Sector Report Telecommunications Industry in

Telecommunications Sector

Singapore topped a 2015 Deloitte global survey for smartphone penetration, where almost 9 in 10 respondents have access to a smartphone (Deloitte, 2015), alluding to a mature telecommunications industry with limited room for growth. Revenue growth of the incumbents, , Starhub and , have plateaued over the years except for M1, being the smallest firm with the lowest market share of 22.8% amongst the 3 telecommunication companies (Today Online, 2015). Local telcos are increasingly supported by debt and have been experiencing mediocre income growth as the effects of the technological disruption reverberate, but that is not to last as they respond to new growth areas such as data analytics. Stable dividends are expected to persist on new revenue streams, although growing debt- to-equity, falling net income growth and free cash flows may limit the incumbents’ ability to support the historical level of dividend payouts in the future.

Figure 1. Revenue growth Figure 2. Dividend Payout 30.00% 140% 120% 20.00% 100% 80% 10.00% 60% 40% 0.00% 20%

0%

2010 2004 2005 2006 2007 2008 2009 2011 2012 2013 2014 2015 -10.00% 2003 2011 2012 2013 2014 2015

Singtel Starhub M1 Singtel Starhub M1

Source: S&P Market Intelligence Source: S&P Market Intelligence

Figure 3. Singtel Dividend Sustainability Figure 4. Starhub Dividend Sustainability 20.00% 60.00% 30% 4000% 10.00% 20% 3000% 40.00% 0.00% 10% 2000% 2011 2012 2013 2014 2015 20.00% -10.00% 0% 1000% 2011 2012 2013 2014 2015 -20.00% 0.00% -10% 0%

Unlevered FCF Margin Unlevered FCF Margin Net Income Growth Net Income Growth Total Debt/Equity Total Debt/Equity

Source: S&P Market Intelligence Source: S&P Market Intelligence

Figure 5. M1 Dividend Sustainability Figure 6. SMS and mobile data volume 20% 150% 3.0 12 2.5 10 10% 100% 2.0 8

0% BILLIONS 1.5 6 PETABYTE 2011 2012 2013 2014 2015 50% 1.0 4 -10% 0.5 2 -20% 0% 0.0 0

Unlevered FCF Margin

2011-Q3 2012-Q1 2012-Q3 2013-Q1 2013-Q3 2014-Q1 2014-Q3 2015-Q1 2015-Q3 2016-Q1 Net Income Growth 2011-Q1 Total Debt/Equity SMS Mobile Data

Source: S&P Market Intelligence Source: Data.gov.sg

The incumbents are the main providers of mobile, cable TV and internet services in Singapore. Mobile services remain their primary source of revenue.

Mobile There has been an increasing demand for data as consumers shift towards data-intensive applications. Weekly SMS usage has declined 8% from last year while Instant Messaging1 usage has increased 9% (Deloitte, 2015). Message-and-voice applications such as WhatsApp may further reduce the demand for integrated mobile plans in turn of SIM-only/customized mobile plans, which can be less costly with lesser SMS and outgoing calls. Telcos’ mobile services revenue can be impacted on a switch to such plans that increasingly meet customers’ needs.

As Singapore’s population growth remains stable at about 1.32% from 2014 with plans to keep it that way, the growth in the number of users is expected to be small and stagnant, close to the population growth of 1-2%.

Yet, the change in consumer demands explores additional ways for customer acquisition and retention and highlights data analytics as another revenue stream, thus possibly negating the impact on integrated mobile plans. The unique qualities of certain applications allow telcos to hinge on users’ loyalty in their advertising campaigns to attract and retain long-term customers, developing a brand loyalty of their own. Coupled with the government’s efforts for Singapore to be the world’s first Smart Nation, the phenomenon simultaneously facilitates the growth of data analytics and Internet of Things (DataSpark, n.d.). Data on Telcos’ network can be monetized through third parties requiring precise advertising and generate a new revenue stream. SingTel and Starhub have established analytics teams to capture this segment (Lim, 2016).

The growth in the Internet of Things (IoT) will push data revenue for communication service providers, but may be limited by telcos’ infrastructure, notably the scarce spectrum available, and different network demands of IoT devices. The 5G network is expected to be rolled out by 2020 on the sequential release of 2G, 3G and 4G every ten years. The plans for the 5G network to provide higher capacity than the current 4G points towards an increasing dependency on spectrum availability.

