little unnerved. “Sir, we’re your bodyguards,” one of them said, meekly. “What on earth for? Have I done something wrong?” Wijesundera asked. “No. It’s just for your protection,” came the answer. “So…you must follow me around even inside the headquarters,” he asked, now amused. “Yes sir. It has always been this way,” one of the guards said as–a-matter-of-factly. Wijesundera refused to have them trailing his every move, especially in his own domain.

Recalling this incident a year later, he says, “This showed me that something was very wrong with SLT.” The bloody separatist conflict with a rebel Tamil paramilitary group ended five years ago, so why would anyone want bodyguards for top management now? It was the culture, Wijesundera realized, as the challenge slowly took shape in his mind on his first day.

It dawned on him that SLT had complex legacy issues. Before opening up the telecommunication market in 1990, SLT was the sole operator, and it took years to subscribe for a telephone connection. There was a long waiting list. Competition forced the company to become efficient and improve its service deliverables. But it could not go all the way.

Two decades later, SLT is still struggling with a bloated fragmented staff numbering 9,300,  thrice has much as its closest competitor mobile telco Dialog Axiata PLC (CSE:DIAL). Nearly 8,000 of them are in SLT’s fixed line unit, which brings only 40% of the group’s revenue compared with 1,300 staff at Mobitel, its mobile telco unit, contributing 60%.

“I found that even at the top level there was a lot of fragmentation. Each person was looking after his own corner,” Wijesundera said.

Despite huge investments in infrastructure and a large pool of staff, SLT’s performance is comparably unimpressive against its closest rival Dialog. Dialog entered the market in 1995 and it seems SLT has squandered a 137-year head start.

While Dialog reported returns on capital of over 8% over the last five years, SLT has managed 6%. SLT has an asset base nearly twice as much as Dialog, but both companies generated revenue averaging Rs60 billion over the last five years, with SLT reporting Rs4.7 billion in average earnings compared to Dialog’s Rs5.4 billion.

“There is legacy, habits, cultures and products with this company. There is baggage we have to live with. That is why you see a different picture compared with Dialog,” the SLT group chief executive says, but adds that attitudes are changing.

SLT, colloquially called Telecom by rural folk, began as the postal and telegraph service under British colonial rule in 1858, still hung over by its government department days. It had problems rolling out its fibre services. Wijesundera is set on changing the culture at SLT.

In December 2015, SLT completed the conversion of its legacy network to fibre. When the first phase was completed in 2012, the company believed it would get 600,000 new customers by 2014. By end-December 2015, SLT managed only a sixth of this.

“When I joined, SLT already had a range of products designed to be the future of this company like high-speed fibre optic and wireless broadband and internet protocol television. They were, at best, pilot projects with grandiose plans,” chief executive Wijesundera said. “There is no point in putting out pilot projects when you have service issues, so my first task was sorting these issues and creating sound value propositions for our products, which we now have”.

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hould SLT succeed in building a monopoly for itself around the national backbone network, there are several reasons to think broadband could become less expensive as margins come under pressure. Fitch Ratings Lanka believes SLT’s profitability will narrow as it continues the fibre rollout. “Margins could narrow due to a change in the revenue mix, as low-margin data services replace relatively higher-margin voice and text revenue,” it said in a recent rating report on the company.

First, if other operators are permitted to backhaul and expand their own fibre networks like Dialog is already doing, it would only create overlap and unnecessarily higher capex, unless a fair pricing mechanism is in place for Dialog or other telcos to access the backbone network.

[pullquote]For SLT, the biggest challenge will come from the dynamic Dialog. In the race for volumes, last mile deliverability will make all the difference. Even if Dialog’s wireless can’t match SLT’s fibre in term of speed or capacity in households, its ability to package, add value and efficient services delivery will be the deciding factor. This has already happened to a degree[/pullquote]

Second, if SLT fails to understand demand and supply dynamics for broadband in rural areas, it could end up with excess dumb pipe capacity. Both these reasons could make broadband expensive if the monopoly tries to raise prices to improve returns. According to ICT policy think tank LIRNEasia, internet demand will reach nearly two million by 2020, with the Western Province accounting for 57%, and the Central and North-Western Provinces together accounting for 23%, leaving six other provinces to account for 20% of the demand. “With the growth in low-cost wireless technologies, it would also be logical to have wireless backbones than making significant investments in laying fibre,” the think tank argued back in 2008.

For SLT, the biggest challenge will come from the dynamic Dialog. In the race for volumes, last mile deliverability will make all the difference. Even if Dialog’s wireless can’t match SLT’s fibre in term of speed or capacity in households, its ability to package, add value and efficient services delivery will be the deciding factor. This has already happened to a degree.

Dialog has 500,000 fixed broadband customers since launching in December 2012. During this same period, SLT was able to attract only a fifth of this as new customers with fibre. “We seem dumb because we did not push our products hard enough back then,” Wijesundera says, recognizing the need for SLT to be aggressive in its approach. He has set a target to connect 70,000 households with fibre by the end of this year, and attract 1.3 million new fixed line subscribers over the next few years.

But no one needs to lose. In the last budget, the government proposed to allow telcos to share infrastructure; this could benefit both operators and consumers. Heavy capex could be spread and broadband pricing will be much cheaper, and as technologies evolve, upgrading legacy infrastructure can be too expensive for a single operator to bear. The telecommunications regulator needs to be much more proactive in formulating and monitoring an open access policy for the national backbone network.