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A peak into the future of telecom profitability 2012-Singtel, Starhub and M1

Telecom stock’s profitability is affected by technology substitutes, size of capital expenditures and the ability to monetize and fight for market share.

We talk a lot of telecom stocks at Investment Moats, and if you would like to know what I thought about them and their direction take a look at the following articles

  1. Primer to telecom investing: Singtel, M1, Starhub
  2. Starhub, M1 and Singtel’s existing telecom business model approaches end of life
  3. How the smartphone revolution will affect M1, Starhub and Singtel
  4. Smartphone revolution causing back hual problems
  5. Telecom operators in US moves to tiered pricing
  6. The rise of VOIP iPhone App Viber
  7. Starhub indicates it will review buffet price plans for tiered plans

Now I thought its time we take a peak again at the future to see if its still rosy for the telecom stocks going forward.

Near term economic moat


In the near term, telecom stocks should do pretty well. Mobile communication have become a utility and in Singapore perhaps data centric communication have become of a utility for many.

Singapore have the highest mobile smartphone penetration rate in the world. If you look at the amount of screen starers in MRT and bus you will realise how much Singaporean’s enjoy their smartphone data lifestyle.

The churn to cancel data looks very low which means that the telecom stocks can maintain their customer base for data.

For this to happen, mobile data phone plans need to remain at an affordable range.

More and more working adults are carrying more than one mobile plans. Specifically mobile data broadband. Else they are going on dual sim. This is likely to increase the amount of ARPU per customer.

Tiered Pricing

Starhub’s indication to move into tiered pricing should help better price differentiate their customer base and monetize usage. This should translate to higher revenues. The problem with the current all you can eat buffet plan is that the telecom companies cannot charge customers for higher usage.


Subsidies competition with other telecom companies are likely to remain which means we should not see this cost going down.

This year may see the roll out of LTE for all three telecoms and in that case expenditure may increase due to subsidies to improve adoption through subsidizing of LTE handsets.

Capital Expenditure

Infrastructure costs should remain constant or less. Judging by Starhub being able to save 30% of capital expenditure and operating expenditure (see here) compare to last time means that latest technology is cheaper and provide the necessary data requirements needed by consumers.

With an aggressive depreciation of older equipment, it means deprecation is higher than capital expenditure.


Regulation conditions remain controlled. The last big policy change was the cross selling of all Pay TV content. This should reduce the aggressive bidding of content.

The question is whether IDA will force the telecom companies from reducing their phone plan prices. Voice on LTE and 3G are not as expensive cost wise compare to last time.

With the technology now, the telecom companies may enjoy expanding margins. If voice is so cheap and no one uses SMS, shouldn’t your price plans be reduced? I honestly see IDA forcing them to reduce the prices and thus ARPU can be maintained.

The downside could be if IDA tells the telecom companies they cannot charge $5 for caller ID and $10 for dual sim,


Competition wlll be intense as always. In fact at current quality of service, product offering and prices, I do not see a difference between the three telecom companies.

One telecom company may choose to reduce its prices due to lower operation costs. This would spark off a price war down to the lowest price based on Nash equilibrium.

The telecom companies are likely not going to but tiered pricing will mean the three telecom companies coming up with different price plans each that make it difficult for you to compare, somewhat like what insurance companies do.

Each companies are offering value added software solutions but I reckon it does not differentiate them because they do not provide huge value add.

Who will win?

Its difficult to differentiate between the 3 even now, but I believe Singtel is the current winner in market share due to their network having a better coverage which provides a better quality of service.

However, Starhub remains nimble and provides the best free cash flow with Singtel following closely due to their lower capital expenditure cost.

Future telecom trend drivers

Multiple Technology Offering a Quality Data Pipe

We can’t tell what other wireless technology is going to be dominant after HSPDA+/LTE  but do not discount other mediums coming into the picture.

Traditional mobile telephony and SMS is going to die soon and what consumers see is who can provide me with the best “data pipe” to access the internet or make a call to communicate.