1 the exchange of text messages through a software application in real-time (Rouse, 2008) 2 Singapore Statistics 2016, http://www.singstat.gov.sg/docs/default-source/default-document- library/publications/publications_and_papers/population_and_population_structure/population2016.pdf

The extent of impact from the 4th telco, TPG Telecom, on the incumbents is uncertain, as the service and pricing strategies of the incumbents have tended to move together, but what’s for sure is that the landscape will become more competitive, narrowing margins in an effort to grow its market share.

Figure 7. International Telephone Call Minutes Figure 8. Mobile Revenue Composition 800,000,000 100% 700,000,000 80% 600,000,000 500,000,000 60% 400,000,000 40% 300,000,000 200,000,000 20% 100,000,000 0 0% 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16

Voice Data SMS and other

2011-06 2011-01 2011-11 2012-04 2012-09 2013-02 2013-07 2013-12 2014-05 2014-10 2015-03 2015-08 2016-01 2016-06

Source: Data.gov.sg Source: DBS Bank

Figure 9. Broadband Subscriptions by Type Figure 10. Broadband Prices (Approx) 1,000,000 Singtel 6Mbps ADSL 29.90/ month 800,000 Singtel 10Mbps ADSL 31.90/ month 600,000 Singtel 500Mbps Fibre 49.90/ month 400,000 Singtel 1Gbps Fibre 59.90/ month 200,000 Starhub 100Mbps Cable 49.90/ month 0 Starhub 300Mbps Fibre 29.90/ month

Starhub 1Gbps Fibre 49.90/ month

2011-06 2011-11 2012-04 2012-09 2013-02 2013-07 2013-12 2014-05 2014-10 2015-03 2015-08 2016-01 2011-01 M1 300Mbps Fibre 29/ month DSL Cable Modem Fibre Based M1 1Gbps Fibre 39/ month

Source: Data.gov.sg

Broadband The Nationwide Broadband Network (NBN) initiative by the Singapore government intensified competition within the fibre broadband market as it paved way for new Internet service providers such as MyRepublic and ViewQwest (Teoh, 2013). Margins were squeezed as the incumbents slashed their 1Gbps fibre broadband plan by up to 8 times in 2014 upon MyRepublic’s SGD 49.99 plan (Tan, 2014). Broadband prices will continue to be placed under pressure as WhizComms recently offered a 1Gbps plan at SGD 32, the market’s lowest (Tung, New Singapore internet provider offers 1GB fibre broadband for US$23, 2016). Internet service providers leasing network access, as with SingTel’s wholesale network access to WhizComms, will however not bear the brunt of such competitive prices.

Fibre broadband subscriptions have been on a steady climb while cable and digital subscription line subscriptions have fallen in contrast. The trend is expected to continue with the possible cessation of Starhub’s existing network lease agreement with SingTel for cable broadband users and more affordable and speedier fibre broadband plans (Tham, 2016). This will provide some growth in the broadband segment as fibre optic cables are more cost-efficient than conventional copper cable lines and fibre

broadband plans have been priced comparable to their older counterparts thus yielding higher margins (Newman, 2009).

The IoT will similarly be a positive factor for Internet service providers, as it drives reliance on connectivity.

Figure 11. Pay TV Subscribers 600

550

500

450

400 2Q2015 3Q2015 4Q2015 1Q2016

Singtel Starhub

Source: SingTel, Starhub

Pay TV The Pay TV revenue segment faces challenges on its own. The Pay TV outlook seems dismal as SingTel experiences stagnant number of subscribers and Starhub faces declining figures. The introduction of online streaming alternatives such as Netflix and Teleport by MyRepublic would have distracted some Pay TV customers, coupled with competitive prices. The effect is compounded by smart TVs and developments in the fibre broadband market which has improved access to speed and allowed customers to enjoy their content via different streams.

Netflix offers various licensed movies and series for less than SGD 17, although one drawback limiting the switch of local customers currently has to be its limited slate of offerings relative to other countries. Netflix is however expected to standardize its global offerings in the middle term (Seah, 2016).

Teleport allows users to watch videos previously blocked by copyright restrictions and operates on the lack of BitTorrent throttling, which is present in Singapore’s other internet providers (Lee, n.d.). It is free for all MyRepublic subscribers.

