Capax Infiniti CFA Institute Research Challenge
STARHUB LTD| SELL CHENG Jun Song, S9205433J Kenny TAY, S9213421J LIM You Jie, S9206224D Sarah Chantalle LEONG Wen Yi, S9326342A Singapore | Telecom Sylvester YEO Kai Ren, S9214214J
20 October 2015 Starhub Ltd
Wishing upon a falling star Rating SELL We issue a SELL recommendation on Starhub with a target price of $3.25 using the Target Price SGD 3.25 Discounted Cash Flow Model. This offers a 10.5% downside from its closing price of Starts At S$3.63 on October 20, 2015. Increasing regulatory pressures and Starhub’s heavy reliance on weakening prepaid and pay TV segments make it more vulnerable to Closing Price increasing competition in the industry. IDA’s support for the 4th MNO in Singapore SGD 3.63 would be the key indicator to look out for. 20 Oct 2015 Intrinsic weakness with mobile segment. Starhub’s high exposure to the prepaid Downside -10.5% segment and higher ARPUs suggest that it is relatively more exposed to a downturn in tightening immigration policies and severe price competition. Coupled with new competition introduced by the 4th telco, Starhub’s margins and subscriber base are At A Glance expected to suffer going forward. Ticker SGX:CC3 Broadband and free Wi-Fi cannibalizing data usage. With the rollout of the Mkt. Cap (S$bn) 6.28 NGNBN network and the Wireless@SG, this has increased the public’s access to free broadband on the go. The number of hotspots around Singapore has doubled to Major Shareholders 10,000 in 2015 and this has boosted wireless connectivity for consumers at shopping malls and train stations. Consumers are able to access free public Wi-Fi and this will Asia Mobile (%) 55.89 in turn reduce the number of subscribers who exceed their data caps. NTT Docomo (%) 9.91 Pay TV losing its luster. Since the introduction of Cable TV, the exclusive content BlackRock (%) 1.45 and innovative services have always been a key differentiator for Starhub services and pay TV is the crown jewel in Starhub’s hubbing strategy. However, competition Avg. Daily Vol. (‘000) 1,906,490 from illegal set-top boxes and network streaming services reduce the stranglehold Starhub once holds over premium content. Beyond a fall in pay TV revenues, we see P/E (ttm) 17.20 the lost in lustre of this key segment will reduce the effectiveness of Starhub’s EPS (ttm) 0.21 hubbing strategy.
Key Financials
(in SGD millions unless otherwise stated) 2012 2013 2014 2015F 2016F 2017F 2018F 2019F Revenue 2,422 2,370 2,387 2,474 2,491 2,495 2,488 2,487 % Growth -2.1% 0.7% 3.6% 0.7% 0.2% -0.3% -0.1%
Gross Profit 1,411 1,428 1,438 1,509 1,519 1,521 1,517 1,516 % Margin 58% 60% 60% 61% 61% 61% 61% 61%
EBITDA 720 743 748 770 777 774 766 761 % Margin 30% 31% 31% 31% 31% 31% 31% 31%
EBIT 447 474 477 434 408 369 326 286 % Margin 18% 20% 20% 18% 16% 15% 13% 12%
Net Profit 359 380 371 341 319 283 246 210 % Margin 15% 16% 16% 14% 13% 11% 10% 8%
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Company Overview
Established in 1998, Starhub was awarded the licence to provide mobile and fixed network Figure 1: Starhub’s Revenue (in mm) services when the government announced that telecommunications sector in Singapore would be completely liberalised by 2002. Despite being a latecomer to the industry, Starhub managed to establish itself as the second largest telecom player in the industry ahead of M1. 167 378 Key Segments: It has business operations in four main segments, mobile, broadband, payTV and fixed network services. In the mobile segment, it focuses on the provision of voice, data and internet services to its subscribers. In the broadband segment, it provides 202 1250 fixed line broadband services, including ultra fast fibre network services, to households. StarHub’s traditional area of strength has been in the payTV segment. It merged with 390 Singapore’ s sole cable television operator, Singapore Cable Vision (SCV) in 2002. As a result of the merger, Starhub acquired SCV’s cable television and broadband operations. Mobile PayTV Apart from offering exclusive channels such as Cantonese dramas and American movies Broadband Fixed Network over a set-top box, StarHub has started to offer these programs through mobile and online platforms. Lastly, the fixed network services segment refers to StarHub’s business solutions unit. The list of enterprise services include mobile, internet & IP solutions, data centre and cloud computing.
Hubbing the cornerstone of Starhub’s strategy: Starhub’s main marketing strategy is to Figure 2: Number of multi-play households with bundle all of its different services together in one package, otherwise known as Hubbing. Starhub Consumers receive discounts and benefits when they purchase several services and
Single Double Hubbing provides consumers with a one-stop solution for all their mobile, internet and entertainment needs.
400 Triple % with TV 71%
350 Hubbing confers Starhub 3 main advantages: 300 70% 1. Cross-selling. Hubbing allows Starhub to bundle services that are less desirable 250 with other services that customers want by offering discounts through hubbing. 200 69% Although other telcos may offer services at lower prices, households will still 150 subscribe to Starhub for its other differentiating products such as pay TV. Hubbing 100 68% also allows Starhub to advertise multiple services on one medium which lowers 50 No. Households of '000 / marketing costs. 0 67% 2. Reduces churn rate. Churn rate measures the annual percentage rate at which 2010 2011 2012 2013 2014 customers stop subscribing to Starhub’s services. By signing users to multiple services under Starhub, this raises switching costs, as consumers must repurchase all the services originally provided by Starhub. 3. Increase ARPU. ARPU increases when users subscribe to more services from Starhub.
Hubbing has been a key strategy for Starhub, as single and double-service households Figure 3: Shareholder Structure of Starhub (households that only subscribe to one or two services) have been decreasing, while [VALUE]% triple-service households have increased from 200,000 in 2010 to 242,000 in 2014 (Refer to Fig. 2). Pay TV has been the key element behind the effectiveness of Starhub’s hubbing strategy, as 70% of Starhub’s households subscribe to Starhub for its pay TV content. Due
[VALUE]% to the exclusive deals held by Starhub with content providers such as HBO and CNN, the percentage of households with subscription to Starhub’s pay TV content have remained [VALUE]% constant between 68% to 70%. [VALUE]% Shareholder Structure: Starhub’s main shareholder is Asia Mobile Holdings Pte. Ltd, a mobile telecoms investment company jointly held by ST Telemedia and Ooredoo. ST Telemedia is 100% owned by Temasek and Ooredoo is a telecommunications company Institutions Asia Mobile Holdings who operates in the Middle East. The second largest shareholder is NTT Docomo NTT Docomo Ventures Public Ventures at 9.91%, the venture capital arm of NTT Docomo Inc. The rest of the shareholders are highly diluted and held by public investors (24.99%) and institutional investors (7.82%).
