ASSESSMENT OF THE IMPACT ON

GRAMEENPHONE LTD. DUE TO

REGULATORY DECLARATION AS AN

OPERATOR WITH SIGNIFICANT MARKET

POWER (SMP)

Grameenphone Limited DSE: GP; BLOOMBERG: GRAM:BD 14 February, 2019 Current Price: BDT 389.9

Analyst:

Mohammad Asrarul Haque research@eblsecurities.com

1 Key highlights of the SMP regulation, disclaimer of EBLSL & the Analyst(s) is located at the end of this report

GP’s healthy growth momentum is expected to continue, despite having the

regulatory declaration as the operator with the ‘Significant Market Power’

Grameenphone Ltd. (GP) has been declared as the operator with the Significant Market Power (SMP) by telecom

watchdog on 10 February 2019.

The regulation aims to limit significant market share acquisition by any single mobile network operator.

Grameenphone still bears potential for healthy growth from existing subscribers despite having potential regulatory

challenges in new subscriber acquisition and differential regulatory directives.

Significant Market Power (SMP) regulation in telecommunication sector aims to bring greater competition

Significant Market Power Regulation for the telecommunication industry in Bangladesh has been finalized recently. A gazette has been published on SMP namely ‘Bangladesh Telecommunication Regulatory Commission (Significant Market Power) Regulations, 2018’ by the telecom regulatory body on 14 November 2018 with immediate effect. The regulation aims to bring greater competition in the telecom market with a view to ensuring improved customer service and safeguarding the industry from being dominated by any single player.

Meanwhile, BTRC has declared Grameenphone Ltd. as an operator with the Significant Market Power (SMP). The commission has found GP as the SMP in two categories: subscribers and revenue. GP is the leading telecom service provider in the industry having almost 46% market share in terms of total subscriber, 54% total revenue market share.

According to the SMP regulation, an operator with SMP is likely to face additional/ special restrictions/ regulation while conducting business operations. According to a report from the Daily Star1, the commission (BTRC) is working on eight points and GP might be charged additionally alongside regular taxes for customer acquisition. The regulator may also apply different prices to GP's charges and call rates and the benchmark for it might be different from other operators when it comes to quality of services. Earlier, according to the Daily Star report, BTRC formed a committee to devise a process to implement SMP regulation. The committee recommended increasing the SMP operator's tariffs for both voice calls and data and imposing different quality control parameters. Any competitor can file complaint against the SMP and the regulator will have a look into it. The latest regulatory move from the government will have material impact on the growth prospect and future business of Grameenphone Limited.

1 https://www.thedailystar.net/business/telecom/news/gp-declared-smp-operator-1700122

The telecom regulator (BTRC) declared Grameenphone as the operator with the Significant Market Power (SMP) on 10 February 2019

‘Bangladesh Telecommunication Regulatory Commission (Significant Market Power) Regulations, 2018’ was published on 14 November 2018

IN FOCUS:

BTRC found GP as the SMP in two categories: subscribers and revenue GP holds almost 46% subscriber

market share GP has almost 54% revenue market

share

PROBABLE ACTIONS:

Additional charges for customer acquisition

Differential tariff structure Differential benchmark for service quality Competitors can file complaint against

SMP for potential anti-market activities

Grameenphone Ltd. Date: 14 Feb, 2019

2 Key highlights of the SMP regulation, disclaimer of EBLSL & the Analyst(s) is located at the end of this report

Evaluating global SMP practices, SMP Regulation doesn’t appear to be a major impediment for GP’s business due to variation in industry structure

The concept of Significant Market Power (SMP) was introduced by the European Commission to convey directives and to regulate competition policy in telecommunications. The European Court of Justice has found that there is a presumption of market dominance if a firm has a market share consistently above 50%2. In this respect, BTRC’s 40% benchmark for market share dominance is more stringent compared to global standards. The regulation is already in place in a number of countries around the globe including some Asian countries like India, Pakistan, Thailand, Singapore, Malaysia and Japan. However, the criteria to define SMP varies across countries.

Telecom Regulatory Authority of India (TRAI) considers 30% share of revenues or subscriber base in a given circle, to categorize a telco as an SMP. In India, if the tariff is adjudged predatory (the practice is exercised to force out the competition out of market and earns monopoly profits later), the service provider shall have to pay a penalty. However, the criteria still remains subjective and leads to litigation procedure to settle.

In Pakistan, an operator shall be presumed to have significant market power (SMP) when it has a share of more than 25% of a particular telecommunication market. The relevant market for these purposes shall be based on sectoral revenues. Pakistan offers lower telecom revenue sharing to government for new entrants in the market.

