The Big Read: Singapore's big telcos face rude awakening, as the little guys get the last laugh
With mobile revenues set to decline at a steeper rate for at least two more years, shareholder values and the jobs of many telco workers here could take a hit, experts say.
SINGAPORE: Back in 2016, the three major Singapore telcos - Singtel, StarHub and M1 - held various meetings with investors and shareholders, reassuring them that a fourth telco would not be a threat to their businesses.
They told the market that it is not a problem, two analysts recalled. The incumbents had felt that if a new competitor appears, it will be an uphill climb to deliver the same quality of services as them.
At least one of the telcos was unconvinced that there would be any serious push to respond to the regulator’s call for proposals earlier that year, believing that there was no business case for a fourth telco.
“That was the thinking then: It already was a crowded market and the telcos believed they didn’t need to do anything. Whatever price the fourth telco offers, they will undercut it to kill off the competition,” one analyst said on condition of anonymity.
So when the regulator, the Infocomm Media Development Authority (IMDA), granted Australia’s TPG Telecom the right to become the fourth telco in December 2016 - loosening the market for the first time in 15 years - the incumbents appeared unfazed.
But the telecommunications landscape today is far from the oasis of stability that the three telcos had portrayed to investors back then.
There are now 11 telcos in Singapore, including the mobile virtual network operators (MVNOs) that have since flooded the scene. Two - Grid Mobile and redONE - were announced in the past month.
Unlike the main telcos, MVNOs do not own and operate any network infrastructure and have to lease it from either Singtel, M1 or StarHub at a cost.
Knee-deep in a price war even before TPG has launched its full commercial services, the three incumbent telcos have seen their profit margins erode in recent years.
Total mobile service revenue shrank 5.3 per cent in 2018. Industry leader Singtel’s group earnings before interest, taxes, depreciation and amortisation fell by 7 per cent in the 2018 financial year compared with the previous year, while StarHub’s service earnings fell by 11.1 per cent and M1’s shrank by 3.7 per cent.
Right now, Singapore consumers are enjoying a variety of telco offerings at low prices like never before.
But with mobile revenues set to decline at a steeper rate for at least two more years, shareholder values and the jobs of many telco workers here could take a hit.
By all accounts, the industry is now rife with talk of market consolidation - the question is whether all the three incumbents will be spared the chopping block.
How did the telco industry, which had enjoyed near monopolistic status in the past, arrive at this stage?
The answer, analysts say, is a complicated one marked by missteps and mistimed opportunities in the telcos’ efforts to transform themselves, and also because Singaporeans are now less willing to pay for data as before.
PAYING LESS FOR DATA
Every month, Madam Yvette Yeo pays around S$60 for her mobile phone line and those of her two daughters, while her husband, who manages his own bills, pays around S$90 for four lines used by his multiple devices - his main phone, a secondary one, an Apple iPad and a laptop.
It is a sign of how gadget-crazy Singaporeans are - a fact that analysts say had propped up the telco industry in previous years as consumers were more willing to spend more on their phones. The mobile population penetration rate in Singapore is at around 150 per cent, while wireless broadband penetration is at around 190 per cent.
But this year, Mdm Yeo wants a change. The advent of lower cost plans offered by both MVNOs and incumbent telcos’ sub-brands, such as Singtel’s Gomo and StarHub’s Giga, have led her to seek out new SIM-only and off-contract plans across multiple telcos that could save her around S$15 a month.
The plans trade voice minutes for higher data caps and free or discounted bundled services such as music service Spotify, said Mdm Yeo. This suits her family’s needs as they use more data than voice calls, she added.
Her husband Oo Gin Lee, founder of technology-focused public relations agency Gloo PR, said such a strategy by the telcos is a big change from the past, when they sought to lock-in their subscriber base into contracts, while charging more by tacking on additional services and data caps.
A key metric in the telephony business is ARPU - the average revenue per user - which shows how much each subscriber pays to the telcos.
“The goal then was therefore to maintain the lock-in while increasing ARPU, and therefore growing revenues for all three telcos,” said Mr Oo.
But ARPUs have declined since 2016. On a year-on-year basis, average post-paid ARPU in Singapore fell by 3 per cent in 2016 and 4 per cent the following year, while for pre-paid, ARPU fell 7 per cent and 5 per cent in 2016 and 2017 respectively, based on a UOB report.
