A challenging future for telcos

It is critical that as telcos make technology investments, they also continue to focus on devising business models to monetise 5G and other opportunities

by NG MIN SHEN/ pic by TMR

ONCE upon a time, the future was brighter than the sun for telecommunications companies (telcos). The rapid technological developments of the 1990s allowed for pocket-sized mobile devices and SMS (short message service), which quickly became highly popular. To meet the demand, telcos built thousands of cell tower sites to connect the country, expand the coverage and woo millions to the wireless communication world.

Then came mobile Internet in the form of 3G. It further enhances telcos’ presence and role as the mobile connectivity partner. Communication suddenly becomes a necessity rather than a luxury. And technology will stay, evolve and improve. Telcos were the darling of the industry and investors all around the world.

But in recent years, telcos’ prospects have suffered due to the technology and application of the connected world. The strength and speed of 4G LTE (long-term evolution) have given birth to messaging and calling apps. The widespread use of messaging apps has rendered traditional voice calls and SMS obsolete. Telcos lost billions in the traditional revenue from phone calls and SMS.

Smaller telcos or mobile virtual network operators (MVNOs) have also emerged in the marketplace and provided cheaper solutions.

Telcos had to respond to the offerings of unlimited data, while exploring alternative revenue streams such as content monetisation and enterprise solutions.

While telcos try to defend their customer base, they risk shrinking their average revenue per user (ARPU).

Affin Hwang Investment Bank Bhd (Affin Hwang Capital), in a March 2019 report, said it’s staying ‘Neutral’ on the sector, which reported a combined net loss of RM1.6 billion in 2018 as telcos’ profit margins were eroded by stagnation in subscribers and stiff competition.

Telcos also had to endure regulatory changes, technology shifts and macro headwinds. Last year, cellular services in Malaysia only grew 0.1% to 42.4 million users.

All of the “Big 3” players suffered declines in subscribers, while others — U Mobile Sdn Bhd, Telekom Malaysia Bhd (TM) and MVNOs — gained 8.2% in subscriber bases and grew their market share to 25.4% from 23.5% in 2017.

“In the fixed broadband market, TM also saw a decline in subscribers and market share. Operationally, the telcos are undertaking various measures to control costs (ie efficiency improvements via digitisation, rationalising staff costs, lowering sales and marketing); these measures should help cushion the impact of external issues, but are unlikely to lift profit margins,” Affin Hwang Capital said.

Kenanga Investment Bank Bhd in a July 3 report also maintained a ‘Neutral’ call on the country’s telco sector, while companies attempt to navigate the stiff competition and the proposed merger of Axiata Group Bhd and Telenor ASA’s Asian operations.

“Sector-wide, cost rationalisation continues to be at the forefront of the telco players’ initiatives against the persistent and increasing stiff competitiveness in the market.

“Cellular companies may also see further recalibration to their guidance and strategies with the pending 700MHz spectrum award. At present, we believe there could be a lack of value-buying opportunities in the large-cap space from the recent rally,” it said.

The Malaysian Communications and Multimedia Commission (MCMC) in 2016 undertook a spectrum re-farming exercise, which essentially benefitted smaller players as they gained lower-frequency spectrum bands that can service bigger areas and better penetrate buildings.

This also resulted in “aggressive pricing behaviour of smaller operators”, AllianceDBS Research Sdn Bhd said in a January 2019 report on the Asean telco sector.

Deloitte Consulting LLP’s MD of technology, media and telecommunications industry practice Mic Locker said it is critical that as telecommunications companies make technology investments, they also continue to focus on devising business models to monetise 5G and other opportunities.

This year alone, many of these revenue- bolstering opportunities will arise from changing market conditions and consumer references, as well as from the first large-scale rollouts of 5G technologies, Locker said in an interview published by Deloitte.

“One of the main opportunities could come from consolidations and partnerships, especially in the areas of cable and content. Today, we observe a high number of consumers who prefer video streaming services over cable subscriptions,” she said.

Deloitte’s Digital Media Trends survey, released in March 2019, revealed that 55% of US households now subscribe to paid video streaming services, while pay-TV penetration fell to 63% from 75% the year before. In response, telcos and cable companies could consider mergers and acquisitions to integrate content and media into their offerings.

“Partnerships are also likely to increase as providers attempt to accelerate the development of new business models and services based on 5G,” Locker said.

Ensuring returns to shareholders has also become a difficult game to play for telcos amid rising costs and the need for higher capital expenditure (capex).

In the Middle East and Africa, for example, total returns to shareholders from telcos averaged 14% annually from 2004 to 2007, but dropped to 9% from 2009 to 2014, according to a McKinsey & Co report in 2016.

While telcos grapple with stiff competition, there’s also the ubiquitous issue of5G—the next-generation of cellular network technology. 5G is said to be anywhere from 100 to 400 times faster than 4G, yet it has lower latency (the time required for devices to communicate via wireless networks), and thus will open up a whole new world of capabilities.

Global telecommunications provider Ericsson, also a pioneer in the 5G space, expects the global market to have over one billion 5G subscriptions for enhanced mobile broadband by 2023, covering 20% of the world’s population.

It predicts 5G growth to be driven by both organic demand — due to its faster coverage speed and lower cost compared to 4G — and new use cases that will extend into fixed wireless access, smart manufacturing, transportation and logistics, and power grid management.

Deloitte’s Locker believes telcos will benefit from 5G, as the technology will bring about revenue from the fixed broadband market and business-to-business opportunities, such as smart cities and the Internet of Things (IoT).

5G will allow the sharing of a given physical network to run IoT, mobile broadband and very low-latency applications, “including many connected-car and connected-home functions that have the potential to create entirely new revenue sources for providers in 2019”.

However, deploying 5G comes at a high cost. In Malaysia, Maxis Bhd — one of the “Big 3” and also the telco with the highest blended ARPU of RM59 as at end-2018 (Celcom: RM50, Digi.Com Bhd: RM41) — has earmarked RM1 billion in incremental capex over the next three years.

While no particular capex has been announced for 5G, Maxis has shown its commitment to the technology, having conducted 5G live trials in Malaysia since March 2019.

Meanwhile, Malaysia’s Axiata and Norway’s Telenor announced in May this year their intention to merge their Asian operations in response to the cost of data monetisation, heightened competition and the need for increasing capex despite flat revenue growth.

At a press briefing to announce the merger, both companies pointed out the increasing competition, not just from smaller telcos, but from converged players as well.

Axiata and Telenor also highlighted the need for large capex in order to meet customer demands for better network service. The returns on these capex allocations are only expected to come in over the longer term, thus leaving telcos in a tight spot as prices of products and services continue to fall.

Times are changing for telecommunications providers. From being utility companies, telcos are transforming into tech companies, creating solutions and applications to boost their network.

An industry source said telcos face the biggest test in the near future as capex and expansion will continue to balloon in saturated markets.

“Some of the telcos are still trying to recover their investment of the 4G network,” said the industry source.

Customers will demand for a faster network with the application of artificial intelligence (AI), self-driving cars and big data. The question is, can one company do it all alone, invest billions into a network and build the critical scale, and wait for 15 years to get their return on investment?