Telcos face enduring squeezed margins as IMDA presses on for competitive 5G landscape

THE competitive pressure in Singapore's telecom market is undeniable. Consumer mobile revenues are a fraction of what they once were, and shareholders have seen share prices and dividends tumble as a result.

Analysts, investors and the telcos themselves are hopeful that 5G mobile technology will alleviate some of the pressure that competition has placed on profitability in the mobile network business. Last week, for instance, analysts cheered numbers from Singtel suggesting 5G is already bringing some higher pricing.

But shareholders would do well to remember that the fate of the telecoms industry in Singapore remains highly dependent on the moves of the regulator. And actions by the regulator seem to suggest that the high 4G consumer mobile receipts we have seen are firmly in the past.

Going by its 4G and 5G market policies, the Infocomm Media Development Authority (IMDA) has thrown its weight behind healthy competition. When it granted Australia's TPG Telecom the right to become Singapore's fourth 4G mobile network operator (MNO) in 2016, the stated reason was "to enhance innovation and competition in the mobile market".

But before TPG unveiled its commercial services in March 2020, the market already witnessed a proliferation of mobile virtual network operators (MVNOs) that lease spectrum from MNOs. Circles.Life was the first to launch, in May 2016 on M1's network, but more soon followed suit.

While some of the MVNOs' toplines does flow back to their MNO partners, the visible consequence is a cutthroat price war that decimated average revenues per user (ARPUs).

Both Singtel and StarHub saw monthly postpaid mobile ARPU of S$28 for the last two quarters - down from around S$70 at end-March 2016, the last full quarter before Circles.Life joined the fray.

The two sets of numbers are not apples to apples, because the industry later adopted new accounting standards that changed the way revenue is recognised, but the difference between the old and restated revenues does not detract from the significant downward trend. (see Amendment note)

To be fair, ARPUs are expected to regain some lost footing when roaming revenue returns post-pandemic. But the promised premium from nascent 5G services has yet to show up meaningfully in the results, and a crowded market continues to be cited as a major revenue dampener.

More distressing for shareholders must be the heavy toll on dividends.

Singtel, which has a March financial year-end, has seen full-year payouts fall from 17.5 Singapore cents a share in 2016 to 7.5 cents in FY2021. StarHub went from 20 cents in 2016 to 5 cents. M1, which paid 12.9 cents in 2016, has been privatised.

Even as shareholders suffered, however, customers were reaping benefits from the higher competition.

Mobile data is now much cheaper. Telcos offer build-your-own mobile products instead of forcing customers to accept fixed packages with a small data quota that is often busted, but 1,000 text messages that likely go unused. Telcos also offer affordable SIM-only and contract-free plans.

But telcos cannot lower prices indefinitely. A race to the bottom is ultimately destructive, and there may come a time when telcos are not able to justify investments into improving their products and services because they cannot make a return.

What will happen then? One possibility is that the market will consolidate, as rumours have long hinted.

But if such consolidation happens, frustrated punters might be tempted to ask: Why, then, was the telecom market allowed to get this crammed? Did the IMDA anticipate this when it opened up to both TPG and a plethora of MVNO challengers?

Aileen Chia, director-general of telecoms and post at the IMDA, told The Business Times in an early 2019 interview that the IMDA must let the market take its course: "There will always be consolidation, because there will be companies who can't keep themselves competitive, can't innovate further, and they have to close."

At the same time, recent events suggest that the IMDA has not given up on the notion of vibrant competition.

Even though TPG lost last year's beauty contest for core 3.5GHz 5G spectrum, other regulatory actions have served to keep it in the game: a requirement for commercial wholesale access to 5G networks, the award of smaller-scale millimetre-wave spectrum, and the opportunity to participate in a fresh 2.1GHz 5G auction.

Against this backdrop, the telcos are acknowledging a need to compete differently. For instance, StarHub's management spoke in an earnings briefing in early August about needing a "tactically differentiated strategy" to "go beyond a price story".

But if telcos don't fight on price, what should they be competing on?

"One of IMDA's many objectives is to bridge the digital divide in Singapore, and the competition among telcos has helped with that," Jensen Ooi, principal analyst at industry research firm Omdia, told BT in an e-mail.

"The competitive pressure has also spurred telcos to look for new innovative solutions to differentiate themselves; and with the 5G network being made available now, we'll see new types of offerings being made available to the consumers."

The most promising of the new offerings is, arguably, enterprise-focused services such as cybersecurity and bespoke business-to-business solutions. These allow telcos to move beyond milking captive consumers - the so-called "pivot to enterprise".

But - especially at the enterprise level - IMDA has also demonstrated it will be taking a hands-on approach. Singapore policymakers have been very clear about their priority: the development of a 5G landscape as a matter of national economic competitiveness, rather than a nice-to-have playground for the private market.

Indeed, S Iswaran, who was Minister for Communications and Information at the time, last year called collaborations across industry, community and government "critical in ensuring a secure and resilient 5G infrastructure and compelling use cases".

At the same time, the 5G enterprise space is much more open and accessible than the 4G space was. Several non-conventional players have already expressed interest or made investments in infrastructure to support 5G or offer 5G-related services.

So, how much sympathy can telcos and their shareholders expect from regulators when it comes to competition on this front? What is the outlook for the competitive landscape, or a potential consolidation?

Citing the tough economic climate and the stiff market competition, Mr Ooi said that "it is only a matter of time" before exits happen: "There's really no protection unless they're a GLC (government-linked company)."

Policymakers want neither competition for its own sake, nor a sheltered ecosystem that rewards shareholders alone. Finding that balance in the market may not be easy - but it will be necessary, especially as the global 5G arms race begins in earnest.

Amendment note: This article has been edited for clarity.