MAKING THE CONNNECTION

Government support remains steady for this key sector

By : OXFORD BUSINESS GROUP

A TECHNOLOGICALLY savvy population, growing demand and competition, and strong support from the public and private sectors make Sabah's communications market one to watch. Rightly considered central to the state's economic and social development, the industry is a priority area, and a range of players are working together to overcome geographical and infrastructural challenges to help Sabah engage with and participate in the global knowledge economy.

MARKET SNAPSHOT: Sabah's information and communications technology (ICT) market is vibrant, with strong demand for hardware, software and services from the private and public sectors and from individuals. The outlook is excellent, given the forecast of continued economic growth and diversification, and ongoing public investment. Rising income levels are seeing Sabahans and other residents invest in more high-tech ICT products and services, while the growth of sectors such as tourism and manufacturing is increasing demand from business.

Education is a sometimes overlooked area with substantial potential, as schools, colleges and universities in both the public and private sector look to increase and upgrade their ICT capacity and students purchase equipment and software to allow them to access the latest educational aids. The expansion of public services and increasing use of ICT in government administration, including e-government, is also keeping the market buoyant.

On going ICT growth is closely linked to the broader economy, as demand is stimulated by economic growth and as economic development and attracting investment are reliant on strong ICT infrastructure and services. This is particularly true in the more remote areas, which have lagged in both economic development and ICT access.

LEADING THE WAY: Malaysia is already one of the most advanced countries in the region in terms of ICT development, and boasts high levels of IT literacy, computer ownership and skills. The Malaysian Communications and Multimedia Commission (Suruhanjaya Komunikasi dan Multimedia Malaysia, SKMM), the industry regulaton points out that Malaysia ranked sixth in Asia in terms ofthe proportion ofits population that are internet users - around 65% in 2010, according to the International Telecom- munications Union, a UN agency that supports the telecoms industry.

Malaysians have also taken up social networks such as Facebook and Friendster with alacrity. In Sabah, most schools have at least basic IT facilities; a computer lab and run computer clubs for pupils to develop their IT skills and work with their peers to share knowledge.

A challenge for Sabah’s ICT development is the relative difficulty of infrastructure construction for optimum population coverage, Sabah is MaIaysia’s second-biggest state by size, and the distances involved are large. The population is scattered and even the main towns, in which a large proportion of the population are concentrated, are often far apart.

The topography, mountains and deepjungles predominate, is another fact on and infrastructure must also stand up to the hot, humid climate and regular adverse weather conditions such as tropical storms. These geographical factors mean capital and operating costs are relatively high, but income levels are lowerthan the Malaysian average, meaning the ability of consumers to bear these costs is also lower.

The government, at the state and federal Ievel,therefore plays a central role in ICT infrastructure investment, in partnership with the private sector.

TELECOMS: Sabah’s telecoms leader is Celcom Axiata, usually known simply as Celcom, with a market share ofmore than 60% in 2010. Celcom partly attributes its success to a "segment marketing" approach which targets specific demographics, often with tailor-made offers.

One example of this is its Sukses programme, which is aimed at the large numbers of foreign workers that live Sabah, and is marketed strongly at access points, including Kota Kinabalu International Airport and ferry terminals, Celcom’s Sabah-Region General Manager, Zurinah Hanafiah, said that the company aims to build on its success by capitalising on its coverage and adoption of the latest technology to stay ahead in an increasingly competitive market.

She has promised "radical changes to bring about radical resuIts" in 2011.

MOBILE: The number of registered mobile subscriptions (both prepaid and post-paid) In Sabah grew 36% to 2.53m in 2009, the last year for which statistics were available, according to the Malaysian Department of Statistics, Sabah. Subscriptions grew 42% in 2008 to 1.87m from 1.32m in 2007. As ofmid-2010 around 75% of the inhabited area of the state had mobile coverage. though population coverage is around 85%, according to the SKMM.

Cities generally have excellent reception, though in rural areas. It is more problematic. The authorities are under-taking a large-scale expansion of coverage over the next several years that is expected to boost mobile access in rural areas considerably, Penetration is over 100%.