Be it WIFI, broadband, WIMAX, LTE/3G, FEMTOCELL, the telecom operators can take advantage of technology and integrate them into a comprehensive data pipe.

We all talked about the backhaul problems with growing data demand from HD movie streaming on the go, one area the telecom operators can look at is to use FEMTOCELL to reduce the load and move it via broadband fibre optics.

Customers will judge by who gives the best coverage for the lowest dollar all else being equal.

Possibility: Medium. Singapore is small, and the telecom operators may be able to upgrade their infrastructure to be able to handle a dense small area such that they do not need supplementary technology like FEMTOCELL and integrated WIFI.

The competition from cheap new entrants to kill margins

As technology gets sophisticated another problem faced by the 3 telecom companies is a 4th player. For a small country like Singapore, what used to be pretty high cost to set up fibres and all may be circumvented by advancement in WIMAX and other wireless radio technology that it becomes easy for them to set it up.

We take the case of which through its fibre broadband network and set-top boxes with WIFI and FEMTOCELL is able to offer unlimited voice calls, SMS, data at half the incumbent’s costs [full article]:

By offering a flat-rate, high-speed Internet connection for 30 euros ($43) a month. That gives’s three million subscribers a connection speed of roughly 28 megabits per second over DSL, free IPTV (and a free set-top box), a free Wi-Fi hub, and unlimited voice calls to some 70 countries.

“We are a broadband service provider,” was his matter-of-fact reply. “Everything else — from voice to IPTV to storage – is just a feature that rides on this data service.” For the rest of the telecom industry, long addicted to metered minutes and billable items, this is rebellious thinking

This is game changing and making the incumbents sit up. The incumbents who is living on metered calls and SMS have a monster on their hands. How do they competed?’s network is going to grow if they don’t do something like this.

This is made possible through shrewd innovative thinking:

“Since it is our own set-top box, we can innovate around it,” he says. “In the U.S., they buy their set-top boxes from other providers.” That’s a mistake and lost opportunity, Niel says and proceeds to outline how pivotal these set-top boxes are for his company and its future.

For example, used the set-top box for automatically sharing a portion of one’s broadband connection via Wi-Fi with other customers. Over five million set-top boxes means has a free Wi-Fi cloud enveloping major cities such as Paris. Even when away from home, you can easily get broadband instead of resorting to an expensive 3G network.

This Free.Fr free Wi-Fi network is going to play a pivotal role in the soon-to-be-launched service, which will be using 42 Mbps HSPA+ technology. The company has built a network of 15,000 macrocells, but those 5 million “nano cells” are going to be the key difference maker, Niel points out.’s newer set-top boxes will have built-in femtocells. On top of that, Free is going to be beefing up its macrocells with high-capacity fiber connections being fed by Iliad’s dark fiber. And when the time comes, he is going to embrace LTE and include that in his network as well. “We will go to wide area network (3G and 2.5G) when we are not in Wi-Fi coverage,” he tells me. (I got a sneaking suspicion Free would be pushing iPhones into the market pretty heavily.) If they pull it off, it’s going to be pretty spectacular and once again, show what the telecom of tomorrow looks like.

The worse possible impact to the incumbent is that

  1. Revenue and market share down
  2. ARPU halved
  3. Capital Expenditure needs to rise

It will just kill those legacy telecom companies

Meanwhile, Les Echos reports that other French operators were “shocked and astonished” at the aggressiveness of their pricing, and quotes Rudolf van der Berg at the OECD pointing out that Free’s service is more open to the Internet than the Dutch operators who are covered by a net-neutrality law. (How many other mobile operators provide a full USENET feed?)

The initial upshot has basically been all about price, though – Fitch Ratings warns that French operators are likely to see their margins drastically reduced, and indeed all three existing mobile operators and several of the MVNOs have already cut prices, although they are trying to hold the line on the top of the price range while matching Free’s prices on their discount offers. That makes sense unless Free users are mostly early adopters (like, ah, Stéphane Richard thinks).

