This article first appeared in The Edge Malaysia Weekly, on November 30 - December 6, 2015.
Film remakes are usually criticised for lacking creativity as part of the problem is breaking away from the original to make a new, superior version. The movie director’s need to find a winning formula that appeals to a wider and tougher audience, in a world in which competition for box office receipts has toughened significantly, is perhaps not all that dissimilar to the challenge faced by those at the helm of mobile telecommunications groups, such as Axiata Group Bhd.
Like the film-making business, telecommunications companies (telcos) too are faced with new challenges brought about by technology, high-speed internet on-the-go and consumers’ fast-changing demands.
Little wonder then that coming to eight years since he was named Axiata’s president and group CEO in March 2008, Datuk Seri Jamaludin Ibrahim continues to be “a man in a hurry”.
Having turned Axiata into a “regional champion” while doubling its market capitalisation, revenue and profit, Jamaludin now wants Axiata to morph into “a new generation telco by 2020”. That rather generic sounding term, he adds, is “for the lack of a better word” for what Axiata will become.
“This is a case where I don’t really know what it means. All I know is that it will be very different from where we are today. We don’t even want to be recognised as a ‘telco’ but I don’t know yet what is a good replacement [word]. Is it
‘digitalco’ or ‘convergedco’, I don’t know. But at least from a results perspective, our business model should be quite different from what we have today,” Jamaludin tells The Edge.
“This is one of the rare moments when I have to admit that the vision is a work in progress. We have an overall feel of where we should be … and we know we should not be a normal telco selling voice and minutes and data. We should not be just a ‘smart pipe’ … We should not just be selling mobile airtime … we should reach you beyond mobility into your homes and the way we charge revenue should not be just the normal tariffs you see today. It could be a bit of advertising, a bit of revenue sharing with our content providers … a combination of all that, but it is not fully defined just yet. Am I embarrassed to say that? No, I’m not embarrassed to say that because we are going into uncharted territory.”
He is right. No “telco” in the world has found the right formula to replace the dwindling profits from providing simple voice (phone) calls and short messaging services (SMS) that have hitherto made incumbent providers “cash cows” and attracted newcomers. “I think, generally, telcos have been comfortable and have not explored enough the different types of businesses … but that’s slowly changing.”
The penalty for not investing fast enough earlier is showing up on the balance sheets as profit from SMS plunges, thanks to free messaging services such as WhatsApp, which makes less than three US cents from each of its 400 million monthly active users.
Yet, social networking behemoth Facebook Inc — with US$298 billion in market capitalisation and US$2.94 billion in net profit in FY2014 — paid US$19 billion in cash and shares for loss-making WhatsApp in February 2014. That’s bigger than Axiata’s current market cap of US$12.8 billion, which made around US$700 million profit in the past year. Similarly, Maxis’ market cap stood at US$11.7 billion and DiGi.Com Bhd, RM9.4 billion. Twitter Inc, which has a US$17.8 billion market cap, is also loss-making.
Armed with a bigger balance sheet and market base, some telcos have chosen to be more aggressive than others — mirroring, perhaps, the behaviour of the world’s biggest internet and technology companies that are turning into conglomerates via acquisitions.
And the competition for good buys is tough. Even Fortune 500-listed China Mobile Ltd, the world’s largest telco with over 820 million customers (comparable to Facebook’s daily active users), is reportedly seeking investment opportunities in the content and internet space to help grow its core telecoms business. While China Mobile has a US$238 billion market cap (slightly smaller than Facebook’s US$298 billion) and made a US$17.6 billion net profit in FY2014 (six times more than Facebook), its competitors include Chinese e-commerce giant Alibaba Group Holdings Ltd, which has reportedly spent over US$16 billion on buying more than 30 companies involved in everything from finance and taxi-booking services to entertainment and media.
Japan’s Softbank Group, for instance, has Softbank Mobile and more than 1,000 investments, the largest being its stake in Alibaba, Yahoo!, Yahoo! Japan Corp, Sprint Corp and game developer GungHo Online Entertainment. At its AGM in June, it told shareholders that the internal rate of return (IRR) on these investments were estimated at between -2% and 78%, averaging at 43%.
Across the Causeway, Singapore Telecommunications Ltd (Singtel) too has been making acquisitions of various sizes to grow its digital and innovation portfolio, having invested in digital marketing (Amobee), advanced analytics (DataSpark) and premium infotainment (HOOQ). As early as 2012, Singtel paid S$12 million (US$9.4 million) for food recommendation site HungryGoWhere.com. To bag the next innovation, Singtel has a US$250 million fund (Innov8) with 48 investments in nine countries.
