Key takeaways from NDR

An Apple iPhone a day keeps the rivals at bay

THE first bout in the prize fight to land Apple’s iconic iPhone may have gone to SingTel but some market watchers are saying this is a hollow victory since the grey market is rife and the deal is likely to be non-exclusive. What these detractors have failed to see, however, is that the temporary advantage may just be enough to put the red camp in pole position with a new dawn for mobile competition.

This is because, come June 13, the desire to hold on to a treasured phone number will no longer prevent consumers from jumping ship as ‘true mobile number portability’ is set to kick in. When that happens, Singapore’s telecommunications regulator expects churn rates among telcos (or the percentage of users who switch) to be between 5 and 15 per cent, based on statistics from countries that have adopted similar regimes.

Using its most conservative estimate, this means that nearly 300,000 subscribers out of Singapore’s pool of 5.9 million could potentially defect. The Infocomm Development Authority of Singapore (IDA) strongly believes such churn is healthy and its new mandate can only benefit consumers as it keeps operators on their toes and forces them to think of new ways to attract customers. Against this backdrop, SingTel’s iPhone deal gives these 300,000 Singaporeans a good reason to initially see red instead of hues of orange and green.

For years, churn in the local mobile sector has been in the low single digits and market share movement between the three players is anything but significant. This is further proof that providing phone services has become somewhat of a lowest common denominator, since operators are largely offering identical services along with a common assortment of handsets.

But given the hype and pent-up demand for the iPhone – a combination iPod, cellphone and wireless Internet device – the outcome could be different this time. In the US, at least, the arrival of the iPhone reinvigorated the stagnant competitive landscape in less than one year.

Exclusive deal

SingTel will be banking on its timed-exclusive deal with Apple to achieve a smaller-scale success locally within three months.

Few handsets in history could boast having the same market-moving impact that Apple’s flagship phone has had.

In less than 12 months, the much-awaited phone – which boasts a large screen where users surf the Web by touching icons and typing in Web addresses on a virtual keypad – grabbed a market share of 27 per cent to be runner’s up in the US market. This is a feat that took competitors years to achieve.

Three months into its launch, Apple announced it had sold one million iPhones in just one market, which translates to nearly 13,000 units a day. This average has since doubled, following the phone’s launch in Europe. And in a single day, SingTel claims it has received ‘hundreds of inquiries’ – an early indicator that local consumer interest is piqued and they are eager to bite. After all, consumers in Singapore have waited more than a year for the iPhone to be officially sold here.

The three-month head start that SingTel is likely to get over rivals also leaves ample time for the company to ramp up the marketing machinery to make its iPhone a must-have for the holidays. In the cut-throat telco world where differentiation is becoming increasingly difficult, any competitive advantage, however short-lived, is quickly pounced upon and seized with an iron grip.

Priming the market

Some analysts say the rampant grey market will take some shine off SingTel’s iPhone win, but I think the reverse is true. The willingness of consumers to pay a premium to buy unlocked units from parallel importers and auction sites merely attests to the allure of Apple’s sexy device, and further primes the market for its official debut. At the end of the day, the gear lust to be among the first to own and experience the cult product is likely to prevail.

Furthermore, no one can accurately predict how big the local grey market is, though the unofficial figure of 10,000 has been used in some media reports. To put things in perspective, this number, even if it is true, represents merely 0.16 per cent of Singapore’s handphone user base. Essentially, the entire market is still up for grabs.

In addition, SingTel’s seasoned marketing gunsight will probably be aimed at the millions of everyday users and not the small pool of gadget-hungry early adopters. In this regard, the official endorsement from Apple is important since product warranty is a major consideration for less tech-savvy users. And judging from Apple’s previous successes with its iPod music players and Macbooks, the task of extending the iPhone’s appeal to the masses shouldn’t be too difficult, especially since latent demand is already present.

With true number portability on the horizon, SingTel has fired the first salvo in its bid to retain supremacy. This leaves StarHub and M1 to play catch-up in their attempt to cut a deal with Apple. But, in a way, the race is already lost; every day they spend negotiating now is an extra day of publicity gained for the red army before the iPhone comes marching in.

SingTel plans $220m network upgrade

Existing HSPA infrastructure will be upgraded to deliver download speeds of 14.4 Mbps

SINGAPORE Telecommunications (SingTel) is investing $220 million in an islandwide cellular network upgrade to set the stage for delivering higher-speed mobile broadband services.

According to a company statement yesterday, the facelift – which is due for completion in March 2009 – will provide the company with a ‘future-proof’ network capable of handling more bandwidth over-the-air at much higher speeds.

‘More and more customers are accessing data and the Internet on the move and they need higher data speeds,’ said Mark Chong, SingTel’s executive vice-president of networks.

To seize on this trend, the company had already launched a 3.5G or HSPA (high speed downlink packet access) network in May 2007 to allow customers to surf the Net on their phones or laptops at broadband speeds of 3.6 megabits per second (Mbps). StarHub and M1 have also introduced similar networks. With the new project, which has been awarded to Swedish network equipment giant Ericsson, SingTel’s existing HSPA infrastructure will be upgraded to deliver download speeds of 14.4 Mbps. This will result in faster loading times for Web pages and could also pave the way for SingTel to deliver its upcoming mobile TV service.

