AMSTERDAM -- How does a national-scale carrier go from nonexistent to profitable in five years?
There's probably no single, simple path. But in the case of YTL Communications in Malaysia, the answer combines aggressive construction of a 4G network, a government boost for new network operators, and a business that embraces the services that many carriers don't like.
That's according to Chief Executive Wing Lee, who sat down to talk with CNET News' Stephen Shankland during a visit to Europe. Lee, who previously worked for 15 years at Sprint and Clearwire, was named CEO of YTL Communications in 2009. He expects the company to become profitable a year and a half from now.
An entrepreneur wanting build a developed country's next Vodafone or Verizon might not be able to take the same route: YTL can attract customers to its wireless service because Malaysia's fixed-line broadband options -- cable, phone, and fiber-optic lines -- aren't as widespread as in many countries.
YTL got its start building its network along highways outside Malaysia's major cities, but the company got an unusual opportunity: a contract to supply Malaysia's 10,000 schools not just with network access but also with a countrywide online education system for students and teachers. YTL brought Google in as a partner, and now it's the largest deployment of Google Chromebooks, Lee said.
Lee is a fan of 4G, which he's lived and breathed for years. YTL and his former employer, Clearwire, embraced the WiMax network standard that mostly proved commercially unsuccessful, but YTL soon will begin installing LTE technology, too.
But Lee believes there's a 4G honeymoon period that will come to end as consumers encounter its shortcomings. To hear his thoughts, read this edited transcript of the interview.
Q: You have an interesting partnership with the Ministry of Education in Malaysia. Can you describe the project?
Lee: Malaysia has a fairly progressive education blueprint that calls for the transformation of learning to prepare the next generation for the workforce. Toward that end, we dived into this private-public partnership with the government. 1BestariNet is a project that's a part of this blueprint. Its focus first and foremost is to deliver Internet to all public schools in Malaysia. There are 10,000 public schools. Malaysia has a population of 28 million, so some of the schools are quite small -- 40 or 50 people in small villages -- to 2,000-plus people in big cities. The total enrollment is about 5 million students. Delivering connectivity to the school is just a starting point. We just happened to have this 4G network, which gave us a tremendous advantage when it comes to deployment speed. The alternative would take years to complete. That's why we can deliver broadband to over 85 percent of the schools in 18 months' time. We target to complete all 10,000 schools by the end of this year.
Do you just put up a wireless network base station by each school?
Lee: That's pretty much how it works. Malaysia has a huge digital divide. If you're in big cities like Kuala Lumpur or Penang, your broadband is OK. But when you're outside the big cities, you're pretty much out of luck. Until our network showed up, there was pretty much no coverage, even on the highways. From the moment we launched our network 30 months ago, we decided to launch the highways and all the major thoroughfares. In five months, we were able to bring all the major highways in Malaysia to run on our 4G network.
The good news is because of that strategic investment we made 20-some months ago, we already have the backbone for the entire country. When you connect the major thoroughfare, you connect all the towns and rural towns. Because of this advantage we have -- it's foresight, not dumb luck -- we are able to connect the schools quite fast. That's how we won this contract.
Highways don't always go to rural areas.
Lee: For that point on, we can backhaul. As long as you have the backbone, you can extend out from the backbone quite easily. There are certain rural areas in east Malaysia you have to take boats to get to. For those, you have to use VSAT [satellite links for Internet access]. But the majority of the schools are all on 4G. Because they're all on 4G, the kids in rural towns will have the same high-performance network as the kids in big cities. That's a level playing field.
That's only the starting point. Anyone can deliver Internet connectivity to a school. What you do with it matters the most.
This is where your partnership with the Frog virtual learning environment comes in.
Lee: We liked Frog because it's very easy to use. And we realized the teacher would be a key determining factor of the success of the platform. If they don't use the tool, then there's no content. This tool is a drag-and-drop interface. That's how you build your material. It could be a text box, a quiz, a survey, a video or audio source. Tacit knowledge is the most important aspect of the teaching resource. Teachers teach through their unique ways. Because this is a national program, we can share this content. Before, with a teacher in a fishing village struggling to teach calculus, the class would struggle with her. Now because this is a national platform, she now can access the material created by a teacher in downtown Kuala Lumpur. That becomes materials the whole country can use. We let the best materials surface -- it's crowdsourcing.
To what extent did the government accelerate your 4G deployment?
Lee: The government played a small role. When it comes to the Internet access, they are not funding our capital. They are paying a service fee. How we bring the Internet to them is up to us. They hold us to a minimum of 4 megabits per second downlink per school.
So that helps defray your costs?
Lee: It helps a bit to have some kind of stable cash flow, but we look at this as a national buildout.
How did Google come into the partnership?
