Industry Focus: A Study in Contrasts - Surveying the Telecommunications Sector

By Matthew Smith

Playing Against The Umpire

Taiwan's telecommunications industry provides two compelling examples of how liberalization -- and the lack thereof -- works in practice.

A well-dressed businessman passes you on the street, gesticulating wildly and enjoying a hearty laugh. He appears to be talking to himself, but an earpiece and a line connected to his belt lets the world know he's gone hands-free wireless. In his hand, meanwhile, is a new GPRS handset, and he is punching away at the keypad, sending off an email. A personification of Taiwan's incredibly rapid adoption of mobile services since the market was opened five years ago?

Perhaps, but glance into a nearby Internet café and you will see that Taiwan's telecommunication services industry might not be so healthy after all. A crowd of mesmerized teenage and twenty-something computer game enthusiasts hog the terminals, spending their very limited funds to access Middle Earth via the café's high-speed connection. True, some are here to avoid parents and homework, but many would prefer to be using their own hardware at home. However, they can't, because they have no way to purchase the high-speed Internet connections that their hobby requires. Despite the nominal opening of the fixed-line telecom market in 2001, they're still waiting for quality broadband services.

That's just a taste of the dichotomy that Taiwan's telecommunications sector presents. The nation's population has shown itself highly willing to embrace the latest available technologies, but operators are often unable to fully meet demand because of de-facto restrictions on new players' access to end-users of their services.

The plain fact of the matter is that Taiwan, which committed itself to full liberalization of the telecom sector in its World Trade Organization accession agreement with the United States, is only halfway there -- and for fixed-line services, not even that far. This is largely because the quasi-utility nature of the telecom sector has resulted in a wide range of legacy advantages for Chunghwa Telecom, the dominant incumbent carrier 95%-owned by Taiwan's Ministry of Transport and Communications (MOTC). Fundamentally, Chunghwa's edge lies in its effective ability to set tariff rates at levels below what private operators deem fair, and to block or delay their access to consumers.

At the heart of the problem is Taiwan's failure to establish a truly independent regulator. The Directorate General of Telecommunications (DGT) under the MOTC was both the regulator and major provider of telecom services from 1943 to 1996, when it was nominally separated from Chunghwa Telecom. However, both the DGT and Chunghwa remain under the auspices of the MOTC. Thus, the regulator has never been truly independent of the incumbent carrier, and Chunghwa carries more weight within the ministry because it earns revenues for the government.

Both on and off the record, industry insiders insist that the DGT is trying its utmost to be an effective regulator, but is ultimately constrained by higher-level officials within the MOTC, who almost always favor Chunghwa over the DGT's efforts to curb its incumbent power. The situation is complicated, "but as long as the incumbent can get away with it, they will certainly try it," says Joseph O'Konek, president of Far EasTone Telecommunications. "It's been said that a monopoly is a great business, if you can get one."


Playing Uphill

Opening the market in 1997 was supposed to have eliminated that monopoly, but new telecom operators say the environment still fosters an unbalanced playing field that, if left tilted in Chunghwa's favor, will continue to stunt the development of Taiwan's telecommunications infrastructure and limit consumer choices. Such a result would be a waste of the market-opening efforts that began in the mid-1990s and that have since created huge economic benefits for Taiwan.

The sector has seen an amazing increase in value since 1997, when the effects of the previous year's Telecom Law came into play (see chart). Total revenues for telecom operators increased from US$6 billion in 1997 to US$10.5 billion in 2001, an 80% increase. And despite the profits earned by private operators, Chunghwa has maintained its pole position, with revenues reaching NT$170 billion in fiscal 1997 and NT$182 billion in 2001. Meanwhile, employment in the sector soared nearly ten-fold from the 1997 figure of 34,700 -- the total number of Chunghwa Telecom employees at the time -- to 320,000 in 2001. These figures represent more than just a boon for telecom operators and their employees -- they also mean a larger tax base for the government of Taiwan, which the recent economic downturn has rendered even more meaningful. The obvious conclusion: liberal telecom policy makes for a good economic environment.

The value created by a more open market goes even further: it is difficult to imagine that the 1,440% growth in cellular phone subscriber numbers since liberalization or the 6,500% increase in broadband users would have occurred had Chunghwa remained the nation's sole player. The same can be said of the US$400 million in foreign direct investment in Taiwan's telecom industry last year. Moreover, liberalization of the market has enriched the lives of consumers and created value for Taiwan in ways that cannot be quantified. For instance, how does one calculate the intrinsic value to the nation of having Asia's highest mobile penetration rate?

Nevertheless, Chunghwa maintains control of Taiwan's taxpayer-financed telecommunications infrastructure, and holds all the cards in terms of interconnectivity to this complete nationwide network, which includes most of the island's population and almost every building and home in Taiwan. Despite regulations that require carriers to share their facilities under certain conditions, new players say that Chunghwa is at best a reluctant sharer.

