Mainstream
Smaller telcos fight the tide
Ng Wai Mun 
Malaysia’s mobile subscribers have declined to 42.8 million as at end of Q1
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A FALLOUT could be looming in the local telecommunications industry. Intense competition among the 13 telco players may soon spell the death knell for the smaller ones, many of which have been operating at a loss the past few years.

The fact that they are still in business has raised questions on their relevance in the industry, and analysts believe it is just a matter of time before the loss-making telcos cease operations.

“There is no such thing as a ‘one size fits all’ answer to explain the continued existence of small telecommunications companies [telcos]. One of the more common reasons is that they may be waiting for buyers,” a regional analyst says.

She says that even if she is right, there is nothing much the smaller telcos can offer as their licences are not much sought after, unlike stockbroking firms and banks.

“Most also operate under what the industry terms as mobile virtual network operators (MVNOs) where the bandwidth and equipment are leased from the bigger telcos as they lack such assets,” says the analyst.

The smaller telcos or MVNOs are FRiENDi, BuzzMe, Merchantrade, Tron, Altel, XOX, Tune Talk and REDtone. “Ultimately, it is not commercially viable to continue operating at a loss,” she says.

The analyst does not expect the bigger telcos to benefit if the smaller players cease operations.

“I doubt the bigger telcos will experience meaningful increases to their respective subscriber bases if some of the smaller ones cease operations.

“There will only be a trivial increase [to the other existing telcos’ subscriber bases] at best. The increase in subscribers is too insignificant after it is divided,” she says.

Some of the smaller telcos or MVNOs may be operating with less than 100,000 subscribers. “What is an additional few thousand subscribers to an existing telcos’ base, which is in the millions?

“And excluding the top three telcos – Celcom Axiata Bhd, Maxis Bhd and Digi.Com Bhd – the profits of the smaller ones may not come from mobile services but other telecommunication related businesses,” she says.

JF Apex Securities senior analyst Lee Cherng Wee says some smaller telcos are still active in the market as they are legally bound by contractual agreements, having bought bandwidth from the major telcos and/or are unable to sell-off the business.

Lee also sees the possibility of smaller telcos ceasing operations over the next few years as they cannot compete with the big boys in terms of branding, marketing and financial support.

Rezolut Consulting CEO and founder, Megat Ishak Maamunor Rashid says: “At the rate the market is going with its price wars, it would not be surprising if they falter and decide to leave the market.

“We have seen smaller players affected by poor take-up rates and meeting the high cost of running a telecommunication service.”

The analyst does not expect the bigger telcos to benefit if the smaller players cease operations

History repeats itself

Megat Ishak stresses that it has happened before and expects it to happen again. “One possible means of sustaining the business and maintaining their hold on the market is by innovating,” he says.

This may sound ridiculously simple, but it can make a difference if smaller players restrategise their positions in terms of product offering and focus on greenfield markets as a target.

It also helps if the MVNOs are realistic and not too bullish in estimating their subscriber acquisition figures.

On the MVNO model’s relevance compared to a few years ago, a REDtone official tells FocusM that it has seen many successful ones around the world.

“We believe the MVNO business is about crafting a strategic model around a mobile offering in a target market. It’s not about competing head-on with the big boys.

“REDtone is working with our respective agents throughout the country to market our Ansar Mobile services,” he says.

The official says REDtone’s strategy is to ride on its agents’ platform and reach out to communities such as NGOs, co-operatives and associations.

“For us, the key to success is discovering niche markets and partnerships,” he says.

On reasons REDtone moved from an MVNO to other businesses, the official says the company’s first MVNO was formed in 2009 and sold off in 2012 as part of its group’s strategic decision.

“Nevertheless, as part of the network sharing and alliance arrangement signed with Maxis in 2012, and an MVNO agreement signed in June last year are concerned, we rolled out Ansar Mobile services by leveraging on the Maxis network,” he says.

Its business strategies are constantly focused on the three pillars of growth – telecommunications services, managed telecommunications network services and industry digital services.

Ansar mobile, the official says, is part of its telecommunications services.

