Sector Report Telecommunications Industry in Singapore
Total Page:16
File Type:pdf, Size:1020Kb
Sector Report Telecommunications Industry in Singapore 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, Singtel, Starhub and M1, 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.