Not surprisingly, the mobile sector is the only telecom segment that has truly blossomed here so far -- mainly because the nature of the technology means that new players do not suffer from lack of access to the "last mile" (the link between a provider's network and a consumer's residence or office). As a result, Taiwan is positioned to be a regional leader in the adoption of 2.5G and 3G mobile data technologies -- in terms of the services, manufacturing of end-devices, and creation of content and applications that have the potential to drive the Greater China market and fuel Taiwan's economic growth.

But compare the mobile sector's success with that of fixed-line broadband services, in which players say that Chunghwa has aggressively used its last mile advantage to exclude them physically, poach their customers, or simply out-price them. The result: Taiwan has been a late starter in broadband, and the entire experiment in fixed-line liberalization stands in danger of failing. If the nation's stated policy of becoming a regional telecom center is genuine, clearly something must be done.

Dial "M" for "Minister"

Giving the industry a regulator with teeth would be the first step in creating a fair and competitive environment, but it will require strong leadership.

Establishing a truly independent regulator and overcoming the problems posed by Chunghwa's market dominance will require changes in the law that extend far beyond telecom regulations. This survey argues -- and the examples of other nations show -- that the active participation of high-level government officials is needed to curb the powers and special privileges of the incumbent provider and to ensure operators access to the widest possible customer base. "In every market where we've seen [telecom liberalization] successfully happen, senior leaders have been critical in making it happen," says David Hoffman, partner with PwC Consulting. It is an opinion echoed again and again by industry players and analysts: officials at the ministerial-level and above -- including, ideally, the president -- have to develop an understanding of the issues in order to resolve them. However, that leadership, which has been seen in Taiwan in the past, seems to be lacking now, says Hoffman: "There is almost a denial here that senior leadership in government has to get involved in championing telecom reform."

Perhaps as a result, telecom liberalization has been stalled since the Telecom Law Amendment of 1999. For example, Taiwan limits foreign ownership of Type 1 telecom operators at 20% direct and 39.99% indirect. A bill that would lift that cap to 49% direct and 25% indirect ownership has been languishing in the Legislative Yuan for two years. Although it recently passed a committee reading, this is no guarantee that it will pass the second and third readings required for enactment. No high-level Executive Yuan official seems to be championing it.

In the meantime, private operators say that the incumbent is competing on price alone and that it is able to subsidize its loss-making business by injecting funds from profitable operations. "We think they've priced ADSL below their cost structure," says Joseph O'Konek of Far EasTone. "If they had it fully loaded, with all of their costs, would they be making money?"

But Chunghwa Telecom chairman Mao Chi-guo denies this charge, saying that the company's reduction in ADSL rates reflects the "world record low price" for equipment that its economies of scale allow. The only cross-subsidization that Chunghwa engages in, he says, is the "healthy" funneling of profits from its mobile and broadband divisions to its local calling services. "I would love to see our local tariffs raised, if only it could be accepted by the Legislative Yuan and consumers," he says.

It is worth noting that Chunghwa's chairman can hardly be considered a protectionist: as a vice-minister of transportation and communications in the mid-1990s, he was one of the key architects and supporters of telecommunications liberalization. Nevertheless, part of his company's strategy has clearly been to compete on price, for which its economies of scale create an unbeatable advantage. This is true of incumbents the world over. What is unusual about Taiwan, however, is that the regulator allows Chunghwa to lead the industry in price cuts. "On a global basis, and even across Asia, I'm not aware of any other case where the incumbent was allowed to be the one lowering prices first," says O'Konek.

In fairness, there have been some encouraging signs that the regulator understands that Chunghwa should not be allowed to take the lead in price cuts. The DGT halved Chunghwa's most recent proposed ADSL rate decrease, which was a difficult move from a political standpoint, given that Chunghwa had already unveiled its intentions to the press. On a higher and more long-term level, there seems to be a newfound acceptance of the notion that the DGT and Chunghwa should be truly separated, and the current drive to re-engineer Taiwan's government is a perfect opportunity to do so. The MOTC is unlikely to hand over its golden goose to another ministry without a major battle, but insiders say that the DGT will likely be made independent or at least moved to the control of another, newly formed ministry. According to the Director-General of Telecommunications, Chien Jen-ter, official details on the restructuring plan for the telecom regulator were to be announced in late April, as TOPICS was going to press.

There are dangers, of course. One rumored plan would place content, an integral part of the industry, under the regulatory control of a separate agency. Given the difficulties of cross-ministry communication and cooperation in regulating any industry in Taiwan, the results could be disastrous. In any case, the new regulatory body must be granted substantial budgetary and personnel support: "Give them the mandate, give them the resources, so that they can do what they're supposed to do," says Kirk Lee, vice president of Mackay Telecom.

