A look at TPG Telecom's impact on Singapore's Big 3
By Goh Thean Eu December 23, 2016
- TPG Telecom, likely to launch services in 2018, will impact market significantly
- Company is no stranger to competing against incumbents
LAST Wednesday, the Singapore's Info-communications Media Development Authority (IDA) announced that Australia's TPG Telecom has won the rights to be Singapore's fourth mobile operator.
The announcement also meant that fixed broadband service provider MyRepublic's dream of becoming a mobile operator has ended, for now.
Although TPG is expected to offer its services some time in 2018, giving the incumbents Singapore Telecoms (SingTel), Starhub and Mobile One (M1) one year to prepare themselves -- the competition, which is already heating up, will likely to get intensify next year.
So, how significant will TPG impact the Singapore telecommunications landscape? Will TPG has what it takes to battle against the big three? Let's explore.
Singapore's mobile telecommunications landscape
Before we look at how significant will TPG impact Singapore telcos, it will be good to have a glance on the Singapore telecommunications sector -- which the total revenue in the sector is at approximately US$2.76 billion (S$4 billion) annually.
As at September 30, 2016, there are more than 8.37 million mobile subscribers (both prepaid and postpaid) -- representing a mobile penetration rate close to 150%.
From the amount, more than half of them subscribed to 4G services (3.99 million on postpaid 4G subscription, and 614,200 on prepaid), while another 3.6 million are on 3G subscription.
Like all markets, Singapore mobile users are also increasingly consuming more data services, and using less voice and text messages.
For the third quarter ended September 30, 2016, mobile users in Singapore consumed 12.14 petabyte of data monthly -- a big contrast when compared to the monthly 5.33 petabytes consumed in the second quarter 2012.
From the 8.37 million mobile subscribers, SingTel has the lion share of 4.11 million mobile subscribers (2.34 million postpaid, 1.77 million prepaid), Starhub has 2.27 million subscribers (1.37 million postpaid, 902,000 prepaid) and M1 has 1.99 million subscribers (1.23 million postpaid, 762,000 prepaid).
What was interesting is that, despite the saturated market, all three mobile operators managed to grow their subscriber base during the third quarter 2016.
While subscriber base expanded during the third quarter, all three telcos are showing declining average revenue per user (Arpu) trend -- one of the signs of intense competition.
TPG's impact on the Big 3
According to TPG in a statement, the company is likely to commercially launch its services in 2018.
While the battle to get a piece of consumers' wallet will begin only in 2018, the four-way battle will likely begin in 2017 -- during the upcoming general spectrum auction.
Currently, the spectrum caps are being imposed on TPG are: 40MHz for the 700MHz band, 20MHz for the 900MHz band, and total of 75MHz (global cap for both new entrant spectrum auction and general spectrum auction).
This means, TPG could bid for another 15MHz of spectrum from the 700MHz and 2500MHz band. (Note: TPG's winning bid of S$105 million was for 20MHz of 900MHz and 40MHz of 2300Mhz frequency band)
Analysts expects competition among Big 3 will further intensified in 2017.
"All three incumbents have introduced attractive data upsize options this year. We expect this trend to continue. Incumbents are likely to dangle attractive promotions to attract consumers to re-contract earlier but get locked up in new two-year contracts ahead of the launch by TPG," said Jonathan Koh, an analyst from UOB Kay Hian, in a report.
Besides the increasingly intense competition in the mobile space, which will negatively impact the telcos' margin, the sector is also becoming less attractive for investors.
Traditionally, telecommunications stock are seen as a defensive stock, or stock that can offer investors attractive dividend yields.
Since Donald Trump won the US Presidential Election, most government bond yields have increased significantly. For example: US Treasury 5-year bond yield is now at the 2.06% level, versus 1.34% level early November; while the 10-year Singapore government bond yield has risen to 2.83% level (from 2.18% level about a month ago).
"Higher bond yields make yield plays, such as telcos, less attractive as yield spreads narrow," Koh explained.
Next page: What can we expect from TPG?
What can we expect from TPG?
If there is one thing that TPG isn't afraid of, it will be competing head on with incumbents.
TPG, a company founded by Malaysian-born Australian tycoon David Teoh, started off in 1986 as an IT company that sells OEM computers.
It is also no stranger to competing against the big boys.
When it entered the Australia telecommunications play in 2008, specifically the fixed broadband space, it had to battle for market share with well-established players like Telstra, Optus, iiNet and M2. It entered the space via the acquisition of SP Telemedia.
