SINGAPORE BROADBAND NETWORK PROMISES FASTER INTERNET

UNCLAS SECTION 01 OF 04 SINGAPORE 001108 STATE PASS USTR SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECPS ECON ETRD EINV SN SUBJECT: SINGAPORE BROADBAND NETWORK PROMISES FASTER INTERNET SPEEDS, MAY RESOLVE MARKET ACCESS ISSUE REF: STATE 27310 ¶1. (SBU) Summary: Supported by a billion dollars in subsidies, Singapore is launching construction of a city-wide next generation broadband network that promises higher connectivity speeds at lower subscription rates. The new fiber-to-home network is part of a grand ten-year plan begun in 2005 to provide seamless connectivity throughout the country and build a new industry to help drive the Singapore economy. Although the new network will provide internet access at up to ten times currently available speeds, internet providers worry whether software developers will be able to create new applications and services that would motivate subscribers to bother upgrading to the new network. In a unique arrangement, the GOS mandated both structural and operational separation for the owner and operator of the network infrastructure to ensure open access to the network and a more competitive playing field for service providers. The new network may also ameliorate a longstanding telecom market access dispute with the United States by allowing telecom providers to bypass the dominant carrier's networks and provide direct service to customers. End Summary. ¶2. (SBU) In August Singapore installed the first residential hookups for what will become a nationwide high-speed fiber-optic broadband network. The new network promises high-speed access to the Internet at speeds up to ONE gigabit per second (Gbps),ten times faster than speeds currently available to residential consumers. For now the newly laid cables lie dormant until more areas of the country are wired and the necessary operating equipment is in place, but the network is expected to be operational in covered areas by the second quarter of 2010. The network is scheduled to cover 60% of the country by the end of 2010, 95% by June 2012, with universal service obligations covered by the beginning of 2013. ¶3. (SBU) The new broadband network is part of Singapore's Intelligent Nation 2015 (iN2015) blueprint, a ten-year plan envisioned to provide seamless connectivity throughout the city-state by 2015. The plan focuses on improving infocomm development in digital media and entertainment, education, financial services, government, HEALTH care, logistics services, and the tourism industry. As part of the plan, the GOS set a goal in 2005 for 90% household broadband penetration by 2015, a goal that has already been surpassed. The GOS sees infocomm development as a new industry to drive growth for Singapore's economy, as well as an asset for improving other existing industries. The GOS is shooting for a tripling of exports of infocomm products and an additional 80,000 jobs in the industry by 2015. ¶4. (SBU) To spur development of the broadband network, the GOS is providing a grant of S$750 million (US$520 million) to the builder of the passive infrastructure, including the fiber and ducts to carry the fiber, and S$250 million (US$170 million) to the operator of the active infrastructure, such as switches and routers. In return, the companies awarded the projects agreed to provide open access to the network, universal service coverage and to offer wholesale services to downstream operators on a non-discriminatory basis. Structural and Operational Separation -------------- ¶5. (SBU) In a bid to level the competition and provide neutrality and open access to downstream operators, the Infocomm Development Agency (IDA),Singapore's telecom regulator, constructed a unique structural and operational separation between the different levels of the network. The system promises to eliminate the possibility of exclusive contracts, allowing open access to all content using any access methodology. Under the plan, a Network Company (NetCo) would design, build and operate the passive infrastructure that would carry the traffic. A separate Operating Company (OpCo) would deploy and operate the active electronics such as switches and routers to manage the flow of traffic, and sell wholesale broadband access to downstream Retail Service Providers (RSP). The RSPs will provide internet services to end-users. Under the contract, the NetCo and OpCo are required to maintain separate management and boards from their parent companies, and any subcontracting to the parent must receive IDA approval. ¶6. (SBU) The structural separation will help prevent domination of the network by dominant incumbent Singapore Telecommunications (SingTel),which owns much of the existing network and which other telecom providers say has been notoriously difficult to work with. Management of the new OpCo say SingTel has adopted a fresh approach since the initiative began and has