Several analyst firms have highlighted Asian carriers-and not the highly watched Japanese operators-as being in the best positions to capitalize on the current mobile industry dynamics. While Europe, Japan and to some degree the United States have been market leaders until recently, the current economic downturn has placed operators in several Southeast Asian markets in a better financial position than carriers in other markets, according to industry watchers.
The first key to the success of Southeast Asian operators is fairly straightforward-they are making money on data. In fact, one-third of the revenues of Globe Telecom in the Philippines come from data services.
“Operators in poor markets have discovered how to deliver data services cheaply,” said John Barrett, senior analyst for Asia Pacific with Pyramid Research.
Pyramid last week released a report titled “Survival of the Fittest” that compares the profitability prospects for mobile operators. The report analyzes various operators around the world and categorizes them into one of three groups: money machines, risky businesses or strugglers. Globe is a money machine, according to the Pyramid analysis.
Globe has an established network without capital expenditures on the horizon. In fact, last week, Globe said it would limit capital spending to US$500 million for the next two years, as the bulk of infrastructure needed to establish its network has been completed.
In addition, it has reversed declining average revenue per user (ARPU) through data services and enjoys what is basically a duopoly market, said Barrett. “Globe can sit back and enjoy the revenues,” said Barrett, adding that although there are only two main players in the Philippines, a strong competition between the two companies drives continued service innovation.
A recent industry outlook report on Asia-Pacific telecommunications from Moody’s Investors Service found similar conclusions.
Operators in Southeast Asian markets, such as Indonesia and Malaysia, have less competition than their counterparts in the United States and the United Kingdom, for example. In addition, they have stronger balance sheets compared with operators in other areas of the world because of lower third-generation (3G) license costs and less merger and acquisition activity, Moody’s said.
“The need to introduce [3G] technology to earn a return on the investment is not immediately apparent,” said the report. “This, in turn, means that most operators in Asia-Pacific have the flexibility to wait and choose proven business models from other regions.”
Moody’s considers only two Asia-Pacific operators to be “over-levered” at current rating levels due to merger and acquisition activity. Telecom New Zealand, rated A2, and Singapore Telecommunications, rated A1, both have negative outlooks.
Brazil is another market where conditions are favorable for operator profitability. Brazil’s mobile market is structured around regional duopolies, although two new personal communications services (PCS) operators are entering some markets. In addition, there is no urgency to roll out 3G networks.
However, the picture in Brazil is not quite as rosy as in the Philippines, for example. “SMS is not as active as in Southeast Asia, so data revenues are not coming in. It is mostly a voice market. The other negative is the currency problem. Capex is in U.S. dollars, and revenue is in local currency,” said Giles Goodhead, chairman of Pyramid.
Most operators around the globe, including U.S. carriers AT&T Wireless Services and Sprint PCS, fall into the risky businesses category, said Goodhead. Because the U.S. market is so competitive with so many players, being one of the two leaders is essential for survival.
Many factors could either positively or negatively affect Sprint’s business, Pyramid said. Sprint’s high debt level, ARPU vulnerability and current market share in the teens all contribute to its placement as a risky business. However, its strong technology migration plan and effective branding are positive contributors.
“AT&T Wireless has a much lower debt level [than Sprint PCS], so they have more margin for error,” said Goodhead. “There’s two to four years of heavy cash flow losses they can accommodate. Sprint can’t do that for that long. The debt market won’t be open to them forever.”
For many European operators that do not lead in terms of market share, the picture is even bleaker than in the U.S. market. O2 in the United Kingdom is one operator that runs a fine line between a risky business and a struggler. Any operator that is last in terms of market share in the toughest European markets would be considered a struggler, said Goodhead.
For those companies, bankruptcies or pulling out of markets might be the only options. “It’s easy to see candidates on the selling side, but more difficult to see candidates on the buying side,” added Goodhead, referring to potential acquisitions of strugglers. “Markets are punishing companies that are buying.”
Any consolidation will be slow and painful, he added. “In a year, it will probably look more acute than now and not a lot of relief in terms of less consolidation,” Goodhead said. “I think it will get worse before it gets better.”
Executives at the risky businesses really hold the companies’ futures in their hands based on their management decisions. Leaders should focus on further improving the areas where a company already excels, such as marketing in Sprint PCS’ case.
The Pyramid and Moody’s reports underscore the fundamental changes taking place across the global wireless industry, where operators once considered leaders now look more like followers playing catch-up. NTT DoCoMo is an example, with its next-generation service numbers trailing its rival’s user figures.
“A lot of operators could look at best practices at operators in other markets,” said Pyramid’s Barrett. “U.S. companies are not good at promoting data services, while several Asian companies are. I doubt Sprint is paying much attention to Globe, but they should be. There probably are some things they could do differently.” GW
