How Might a Fourth Player Affect Singapore’s Telecommunications Industry?

One of the main concerns that current and potential investors in Singapore’s telecommunications companies – namely Singapore Telecommunications Limited (SGX: Z74), StarHub Ltd (SGX: CC3), and M1 Ltd (SGX: B2F) – are likely to have is the impact on the industry with the potential entrance of a fourth player in the scene.

In here, I want to take a look at two possible impacts that a fourth telco may bring to Singapore’s telecommunications industry.

First up is pricing competition.

Given the commodity-like nature of telecommunications services where there’s little differentiation – except for perhaps speed and reliability of service – companies might resolve to compete on price.

A new player will be eager to build market share and one of the best tactics to accomplish that is for it to provide an equivalent or better service at a lower price. Though price cutting is not guaranteed since the newcomer would also have to take care of its bottom-line and there’s no guarantee its cost structure can allow it to offer services at a lower price while making a sustainable profit, heightened competitiveness could still eventually lead to some form of pricing pressure.

In fact, a price war had recently developed between the trio of Singtel, StarHub, and M1. It’s possible that all three are trying to pre-emptively protect or widen their turf in preparation for a possible entrance of a fourth telco.

Second is the overall operating costs of companies in the industry will rise.

Telecommunications is a business that has significant fixed costs (costs that will not change regardless of the quantity of services sold) largely as a result of the capital investment needed for the technological infrastructure and the acquisition of spectrum.

Given that fixed costs are well, “fixed” in nature, it will be best that the costs are shared among a high number of customers. If a fourth telco enters the scene, there’d be an increase in the supply of telecommunications services with no significant increase in customer demand – the result is that the fixed costs per customer for telecommunications companies will rise. This can then lead to lower profitability.

A Fool’s take

Though the introduction of a fourth player is likely to see a change in the industry’s landscape, do note that the potential impacts I have shared are merely hypothetical. There’s no guarantee that the adverse impacts will definitely happen, but they are risks that investors may want to think about when looking at telecommunications companies in Singapore.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.