Axiata Berhad’s next phase of growth will be driven by efficiency and a data-centric strategy-
Malaysia-based telecom group Axiata Berhad that has a footprint in South and Southeast Asian telecom markets is gearing up for its next phase of growth, which will be driven by efficiency and a data-centric strategy. The growth rate of its voice operations in the Malaysian and Indonesian markets has been subdued, due to declining average revenue per user (ARPU), low subscriber growth, and an increase in market competition. This situation has compelled Axiata to channel its resources towards data services and other emerging business opportunities. Further, its strategy of expanding into the low-penetration market has led to its focus on infrastructure sharing and other optimisation strategies to protect its margins.
Axiata rolled out its 3G networks in the Indonesian and Malaysian markets as early as 2006 to ensure a smooth transition to next-generation networks that provide both data and voice services. However, it was just recently that the company expedited the augmentation of its 3G network coverage across its operational markets to provide high speed mobile broadband services. As a result of these efforts, the data segment’s share of the group’s service revenues (excluding value-added service and SMS) have increased from 15.3 per cent for the quarter ended June 2012 to 17.1 per cent for the corresponding quarter in 2013.
Another focus area for Axiata has been the optimisation of cost efficiencies across operations. The company is sharing the infrastructure of its backhaul network with other service providers in an endeavour to cut operational costs. It is also implementing data analytics techniques to gain insights into customer behaviour. These customer insights are processed to streamline marketing and customer acquisition efforts, thus helping Axiata to manage costs. Axiata, with help from Standard Chartered, has also established a regional treasury management centre in Malaysia to centralise its financing activities, improve cash management efficiency, and provide end-to-end visibility on the flow of funds.
Spreading footprint
Axiata has operations in Malaysia, Indonesia, Cambodia, Sri Lanka, and Bangladesh. It has a 100 per cent stake in Malaysia-based Celcom, a 66.6 per cent stake in Indonesia-based PT XL Axiata, a 90 per cent stake in Cambodia-based Smart, an 85 per cent stake in Sri Lanka-based Dialog, and a 70 per cent stake in Bangladesh-based Robi. Moreover, the company also has a presence in the telecom sector in India, Pakistan, Singapore, and Thailand via its affiliates, Idea Cellular, Multinet, M1, and Samart i-mobile, respectively. Axiata’s total subscriber base across all the markets stood at about 229 million as of June 2013.
The company’s extensive presence across the Asian region can be attributed to its strategy of entering low-penetration telecom markets. For instance, Axiata entered the Indonesian telecom market in 2005, when its teledensity was below 30 per cent. Similarly, the company ventured into the Cambodian market in 1998, when the country’s overall teledensity was less than 1 per cent.
Notwithstanding its presence in multiple countries, Axiata still derives about 70 per cent of its total revenues from its Indonesian and Malaysian operations. Celcom and XL Axiata accounted for about 67 per cent of the Axiata Group’s entire subscriber base as of June 2013. These figures are hardly surprising given the fact that the Indonesian and Malaysian telecom markets are more mature than the other operational markets in the Asian region.
Celcom faces competition from small players in Malaysia
Celcom Axiata is the second largest telecom company in the country: its 2G and 3G network coverage is about 95 per cent and 83 per cent, respectively. As of June 2013, its subscriber base stood at 13 million, of which 1.08 million were internet customers.
Over the past few quarters, the voice services business has been experiencing limited growth, while the SMS business has taken a hit owing to competitively priced offerings in the prepaid segment from DiGi and small players like U-Mobile. Consequently, ARPU declined from RM 49 during April–June 2012 to RM 47 during the corresponding period in 2013.
However, the data services segment has been improving: the data subscriber base increased from 994,000 to 1.08 million in the post-paid segment during the same period. Revenues from the data services segment also grew by 17.78 per cent from RM 225 million for the quarter ended June 2012 to RM 265 million for the corresponding quarter in 2013.
To provide a further boost to its data business, Celcom launched long term evolution (LTE) services in the Klang Valley on April 22, 2013, with an initial deployment of 70 LTE-based base transceiver stations (BTSs). The company initially provided LTE services using spectrum in the 2600 MHz band. Subsequently, the company switched to the 1800 MHz band that had been allocated for 3G offerings, after approval was granted by the Malaysian Communications and Multimedia Commission.
Using spectrum in the 1800 MHz band to serve data customers will be beneficial as it is considered to be more efficient than that in the 2600 MHz band. The 1800 MHz band that requires less tower sites than the 2600 MHz band to provide the same network coverage has enabled Axiata to lower opex. Moreover, the LTE ecosystem of the 1800 MHz band is more mature than that of the 2600 MHz band, hence leading to more device availability.