Not to be left behind, Axiata too is investing 1% to 1.5% of its revenue annually in new businesses that would complement its core business, including digital services, internet-related services, m-commerce and innovations in the Internet of Things. The money can also go to acquisitions.
“Not doing anything is the most dangerous thing to do but putting too much money is high risk,” Jamaludin says. As such, Axiata has decided to continue taking a “moderate” stance in terms of risk on its core business while taking on some small high-risk investments.
“By ring-fencing the high-risk areas, the worst thing that can happen is [the investment is all lost] but if it multiplies by 5, 10 or 100 times, fantastic!”
The earmarked 1% to 1.5% of its revenue to be put into new complementary businesses, Jamaludin says, does not include its investment in its tower business, parked under edotco, which recently announced a US$221 million acquisition of a controlling 75% stake in Myanmar Tower Co Ltd from Digicel Group.
Singapore-listed and Myanmar-based Yoma Strategic Holdings Ltd holds the remaining 25% stake and is believed to be open to selling the stake as it is sitting on sizeable paper gains based on the price edotco paid Digicel. “From a directional point of view, we would like to have a local partner and if they stay, better still, but we’ve not come to any agreement yet,” Jamaludin says.
While admitting that conditions in Myanmar can be challenging, Jamaludin is confident the move will pay off. “We think it is pretty good, a lot of challenges, but a lot of opportunities too,” he says.
If the move pays off, a sizeable Myanmar tower business would boost valuations for edotco, which could go for IPO later. But it would be unlikely to have towers in Indonesia due to limitations on foreign controlling ownership of the business there. This is why Axiata’s telecoms towers in Indonesia are for sale.
In the meantime, Jamaludin says Axiata is always open to “opportunistic” acquisitions and partnerships. It continues to think “proactively and reactively” on consolidating its position in the markets it operates as well as other potentially propitious markets. “If it is within a territory that we like and we’re relatively familiar with, we will go for it but I don’t go around shopping with a big cheque book.”
Apart from Celcom in Malaysia, Axiata’s regional mobile footprint is in XL in Indonesia, Dialog in Sri Lanka, Robi in Bangladesh and associate stakes in Singapore’s M1 Ltd and India’s IDEA Cellular Ltd.
Axiata is redefining itself as the business transforms from being just a seller of traditional voice and data to a one that incorporates elements of the internet world as it looks to generate more revenue and profit from what it knows about its customers, without being intrusive. “Trust and privacy are issues that telcos are very mindful of … A shopper might not mind receiving an SMS telling them there is a sale [where they are] … the key is to differentiate between who would want that and who would be annoyed.”
Whether Axiata will have a new revenue stream from advertising or something other than the traditional voice and data should be evident within three years.
“We started last year. Right now, you see dotted lines. By 2017, you will see the dotted lines connected and there will be greater clarity on what our revenue will look like. How we combine the so-called disparate initiatives into revenue generators will come together by end-2017. By then, I can tell you how the new generation telco should be like,” Jamaludin says.
With 20 “hold” recommendations versus 10 “buys” at the time of writing,
Axiata could well fall out of favour with some investors with shorter-term horizons who expect its capital expenditure to fall next year. “Originally, after 2016, capex was supposed to come down … I don’t know how much yet at this point, but it doesn’t look like it is going to go down next year,” Jamaludin says.
He is actively engaging with investors who have longer investment horizons. “We’re doing this exercise proactively, meeting some investors to invest from a longer-term perspective. There’s nothing wrong or right with short-term investors, it can be a matter of having different mandates and some people are mandated for a very short term … So what we can do is match [ourselves] with the kind of investors who would appreciate what we want to do.”
By longer term, Jamaludin means “three to five years”. “Beyond five years is too long. Very few investors will have that kind of patience … By the second or third year, we should see pretty good results already on the things we spoke on. It will be a lot clearer by 2017,” he says.
Whether or not Jamaludin succeeds in winning over investors, just like director Steven Soderbergh did with his remake of 1960 film Ocean’s Eleven, he has this to say about Axiata’s future: “In the future, three things can happen. It can be high dividend and high growth but it is more likely that [Axiata] will offer high dividend and lower growth or remain as moderate dividend and moderate growth.”
It is worth noting that Axiata — which, through its subsidiaries and associates, serves over 260 million subscribers in Asia and made a profit of about US$703 million last year — is a lot more profitable than the likes of loss-making Twitter and WhatsApp. However, Axiata commands a smaller market cap of US$12.8 billion than Twitter’s
US$17.8 billion and the US$19 billion Facebook paid for WhatsApp. It would be interesting to see if Facebook would open its cheque book to buy a stake in telcos such as Axiata, which still has sizeable earnings that even the most promising technology startups might never make.
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