Southeast Asian telecom operators shift focus to data in 2014-
The Southeast Asian telecom industry is on the cusp of a new technological revolution, led by data services. With these services becoming the primary growth driver for the telecom industry, most companies are investing considerable capital in upgrading their networks to support the growing data traffic and offer improved user experience. Meanwhile, the telecom operators are increasingly focusing on emerging business opportunities such as enterprise services given that the traditional telecom services are witnessing a declining growth. Also, several telecom players in the Southeast Asian markets are transforming themselves into an integrated company in their attempt to offer multitude of services.
Southeast Asia Infrastructure takes a look at the key emerging trends in the telecom sector in the Southeast Asian markets…
Growing adoption of mobile broadband services
The year 2014 has seen the maximum surge in the adoption of data services on account of rising smartphone uptake and increased demand for mobile broadband services. Most mature markets in the Southeast Asian region are now covered with 3G networks while many of them have also witnessed partial roll-outs of 4G-long term evolution networks. Investments in the deployment of next generation networks have also started yielding positive results for telecom operators.
Many operators had been witnessing a slowdown in revenues on account of cannibalisation of voice and messaging services due to higher uptake of over-the-top (OTT) applications such as Skype, WhatsApp and Viber. Minutes of usage on networks of most telecom operators have declined over the last few years, which have resulted in decrease in ARPU. For instance, voice ARPU of Thailand-based operator dtac has reduced from THB 211 in 2012 to THB 203 in 2014. Similarly, Malaysia-based XL Axiata has witnessed a fall in its voice ARPU from Rp 30 to Rp 26 during the same period. Due to this, the top line of most companies has suffered as voice services still account for about 70-80 per cent of the total service revenues.
On the upside, high usage of OTT applications has been driving significant growth in data traffic on operators’ networks, thereby increasing their data service revenues. To some extent, this has enabled operators to offset the decline in voice revenues and stem the decline in profitability. With data services expected to remain the biggest growth driver for mobile services in the near future, operators are aggressively ramping up their data networks. Further, the operators are adopting small cell solutions to improve data capacity in high density urban areas. For instance, Singapore-based telecom operator M1 has deployed Alcatel Lucent’s small cell (femtocell) solutions to enhance its 3G network coverage.
Enterprise segment emerging as a big growth opportunity for operators
Apart from mobile data services, another avenue for growth for telecom operators is the enterprise business segment. Operators are increasingly looking beyond the delivery of traditional consumer services to drive business and revenue growth. According to the industry estimates, the enterprise segment is expected to be worth $237 billion by 2018, with the greatest increase in revenue during this forecast period coming from Southeast Asian markets.
Both multinationals and SMEs are shifting towards converged platforms to improve connectivity and raise the productivity of their workforce in a cost-effective manner. The adoption of mobile solutions by enterprises is growing at a rapid pace, as more and more organisations equip their employees with new technologies that provide faster download speeds, advanced content, and any time, anywhere connectivity. Further, there is a growing trend of professionals accessing all systems in their offices through their mobile devices. This development has increased the need for a virtual IT infrastructure to better manage, access and analyse large amounts of data generated on a daily basis.
Considering this, the operators are offering cloud services, tailor-made solutions and dedicated bandwidth pipes to enterprises. They also provide corporate email, customer relationship management and billing, and unified communications. The provision of such services translates into ARPU, while enabling operators to leverage upon their network assets in a differentiated manner.
Meanwhile, telecom operators in the region are also partnering with vendors, or acquiring IT companies, to offer cloud solutions to the enterprise customers. These partnerships are crucial for operators who are venturing into the cloud business for the first time. For instance, Singapore’s SingTel has acquired NCS, an IT services company, to tap the enterprise segment. Similarly, Indosat has partnered with Dimension Data to offer enterprise cloud services in Indonesia. The partnership combines Indosat’s nationwide connectivity backbone infrastructure and its 10 data centre facilities in Indonesia with Dimension Data’s cloud consultancy services. Given that the enterprise segment is a highly profitable business, many more operators are likely to venture into this segment in the near future. This will further allow operators to diversify their service offerings and further offset decline in voice revenues.
Debt instruments emerge as the key financing source for telecom operators
In order to finance capital expenditure for telecom networks, operators have mostly resorted to debt financing given it is a low-cost of capital as compared to that for equity financing. Interestingly, in the recent times, this route of financing has been preferred by telecom companies from Indonesia and Philippines. Moreover, the majority of companies have opted for medium- to long-term loans. The biggest debt deal witnessed in the Southeast Asian region in the past one year is a $1.67 billion three-year syndicated loan by SingTel, proceeds from which the company intends to use for general corporate purpose.