Lee: We brought them in. We realized the schools had challenges. We all know the traditional PC paradigm is quite expensive to acquire and even more expensive to maintain. The government doesn't have the budget or the workforce to maintain it. When we started deploying this, we saw it would be the single most important missing link. If you have all this good stuff in the cloud but you can't get to the cloud from your devices, it's far away. We talked to all the big players -- Micrososft, One Laptop Per Child, Apple, and of course Google. Our conclusion was that the Chromebook has unique characteristics. It's very low maintenance. It's not susceptible to viruses or malware. It's designed to be sharable -- you can have multiple people sign on to the Chromebook.
Through our discussion, we also identified that Google Apps could also be a very important component to enabling collaboration. We integrated Google Apps seamlessly into our learning platform.
How many Chromebooks are being deployed as a result?
Lee: We won the contract a few months ago. Over the last three months, we have deployed over 130,000 Chromebooks. This is I think the largest Chromebook deployment in the world.
Those are the Samsung Chromebooks -- the ARM-based models?
Lee: Yes. The neat thing about Chromebooks is it doesn't matter what runs underneath the hood because everything is the cloud. So if a Chromebook dies or has a maintenance issue, we just give them a new one and everything is still there. This is the right paradigm for us, because the teacher has no interest or time to be the IT support.
Do you think 4G is good enough to deliver broadband to everybody? If you live in a city, there are more options with wired connections, but what do you think will happen with the rest of Malaysia or or the rest of the world? Will most people get broadband wireless or wired connections?
Lee: In emerging countries like Malaysia, wireless is the way to go. For an emerging economy coming from a less robust background, the only way to leapfrog is to use wireless. You can dig up the roads and trench and lay fiber, but it would take years if not decades to complete. Emerging countries don't have the time. As far as we're concerned, 4G is the right answer. We'll be launching 4G LTE in about two quarters, so we feel we should be able to really deliver much higher throughput.
How many base stations do you have so far?
Lee: We have over 4,000 base stations. That gives us 85 percent population coverage. We'll be adding LTE. We already have a 4G network based on WiMax. I used to work at Clearwire, so I know something about WiMax.
We are not religious about this. WiMax was the best technology in the toolbox four years ago when we first started this deployment. You cannot keep waiting and waiting for technology. Technology evolution happens all the time, so we built our network to be a flat IP [Internet Protocol] network, so any IP-based technology can plug into our network. For us, adding LTE is as simple as adding a channel card.
So was two years enough to get a return on investment on all that WiMax hardware?
Lee: Absolutely not. That's why we're keeping our WiMax network running. If you look at WiMax and LTE from a technology standpoint, WiMax is actually quite mature. The cost per bit is reasonable and the performance is there. There's still lots of opportunity to monetize our WiMax network. A lot of data-centric applications do not require LTE. You need LTE for the most part to take advantage of those new fancy devices. If it's just a data dongle, a home gateway, who cares whether it's WiMax or LTE, so long as it's got a good price point and good performance. So we use LTE to augment our existing network.
How many subscribers do you have, and how is the business going?
Lee: We're losing money still. We've been in business for 30 months now. We're optimistic that we'll break even in the next year and a half. That's rather fast for a company that has a national footprint we built in such short order.
We have about 600,000 customers, but one customer called the Ministry of Education that has a lot more accounts underneath. We literally could be in the millions.
How many of your customers use your services for the equivalent of wired broadband and how many use them for mobile phone service?
Lee: We own the market when it comes to mobile data. We are the net-add [increasing the number of subscribers overall] leader in Malaysia in the last three quarters and soon to be four when it comes to mobile broadband. The best-selling devices -- the mobile router is No. 1. MiFis are fantastic. The second would be home gateway. We also have voice. We look at voice as a value-added service. We have implemented telco-grade IP telephony. We have mobile number assignment from the Malaysian government. We are fully interconnected domestically and internationally. That's how we're going to compete. We are 10 years behind our competitors when it comes to GSM. We'd rather go the other direction to create new innovation to use IP voice.
There seems to be a lot of reluctance among carriers to move ahead as fast as possible. I understand the issues of return on investment, but does it seem to you the network operators are moving fast enough for where the industry needs to go?
Lee: I think there's hesitation. I understand how they think because I used to work there. The majority of the 3G networks in the world haven't been paid for. It's a tough discussion to ask the board for another few billion dollars to invest into LTE when they haven't returned the investment on 3G. Many countries are still building out their 3G network -- still ordering HSPA base stations. So this is a crossroad. If they don't change their paradigm, still keep thinking I'm just going to sell more subsidized Android phones and iPhones, then there's no new revenue. With no new revenue, how do you justify all this additional new capex [capital expenditures like new base stations]?
So how do you change the paradigm?
Lee: People have to understand the importance of cloud. People need to start going from talking to doing. Operators have to realize where they are in the value chain. We are always in the middle. So how as a middleman do you add value? We added value through our Malaysian deployment by making it easy for people to connect using a single ID into our wireless network, a learning platform, a content store, to collaborate and create documents. That's high value.
Do you think the dumb pipe -- even a very fast, very nice dumb pipe -- is a doomed business?
