Industry Perspective

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Industry Perspective Technology, Media & Telecommunications Industry Perspective The future of telecommunication companies Industry Perspective Technology, Media & Telecommunications 2 (This page is left blank intentionally) Industry Perspective Technology, Media & Telecommunications 3 Executive summary In the past, telecommunication operators (telcos) used to just be pure utility players focused on building extensive networks and monetising their traditional services by charging for voice, short message system (SMS), international calls and roaming. However, in recent years, over-the-top (OTT) service providers have disrupted the traditional business of telcos by offering Technology, Media & communication services through their various applications (apps), resulting in Telecommunications a drop in revenue for telcos’ traditional businesses. Figure 1 on page 4 illustrates the evolution in telcos’ business models as they move from being pure utility players to digital players through expansion in the digital space. Most telcos are already “digital enablers” and are continuing to seek new areas of growth to extend their reach across the digital space. We believe it is important for them to do so to remain competitive, especially via increasing services/platforms as that will result in greater stickiness and revenue from consumers. Essentially, as telcos seek to increase their share in the digital space, they need to: a) Ensure that their connectivity services are sufficiently advanced to protect their core business; b) Create content while driving partnerships with various OTT players; and c) Create new areas of growth and services to target consumers as well as businesses in the different sectors Impact on telco dynamics a) Telcos will face challenges as they venture into the digital space, such as long gestation periods and losses in the initial years. Partnering with the same OTT providers will limit content differentiation, as original content development entails high cash burn rate with low guaranteed Most telcos hit rates. are already b) Telcos will also need to grapple with strong competition from tech giants in the digital space as well as data privacy issues. Nonetheless, a “digital measured approach towards digital investments should keep debt at manageable levels. However, regulatory risk still remains a key enablers” concern, particularly in China and Thailand. as they seek new areas of growth to extend their reach across the digital space Industry Perspective Technology, Media & Telecommunications 4 Figure 1: Evolving nature of telcos’ business models Most telcos are trying to streamline their core business and move towards becoming digital players Telco as a utility player Telco as a digital player Digital Enabler • Infrastructure and network • Partnerships with: Entertainment provider players, banks, OTT players • Mobile Virtual Network • E-Wallet player Operator (MVNO) • Content aggregator • Digital advertising • Data analytics • Cybersecurity • IoT • Industry 4.0 Source: UOB analysis Connectivity and infrastructure are the core of the telcos’ business. Hence, telcos need to ensure that they are sufficiently advanced in this area to protect their core business before expanding into new business areas. UOB offers sector solutions to tackle rising competition within the telecommunications space. For more information on UOB’s value chain solutions for the telecommunications sub-sector, please reach out to us at [email protected]. June 2019 Industry Perspective Technology, Media & Telecommunications 5 Content 03 Executive summary Telco as a 06 utility player Sector: Technology, Media & Telecommunications Transitioning from a utility player to a digital player The Future 10 of Telcos 12 Telco as a digital player Industry Perspective Technology, Media & Telecommunications 6 Telco as a utility player Decline in traditional business areas amid intense competition Telcos globally have faced a significant drop in their traditional business and this In Singapore, has led to a decline in the average revenue per user (ARPU) across all regions. From Table 1, it can be seen that the pre-paid and post-paid ARPU for most competition has countries in Southeast Asia faced a decline in 2017. been heightened due to the entry Table 1: Post-paid and pre-paid ARPU growth rate for the various markets of MyRepublic, YoY (Post-paid) YoY (Pre-paid) Market-average ARPU TPG, Circles.Life FY2016 FY2017 FY2016 FY2017 Hong Kong 11% -5% - - and Zero Mobile Indonesia 12% -9% -2% -10% Malaysia 3% -2% -3% 3% Singapore -3% -4% -7% -5% Thailand 0% -1% 4% -3% Source: Company data, UOB Analysis Operating margins are also challenged by the shift towards lower-margin data business from the more lucrative legacy business. While consumers’ data usage has been increasing, there has been a decline in SMS and Voice ARPU due to consumers switching to data-based OTT services. Besides intense competition, particularly in Singapore and Malaysia, telcos in the region face different challenges and are therefore