Three divergent trends

• Voice, a major two-thirds slice of the mobile business, is rising for M1 but declining for StarHub.

• Non-mobile business offers opportunities for M1 but poses challenges for StarHub.

• M1 may pay more dividends on top of its regular dividend while StarHub’s commitment to regular dividends could be under pressure.

• M1 is our top sector pick. Longer term, we like SingTel for Bharti’s recovery and potential for capital management with 4Q11F results.

Voice minutes declined at StarHub but rose at M1. Despite a much higher data contribution, StarHub’s 9M10 postpaid ARPU was up 1% yoy vs M1’s 5% yoy increase. This can be attributed to more than 16% decline in voice-minutes for StarHub over the last 7 quarters. Clearly, people are spending more time surfing the web than talking over the phone, impacting players with higher voiceminutes. Previously, most StarHub customers subscribed to highend plans with more voice minutes, but are substituting voice with data now. M1’s users, on the other hand, used lower voice minutes in the past and are now upgrading to high-end plans with data in lieu of higher smartphone subsidies. M1’s launch of per second billing in 2009 may have contributed to rising voiceminutes. SingTel’s voice-minutes have been stable.

Non-mobile business is likely to be up for M1 but down for StarHub. We project StarHub’s non-mobile EBITDA (40% of group EBITDA in 2010) to decline by 5%/3% in FY11F/12F due to the entry of new players in the broadband segment and more competition from SingTel, which is aiming to add >80K pay TV subscribers p.a. over the next 3 years. For M1, we project nonmobile EBITDA (2% of group EBITDA in 2010) to grow by 50%/25% in FY11F/12F on the back of its growing SME broadband business via the National Broadband Network.

Capital management potential at M1. M1 pays out only 80% of its earnings in dividends compared to StarHub’s effective payout of over 130% for FY10F. In our view, M1 could raise its regular payout ratio to over 90% or announce a 6%-9% yield in capital management on top of its regular 6% yield. We rule out capital management at StarHub and remain skeptical about the sustainability of its 20 cents DPS. In the longer term, we like SingTel for Bharti’s recovery and potential for capital management with 4Q11F results. A strong Singapore dollar, diluting overseas contribution is the key concern for SingTel in the near term.

Three divergent trends

• Voice, a major two-thirds slice of the mobile business, is rising for M1 but declining for StarHub.

• Non-mobile business offers opportunities for M1 but poses challenges for StarHub.

• M1 may pay more dividends on top of its regular dividend while StarHub’s commitment to regular dividends could be under pressure.

• M1 is our top sector pick. Longer term, we like SingTel for Bharti’s recovery and potential for capital management with 4Q11F results.

Voice minutes declined at StarHub but rose at M1. Despite a much higher data contribution, StarHub’s 9M10 postpaid ARPU was up 1% yoy vs M1’s 5% yoy increase. This can be attributed to more than 16% decline in voice-minutes for StarHub over the last 7 quarters. Clearly, people are spending more time surfing the web than talking over the phone, impacting players with higher voiceminutes. Previously, most StarHub customers subscribed to highend plans with more voice minutes, but are substituting voice with data now. M1’s users, on the other hand, used lower voice minutes in the past and are now upgrading to high-end plans with data in lieu of higher smartphone subsidies. M1’s launch of per second billing in 2009 may have contributed to rising voiceminutes. SingTel’s voice-minutes have been stable.

Non-mobile business is likely to be up for M1 but down for StarHub. We project StarHub’s non-mobile EBITDA (40% of group EBITDA in 2010) to decline by 5%/3% in FY11F/12F due to the entry of new players in the broadband segment and more competition from SingTel, which is aiming to add >80K pay TV subscribers p.a. over the next 3 years. For M1, we project nonmobile EBITDA (2% of group EBITDA in 2010) to grow by 50%/25% in FY11F/12F on the back of its growing SME broadband business via the National Broadband Network.

Capital management potential at M1. M1 pays out only 80% of its earnings in dividends compared to StarHub’s effective payout of over 130% for FY10F. In our view, M1 could raise its regular payout ratio to over 90% or announce a 6%-9% yield in capital management on top of its regular 6% yield. We rule out capital management at StarHub and remain skeptical about the sustainability of its 20 cents DPS. In the longer term, we like SingTel for Bharti’s recovery and potential for capital management with 4Q11F results. A strong Singapore dollar, diluting overseas contribution is the key concern for SingTel in the near term.

Little impact on telcos from latest tune-up

SINGAPORE’S telecommunications regulator may have toughened the rules for operators but it should be business as usual when the new regime kicks in next month. What could make a major difference to the consumer businesses of SingTel, StarHub and M1 is the government’s eventual decision on the controversial issue of ‘net neutrality’.

Last week, the Infocomm Development Authority of Singapore (IDA) finalised the changes to the country’s Telco Competition Code after a two-year deliberation. These regulations, which prescribe how operators should market their products and services and behave towards competitors, will take effect from Jan 21.

Rather than overhauling the landscape, IDA has fine-tuned existing regulations by taking more precautionary measures to safeguard the interests of the country’s growing pool of mobile and broadband users.

The headlining change is the outlawing of bait-and-hook tactics. Telcos are forbidden from automatically charging consumers upon expiry of services that were once offered as a free trial.

While this might have been an issue in the formative years of the mobile industry, telcos now know that this trick will do more harm than good.

A disgruntled customer now has the ability to air his grievances to hundreds and even thousands with a mere mouse click. The explosion in social media tools such as Facebook and Twitter has given consumers the ability to put their service providers on a much tighter leash.

As such, most should have already steered clear of such tactics. Outlawing bait-and-hook then becomes more of a legal formality than a behaviour-changing endeavour.

