Interview with Dr Daniel Ritz, CEO and President, PTCL Group: PTCL is geared up for transformation

Dr Daniel Ritz has been serving as the President and CEO of the PTCL Group since March 2016. Before that, he was working with the Etisalat Group as Chief Strategy Officer. Prior to Etisalat, Dr Ritz had served as the CEO of Swisscom Central & Eastern Europe. He started his career with The Boston Consulting Group. Dr Ritz holds a PhD (magna cum laude) from the Hochschule St. Gallen in Switzerland and was a visiting PhD student at the Harvard Business School.
BR Research sat down with the PTCL President and CEO in Islamabad last week to understand the telecom giant's strategy-in-action under the new leadership. Edited excerpts from a long and candid conversation are provided below:
BR Research: You have a long leadership experience in telecoms. The PTCL Group, which you now lead, has presence in all three broadband segments: fixed, wireless, and mobile. About year and a half since becoming the CEO and President, what is your assessment of the local broadband market and how your group is faring in this market?
Daniel Ritz: I would start by saying that there is a huge growth potential in Pakistan's broadband market. The potential is primarily on the fixed broadband side and less on the mobile broadband side. That may seem counter-intuitive, but let me explain.
One, there is significant under-penetration of fixed broadband in this market. There are about 32 million households in Pakistan, as per the recent census data. The PTCL Company has about 1.4 million DSL (fixed-line broadband) subscribers, out of 1.6 million in the total market. That's a very low penetration, of 5 percent. But there is no reason why this number shouldn't go to 10 percent, 15 percent, or even 20 percent. There is huge pent-up demand that has not been exploited yet.
My second point is that the logical thing to happen is to have a primary Internet connection at home that is fixed, not mobile. Compared to mobile broadband, fixed broadband is unlimited, and it can serve the connectivity needs of many users at once. It is an anomaly in the market today that a lot of people are getting a dongle rather than a fixed-line, because the fixed-line is not performing at the expectation that they have.
BRR: Indeed. That anomaly reflects in mobile broadband uptake that is on the rise whereas fixed broadband numbers have stagnated. What is your understanding of this consumer behavior?
DR: As we have seen in all the mature markets, subscriptions for dongles (mobile broadband) first went up and then they came crashing down. Why? Because at the end of the day, dongles were reduced to their logical usage case, which was limited mobility. At home, the primary Internet connection tends to be fixed. And that's logical. The challenge for the PTCL Company, which is the market leader in fixed broadband, is that our network is not able to meet the expectations of customers. Therefore, a lot of people today are opting for a dongle, rather than for a fixed connection.
BRR: If the supply of fixed broadband is constrained, what about the demand side?
DR: The demand for fixed broadband is there; we just haven't been able to serve it properly. Wherever we have upgraded our exchanges and networks, we have seen significant uptake. In the last twelve months, PTCL DSL subscriptions have gone up - not by the amount that they should be up, but there is healthy growth year-on-year.
BRR: The broadband segment has been central to PTCL management's narrative of a promising future, in the wake of pressure on voice revenues. But in CY15, CY16, and now in 9MCY17 as well, we saw PTCL's standalone topline decline year-on-year. How do you explain this trend?
DR: For the first three quarters this year, PTCL's standalone revenues are down 3 percent year-on-year. You may say PTCL really has a problem. Reality is that we have huge variances in our revenue streams. We have revenue streams that are growing 15 percent to 20 percent per year; and we have revenue streams that are declining 45 percent year-on-year. So the 3 percent topline decline doesn't tell you much, as it's the aggregate of everything that happens.
BRR: So what is going on over at the revenue spectrum?
DR: Some 40 percent of the revenue base that is declining - consisting of PSTN (fixed-line voice), International business (LDI), EVO CDMA (fixed wireless) etc. - currently has a bigger shrinking effect on the overall topline than the amelioration that is coming from 60 percent of the revenue base that is growing - consisting of DSL, wholesale services, corporate services, Charji LTE (fixed wireless), and IPTV.
The first ambition is to turn around PTCL, stop shrinking and start growing. We are aware of the market dynamics and are taking all steps to turn things around. This is evident from the accelerated growth of DSL, Charji LTE and corporate services. Mathematically, if you wait another year, PTCL, without doing anything else, will have stopped shrinking. Even now, despite a declining topline, the PTCL Company's net profit margin has been higher than most of the mobile network operators in this market.
BRR: To achieve that turnaround, how are you allocating your capex?
DR: Our capex is going into the growth segments. Our main growth engine is Data. And where we are investing in Broadband, PSTN will also benefit. Similarly, in wireless we would invest in Charji LTE rather than EVO CDMA or WLL. And that is also something we see internationally.
BRR: Let's talk about the revenue streams one by one. Given the low penetration of PSTN lines in Pakistan (PTCL has about 2.5 million PSTN subscriptions), shouldn't you be investing in this under-penetrated segment as well?
DR: We all know about the mobile revolution that has taken place all over the world. There is a lot of cord-cutting that has already happened in PSTN in Pakistan. And those customers who keep the landline, they do so for a back-up. Folks hardly ever use the fixed-line phone nowadays. However, there is a demand for Business customers to keep it.