Lee: There is still a business for the dumb pipe. If you run a high-speed broadband business, there is still going to be demand, especially for many enterprises. All they want is to run a VPN [virtual private network] on those dumb pipes. They want it to be cheap, reliable, and fast.
If you want to be a Southwest Airlines, then make yourself a no-frills low-cost operation. If you want to be -- pick your fancy airline -- then you have to have the service level and the value add. If you want to be Qatar Airways, you have to understand how the emergence of cloud services will change your business model, and how do you embrace it as opposed to fighting it.
Google Fiber is interesting. Google is a company with lots of over-the-top services that often irritate network operators, and now it says it can be a pipe, too. What message has Google Fiber sent to the network service industry?
Lee: It's no different from what Google did with the 700MHz auction in the US. I think they're trying to ensure the public knows there are new ways to create innovation. They play the role of a catalyst. Wherever they go, they launch, and the other guys at some point have to buck up and do something interesting. I don't think Google intends to turn this into a profit center, but they want to turn it into a way to disrupt the existing business model and legacy thinking.
Are we in a LTE honeymoon period? Is it going to get just as bogged down as 3G is, once more devices arrive to use it?
Lee: It's a honeymoon period for three reasons. No. 1, right now you take your phone, you get onto high-speed rail, you go to Amsterdam, and you're able to connect through the notion of roaming. But with the band use in LTE, there's no such thing as global roaming.
Because of spectrum fragmentation?
Lee: Precisely. No. 2 is when it comes to LTE devices, they are expensive and less power efficient because LTE technology is still at that stage. No. 3, when it comes to LTE technology, you still have to fall back to legacy networks, because the deployment footprint will take several more years to have parity. It's a very high capex scenario for the operators, and for the user, it's not a very good experience. So all parties have to have their eyes wide open. That's why Apple had such a hard time launching a global SKU [model] -- because of LTE. Apple has been maniacal in terms of launching global SKUs. There's no more global SKU now that they have LTE. It's all due to this fragmentation.
But what about the issue of network capacity? Are the networks going to get bogged down?
Lee: Yes, they will. That's why many operators are really trying to do LTE on a phased manner. LTE runs on a higher frequency band -- 1.8GHz, 1.9Ghz, 2.3GHz, 2.5GHz, 2.6GHz. In order to take full advantage of LTE, you need to take advantage of high-capacity bands. A lot of operators have to build more base stations in order to provide the same footprint.
You have to be closer.
Lee: Precisely, because the high frequencies don't propagate as far. Therefore the radii of the base station would decrease. When that decreases you have to add more base stations. Otherwise you have drops left and right. The existing base station buildout has to be relooked at. It's very expensive. Rental payments are very expensive. Also, with a single base station, there are only so many single concurrent users you can take on. It's not a huge number. So [carriers] have to embrace small cell [base stations that have shorter communication ranges]. Small cells as a physical device is not expensive, but deployment of small cells -- rental payments, opex -- is high. So it'll be several years before there is true high-capacity LTE network. What we have built in Malaysia -- at the high frequency band -- has positioned us very well to compete for the long term.
What do you think about femtocells -- little teeny tiny base stations?
Lee: Femto is OK. But femto requires you to have good fixed-line communications. You use someone else's fixed line [DSL or cable broadband, for example] as your backhaul [to link to the Internet]. We toyed with femto when I was at Sprint. We used femto as a retention tool. If a customer was complaining about no coverage at home, and we don't have an ability to deploy coverage, we send them a femto. But that's not a sustainable model, because for femto to work, you have to have good broadband. The customer then has to pay two bills: the have to pay a bill to us, a 4G operator, and a hefty bill to getting high-quality backhaul.
What do you think of the European Commission's goal to spread broadband faster and the network operators' reluctance? Who's right?
Lee: The EC has the right request. They believe broadband has direct correlation to improving economic conditions of all member countries. The problem is that the carriers haven't sorted out the business model. So the goal is noble, but unless you know how to capitalize on that broadband, you'll have a big sinkhole. This is going to be a long debate.
What's the resolution? Some government subsidy where the EC argues if we fund this our economies will improve faster?
Lee: My answer will take the form of an example of how we do things in Malaysia. When the government decided to auction 4G licenses five years back, they decided not to grant them to the existing incumbents. They grant them to new entrants like us. We built this network, and now the other guys are hurrying up to build their LTE network and the national incumbent is hurrying to build more fiber-connected homes. So I think introducing competition in the form of a new entrant is good for the ecosystem. It has to be done thoughtfully and given to someone who has the credibility.
Do you think the European market is hobbled by national incumbents?
Lee: So it seems.
Until people see a business model, they will not jump in and invest. Hopefully with guys like us having success, there will be more people trying more 4G deployment globally. Many operators are still using the model of the legacy. We need to get them to understand the new model and hopefully use that to catalyze other operators to start driving this harder.