Possibility: Medium. I think the key for to be so successful was their acquisition of dark fiber in France. In Singapore, the whole island have been wired by Singtel which have relinquish the fibre assets to the NBN OpCo. There is no monopolization of fibre optics. Without that form of exclusivity, a new entrant or any of the telco can provide this level of deployment exclusively.

They can however provide a good quality data pipe and charge a low fee to under cut the rest. In that scenario, the rest will have the capability to meet that low price. It becomes a lose lose situation for all the telecoms.

Commodity data pipes – why should I switch?

The previous two points builds to this current point: Given that in the future, digital broadband set top boxes are standardize and fibre optics are available to all, and that technology is able to cover the island with LTE wireless data access well, what is the difference between the 3 telecom operators?

If your answer is that each telecom would value add to their customers by providing end user services and apps, then my answer to you is that not many would subscribe or think that it is a differentiating factor.

The content aspect is actually provided by the major cloud or content players such as Amazon, Apple, Google, Facebook.

The major payment solutions are provided by banks,Paypal, Mastercard and Visa.

The telecoms are just pipes.Even now with all the regulations from IDA, we can’t really point to the difference between the 3 telecoms. The biggest differences being quality of service.

You cannot charge a good premium if you cannot differentiate and this is a big problem for telecoms. There is a high threat that a newcomer will come in and undercut bringing everyone to a Nash equilibrium low price.

Possibility: Very High. It is already happening

Telecom not being able to outdo Disruptors Apple, Google, Amazon and Facebook

Supported by hundreds of thousands of software developers, Apple, Google and Facebook’s platforms are fuelling innovation in consumer and, increasingly, business services on both the fixed and mobile Internet. Amazon has set the benchmark for online retailing and cloud computing services, while Skype is reinventing telephony, using IP technology to provide compelling new functionality and features, as well as low-cost calls.

On their current trajectory, these five companies are set to suck much of the value out of the telecoms services market, substituting relatively expensive and traditional voice and messaging services with low-cost, feature-rich alternatives and leaving telcos simply providing data connectivity. At the same time, Apple, Amazon, Google and Facebook have become major conduits for software applications, games, music and other digital content, rewriting the rules of engagement for the media industry.

In a Telco2.0 online survey of industry executives conducted in September 2011, respondents said they expect Apple, Google, Facebook and Skype together to have a major impact on telcos’ voice and messaging revenues in the next three to five years . Although these declines will be partially compensated for by rising revenues from mobile data services, the respondents in the survey anticipate that telcos will see a major rise in data carriage costs (see Figure 15 – The potential combined impact of the disruptors on telcos’ core services).

Unlike telcos, the disruptors are generally growing quickly and are under little, or no, pressure from shareholders to pay dividends. That means they can accumulate large war chests and reinvest their profits in new staff, R&D, more data centres and acquisitions without any major constraints. Investors’ confidence and trust enables the disruptors to spend money freely, keep innovating and outflank dividend-paying telcos, media companies and telecoms equipment suppliers.

By contrast, investors generally don’t expect telcos to reinvest all their profits in their businesses, as they don’t believe telcos can earn a sufficiently high return on capital. Figure 16 shows the dividend yields of the leading telcos (marked in blue). Of the disruptors, only Microsoft (marked in green) pays a dividend to shareholders.

Reducing Barriers – SPH, SingPost and Vodafone

The lower technology cost and technology innovation may bring about other entrants.

SPH and SingPost have their own crumbling business models, they are looking at creating a content pipe as well, similar to the telecoms.

I suspect we may see a merger of SPH with Starhub or M1 due to the synergy there. Starhub and M1 lack the content people want, SPH have a large content and they are an advertising business. This can be a marriage make in heaven.

Possibility: Medium.

Telecom as a payment service provider versus MasterCard, Visa, Apple, Google

We talked about ways to differentiate but moving into payment is more about leveraging on the close relationship with the end users.

Instead of going into banks and viewing on the computer what is it that we have on ourselves more than anything else? Our smartphone.

The smartphone have become the platform to do internet banking at DBS, OCBC, but this is more than that.

I believe what the telecom operators will be looking at is leveraging on their already large customer base to become their payment solutions thereby earning small transaction fees by going through them.