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Industry Overview and Competitive Positioning
Telecom industry characterised by high barriers to entry and strong bargaining power over its consumers: High barriers to entry in the telecom industry Figure 4: Porter’s Five Forces is evidenced by the high capital expenditure and time taken by existing mobile network Bargaining operators (MNOs) to lay down network infrastructure. Such a commitment has deterred Power of entry of new MNOs despite efforts by the Infocomm Development Authority of Singapore Buyers (IDA)’s to encourage competition. In addition, another barrier to entry is the huge subscriber base that the incumbent MNOs possess. With most of Singapore’s population already subscribed to a mobile plan, the incumbents have an advantage of an existing Bargaining customer base and economies of scale it can utilise in any price competition. Hence, a Substitutes Power of new MNO will have to offer prices and services that are significantly superior to Sellers incumbents for it to obtain market share, which is highly improbable without government support.
Entrant of a 4th Mobile Operator: Despite high barriers to entry and strong bargaining Competitive Barriers to powers over consumers, we believe these key competitive advantages may be eroded Rivalry Entry with the introduction of a new MNO. The IDA has noted the fall in service standards from telecom operators. Although Singapore’s average mobile speeds are faster than that of Before MNO After MNO neighbouring countries, Singapore also has one of the highest ARPUs in the region. The oligopolistic structure has cultivated a comfortable scenario for the telecom operators, leading to a fall in service standards. Therefore, the IDA seeks to increase competition by Figure 5 Distribution of Speeds (size of bubble reserving a key spectrum in the upcoming auction for a new MNO. IDA has set aside 60 equates to smartphone penetration) MHz out of 225 MHz of spectrum at a lower indicative reserve price of S$40 million, in an auction open only to potential new entrants. Furthermore, the new MNO, likely to be 60 MyRepublic, already has a sizeable customer base with its broadband services, with 10%
55 market share. The introduction of a new operator will lead to intensified price competition, Singapo 50 re resulting in lower ARPUs for all telecom operators, and a decrease in market share for the incumbent MNOs. StarHub, as a telecom operator with operations only in Singapore, will 45 be especially affected by the increased competition. 40 Japan 35 Hong Price competition and little differentiation: Mobile services are a necessity for Kong 30 South many people throughout the world. Although MNOs try to differentiate themselves by
Postpaid Postpaid ARPU (US$) bundling mobile data plans with other complementary services such as broadband and 25 Korea pay TV, there is still a lack of differentiation in these services due to the similar nature of 20 the products. With broadband services an increasingly commoditised service, telecom 12 14 16 operators have faced problems in monetising an increase in date usage. There is also a Average Mobile Speeds/Mbps convergence of popular channels offered on pay TV. A cross-carriage law in 2010 mandates that screening rights for all exclusive television content deals must be made available to the customers of competing pay TV operators. This lack of product differentiation will intensify cost based competition. Hence, we believe that the key Figure 6: Broadband ARPUs have fallen due to consideration for consumers when they subscribe to a new plan(mobile/broadband/pay little differentiation TV/fixed line), would be increasingly dependent on prices, turning the telecom industry into a low margin and high volume business. 300 440 444 448 500 422 469 SingTel insulated from local slowdown, M1 focus on undercutting competitors: As 250 400 the largest telco in Singapore, SingTel has the superior clout and strength to compete with 200 300 Starhub in the move for quad-play households. Since launching MioTV in 2007, Singtel 150 has been competing with Starhub in the payTV segment. In recent years, it has focused 236 243 251 242 200 100 202 on expansion overseas in Australia and Philippines and targeting SMEs with its group 100 50 47 46 47 45 36 enterprise solutions. This is the next largest growth segment for telecom providers in 0 0 Singapore’s move to a Smart Nation and Singtel is the largest provider of enterprise 2010 2011 2012 2013 2014 solutions. Its $4.5bn revenue from Singapore Enterprises dwarf Starhub’s $378.3mm Broadband Revenue in S$ mn (LHS) revenue by more than 10 times. On the other hand, M1, with its limited offerings of mobile and broadband, focuses on price competition by offering services at a lower rate to that of BroadBand Subscribers in '000 Households (RHS) and Singtel.
ARPU per month in S$
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Investment Thesis 1: Intrinsic Weakness In Mobile Business Figure 7: Total Customers (‘000) 4,500 Mobile, the largest contributor to Starhub’s revenue at 52.7%, is facing headwinds from 3,750 customer additions and declining pre-paid segmental revenue. This was underlined by a
3,000
decline in the total number of customers in Starhub’s mobile segment. This comes off to a
2,250 total decline of 2.5% as compared to M1’s total decline of 7.5% over the 10 periods. While
4,090 4,090 4,090
4,080 4,080
4,070 4,070 4,010 4,010
1,500 3,980 less than M1, we note that M1 has turned around its numbers in 1Q15 and operates as the 2,349 2,349
2,292 2,292 lowest priced competitor in Singapore.
2,183 2,183
2,162 2,162 2,147 2,147
750 2,148
2,104 2,104
2,003 2,003
1,903 1,903
1,883 1,883
1,870 1,870 1,852 1,852 – 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 Unlike the case for M1, StarHub faces a fundamental challenge of higher ARPU for both Starhub Singtel M1 post and pre-paid subscribers, and more importantly, it has a larger exposure to prepaid subscribers which has been on a decline as a consumer base. Over the past 10 quarters, Figure 8: Total Customers Growth q/q prepaid subscribers have been declining continuously since 4Q13 and has since 3.0% decreased by 10.4% (3.75m -1Q13; 3.36m-2Q15). 1.5% – Declining prepaid subscribers: In April 2014, Ministry of Home Affairs (MHA) and 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 (1.5%) Infocomm Development Authority of Singapore (IDA) introduced regulatory controls on (3.0%) pre-paid SIM cards. This reduced the maximum number of prepaid SIM cards per subscriber from 10 to 3, regardless of which mobile service provider they were purchased (4.5%) from. (6.0%) Starhub Singtel M1 Correspondingly, we saw that in 2Q14, prepaid subscribers in Singapore dropped 4.4% and has been decreasing. While we believe the numbers are bottoming out, we do not expect a recovery in this segment due to employment controls in Singapore. With the Figure 9: Total Post and Prepaid customers government taking a proactive stance on limiting the reliance of foreign workers, we do not expect a near term recovery of prepaid subscribers from the influx of foreign workers. 6,000 2.0% 5,000 1.0% – 4,000 (1.0%) This is supported by statistics from the Ministry of Manpower (MOM) on the foreign labour 3,000 (2.0%) force in Singapore. While growth was 4.2% in 2013 and 2.6% in 2014, the number of 2,000 (3.0%) (4.0%) prepaid subscribers has not experienced a similar increase. With a muted 0.92% growth 1,000 (5.0%) – (6.0%) rate in the foreign workforce, we believe that a recovery of prepaid subscriber revenue 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 driven by the quantity of prepaid cards sold would be extremely unlikely. Postpaid Prepaid Postpaid Growth Prepaid Growth Large Exposure to Pre-paid Subscribers: Among the 3 local telco operators, StarHub has the second highest exposure to prepaid subscribers. StarHub’s prepaid Figure 10: Total Foreign Workforce and Growth rates subscribers accounted for 39.3% of mobile customers and 14.3% of mobile revenue. We used a sensitivity analysis to find out StarHub’s exposure to changes in prepaid segment