Megat Ishak believes that MVNOs will fail to exist if they cannot sustain their subscribers’ interest and maintain service reliability.

“The strength of their relevance depends on several key components that MVNO must have in place,” he says.

He says firstly, the product brand must be firmly entrenched in the subscriber's consciousness. This ensures brand loyalty and continued subscription, which can go a long way.

Secondly, the value-added services that a subscriber can obtain from the MVNO must be compelling.

The market has produced subscribers who are spoilt for choice. Hence, the additional push can make a difference between staying and leaving. And this is where it gets a bit complicated for most existing and new MVNOs.

Megat Ishak says: “More often than not, the MVNOs finds it difficult to retain their market hold when full-fledged telcos flex their considerable muscles.”

Thirdly, the product must be easily available to the potential subscriber. Not only must it be visible, it must also be easy to access.

Subscribers must be encouraged to have an additional line or completely switch by porting out of their existing lines in place of the new one.

Help for the sector

The analyst feels the authorities are not helping the sector by continuously charging the telcos 6% of their revenue from selected services for the Universal Service Provision (USP) fund.

Citing XOX Bhd’s FY16 ended June, she says the company recorded a pre-tax loss of RM8.3 mil while the turnover was RM161 mil. Its USP contribution would be in the region of RM7 mil to RM8 mil.

“Imagine how much better its financials will look without the USP contribution. Depending on the actual quantum paid by XOX, the losses could have turned into profits instead,” she says.

Financial comparison of selected mobile telcos
Subscribers market share by service (as at end-March) 

While the analyst acknowledges the importance of the USP fund to develop the communications sector, she says the authorities should occasionally look into easing the contribution when the economy is not doing so well.

“Instead, telcos are forced to continuously pay 6% [of their revenue] to the fund.” The 6%, she stressed is in the form of cash and not some “paper” profit.

Even for the bigger players like Digi with relatively deeper pockets and FY16 revenue of RM6.6 bil, the analysts say its [USP] contributions can be as much as RM400 mil.

“It may be trivial to a big company but that should be seen as having RM400 mil less for its own capital expenditure,” she says.

The uniqueness of the communications sector’s licensing structure should also be relooked.

The analyst says the “convergence” licensing under the Malaysian Communications And Multimedia Commission (MCMC) was formulated to be both technology and service neutral.

“One way of looking at this ‘service neutral’ term is that the authorities have no means to control the number of players in any particular market within the local communications sector.

“If they had limited the number of mobile telcos at some point, we may not be facing the current predicament,” she says.

Megat Ishak says telco price wars may force the smaller ones out of the market

Megat Ishak says even though the regulatory body, with its licensing regime, allows for new players to enter the market, the nature of the business itself has inadvertently created a Darwinian, “survival of the fittest” scenario.

 

“If you can survive the extreme market competition, carve a spot for yourself, and deal with regulatory hurdles, then you deserve to survive ahead of other players,” he says.

The outcome of such a regime, he says, is to create hardy and tough players who can weather the storm.

“At the end of the day, it is a subscriber's market where the pickings for best deals are always available,” says Megat Ishak, who is also the former director of MCMC’s licensing department.

 

Extreme conditions

However, the regional analyst plays down the disadvantage of being an MVNO.

She says the smaller telcos, be they MVNOs or otherwise, are operating under extreme conditions due to the saturated market.

This is the main reason why losses are accumulating, she says, stressing that MVNOs continuously seek to acquire the relevant licences so they can operate as full-fledged mobile telcos.

“Taking the initial path of an MVNO allows them to operate first, while awaiting licensing approval, which may take a couple of years,” the analyst says.

Transparency Market Research (TMR) says the MVNO global market, valued at US$46 bil last year, is expected to experience a compound annual growth rate of 7.4% from 2015 to 2023.

TMR is a global market intelligence company providing business information reports and services.

The analyst says this proves the MVNO model is sound, at least for the global market.

She concedes that the unique “convergence” licensing may have been ideal when it was first introduced some 20 years ago, but it is time its framework undergoes a major overhaul.

However, she doesn’t foresee this cost saving to be sufficient to turn one’s losses into profits.