There are other regulatory issues on the table, including the rules that force operators to spend their own capital to enable government officials to eavesdrop on their customers. But the fundamental problem is clear: until the regulator is made truly independent of the state-owned incumbent so that it can effectively curb Chunghwa's power, Taiwan's telecom industry cannot be considered fully liberalized. For the new mobile operators, Chunghwa's continued dominance will hurt revenues, decreasing the incentive to innovate, improve quality, and create value. For the new fixed-line players, the results could be even worse.

Bad Connections

As the new market entrants are finding, it's one thing to have a fixed-line license, and another to be able to reach customers.

Step back a year in time, and the loudest debate surrounding Taiwan's telecommunications industry was over the stringent requirements for new fixed-line licensees that were scheduled to begin operating on July 1, 2001. The prerequisites to obtaining a Type 1 license included minimum paid-in capital of NT$40 billion and a commitment to build up 1 million access lines each. DGT officials insisted that such strict conditions were necessary to ensure that opening the market to new players would result in privately owned broadband infrastructure networks capable of competing against Chunghwa and of leading Taiwan into the information age.

The U.S. Trade Representative Ð and companies such as Level 3 and Asia Global Crossing -- meanwhile argued that the requirements violated Taiwan's WTO commitment to full liberalization. They exerted heavy pressure on Taiwan to drop the conditions and allow free access to the Type 1 market, while the three would-be licensees, which had already put up as much as US$3 billion, were trying their best to make sure that the gate stayed closed behind them (see "Static on the Line", Topics June-July 2001).

Both sides of the argument had valid points, but in the end, the DGT held its ground and refused to change the rules just when the game was about to get under way. Subsequently, Level 3 divested itself of its Taiwan operations, Asia Global Crossing went on to construct and operate its submarine cable services here, and Taiwan became the 144th member of the WTO with no USTR objections. For the three new licensees, it was a happy ending -- but only to that particular chapter.
The next has taken an ironic twist: after being compelled to commit to building expensive new networks that the DGT insisted were crucial for propelling Taiwan into the information age, the operators have found themselves blocked from making good on that pledge. Although they have been able to construct their fiber-optic infrastructure, they have found that crossing the "last mile" -- the crucial physical connection between their infrastructure and the end-users of their services -- is an almost insurmountable hurdle.

Can You Dig It?

"It's really killing us," says an executive at one of the new fixed-line players. She's speaking on condition of anonymity about the difficulties her company has in getting construction permits from local government authorities so that its work crews can dig up local roads and install proprietary telecom cables. In addition to the special municipalities of Taipei and Kaohsiung, Taiwan has 16 counties, 5 provincial municipalities, 28 county municipalities, 60 urban townships under county jurisdiction, and 221 rural townships. Local authorities at every level have the authority to apply their own, often arbitrary, conditions on issuing construction permits.

Nor do these conditions always correspond to the terms demanded by other governments, so having permission to dig from one authority is not carte blanche to proceed with installation. Public nuisance laws, conflicting government jurisdictions, and local vested interests make expanding networks to consumers a far more costly endeavor than anyone had anticipated. At NT$6 million per kilometer, the costs of building out the final network links are three times original estimates -- a situation that has the potential to cripple the new fixed-line providers.

In fairness, local officials in democratic Taiwan must consider their popularity with constituents, who more often view such construction as an unnecessary annoyance rather than as an inconvenience worth suffering in the interests of upgrading Taiwan's information network. The fact that three new companies are coming in on their own schedules compounds the problem: if local officials allow one operator to dig up the roads, they can't see much sense in letting another disrupt municipal traffic flows yet again. Even in Taipei, which is seen as the jurisdiction most friendly to opening fixed-line services, voter convenience takes precedence: companies have to make a separate application for every 100 meters of road construction, a rule designed to keep traffic disruption to a minimum.

Not surprisingly, providers say the problem is far worse elsewhere. A company might fight hard to obtain permission to lay cable from a county government, only to be refused by officials at the municipal or prefecture level. These luminaries often require "gifts" to change their minds, although even a payoff doesn't guarantee permission to dig: "Sometimes it's difficult to tell whether or not you have bribed the right party, because there are so many people saying that you can or cannot do certain things," says the executive. And even the process of applying for legitimate permission can result in a two- to three-month wait before it is issued, seriously slowing the rollout of new networks, with the result that one operator, which has signed up 70,000 customers, has only been able to reach 10% of them.

In theory, equipment that transmits signals through the airwaves could come to the new players' rescue, by eliminating the need to install lines. Such "wireless local loop" technology has helped operators elsewhere to leapfrog over the last mile. Fixed-line signals are sent via locally placed wireless transmitters to base stations, where they are routed back into the service provider's wired infrastructure. The technology was tested and it works fine, says the anonymous fixed-line executive, but there is a catch. Wireless local loop technology raises misgivings about potential health risks, and residents have refused to allow the transmitters to be set up on their rooftops. When one considers that consumers already have wired telecom connections, it is understandable that they are not taking any chances. So, unless the safety of such technology can be demonstrably improved, fixed-line providers in Taiwan will remain just that.