1,400 8.00% on its mobile revenue. If prepaid subscriber’s base decreased by 10,000 at current ARPU,
1,360 we estimate that mobile revenue would fall by 0.17%. 6.00%
1,320
Thousands 4.00%
1,280 2Q15 mobile revenue for StarHub saw a decline of 0.2% YoY despite increasing ARPU for
1,368
1,356 2.00% post-paid and additions to subscribers as a result of weakening pre-paid revenues. With 1,240 1,322
1,268 relatively large exposures as compared to SingTel and M1, we expect StarHub to be 1,200 – Dec-12 Dec-13 Dec-14 Jun-15 negatively affected by the tightened immigration policy in Singapore. Total Foreign Workforce Growth
Figure 11: Prepaid Customers (‘000) & growth rates Figure 12: %∆ in revenue for 10k drop in Prepaid Customers
Prepaid 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 2Q15 Total 2Q15* Total % Change
1,120 1,049 929 871 846 849 StarHub StarHub Postpaid $275.7 $275.7 $321.6 $321.0 (0.17%) (1.8%) (6.3%) (11.4%) (6.2%) (2.9%) 0.4% Growth Prepaid $45.9 $45.3 1,780 1,790 1,830 1,830 1,820 1,800 Singtel Singtel Postpaid $506.2 $506.2 $530.0 $529.8 (0.04%) 0.6% 0.6% 2.2% – (0.5%) (1.1%) Growth Prepaid $23.8 $23.6
M1 966 855 756 703 713 714 M1 Postpaid $217.8 $217.8 $249.7 $249.3 (0.18%) Growth (1.3%) (11.5%) (11.6%) (7.0%) 1.4% 0.1% Prepaid $31.9 $31.5
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Unlikely turnaround with Higher ARPU: The telecom industry in Singapore has seen relatively higher ARPUs for its mobile segment as compared to other developed countries Figure 13: Post-paid ARPU for Local Telcos with Singapore second only to the US. With Singapore’s mobile prices already ahead of $80.0 developed countries like Australia, UK, and Hong Kong, we do not expect much room for a further increase ARPU by the telco players. $75.0
$9 discount $4 discount Furthermore, we expect the trend of StarHub’s pricing for post-paid mobile being $70.0 sandwiched between that of SingTel and M1 to continue. Over the last 10 quarters, StarHub has narrowed its discount as compared to SingTel. In 1Q13 Starhub’s post-paid $65.0 ARPU was priced at a $10.0 discount to SingTel but this has since improved to $4.0 in 2Q15. Thus, StarHub has limited room for an increase in ARPU unless SingTel has a $60.0 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 similar increase in ARPU. Given the pricing trends in Singapore, it is unlikely that StarHub Starhub Singtel M1 would be able to charge a premium to SingTel.
Case Study of Iliad and France: Incumbents’ Weakness Figure 14 : Market Share of France Telecoms Exacerbated By Entry of 4th Operator
100%
To facilitate greater competition in the mobile market, the IDA seeks to lower the barriers 80% to entry for a new mobile operator. The new mobile operator will be able to obtain 60% spectrum at a subsidised price in a separate auction from the incumbents. In addition, the IDA will also set a lower indicative reserve price of S$40.0 million for the entire spectrum 40% set-aside block. This proposed spectrum set-aside block will include a combination of both
20% low and high frequency spectrum. Low frequency spectrum has better propagation Market Market Share % / 0% characteristics: 1) they can provide better indoor signal strength and 2) greater connectivity range.
4 Key Effects on Incumbents: There will be four key effects on the incumbents. Firstly, Orange SA SFR Bouygues SA Iliad SA the reduction in low-frequency spectrum allocated to the rest of the MNOs will result in gaps in their mobile coverage. The MNOs will have to increase capex to build cell towers for greater mobile coverage. Secondly, incumbent MNOs may also have to migrate their subscribers out of their existing 900 MHz spectrum holdings, which will result in additional costs. In addition, the decreased supply of an already scarce resource to them would Figure 15 : Mobile ARPU of French Telecoms cause the incumbents to increase their bids for the remaining spectrum rights. Lastly, with increased competition, there is likely to be a fall in the subscriber base and ARPU that the
50.0 € incumbents can charge. This phenomenon can be observed in a precedent example in 40.0 France. 30.0
20.0 In France before 2012, the incumbent telecom operators enjoyed high profit margins and 10.0 was able to charge plans ranging from €32.0 to €36.0. However, the entry of a fourth Mobile / ARPU 0.0 operator, Free mobile, put that to an end. Free Mobile attracted French subscribers with its low-cost offers, starting from just €2 a month. In a space of a few years, there was clear loss of market share to Free mobile, as they achieved 8% market share, while the Orange SA SFR incumbents lost between 3.5% to 5.3% (Refer to Figure 14). Moreover, mobile ARPU Bouygues SA Iliad SA declined 28-32%, as the extent of Free Mobile’s discounts triggered a price war from the incumbents to stem revenue declines (Refer to Figure 15).
Starhub and M1 most affected: Going forward, we believe we are likely to see similar Figure 16 : EBITDA Margins of French Telecoms price declines, losses in market share and an increase in customer acquisition costs by the incumbent operators. The introduction of the 4th MNO will particularly be of concern to
50% StarHub and M1, as most of their operations are based in Singapore. One key difference 40% will be the rollout time between France and Singapore. As IDA has explicitly stated its reluctance to support a roaming agreement for the 4th operator to “reduce the reliance of 30% the 4th operator on any incumbent” and “expeditiously rollout its own infrastructure”, the 20% earliest time we would see a 4th mobile operator in the market would be April 2017. Nevertheless, we believe that margins would decrease (Refer to Figure 16), as the 10%
incumbents increase customer acquisition efforts to retain and attract new customers EBITDA EBITDA Margins % / 0% before the introduction of the 4th operator. In addition, the 4th operator would be able to 2009 2010 2011 2012 2013 2014 benefit from low frequency spectrums, which reduces their capex needs, and allow them Orange SA SFR Bouygues SA to achieve the same mobile coverage as the incumbents.
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Figure 17: Mobile Data usage compared to Mobile ARPU Investment Thesis 2: Broadband and Wi-Fi Cannibalizing Mobile Data Usage Mobile Data Usage Starhub Singtel M1 With the increasing popularity of over-the-top (OTT) service providers, traditional SMS and 12 $80.0 calls are under threat from data driven substitutes such as Line and Skype. The provision 10 $76.0 of OTT services is in the process of obsoleting the need for traditional services such as 8 $72.0 SMS-es and calls (with Whatsapp and Facebook featuring call services, which are 6 becoming increasingly efficient and popular), leading to a decrease in revenue from $68.0
4 traditional mobile revenue sources. Therefore, with data usage as the key component of Mobile APRU 2 $64.0 post-paid mobile revenue, telecom operators have attempted to tap on the increase in data usage by introducing tiered data plans. Due to the migration of customers from 2G/3G to 0 $60.0
Mobile (in DataPetabyte) 4G and the popularity of data intensive social networking services (SNS) such as Vine,
2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 1Q13 Instagram and Tumblr, we believe data consumption would be higher as a result. However, the roll out of the New Gen NBN and Wireless@SG hotspots have undermined telecom operators’ attempts to monetise this increase in data usage. The increased affordability and availability of free wireless hotspots decreases the amount of data that is overused per customer and thus we see limited upside in the post-paid segment.