The obvious answer is that Telcos charge customers a flat fee for the privilege of being their customers  – for managing their bills, providing call centers and guaranteeing them a unique telephone number.   If Visa relied on the same, which by analogy would make sense (it provides bills, call centers and “unique” credit cards) , its business model would collapse. Visa needs to make money by providing payment services to merchants and banks – services to the customer is just the channel.

So the obvious way for Telcos to exploit their relationship with their customers is to be the same – by becoming a billing and payment provider.  Instead of the credit card with chip ‘n’ pin – they have the Phone Number + SIM.

– Telco Professionals.

In the last five months there has been a wave of billing partnerships between device and/or platform vendor app stores and telcos – both in mature and emerging markets. Examples include RIM/Blackberry (with Vodafone), Microsoft (Orange), Nokia (Reliance, UK operators), Google/Android (AT&T).

Banks in Canada and South Africa have applied for banking license. Your Singtel, Starhub and M1 billing is synonymous with credit facilities provided by banks in that you make use of the services and pay at the end of the month.

VISA, Mastercard does the service of managing credit and debit transactions between merchants (bricks and mortar or software)

Apple and Google app stores provide the content infrastructure content providers demanded which then leverage on VISA and Mastercard.

Google itself is playing this smartphone payment game with Google Wallet, like Square and Paypal. They are essentially Peer to Peer transaction solution leveraging on internet as a space and smartphone as a transaction medium. But they still have a bank or VISA backend. Take a look at this comparison of Google Wallet vs Square vs Paypal charges, and that is why the telcos are trying to edge in. The money in payment is there.

Where is the pie for the telecom operators? For one thing pre-paid is a huge opportunity there. Some may not know that in many countries such as Thailand and India, most of the population is still on pre-paid.

In 2008 about 17% of the US mobile subscriber base were on prepaid deals, but since the GFC (Global Financial Crisis) approximately 65% of net new subscribers are prepaid users. In emerging markets like India and China 90%+ of the subscriber base is prepaid, and the same counts for sub-Saharan Africa, and broadly across Eastern Europe and Asia. So what does this have to do with banking?

Prepaid subscribers for mobile phones generally speaking are more likely to be at the lower end of the scale for retail banking (less profitable, underbanked) or even in the unbanked segments. These are customers who don’t have extensive multi-bank relationships, and who increasingly are moving to products like prepaid debit cards to facilitate their day-to-day banking needs.

So guess what happens when you combine a prepaid debit card with a prepaid mobile phone? It’s a marriage made in heaven! What’s the difference between making a telephone call, an ATM withdrawal or a debit card transaction at a merchant – they are all just transactions from a value store.


The biggest benefactor of this will be Singtel out of the 3 local telecoms.

The problem for local telecoms is that their own app store dreams are either in dream state or not working. People would rather use Apple and Google’s app store which uses Mastercard and VISA mainly.

As long as the local content doesn’t get attractive, I believe this payment revenue stream will not take off.

The company’s digital services unit, headed by Nordic and broadcast businesses chief Kristin Skogen Lund, announced a deal with Google in November to let its customers in 11 countries pay for Android apps on their phone bills, and will also have its own shelf in Android market. More deals will follow, Baksaas said.


The number of announced partnerships suggests that telcos clearly find the potential revenues from such deals attractive. It would be an easy, if not exactly a large, revenue stream for individual operators, which requires little investment. But providing billing to third party app stores raises questions about the telco’s own app store strategies. Arguably, such partnerships boost third party app store’s attractiveness and convenience at the expense of telcos’, particularly as many (e.g. Apple, Google) have far greater number of applications, and higher download volumes. We suspect there is a hard calculation at play here. The billing revenues from such deals are on the table today, while fierce downward pressure on ARPU and revenue growth means that there will always be telcos keen to go down this route. Hence, in effect this is no different to the classic wholesale/retail strategy dilemma that telcos have had to face in other areas (e.g. MVNOs).