Revenue from PSTN is a function of the number of lines and the revenue per line. The number of landline customers is stabilizing. The line losses are getting less. However, people are using it less and less and less. So the drop that we get is from the traffic revenue that is declining. Therefore, we are not promoting PSTN per se. You get PSTN as a spillover: if you get a DSL line, you also get a PSTN connection.
BRR: Seems like you are giving up hope on 'voice'.
DR: As mentioned, our growth engine is broadband. As a result of our investment in Broadband, PSTN will also benefit. Voice is still 20 percent of our revenue, which is declining by 9 or 10 percent every year. So, if we get this decline to 4 or 5 percent, it will help us a lot on the overall revenue growth.
If you ask me will we see PSTN 'voice' growing again, I don't think so; it has gone too far already. However, what we need to make sure is that we price the utility properly. There are still 2.5 million households in this country keeping a landline, and there is a reason why. People are keeping it as reassurance in case of emergencies. So we need to price that reassurance properly. But trying to stimulate revenue traffic on those lines would be unrealistic.
BRR: You talked about fixed broadband (DSL) earlier. Over in the wireless broadband segment, why are the two Evo services - Charji and CDMA - behaving differently?
DR: We have double-digit growth coming in Charji LTE. It has a small base - about 2 percent of revenues - but we are growing it very rapidly. Charji LTE is a smashing success wherever we are launching it, mostly in pockets composed of large cities and un-served areas. However, EVO CDMA, which has comparatively bigger revenue contribution but is powered by a dying technology, is declining very rapidly.
BRR: Corporate services' revenues are growing but their weight remains small in your revenue mix. What's the strategy for this segment?
DR: It is an interesting segment. It is small today, but it has untapped opportunities. Over here as well, our DSL network is the key. When I talk to a client CEO, he tells me to upgrade my network first and then he will talk about lots of other things. But despite all the challenges, we are growing 10 to 11 percent on the corporate side.
BRR: How do you see the future of IPTV, which currently has a tiny share in the revenue base?
DR: Video is driving data growth worldwide. We see this in Pakistan also. Video streaming is a significant portion of our Internet consumption. IPTV provides customers an ability to watch digital quality content - live and on demand. The IPTV will grow as a function of DSL.
We currently have a 10 percent penetration of IPTV on our DSL lines. Why is it not higher? It is mainly because of the quality of the DSL line. People are not subscribing to IPTV because it's a bad product - it's actually a good product. But if your line quality is bad, you will have a bad TV experience.
The key for us to a lot of stuff on the consumer side is to improve the quality of our fixed access network. It will help us on DSL, PSTN, and IPTV. We have some homework to do on the basics. We are also focusing on taking IPTV as an app (PTCL Smart TV app) and partnering with national and international content providers to bring quality content for PTCL customers and grow this segment.
BRR: Let's pivot to the wholesale business segment now. The PTCL Company possesses major connectivity infrastructure. Since the launch of mobile broadband in 2014, how has been the supply of and demand for PTCL's wholesale bandwidth services?
DR: For us, the launch of 3G and 4G services has been a good thing, not only on the consumer side, but also on the backhaul side. We have signed significant fiber-optic IOU deals with Telenor and with Zong. There is more in the pipeline. These guys need more bandwidth to satisfy the data hunger of their customers. Increasingly they need to replace the backhaul from wireless media to fiber optic. Currently, we build it for them. Ideally we would like to do more on-net, which means we should re-sell what we already have.
Having said that, it's a big opportunity for us, but in this area, too, we need to work on the quality of our long-haul network.
BRR: Fiber cuts seem to be increasing, causing service downtime. What is the underlying cause?
DR: Unfortunately, there are a lot of fiber cuts happening. In most cases, it is because of civic works that are going on. If you just look at Karachi, there is lot of construction going on. And unfortunately, we are not informed in advance when and where this is going to happen. We need to improve our coordination with the civic agencies so that we can plan and relocate our network elements from the construction zone.
For us, the fiber and backhaul business is a big growth area. But we have to do a lot of work to increase the resilience of our backhaul fiber. We are currently putting in fiber guards to patrol the key areas. We are also putting in new, additional fiber-maintenance centers.
BRR: Being the leading fiber-optic network provider; how is PTCL's fiber penetration like in rural areas?
DR: Our long-haul network extends into many areas, including rural areas. But the point is about the last-mile access. Today, a significant part of our customer base is still on 1Mbps to 2Mbps DSL lines. With the upgraded network that we are working on, you can go up to 20Mbps even on a copper line. The solution is not always fiber to the home (FTTH). If you are going to deploy the network in Greenfield areas, you deploy the FTTH. We do the same. But there is no business case for us to rip out all the copper and put in fiber everywhere in the last-mile access.
The FTTH rollout is very expensive, as you can see even in European countries. We do the fiberisation in a targeted manner, mainly in areas that classify as socioeconomic class 'A'. In many other areas, we are working on a network transformation programme to rehabilitate our copper network and shorten the loop length to deliver the 20Mbps speed. That's a lot of speed for a copper connection.
BRR: Can you elaborate what this network transformation programme entails?
