This article first appeared in The Edge Malaysia Weekly on June 19, 2017 - June 25, 2017

THE intense competition in the mobile industry is hurting the top three telecommunications companies (telcos), as evidenced by the decline in their revenue in the first quarter ended March. But at this low point in the telecoms industry, who is gaining market share? And at what cost?

Toh Woo Kim of AllianceDBS Research notes that Maxis Bhd managed to keep its service revenue flat in 1QFY2017, outperforming DiGi.Com Bhd and Celcom, which suffered year-on-year declines of 5.6% and 2.4% respectively. Other than the Big Three, he believes U Mobile Sdn Bhd is winning market share.

Jeffrey Tan of RHB Research says webe — Telekom Malaysia Bhd’s wireless mobile service offering — has also been gaining traction in a few key markets. “It’s a mixed bag. DiGi has continued to capture postpaid share at the expense of its larger peers while Maxis has been growing its share of the mid-end prepaid segment,” he adds.

According to Thong Pak Leng of BIMB Securities Sdn Bhd, each of the Big Three is expanding in its niche, although Celcom is seeing a fall in subscribers.

In the first quarter of 2017, the total number of prepaid subscribers declined 11.6% year on year to 24.6 million while postpaid subscribers increased 5.9% to 7.9 million, indicating a migration from prepaid to postpaid.

CIMB Research analyst Foong Choong Chen concurs with this data in his June 2 report. “Postpaid revenue was largely flat quarter on quarter due to seasonally lower roaming usage, although it was up 4.9% year on year, driven by continued growth in subscribers as a result of prepaid-to-postpaid migration and some of them signing up for higher-end plans [given the generous amount of data quota],” he says.

DiGi saw the biggest increase in postpaid subscribers, up 15.1%, compared with a year ago, followed by Celcom’s 3.7% rise while Maxis edged 1.8% higher.

In the prepaid segment, Celcom fell behind Maxis in terms of subscribers — down a sharp 21% year on year to 7.3 million. Maxis saw a 5.4% decline during the same period to 7.8 million subscribers while DiGi, which has the most prepaid subscribers, experienced an 8.1% drop to 9.6 million.

Judging from the decline at all three incumbents, Toh of AllianceDBS and Tan of RHB Research believe U Mobile has been eating into their market share.

Downward pressure on ARPU to persist

The 1Q2017 financial results released by the telcos also point to a downward trend in their average revenue per user (ARPU) as competition has heated up since the spectrum realignment.

DiGi’s ARPU in the postpaid and prepaid segments slipped 1.3% and 8.6% year on year to RM79 and RM32 respectively. As for Maxis, its postpaid segment saw a flat ARPU year on year while its prepaid segment grew 7.7% in the same period. Axiata Group Bhd saw Celcom’s ARPU in the prepaid and postpaid segments increase 3.4% and 6.6% to RM30 and RM81 respectively during the same period.

Toh shares with The Edge that voice and SMS (short message service) accounted for a substantial 60% to 70% of revenue for the telcos. “Thus, ARPU is still at risk of declining further as substitution with data continues. At the same time, the telcos have not managed to effectively monetise the surge in data consumption, given the sharp fall in data tariffs as a result of the stiff competition in the mobile market.”

RHB’s Tan agrees, saying competition has heightened on the back of the spectrum realignment and subdued consumer sentiment. “Data monetisation remains an uphill battle with the downward pressure on ARPU likely to persist in the medium term as the momentum of prepaid revenue remains weak.”

Thong, however, points to the different strategies adopted by the telcos recently as an indicator that ARPU will stabilise. “I think ARPU will stabilise because the telcos are offering higher data instead of lower prices. But this will also lead to higher capex (capital expenditure), which will result in higher depreciation.”

But another analyst thinks that if U Mobile’s aggressive pricing succeeds in stealing more subscribers, the pressure on the incumbents could push their price point lower.

The weaker results of the telcos could also have a negative impact on their dividend yield. “We are seeing risks to dividend payout by these players due to their declining earnings and spectrum fee payments, which could impact their free cash flow and ability to pay out dividends,” Toh says.

Tan agrees, especially if capex and spectrum payouts surprise on the upside. He highlights that some of the telcos are already reaching the ceiling of the net debt-to-Ebitda (earnings before interest, tax, depreciation and amortisation) profiles.

Thong, however, says the risk might not be the same for all the players. “It depends on the companies. Maxis pays a flat dividend while that of Axiata, DiGi and Telekom depends on their earnings.”

Digitalisation initiatives embraced by telcos

According to Tan, the digitalisation initiatives have been adopted by the telcos with different degrees of execution and success. “There have been some positives on the cost front from the digitalisation of the core network and streamlining of the distribution channel. Also, the progressive migration to 4G will contribute to better data profitability.”

A fund manager with a local asset management company says things remain challenging for the telcos in the near term, given the saturated market. But he highlights such initiatives as the formation of new divisions, like DiGi-X, that aim to create new digital start-ups from within and externally.

“There are unlikely to be near-term material earnings from such initiatives but in the long term, they could lead to service differentiation and penetration of new markets. One thing is certain for the telcos — they will be seen more as digital service providers than mere telecoms service providers in the future,” he says.

However, it should be noted that success is not certain. Besides DiGi, Axiata has been aggressively investing in digital services but monetisation is yet to be seen.

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