changing their strategies. In Singapore, competition has heightened due to the entry of the fourth operator (TPG) as well as MVNOs such as MyRepublic, Circles.Life and Zero Mobile. The new entrants will likely experiment with aggressive pricing to gain market share, while existing telcos will be pressured to introduce cheaper data price plans in response. This will lead to lower average data ARPUs for incumbents. Smaller players may be more vulnerable to failure amid intense competition. In Indonesia, the pre-paid market makes up a large percentage of Indonesian telcos’ revenue. Consumers previously would often change their pre-paid SIM cards to get the best deal. However, the government has tightened its regulation on the usage of SIM cards by ensuring that each citizen ID is only linked to a maximum of three pre-paid SIM cards to reduce misuse. In April 2018, Indonesia’s Ministry of Communication and Information Technology blocked 83 million unregistered SIM cards. This and stricter regulations meant lower revenues for telcos in the first half of 2018. For example, Indosat saw a year-on-year (YoY) decline in operating revenue of more than 20% in FY 2018. However, this decline is likely to be temporary. Telcos such as Telkomsel also raised their data prices by 5-10% in early July 2018 in an attempt to increase revenue. Industry Perspective Technology, Media & Telecommunications 7 Telcos’ investments in infrastructure With OTT players driving a rise in data consumption, telcos need to constantly Telcos have invest in their networks to handle the increased data flow. In Thailand, Indonesia and Malaysia, various telcos are still bidding or were just awarded been investing additional 4G spectrum. in their networks to There are specific coverage and quality requirements requested by the handle regulators after the award of a spectrum. This means that telcos will have to continue with their investments in 4G infrastructure to ensure that they meet increased regulators’ requirements. data flow Back in 2016, Thai telcos migrated their users from 2G to 3G/4G as True and AIS had to shut down their 2G networks. As they completed the final stages of their 3G coverage, AIS and True also acquired new 4G spectrum. As a result, they extended their capital expenditure cycle as they will continue to ramp up 4G coverage in the coming years. The Malaysian Communications and Multimedia Commission (MCMC) reallocated the 700 megahertz (MHz) spectrum in 2018 and these frequencies will be made available to cellular telcos in 2019. This means that Malaysian telcos will also be investing more to improve their 4G network coverage in the coming years. In Indonesia, Telkomsel was awarded the 2.3 gigahertz (GHz) spectrum in October 2017 while Three Indonesia and Indosat Ooredoo won additional 2.1GHz frequencies in the same month. These operators will have extensive capital expenditure programmes. The Indonesian government has also made infrastructure investments to extend LTE coverage so as to drive wider 4G adoption in Indonesia. The 2.1GHz and 2.3 GHz spectrum bands can also be used to deliver 5G coverage in the future. Investments in the infrastructure for these spectrum bands will help telcos in their preparations for 5G rollout in the future. Industry Perspective Technology, Media & Telecommunications 8 Countries such as Myanmar and Vietnam are late to the 4G space The Vietnam telecommunications market is heavily regulated by the government, and the introduction of 4G technology was deliberately delayed till 2016 to give the state-owned operators more time to monetise their 3G networks. Given that Vietnam is late to the 4G game (VNPT-Vinaphone launched 4G services only at the end of 2016, Viettel and MobiFone launched 4G services in 20171), we can expect Vietnamese telcos to continue to invest in 4G infrastructure in the coming years as their network rollout plans progress. GMobile has been slow with its 4G rollout and Vietnamobile will only start to deploy 4G in 2019. For Myanmar, major operators are continuing with their push in the 4G space. Myanma Posts and Telecommunications (MPT), Ooredoo and Telenor Myanmar have been investing heavily in their 4G services as they await the arrival of Mytel, an operator that was given a licence in January 2017. Mytel will be offering advanced 4G services at highly competitive prices across the country2. Hence, countries that have been slow to introduce 3G and 4G capabilities will still be investing in 4G infrastructure in the coming years. Figure 2: Carriers’ network equipment spending for Indonesia, Malaysia, Singapore, Thailand and Vietnam 12,000 30% 25% 10,000 20% 8,000 15% 6,000 10% 5% 4,000 0% 2,000 -5% 0 -10% 2015 2016 2017 2018 2019 2020 2021 Combined Total for 5 countries (US$ million) YoY growth Source: UOB Analysis3 From Figure 2, it can be seen that Southeast Asian telcos’ spending on network equipment is expected to see a slight year-on-year (YoY) decline from 2018 to 2021. This is due to a respite from the heavy investments that they have made for 3G and 4G in 2013 to 2017.
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