Published April 7, 2009

What the OpCo win really means for StarHub

By WINSTON CHAI

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IT WAS a case of drinking on the job with champagne flowing freely at StarHub Centre all afternoon as staff celebrated their OpCo (Operating Company) triumph last Friday. Some market analysts also expect investors to add icing to the cake through a near-term rally on the back of the news that StarHub has been anointed by the government to operate Singapore's upcoming high-speed fibre-optic network.

While any success is undoubtedly positive, the key question to ask when the confetti settles is: just how significant is this victory and what are the implications for StarHub's lucrative broadband businesses?

From the onset, it would seem StarHub picked the short stick in the long-drawn fight for a stake in Singapore's new digital superhighway.

To recap, StarHub last week won the bid to operate the Next-Gen NBN (National Broadband Network) and wholesale bandwidth to companies that are keen to provide Internet-related services using the new pipes. To fulfil this obligation, it will establish a new company called Nucleus Connect. Last September, a SingTel-linked group called OpenNet won the government tender to build the fibre-optic network.

New expressway

To put it plainly, OpenNet's role in the project is akin to a construction company tasked to build a new expressway. Once completed, it leases the highway to StarHub, who then carves out lane markers and puts in place toll booths for charging, say, logistics companies who plan to use the new infrastructure to deliver goods.

While it seems like a win-win case for both, the key difference is that StarHub's returns hinge on the number of companies that would be willing to use the expressway. While a vibrant broadband market is the desired outcome, it remains to be seen if Singapore's small market size can support a large service provider crowd.

Furthermore, existing telcos - StarHub, SingTel and M1 - can cross-subsidise their Internet ventures with their sizeable mobile revenue streams, making it difficult for a newcomer to compete from scratch.

Unlike StarHub's OpCo venture, OpenNet is assured of a stable stream of recurring income from construction and leasing. And SingTel, in particular, stands to land an additional billion-dollar windfall as it will be hiving off the bulk of its existing Internet assets to OpenNet to speed up the construction timeframe.

This masterful stroke allows the operator to pocket nearly $60 million annually and, at the same time, divest infrastructure that is set to lose its strategic value. Owning Internet pipes in future will not be advantageous as the government's 'open access' mandate forces the owner to allow any company to tap the network at a universal price.

As the OpCo, StarHub will be left with the dilemma of deciding the fate of its current Internet assets. The company invested nearly $600 million a decade ago to roll out the cable network it needed for providing pay-TV and broadband access.

It will now have to incur heavier costs from maintaining two separate networks for the next five years at least, since the shelf life of fixed-line assets is usually two decades or more. At the same time, the minting of the NBN in late 2012 threatens to hasten the erosion of StarHub's broadband margins.

Once the NBN is operational, StarHub can be expected to migrate its higher-end customers to the new ultrafast network, while using its current cable platform to offer cheaper, lower-tier Internet access. While the same is true for SingTel's broadband portfolio, the red camp would have been compensated in part through the asset divestment.

Road hump

Another road hump stemming from the OpCo contract is that it is exclusive to the StarHub unit only for the first five years, or until it has claimed a 25 per cent broadband market share. After that, other companies can technically be allowed to apply for an OpCo licence.

For StarHub, the priority now is to start nailing down the types of new services that can be powered by the NBN since it will be most well-versed with the mechanics of how it operates. In particular, business offerings - be it hosting services for gaming companies, or high-speed disaster recovery - could be considered since companies are the likely early adopters of breakneck access speeds.

While the NBN presents fresh challenges, it will also allow StarHub to strengthen its corporate push - a segment which SingTel has been aggressively branching into this past year. The difference this time round is that both companies will be competing on a level playing field, so it truly becomes a case of the best man carrying the day.