Figure 18: Singtel users who exceed data caps Wireless@SG Reduces Time on Mobile: Despite the increase in affordability of broadband, telecom operators have been unable to monetise the increase in data usage.
30.0% 80.0% The increase in number of broadband subscriptions increases the connectivity for
25.0% subscribers at home and at work. For example, the number of residential wired broadband 60.0% subscriptions and corporate wired broadband subscriptions have increased by 21% and
20.0% tiered 7% respectively in the last three years. Furthermore, to support the growth in demand for 15.0% 40.0% free public Wi-Fi services, the IDA, with the support of Wireless@SG operators and venue 10.0% owners, will roll out more hotspots progressively. By 2016, the IDA will double the total 20.0% postpaid
5.0% % %
% exceed exceed % datacaps number of hotspots to 20,000. Since the launch of Wireless@SG, usage of the service has 0.0% 0.0% increased six-fold and now stands at nearly 32 hours per user per month. SMEs that are 1Q13 3Q13 1Q14 3Q14 1Q15 keen to offer Wireless@SG services at their premises can apply for a one-time subsidy capped at $2,400 from IDA to offset the cost of wireless equipment. 50% of the monthly recurrent cost of the fibre subscription plan will also be subsidised, capped at $120/month. Hence, with cheap broadband and the government’s plans to expand connectivity, consumers will be able to access data easily, be it at home or at the workplace, thus Figure 19: StarHub users who exceed data caps reducing the amount of mobile data they use through their phones.
25.0% 80.0% Since the shift to tiered data plans, given the popularity of data and with data taking a
20.0% central role in mobile communication/entertainment, mobile ARPU has been kept afloat by
60.0% subscribers who exceed their data caps. Moreover, mobile video is by far the biggest tiered 15.0% driver of the usage in mobile data. Data collected by Gartner from various mobile providers 40.0% 10.0% suggests that mobile video streaming is generating 50% of all mobile data due to its intense rate of data consumption through, with intensity defined as the amount of data 20.0% postpaid 5.0%
% % used per minute. However, with the increase in the accessibility of hotspots nationwide % exceed exceed % datacaps 0.0% 0.0% providing users with convenient access to free data sources coupled with a cap on data 1Q13 3Q13 1Q14 3Q14 1Q15 usage intensity due to technological advances, we believe that growth on revenue charged on over-usage of data is limited. This phenomenon can be observed from the slowing increase in users who exceed their data caps. The % of tiered subscribers who exceed their data caps have remained constant at 23% in the past few quarters after an initial steady increase. We believe that with increased connectivity now changing data Figure 20: M1 users who exceed data caps consumption patterns due to the accessibility of free data sources through the overlapping Wifi hotspots around Singapore as part of the NGNBN, the value-added service (VAS) 25.0% 80.0%
charged for exceeding data caps will decrease going forward.
20.0% 60.0%
tiered Figure 21: Excess local data charges 15.0% 40.0% 10.0% Criteria Starhub SingTel M1 For 3G: $5.35 20.0% postpaid 5.0% Excess Local Data Charges $8.56/GB $10.70
% % For 4G: $10.70
% exceed exceed % datacaps 0.0% 0.0% 1Q13 3Q13 1Q14 3Q14 1Q15
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Investment Thesis 3: Stagnating Growth in the pay TV Business
Figure 22: Pay TV Segment Revenue and Growth Rates The payTV segment, which contributed 16.3% to StarHub’s revenue in 2014, is the second $420 20% largest revenue driver and its composition of total revenue has remained constant since
$400 15% 2011. The segment is expected to stagnate due to a lack of content exclusivity, saturation of $380 10% subscriber base and substitution risks from Over-the-Top (OTT) steaming services. Millions $360 5% Subscriber base has remained constant with a muted growth range between -1.7% to 1.7% $340 0% since 2010. The cross-carriage regime has resulted in Starhub losing its dominant position in $320 -5% the payTV segment, as it can no longer differentiate itself through content exclusivity. $300 -10% Furthermore, given its failure to secure the rights to broadcast the Barclay’s Premier League 2007 2008 2009 2010 2011 2012 2013 2014 matches, ARPU fell 14.3% to $48 in 2010. We expect the convergence of content offering to Pay TV segment revenue Growth Rate (%) result in intensified price competition, limiting ARPU growth potential.
Figure 23: Percentage composition of Pay TV segment revenue Lack of content exclusivity due to cross-carriage regime: In September 2009, after Starhub lost its exclusive agreement to broadcast the Barclay’s Premier League (BPL) $3,000 16.5% 16.4% football matches from 2010 to 2013, revenue from the segment fell 0.83% in 2009. Following $2,500 16.3% the Media Development Authority’s announcement that payTV retailers will have to cross- $2,000 16.2%
16.1% carry content as part of Singapore’s NGNBN in 2010, the exclusiveness of Starhub’s $1,500 16.0% 15.9% featured content was eliminated, limiting the growth in its subscriber base since 2010. With Millions $1,000 15.8% the convergence of content and the loss of Starhub’s dominant position in offering exclusive $500 15.7% 15.6% content, we expect more competition on price offering, limiting any substantial upside in the $- 15.5% segment’s ARPU. 2011 2012 2013 2014
Pay TV segment revenue Total Revenue % Composition Saturation of Subscriber Base and limited ARPU growth potential: Starhub’s Figure 24: Comparison of Starhub and Singtel Pay payTV base has seen net additions after hitting a low in 1Q2014 (See Figure 24). Ever since TV Revenue 2010, Singtel’s ARPU remained at $41, while Starhub’s ARPU flattened out at $51. ARPUs $450 appear to have hit a plateau, indicating a lull in the intensified competition due to Singtel’s $400 OTT offering. Even though total revenue in the payTV industry grew by 13.0% in 2014, it was $350 driven by top-line improvements of 15.0% by Singtel and 1.0% by Starhub. Given that $300
$250 Singtel’s broadcast rights to the BPL lasts till 2016 with no major sporting events for 2015,
$200 ARPU is expected to remain at current levels for the next two years. At the end of 2014, Millions $150 SingTel had 420,000 mio TV subscribers (up 0.1% from 418,000 in 2013), while StarHub $100 had 542,000 pay TV subscribers (up 1.7% from 533,000 y-o-y). The current penetration rate $50 of cable television among households is 70% as of 2014 and is expected to reach 92.7% by $- 2007 2008 2009 2010 2011 2012 2013 2014 2030. With existing high levels of penetration, we believe that the payTV industry is saturated and expect annual growth rates to remain muted for the year ahead. Singtel Starhub Substitution risks from Over-the-Top (OTT) streaming services: Even though Figure 25: Total Pay TV Subscriber Base and ARPU Starhub’s payTV base has started experiencing net additions after bottoming out in the 1st $60 550,000 540,000 quarter of 2014, the segment continues to face substitution risks from OTT services given $55 530,000 increasing consumer preference for online streaming content. Based on a survey by the $50 520,000 Media Development Authority (MDA) of Singapore in 2013, local consumers are spending $45 510,000 significant amounts of time accessing the internet for media related content. In a typical 500,000 $40 week, local consumers spend approximately 4.6 hours (16.4% decrease from 2011) on 490,000 StarHub’s cable TV. Contrastingly, an average local consumer spends 12.9 hours a week $35 480,000 2007 2008 2009 2010 2011 2012 2013 2014 (89.7% increase from 2011) using the internet to access media-related content.