All said, the rapid acceleration of smartphone penetration, combined with the dominance of the handset and platform vendors app stores, and the slow progress of cross-telco app store initiatives (e.g. WAC) will continue to put telco content strategies under pressure. By making paying for apps on other app stores more convenient, this move will add to this pressure, regardless of whether telcos acknowledge the fact either internally or externally. In effect, third party billing could be counter-productive to realizing telcos own content provider dreams – but it may well be a nice and more profitable improvement on a pure ‘bit pipe’ nightmare.


Telecom as Identification Managers

The other thing that shapes the future for telecom is identity management. Think about this: Your phone number is becoming like an ID. This ID is gotten from a telecom operator after certain verification of your credentials. The ID takes the form of a SIM card.

What the telecom can perform is authenticate and verify credentials between your ID with the government and various services that requires it. We are not talking about an application but a build in protocol into the telecom’s 3G / LTE network to provide this form of authentication and credentials verifications.

The smartphone is a multi input device that may in the future provide multi factor authentication that is required.

Possibility: Medium to Low. The possibility of ID management is high, but why I say low is that it is likely to be taken up by the regulators and the government to provide the standardization.

Without standardization, this will be the value add that telecom can provide. This will differentiate one telecom from another.

But the main reason you will want to authenticate is to make use of a myriad of local and online services and to do that you have to follow a certain ID management standard. If you follow a certain ID management standard, your competing telecom can just do the same thing and you end up back to square one.


The future outlook for Singapore telecom as of now looks as if differentiation is a failure.

  1. They fight on giving subsidies, freebies instead of lowering their prices
  2. Their cloud solution does not seem to have become the strategic drivers people have hope for but perhaps its still early stage
  3. They boost mediocre quality of service when I spoke to friends from different carriers
  4. They all boost lackluster customer service with possibly M1 being better there.

In the end, failure to differentiate makes them a “data pipe”. You will likely go with the cheapest and best QOS pipe.  In the end they become like power generation, high capex and regulated profits. They may still provide yields, though I don’t see the yield growing like Kingsmen, Boustead or Keppel.

If IDA or new entrants doesn’t force them I believe they will not under cut each other. Status Quo. If something like starts happening here or IDA looks over at overseas markets and see the 3 of them not bringing down prices you can see ARPU hit.

The margins will depend on how well the 3 telecom can optimize their infra, capex versus providing adequate to good quality of service. At the moment Starhub looks to be doing this well. Maintaining the margins would mean maintaining the free cash flow.

I think we may see Starhub or M1 taking up the mobile payment route by applying for banking license. They may be merge with SPH because they have the same issues and could very well help each other or hug each other to cry.

As usual, I am not an expert in this field and would be interested to hear you guys opinion on this matter.

Do you guys see other opportunities or threats?

I run a free Singapore Dividend Stock Tracker . It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.


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Monday 23rd of January 2012

As more and more devices are portable, alway-on-always-online will be a basic feature, that requires data from tele, so I think they still able to maintain cash flow. I like Starhub because it focus on Sg market, no need much capital reserve. That's just what I want, as long as Starhub can deliver 7 to 8% dividend yield, that's good enough.


Monday 23rd of January 2012

hi John,

always on is really bad for battery life. on the topic of starhub do note that their revenue have not been growing, where they are outperforming is lower capex. it will have to end when LTE roll out happens. the subsidization of handsets will increase COGS which will bring it back to status quo.

YH Tan

Monday 23rd of January 2012

Hi Dizzt,

Great article.

SPH own shares of both Starhub and M1. In fact I've been quietly hoping Starhub and SPH to merge. Can you imagine what they will create. But it seem like SPH is going into property/mall development and management.

Wishing you Gong Xi Fa Cai.


Monday 23rd of January 2012

hi YH,

That is just an anticipation, they might not do it. Doing that will combine content with delivery channel. But you have to ask yourself whether SPH content is that relevant that it becomes an exclusive edge.


Sunday 22nd of January 2012

no probs.

ma dao gong chen

Jared Seah

Sunday 22nd of January 2012

Wow! What a great read for the holidays!

Thanks Drizzt!

Wan Shi Ru Yi :)

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