According to Bukhari Yahya,the director ofthe Sabah and Labuan Regional Office of the SKMM, probably slightly behind the 112% of Malaysia as a whole reported by the SKMM in mid-2010.

Bukhari points out that, as elsewhere, penetration figures probably overstate the number of mobile users, as many people have two or three SIM cards and rotate them, depending on the offers available or the numbers they are calling.

Sabah has three mobile operators; Celcom, Maxis and DIGI. Broadly speaking, Celcom, the market leader, has probably the widest coverage and tends to aim for the mass market. DIGI has targeted higher earners, whereas Maxis has aimed for a mix of customers.

Maxis has been particularly aggressive in its 3G roll-out, which now offers high-speed connections in most majortowns. With the SKMM's encouragement, the operators often share infrastructure, understandably given the capital costs involved.

Despite there being only three operators, the mobile market is very competitive, and average revenue per user has declined in recent years as operators have looked to build market share and increase penetration.

The introduction of mobile number portability in 2008 intensified the competition, making It simpler for subscribers to switch operators. With margins on 2G narrower than before, and similar services on offerfrom all three on standard voice and text, operators are adopting various strategies to boost profitability.

These include creative marketing campaigns to draw in new customers. including those who do not currently have mobiles, among whom Bukhari says there is still scope for growth.

Most important, howeven are likely to be 3G services, a moderately sized but growing and high-value part of the market. The expansion of mobile broadband and its potential for high-speed data transfer and mobile internet services are likely to be defining features of the market for some time to come, and provide new growth opportunities for telecoms firms.

"Broadband will determine growth in the future," Bukhari told OBG.

"With 3G, more and more people will sign up, and the market is huge, with the vast majority of the population unpenetrated."

FIXED LINE: Sabah had a total of 236,358 fixed lines in 2009, the last year for which figures were available, upjust 0.3% from 235,652 the previous year according to the Malaysian Department of Statistics, Sabah. Of these, 133,265, or 56,4%, were residential Iines (up 5.8% on 2008); 97,294 (41.2%) business connections (up 5%) and 5093 public telephones (down 9.2%).

The figures reflect the fact that fixed lines, while not growing quickly in physical terms, are still an important part of Sabah's telecoms sector, and rates of take-up by households and businesses are higher than those of disconnections, unlike many other places in the world, including emerging markets.

However as elsewhere, the spread of mobile telephony is eroding the utilisation of public fixed-line telephones; though even countries with very high mobile penetration tend to maintain a reasonable public telephone infrastructure.

Telekom Malaysia (TM), a government-linked corporation with a fixed-line monopoly, is aiming to increase the capacity of its network in Sabah by replacing copper wires with fibre-optic cables and improving its exchanges, though it is not a top priority for the firm, which is focusing on its network in the Klang Valley in West Malaysia.

The size and nature of TM’s Sabah network means capacity can be low at times, and response and repair times are longer than mission-critica| users would like.

DIGITAL DIVIDE: One of the primary aims of Sabah’s ICT policy is to bridge the so-called digital divide between those who have access to technology and ICT skills and those that do not.

As is the case internationally, the divide is often stark, as most of those with regular access to computers have a degree of computer skills, however basic. whereas those without access have few.

Furthermore, the latter group are generally the less well-off and they risk being further marginalised from economic growth and social development with-out the ICT skills and access that are needed to plug into the modern economy and to gain from the benefits of the online society.

The digital divide is seen as being particularly acute in Sabah, where the urban population is generally well-acquainted with ICT. but where in more remote upcountry areas ICT literacy is low and equipment much scarcer.

A large number of urban workers use computers every day at work and often at home, whereas in rural areas the opposite is true. With this dichotomy in mind. in june 2010 it was announced that Sabah had been allocated Rll/I383m ($120m) under the Universal Service Provider (USP) programme. into which telecoms licensees pay.

Some 500 villages in the state have been identified as priority areas for wireless broadband and general ICT development under the USP programme.