This is due to heightened competition from MVNOs, such as MyRepublic, Circles.Life and Zero Mobile, whose leaner cost structures and digital retail model have allowed them to roll out lower priced plans to gain market share from the bigger players. The telcos had to respond by offering such plans of their own, while offering more sweeteners through higher data caps at little to no additional cost to the user.
Phillip Securities Research analyst Alvin Chia said it is no longer the case that telcos can monetise data as they did in the past, when people were willing to pay high fees for premium plans that boasted more data. Today, nearly every telco offers affordable unlimited data plans.
“There is nothing much the telcos could have done here because this is a global trend. Consumers expect to get more data and pay less, which translates to more data consumption and less data revenue for the telcos,” said Mr Chia.
The popularity of off-contract plans also shows a change in handset replacement patterns among a segment of consumers, who are increasingly unwilling to be locked in. SIM-only plans have whittled down the dominance of the two-year post-paid contract model in Singapore, whereby expensive phones are subsidised by the telcos.
Now, SIM-only plans is estimated to contribute between 10 and 15 per cent of their subscriber mix, he said.
Part of this is due to Chinese phone manufacturers such as Huawei and Oppo, whose phones boast lower prices than that of Apple and Samsung while offering similar performance. The influx of cheaper phones reduce the attractiveness of subsidised plans, and hence lowers the ability of telcos to lock customers into two-year plans.
Mr Terence Koh, UOB head of telecommunications, media and technology, said: “The mass market is likely to shift towards SIM-only plans. In particular, post-paid SIM-only plans enable consumers to enjoy the flexibility of subscribing to value-added services based on their lifestyle needs.”
Post-paid plans, he added, will still be in demand from consumers who want premium mobile phones.
RISE OF THE MVNOs
If such changing consumer trends had rattled the big telcos, the arrival of the first MVNOs in 2016 was what triggered the price war today, said experts.
The irony is that the incumbent telcos were the ones which allowed MVNOs to enter, albeit begrudgingly, so as to defend themselves against TPG’s arrival this year, they said.
READ: ‘Fittest will survive’: Singapore’s 4th telco TPG confident of thriving amid growing competition
Ms Janice Chong, director of Asia Pacific corporates ratings at Fitch Research, said by crowding out the market with MVNOs offering cheaper plans, TPG would be hard-pressed to gain a foothold in Singapore if its selling point is to offer low-priced plans. Telcos would also benefit from the MVNOs’ wholesale revenues.
“It is sort of a double-edged sword for incumbents to cannibalise themselves and dilute their ARPU. But will you be rather losing that share to TPG when they do come in?” she asked.
While the plan is to undercut TPG, the state of competition today has ignited a price war that could leave a long-term impact on the industry. Ms Chong said that the telcos “face challenging times ahead”, as a consequence of the MVNOs’ growing threat.
“They (are) having to make continuous investment into the infrastructure that they own while not being able to fully monetise the increasing data use.
“Instead of running to keep ahead of the competition, the telcos are now running to stay still,” Ms Chong added.
To date, there are seven MVNOs in the market, excluding Gomo and Giga as they do not need to lease mobile bandwidth from their telcos. We understand that another MVNO will be announced soon.
Since the launch of Circles.Life in May 2016, its telco partner M1 has increased its mobile revenue market share by three percentage points, said Ms Nidhi Dhruv, vice president and senior analyst at Moody’s Investors Service.
Correspondingly, StarHub’s market share has contracted by three percentage points, while Singtel maintained its share of around 53 per cent.
When Circles.Life entered, the incumbent telcos appeared confident that things were still going according to their plan to squeeze out TPG.
The telcos also had SIM-only plans which were priced lower than the new MVNO at the time.
Telcos had little qualms about dealing with one MVNO then. In 2001, Britain’s Virgin Mobile had entered the Singapore market by leasing bandwidth from Singtel, but exited after around nine months due to the competition.
But Virgin lacked the selling point that Circles.Life has now - off-contract data plans. Being more cost-effective than the three big telcos, Circles.Life was eventually able to offer more competitively priced plans than them, the analysts noted. The MVNO has become Singapore’s fastest growing telco, gaining market share at the incumbents’ expense and poking its rivals in marketing efforts, touting how it “gave power back to the consumers”.
Its success attracted others into the fray.
Mr Oo said it soon became “a proxy war”, with telcos using the MVNOs leasing their bandwidths to grab market share, while watching from a distance.
“The blood on the floor is with the no-contract plans, because this is where the current battle lies. If you are on contract, the telcos love you because they have you for two years. The big shift is the big 3 are no longer sitting around and figuring out the battlefield, they are now deep into the battle,” he said.