been much easier to work with. Nevertheless, there are still concerns that with SingTel having a sizable stake in the owner of the passive infrastructure there may SINGAPORE 00001108 002 OF 004 be overlapping interests that could complicate matters down the road. NetCo - OpenNet -------------- ¶7. (SBU) In September 2008, IDA awarded the NetCo contract to build the passive infrastructure to OpenNet, a consortium between SingTel (30%),Canada's Axia NetMedia Corporation (30%),Singapore Press Holdings (25%) and SP Telecommunications (15%). Under its proposal OpenNet will deploy and own all the fiber optic cables and offer wholesale dark fiber (fiber that has yet to be "lit" or activated) services to downstream operators. Prices are set at S$15 (US$11) per month for a residential fiber connection and S$50 (US$36) per month for non-residential connections. Under the contract, OpenNet is required to waive installation charges for building owners when the network reaches their premises, and after 2013 under universal service obligations will continue to install fiber termination points in new homes, offices and buildings. In addition, OpenNet will run fiber to non-building address points like bus stops and lamp posts for possible future uses of network services including e-signage and traffic control. ¶8. (SBU) OpenNet began its first network connections in August and plans to have 15 percent of the city covered by the end of the year. With much of the passive infrastructure owned by consortium member SingTel already in place, little time-consuming digging will be necessary to link buildings to the network. However, OpenNet has initiated hooking up customers based on the location of its existing infrastructure rather than locations with higher concentrations of customers. Some major corporate sites where infrastructure is solid will see connection during the first year, but network expansion to some residential areas will be more sporadic. OpenNet plans to have all Singapore schools connected by mid-2010. OpenNet's biggest challenge thus far has been convincing residents to allow its technicians to link the fiber to their homes, said Ms. TAN Kah Rhu, OpenNet's CEO. OpenNet has so far received a low response rate to its letters to homeowners notifying them that the fiber will soon be installed and requesting access. ¶9. (SBU) The GOS will grant S$750 million to OpenNet to help finance the network construction. The GOS will progressively dole out grant funds based on a combination of area covered and the take up rate by consumers. OpenNet expects to expend S$1 billion on initial construction costs, and as much as S$2 billion to lease infrastructure from SingTel. The company will transfer its extensive infrastructure already in place, including ducts, manholes and exchange buildings to an independent asset company known provisionally as AssetCo by mid-2011. That company will in turn lease those assets to OpenNet. Analysts say the transfer will be a boon to SingTel as the value of its infrastructure was expected to decline as the new fiber network expands and SingTel would no longer be able to compete on the basis of owning its own network. ¶10. (SBU) Once construction of the network is complete, OpenNet expects a steady stream of profit from leasing lines. Post-construction costs are expected to be minimal, with little more than maintenance and extension of the network to new buildings. Prices for access to lines will likely drop after the initial construction investment costs have been covered. OpenNet is nevertheless under IDA-set price controls for eight years with occasional price reviews to allow OpenNet to raise rates if costs are increasing. OpenNet has a 25-year license to manage the infrastructure, which it is not allowed to abandon. Under the terms of the contract, OpenNet submitted a business continuity plan for the possibility it would be unable to continue operation. IDA officials say that if necessary the GOS would step in to take over the network. NetCo - Nucleus Connect -------------- ¶11. (SBU) In April the second layer of the new network fell into place as IDA accepted Nucleus Connect's bid to be the Operating Company. Nucleus Connect is a wholly owned subsidiary of local telco StarHub. The company has committed to begin service to wired areas of the country by the end of March 2010. After operation begins, Nucleus Connect is required to be able to provide service to customers within seven days after the network reaches their premises. The operator will receive a S$250 million grant from IDA to subsidize its planned expenditures of approximately S$1 billion for the active network over the 25-year period of the license. The grant will be disbursed in increments as Nucleus Connect meets certain subscription benchmarks. The GOS believes Nucleus Connect can hit 80-90% of its targeted take up rate, but says it will count only subscribers to 100 mbps service