The scheme is being rolled out in Sabah over five years from 2010, with sums ring-fenced for incor- porated projects, including community broadband centres, providing cheap access and free ICT training, which will receive a RM55m ($17.2m) investment; 14 broadband libraries (RM22m, $6.9m); and a programme targeting the most underserved groups (RM8m,S2.5m).The remaining RM298m ($93m) will be invested in the construction of 212 transmission towers to expand mobile phone coverage, to “ensure more people in the rural areas are able to enjoy cellular phone services", according to the SKMM. Some 50 new towers should be operating by mid-20.

NETBOOKS: A related programme to tackle the digital divide was spelled out in the 2010 federal budget. Measures include the opening of community broadband centres in residential areas at a cost of RM60m ($19m) and providing netbooks to 1m disadvantaged students nationwide, for which RM1bn ($313m) has been allocated.

Tax relief of RM500 ($157) on netbook purchases is also provided. In August 2010 9500 netbooks were distributed at 19 community broadband centres in Sabah. A second phase will see an additional 175,000 netbooks handed out. Fees start from RM11 ($3.45) per month.

The devices, along with increasing broadband access, are expected to allow citizens to "upg rade knowledge in the plantation or business sectors", according to Bukhari.

He said that broadband centres will help the development of sectors as diverse as plantations, education and health care, and support the growth of small and medium-sized enterprises.

"Communications are essential in the modern economy," Bukhari told OBG. "Cost-effective wireless services will help rural people reach the market, find pricing information and even sell products online?

Sabah`s e-Desa (desa means 'rural' in Bahasa Malaysia) programme is also bearing fruit. E-Desa buildings are Wi-Fi-linked cyber centres equipped with 10 computers, a scanner and a public·address system located in villages, and 19 were established between the programme’s launch in 2005 and early 2011.

The state plans to expand the network to 85 centres over the course of the 10th Malaysia Plan, which runs from 2011-15. Each e-Desa facility costs around RM600,000 ($188,000).

Sabah is also expanding its programme of ICT and English training,which is specificallytargeted at rural areas. More than 80,000 people took ICT courses between the scheme`s launch in 2005 and mid-2010, according to Yee Moh Chai, the Minister Of Resource Development And Information Technology.

INTERNET PENETRATION: Sabah set a target of achieving 30% household internet penetration by the end of 2010, upfromjust 1 1% at the end of 2009. As the SKMM points out, penetration statistics should be compared with a deg ree of caution, given the fact that measurements vary from country to country.

The commission notes that household penetration in Malaysia and Sabah may make broadband usage seem considerably lower than it actually is, as "most Malaysians prefer to use the internet in their offices, cybercafes, schools, libraries, community centres and other places, rather than subscribing to it at home".

In these public facilities in Sabah, broadband access is already widespread and will be near-universal in the not-too-distant future. Furthermore, current figures may not take into account usage of an internet connection by several people.

INFRASTRUCTURE: The authorities and the private sector in the ICT industry and beyond are in agreement that the most important factor for growth in internet penetration and usage is the strengthening of Sabah’s broadband infrastructure. To this end, a public-private joint venture has been formed to develop a high-capacity fibre network linking all the state’s major settlements.

The network is expected to be an important facilitator for economic development and growth. Sabah’s internet traffic is currently routed through a hub in Kuala Lumpur passing through a submarine cable connecting the peninsula with Kota Kinabalu.

An common complaint inthe ICT sector is that this system is costly, dueto the price of leasing band-width and inefficient, given the distances involved. There is increasing support for the idea of estabIishing a hub in Sabah it self which would go some way to addressing these problems and could provide a fillip to the budding local ICT industry.

However: the cost is currently considered prohibitive, given usage rates in the state. A temporary solution would be to use the gateway in neighbouring Brunei, which is at least on the island of Borneo.

"Sabah cannot rely on the Kuala Lumpur gateway that is being used at the moment," Jasmi Adnan Thien, the CEO of Vast Meridien, a Kota Kinabalu-based technology firm participating in Saba h’s broadband fibre roll-out, told OBG.