Other Asian peers consider additional factors to categorize an SMP in telecom sector. Malaysia looks at economies of scale/scope and potential competition, Japan factors in ‘control of essential facilities’ and South Korea gives weightage to metrics such as level of innovation and investment. Malaysia places market shares of 25-40% in the ‘probable SMP’ category, and over 50% market share in the SMP one. Thailand has redefined SMP for five different categories and each category is further divided into ‘wholesale’ and ‘retail’ segments from its earlier 25% market share benchmark. Those classified as SMPs are subject to stricter rules and price caps. For EU countries, regulators consider potential for competition, barriers to entry and control of an essential facility3.

Country SMP Criteria based on Market Control

India 30% ( revenues or subscriber)

Pakistan 25% (Based on Sectoral Revenue)

Malaysia 25-40% market share (probable SMP) >50% market share (SMP)

Other Countries A number of subjective criteria are being evaluated for defining SMP

In June 2018, the Competition Authority of Norway (Konkurransetilsynet) fined Norwegian telecommunication giant Telenor (parent company of GP) over misusing its market power to prevent a third mobile network from establishing in Norway. The company receives 788 million NOK (97 million USD) penalty. However, due to variation of business model of telco’s in Bangladesh, such regulatory action is not applicable for Bangladesh.

Though there are litigations on-going on SMP determination and directives in various countries and disputes remain, the business models and SMP definition criteria doesn’t appear to be exact fit for Bangladesh model. Due to prevailing high regulatory intervention in the country’s telecom industry such as tariff circuit and MNP facility etc. (that were introduced to ease GP’s market dominance) the fresh SMP declaration by BTRC might not have any significant impact on GP but the growth prospect may become slower compared to its competitors if any adverse regulatory directives appears in future against GP as per SMP regulation.

2 https://www.itu.int/osg/spu/ni/competition/background/Final%20background%20paper.pdf 3 https://economictimes.indiatimes.com/news/economy/policy/view-on-telecom-front-let-the-market-determine-the-tariff/articleshow/63260369.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

The regulation is already in place in a number of countries around the globe including some Asian countries

A number of factors are considered for defining SMP globally

Grameenphone Ltd. Date: 14 Feb, 2019

3 Key highlights of the SMP regulation, disclaimer of EBLSL & the Analyst(s) is located at the end of this report

Potential regulatory impediment may result in slower growth in subscriber acquisition than the competitors but Grameenphone still bears potential for healthy growth from existing subscribers

As the regulation aims to limit significant market share acquisition by any single mobile network operator, GP might face restriction in acquiring new subscribers and increasing further market share in the form of increased subscriber acquisition taxes. Due to potential regulatory restrictions, GP’s scope of growth through acquiring further market share will be reduced to some extent. However, for a better understanding of exact impact, we shall have to wait for the next directives from BTRC specifying ‘dos and don'ts’ for GP. However, GP still bears the potential to grow from the following points of view:

Though overall industry subscriber penetration is almost 95%, unique mobile user penetration is still around half of the entire population. So, the industry still bears the potential for natural growth and GP’s subscriber base also is expected to continue its growth in line with the industry even at higher acquisition cost due to higher brand equity.

Growth from existing subscriber base is justifiable. Though we can expect that voice revenue may become stagnant due to increased competitive pressure on pricing and steady AMPU, growth in both the data users from existing subscriber as well as data consumption per user will experience natural growth.

GP has attained the leadership position in the market despite charging comparatively higher than other industry players. Comparatively better service quality and wider network coverage helped the operator to attain loyal and quality subscribers -the key strength of GP. Hence, we expect that price elasticity for the operator will be comparatively lower that will ultimately result in lower churn rate even if differentiated floor prices for voice traffic is introduced aiming to make GP services costly.

Due to higher OTT (Over-the-Top) calls, the industry will experience a decline in voice revenue growth in the long run and contribution & consumption of data will go up. So, potential increase in floor price will not be a major concern for GP in the long run. Besides, any rational increase in floor prices for GP voice calls will yield higher revenue per user for GP in the short-run, and if the operators can retain its subscriber base through brand loyalty, its overall revenue will grow up further.

In response to the upcoming challenges, GP now has been actively promoting its subscriber acquisition campaigns along with bundle packages prior to imposition of any specific directives and restrictions by the telecom regulatory body for the operator.