to promote new applications it SINGAPORE 00001108 003 OF 004 hopes the new network will bring. Nucleus Connect will charge S$21 for a line, S$6 over its cost from OpenNet. Prices will be fixed for six years, but Nucleus Connect does not expect prices to increase after that date. ¶12. (SBU) Nucleus Connect will have an exclusive license as the operating company for five years or until it has claimed a 25 percent broadband market share. In practice, Nucleus Connect expects to have a 25 percent market share at the open of the network operation as its parent StarHub plans to buy all its access from OpenNet, enough to cover at least 25 percent of the total market. However, the company does not expect immediate competition to provide retail bandwidth as nationwide coverage will not be complete for another two years and other OpCos would not likely see immediate market entrance as profitable. David Storrie, CEO of Nucleus Connect, told Econoff he eventually expects more competitors at the OpCo level, although the government's plan was structured so that most competition will take place at the RSP level. ¶13. (SBU) Nucleus Connect is also hoping for a boost from government contracts as the GOS encourages agencies to spend their annual expenditures of $S150 million on communications services on the new network. Nucleus Connect believes they will get a substantial piece of the government business, but notes that the government may in the end set up their own government-wide RSP to provide services. In the meantime, Storrie says he has been assured that "something big" is coming their way from the government that will add to their business, possibly mobile road pricing. IDA officials say their e-government plans for the network are still in the works. New Applications or No New Customers -------------- ¶14. (SBU) Although the new network will provide speeds up to 1 Gbps, ten times faster than currently available speeds, there may be a limited number of consumers who can or need to utilize those faster speeds. Nucleus Connect is concerned about attracting a sufficient number of subscribers while simultaneously dealing with lower prices for broadband. Industry expects that the network's open access and non-discrimination structure will send prices per mpbs crashing. The current S$50-60 subscription rate for a 10 mbps broadband connection will likely stay steady at the new speeds of 100 mbps, with prices for slower speeds dropping significantly. ¶15. (SBU) To woo new subscribers, Nucleus Connect is banking on the development of new service applications to make use of the faster speeds, such as remote diagnostics for HEALTH care, grid computing, and improved interactive learning applications. To spur network usage, IDA has started the Next Generation Multi-Media Applications and Services (NIMS) to put an open platform in place where code writers can write new applications and put them on the market quickly. Tom Cheong, Managing Director for Cisco in Singapore, said Cisco would be targeting sales for its TelePresence product used for teleconferencing, a popular product but ONE that required substantial bandwidth. FTA and Market Access -------------- ¶16. (SBU) Singapore's fiber-to-home network may resolve or at least ameliorate a long-standing trade dispute under the U.S.-Singapore Free Trade Agreement involving market access in the telecom sector. U.S. telecom providers in Singapore have been unable to obtain reasonable access to SingTel's network at economically efficient points of aggregation, forcing providers to build out networks to disparate local exchanges. SingTel has announced plans to close a number of exchanges without specifying which ones, adding to providers' cost and uncertainty. With an open access network with fiber in each home and office in Singapore, other telecom providers may soon be able to bypass SingTel's network and provide service directly to customers. ¶17. (SBU) Local representatives from U.S. telecom provider Verizon told Econoff that although the new fiber network offered a new competitive option for providing services, it did not close out other options and the issue of improved access to SingTel's network remained. Depending on the building, its proximity to the network and the number of customers in the building, linking through SingTel's existing network could still be more cost-effective than using the new fiber network. Although Verizon expected OpenNet to lease fiber at a fraction of SingTel's prices, they also expected prices could be substantially higher for particular buildings and links under the new network, especially if fiber passed through more than ONE exchange before reaching the endpoint. For the moment, Verizon plans to begin leasing bandwidth on the new network within SINGAPORE 00001108 004 OF 004 two years, but will be monitoring the operation of the network to see where the most cost-effective opportunities may lie. SHIELDS