Telstra venture seen ‘challenging, rewarding’

AUSTRALIAN telecom firm Telstra’s prospective team-up with conglomerate San Miguel Corp. to challenge the two existing telecommunication giants in the Philippines—a market with high mobile penetration rate but poor wireless coverage quality—is likely to be “challenging but rewarding,” international investment house CLSA Asia-Pacific said.

CLSA sees room for a third player to grab a reasonable market share in this country with a population of 102 million and where Internet penetration is still in its infancy.

A research note on Telstra, titled “Long Distance Call” written by analysts Roger Samuel and Hazel Tanedo and published on Nov. 26, cited studies conducted by GSMA Intelligence showing that a new mobile player could achieve an average of 14 percent market share in a two-player market and an average revenue per unit (arpu) of A$8 (US$5.74) about 6.5 years after launch. CLSA adopted this estimate as its base case scenario on Telstra/SMC’s telecom foray.

CLSA’s best case scenario shows that SMC/Telstra can achieve a 27- percent market share after six years or by fiscal year 2023 alongside an average arpu of A$12 (US$8.61). The worst case scenario is for the partnership to attain a mere 1-percent market share and arpu of A$4.4 (US$3.16).

“There are merits to combining SMC’s telecom assets with Telstra’s network design and planning capability. Filipinos have long put up with slow and poor network coverage. SMC/Telstra could make a difference, especially in 4G,” the research said.

Arpu in the Philippines will likely remain under pressure over the next two to three years due to free data promotions introduced by the incumbent players, CLSA said. In the medium-to-long term, however, CLSA expects arpu to improve once consumers are “addicted” to data and as smartphone penetration further increases.

The partners

SMC enjoys a monopoly of the much-coveted 700MHz spectrum, described as one of the highest quality wireless frequencies—capable of traveling longer distances, requiring fewer cell towers and enjoying stronger indoor penetration. This is on top of SMC’s 800MHz, 1.8GHz and 2.3GHz spectrums alongside 1,800 base stations in key cities. This is as a result of its acquisition of a string of telecom companies with unused spectrum in previous years.

Incumbent players Philippine Long Distance Telephone Co. and Globe Telecom have significant amount of spectrum but CLSA said they were limited to high-frequency spectrum.

“We understand that SMC’s ownership of the 700 MHz spectrum is being challenged by PLDT and Globe Telecom, which are appealing to the government to bid out the spectrum to level the playing field for all telcos. However, SMC has legal ownership of the spectrum and has made appropriate payments to the government to use and keep the spectrum,” the research said.

CLSA’s base case scenario thus assumes that SMC has a good chance of keeping the 700 MHz spectrum exclusively.

Telstra, for its part, can bring to the table its network design and planning capability, the research said. “Without a doubt, Telstra runs the best mobile network in Australia with 4G coverage of 94 percent of the population. It is aiming to cover 99 percent of the population by 2017,” CLSA said, noting that Telstra was also a leader in technology and product innovation, having launched several value-added services aimed at increasing share of wallet, such as data sharing, carrier aggregation and voice over LTE (VoLTE).

The Australian firm also owns a network of submarine cables in Asia, including EAC-C2C which lands in the Philippines (Cavite and Batangas) and stretches all the way to Singapore and Japan. It also co-owns APCN-2 with Singtel, Verizon, AT&T and many others which has a landing station in Batangas alongside interests in more than 26 countries in Asia. “In short, Telstra will not need to buy or lease international bandwidth from PLDT,” CLSA said.

CLSA cited significant challenges associated with the market entry— strong incumbents, low disposable incomes and what was described as a “patchy” Asian mobile expansion history of both SMC and Telstra. “But, in our view, the downside for Telstra is limited,” it said.

Citing industry contacts, CLSA estimated that the loss from the earlier joint venture between SMC and Qatar Telecom (QTel) stood at P8 billion to 10 billion. For Telstra, CLSA estimated that the most Telstra could lose in the Philippines would be about A$5 billion (US$3.59 billion) in present-value terms. The estimate is based on initial capital expenditure of A$1.4 billion (US$1 billion) at most, plus A$100 (US$71.72 million) million in annual capital outlays and A$93 million (US$66.70 million) per year in losses under the worst-case scenario.

Favorable demographics

Despite a high mobile penetration rate (112 percent), CLSA noted that the 47-percent smartphone penetration in the Philippines was still lower than Malaysia’s 61 percent and Thailand’s 57 percent. In addition, CLSA noted that 4G coverage was scarce and consumers were frustrated with the poor service currently available.

CLSA noted that the Philippines also had the lowest fixed broadband penetration in the region. But with a population spread across 7,000 islands, it noted that smartphones were increasingly relied on to access the Internet.

In the meantime, CLSA noted that the Philippine Internet speed offered the lowest value for money in 2014, with actual connection speed typically 80 percent lower than advertised. The bandwidth price of $25 to $45 per Mbps in Metro Manila, which goes up to $70 in Cebu, was higher than $5 in Hong Kong and $6 in Australia. It cited studies pointing to the lack of government support for Internet infrastructure and the lack of real competition in the telecommunications industry as the culprits.

Having only two players in the industry, CLSA said the mobile market was less crowded than other markets where there were three or more mobile operators. To date, it said, the duopoly structure continued to provide existing players with high margins, even if these margins had come down in recent years. CLSA also noted that earnings before interest, taxes, depreciation and amortization (Ebitda) margin of 43 to 45 percent generated by the incumbent players were still above Telstra’s mobile margin in Australia of 40 percent.

“We note that PLDT and Globe Telecom have legacy technologies, whereas SMC/Telstra would effectively be building a new network from scratch which may result in lower operational costs after the startup period,” it said.

The entry of a third player will gnaw at the two incumbent players as the market is unlikely to materially grow with high penetration rates at 112 percent, CLSA said.

“While Globe Telecom has been the stellar performer in terms of customer growth, we caution that it will likely be more negatively affected should a new player emerge. This is because of its more wireless-oriented revenue base (85 percent of revenue) as compared to PLDT (69 percent of revenue), which has a more significant contribution from the fixed-line segment,” it said.