By G. Sharmila
The Malaysian telecommunications industry is in a tight spot. Growth is slowing and new threats are creeping up on players. It is no surprise then if one were to question if the industry is as exciting as it used to be to investors although returns are still great. ____________________________________________________________________
For the uninitiated, the three key telco players with the lion’s share of the market are Maxis Communications Bhd, DiGi. Com Bhd and Celcom Axiata Bhd. Smaller players that are on the fast-track to shaking up the market are U Mobile Sdn Bhd, YTL Communications Sdn Bhd and Altel Communications Sdn Bhd. Telekom Malaysia Bhd is also a potential threat to mobile players by virtue of its recent tie-up with Green Packet Bhd.
“It is a mature market with (mobile) penetration exceeding 130%, revenue growth sliding off and margins under pressure. Competition has been very rational for years and it does look like the operators have their respective niches and ‘go to strategy’ with respect to sustaining growth”, says regional head of telecoms research for RHB Research Jeffrey Tan to KiniBiz.
“The smaller operators, while not overly disruptive in their pursuits, have succeeded in moving the telcos from their comfort zones. We believe competition is heating up with Maxis looking to make a comeback after ceding market share over the past few years,” he adds.
However Tan is positive on the telco industry’s attractiveness to investors. He says that a mature market also means that telcos are blessed with very strong operational cash flows and balance sheets allowing for generous dividend payouts. “Investors are comfortable in the defensive earnings of the sector as with the good dividend yields offered,” he says.
The ‘danger’ of data
That could very well be true, but investors may not realise that the threats and trends affecting the telco space are very real. The smartphone craze, for one, poses inherent dangers to mobile players.
Avinash Sachdeva
“The current smartphone penetration is 42% and smartphone users are growing at 20% year-on-year,” Avinash Sachdeva, senior industry analyst for telecoms, Frost & Sullivan APAC tells KiniBiz.
According to Avinash, the increase in smartphone penetration will continue to drive Internet adoption. thereby increasing the demand for data services. However, the downside to this demand is that over-the-top (OTT) applications are cannibalising traditional revenues and thereby becoming a significant threat to mobile operators.
“Malaysian mobile operators have been losing their SMS revenues over the past three years. Further to this, OTT messengers and voice calling apps are adversely impacting the minutes of usage and are cutting down their voice revenues. For FY2013, all key providers in Malaysia including Celcom, Maxis and DiGi reported low-single digit decline in their voice revenues,” Avinash explains.
“In case WhatsApp launches its full voice-calling service, it will significantly disrupt the entire mobile industry ecosystem,” he cautions.
RHB Research’s Tan concurs. “Data usage (traffic) is growing exponentially but telcos are facing challenges monetising data due to mispricing, subsidies and the lack of a critical mass of users to defray the huge investments sunk in for data. The telcos have been aggressively cutting costs via the sharing of infrastructure, outsourcing of network maintenance and even disposal of passive/non core assets to mitigate the pressure on revenues,” he says.
It appears that these are scary times indeed for mobile operators. So what else is going on in this fast-changing mobile landscape?
Current telco trends
One trend that appears increasingly pervasive is the move to 4G (fourth-generation of mobile telecommunications technology). The major telcos, namely DiGi, Celcom and Maxis rolled out their 4G services last year. So did U Mobile and YTL Communications, whereas Altel Communications plans to roll out its 4G services by year end.
“Over the next few years as the 4G adoption picks up, we expect it to be a significant revenue driver for mobile and broadband players. 4G services tend to command a premium and generate significantly higher ARPU (average revenue per user),” points out Avinash. (ARPU measures how much income a business generates, taking into account the size of its customer base.)
Another trend he observes is the ‘Internet of things’. “Current M2M (machine-to-machine) offerings are in the early stages of evolution but hold significant potential to the industry. These services offer sharing of basic data from independent devices to the main data collection centre. The services are being leveraged by some of the logistics and utilities companies in the country.”
He adds that although average revenue per SIM for these services is quite low compared to mobile subscribers, the recurring revenue potential is significant when overall deployment opportunity is factored in, such as in automobiles and electricity meters.
“As the services mature in terms of the business model and benefits, we will see significant adoption from various industries including agriculture, manufacturing, healthcare and vigilance,” he explains. According to him, Celcom and Maxis offer these services and have fewer than 50 clients collectively.
MVNOs (mobile virtual network operators) are also in the limelight currently. “Through MVNOs, telcos are getting two-fold benefits. First they are able to address the untapped market; and second, they are able to monetise the under-utilised network,” says Avinash.
“These players are targeting niche customer segments that are not being addressed by the large providers. They (MVNOs) are growing their subscriber base by more than 50% a year; and leverage alternate sales channels,” he adds.
Among the more prominent MVNOs in this country are redONE Network Sdn Bhd (owned by the REDtone Group) and XOX.Com Bhd. Are they a real threat to mobile players like DiGi, Celcom and Maxis? We will explore that further in our third story. In our second article, we speak to the telcos for their side of the story on how they are dealing with threats within and without the industry.
Another factor to consider is that telco’s are still very profitable in Malaysia. For a instance, a CIMB report indicates that the weighted average return on equity for telcos in Malaysia for 2014 is 22.6%.
This is higher than almost all regional markets. China’s is 10.4%, India 7.0%, Singapore is 17%, Indonesia is 20.7%. That is an indication that margins are still quite good in Malaysia although growth is still limited.
But there is every likelihood with increasing competition, margins may come down and put pressure on profits as well. Meantime, telcos are responding to all of these threats although it is not clear how well they will do.
Tomorrow: The mobile captains speak
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