The telecommunications industry is universally characterized by high capital expenditure, requiring significant infrastructure investments. The incumbents have invested heavily on data infrastructure to improve mobile connectivity and potentially control costs, including offloading data to Wi-Fi, a fixed-line network, from mobile network, which has limited capacity and introduces congestion (Lim, Data becomes telcos' new competition arena, 2016). Investments will continue for service improvements but will be limited by Singapore’s scarce spectrum and consequentially costlier auctions.

Cloud Computing Cloud computing is on the rise with the Government’s push for Singapore’s Smart Nation Plan, it being an integral cog (Lim, 2015), with IDA helping to push for transparency and facilitate adoption. SingTel, Starhub and M1 provides cloud computing services. Research firm IDC forecasts the cloud computing market in Singapore to grow to about US$1 billion by 2017. There are many firms out there providing cloud computing services, with giants such as Google, IBM and Amazon pushing aggressively. Adoption

rate has been slowly increasing, as mid-market companies want to see proof of the pudding established before adopting the technology. (Sahni, 2016)

Cloud computing services will face intense competition from between the telecommunication firms and technology firms, to share a piece of the pie. As many small and medium firms has yet to fully embraced cloud computing, there is potential for further growth for cloud computing service providers to penetrate further.

Competitive Analysis

Competitiveness within the telecommunications industry has heated as Australia-based telecommunications company TPG Telecom recently won the bid to become Singapore’s fourth mobile operator. It is worthy to note however, that users may have to wait for a considerable amount of time – up to 54 months before 4G services are available island-wide (Tung, TPG Telecom wins bid to become Singapore’s 4th telco, MyRepublic loses out, 2016). The industry that was once dominated by Singtel, Starhub and M1, also faces increasing competition from digital telco Circles.Life and local fibre broadband operator MyRepublic and ViewQwest.

TPG, the second-largest broadband operator in Australia, has over 1.8 million broadband customers and more than 460,000 mobile users in Australia (AFP News, 2016).

Telcos should integrate the different services with the applications and devices that consumers and businesses use to create greater value propositions that benefits them, to stay ahead and maintain their market share. The sector should revamp their operations to be proactive at viewing the future products and services demanded and not be focused solely on new entrants.

Porter’s 5 Forces

By assessing the telco’s industrial organization economics, the framework describes the level of competition of the industry and therefore its attractiveness.

Threats of New Entrants: Low

Telecommunications is an expensive business in view of the large initial costs to set up telecommunications networks throughout the island. The high initial costs and low subsequent costs of adding additional subscribers allows existing providers to capitalize on economies of scales to keep out new entrants.

Apart from the need to set up infrastructure, it also incurs extensive updating costs to ensure security and to avoid obsolescence which most small to medium companies lack the capitalization and expertise to keep up with the industrial requirements. Moreover, licenses to operate a telecommunications business are not easily approved by the Infocomm Development Authority of Singapore, hence the threat of new entrants to telco companies in Singapore is low to negligible.

Threat of Substitutes: Moderate

Telco companies in Singapore faced high threat of substitutions due to limited differentiation amongst them. This is because consumers are generally highly price-sensitive and would not hesitate to change mobile service providers to cut down on their expenditure. On the other hand, the use of 2-year subscription contracts has helped to relief the threat of low switching costs considerably with the introduction of cancellation fees and loyalty discounts. Nevertheless, apart from the penalty the subscriber must incur upon breach of contract, the telco companies’ services are indeed readily replaceable.

Supplier’s Bargaining Power: Moderate

Sellers of latest technology and mobile devices for instance Apple Incorporation, has high bargaining power. This can be attributed to most of the mobile subscribers aiming to obtain specific devices during subscriptions or when re-contracting. Coupled with low switching costs of telecommunications companies, they depend greatly on the suppliers to retain their mobile subscribers. However, in terms of other hardware and devices such as Alcatel phones and routers, these suppliers have low bargaining power due to low switching costs.

Buyer’s Bargaining Power: High

The three incumbents provide similar products with low price differentiation. This translates into low switching costs and hence buyers have higher bargaining power. Below shows the comparison of services provided by the main telco companies as of March 20, 2016:

Source: hardwarezone.com

With higher bargaining power on the part of mobile data subscribers, telco companies are expected to provide higher quality product, better customer service, and lower prices, which ultimately reduce their potential profits.

Competitive Rivalry: High

Since telco companies in Singapore are providing similar products at similar prices, coupled with high bargaining powers of customers, they resulted in price wars amongst telco companies over the years. It is expected to intensify with the 4th telco TPG.