In addition, upload speeds will also be bumped up from 384 kilobits per second (Kbps) to 5.76 Mbps, making easier for users to add large files to their blogs or their e-mail attachments through their mobile connections.

To deliver the speed boost, SingTel will be adding more base stations across the island. Once completed, the company’s network coverage will be powered by over 2,800 base stations.

This network overhaul will also help prepare SingTel for the deployment of future upgrades to HSPA technology, the group added.

‘The network enhancement programme will elevate our mobile service and coverage to an even higher level,’ said Quek Peck Leng, SingTel’s executive vice-president of its consumer division.

SingTel currently has the lion’s share of the local mobile market with a customer base of 2.5 million, followed by StarHub and M1.

Closer look at 4QFY08 results

• In line. FY08 net profit of S$3.96bn (+4.8% yoy) is 2.4% ahead of our estimate but beats consensus by 5%. 4Q08 core earnings of S$968m were up 9.8% yoy. DPS of 12 cts/share disappointed but signals SingTel is serious about MTN acquisition.

• Singapore: topline growth with margin compression. Mobile subscriber market share gains and ARPU growth drove FY08 topline growth of 11% yoy. EBITDA margin was down 270bp yoy on higher subscriber acquisition costs. Revenue growth should moderate to 3.7% in FY09, with stable EBITDA margin of 40% (guidance).

• Optus: topline growth revived, margins next? FY08 topline grew 3.8% yoy on subscriber growth and launch of wireless broadband. EBITDA margin showed signs of revival (+280 bp qoq). Momentum from wireless broadband and further prepaid subscriber growth could support sustainable margin expansion in FY09.

• Associates: strong performance but slower growth ahead. FY08 was a strong year, driven by Bharti, Telkomsel and favourable exchange rates. Expectations for stronger S$ and price-war woes for Telkomsel mean slower growth ahead.

• Maintaining Neutral with sum-of-parts valuation of S$4.05. Slower growth outlook with limited scope for upside earnings surprise drive our Neutral rating. FY09-11 DPS trimmed by 11-23% as we expect SingTel to prefer to keep the powder dry for acquisitions amidst credit crisis. However, SingTel remains our top pick for Singapore telcos as it offers the best earnings growth prospects while potential acquisition of MTN with/via Bharti is a near-term re-rating catalyst.

SingTel looks further afield for surer prospects

SINGAPORE Telecommunications has reported decent enough results for the 12 months ended March 31, 2008. And although the final dividend of 6.9 cents – giving a full-year dividend of 12.5 cents or a yield of 3.33 per cent yield based on Tuesday’s closing share price – could have been better, investors seemed to have shrugged off their disappointment over the absence of a special dividend. The stock closed two cents down at $3.73 yesterday.

In an uncertain economic environment, SingTel along with other telcos in the region, is benefiting as risk-averse investors seek dividend plays with stable earnings prospects. Telcos are increasingly regarded as utilities which people cannot do without.

There was also positive news earlier this week when SingTel announced that it clinched the prize of selling the iconic iPhone in four countries: Singapore, Australia, India and the Philippines. That deal should result in millions of iPhones sold, given that SingTel’s combined customer base in these four countries numbers 93 million.

Yet the group’s prospects are overcast with a shadow from Indonesian associate Telkomsel, Indonesia’s largest mobile phone operator. Last Friday, the Central Jakarta District Court ordered Temasek Holdings and its affiliates to sell one of its two Indonesian telecom units, upholding an earlier ruling by the country’s antitrust body, with some changes. The court cut an earlier fine of 25 billion rupiah to 15 billion rupiah (S$2.23 million) and gave Temasek the option of cutting stakes in both Telkomsel and second-ranked Indosat by half. It also shortened the deadline for divestment to 12 months, from the two-year deadline set by KPPU, the antitrust body.

Although SingTel and Temasek will continue to fight the court ruling by appealing to the country’s Supreme Court, the outcome looks very uncertain.

Some observers may take Jakarta’s policy on consolidating the banking industry as writing on the wall on how it regards the first wave of foreign investors who were invited to bail out its ailing industries in the aftermath of the 1997-98 Asian financial crisis. A Temasek-led group in March sold its 56 per cent stake in PT Bank Internasional Indonesia to Malayan Banking Bhd, helping meet the country’s central bank rules limiting investors to ownership of one bank.

Telkomsel is very important to SingTel. In the quarter ended March 31, its post-tax contribution was up 3.3 per cent to $186 million, accounting for 19 per cent of the group’s underlying net profit. Telkomsel also paid an interim cash dividend in the December 2007 quarter, in which SingTel’s share came to $54 million. For FY2006, Telkomsel paid a full-year dividend of 85 per cent on net profit, and SingTel’s share of this was a massive $550 million.

Given the situation in Indonesia, SingTel’s acquisition strategy takes on a critical hue. And it strengthens talk that SingTel will take an active and direct role in helping 30.4 per cent-held Bharti Airtel, its Indian associate, land the massive takeover bid for South Africa’s MTN. Bharti has said it is in exploratory talks with MTN but has not yet made a bid, in what could become India’s biggest ever foreign corporate takeover.

Media reports have said it is eyeing a stake of 51 per cent at a value of around US$19 billion, which would create the world’s sixth-largest mobile company with 130 million subscribers in more than 20 countries. It would be a coup indeed for Bharti if it succeeds, and even more so for SingTel.