Subscriber Base ARPU PayTV segment losing its lustre: With the use of VPN (Virtual Private Networks), viewers will be able to subscribe for services from online providers like Hulu and Netflix to gain Figure 26: Average Prices (USD) of Netflix in access to an extensive library of media content at significantly lower price points, as Other Countries in 2015 Country Price (USD) compared to StarHub. ViewQwest recently launched an agnostic VPN set-top box, which Argentina 4.75 would allow users to access content from international streaming sites including Netflix and Chile 6.61 Viki. Netflix is also poised to launch its online streaming services in Singapore by early 2016. Mexico 7.60 Even though price plans have not been fixed, average prices charged by Netflix in other Canada 7.78 countries are significantly lower than Starhub’s current ARPU, potentially exerting a Colombia 7.82 downward pressure on future ARPU once Netflix enters Singapore. Furthermore, Singtel Brazil 7.98 launched its HOOQ OTT video streaming service, priced at 149 pessos (approximately Japan 8.01 USD3.29) in Philippines, to leverage on the increasing popularity of online media content. United States 8.16 Switzerland 9.80 UK & Ireland 10.89 Given the popularity of online streaming content with consumers, with online streaming being Netherlands 11.38 a direct substitute to payTV content, the affordability/availability of OTT, coupled with France 11.88 superior streaming services in the form of fast broadband, we would expect the payTV Sweden 12.36 subscriber base to fall from its current level. This dulls the key differentiating edge provided Norway 13.44 by payTV content as part of Starhub’s hubbing strategy. This will expose Starhub to greater Denmark 15.11 price competition, which will affect the significant margins it has on its payTV segment.
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Capax Infiniti CFA Institute Research Challenge
Valuation We have considered two approaches to value Starhub – Discounted Cash Flow (DCF) model, Dividend Discount Model (DDM) and relative valuation.
Starhub Valuation -- Range of Implied Per Share Price DCF Valuation
WACC -- 4.9%-5.4%, Terminal Growth -- 0% to 1.5%
Dividend Discount Model Cost of Equity -- 5.1%- 5.6%, Terminal Growth -- 0% to 2.5%
Market Comparables
Forward EV/Revenue
Forward EV/EBITDA
WACC Input Forward P/E Risk-Free Rate 2.97% Expected Trailing EV/Revenue Market Return 7.50% Cost of Debt 3.09% Trailing EV/EBITDA Marginal Tax Rate 17.00% Debt 688 Trailing P/E Equity 6,279 $0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 $7.00 Assets 6,967 DCF Valuation
We used a two-stage Discounted Cash Flow: Free Cash Flow to Firm model. We subsequently deduct the value of net debt from the free cash flow to the firm to obtain equity Risk-Free Rate 2.97% value. We divide equity value by the number of shares to obtain Starhub’s intrinsic share Equity Risk Premium 2.36% price. The base case takes into account the introduction of the 4th MNO, as that is the Beta 0.52 highest probability event at 50%. The assumptions for the model was formulated using Country Premium 4.53% guidance from historical performance of the French telecoms after the entry of the 4th MNO Expected Market Return 7.50% operator, the company’s guidance on capex and margins. The DCF is most sensitive to the Risk-Free Rate 2.97% following factors, the derivations of which are explained below: Cost of Equity 5.3%
Weighted Average Cost of Capital (WACC)
We used the average yield to maturity for the 10-year Singapore bond from June 1998- September 2015. For market return, we calculated the expected market return of the Straits Times Index. To calculate Beta, linear regressions of telecoms in the region were run against Cost of Debt 3.09% their respective national indices. Telecoms that were chosen were telecom with similar 4G Weight of Debt 9.9% penetration in the market and mainly mature telecom industries like Singapore. We Cost of Equity 5.3% subsequently adjusted the betas obtained and obtained a median beta of 0.48. Using a Weight of Equity 90.1% debt/equity ratio of 0.11 and Singapore’s corporate tax rate, we obtained a levered beta of WACC 5.1% 0.52. This beta makes sense, as telecom industries are generally non-cyclical defensive stocks. For the cost of debt, we used the interest rate of 3.08% on Starhub’s medium term notes. We used the current capital structure of Starhub and obtained a WACC of 5.1%.
Terminal Growth
Median EV/EBITDA 6.9x We used a terminal growth rate equal to expected inflation of 1% to forecast the terminal EBITDA $ 747.90 value by the Gordon growth method. Enterprise Value $ 5,160.51 +Debt $ 687.50 Relative Valuation -Cash $ (264.20) Equity Value $ 5,583.81 For relative valuation, we used a list of companies similar to the companies for our beta. Number of Shares 1726.32 Using a median EV/EBITDA ratio of 6.9x, we obtained a share price of $3.23.Other valuation Implied Share Price $ 3.23 methods such as Price/Earnings ratio also gave us a share price similar to the target price of $3.25.
