Singapore's telcos turn to MVNOs as a defensive strategy

A sharp increase in new mobile operators is placing further pressure on them to solidify their subscriber bases.

With Singapore slated to have at least seven mobile operators in 2019, telco operators are set to turn to low-cost mobile virtual network operators (MVNOs) as a defensive strategy as the already saturated domestic market welcomes new players into the scene, according to a report by Moody's Investors Service.

The rapid buildup on competitive pressure in the last two years is forecasted to continue declines in mobile revenue in Singapore in the next two years, driven by compression in average revenue per user (ARPU) on top of a stagnant subcriber base. Of the seven mobile operators, three were identified as mobile network operators (MNOs) whilst the other four are MVNOs, the report revealed. 

"We expect industry consolidation to take place in the next two to three years, with competition in a saturated market worsened by four low-cost MVNOs," Moody's analysts stated in its report.

MVNOs are said to lure price-sensitive customers to cheaper postpaid SIM-only plans on the back of its low-cost model, efficient app-based customer interface and better networks. The country's leading telcos Singtel, StarHub and M1 have introduced a variety of price plans and innovative content in their bid to compete effectively, and are expected to offer flexible wholesale pricing to their MVNOs in a defensive move against TPG's entry which is slated for Q2 2019.

Also read: Singapore's new MVNOs to cause headwinds for telcos

"The telcos would prefer losing revenue share to their respective MVNOs rather than to TPG because a large part of an MVNOs revenue is paid to the telco partner," Moody's analysts explained. "Still, it remains to be seen how much Singtel will benefit from this strategy."

Singtel is set of face off against a rise in new mobile operators to defend its leadership position in the Lion City. Whilst it has two MVNOs, Zero Mobile and Zero 1, under its belt, it may not be enough as these are considered to be less active and favoured compared to its counterparts such as M1's Circles.Life and StarHub's MyRepublic, the report highlighted.

Singtel’s dominance in its home market and the stability of the local telecom industry in previous years were said to have underpinned the firm’s credit quality. However, its domestic profitability is coming under immense pressure with the sharp increase in competitors entering the market.

Singtel saw its profits plummet 77% YoY to $667m in Q2 from $2.6b in 2017 on the back of a net exceptional loss of $48m comprising primarily of staff restructuring costs. Singtel’s CEO Chua Sock Koong explained in a statement then that the industry continued to face various headwinds and intense competition which contributed to the decline in earnings.

Also read: Singtel's Q2 profits plummeted 77% to $667m

Moody’s added that the rapid buildup in competitive pressure will bleed into Singtel’s mobile revenue, and the firm may see its earnings continue to decline in 2019 and 2020. Analysts noted that whilst Singtel's Singapore earnings before interest, tax, depreciation and amortisation (EBITDA) margins were the highest amongst its peers up to FY 2013 at approximately 31%, it has continued to decline yearly, hitting 27% in FY 2017 which ended March 2018. Singtel's EBITDA is expected to contract a further 2% in the coming months. By comparison, M1's EBITDA margin stood at approximately 30%, whilst StarHub's hit 28% in 2017.

A report by RHB research also cited that Singtel’s headwinds may persist unless its ICT segment can recover. Analysts highlighted that through the resumption of smart nation projects following the government’s review of cyber security risks and measures, as well as additional opex savings, Singtel may see its earnings inch up.

Telcos race to expand their presence before TPG's entry

TPG is expected to target a revenue market share of 4-5% over the next three to four years amidst the delay in its commercial launch. The delay was reportedly due to its need for more time to negotiate agreements with its incumbent mobile operators to access their network systems, Moody's report revealed. 

"Based on capital spending to date in Singapore, we expect TPG to rely on partnerships with existing telcos to make a nationwide commercial launch," Moody's analysts explained. "This leads us to believe that TPG is unlikely to be a disruptive player in Singapore at least over the short-term."

Also read: TPG could struggle against Singapore's 7 telco service providers

That being said, analysts highlighted how Singapore's telcos should use the delay in TPG's launch to their advantage in terms of solidifying their subscriber bases.

StarHub has been pushing forward with its efforts to rebound its earnings after seeing a 12.8% fall in its profits to $57m in Q3. These have included pulling the plug on its cable services to make way for its Pay-TV segment and axing 300 full time employees to streamline its organisational structure. Likewise, M1 which is projected to likely accept Konnectivity's buyout offer has also been stepping up its game following its partnership with Nokia and plans to develop Jurong Port into an advanced digital smart port.

Not to be left behind, Singtel been ramping up its efforts to expand its presence in the local market, with moves such as welcoming Visa and Apple Pay to its mobile app Dash and its foray into the electricity-reselling business to offer electricity plans under a partnership with YTL PowerSeraya's energy provider unit Geneco. 

“Singtel will retain its market position, although its share of industry revenue and subscriber market share will fall marginally in 2019,” Moody’s VP and senior analyst Nidhi Dhruv said in a statement. “The company’s higher overall profitability relative to its peers, helped by its overseas operations which generate around 65% of adjusted EBITDA, and significantly larger revenue scale will offset stress in its domestic market.”