In 2015, the losses posted by MVNOs ranged from a low of RM2 mil to as high as RM33 mil.

The analyst says not only are they posting losses, even some full-fledged mobile telcos are suffering likewise.

While some of the losses incurred are just on paper, the analyst believes as long as their respective operational cash flows are positive, the companies will and can continue to operate.

The latest Q1 mobile phone subscribers’ data released by MCMC indicates the top three telcos have lost market share.

Their share of the prepaid subscribers market as at end Q1 shrunk by 5% to 76% year-on-year.

Even if the smaller telcos can gain the 5%, this works out to about another 1.5 million subscribers, which will not benefit them substantially.

“Wrestling the 5% from the top three telcos is not sufficient to turn around the loss-making ones,” the analyst says.

She says as most of the smaller telcos offer prepaid mobile services, hypothetically, of the three major telcos, Digi will benefit as it has the highest number of such subscribers.

 

Declining shares

Celcom Axiata, Maxis and Digi.Com have experienced continuous declines in their combined market share since Q2 2015 – from 81.6% to 76% as at end Q1. The 76% translates to 32.5 million subscribers.

The three telcos’ combined share of the prepaid market fell more compared with the post-paid segment.

Their market share contracted by over 6% from 80% as at end Q2 2015 to 73.8% as at Q1.

In comparison, the combined post-paid market share fell by less than 5% from 88.4% to 83.8% as at end Q1.

Except between end 2015 to early last year when it recovered momentarily, Malaysia’s total mobile subscribers have been declining since hitting an all-time high of 45 million in 2014.

The total stands at 42.8 million as at end of Q1.

Digi has been gaining market share since Q2 2015 for prepaid and post-paid segments. It commands a 27.5% share of the country’s total subscribers.

In contrast, Maxis suffered a 4% loss in market share in the post-paid segment and its prepaid market share fell 2%.

Likewise, Celcom’s post-paid market share shrunk by 3% while its prepaid segment fell by 5%.

However, in terms of revenue, Maxis’ market share has been increasing since 2014 from 36% to almost 40% last year.

Given that Digi’s share has been hovering around 30%, it appears that Maxis’ higher market share is at Celcom’s expense.

The combined revenue of the three telcos declined since 2014. Celcom’s revenue fell from RM8 bil in 2013 to RM6.6 bil last year.

Of the three telcos, Maxis is the only one which recorded revenue growth since 2014.

The analyst says expressing market share in terms of subscribers is common among analysts as the revenue of the other mobile telcos is unknown.

“The lack of revenue related data means one can only compute market share among the three if one looks at it in terms of revenue,” she says.

 

Not a rosy outlook

AS the mobile telecommunication sector moves forward, analysts ask where its growth will come from?

A regional telecommunications analyst tells FocusM: “The top three mobile telecommunication companies’ (telcos) combined revenue is already declining and has been so from 2014 [if not earlier].”

The top three being Maxis Bhd, Celcom Axiata Bhd, and Digi.Com Bhd.

The combined revenue declined by 3% in 2014 to RM23 bil and by another 1% to RM22.8 bil in 2015. Last year, revenue fell by another 5% to RM21.8 bil.

The analyst attributes the declining revenue to two factors – a saturated market and consumers’ low-income growth.

“At best, subscribers’ growth will only be in line with the 1.5% annual population growth in the region.

“I think we may actually see total subscribers shrinking further.

“This is made worse by the new prepaid registration guidelines,” he says.

Second is the population’s slow income growth which restricts consumer spending.

The market hit an all-time high of 44.97 million subscribers at the end of Q4 2014.

The maximum number of prepaid subscribers – 36.8 million – was also achieved at the end of that period, while post-paid subscribers peaked only in Q4 last year when it chalked up 9.64 million.

Since the mobile telecommunications market is saturated, instead of targeting first-time subscribers, the analyst says telcos will attempt to increase their subscribers’ average spend by introducing new plans and packages.

While Digi and Celcom saw their respective average revenue per user (ARPU) declining in FY16 from the year before, Maxis’ ARPU for post-paid and prepaid subscribers increased in FY16.