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Financial Analysis Figure 27: Total Revenue for StarHub
$2,550M Total revenue 2012 2013 2014 2015F 2016F 2017F 2018F 2019F $2,500M Profitability $2,450M Return on Assets % 20% 20% 19% 17% 15% 11% 8% 7% Return on Capital % 38% 40% 38% 33% 29% 21% 15% 12% $2,400M
Return on Equity % 574% 343% 249% 238% 217% 170% 175% 306%
$2,350M
2,491
2,473
$2,300M Margin Analysis
2,422
2,411
2,387 2,370 Gross Margin % 58.3% 60.3% 60.2% 61.0% 61.0% 61.1% 61.1% 61.2%
$2,250M 2,327
2,300 SG&A Margin % 11.0% 11.7% 11.5% 11.1% 11.0% 11.4% 11.8% 12.0% $2,200M EBITDA Margin % 29.7% 31.4% 31.3% 31.1% 31.2% 29.9% 28.5% 28.0% 2012 2013 2014 2015F2016F2017F2018F2019F EBIT Margin % 18.5% 20.0% 20.0% 17.5% 16.4% 13.1% 9.7% 7.6%
Net Income Margin % 14.8% 16.0% 15.5% 13.7% 12.6% 9.7% 6.9% 5.2%
Asset Turnover Total Asset Turnover 1.3x 1.3x 1.2x 1.3x 1.2x 1.2x 1.2x 1.3x Fixed Asset Turnover 2.0x 1.9x 1.8x 1.9x 1.7x 1.7x 1.8x 1.9x Figure 28: EBITDA and SG&A Margins Accounts Receivable Turnover 14.7x 15.2x 14.8x 14.9x 14.9x 14.9x 14.9x 14.9x 35% 31.4% 31.3% 31.1% 31.2% Inventory Turnover 36.0x 21.8x 22.4x 25.3x 23.1x 23.5x 23.9x 23.5x 29.7% 29.9% 28.5% 30% 28.0% Short Term Liquidity 25% Current Ratio 0.7x 0.7x 0.6x 0.5x 0.5x 0.5x 0.5x 0.6x 20% Quick Ratio 0.4x 0.4x 0.3x 0.3x 0.3x 0.3x 0.3x 0.3x
15% 11.0% 11.7% 11.5% 11.1% 11.0% 11.4% 11.8% 12.0% Long Term Solvency 10% Total Debt/Capital 91.7% 86.1% 82.2% 83.7% 84.6% 85.5% 89.7% 95.0% LT Debt/Capital 91.7% 86.1% 58.3% 55.9% 51.9% 51.2% 54.3% 62.7% 5% 2012 2013 2014 2015F 2016F 2017F 2018F 2019F Total Liabilities/Total Assets 96.6% 94.1% 92.5% 92.8% 93.0% 93.3% 95.3% 97.9%
EBITDA Margin % SG&A Margin % Interest coverage ratio EBIT / Interest Exp. 22.4x 25.2x 21.1x 16.1x 13.5x 9.6x 6.9x 5.7x
EBITDA / Interest Exp. 36.0x 39.5x 33.1x 28.6x 25.8x 22.0x 20.1x 21.0x
Worsening margins due to competitive mobile environment: As StarHub’s mobile segment continues to face declining prepaid subscriber segment and headwind Figure 29: Debt/Capital Ratios from post-paid ARPU, margins have been adversely affected. As competition intensifies 100% with the entrance of a 4th telco, we expect operating expenses to go up significantly as 80% StarHub increases customer acquisitions and customer retention efforts. We expect SG&A
margin to rise from 11.5% to 12% from 2014 to 2019.
60%
As a result we forecast EBITDA margins to fall by a CAGR of 2.2% from 2014 to 2019 with
40% 91.7%
86.1%
increasing operating costs. This is heightened by falling revenues which we forecast to fall
58.3% 58.3% by a CAGR of 0.74% from 2014 to 2019.
20%
43.9%
43.4%
38.8%
27.3% 25.2% 0% 24.8% High debt level to limit returns for StarHub: Since 2012, StarHub has had higher 2012 2013 2014 M1 Singtel starhub debt to capital ratios as compared to Singtel and M1. In 2014, StarHub’s debt/capital ratio was 58.3%, significantly higher than Singtel’s 25.2% and M1’s 43.4%. Going forward, we see the higher debt levels to limit StarHub’s ability to lever its growth.
Forecasting an increase in debt levels as StarHub seeks to lever its growth, we still forecast decreasing profitability levels for StarHub. With greater opportunity for its peers to lever with debt, we see StarHub’s higher debt levels and weakening growth to suggest Figure 30: FCFF and CAPEX that StarHub is poised for decline. $600M 483 $500M Decreasing Free Cash Flow to limit dividend opportunity: FCF for StarHub has 414 369 been decreasing since 2012 as a result of poor business. As StarHub operates in an asset $400M 343 354 354 345 353 intensive business, it has spent heavily on capital expenditure to maintain and grow its $300M infrastructure. Thus, we forecast a declining FCF as top line growth declines due to 308 272 302 321 284 $200M 241 257 259 intensified competition while CAPEX expenditures remains flat. $100M Consequently, we expect lower FCF to translate to lower dividend returns to shareholders. - We do not expect StarHub to be able to maintain its S$0.20 DPS and we expect this to fall 2012 2013 2014 2015F2016F2017F2018F2019F as its FCF declines. We note that on a dividend play perspective, M1 has had higher Free Cash Flow CAPEX dividend yields.
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Upside Risk Figure 31: No. of new business and % growth
Regulatory Risk 1 (RR1) | Support from IDA in iSPRINT packages enhances growth in enterprise segment: Over the past two years, revenue growth of StarHub RR1 has been primarily driven by the enterprise segment that accounts for 16.4% of revenues. Fixed network services revenue grew YoY by 5% and this is due to increasing take up rate by internet data services by SMEs. The enhanced iSPRINT packages that was granted in 1st April 2015 caused an increase in revenues QoQ in 2Q15 by 6.3% from what was previously a decline in revenues by 10%. Thus, we foresee that this continued
Probability support can boost revenue growth in StarHub, resulting in upside risk.
OR RR2 Mitigation 1: Limited growth from data and internet revenue: However, we believe that this revenue uptick is only temporary and will eventually taper off. This is due to the declining growth in the number of new businesses at -20.1% YTD and the existing Impact manpower challenges that Singapore faces causing limited SME growth. Hence, this suggests that there is limited growth in the overall SME segment that Telcos can target. Risk Mitigating Strategy Furthermore, there are strong incumbents such as MyRepublic and SingTel, the pioneer RR1 1. Revenue to taper off due to and dominant player in the SME space, respectively, that underlines the limited share declining growth in new business grab by StarHub. The relative complexity of enterprise services causes the churn rate in and limited share grab the segment to be lower (compared to residential) and despite SMEs being more price- 2. Price competition from business sensitive, market share erosion by StarHub is expected to occur in the distant future. voice revenue RR2 Funding from investors and IDA Mitigation 2: Unsustainable price competition from voice revenue: Further subsidies to support the bid of a 4th contributing to fixed network services is business voice revenues at c.16% of the fixed operator network revenue share. Business voice revenue declined YoY by 6% and revenue CAGR OR1 Late entrant and unable to match up for the past 3 years is at -4.8%. This is attributed to price erosion in the market and is with competitors expected to continue as stiff competition rises. Other internet telephony service providers such as MyRepublic and Consistel are both offering business voice at competitive prices and there are various other pure-play SIP trunking providers that contributes to the price pressure. Coupled with declining consumption of IDD and overall decline of voice traffic, Figure 32: No. of new business (‘000) and growth even partnership with Avaya to deliver unified communications services is dated and 100 100.0% does not offer a compelling profile for price differentiation. Thus, revenues from business 80.6% voice remains supressed and this negates revenue growth in the fixed network segment. 80 th 26.6% 50.0% Regulatory Risk 2 (RR2) | Lack of bids for the 4 operator: In the last 2 bids, 60 IDA has reserved a spectrum for a 4th operator but there were no bids as they were 15.8% -4.3% unable to raise sufficient funds for the venture. 40 36 0.0% 29 Mitigation: Support from IDA and investors to encourage more bids: However, with 20 20 -20.1% Indonesian telco Sunshine Network and French telco Free injecting over S$30mm in 14 16 MyRepublic’s last fundraising, we believe that it will be able to raise sufficient funds from 0 -50.0% these cornerstone investors once IDA has clarified its support for the 4th operator. 2011 2012 2013 2014 YTD 2015 Furthermore, IDA is offering a 60% discount on the starting price of the auction to ensure that the 60MHz spectrum is taken up by the prospective newcomer. Overall, this suggest Formation Cessation a high likelihood of a 4th operator in the next bid. Existing % change Operational Risk (OR) | Realising potential on CAPEX investments. StarHub has increased CAPEX investments with focus on enterprise segment at an average rate of 13% of revenues yearly with the most recent increase in 2Q15 by 43% to S$96mm Figure 33: Declining growth of business voice compared to one year ago. This investment could translate into future value for the firm. 64.7 62.8 -4.8% Mitigation: Still pales in comparison to threat by competitors: Then again, we CAGR believe that this would take time to have a positive financial impact. Despite steady movements up the enterprise value chain to include capabilities such as cloud, M2M, 57.5 security and data analytics, StarHub is a late entrant in offering these services and their 55.8 CAPEX are pale in comparison with SingTel at S$2.2Bn YoY.
