The Motley Fool

3 Clear Signs That Telecommunication Businesses Are Under Pressure

Investors used to be able to rely on the telecommunication (telco) industry to provide them with predictable earnings and steady dividends. Local telcos such as Singapore Telecommunications Limited (SGX: Z74), or Singtel, and Starhub Limited (SGX: CC3) used to be known as consistent dividend payers as the industry boomed. The industry was structured as an oligopoly, so investors also didn’t need to worry about competition being a threat to earnings, cash flow, and dividends.

The telco industry landscape has altered significantly in the last five years, though. Not only has the Info-communications Media Development Authority (IMDA) introduced competition, but technological advancements have also rendered the telcos’ old business models increasingly obsolete as they struggle to keep up.

Our FREE SGX stock pick!

chart

We reveal 1 fast growing, Singapore stock pick flying under the radar, absolutely FREE!

Here are three clear signs that telcos are facing a great deal of pressure.

1. Declining average revenue per user

Telcos measure their operational performance using a metric known as average revenue per user (ARPU). ARPU is similar to the average spend per customer in the restaurant industry and represents the average dollar value of services rendered to customers. ARPU has been on a consistent decline for mobile services for both Singtel and Starhub. In Singtel’s FY 2019 earnings, its Singapore mobile division recorded a year-on-year fall in blended ARPU per month of 6.5% to S$32, while Starhub reported a 9.3% year-on-year fall in ARPU for its post-paid mobile division for Q1 2019.

ARPU decline seems to be an industry-wide phenomenon as the competition heats up for data, rather than voice. More mobile virtual network operators (MVNO) are springing up and offering either free or lowly-priced data bundles to consumers. Over time, this will continue to further depress ARPU for telcos unless they can devise a method to entice consumers to pay more for data.

2. Liberalisation of the telco industry

In 2016, IMDA announced that the telco industry will be further liberalised and granted a license for a fourth telco to “enable greater competition and service innovation in the market.” Australia’s TPG Telecom Ltd (ASX: TPM) then emerged as this fourth player as it won the spectrum with an S$105 million bid that same year.

This news caught the industry completely by surprise as the incumbents felt that the industry was already saturated and that the market was too small to be able to accommodate a fourth player. Though TPG has yet to officially launch in Singapore due to problems it encountered over the last three years, it’s only a matter of time before it does so, and existing players should brace themselves for even stiffer competition in the years to come.

3. Cable TV competition

Singtel and Starhub both have cable TV divisions that offered a suite of channels and programs to customers. This division is now under pressure as competitors are popping up to offer on-demand television as well as original content. Neither telco creates its own content but instead broadcasts channels from original content providers.

Competitors such as Netflix Inc (NASDAQ: NFLX) offer an affordable subscription for customers to view a variety of TV series and movies on demand, and the company has also created original content of its own that’s streamed through its service. Other competitors include Apple Inc (NASDAQ: AAPL) with its Apple TV service and Amazon.com Inc (NASDAQ: AMZN) with its Prime Video.

Want to keep reading and learn more from The Motley Fool? There are many important things we think every Singaporean investor should know before jumping into stock picking—and we’ve laid them all out in our eBook, which we think will help you become a Smarter, Happier and Richer investor. You can download the full e-book FREE of charge here

The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore has recommended shares of Apple Inc and Amazon.com Inc. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.