Mr Francis Cheang, chief executive of redONE Singapore, said these MVNOs emerged because they can “reach out to certain market segments” that incumbent telcos cannot due to their business model.
redONE is the latest MVNO to be launched, and leases network capacity from StarHub.
“Different MVNOs have different market strategies targeting other market segments, such as the lifestyles of various age groups. For redONE, we believe that there is an opportunity to give more value to commuters travelling between Singapore and Malaysia,” said Mr Cheang, referring to the absence of Singapore and Malaysia roaming charges in the data bundles offered by redONE.
MVNOs are now in a crowded market, but Mr Cheang believes that they can survive by moving into areas that traditional players would avoid.
For example, VivoBee, which has partnered StarHub, offers low-cost plans with flexible overseas top-up schemes catered for the foreign workforce. Grid Mobile appeals to millennials with a points system that rewards consumers for loyalty and helps offset their spending. Circles.Life, MyRepublic and Zero Mobile all target data heavy users who prefer the contract-free route.
BIG BOYS FIGHT BACK - TOO LITTLE, TOO LATE?
In response to the MVNOs, Singtel and StarHub launched their own digital telcos Gomo and Giga in March and May respectively, featuring lean cost structures and consumer price plans resembling MVNOs.
M1 was the last to react, consolidating its previous plans into OnePlan - based on a digital retail model - in end-May.
In a May conference call with investors, Singtel Consumer Singapore chief executive Yuen Kuan Moon said Gomo targets a different segment of the market - those who are digitally savvy and want affordable no-contract plans with high data bundles.
“(In) the initial first month, we do see a huge take-up from the market. In fact, it has actually run way ahead of our own internal expectations. We also see very little cannibalisation of our existing plans because it is really targeting a new segment,” he said.
The introduction of these new digital brand segmentation and pricing by the incumbents, and the impending entry of yet another new MVNO - even before TPG’s commercial launch - is a further escalation of the SIM-only price war which started with the MVNOs’ arrival, said Maybank Kim Eng analyst Luis Hilado.
“Whether the other MVNOs can continue to co-exist with the incumbents … remains to be seen, but we believe industry repair will not appear any time soon,” Mr Hilado said.
One analyst, who declined to be named, said it is the incumbent telcos’ strategy of allowing MVNOs which ultimately backfired: “In hindsight, if the telcos could rewrite history, they should not have introduced MVNOs so early. But someone jumped the gun way before TPG could get off the ground.”
He suggested that the telcos could have focused on Gomo and Giga, without having to jostle with MVNOs at all. That would mean having to invest heavily in transforming their legacy businesses towards digitalisation.
Instead, the digital efforts came a little too late, he said.
StarHub began its S$25 million restructuring exercise in October last year, laying off 300 full-time workers in a one-off exercise to improve productivity and lower operating expenditure. StarHub had employed around 2,500 staff.
Singtel, too, is seeking to lower its operational expenditure of S$490 million in the last financial year. Its group chief financial officer Lim Cheng Cheng has told investors that “a large part will come from the rightsizing through staff optimisation”, as well as looking at other costs.
Mr Chia from Phillip Securities said: “In that sense, the telcos have been laggards. It is quite an irony that the (telcos), which have been leading tech disruptions across the economy and have been helping enterprises go digital and are at the forefront of digitalisation, are being disrupted themselves.”
While Singtel and StarHub have announced efforts to digitalise, not much is known of M1’s plans on that front.
The telco was delisted from the Singapore Exchange in April after it was bought out by Konnectivity, a joint venture between Keppel Corporation and Singapore Press Holdings (SPH).
In a statement after the privatisation, M1 said that it will “devise a multi-pronged strategy of innovation, technology adoption, and digitisation, to better meet the needs of its customers".
Few details have emerged since, besides the launch of OnePlan.
JURY STILL OUT ON DIVERSIFICATION EFFORTS
One of the analysts said he believes the three telcos had been slow to undergo transformation because prior to 2016, they were focused on paying out dividends to shareholders rather than “on change that was sorely needed”.
M1 had a high free cash flow payout ratio of nearly 100 per cent, which indicates how much shareholders are paid relative to the total earnings of the company. This was similar to StarHub then while Singtel's was around 70 per cent, said the analyst who did not want to be named.
“(M1’s) delisting helps them. Now with the money from Keppel and SPH, they can begin to invest all their earnings into new businesses, new ventures. Not paying dividends is the only way for them to do something new,” he said.