Conclusion
2012 2013 2014 YTD 2015 Overall, StarHub does not offer a compelling risk-reward profile for investors given their positioning against macroeconomic headwinds, poor monetisation strategies and limited Business Voice Revenue (SGD'mm) growth potential that all points to a SELL call with 10.5% downside to a TP of $3.25.
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Appendix I: Broadband Outllok
Figure 1 75 Figures in S$ 0.3 With the increasing popularity of over-the-top (OTT) service providers, traditional SMS and calls are under threat from data driven substitutes such as Line and Skype. The provision 60 of OTT services is in the process of obsoleting the need for traditional services such as 0.2 45 SMS-es and calls (with Whatsapp and Facebook featuring call services, which are becoming increasingly efficient and popular), leading to a decrease in revenue from 30 0.1 traditional mobile revenue sources. Therefore, with data usage as the key component of 15 post-paid mobile revenue, telecom operators have attempted to tap on the increase in 0 0 data usage by introducing tiered data plans. Due to the migration of customers from Singtel StarHub M1 VQ MyRepublic 2G/3G to 4G and the popularity of data intensive social networking services (SNS) such as 1000 MBPS Plan Cost (LHS) Price per Megabyte (RHS) Vine, Instagram and Tumblr, we believe data consumption would be higher as a result. However, the roll out of the New Gen NBN and Wireless@SG hotspots have undermined telecom operators’ attempts to monetise this increase in data usage. The increased affordability and availability of free wireless hotspots decreases the amount of data that is
Figure 2 overused per customer and thus we see limited upside in the post-paid segment.
300 440 444 448 500 422 469 450 250 400 Singapore’s Broadband Outlook: With the roll out of the (NGNBN) to be completed in 200 350 2015, Singapore is poised for the transition into a nation-wide fibre optics network 300 coverage. NGNBN increases the affordability of broadband for residential households and 150 250 236 243 251 242 200 enterprises, meaning that more users can link up to free Wi-Fi at home and at work. For 100 202 150 example, the number of residential wired broadband subscriptions and corporate wired 100 50 47 46 47 45 36 50 broadband subscriptions have increased by 21% and 7% respectively in the last three 0 0 years. In addition, the NGNBN has also diminished the telecom operator’s ability to 2010 2011 2012 2013 2014 monetise faster data speeds. This has ensured that high speed fibre services are not a Broadband Revenue in S$ mn (LHS) differentiated service that consumers could be charged a premium for, as the dynamics have remained a cost competitive structure. With Korea as the most comparable reference BroadBand Subscribers in '000 Households (RHS) point to gauge the prospects of high speed broadband in Singapore, the outlook seems
ARPU per month in S$ stagnant, at best.
Figure 3 StarHub’s prospects in its broadband segment is severely hampered by its ability to raise SK Broadband ARPU (KRW) its top-line from high speed broadband services. The cause of this is attributable to two main reasons. 20,948 19,574 18,150 16,906 Commoditised Nature of Broadband Speed: Its ability to raise its top-line is hampered 15,292 by the commoditised nature of the broadband market in Singapore. This is due to the intensified price competition between high speed fibre internet service providers started by MyRepublic, ending up in price levels as shown in Figure 1. As a result, recent developments from high speed fibre optics network have not effected change to this cost competitive structure as previously mentioned. . 2010 2011 2012 2013 2014 Poor Monetisation of Fibre Optic Network: The switch from cable broadband to fibre SK Broadband ARPU optics broadband has not yielded an increase in ARPU for StarHub or any of the players in Linear (SK Broadband ARPU) the broadband market. Going forward, we believe revenue drivers for growth would be absent as we use Korea as a comparative example. Both Korea and Singapore have very Figure 4 similar factors at play, with strong government support for the establishment of a high Korea Fixed Line Industry Revenue (KRW bn) speed internet network across the country, a highly urbanised and dense population, an eager and technology-savvy market and an open network for internet service. Moreover, both have made the switch into high speed fibre broadband as is part of their national 12,771 12,985 12,903 12,859 policy. Korea’s fixed broadband prices have ranged between US$22.2-US$33.9 according 2,011 2,492 2,539 2,654 to the latest data from OECD1, which is lower than that of Singapore’s but provides higher connectivity speeds according to Akamai2. Moreover, SK Broadband, a pure play 7,754 7,460 7,303 7,047 broadband firm in Korea with significant market share, has seen its ARPU decrease 27% from 2010-2014 (Appendix 3). This would be attributed to the strong cost competition
3,006 3,033 3,061 3,158 between broadband service providers, that is encourage by the government, due to the open network scheme where broadband providers must share the cables that provide 2011 2012 2013 2014 internet signals to consumers’ for a fee. This strong competition in the entire industry is
SK Broadband KT LGU reflected in the fixed line industry’s muted growth, with overall revenue of the top 3 broadband providers declining 1.5% from 2010-2014, underlined in Appendix 4. Drawing parallels between Korea and Singapore’s high speed internet industry; it is reasonable to conclude that, at best, revenues for broadband would remain stagnant for the future.
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Appendix II: MVNO Case Study in South Korea
Smartphone users in Singapore might still be getting used to the rapid connections offered by 4G mobile networks, but South Korea first rolled out the technology in 2006. Now, the country’s telecom networks are racing to develop a 5G network to attract more mobile subscribers in a saturated market. It has one of the largest smartphone and tablet PC user bases in the world at 41.4 million and 564,000 respectively. With the fastest network in the world, consumers are happy to spend on mobile services and keen to upgrade to the latest services. This desire to upgrade is essential for a saturated market, where organic growth has plateaued more than five years ago. There is no real top-line growth and the three major telecom providers, SK Telecom, KT Strategy and LG U+, have engaged in intense price competition and bundling of services to boost their market share. Nevertheless, the government has regulated the market heavily to advantage smaller Figure 1: South Korea Wireless ARPU players such as mobile virtual network operators (MVNO) and is keen to introduce a fourth mobile network operator to increase competition and consumer choice. The emergence of MVNOs, heavier regulation and greater product differentiation will be the key trends shaping the telecoms industry in South Korea.
