Demand for Taiwan teleco services shifts to data from voice

Taiwan has one of the most advanced telecommunications networks in Asia. The level of penetration in the mobile sector has passed 100%, which reflects the trend among users to own several devices or subscriptions. Fixed-line penetration is about 60%. Taiwan regularly adopts advances in technology and, unlike many other markets, has a well-developed 2.5-generation infrastructure, which is delivering strong profits for major operators .

Deregulation of the fixed and wireless sectors was introduced in the late 1990s, but the industry continues to be dominated by a few operators. In the fixed-line voice and data services sector, the leading operator is Chunghwa Telecom Co. Ltd .

Chunghwa Telecom, foreign currency rating; AA-/Stable), with an 88% share of the domestic long distance market and 60% of all international calls. Three relatively new carriers, Taiwan Fixed Network Co., New Century Infocomm Tech Co., and Eastern Broadband Telecom Co. have provided fixed-line services since 2001 .

However, they have found it hard to penetrate the residential fixed-line market and now focus their operations on more profitable international long distance services and business customers .

In the wireless sector, Taiwan Cellular Corp. with a 30% market share, Far EasTone Telecommunications Co. Ltd. (Far EasTone; BBB-/Stable) with 32%, and Chunghwa Telecom with 34% are the leading operators. The wireless sector has been extremely competitive, but with recent consolidation, pressure has begun to ease. Far EasTone recently acquired KG Telecommunications Co. Ltd., while Taiwan Cellular has merged with smaller rival Mobitai Communications Co. Ltd .

Regulatory Developments

Taiwan's telecommunications industry is subject to extensive regulation and supervision by the Ministry of Transport and Communications in areas such as licensing, pricing, competition, foreign investment, and interconnection arrangements. Overall, the Taiwan government is relatively pro-operator in its attitude to the telecommunications industry .

The main regulatory issue at present is the unbundling of telecommunications services. Chunghwa Telecom is in the process of reaching local loop unbundling agreements with several new local exchange carriers, although the process has been extremely slow. Discussions began in 2001, but so far only voice unbundling has been agreed; data unbundling is still under development. Chunghwa Telecom appears to be delaying negotiations so that it can maximize its broadband subscriber base .

Voice over internet protocol (VoIP) was deregulated in 2001 but remains relatively undeveloped. There appears to be little room for new VoIP operators to launch services successfully because Chunghwa Telecom has more than 80% of the broadband market. Number portability in the mobile sector is to begin in 2005, but consolidation into a three-operator market should mean that destructive competitive pressures are kept to a minimum .

Third-Generation (3G): Friend or Foe?

Consistent with the relatively mature nature of Taiwan's mobile telecommunications sector, the island has been actively pursuing the 'next generation' of mobile services. The new services offer access to internet data and video through devices including personal digital assistants, mobile phones, and laptop computers. In early 2002, Taiwan awarded five licenses for 3G services. The 3G license holders are Taiwan Cellular, Asia Pacific Broadband Wireless Communications Inc., Chunghwa Telecom, Taiwan 3G Mobile Network Inc., and Far EasTone .

Asia Pacific Broadband launched Taiwan's first 3G services in July 2003 but the company is having problems reaching its subscriber targets. Chunghwa Telecom is expected to launch a 3G wireless service in the second half of 2004. The company paid Taiwan dollar (NT$) 10.2 billion for a government license to provide 3G services, which it originally planned to introduce in 2003 following completion of the first stage of its CDMA network rollout. However, the launch was delayed because the company wanted time to study the launch of other 3G services elsewhere and to assess subscriber take-up, and also because of delays in 3G handset supplies .

Taiwan Cellular and Far EasTone appear to be taking a more cautious view of 3G development and do not plan to start such services until 2005 .

Standard & Poor's is less concerned about the success of 3G in Taiwan than in Europe, because the up front license fees cost less and the financial profiles of the main operators remain sound. Nevertheless, Standard & Poor's remain cognizant of the operating risks associated with this technology. Marketing challenges still exist, and subscriber acceptance in other markets has been slow. However, now that the problem of handset supplies is being resolved, the establishment of a 3G network seems more likely. The success or otherwise of 3G operations could play an important part in determining the future competitive landscape in Taiwan .

Where to Now?

With high penetration rates, operators in Taiwan are less interested in chasing an ever-diminishing pool of available subscribers and instead are focusing on revenue enhancement in an attempt to maintain their average revenue per user levels .

Wireless carriers are strengthening their customer retention strategies and shifting their attention to value-added services and new technologies, such as 3G wireless and broadband services. Carriers are most attentive to retaining their best customers and terminating their relationships with high-cost, low frequency users .

Standard & Poor's expects industry sales to register a low single-digit annual increase over the next few years with any improvement coming mostly from increased average revenue per user rather than through subscriber number growth .

The importance of fixed-line voice services will decline while revenue from broadband access will increase. Factors such as the high number of personal computers in Taiwan and the affordability of broadband services are likely to help drive broadband subscriber growth. Wireless data contribution to average revenue per user is unlikely to strengthen until 3G gains acceptance .

Operating cash flow levels are expected to remain high for the main operators, and should more than cover the higher capital expenditure required to roll out the planned 3G networks. The ability to control marketing costs and capital expenditure will be important if the industry is to maintain its high return on equity. Debt leverage ratios are expected to remain low and credit ratios should stay at healthy levels .

Some operators continue to offset the risk of expansion by raising equity .

The established strong branding of leading telecommunications service providers will mean that smaller operators will find it difficult to generate sufficient cash to expand their businesses. Delays in local loop unbundling are making it difficult for smaller entrants to compete effectively with their larger competitors. Similarly, second-tier operators will find it increasingly difficult to increase their subscriber base and drive up their market share, and as a result, may be candidates for industry consolidation .

N.R. - Not rated. *Includes acquisition of KG Telecommunications Co. Includes acquisition of TransAsia Telecommunications Co.

This report was reproduced from Standard & Poor's RatingsDirect, the premier source of real-time, Web-based credit ratings and research from an organization that has been a leader in objective credit analysis for more than 140 years. To preview this dynamic on-line product, visit our RatingsDirect Web site at www.standardandpoors.com/ratingsdirect. Standard & Poor's .

Credit Analyst: John Bailey, Hong Kong (852) 2533-3530; Tony Tsai, Taipei (8862) 2368-8721