DR: It became clear to me early on that we were missing out on big-time opportunities due to the quality of our network. About a year ago, the Board of Directors approved a significant network transformation programme, which is currently under implementation. Let me explain how this works.
In the old network, we have the local exchange; then we have the copper cabinet; then we have secondary copper to a distribution point; and then we have a drop wire that goes to the house. The problem with this network is that loop lengths are very long. The law of physics tells us that if the loop is long, it limits the speed you get, even with a good quality copper. Under the programme, what we are doing is we upgrade the exchanges, then we dig and put fiber into a device (multi-service access gateway), and from there we either rehabilitate the copper to make it good quality (providing speed up to 20Mbps) or put in the FTTH that goes straight to the house (achieving speed up to 100Mbps).
BRR: How much of your network has been transformed that way thus far?
DR: This programme aims to transform 100 out of our 427 exchanges until the first quarter of 2019. Those 100 exchanges provide us with about 50 percent of our customer base. They tend to be in bigger cities. We have currently upgraded, end to end, about 13 exchanges, and we are working to upgrade more by the end of this year. There is a lot of heavy-duty digging going on around the country right now. It is a complex, and very labor intensive program.
BRR: What kind of a capex are we looking at for this programme?
DR: About Rs 27 billion, over two and a half years.
BRR: One last question about the PTCL Company. The firm is active in both last-mile business and carrier & wholesale business. Given the market conditions, do you think you need to be more selective?
DR: We need to keep focusing on both. The retail business gives us over 60 percent of our revenue. We are an 18,000 people strong company. If we were to shut the last-mile business and become a complete wholesale connectivity provider, we would have to shed thousands of people. This is not our plan or intention.And if you are just focusing on the last-mile business, you are foregoing big potential on the backhaul, because 4G and 5G will drive the data demand. Most fixed-line operators all around the globe are doing both, retail and wholesale.
BRR: It is now time for us to address Ufone, which also falls under your domain. Ufone, which has been relegated to the last rank in terms of subscriptions, continues to make a net loss. What is the strategy to turn Ufone profitable again?
DR: As for the subscriber numbers, the subscriber share is not the primary driver for me; it's the value share. And there, indeed, Ufone is second last.
A net profit of zero is a good ambition to have for Ufone, but it's not an easy ambition. Ufone is a fairly lean company, so its profitability is essentially a topline question. Compared to other mobile operators, Ufone operates at a disadvantage in terms of coverage and capacity. The challenge for Ufone is whether getting more spectrum makes financial sense. It's a 'damned if you do; damned if you don't' scenario. And it's a market problem, to be frank. For Ufone, however, it is a little more pronounced.
BRR: But if other operators keep on investing and Ufone sits on the fence, will it not eventually become a question of relevance for Ufone?
DR: Look, there are important decisions to be made, but they are not that easy. If you look at it from a financial mindset, I would challenge all the mobile operators in this country on whether they are creating an economic value above the cost of capital. The answer is probably no. But you have a point about staying relevant in the market. That's the balance that you have to find.
BRR: I guess this is the point where I ask this question: following Mobilink's acquisition of Warid, do you think there is room for further consolidation in the sector?
DR: Let me answer it the following way. The way the market is currently going, and the way the regulator doesn't step in, then it's a logical consequence - so, the answer is yes. But that is not the same as saying it is our strategy. Do not confuse the two, please. I am looking at it from a macro perspective.
BRR: You mentioned the regulator's role. What would you suggest them to do differently, in the interest of a conducive business environment?
DR: First of all, there is clearly a market failure right now. In my view, it is high time that a price floor, also for data, is introduced. Secondly, termination rates need to be looked at, as they haven't been looked at for many years. I think it is high time for asymmetric termination. Thirdly, there is clear case in the market of price dumping, which is anti competitive. I won't take names, but this needs to be called out and stopped. Fourthly, the tax regime should be such that the government makes money off of corporate income tax rather than through sales tax slapped left, right and center on telecom services. Regulator has done very well to develop Pakistan's telecom market. Now the need is to change gears and the regulator has to play a different and active role in protecting the industry. Now it is about establishing a strong and conducive business environment framework for the industry to grow and glow. Do you want a healthy four-player market? Yes or no? And the way it goes right now is, it seems people are saying, let the strongest win. I know it's difficult because consumers are enjoying it. But the question is about long-run sustainability. If you look at all the operator groups, at some stage they have to ask themselves from a return on investment perspective whether the next billion dollars they want to invest will go to Pakistan or somewhere else.
BRR: Do the challenges that you mentioned dull your impression of the market opportunity you spoke of earlier?
DR: No, I am not worried about the market challenges. On the contrary, I look at this as a tremendous opportunity for the PTCL Company, which is clearly ready and working towards capitalizing it. It is our homework that we have to do, which we have already started, in terms of improving the quality of our network and the quality of our customer service and changing the organizational mindset.
This is pretty basic stuff. But we have to put the solid foundations so we can stop shrinking and over time start growing. It's a big engine, so it will take time. We have been serving the country and connecting the nation since 1947. Be assured, PTCL is committed to a digital and connected Pakistan.