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

September 17, 2011 by Kyith 15 Comments

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.

—————————————————————————————-

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.

[Read full article here >>]

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.

Filed Under: Dividend Investing, Economics Tagged With: apple, economic moats, Google, m1 limited, singtel, skype, starhub, telecom, telecommunication stocks, viber

High China Interest Rates may be a reason why S-Chips prefer rights issues than taking on debts.

July 14, 2011 by Kyith Leave a Comment


Source: tradingeconomics.com

 

Here is a chart on China interest rates. The base interest rate is nearly 5%. To operate in China and borrow money, the cost is high. Perhaps that is why they would prefer to do rights issue according to Nick.

For those interested in tracking my most current holdings, you can review my portfolio over here. Learn to use our Free Stock Portfolio Tracking Google Spreadsheet to track stock transactions.

Filed Under: Economics

Fwah Moment: 2nd Generation Satellite ERP System in the future??? WTF!

June 30, 2010 by Kyith Leave a Comment

Drizzt:

Ok I came back home from work to see this ridiculous article from Channelnewsasia:

The Land Transport Authority will soon be calling for a tender to invite industry players to submit technical proposals for a second generation ERP system.
One of the key technologies identified is a Global Navigation Satellite System (GNSS) which makes use of satellites to determine the position of a vehicle.
Transport Minister Raymond Lim said the LTA will be conducting various technical tests to evaluate if the latest technologies available in the market today are accurate and effective enough for use as a congestion charging tool, especially taking into consideration the dense urban environment in Singapore.

Drizzt:

Ok so what is so deficient about the current ERP system? Is it they are not bringing enough revenues for the government?

Is it because it takes too much effort to put up gantries all over singapore?

However, he added that the development and testing of new ERP technologies that are suitable for Singapore’s conditions could take some years before it is ready to be launched and implemented.

Speaking at the World Urban Transport Leaders Summit 2010 being held at Singapore’s Suntec Convention City Centre, Mr Lim pointed out since being implemented in 1998, the gantry-based system Electronic Road Pricing (ERP) system has served well.

However, as the number of vehicles on Singapore roads increases over the longer term, congestion will become more extensive and it may become impractical to continue installing ever more physical gantries to manage congestion.

Drizzt:

Ok so how many of you think that this ERP system is actually funneling and optimizing traffic well?

I think Singapore pride itself to have an educated work force so when I spoke to all my educated friends and acquaintance. They point to one problem for our traffic congestion: Too much cars!

I really sometimes wonder what is the freaking point of putting up so much gantries when every where you go gantries or not, it is still freaking jam.

I do go on site quite a fair bit and sometimes I require to go somewhere fast, so I took the route that has the most ERP and the fastest. When I take the CTE, its still freaking jam!

Why is there often such a jam, because of impatient drivers trying to navigate a traffic condition brought about by too much cars!

And since I took on average 5 taxi trips every month I managed to speak to a fair share of taxi drivers.

Their assessment: Whats the point of ERP? its freaking jam! Given the choice they would rather drive at night.

The Transport Minister told the world-gathering that Singapore is in a very unique situation being a small city state, with a growing population whose needs have to be met.

"Our transport sector plays an important role, in being able to move people quickly and efficiently, while managing road congestion. This is critical in keeping Singapore vibrant, green and an attractive place to live, work and play" he said.

This means options that include ways to encourage the development and use of green technologies in Singapore and nurturing green businesses and clean tech industris through tests of clean technologies in the transport sector.

This includes energy efficient lighting for traffic and street lights, recycled materials for road pavement construction, and construction methods that minimise the impact on the environment.

To improve the living environment, Singapore has also been testing green transport technologies such as the trial of diesel hybrid buses and diesel particulate filters in conjunction with the vehicle emission test laboratory (VETL) which was set up in October 2009.

An Electric Vehicle Taskforce co-chaired by the Energy Market Authority (EMA) and LTA was also established to assess the feasibility of the EV technology in the local transport eco-system.

Mr Lim said LTA and the EMA will next jointly develop the necessary charging infrastructure to ensure convenient access to the electricity grid, with electric vehicle charging stations from service providers currently under evaluation.
With the electric charging infrastructure set up, and anticipated delivery of the Mitsubishi iMiEV electric vehicles, the test-bedding trial will bring Singapore be a step closer to going electric, on the road.

Drizzt:

Make no mistake. the people’s money will be expanded again to replace this IT system. one of NCS, ST Electronics or Accenture will benefit from this. Its gonna stimulate the IT industry, but is it for the best?

Filed Under: Economics, Fwah Moment

How the economic crisis destroyed Detroit

April 28, 2010 by Kyith 1 Comment

Here is a sad video on the state of a once powerful car manufacturing city. Do you fancy investing in a USD1000 apartment where you have no neighbors?

Filed Under: Economics

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