Another big debt funding was secured by XL Axiata through an arrangement of three-year loan worth $500 million for the acquisition of Axis Telekom. Meanwhile, few companies have also raised funds through a short-term loan facility, with a tenor of one year. For instance, Indosat has opted for short-term loan due to high volatility of rupiah. In fact, sharp depreciation of local Southeast Asian currencies vis-à-vis dollar during the last two years was the primary reason for many telecom companies experiencing high financing costs, which resulted in lower profitability.
In the near future, several companies are planning to arrange for loans from private and public banks. Indosat, for instance, is likely to secure a $450 million syndicate revolving credit facility, the proceeds from which will be used to refinance existing debt. The company has been looking to raise $850 million through rupiah-denominated loans to refinance existing debt, reduce the company’s proportion of dollar-denominated debt from 50 per cent to 25 per cent by 2015, and fund capex.
Monetisation of tower assets
With the debt burden significantly high on account of investments in data networks, many telecom operators are increasingly focussing on monetisation of their tower assets. Due to high debt, operators have been incurring considerable interest expense which has impacted their profitability. Further, the operational expenditure of telecom operators has risen significantly primarily on account of the rise in fuel costs. Consequently, there is a tremendous pressure on telecom companies to maintain their bottom line.
Given this scenario, operators are either selling their tower assets to infrastructure service providers or hiving them off to a separate entity that is subsequently divested. On one hand, this strategy allows telecom companies to raise significant amount of capital which helps in deleveraging balance sheet. On the other hand, it enables operators to focus on their core business – wireline and wireless telecom services – thereby leading to better operational efficiency.
In the past one year, several telecom companies in the Southeast Asian region have opted for monetisation of tower assets. In December 2013, Thailand-based True Corporation transferred its telecom network assets to a subsidiary, True Telecommunications Growth Infrastructure Fund (TRUEGIF). TRUEGIF then raised about $1.8 billion through an initial public offering, providing the parent company with considerable capital. Meanwhile, True Corporation will lease back these assets for 15 years for its own operations. On the other hand, XL Axiata has signed a deal with telecom infrastructure firm PT Solusi Tunas Pratama for the sale of 3,500 towers for Rp 5.6 trillion. As part of the deal, XL Axiata will lease back these towers for 10 years. Through this deal, XL Axiata intends to reduce its debt, which has increased to $865 million following the acquisition of Axis Telekom.
Indonesia-based Telkom Indonesia has also opted for this strategy. The company has entered into share swap deal with Tower Bersama for the sale of 49 per cent stake in its tower unit, Dayamitra Telekmounikasi (Mitratel). As per the agreement, Telkom will receive a 5.7 per cent stake in Tower Bersama. Telkom will also receive up to Rp 1.739 trillion in cash if Mitratel achieves certain performance targets.
Infrastructure sharing gains popularity
Another trend being witnessed in the telecom markets in the Southeast Asian markets is sharing of telecom infrastructure to reduce their operational expenditure and improve profitability. For instance, Malaysia-based operators Celcom Axiata and DiGi Telecommunications have extended the validity of the infrastructure sharing deal that the pair initially inked in January 2011. The two companies will continue to share infrastructure assets for another three years, till January 2017.
Also, sharing the existing infrastructure enables operators to expedite the roll-out of their networks. For instance, Malaysian mobile network operator U Mobile has reportedly signed a 10-year deal under which it will lease tower site space from infrastructure service provider edotco. U Mobile is of the view that the deal will allow it to accelerate its network roll-out while also improving customer experience.
Mobile money services continue to witness uptake
The trend of using mobile devices for money transactions has gained momentum in Southeast Asia. In this regard, many operators have collaborated with banks to offer low-cost and easy access to financial transactions on the mobile platform.
The success of mobile-enabled financial transactions in technologically advanced markets such as Malaysia, the Philippines, and Indonesia, can be attributed to the convenience of facilitating money transfers while on the move. Cambodia and Thailand are seeing increasing use of mobile money services because of growing wireless penetration and because large sections of the population do not have easy access to banks. As a result, the mobile phone is emerging as the foremost platform for gaining access to financial services.
Though operators generally seek assistance from the banks in fulfilling these transactions, many services are being managed solely by the operator. For instance, G-Cash is a stand-alone account managed by Globe in the Philippines, and is not associated with bank accounts. Globe plays the role of a bank, as a provider of a payment solution. It assumes the responsibility for the financial aspects of the transaction and has to comply with the country’s financial regulations.
Future positive
Going forward, data services are likely to remain the key focus area for telecom operators as they continue to improve network capacity and coverage. Many companies are likely to focus on emerging opportunities within the data space to diversify operations and improve profitability. Whether these operators can maintain profitability during the transition time from voice to data remains to be seen, but the slow revenue growth witnessed during 2013 has surely been overcome.