A second revision to the Telco Competition Code removes the ability of telcos to cross-terminate services. For example, if you repeatedly fail to pay your monthly mobile bills, your operator cannot threaten to cut off your home phone line subscription or your broadband if they are under a separate contract.

As the operators have rightly pointed out to IDA during its two-year feedback process, they resort to the termination of services only as a last resort after all other measures have been exhausted.

In the grand scheme of things, bad debts from such defaulters are but a pin prick on an operator’s overall revenue.

Throughout the year, the mobile subscriber bases of all three telcos showed signs of healthy growth. This trend is set to continue into 2011 with the release of more feature-packed smart phones, including the much-speculated iPhone update.

What the regulator has left untouched are the guidelines for quality of services and, in particular, the mobile broadband consumer experience.

The telcos are now monitored for their service levels when it comes to fixed-line Internet services. As more and more users are now surfing on their phones, the same yardsticks should be applied to mobile broadband as well.

However, this issue could eventually be addressed in a separate IDA consultation. Specifically, the regulator is currently seeking feedback on net neutrality.

The subject is a hotly contested one in the United States. Net neutrality proponents assert that everyone should be allowed equal access to all legitimate content and services on the Web.

Operators should not be allowed to block sites or applications, nor should they be allowed to tier their pricing. This means service providers cannot create a fast lane for people who can afford to pay more for broadband, thereby creating a speed divide between the rich and the poor when both are accessing the same content.

The US Federal Communications Commission did not address this issue in its inaugural net neutrality ruling last week but it did prohibit operators from blocking sites and services on their fixed-line network.

Blocking is already frowned upon by IDA but what it is seeking to do now is to make operators reveal their actual or average broadband speeds. Currently, local telcos are promoting their broadband packages based on top speeds – a scenario rarely achievable for the home user.

In place of such unattainable claims, IDA wants operators to be transparent and give users a more realistic indication of what they can expect on a daily basis.

If enforced, this rule could add to a telco’s operating costs. Consumers would naturally lean towards operators who give them more bang for their buck.

To ensure they don’t end up on the losing end, telcos will have to step up their monitoring efforts and even invest in tools to better manage their broadband pipes.

After a decade of market liberalisation, local authorities seem bent on nudging the telecommunications industry into the next phase of development. The onus is now on telcos to quickly adjust to what is shaping up to be a challenging 2011.

Hopefully, when the going gets tough, local operators will prove their mettle and really get going.

Stiffer rules to keep telcos in line

IDA move set to raise transparency, consumer protection and promote fairer competition

After a two-year deliberation, local authorities are pressing ahead with plans to raise consumer protection by outlawing the use of bait-and-hook tactics where telcos start charging unsuspecting consumers after a free trial.

From Jan 21, the Infocomm Development Authority of Singapore (IDA) will introduce a stiffer set of operating rules for telcos as part of its triennial review of the Singapore Telecom Competition Code.

Among the upcoming changes is a new rule which forbids telcos from automatically charging consumers upon the expiry of a complimentary trial. Operators can only do so if they have ‘obtained express agreement’ from customers, the IDA said in a statement yesterday.

Dishing out freebies such as time-limited access to more pay-TV channels or selected mobile services is a common tactic telcos use to get subscribers to try out more offerings in the hope of eventually converting them to become paying customers.

However, consumers have cried foul that the terms of some of these free trials are buried deep in the fine print of their contracts. Consequently, they end up being charged for services that they are unaware of.

While the ruling will still allow for free samples, it will prevent such disputes from arising as consumers will now need to give the go-ahead.

In addition, the regulator also seeks to ensure that Singaporeans will have uninterrupted access to basic telecommunications services such as a fixed-line telephone with its new rules.

To guarantee this, IDA will not allow telcos to ‘cross-terminate’ a customer’s fixed-line subscription if he has violated the conditions of a separate agreement such as failing to pay his monthly mobile phone bills.

The same prohibition applies to services that are covered by a telco’s affiliates under separate agreements.

‘This would mean that telecom operators cannot exert undue pressure on consumers to make payment of disputed charges through threatening to terminate services offered by an affiliated telecom operator, unless the services are offered under the same service agreement,’ the IDA explained.

Another major change to the Singapore Telecom Competition Code is aimed at promoting fairer competition.

It comes in the form of a caveat which allows the IDA to slap a prohibition clause on any telco that is found to have abused its market position.

Previously, this only applied to Singapore Telecommunications and StarHub, the two operators that are deemed to be dominant by the IDA.

‘This (the change) takes into consideration that licensees may acquire significant market power in certain telecom markets over time, and will allow IDA to investigate and take measures if such licensees’ actions restrict competition,’ it explained.

When contacted, all three operators – SingTel, StarHub and M1 – said that they are reviewing the changes.

StarHub added that it is already going by IDA’s new book as it does not charge customers after their free trials without their consent.

Plans to change these regulations were first unveiled in November 2008 when the regulator initiated its first round of public consultation.

It then fine-tuned the rules after taking into account feedback from telcos and industry players and opened them up for a second round of comments a year later.

More changes could yet be in store for local operators as the IDA is currently seeking public feedback on proposed changes to the broadband landscape as well.

A new condition that is being studied as part of its ‘Net Neutrality’ consultation is the requirement for telcos to disclose real or average download speeds.

Currently, telcos advertise their Internet packages based on peak download speeds that are typically attained in controlled, laboratory conditions.

The increased transparency will give consumers a better picture of what they are paying for, the IDA previously said.

In addition, operators will not be allowed to block legitimate content and services, a condition similar to the one adopted by the US Federal Communications Commission in its Net Neutrality ruling on Tuesday.