Barriers to Entry

Accessing the local loop will require more than digging up public roads. New providers say that gaining entry to private buildings is likewise difficult, because they must first obtain permission from landlords, who are normally reluctant to allow line installations without charging a hefty fee. Few property owners see the value of giving their tenants a hi-tech choice for telecommunications, and changing this mindset will require government efforts to educate them, says Kirk Lee of Mackay Telecom. "At this point, it doesn't seem to have gotten through their minds," he says. "But time is of the essence -- new fixed line operators have to develop their networks as quickly as possible." He adds that the biggest landlord of all -- Taiwan's government -- could get the ball rolling by opening its own properties to both private fixed-line and mobile providers. Currently, access to government buildings is essentially monopolized by Chunghwa Telecom.

Indeed, while new operators struggle to extend their coverage, the incumbent enjoys almost complete control of the last mile through its nationwide network and customer base, which have been built up over the last 50 years. The DGT requires Chunghwa to allow other players access to its "bottleneck" facilities, or those the regulator deems impossible for new operators to build within a reasonable amount of time and money (such as the vertical risers that offer access to high-rise building tenants). Yet, new operators say, the incumbent nonetheless attempts to exclude them from bottlenecks by stalling on the issuance of lease terms for the facilities.

Chunghwa has never had to suffer through the construction permit nightmare, because as part of the central government, local officials did not even think to get in its way. And as the historic monopoly telephone provider, property owners could hardly exclude it from their buildings. As a result, fixed-line penetration has reached 57% of the population, or two subscriber lines per household. But its would-be competitors say that Chunghwa's comprehensive network, which was financed by the taxpayers of Taiwan, should not be viewed as its own property (although, to be fair, the network generates revenues for Chunghwa that supplement the central government's coffers, and thus provides benefit to Taiwan's taxpayers).

Of the new operators, analysts say that Taiwan Fixed Network is in the lead in terms of its rollout, while Sparq has obtained permission to construct its network in about half of its target area. "We don't see [the three new fixed-line providers] as very aggressive in building out their networks," says Wang Hui-chun, an analyst at the Market Intelligence Center. "They still have a lot to learn, and the difficult thing is choosing where to focus first."

Nevertheless, rapid expansion of their networks to attain a critical mass of customers is a must for the operators, even to the extent that they sacrifice their profits by slashing prices, says analyst Victor Kao of Capital Securities. "It's a choice between whether you want to die today or die tomorrow," he says. "Sacrificing today means that they will have a future opportunity to be delivered." But with 99% control of the local loop in Taiwan as of the end of 2001 (according to the World Bank), Chunghwa's overwhelming economies of scale mean that competing against the incumbent on price is hardly a recipe for longevity, either.

Wide Bandwidth, Narrow Choice

Given its advantage, it's hardly surprising that Chunghwa Telecom has a huge lead over would-be rivals. But what does that mean for consumers?

Even if globalization hasn't done the new fixed-line providers much good yet, it has certainly spurred Chunghwa Telecom on to new heights -- and Taiwan's consumers are, for now, the beneficiaries. Perhaps mindful of the embarrassing loss of market leadership it suffered in the early days of mobile competition, Chunghwa has focused heavily on developing its ADSL services since prior to the run-up to fixed-line competition.

It has been no easy task turning this aircraft carrier around. Its chairman, Mao Chi-guo, notes that retraining the incumbent workforce for the Internet age was particularly difficult: "It was a new learning process for them, and we encountered a psychological barrier, even an emotional barrier." But those efforts have paid obvious dividends, as Taiwan now boasts the world's 3rd highest number of DSL subscriptions per person in the world, almost all of which is Chunghwa's business. The company entered into an NT$7.11 billion deal with Alcatel to supply the equipment for a world record 1.26 million ADSL lines in March. After Chunghwa trimmed its rates in April 2001, the ADSL market took off, overtaking cable as Taiwan's choice for broadband access, with some 1 million subscribers by the end of 2001. Today, Chunghwa claims 1.2 million ADSL customers, with an additional 4,000 to 5,000 new subscribers coming on line every day and a year-end company goal of 2 million.

For the new providers, finding profitable business models under Chunghwa's nose will be difficult, even if they are able to complete their networks Ð which is by no means a certainty. Analysts say that Chunghwa has by and large sewn up the island's DSL market. The MIC forecasts that by year-end, Taiwan will have 2 million ADSL lines, with Chunghwa accounting for 80% of that total. The voice market, which totaled NT$110 billion last year, is likewise the domain of the state-owned carrier and in any case is no longer growing substantially (although the new carriers have made some headway with international call services). Therefore, Chunghwa's dominance of fixed-line voice will likely continue, at least until such time as new providers can offer voice-over-IP services. Chunghwa already offers limited voice-over-IP, but the company avoids cannibalizing its existing telephone operations by charging fees for the service, which limits its consumer appeal. Eastern Broadband Telecom has announced it will offer the service starting in May, but without a wide customer base, it will be difficult to succeed, says the MIC's Wang.