“New phone models will be thrown into the packages and plans as sweeteners to entice subscribers to switch,” he says.

As much as subscribers are keen, the low increase in income is stifling consumer spending.

The country’s chief statistician Dr Mohd Uzir Mahidin says the country’s median monthly household income last year increased to RM5,228 from 2014’s RM4,585.

The mean monthly household income, in turn, rose to RM6,958 last year from 2014’s RM6,141.

After adjusting for inflation rates over the past few years, there is not much disposable income left to allow consumers the luxury of frequently opting for different packages and/or new phones.

“One can’t compute the sector’s overall revenue because, being mainly private companies, most of the smaller player’s financials are not available,” he says.

The analyst, however, estimates that the combined revenue of the other mobile telcos is only about RM4 bil to RM4.5 bil.

Adding that to the top three’s combined revenue of RM22 bil, the sector’s overall revenue is about RM26 bil.

Faced with a shrinking subscriber base and declining revenue, the sector’s outlook isn’t too rosy.

 

Mobile Virtual Network Operators (MVNO) in Malaysia

Tune Talk Sdn Bhd
TUNE Talk, officially launched in August 2009, is one of the larger mobile virtual network operators (MVNO) in the country.

The company signed an agreement with Celcom Axiata Bhd (Celcom) in December 2008 to piggyback on the latter’s networks to provide MVNO services. Tune Talk’s single largest shareholder is Celcom with a 35% stake.

Tune Group Sdn Bhd which is jointly owned by Tan Sri Tony Fernandes and Datuk Kamarudin Meranun, holds another 25.1%.

Tune Talk is also a holder of the Network Service Provider (Individual) and Application Service Provider Class licences.

Ceres Telecom Sdn Bhd
Ceres Telecom owns and operates the FRiENDi mobile brand in the country. 

FRiENDi started operations as an MVNO in 2013, riding on U Mobile’s networks. It is owned by Virgin Mobile MEA, Kumpulan Perangsang Selangor Bhd and Samena Telecom Ltd.

Ceres has held a Network Services Provider Individual Licence since February 2012 from the Malaysian Communications and Multimedia Commission.

It also holds an Application Service Provider Class Licence.

 

Talk Focus Sdn Bhd
Tron, which stands for Technology Revolution On-Net, is the brainchild of Talk Focus Sdn Bhd, an MVNO.

The company owns a Network Service Provider licence from the Malaysian Communications and Multimedia Commission since 2011. It leverages on Digi’s network to provide telecommunication services.

 

Altel Communications Sdn Bhd
Altel started operations in July 2012. It is part of the Albukhary Group of Companies controlled by tycoon Tan Sri Syed Mokhtar Albukhary.

Altel, a subsidiary of Altel Holdings, aims to be a Long Term Evolution (4G) and related telecommunications services, provider.

 

REDtone Engineering & Network Services Sdn Bhd
REDtone Engineering & Network Services Sdn Bhd and Maxis Bhd entered into a network sharing and alliance agreement in 2012.

Both companies signed an MVNO agreement in June 2016, by leveraging on the Maxis network.

REDtone rolled out its mobile service “Ansar Mobile” in September last year, specifically designed to cater to light mobile users.

 

XOX Mobile
XOX Mobile is an MVNO that started offering its services in 2005. Assigned with the mobile number prefix of 010 by the Malaysian Communications and Multimedia Commission, it mostly caters to the Chinese community.

 

Merchantrade Asia Sdn Bhd
Merchantrade is primarily a money service business operator. Two of its largest shareholders are Celcom Axiata Bhd and the Sumitomo group with stakes of 20% and 16% respectively.

It also provides telecommunication services in its capacity as an MVNO which was launched in 2007 with Celcom Axiata Bhd.

 

Mobile 8 Telco Sdn BhdEstablished in May 2013, Mobile 8’s brand Buzzme is an MVNO that partners with U Mobile to provide prepaid mobile services nationwide.

Like most mobile telcos, Buzzme provides voice, SMS, mobile Internet and IDD call services. 

 

 



This article first appeared in Focus Malaysia Issue 255.