Material impact in Grameenphone’s financial result may result from potential regulatory directives time to time but no immediate significant financial impact is expected considering present industry landscape

Grameenphone might experience material impact in it’s the financial performance due to following; a. Imposition of any new taxes, including in the form of increased revenue sharing to

government, increased SIM taxes may squeeze profit margin of the company. b. Increased and differentiated tariff structure and floor prices for voice and data prices etc.

might have negative impact on the average minutes per user (AMPU) and average revenue per user. As there’s no tariff structure for data in the industry as of now, we are not expecting any restriction in this regard right now for GP. However, any rational increase of voice tariff floor prices may result in increased ARPU in short term.

c. The regulatory body also poses special rights for imposing any actions and directives from time to time that may have material impact on the company’s financials. However, we expect that the regulatory body will issue few more directives specifying the scope of regulation and details of the action.

GP still bears the potential for healthy growth from existing subscriber base to be driven by higher data ARPU and brand equity

Grameenphone Ltd. Date: 14 Feb, 2019

4 Key highlights of the SMP regulation, disclaimer of EBLSL & the Analyst(s) is located at the end of this report

However, from the perspective of the viability of the regulation, we think that GP is not in a position to face any punitive measure as there were no apparent actions from the operator that might hamper industry competitiveness. The operator has historically positioned itself in the ‘better quality at higher prices’ segment. Besides, floor prices for voice traffic is already been set by the regulator in the industry. There was no aggressive campaign from the operator that might hamper industry competitiveness. Considering these factors we are not in a position to expect any punitive measures for the operator even after being declared as an operator with SMP in Bangladesh telecom industry. However, due to the uncertainty in potential regulatory action will lead us to increase our regulatory risk premium for Grameenphone Ltd.

Right Now, GP is not in a position to face any punitive measure as there were no such apparent actions from the operator that might hamper industry competitiveness

Grameenphone Ltd. Date: 14 Feb, 2019

5 Key highlights of the SMP regulation, disclaimer of EBLSL & the Analyst(s) is located at the end of this report

Appendix-1:

Key highlights of the SMP regulation: 1. Any operator shall not engage in any anti-market activities that may have significant impact in the telecom industry, like

Any operator shall not engage in any kind of agreement or collusion that may have or cause any significant impact in the market to create monopoly or oligopoly situation.

Make mutual agreement, take decision or collective actions that may reduce/ hinder/ limit/ stagnant the market competitiveness

decide on buying/ selling prices or any other commercial agreement without consultation

limit or control product, market and technical development and local or foreign investment

Monopolistic control over market or sources of production

Imposing any unequal conditions in arm’s length transaction that may place the other party into disadvantaged position

Impose additional conditions

Pushing others to agree on additional conditions that are beyond the contract

Any explicit or implicit agreement or misuse of power with a view to establishing monopolistic control.

Any anti-market agreement including above mentioned activities that may have significant impact will be considered as void ab initio.

An operator can’t impose any conditions on subscribers restricting to avail services from other operators.

2. Permission needs to be taken from the commission for any activities that may potentially reduce industry competitiveness. And commission may give permission beyond the SMP regulation if,

Related to national interest For the explicit wellbeing of the consumers or for definite economic or social welfare

and not at the cost of other operators’ interest In line with approved government regulations

3. Determination of significant market power: The commission may decide on significant market power considering relevant issues. The commission may consider, among other, following issues…

Structural Issues A. Market share and concentration level: while determining market share

and level of concentration commission will consider, among other, following issues

The operator’s assessed contribution to the total unit sold in the industry

The operators available capacity of the probable total unit sold in the industry

Percentage contribution to the total generated revenue by all operators.

B. Vertical integration level in telecom industry C. Degree of entry barrier D. Trend in global trade and technology E. Product/ service differentiation and standard of revenue growth.

Restriction to engage in anti-market activities and make agreement or collusion to create monopoly

Regulator may permit certain activities that may potentially reduce industry competitiveness in special consideration

Grameenphone Ltd. Date: 14 Feb, 2019

6 Key highlights of the SMP regulation, disclaimer of EBLSL & the Analyst(s) is located at the end of this report

Behavioral issues A. Supply B. Price fixation C. Degree of freedom

The commission may issue directives considering other relevant issues along with

above mentioned issues for determining significant market power. If any of the service providers hold at least 40% control in terms of any of the below

mentioned indicators over retail mobile service industry (the industry where commission allocated spectrum is used for providing voice, data & internet services and earns direct or indirect revenue from subscribers) that will be defined as Significant Market Power.

