Wake-up call for Singapore telcos

NEW CHALLENGE: All three incumbent telcos reported lower earnings in the quarter ended Dec 31, 2015. They will have to be more nimble to thrive here. ST FILE


    Mar 10, 2016

    Wake-up call for Singapore telcos

    TECHNOLOGY disruption has had profound impact on the global telecommunications industry, usurping existing business models with new ones that have low barriers of entry.

    This is good news for customers.

    A new breed of telecommunication companies are no longer just "phone companies" but IT companies offering services such as Internet access, managed services, cloud computing platforms and online security.

    Legacy revenue streams from voice calls and SMS are fading away, replaced by new sources of income.

    Singapore is no exception to this transformation. It has been happening over the past few years, starting with the introduction of OTT (over the top) messaging services like WhatsApp, WeChat and Skype.

    The past few quarters have been challenging for the three incumbent telcos. In the quarter ended Dec 31, 2015, all three reported lower earnings.

    Singtel saw a 1.7 per cent year-on-year drop in net profit for the three months, StarHub a 14.3 per cent fall and M1 a 2.1 per cent dip.

    The reasons for the lower earnings, as explained by the financial statements, are different for all three but the underlying theme is the same.

    The local market, despite a high Arpu (average revenue per user) valuation which some analysts put at US$52 (S$72) - making it much higher than the Hong Kong or UK markets - is becoming a tough place to keep growing revenue.

    And it is expected to get even more tougher next year when there could be a fourth telco gatecrashing into the market.

    Singtel is best positioned to cope with the current market situation.

    It derives only 34 per cent of its funds from its Singapore operations, thanks to its globally focused business.

    What happens in the Republic has less impact on its bottom line.

    The net profit fall for its October-December 2015 fiscal third quarter was due mainly to adverse foreign currency fluctuations as well as investments, both in spectrum (outside of Singapore) and core capabilities (which include the acquisition of Trustwave).

    However, as discussed later, its Singapore operations did not do well during the quarter.

    For StarHub, the adverse impact came from lower service revenues from its mobile and fixed network services, which fell 2.3 per cent and 2.9 per cent year-on-year respectively.

    This fall was mitigated by higher revenue from broadband services which registered a 9.2 per cent year-on-year increase during the quarter.

    In the case of M1, its mobile telecommunications revenue decreased by 2.1 per cent during the quarter.

    However, its revenue from data continued to grow, with mobile data contributing 51.2 per cent to its service revenue and its fibre broadband Arpu up 2.4 per cent at $47.5 for the quarter.

    Singtel's Singapore consumer operating revenue saw a 3.7 per cent dip, with slower growth in mobile communications revenue and declines in equipment sales and international phone revenues.

    Data, however, continued its strong momentum as more postpaid customers upgraded to higher data bundles.

    On the other hand, Singtel's underlying operating revenue from its Singapore enterprise business increased by 3.6 per cent - driven mainly by strong growth in Infocomm Technology (ICT) business, data and Internet, and equipment sales.

    StarHub and Singtel have had a steady cable/pay TV business. This business is under threat with OTT players such as Netflix and other region-specific Internet TV offerings becoming available in Singapore.

    A research note from Nomura last month provides an interesting calculation for a typical non-tech-savvy family in Singapore. It calculates that by moving to MyRepublic broadband and Netflix, by either exiting or reducing the engagement level with offerings from the telcos, this family could enjoy a 40 per cent saving without seriously impacting the quality of service.

    Nomura feels that going forward, more people will transition to OTT content. This does not mean that they will switch off their pay-TV services but will seek to modify the contracts to get just local content and sports shows.

    In this situation, StarHub, which gets around 16 per cent of revenue from TV, will be the most affected.

    Singtel, Nomura adds, will be less affected because it gets around 1 per cent of revenue from Mio TV.

    The demand for OTT services over high quality broadband can potentially be beneficial for M1 as it seeks to boost its broadband offering.

    Its broadband subscriber base has been rising at a modest but steady clip. In the fourth quarter of 2014, it had a subscriber base of 103,000. This rose to 128,000 in the fourth quarter of last year.

    StarHub and Singtel use their pay TV business to provide attractive bundles for their other services.

    This makes their relationship with customers "sticky".

    Also, instead of trying to put the genie back in the bottle, Singtel, for example, has already launched its own OTT Internet TV service Hooq.tv regionally.

    It has entered into an agreement with Netflix to allow for the streaming of the service through its set-top boxes.

    StarHub has introduced its own streaming service called StarHub Go which allows customers to view TV programmes on their mobile devices.

    It is quite clear that going forward broadband data (mobile and fixed) for consumer and enterprise businesses will be the growth engine for telcos here.

    This is in keeping with the international trend. The trick will be on how the companies can innovate and offer value-added services over broadband to develop new revenue streams.

    There is also the opportunity that Internet of Things services will provide.

    For example, M1 has unveiled a new subscription-based elderly activity monitoring service, using its broadband network. This and other initiatives announced in the recent past show that M1 is trying to move its business model away from just being dependent on traditional telecom services.

    Singtel is already offering managed services, data centre services and security offerings, mainly to enterprise customers.

    StarHub is also ramping up enterprise offerings with data centre and other services.

    Expect to see a far different telecom industry within a year's time. Will the Arpu remain as high as it is today?

    That will depend on the innovation and adaptability shown by the telcos.

    If they are successful, both shareholders and customers will benefit.