M1 is the least diversified of the three major telcos, with a large majority of its business coming from mobile services.
With the headwinds in consumer telecommunications, the analysts said telcos need to diversify their revenue streams into new business models in order to thrive.
DBS strategist Dylan Cheang reiterated that telcos and utilities firms no longer enjoy “monopoly-like status”.
New digital services, such as Skype, Apple’s Facetime and Tencent’s WeChat, are also offering more attractive and innovative communication services, he added.
Citing a McKinsey report, he noted that the share of messaging and mobile voice revenue by these players have increased drastically. In 2018, people used these digital services to message others 60 per cent of the time, up from 9 per cent in 2011.
“Telcos do not have the pricing power as before. If they do not evolve, it warrants a re-look at how they can be classified as a defensive investment,” said Mr Cheang.
He added that investors could move away from telcos towards bona fide technology firms, which have proven to be more resilient.
Singtel’s share prices climbed overall in the past year, from S$3.16 in July 2018 to S$3.53 in July this year.
StarHub’s fell from S$1.70 to S$1.54 in the same time period. M1 last traded at S$2.05 on Mar 21, before its delisting on Apr 24.
UOB’s Mr Koh said that telcos can also compete in new areas to capitalise on the growth potential of the digital economy, providing more digital services while maintaining their core businesses of being an infrastructure and network provider.
This is largely what Singtel has done, said DBS head of telecom, media and technology research Sachin Mittal.
While the group’s weakness was in its Singapore operations in the latest quarter, this was offset by a strong performance in Singtel-owned Optus in Australia, and its other associates.
In fintech, Singtel has also ventured into mobile financial services, such as mobile payments solution Dash. The group has also expressed interest in applying for a new digital banking licence, which will allow it to operate as a bank that can take deposits from customers, and is currently reviewing the licensing conditions, said a spokesman.
Analysts stressed that diversification is no silver bullet as these efforts may take time to pay off and have their own risks too.
For example, not all of Singtel’s digital life business made money in the past year, with its recent acquisitions such as digital marketing arms Amobee and Videology, as well as cybersecurity services provider TrustWave, posting losses.
StarHub’s pay television division, too, has continued to see shrinking revenues, Mr Mittal noted.
Around 170,000 subscribers have left pay TV services since January 2016 - when Netflix entered the Singapore market - with around 75 per cent coming from StarHub.
On the enterprise services front, StarHub has also made an aggressive push into cybersecurity, working with Certis Cisco to create Ensign. Its enterprise business delivered 16 per cent year-on-year growth in service revenues.
WHAT THE FUTURE HOLDS: CONSOLIDATION AND THE 5G HURDLE
The intense competition would likely push the industry towards consolidation in the next three years, analysts from credit rating agency Moody's warned in January. This was at a time when only seven mobile service providers were expected to appear in 2019.
Ms Nidhi said that the presence of MVNOs and TPG Telecom’s commercial launch later this year will aggravate pricing pressure, leading to consolidation.
Mr Chia noted that most countries can accommodate three mobile operators, an ideal number that allows competition to be feasible.
“Singapore is such a small market, but you have 11 mobile operators now. Certainly, there will eventually be some form of consolidation,” he said.
Consolidation will coincide with the impending rollout of the ultra fast fifth-generation (5G) telecommunications network in Singapore - which would be another obstacle for telcos given the sizeable capital expenditure, or capex, needed.
The IMDA has launched a public consultation for 5G network rollout starting from 2020 onwards, and has proposed to base these networks on "standalone" specifications and architecture. This means that the 5G network cannot piggyback on the existing 4G infrastructure.
Telcos may also share “at least two” nationwide 5G networks at the outset, the regulator has proposed.
Analysts said that currently, there are not enough consumer- and enterprise-use cases to justify more than two networks.
Ms Chong pointed out that main telcos need to own the network infrastructure in order to survive in the long term. “Principal telcos need scale to enjoy economies of scale, and need the spectrum so that they don’t have to rely on another telco to determine their capex and cost structures,” she said.
Negotiating how to share these networks could be a “long-drawn” process, said Mr Koh. But the idea is to consolidate their products to optimise their capex, he added.
In the meantime, Mr Koh said telcos should collaborate with service providers in other industries “to bolster their capabilities and offerings” in the face of the rising competition.
Asked if the telcos could have done more to stave off the competition they face today, Ms Chong said: “That is the million-dollar question that all of the three telcos are grappling with.”