For now, it is unsure how much will prices drop as a result of TPG's entry, but, based on Australia's price trend when TPG joined the it is safe to say that the decline will likely be significant.
When TPG entered the Australian telecommunications scene in 2008, it did directly, and indirectly, resulted in lower prices of Internet services. According to a report by Australian Competition and Consumer Commission, average real prices for Internet services decreased by 4.6% in 2008-09.
Aggressive, but optimistic plans ahead
So, how will TPG compete against its more well-established rivals? Somewhat aggressive.
TPG announced that it will be allocating up to S$300 million to obtain nationwide coverage by September 2018. In contrast, M1 spent S$133 million on capex last year. It will not likely be a major challenge for TPG to fund its S$300 million capex -- for the financial year ended July 31, 2016, it has raked in A$759 million in operating cash flow and has a free cash flow of A$318 million.
TPG also said that its immediate aim is to capture 5-6% market share as fast as possible, as it is a crucial part for it to become profitable operationally (Ebitda positive).
In order for one to have a rough idea how TPG will be competing against its Singapore peers, one can also look at how it compete against its peers in Australia.
In Australia, TPG's offerings include fixed broadband, as well as mobile broadband. It offers its mobile services via mobile virtual network operator (MVNO) arrangements. (TPG signed MVNO deal with Vodafone Australia, while its subsidiary iiNet, which it acquired in 2015, has a MVNO arrangement with Optus)
Nevertheless, it does not stop TPG to offer competitive prices to customers. Today, TPG is offering SIM-only 1.5GB mobile plans for A$19.99 a month, 3GB for A$29.99 a month, and 10GB for A$39.99 a month. (The 10GB plan also comes with unlimited calls and text messages)
In contrast, Telstra's SIM-only 10GB mobile plan is A$70 a month, 500MB for A$35, and 5GB for A$50 a month. In fact, TPG's SIM-only plan pricing is competitive against Telstra's 12-month plans -- 10GB (5GB + 5GB of bonus data) for A$50 a month; 5GB for A$40 a month.
So far, TPG did not disclose on its exact go-to-market strategy, however, it did drop a clue that it will be very competitive in the market come 2018.
"The company expects to start delivering services to customers in 2018 and forecasts that it will become Ebitda (earnings before interests, tax, depreciation and amortization) positive when it reaches a market share 5-6% which it believes should be achievable within a short period of time due to the excellent value of offerings that it will bring to the market," said TPG in a statement.
Manage to grow significantly at lower margins than peers
Besides known for offering value to customers, TPG is also proved that it is able to grow at a strong pace - even when it is having one of the slimmest margins versus its peers.
For example: During the full year ended July 31, 2016, its revenue and net profit jumped 88% and 69% to A$2.39 billion and A$379.6 million, respectively. This achievement is based on Ebitda margin of 40% (for its broadband business), and 20% (mobile/ other business). During the same period, its subsidiary iiNET recorded an Ebitda margin of 27% (for its broadband business), 16% (fixed voice business) and 4% (mobile business).
Interestingly, iiNET was able to register an Ebitda of A$2.4 million, despite having a 4% margin.
In contrast, most of its rivals are operating at a higher margins. Telstra's Ebitda margin for its fixed voice, fixed data, and mobile are 51%, 41% and 42%, respectively.
Another interesting piece of data about TPG is that - the company managed to return to profitability within two years of entering the telecommunications industry. For the financial year ended July 31, 2008, it registered a net loss of A$18.9 million. A year later, it posted a net profit of A$17.7 million.
From TPG's past track record, it seems that it is all set to make a significant impact in Singapore, and it appears to be confident with its game plan. Based on its price points offered in Australia, one can be confident (to a certain extend) that it will likely also offer very competitive pricing to attract customers.
However, it will not be an easy journey, and Teoh and his team at TPG are aware of it. They know that the incumbents will do all they can to keep their customers loyal, or stick with them, for the next two years.
But, TPG is not the usual new kid on the block. It is a company that is used to competing with the "big boys".
For now, there are uncertainties on how the telecommunications industry will pan out and which incumbent will lose the most market share. This is because the outcome is also dependent on the result of the upcoming general spectrum auction, the intensity of the competition (will there be a price war?), and of course, TPG's game plan.
However, there is one thing that we all can bet on - that is the ultimate winner will be the consumer.
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