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Tough year ahead for Singapore telcos

The Business Times | Amit Roy Choudhury | Thursday, Feb 16, 2017

Photo: Reuters

The next couple of months will be an interesting period for the Singapore telecoms industry. First a spectrum auction will be held by the Infocomm Media Development Authority (IMDA) of Singapore for newly freed-up spectrum. After that, in April, the three incumbents - Singapore Telecommunications (Singtel), StarHub and M1 - will get a better idea of what the gameplan is for Singapore's prospective fourth telco, Australia's TPG Telecom, which is expected to start building up its network from that month.

It's quite likely that the Australian company, which already has 60 MHz (megahertz) of spectrum that it bought for S$105 million in the closed auction meant for the new incumbent, will bid for more spectrum with the three established telcos during the open auction. The company is on record as saying that it wanted 75 MHz of spectrum to start its Singapore operations. Going by this, it would be looking for 15 MHz more. Needless to say, an entry of a fourth bidder is likely to raise spectrum prices.

TPG's entrance into the market comes at a time when the incumbents are in the process of restructuring their business to reflect the data-centric nature of mobile telephony. Their legacy businesses, like international direct dialling (IDD) and normal telephone calls, are literally falling off the cliff, thanks to changing user habits. Customers are using OTT (over the top) services like WhatsApp, WeChat, Skype and others over data plans to make international and local phone calls, send messages and even do video conferences. This should be good news for telcos as users consume more data. However, the problem as it stands now is that money from data consumption is not sufficiently compensating the fall in legacy business revenue.

Of the three incumbents, Singtel, the biggest with a 50 per cent marketshare, is sitting pretty. This is not to say that its traditional telephone business is not facing the same problems. It's because, thanks to the diversified nature of its business, most of its revenue comes from outside of Singapore thus giving it a nice financial cushion.

Read also: Australia TPG Telecom's unit wins bid to become new Singapore telco

M1 and StarHub are clearly under pressure.

For its financial year ended Dec 31, 2016, M1's net profit fell 16.1 per cent to S$149.7 million, from S$178.5 million a year ago. Revenue dropped 8.3 per cent to S$1.06 billion from S$1.16 billion. M1's mobile service revenue for the year slipped 4.19 per cent to S$640 million from S$668 million. M1 said the fall was mainly due to lower voice and roaming revenue. IDD revenue was down 10.8 per cent at S$61 million from S$69 million a year ago.

In contrast fixed services - meaning broadband - was up 21.4 per cent at S$104.2 million from S$86 million. Fixed services also include M1's fledgling enterprise business. However, as the numbers show, the rise in fixed services has not been enough to compensate for the drop in revenue from traditional businesses and hence M1's service revenue was down 2 per cent at S$805.5 million in fiscal 2016.

M1 has upped its capex (capital expenditure) for 2017 to S$170 million, which includes S$30 million for narrowband IoT (Internet of Things), ICT (Infocomm Technology) services and related investments which are more focused on enterprise customers.

StarHub's full year net profit fell 8.3 per cent to S$341.4 million from S$372.3 million, while revenue dropped 1.9 per cent to S$2.4 billion from S$2.44 billion. Mobile revenue for 2016 was down 2 per cent at S$1.22 billion. Mobile contributed 50.7 per cent of total business. Pay TV revenue - also hit by OTT players such as Netflix - was down 3.4 per cent at S$377.8 million. However, broadband rose 8.2 per cent to S$216.8 million and enterprise fixed services was up 3.9 per cent at S$400 million. As the case with M1, StarHub's growing data-centric business has not been able to fully compensate for the decline in its traditional mobile and cable TV business.

Tricky comparison

For Singtel, the quarter ended Dec 31, 2016, was its fiscal third quarter since its financial year starts in April. Comparing its results with StarHub and M1 is a bit tricky since so much of its revenue comes from outside Singapore. However, the company's third-quarter revenue was down 1.5 per cent at S$4.41 billion and it attributed the revenue drop mainly to continued voice to data substitution and roaming revenue declines. Net profit for Q3 was S$972.8 million, up from S$953.5 million.

For its Singapore operations, Singtel's mobile communication revenue was down 0.4 per cent at S$328 million during the third quarter while residential Pay TV revenue was up by 12 per cent at S$57 million, thanks in part to its broadcast rights to programmes like the English Premier League. While fixed broadband revenue rose 9 per cent to S$57 million, IDD fell 18.8 per cent and local telephone call revenue fell 6 per cent.

Singtel's enterprise business reflects the changing dynamics of the industry. Services (overall and not just in Singapore) like cyber-security, managed services and business solutions, which fall under Infocomm Technology services, did well with a combined revenue of S$758 million - up 5.2 per cent from S$721 million a year ago during the quarter. But the gains were somewhat negated by a fall in more legacy services: enterprise mobile communications revenue fell 5.5 per cent to S$250 million from S$260 million a year ago, and IDD slipped 13 per cent to S$50 million from S$58 million.

The likely impact of TPG's entrance into Singapore could be a price war as it seeks to grab customers from the incumbents. However, it needs to be remembered that TPG has quite a few constraints of its own. The most important one is money. It is committed to major capex expenditure in its home market this year and next and so the question does remain: How much money it would be able to spare for its Singapore venture? It plans to spend S$200-S$300 million to build its network in Singapore venture. It will need more money if it plans to undercut the existing players with cheaper plans. The other potential problem for TPG could be brand recognition. MyRepublic, the other player in the fray for the fourth telcos slot, has been around for sometime and it has a successful fibre broadband business which it had planned to leverage to attract customers if it won the right to become the fourth telco. TPG quality of service delivery is a big unknown for Singapore customers. It remains to be seen how it plans to overcome this hurdle. One way could be by offering fibre broadband services here as its main line of business in Australia is broadband. Most market watchers expect TPG to become a retail service provider (RSP) riding on top of the national broadband network.

A price war can be expected once TPG reveals its business model and mobile plans and one can expect the existing incumbents to be aggressive in this in order to keep customers.

Meanwhile, StarHub and M1 have signed an MoU (memorandum of understanding) to study further collaboration in mobile infrastructure sharing. StarHub is not adverse to the prospect of a similar deal with Singtel.

What is certain is that bottomlines will be under pressure as capex and opex (operational expenses) are likely to go up. In this respect, M1, as the smallest of the three telcos, may be more vulnerable than StarHub and Singtel. It has far less leverage to offer bundled plans - a combination of mobile, broadband and TV - than the other two.

Singtel is, of course, in the best position. Money is not a problem for the company. It has deep pockets and with the impending IPO (initial public offering) through which it plans to divest more than 75 per cent of its holding in NetLink Trust, it may earn as much as S$2.5 billion.

Interesting times are ahead for the Singapore telecom market.


This article was first published on Feb 16, 2017.
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