References AFP News. (2016, December 14). Australian firm is Singapore's 4th telco. Retrieved from Yahoo! News: https://sg.news.yahoo.com/australian-firm-singapores-4th-telco-112723755.html

DataSpark. (n.d.). DataSpark helps drive Singapore’s Big Data revolution. Retrieved from DataSpark: https://datasparkanalytics.com/insight/dataspark-helps-drive-singapores-big-data-revolution/

Deloitte. (2015). Mobile multiplies. Global Mobile Consumer Survey. Retrieved from Deloitte Southeast Asia: https://www2.deloitte.com/content/dam/Deloitte/sg/Documents/technology-media- telecommunications/sg-tmt-global-mobile-consumer-survey-noexp.pdf

Kaplan, K. (n.d.). The plans for 5G to power the internet of things. Retrieved from Quartz: http://qz.com/179980/the-plans-for-5g-to-power-the-internet-of-things/

Lee, T. (n.d.). MyRepublic unveils 1Gbps broadband plan that doesn’t cost a fortune - See more at: http://sbr.com.sg/source/tech-in-asia/myrepublic-unveils-1gbps-broadband-plan- doesn%E2%80%99t-cost-fortune#sthash.OBucCsiC.fcpPL9vH.dpuf. Retrieved from Singapore Business Review: http://sbr.com.sg/source/tech-in-asia/myrepublic-unveils-1gbps-broadband- plan-doesn%E2%80%99t-cost-fortune#sthash.OBucCsiC.dpuf

Lim, P. J. (2015, August 20). Cloud computing set to become integral part of Smart Nation shift. Retrieved from Channel NewsAsia: http://www.channelnewsasia.com/news/business/singapore/cloud-computing-set- to/2063812.html

Lim, P. J. (2016, November 22). Data becomes telcos' new competition arena. Retrieved from Channel NewsAsia: http://www.channelnewsasia.com/news/business/singapore/data-becomes-telcos- new-competition-arena/1920304.html

Newman, T. (2009, August 11). Fiber vs. Cable vs. DSL – What you Need to Know. Retrieved from FiberforAll: http://fiberforall.org/fiber-vs-cable-vs-dsl/

Rouse, M. (2008, January). TechTarget. Retrieved from instant messaging (IM or IM-ing or AIM): http://searchunifiedcommunications.techtarget.com/definition/instant-messaging

Seah, M. (2016, April 27). Netflix ‘recognises’ frustrations of S’pore viewers. Retrieved from Today Online: http://www.todayonline.com/entertainment/television/netflix-recognises-frustrations- spore-viewers

SGX. (2016, May 24). March Quarter Earnings of Singapore’s Three Telecoms Operators. Retrieved from SGX Market Updates: http://www.sgx.com/wps/wcm/connect/sgx_en/home/newsflash/mu_24052016_2

Tan, W. (2014, September 12). Price war breaks out among telcos. Retrieved from Today Online: http://www.todayonline.com/singapore/price-war-breaks-out-among-telcos

Teoh, M. (2013, March 5). Compete With Telcos? You Must Be Crazy! Singapore Startup MyRepublic is Doing Just That. Retrieved from TechinAsia: https://www.techinasia.com/compete-telcos-crazy- singapore-startup-myrepublic

Tham, I. (2016, June 1). Internet Service Providers wage new broadband war. Retrieved from The Straits Times: http://www.straitstimes.com/tech/internet-service-providers-wage-new-broadband-war

Today Online. (2015, April 14). M1’s Q1 profit up 6.6% but market share falls. Retrieved from Today Online: http://www.todayonline.com/business/m1s-q1-profit-66-market-share-falls

Tung, Y. H. (2016, November 2). New Singapore internet provider offers 1GB fibre broadband for US$23. Retrieved from e27.co: https://e27.co/new-singapore-internet-provider-offers-1gb-fibre-for- us23-20161102/

Tung, Y. H. (2016, December 14). TPG Telecom wins bid to become Singapore’s 4th telco, MyRepublic loses out. Retrieved from Yahoo! News: https://sg.news.yahoo.com/tpg-telecom-wins-bid- become-singapore-4th-telco-101208806.html

Lu, J. (2016, March 20). Data Wars: Telco data plan comparison. Retrieved from Hardwarezone: http://www.hardwarezone.com.sg/feature-data-wars-telco-data-plan-comparison