Wang suggests that the new players forget about residential ADSL and instead focus on the commercial market, by offering fiber-optic cables directly to office buildings. (Ironically, this would be exactly the kind of "cherry picking" that the DGT feared would happen if the market was flung open to new competitors with no commitment to building out a widespread broadband infrastructure.) Japanese operators have had success providing fiber-to-the-building and fiber-to-the-home services in Tokyo since last October, notes Wang: "It would be a good start, a good way for the new companies to tap into the market."

And Then There's VDSL

Another possibility for them is to focus on developing next-generation technologies, such as VDSL, which is said to offer speeds of up to 28 Mb/second (nearly 20 times faster than the fastest ADSL line at present). But there are questions about the technology, and Chunghwa, which has shown little interest in providing such services to date, is nonetheless unlikely to sit by and watch this demand be filled by other players. Mao Chi-guo says his company is ready to offer fiber-to-the-building services in 80% of municipal Taiwan now, and will start to do so in the second half of this year.

Clearly, if the new operators are to have a fighting chance against Chunghwa, the last-mile issue must be tackled head-on. However, it is an extremely complex problem that touches upon legal areas far beyond the jurisdiction of the DGT. Providing an environment in which new players are allowed access to consumers will require changes in the law, and for that to happen, leadership is required. As David Hoffman of PwC Consulting says, "A task force comprising geographic leaders with central government leaders could take a more holistic view of the overall requirements and opportunities, as opposed to vested, Ônot in my backyard' local interests."

What will happen if it doesn't materialize? "It is particularly important to the fixed-line players that these issues get resolved, and quickly. Otherwise we could see some terrific failures," he says.

Of course, companies also need to understand that the government's responsibility is to see that Taiwan's citizens are well-served by the telecommunications industry, not to ensure that every investor makes a killing. That said, allowing consumers a choice of fixed-line service providers will continue to spur innovation and raise the nation's technological standards -- but only if all companies are allowed to deliver that innovation to the Taiwanese people.

Still Above Water

Submarine operators help Taiwan get access to the outside world. So far, they seem happy to stay that way.

Excluded last year from entering Taiwan's fixed-line telecom market, undersea cable operators must be happy as clams that they didn't get what they had wished for. While the DGT has promised to gradually lift restrictions on the types of services they can offer, the experience of the new fixed-line players shows that the market is far from truly open.

Applications that require more and more bandwidth are doubtless on the way, but the bandwidth glut in the United States is clear evidence that they are not yet widespread, even in the leading broadband markets. While that oversupply of capacity helped push Global Crossing into bankruptcy, its arm on this side of the world, Asia Global Crossing (ACG), continues to operate and expand its operations in Taiwan. Not surprisingly, it is now negotiating to extend its reach into China, the only major telecom market that is showing substantial growth.

AGC, which was awarded its concession license in August 2001, was Chunghwa Telecom's first competitor in the sector. The incumbent had seen the word "competition" written on the wall, and cut its international bandwidth rates by almost half in April 2001. But telecommunications is a strange business, in which your competitor is often simultaneously your cooperative partner. For now, AGC acts as a "carrier's carrier" -- providing bandwidth to other operators that need access to its worldwide fiber-optic cable network. AGC's submarine cable comes to shore at Bali (across the river from Tamshui in northern Taiwan), the location of the company's landing station. A company-owned "backbone" connects this site with its Neihu "telehouse," the gathering point for the lines that connect to end-customers. While submarine cable licenses do not authorize companies to offer connectivity directly to the end-customers, they nevertheless indirectly suffer from the "last mile" problem. Their only customers are other carriers, after all, so a successful rollout of the new fixed-line networks would obviously work to their benefit as well.

Despite the spectacular crash of AGC's parent, Feng Chian, AGC general manager in Taiwan, says the privately held company is doing well here. That may be difficult to believe, given the global gloom surrounding broadband, but other players are knocking on the door. Two of the five submarine cable operators whose business plans were originally accepted by the DGT dropped out after failing to post the required NT$80 million performance bond. Nevertheless, Reach, which purchased Level 3's Asian cable operations, finished rolling out its Taiwan network Ð a landing station in Ilan County and a telehouse in Neihu -- in January and expects to receive its concession license by this summer. Taiwan International Gateway, a tertiary subsidiary of U.S. giant Tyco, is said to be two to three months behind, and a fourth player, Flag, is also on its way.

