In Singapore, with a sky-high mobile penetration rate of 150% and stagnant subscription numbers since 2014, there is literally no room to attract new consumers. With an already saturated market, the Singapore telco industry is fast becoming a zero-sum game. New alternatives such as online services and new entrants will only further fragment the market and capture niche segments at the expense of incumbents’ market share. This applies all of StarHub’s 3 business segments: mobile, broadband and cable TV. We may have to prepare ourselves to enter a new norm of more sluggish top-line growth for incumbents, and valuations that take that into account.
One research article that covers the telco sector has been done by the Research and Education department from NTU Investment Interactive Club @ntuinvestmentclub. Refer to the research here: https://www.investingnote.com/posts/108786.
As such, we will be delving deeper into recent developments involving the sector: namely, TPG’s entrance as the 4th telco, Netflix’s entrance and the collaboration between Starhub and M1 in a bid to counteract their difficulties.
1. TPG’s entrance as the 4th telco
TPG’s entrance into the mobile market does not pose a large threat to Starhub as Starhub can differentiate themselves through providing bundled plans. Starhub’s “Hubbing” product bundle offers all 4 services: cable, broadband, mobile and home tel, at discounted rates. However, if TPG captures only 7% of the market and takes market share proportionally, Starhub’s mobile market share will fall from 26.7% to only 24.8%.
Although TPG’s main line of business within Australia is broadband, it is unlikely that it will enter the broadband arena in Singapore in the near future as its allocated CAPEX resources are currently tied up in establishing nationwide coverage for mobile data in Singapore and Australia
As a new entrant, TPG may not gain traction due to its nonexistent branding and most handphone subscribers prefer to stick to an existing plan since they are rewarded with accompanying loyalty benefits. Moreover, TPG may struggle to develop a network with sufficient quality to challenge the incumbents as its estimated CAPEX of 200-300m is seen by the industry as modest at best. Market research firm Ovum believe that the CAPEX set aside is insufficient to install base stations, data centres and the backend fibre-optic cables.
2. Netflix and the impact on Starhub’s Pay TV business segment
In Singapore, rather than directly disrupting the Pay TV industry, streaming video providers such as Netflix are likely to complement each other and by offering both services as a bundle. The collaboration is necessary as Netflix ride on the Internet infrastructure owned and operated by telcos and Internet service providers (ISPs).
The Pay TV business segment contributed 17% to Starhub’s total revenue for FY 2016, down from 17.6% in FY 2015. With the decline, the Enterprise Fixed segment’s revenue eclipsed Pay TV’s contribution for the first time in 2016.The number of Pay TV customers fell 7.2% yoy to 498,000, Starhub recorded a corresponding drop in revenue of 3.3% yoy to $378 million. In summary, All in all, StarHub’s Pay TV business ended FY2016 with a loss of 47,000 subscribers – or 8.6% of the segment’s subscriber base since 2015.
It seems that as Netflix will eventually ease into the role as a complement to Starhub’s offerings rather than as a direct competitor. Firstly, existing Pay TV customers will still pay for regional and localised content in the local languages. Next, some consumers subscribe to Pay TV is to watch sports content such as EPL and NBA which is not available on OTT services. Lastly, Starhub joined in the OTT fray with their own mobile TV apps which do not charge subscribers for mobile data consumed while watching on the go. Also, StarHub, allows its customers to sign up for Netflix through StarHub’s Fibre TV set-top box.
The decline in subscribers does not represent a complete shift towards Netflix as some consumers are merely shifting to a different platform for video consumption. That said, although Netflix might not have fully displaced conventional cable TV, but its hold on the local TV-watching landscape grows stronger every month, thanks to its original or exclusive content.
In conclusion, whether Netflix will continue to convert existing Starhub users to its services depends on one word: content. If Starhub can deliver content that is equally entertaining in addition to its current offerings of Asian TV shows, we will see the numbers of conversion stabilize. Ultimately, Netflix and Starhub have a symbiotic relationship,, collaboration rather than competition will lead to the greater good for both the companies and the consumers.
3. What investors should know about Starhub’s collaboration with M1
In January 2017, Starhub announced a Memorandum of Understanding (MOU) with M1. It stated that the two companies are in negotiations regarding mobile network infrastructure sharing for Radio Access Networks (RANs), backhaul transmission and access assets. Despite this apparent collaboration between Starhub and M1, they are still competitors in the telecommunications industry.The MOU was not the first synergy of Starhub and M1, their collaboration through network infrastructure sharing has been in process for several years, and this includes cooperation on combined antenna systems, in-building fibre and tunnel cables.
According to Starhub’s 1Q17 result that released on 3 May, Starhub’s Capex cash payment has decreased 19% when compared to data of first quarter in 2016, and the percentage of Capex to revenue observed 1.4% drop from 7.1% to 5.7%. Thus, based on this, network infrastructure for RAN indeed help Starhub cut its capital expenditure. However, investors should know that Capex will not be wholly charged as current year’s expense; instead, it will be expensed yearly through depreciation based on the useful life. In a nutshell, Capex reduction affect only small portion of total expenditure, thus will not guarantee less expenses.
Though Starhub’s other operating expenses had drop of 6.7% in 1Q17, the total operating expenses increased 2.6% due to the higher cost of sales. Since Starhub almost earned same revenue as 1Q16, the higher operating expenses became one of the reasons of declining quarterly profit.
From the perspective of cash position, Starhub’s net cash from operating activities was S$18.5 million higher because of the lower working capital needs and income tax paid. Net cash used in investing activities decreased S$9.8 million to S$31.8 million in 1Q2017, which is mainly because of due to lower CAPEX payments and repayment of loan from associate.
We can draw a conclusion that the collaboration between Starhub and M1, has benefited Starhub from the reduction of Capex and partial expenses. Also, share of network allowed Starhub accumulate greater amount of cash because it didn’t need to invest as much as in previous years on infrastructure construction. However, the competition is still fierce and the market is already saturated. This collaboration seems more likely to be for the purpose of maintain rather than boost Starhub’s business, and it failed to save Starhub from the downtrend.
Please refer to the attachment for the full report