"In the short term it would make sense to use the Brunei gateway and construct a specific one for Sabah in the longer term. Over the long term a consortium will have to be formed to construct a specific Sabah gateway. It will have to be done in this way as the cost is too high to expect a single investor to take it on."

GOING FOURTH: In March 2011 Malaysian company YTL Communications announced that it would be applying for a spectrum licence in Sabah and the neighbouring state of Sarawak to offerits 4G services in Eastern Malaysia.

YTL's 4G service, Yes, was launched in Western Malaysia in November 2010 and had signed up around 100,000 active subscribers by March 2011, carrying 1m voice minutes, more than 670,000 text messages and 104 TB of data traffic in that time.

The firm claims that the service is three to five times quicker than other connections and is continuing its roll-out on the peninsula, aiming for 85% population coverage, up from 65% in early 2011. The Yes expansion goes hand-in-hand with YTL's two new devices, the Yes Buzz, a 4G mobile telephone, and the Yes Zoom, an "all-in-one communications solution" with integrated wireless internet capability.

STRONG INDUSTRY POTENTIAL: Sabah's ICT out-sourcing, service and development industry is currently fairly small compared to that of Western Malaysia. However: it has great potential. given the state's competitive advantages. The level of education is generally high, and there is a significant pool of local IT experts, in particular web designers and online animators, who benefit from being geographically footloose.

Labour costs and overheads are also relatively low, and Sabah could benefit from the implementation of Ma|aysia’s New Economic Model, which seeks to focus on high-tech and value-added sectors and may lead to the introduction of further investment incentives in ICT.

PHONES FOR FARMERS: Home-grown innovative companies already exist in the state. as do local service centres for some ICT companies. Both remain largely focused on the Sabahan market, but they demonstrate the industry’s potential. One example is Gooble, which develops mobile applications for the agricultural sector to help farmers sell their produce through a GSM platform. Inspired by models in India, where farmers and fishermen often use mobile calls and text messages to determine where they will get the best price for their products, Goob|e's applications link buyers and sellers without middlemen, allowing both to get the best prices.

Interestingly, the company actually benefits from Sabah’s patchy broadband infrastructure by lever-aging simpler and more widespread GSM technology. However. GoobIe’s CEO, Hamdani bin Amin, feels that the development of broadband infrastructure and a local internet hub will be essential for nurturing the fledgling ICT industry.

"The big players will not come and local players will not thrive - without a proper broadband solution, with really good infrastructure and a data centre for Borneo atleast," Hamdani told OBG. “Then we can gain momentum and drive forward with our initiatives."

NETWORK:WhiIe it may take time, Sabah should have a new broadband backhaul fibre network and connected urban networks statewide by 2015, later than many would like, but still likely to provide that much-needed connectivity. Hamdani also sees promise in the development of Multimedia Super Corridor (MSC) incubators, government-designated zones designed to support technology firms.

MSC incubators provide a range of benefits, including first-class installed physical and communicationsinfrastructure, financial benefits including a 100% investment tax allowance. pioneer status exemption from tax on statutory income forfive years and duty-free imports of multimedia equipment. Research and development grants are also available.

In November 2010 local press reported that Yayasan Sabah Group, a state development organisation, and Multimedia Development Corporation, a federal government agency, were to work together on the establishment of Sabah’s first MSC incubator.

While the timeline is as yet uncertain, the development could provide the impetus needed forSabah to capitalise on its considerable potential.

"Incubators helpjump-start business," Hamdani said. "Sabah is now at the stage that Thailand was at in the 1990s, with low labourand real estate costs and untapped resources. This is attractive for investors seeking a higher return."

PUBLIC SERVICES ONLINE: Sabah's government is undertaking an ongoing programme of computerisation and automation. which covers everything from the development of IT systems for back office operations through to the deployment of a growing range of e-government services.

Government use of IT goes back along way, with the first systems for the management of financial data operational in 1977, and its internal network launched 20 years later. The current aim is for administration to become effectively paperless.

