Published September 30, 2008
SingTel scores twice on big broadband deal
By WINSTON CHAI

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THE term win-win is common parlance when an agreement is struck between two parties. But Singapore Telecommunications shows that with shrewd negotiation, sometimes the same company can profit twice from a single deal.
With OpenNet taking the chequered flag in the government's mammoth NetCo (Network Company) tender, consortium member SingTel has guaranteed itself of a stable stream of toll revenue from the Republic's new broadband highway. Adding icing to the cake is a leasing arrangement which would yield an additional billion-dollar windfall for SingTel from the very same project.
Last Friday, OpenNet won the much-awaited tender in Singapore's bid to build a new fibre-optic network to provide all homes and offices with ultra-high-speed broadband access. The group, led by Canada's Axia NetMedia, also includes two other members: Singapore Press Holdings (SPH) and SP Telecom. It prevailed over sole rival Infinity Consortium, a group made up of SingTel rivals StarHub and M1, along with the Qatar Investment Authority.
As the NetCo, OpenNet essentially builds the foundation of the new broadband network by extending fibre-optic links from the ground to residences and offices. Once completed, it leases this so-called 'passive infrastructure' to another entity called the operating company at a monthly price of $15 for each residential connection and $50 per office link-up.
As a 30 per cent shareholder in OpenNet, SingTel is already entitled to a major cut of OpenNet's takings. With around 1.12 million households in Singapore, the group could be looking at a maximum recurring monthly income of $16.8 million from consumers alone. This figure is multiplied at least three-fold when revenue from businesses is taken into account.
And instead of funding the OpenNet venture with cash, SingTel is offering access to its existing Internet infrastructure to expedite the rollout of the fibre- optic network. The operator owns the most extensive underground network in Singapore, which it currently uses to provide broadband connectivity to households and corporations.
The most time-consuming component in such a major broadband upgrade is often the grunt work associated with digging up roads, laying cables and building exchanges. Access to SingTel's infrastructure eases this labour-intensive workload significantly and plays a key role in bringing forward OpenNet's project completion date to 2013, two years ahead of the government's envisioned 2015 timeframe.
In return for opening the door to its passive infrastructure, OpenNet will pay SingTel a leasing bill which works out to approximately $60 million a year. This arrangement will be handled by the AssetCo (Asset Company), a wholly owned SingTel unit with the responsibility of overseeing nearly $2.8 billion worth of such Internet assets.
Over the next five years, SingTel could sell off as much as 70 per cent of its shareholding in the AssetCo to meet the government's mandate for 'structural separation' - a clause designed to prevent a single company from having excessive control over the broadband ecosystem and downstream pricing. This sale could translate to a divestment income of a billion or more for Singapore's largest telco.
The creation of this AssetCo is a masterstroke as it allows SingTel to quickly hive off and monetise an asset which is set to lose its strategic importance. Unlike the current regime, owning infrastructure under the Republic's future broadband landscape will no longer provide the telco with a competitive advantage.
This is because the authorities have introduced an open access requirement to level the playing field and ensure that all companies will have access to broadband pipes at the same prices. This means SingTel's Internet subsidiary SingNet will be charged the same wholesale rates as everyone else, effectively eroding any price advantage it could have once enjoyed.
With the twin benefit of revenue- sharing and leasing income, SingTel has definitely structured the OpenNet deal to its maximum advantage. However, with its infrastructural dominance soon to be lost, the operator must move fully into higher-margin services play. The question here is whether the mighty red giant is nimble enough to make this business transition.