Who will buy all this bandwidth? At the moment, it is unclear. The viability of the three new fixed-line players remains in doubt, and international data network service companies, such as AT&T and Worldcom, already own their own systems. Cable TV operators would be a potential target, but there are relatively few in Taiwan that have the regulatory authority and the skill to offer international communications services. "These undersea cable companies were aggressive when the Asian communications market was growing so quickly," says Wang of the MIC. "I would say they will be relatively conservative during the next few years." In Taiwan, that is, but perhaps not in China.

The Green Cellular Island

The astounding growth of cellular phones and services in Taiwan provides a blueprint for the liberalization of any industry.

Imagine a Taiwan where loud musical tones and unapologetic shouts of "wai!" were not an integral part of the movie-going experience, where dinner dates were free from the wireless interruptions of nosy friends and worried family members, and where a man using a da ge da (cell phone) could be safely assumed to be, in fact, a da ge (petty organized crime boss) himself.

It might be hard to accept now, but that idyllic place existed just a few years ago. Then came the opening of the mobile telecom services market in 1997, when the entry of five private operators tapped overwhelming pent-up demand and sparked a growth story that would be unbelievable if it had happened anywhere outside of Asia. In just half a decade, reported subscriber numbers soared from less than 1 million in 1996 to more than 22 million at present. Subscriber penetration rates (measured by the number of SIM cards issued) have reached 96.55%, the highest in the world. And over the past four years, revenues from mobile services climbed by a factor of 7.84 to reach NT$171 billion in 2001.

Along the way, one of the new providers, Taiwan Cellular Corp. (TCC), unseated the incumbent Chunghwa Telecom as the nation's wireless leader both in terms of revenues and subscribers in 2000. While TCC's ownership of Transasia Telecommunications means that it remains the market leader, Chunghwa's wireless arm last year regained the top individual spot for mobile service providers. This is not necessarily something to boast of, however, as its competitors attribute such success to predatory pricing tactics, refusal to grant equal access to its facilities, and cross-subsidies from other areas of the firm. Nevertheless, few would argue that liberalization of the mobile telecom industry has failed. The market's spectacular growth, quality of services, and number of choices available to Taiwan's mobile-hungry consumers are testament to its overall success.

The question is, what do you do once you have reached such an amazing saturation level? For mobile servers, the trick will be ensuring that they can continue to foster market growth in an environment where almost everyone already owns a cellular phone. Mobile subscriber growth slowed to just 21% last year, compared to 35% in 2000. And what is becoming ever more clear is that a run-up in users does not always reflect a concomitant increase in value to the providers. According to the DGT, average revenue per user (ARPU) for the overall industry fell from NT$11,700 in 1997 to NT$7,900 last year.

A closer look shows that profitability varies widely among the wireless providers. According to PWC Consulting, Chunghwa's ARPU in January 2002 reached NT$810, the best performance, while laggard KG Telecom's ARPU was just NT$358 (see chart below). It would seem that not all of those subscribers are as loquacious -- or anyway, as profitable -- as service providers would like them to be. "Other than data, I don't see any significant drivers of this industry," says Alex Wu, an analyst with KGI Securities.

Nevertheless, operators insist that there is still room for growth in revenues from the voice market. Currently, mobile usage -- call traffic that passes through the mobile network -- accounts for just 20% of total call traffic in Taiwan. "We still have 80% of the market up for grabs," says William Newton, vice president of Taiwan Cellular (TCC).

How can a provider entice users to eschew the landline, make more cellular calls, and talk longer? The obvious answer is to reduce tariffs, but this impacts profitability. Like mobile providers all over the world, service companies here are focusing on other strategies, including offering promotions during off-hours, when capacity is under-utilized. Other products include "sponsored" calls, in which a user gets free calling time in exchange for listening to an advertisement, or matchmaking services that allow callers to contact potential friends anonymously.

The "big three" providers are also aggressively promoting "enterprise solutions," which entail packaging existing services, such as voice calling and short message services, for companies with diverse communications needs. It may sound like a fancy marketing ploy to peddle existing technology, but Capital Securities analyst Victor Kao notes that ARPU for corporate clients is 35% higher than that for individual accounts. Companies currently make up just 2% of Taiwan's mobile market revenues, compared to 10% in Japan and 15% in the United States, so he believes that there is room for growth in the enterprise market, which still accounts for just a sliver of mobile revenues. Nevertheless, building a corporate client base now could potentially become more valuable after the next evolutionary step in mobile communications -- the widespread use of always-on, high-speed mobile data services.

Ready to Rumble

Wireless data services promised by 3G license-holders remain a way off. But despite recent skepticism, that's not to say they won't be worth the investment.

It should have been called the Melee in Taipei. Starting on January 16, six bidders went toe-to-toe for a world record 180 rounds, fighting it out to decide who would get the five Third Generation (3G) mobile cellular licenses being auctioned off by the DGT. The bout ended on February 6, when bidder 3GO Telecom threw in the towel. The winners (see chart on next page) took home their 3G belts amid fears that the price they paid was too high; the three listed licensees (FET, TCC, and CHT) had seen their stock valuations fall about 10% during the bidding.