Though Celcom’s strategy to improve its data offering is a step in the right direction, the company should also maintain its market position in the voice segment that still accounts for most of its mobile revenues. This segment is all the more important as revenues from the data services segment will not be able to compensate for the loss of income from the voice segment, at least in the near term.
Celcom can strengthen its market position by offering bundled mobile offerings that include both data and voice services at competitive rates. Although this strategy may result in lower margins for Celcom over the next few quarters, it would go a long way towards helping the company to regain its lost market share, as the small players would find it hard to match Celcom’s customer reach and network coverage.
XL Axiata increases spectrum holdings to improve competitiveness
XL Axiata is the third largest GSM operator in Indonesia, with a subscriber base of 54.17 million as of June 2013. XL Axiata offers both 2G and 3G services using spectrum in the 900/1800 MHz and 2100 MHz bands, respectively. Though well positioned in the hypercompetitive telecom market, XL Axiata has been losing market share as a result of aggressive expansion by small players and the tariff war in the industry.
In its effort to regain market share, the company reduced voice tariffs during October–December 2012. However, as this move did not yield any significant benefit, the company restored its previous tariffs to improve ARPU. Despite these efforts, revenues for the quarter that ended in June 2013 were not encouraging: they fell from Rp 5.31 trillion for quarter ended June 2012 to Rp 5.29 trillion for the corresponding quarter in 2013. Profits declined sharply by 55.28 per cent to Rp 355 billion.
The data services segment that is gaining traction has become the focus area for XL Axiata to improve revenue growth. During the April–June quarter of 2013, the company added 891 3G-based BTSs (Node Bs), bringing its total number of tower sites to 14,186. With improved network coverage and higher speed, its data traffic grew by 88 per cent year on year during the quarter.
XL Axiata has earmarked an investment of up to Rp 9 trillion to expand its mobile broadband business in 2013. It has already commenced trials for LTE services in Bali. To fulfil the high bandwidth demand of its customers, the company is planning to roll out 9,000 km of optical fibre in its network.
XL Axiata is also addressing the problem of spectrum shortage for its high speed data services. The company has acquired a 95 per cent stake in its competitor Axis Telecom in order to shore up its spectrum holdings, though this deal has yet to be approved by the regulatory authorities. Following the acquisition of Axis, XL Axiata will gain access to the additional 10 MHz of spectrum in the 2100 MHz band, thereby increasing its total spectrum holdings in the band to 25 MHz. XL Axiata will also be able to use Axis’ 15 MHz of spectrum in the 1800 MHz band, which will most likely be used for the provision of LTE services.
However, the rapid expansion of the company’s 3G network coverage could prove to be a costly affair in the short term. XL Axiata faces the uphill task of persuading its price-sensitive customers to adopt 3G services. If 3G uptake fails to pick up significantly, its infrastructure would remain underutilised and hence result in lower margins. Currently, about 15 per cent of the total subscribers in the country use 3G-enabled handsets. Others have yet to move from 2G phones due to the prohibitive costs of branded 3G handsets, which are preferred as compared to cheaper smartphones. Until branded 3G-enabled smartphones become affordable for the masses, adoption of data services will remain limited.
Nonetheless, the strategy will benefit XL Axiata in the long term, as data services gradually gain traction among the masses. Higher spectrum holdings will be the key to providing high speed services and better network coverage.
Riding the future wave of data traffic
Despite the fact that Axiata faces several headwinds in the near term due to intense competition in the Indonesian and Malaysian markets, the long-term outlook of the company remains positive. The company that is banking heavily on the data business has invested significant capital in improving its 2G and 3G network coverage, in line with its data-centric strategy to enhance profits. It is also betting big on the machine-to-machine and digital service businesses to improve its cash flows.
Celcom is also exploring business opportunities in digital services such as payments, advertising, and e-commerce; it is targeting for a revenue compounded annual growth rate of 35 per cent over the next five years for these services. It has appointed Huawei to provide development tools for digital content development and billing solutions for the efficient management of service contracts with digital content developers. At the same time, XL Axiata has implemented Amdocs’s mobile payment solution to enable its customers to pay their bills for downloaded apps through their mobiles.
Finally, the Axiata Group is looking at monetising its tower sites to improve revenues and unlock asset value. The company intends to create a separate entity for its tower assets and launch an initial public offering for this entity at a later date. The listing of its tower assets would enable Axiata to secure a significant amount of capital: several investors would be eager to cash in on the surging returns from investment in the tower business. Of late, this business has been experiencing huge demand due to operators’ decision to reduce operational costs by sharing telecom infrastructure.
Ultimately, while Axiata may have been suffering from a slowdown, this could be considered a temporary setback. If Axiata is able to execute its data-centric strategy and cost management plans successfully, it may well go on to become a regional telecom giant by 2015, as envisioned by the company’s management.