A. Number of total subscriber B. Annual revenue achieved C. Commission allocated spectrum and other properties

The commission shall, if required, discuss with other government bodies for

determining SMP. The commission can identify an operator as an SMP and issue directives for ‘dos and

don'ts’. If any activities from the SMP results in the reduction or arises any probability of

reduction in the market competitiveness in the country’s telecommunication industry, the commission may direct the operator to suspend relevant activities or, if required, direct to initiate any special steps or activities.

The commission will consider following issues while determining the result from any activities

A. The extent to which the industry competitiveness has been damaged or likely to damage

B. The operator’s explanation, if any. However, the operator’s intention will not be considered.

Before issuing any directives, the commission will give a notice for providing explanation, if any, within 15 days.

The commission will take remedial measure if the said operator experiences any loss due to implementation of the above mentioned directives.

Among other criteria, having 40% market share in terms of either number of subscribers or annual revenue or commission allocated spectrum and other properties will be major consideration for determining SMP

BTRC may issue further directives considering other relevant issues along with mentioned issues for determining significant market power

The commission may direct the SMP operator to suspend relevant activities or, if required, direct to initiate any special steps or activities

The commission will consider the extent of the probability of damage in industry competition and operators explanation before issuing any directives

Grameenphone Ltd. Date: 14 Feb, 2019

7 Key highlights of the SMP regulation, disclaimer of EBLSL & the Analyst(s) is located at the end of this report

References and Recommended Readings 1. Bangladesh Telecommunication Regulatory Commission (Significant Market Power) Regulations, 2018,

S.R.O no-315-AIN/2018 2. Competition Policy In Telecommunications: Background Paper; ITU

(https://www.itu.int/osg/spu/ni/competition/background/Final%20background%20paper.pdf) 3. Competition Aspects of Digital Financial Services; ITU

(https://www.itu.int/en/ITU-T/focusgroups/dfs/Documents/201703/ITU_FGDFS_Report-Competition-Aspects-of-DFS.pdf)

4. Competition Policy Digital Age- Case Studies from Asia and Sub-Saharan Africa; GSMA (https://www.gsma.com/publicpolicy/wp-content/uploads/2016/12/2.CPITDA_Case_Studies_Asia__Sub-SaharanAfrica_Asia.pdf)

5. Grameenphone named significant market power; The Daily Star (11 February 2019) (https://www.thedailystar.net/business/telecom/news/gp-declared-smp-operator-1700122)

6. Competition and regulation in a converged broadband world, ITU (http://www.itu.int/ITU-D/treg/publications/Competitionregulation.pdf)

7. Consultation Paper On International Private Leased Circuits (IPLC), IP Bandwidth, Domestic Private Leased Circuits (DPLC) & Line Sharing Charges of PTCL- Pakistan Telecommunication Authority (https://www.pta.gov.pk/media/cons_paper_bandwidth_tariff_310712.pdf)

8. Principles for market definition and identification of operators with significant market power, ITU (https://www.itu.int/rec/dologin_pub.asp?lang=e&id=T-REC-D.261-201610-I!!PDF-E&type=items)

9. Competition Issues: Market Definition, SMP and Dominance; Sofie Maddens Head, Regulatory and Market Environment Division Telecommunication Development Bureau (BDT) (https://www.itu.int/en/ITU-D/Regional-Presence/AsiaPacific/Documents/Events/2015/Aug-ITP/Presentations/ITU-MCMC%202015_SM_Competition_for%20upload.pdf)

10. Bangladesh Telecommunication Industry: A Comprehensive Review: EBL Securities Ltd. (http://www.eblsecurities.com/AM_Resources/AM_ResearchReports/SectorReport/Bangladesh%20Telecommunication%20Industry-A%20Comprehensive%20Review%202019.pdf)

11. Executing dual brand successfully and 4G leadership; Mahtab Uddin Ahmed, Managing Director/Chief Executive Officer, Robi Axiata (http://axiata.listedcompany.com/misc/4%20%20Robi_Executing%20dual%20brand%20strategy%20successfully%20and%204G%20leadership.pdf)

12. SMP definition in tariff order may favour Jio, say analysts; The Economic Times 13. (//economictimes.indiatimes.com/articleshow/63007601.cms?from=mdr&utm_source=contentofintere

st&utm_medium=text&utm_campaign=cppst) 14. TDSAT junks Trai's predatory pricing order; The Economic Times

(//economictimes.indiatimes.com/articleshow/67077045.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst)

15. View: On telecom front, let the market determine the tariff; The Economic Times (//economictimes.indiatimes.com/articleshow/63260369.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst)

16. Investor Relation Department, Grameenphone Ltd.

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