The erosion of telecom margins: Will mobile operators like Singtel, M1 and Starhub lose to Google and Apple?

Readers at Investment Moats will be familiar that I have highlighted a few articles in the past that what you think is a business model with a strong economic moat enhanced by the smartphone revolution might kill telcos like Singtel, M1 and Starhub more than enhanced them.

Consider reading these few past 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

What we learn from these article thus far is

1. Telecom is a utility like business that is resilient in recession times, offering something people cannot lived without.
2. Telecom Stocks pay a good dividend yield
3. The smartphone revolution makes mobile phones indispensible, enhancing telcos at the same time
4. It however commoditizes telcos. Users differentiate based on who can provide me with sophisticated phones rather than good service
5. 3G and LTE creates huge amount of data demand that places pressure on telco’s network, resulting in higher capex.
6. Telcos cannot priced in this higher capex due to users getting used to all-you-can-eat buffet phone plans.

So how is the situation now?

We know that in the last half year:

1. EBITDA margins at Singtel, M1 and Starhub is contracting due to competition. ARPU is rising due to the more expensive 3G data plans, yet the telco’s are not making substantial gains.
2. Gains are garnered by selling more bundled smartphones and lowering of subsidies used to entice users to jump to their platform.
3. Telcos are struggling to sell value added services. Singapore consumers are not really interested in them.
4. Capex is not rising as fast as anticipated based on the back haul problems.
5. M1 becomes the first telco to do away with unlimited data for their data only mobile broadband plans, following the US telco.

Make no mistake, currently telcos are great investments, as shown by the dividend yields of the 3 telcos listed on my Singapore Dividend Tracker. But how would they look in the future?

I came across this article written by IIja Laurs who is the CEO of GetJars on Gigaom, talking about mobile operators losing voice services to mobile platforms. I find this a good read and thought provoking and entirely realistic.

Here are a summary of points made

1. We are only tied in to our mobile phone company because of SIM card. Other than that we do not consume any of their value added service or bloat ware.
2. We probably will not rely on the phone number any more. If we want to contact someone, we will go to a social networking site such as Facebook or LinkedIn or Google Contacts and data message the person or VOIP the person.
3. When we purchase a phone, the first point of registration will be to a global provider like Google or Apple. Why do we choose them? on the virtue of the value added services provided.
4. Google and Apple will be what Singtel, M1 and Starhub envision to be: Mobile Operators who provides value added services.
5. In this case, the mobile operators such as Singtel, M1, Starhub or Telekom Malaysia will just be a cell tower or infrastructure operator. They have no pricing power and they compete with each other through price, scope of network, quality of service.
6. As an end user, all you care about is to use Google’s services, you manage your fleet of telcos through Google. When you go to another place, you can easily subscribe to the strongest signal there.
7. Why would the 3 mobile operators do something like that? Sometimes this change is inevitable. It may take IDA to offer another spectrum and a new entrant coming in hoping to tie up with Google or Apple. It may take the weakest telco of the lot (M1) to cave in and tie up with Apple.
8. This is essentially the prisoners’ dilemma from economic textbooks: If both prisoners don’t talk, both win. But if separated and one is promised a way out and he talks first, then game theory suggests the winning strategy for each prisoner is to talk. In other words, one of them will crack.
9. As a supporting evidence, Apple took over the app distribution business of the mobile phone operators, something they entirely dismiss when Apple started this. Now they are losing this to Apple.
10. The mobile operators were reluctant to accept Google’s Android plans initially, but it just take one smaller player (T-Mobile) to cave in and it will spark of what the game theory depicts.
11. Google just purchased Motorola Mobility, they as the provider of value added services have better pricing power. They can acquire or dictate the direction of telcos much better.
12. Singtel, M1 and Starhub may eventually be reduced to infrastructure assets like CMPacific, CitySpring or SP Ausnet.

Do read this article. It has some nice discussion as well. Tell me what you think.

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Imagine buying your SIM-free mobile phone from a local electronics store and logging into your Google or Apple account as soon as you turn the phone on for the first time. Then imagine having the phone ready to use for voice calls with a phone number provided to you by Google Talk or Skype, and ready to access email, YouTube or Facebook.

That same phone automatically hooks to your home Wi-Fi or any of the available 3G, WiMax or LTE networks without you even knowing (or caring) which specific network its running on at the moment. No longer do you have to belong to a specific carrier — your phone automatically picks the strongest and cheapest network option at any given time. Your network access, along with voice, app/in-app purchases and everything else are provided to you by the mobile platform provider. The carriers are only there to run network infrastructure and sell bandwidth to two to three mobile platform providers.

Let’s face it, the only two things that still connect carriers to consumers are the voice number and billing for the network access. SIM card technology is rudimentary — you can easily conduct user authentication using a simple login, just like Apple does on iPods when you want to buy apps or songs from the iTunes store.

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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.