5,000,000 SKT KT Product Differentiation over Price Competition 4,000,000
3,000,000 South Korea is a mature mobile market which supports the emergence of latest services and devices. With 3G to 4G migration the main driver of growth, success from new 2,000,000 networks frequently relies on having a critical mass of subscribers to spread out the fixed 1,000,000 cost of network roll-out. This market share needs to be secured at the onset as it is more
NumberSubscribers of 0 difficult for telecom carriers to entice customers away from competitors once they are tied- up in postpaid plans. Consequently, operators increase their promotional sending and target one of the most important considerations behind the consumer’s purchasing decision – the availability of handset subsidies – to lower the cost of owning expensive Figure 2: Number of MVNO Subscribers by smartphone models by prospective customers. telecom carriers
Consumers’ enthusiastic embrace of first 3G and then 4G technology has had a positive impact on operator APRUs, as operators have successfully encouraged subscribers to 400000 50 spend more as they upgrade to the next generation platforms. Presently, LTE migration 300000 40 has been largely a result of both the novelty factor and handset subsidies in the industry. 30 200000 Increasing competition to sign up subscribers to LTE services will mean APRUs continue
20 to decline in the medium term. 100000 10
0 0 Spending
Revenue Revenue (in mn) KRW However, the excessive price competition based on handset subsidies and multi-billion
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 dollar marketing programs has caused the South Korean regulator, Korea Wireless Revenue Communications Commission (KCC) to impose a handset subsidy cap to break up a price Wireline Revenue % AS GLobal of Wireless Capital war between the three operators. Nevertheless, the search for higher APRUs will continue Korean Wireless Capital Spending in the form in greater investments in infrastructure and innovative products to attract new consumers who wish to upgrade. In H215, the telecoms regulator aims to hold a spectrum auction for 700MHz bandwidth. The 700MHz band could help operators to deploy 5G networks using fewer base stations than are needed for 3G/4G services. In addition, the Figure 3: Key Industry Statistics in South Korea telecom carriers have also engaged in product innovation to deliver the fastest and best possible service to attract a burgeoning market. (See Figure 2) This battle to win greater market share will depend highly on the success of their technologies and whoever has the first-mover advantage.
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Upcoming Developments SK Telecom KT LG U+ Developed two technologies Entered a partnership with Launched a voice-over-LTE for 5G network Nokia to complete trials of 4- (VoLTE) roaming service in transmit-4-receiver antenna April 2015 with Japan-based st 1 : Orchestration -- aimed at technology: telecoms operator KDDI: assisting engineers design, -can expand LTE coverage -facilitate high-definition voice develop and establish mobile range from a single base and video calls for LG Uplus services on a cloud network station to up to 120km and KDDI subscribers over 2nd: Cloud Virtualised Radio -supports a maximum the operator's respective 4G Access Network has been downlink data speed of up to networks developed to build base 100Mbps -enable LG Uplus subscribers stations for the 5G Network to use the service while roaming abroad.
Heavier Regulation As mobile networks are an essential technology, the three telecom providers in South Korea are heavily regulated by the KCC. Apart from the handset subsidy cap, the KCC is pushing for mobile operators to cut call and data usage charges to help achieve lower monthly bills in a time of stagnant economic growth. In particular, the introduction of a handset distribution law would weigh on the ARPU of operators. Under the new reform, operators must offer consumers the choice to choose between handset or tariff discounts. The government is also contemplating new legislation requiring carriers to disclose incentives they offer to clients. These regulations are likely to spur competition and level the playing field between large operators and MVNOs. It may also encourage greater collaboration between telecom carriers and MVNOs.
Heralding the rise of MVNOs MVNOs are companies that provide mobile communication services, sells subscriptions to customers under their own brand but do not have their own spectrum license. A MVNO simply rents the required bandwidth to convey its communication and value-added services from an existing telecom carrier. These partnerships can create a win-win environment for both telecom operators and MVNOs. Telecom operators can continue to serve their customers while making bulk sales of bandwidth to companies or brands that want to function as MVNOs thus increasing their sources of revenue. The telecom carriers can also strengthen brand image and power by providing value-added services to its customer under its own brand. Figure 3: Number of MVNO Subscribers by telecom carriers \s While some operators attempt to undercut MVNOs to protect their own margins, the proliferation of MVNOs are an inevitable development of a mature telecommunications industry. MVNO subscriptions have grown rapidly and passed the 5 million mark in mid- April 2015. The KCC has expressed strong support behind MVNOs with the introduction of wider initiatives that protects MVNOs. Initiatives being considered include the lowering of wholesale network and spectrum access charges payable by MVNOs to their host network partners, as well as deferring MVNOs’ spectrum usage payments by another year. MVNOs also provide niche services at more affordable prices, while allowing the telecom carriers to focus on infrastructure development.
First Mover to introduce 5G will have an advantage
The combination of factors of regulations on price competition, limits on call and data usage charges and competition from MVNOs will shift the battleground from the marketing of handsets and subsidies to the development of better quality services or more innovative products. SK Telecom, KT and LG U+ have all unveiled ventures with other companies such as Nokia to develop faster and more reliable transmission speeds. Therefore, the key factor that will differentiate the three telecom carriers will be a first-mover advantage in launching an unparalleled 5G network. The first-mover advantage is key, as customers rarely switch between subscription plans and it will also help these telecom carriers to negotiate better collaborations with the MVNOs.
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Strategies for each Telecom SK Telecom KT LG U+ With the introduction of the handset KT plans to invest KRW4.5trn over the next LG U+ has priority access to new devices distribution law in October 2014, SK three years to roll out GiGA FTTH (fibre-to- launched by LG Electronics. Telecom is expected to shift its focus from the-home) network that offers 10x faster The firm has steadily gained market share aggressive handset subsidisation to building speed than its current internet network. over the past three years in part because the its 4G ecosystem for the longer term firm has outspent its competitors on handset KT targets growth in five future convergence subsidies during the LTE era. However, with SK Telecom will also develop new products services - smart energy, integrated safety, the handset distribution law poised to take such as the company's m-commerce portal next generation media, life-enhancing care place from October 2014, LG U+ will need to SK Planet and mobile wallet service Smart and networked transportation. rely on better quality services to gain market Wallet, entrenching its market leader share. With the new handset distribution, KT’s position. strategy is expected to shift towards better The firm has launched new unlimited LTE quality services or more innovative products. plans to continue its pursuit of LTE SK Telecom launched new unlimited voice subscribers. LG U+ provides KRW80,000 calling plans for mobile subscribers in May KT has introduced an unlimited LTE, (USD75.54) and KRW85,000 (USD80.26) 2015. The operator is offering the Band Data messaging and voice calls package for monthly packages with unlimited messaging, plans in eight different categories, ranging KRW70,000 (USD70.81) monthly from April voice calls and LTE data 2014. between KRW29,900 (USD27.32) and KRW100,000 (USD91.37) per month..
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