As with most boxing matches, the biggest winner was the organizer. Taiwan's haul from the 3G auction: a cool NT$48.9 billion, 145% higher than the reserve price set by the DGT.

Not a bad take from the sale of five CDMA licenses, which will allow the companies to operate wireless broadband networks -- assuming the fabled 3G market ever emerges. There are plenty of those who doubt this will ever occur, but not among the companies that bought the licenses. "The operators obviously recognize that 3G has a future," says Jean-Phillipe Benoist, president of Alcatel Taiwan. "Otherwise they wouldn't spend this kind of money on the wavelength spectrum."

Some of the bid winners voiced irritation over the licensing fees. They would have preferred a "beauty contest", which would have awarded licenses based on each company's perceived potential to develop a 3G network. Nevertheless, Taiwan stacks up well in comparison to other countries, where notoriously exorbitant licensing costs have brought 3G licensees to their knees (see chart on next page). "Taiwan's auction was timed well," says analyst Alex Wu. "People have learned not to pay such high fees for licenses -- especially considering the fact that you can't see any immediate profit from them because the 3G market has not yet materialized."

That's true enough, but the odds of making it in Taiwan are probably better than most places, which gives the nation an opportunity to take a leading role in the development of 3G for Greater China.

Columbus' ROI?

Intel CEO Andy Grove once famously compared the potential for mobile data communications with Christopher Columbus' voyage to the New World in 1492. Yet like Columbus, providers are sailing into uncharted territory, and the market's direction is still unclear. Most expect 2.5G technologies, which offer data transmissions at faster speeds than the traditional dial-up GSM protocol, to allow service providers a relatively inexpensive method of testing products Ð and training the market Ð before they roll out more costly 3G networks.

The success of services like NTT Docomo's I-Mode, which has over 31 million subscribers in Japan, and other Japanese operators has given mobile service providers here some encouragement that the data market in Taiwan will follow suit.

The market here seems most likely to develop first by the spread of slower 2.5G data services before the more expensive 3G systems are implemented. This is partly because of the lack of commercial availability of 3G systems and services, but also because the market normally develops in a step-by-step manner. "Is it because I as a consumer need to evolve slowly, or because the technology needs to evolve? Whichever one of those it is, the reality is that we evolve, rather than have an enormous revolution," says TCC vice president William Newton.

It is a widespread opinion, but there are others. "I see the market for 3G accelerating in the region, and therefore I think there is a risk for the 2.5G market," says Alcatel President Jean-Philippe Benoist, whose company is about to unveil its end-to-end 3G technology in Taipei. Benoist believes that much of the skepticism surrounding 3G was caused by the global hi-tech slump and by early promises to deliver the technology more quickly than was possible. But now, he says, 3G is "no longer just Power Point slides Ð it's hardware that people can touch and use."

Indeed, with the 3G licenses due to expire in 15 years, it is in the interests of providers to move quickly, if they move at all. The two "greenfield" licensees (Taiwan PHS and Asia-Pacific Broadband Wireless), which lack existing subscriber bases, are seen as likely to take the lead in rolling out services. Taiwan 3G Mobile Network, backed by a number of Taiwan's biggest hi-tech companies, claims that it will begin operations in June 2003. With estimated costs of US$1.5 billion to US$2 billion to build a 3G business from scratch, there is no shortage of doubters.

What will all this bandwidth be used for? That really is the key question. If and when it materializes, wider bandwidth holds the promise of allowing a broader range of applications to be developed, which will be necessary to fuel the subscriber interest in mobile data that so far seems lacking. "You have to develop the value of content to get people to spend money on it," says Wu Shein-tung, a consultant at the Market Intelligent Center. "Operators and content developers don't really understand the needs of the market yet."

The World Wide Wireless Web

The key word, 3G developers might say, is "yet." As consumer usage of always-on 2.5G and 3G mobile data systems becomes more and more pervasive, service providers will obviously be better able to analyze consumers' needs, habits, and movements. This will provide an unprecedented opportunity to segment the market and tailor products and services for individual groups, similar -- but in many ways more detailed -- to the customer tracking that Internet-based companies already do. "The more a company's offerings can capitalize on the 'personal, interactive, always-on, always-with-you, and know-where-you-are' characteristics of mobile devices, the more likely they will benefit from this new platform," argue Boston Consulting Group consultants David Michael and Greg Sutherland in Asia's Digital Dividends (John Wiley & Sons, 2002).