The government is able to draw on its own skilled pool of IT specialists, and around 95% of the 200-plus applications it deploys are developed in-house, according to Mingu Iumaan, Director of the Sabah State Computer Services Department (SCSD), which over-sees state government IT operations and activities.

A wide range of internal operations and services are now ICT-based, including civil service training, human resource applications; including the approval of leave and training days and the issuing of travel documents, all functions that employees can access from any internet connection, anywhere.

These initiatives have made the administration more efficient and cost-effective, and they have also enhanced real-time management.

CONVENIENCE: Even more important for Sabahan citizens is the increasing variety of services that are available to them online. E-government operations include e-banking for public bills, information on subsidies and welfare payments, and even scholar-ship applications, "IT has already improved operations," Mingu told OBG.

"The aim is to ensure that government is closer to citizens to make their inter-actions more convenient, and for people to communicate with the government from home."

The importance of lCT at the government level has led to Chief Information officers (CIOs), who are responsible for IT implementation, becoming senior decision-makers in government agencies. CIOs from different departments and public organisations meet regularly. Other senior officials are encouraged to attend IT training and are sent to educational events outside the state at public expense.

While the public sector has a great deal of internal ICT capability, Mingu told DBG that there is 'always room' for the private sector to participate. Initiatives exist for private firms to become involved in areas including outsourcing, maintenance and the supply of hardware and software. and the state is aiming to increase private sector participation and reduce the direct burden on government resources.

The SCSD’s other long-term plans include increased implementation of cloud computing (the storage of information and resources in network 'clouds') and the development of green IT. Green IT is a straight-forward concept, encouraging reduced power usage and paper consumption. In practice this entails not just cutting down on printing; something that is already implied by the goal of becoming paper-free, but also reducing server utilisation.

There are currently around 70 servers in operation, but the aim is to run an increasing number of applications on a single server something that will obviously entail the use of sophisticated equipment.

Another niche that may have potential is back-up centres, "Sabah can offer the large banking and finance corporations in West Malaysia IT back-up data centre solutions, being a secure offshore location," the CEO of KKIPC, Nelson Chua, told OBG.

SABAH COMPUTER SOCIETY: An important force in increasing ICT usage, awareness and skills development in the state is the Sabah Computer Society (SCS), a non-governmental organisation run by volunteers, mainly IT specialists. The SCS supports the government in its IT functions and aims to promote IT and upgrade standards in Sabah.

The organisation’s activities include holding an annual ICT 'fiesta' to demonstrate the latest technology, organised in partnership with the Ministry of Resource Development and information Technology; providing computer and IT training for senior citizens, students and people in rural areas, including education about internet marketing and social networking; overseeing regular ICT months; and holding public seminars on IT to help people, including members, upgrade their skills.

The SCS has a particular focus on senior citizens, who leading members identify as generally having a lower ICT skill level than the rest of the population, but also having the potential to gain greatly from technology. They have also been identified as a little-tapped market for IT companies

"Older people are still in the market, they have time and often have money and experience," Kenny Lim Fu Hwa, an SCS committee member told OBG. "They can offer their know-how and services through the internet, for example consultancy, and make some money on the side. They appreciate the opportunities to continue to work, but in their own time and from home."

The society has a number of ongoing projects in the pipeline, including the assembly of a database of vendors and IT specialists in Sabah, and an 'e-waste' scheme to promote recycling of computers and other hardware, both to protect the environment and to make sure that useful equipment is not thrown out. SCS members also organise the donation of used computers to schools.

OUTLOOK: Sabahans of all backgrounds correctly identify communications as an essential enabler for economic growth and diversification, for social development and for the expansion of new, high-value industries, from tourism to technology. Geographical and demographic factors make Sabah a challenging place to develop infrastructure, and capital costs are relatively high as a result.

Nonetheless, financial and logistical supportfrom the federal and state authorities. working in partnership with both the private sector and civil society, are helping the state catch up. and fast, The growth of broadband and mobile internet in particular will support economic growth going forward, provide opportunities for investors and could also add impetus to home-grown ICT innovation.