With mobile transmission speeds on the increase, the potential content of wireless data services is nothing less than the entirety of what is available on the Internet. Thousands of sites already offer no frills, text-heavy mobile versions in WML format for the 2G WAP platform, and I-mode's use of c-HTML, a wireless version of the Internet's HTML, has resulted in tens of thousands of content sites accessible to its users. In addition, users of mobile data services can change the settings on different levels -- such as their handsets, their SIM card, or the website itself -- to personalize the content they receive. Other products are more mobile-specific, such as location-based services that provide information about, for example, restaurants in a particular neighborhood, or that let users know about promotions in nearby retail stores -- ads that also target the individual's personal habits and preferences.

Meanwhile, Taiwan's fondness for things Japanese means that popular and profitable applications there, such as downloadable icons, ring tones, and daily horoscopes, can probably make headway here as well. And email, the Internet's deadliest "killer app" to date, has already been transferred to the mobile platform through SMS services. Intriguingly, wider bandwidths will allow multimedia messaging, including the transmission of still and moving video images: Japan's J-phone already offers this service, albeit at 2G speeds. "The array of mobile data services keeps growing," says TCC's William Newton. "And when you have this many sticks in the fire, it is highly likely that a few of them are going to burn -- that is, a few of them will be blockbusters."

Yet if the possibilities are almost unlimited, so too are the complexities. Mobile customers have become accustomed to being able to roam the globe and use their GSM phones anywhere, something much more difficult to achieve with data services because platforms and available content itself are not always compatible in different countries. Tellingly, it is easy to obtain English-language information about Bangkok using mobile applications, but this doesn't do a British or Canadian tourist much good in Taipei, where most mobile content is Chinese-only. "There are numerous challenges that face the market to make the promise come true," says Joseph O'Konek. "It's not a lack of content so much as a lack of content that is relevant to you."

Moreover, the more hardware makers, content developers, and service providers strive to differentiate their products to make them relevant to individuals, the longer it will take for consumers to learn how to use them. Creating content and the devices that can access it -- and making both useful to and usable for consumers -- has tremendous potential for Taiwanese companies.

But of course, we're not telling them anything they don't already know.

Electronics Endgame

Will the rollout of 3G networks allow Taiwanese IT manufacturers to make a great leap forward in China?

For Taiwanese ODM electronics manufacturers, it is a time of tremendous opportunity. The success of the world's nascent data services market will depend on applications and content relevant to the users, and it is equally important that these applications be delivered on devices attractive to the same consumers. Yet we do not live in a one-size-fits-all world, which is why smart manufacturers appear to be gearing up to leap across a "last mile" gap of their own. Believe it or not, Taiwanese companies, which have made a science out of manufacturing for others, are in an excellent position to manufacture 3G products -- and market them to consumers under their own brand names.

It is an old dream, and it has been shattered before. Witness Acer and Mitac's advances into -- and subsequent retreats from -- the U.S. consumer market. But with mobile data, there is a significant difference: China. The success of Taiwan's popular culture in the world's largest mobile phone market by subscriber numbers -- and the market for 38.5% of Taiwan's handset exports last year -- has shown that the two nations harbor more similarities than differences when it comes to just about everything except politics. Advantage, Taiwan.

The company that is perhaps best placed to make and market 2.5G and 3G products is run from an unassuming complex on a side street in Shihlin. One of the nation's largest electronics companies, perhaps best-known as a supplier of notebooks to Compaq, Inventec Corp. has progressed from OEM into ODM, and executive vice president Eric Chen says the company is now ready for "OIM -- original idea manufacturing."

To date, Inventec's self-branded OK-WAP 2G cellular handset has achieved sales of 100,000 units in Taiwan, and the company has its sights set on the China market. It employs 1,500 software engineers in Shanghai, developing OS applications for wireless devices. Perhaps more importantly, however, Inventec also has two divisions set up to develop content: Besta, which focuses on "e-learning" and Tomorrow.com, which acts as an "online bookstore." So the group's business model, which combines hardware manufacturing, software production, and content development, gives it unique strengths for the nascent mobile data sector.

What about marketing? Chen stresses that Inventec's consumer sales strategy is really only focused on Greater China: "We have to forget about having a worldwide brand name -- it's just not feasible." The China market could be considered a world unto itself, since -- WTO or no WTO -- authorities there are likely to protect local manufacturers. But content, not just hardware, remains the key, so Inventec has an advantage that Western companies will find tough to match.

It would be hard to find a Taiwanese business group that did not have electronics manufacturing interests, but a glance at some of the backers of Taiwan's new 3G players -- which include some major electronics makers -- shows that the interest in 3G devices might extend even wider. Can Taiwan compete with the likes of Motorola, Ericsson, and Nokia in the Chinese market? Given the cultural affinities, it's certainly possible. "As an American, I wish them the best of luck," says Kirk Lee of Mackay Telecom. "That's tough competition, but Taiwan's electronics makers never feared competition anyway."

It will be a tough struggle, but the vast potential rewards make it well worth undertaking. In any case, electronics makers can credit the liberalization of the telecommunications services sector for creating the environment that is spawning the opportunity -- proof, once again, that good telecom policy is good economic policy.