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Mobile myths, competition demystified
David O'Brien , Jakarta | Wed, 09/17/2008 10:27 AM | Opinion
Dennis Pratistha has reopened the can of worms I alluded to earlier in the year in his piece of Aug. 11, Mobile phone industry shake-up. A subsequent piece by Jakarta Post staff on Aug. 19 looks at ad spend and claims of healthy competition by the regulator and industry participants.
A review of recently published (as available for publicly held entities) first half 2008 figures makes for interesting reading. XL have managed to push their EBITDA margin up by 10 percent to 45 percent while Telkomsel as industry leader have suffered a fall from 72 percent back to 69 percent in the past year; with Indosat slipping slightly back to 50 percent (see table).
The CDMA operators are squeezed as their low cost model is impacted by matching higher promotion costs on a lower customer and revenue base. Overall all seems rosy.
Benchmarking to established markets operators and their shareholders at margins is in the region of 35 percent- 40 percent. The CDMA operators are the operating at much narrower margins to maintain growth with recent Mobile 8 numbers not available and Bakrie falling to 25 percent. So what is going on?
Looking at the comparative marketing spend and net cash flows provides an interesting snapshot. At present Telkomsel is the only operator with positive operating cash flow (cash generated from operating activities less investing activities).
Growth is flattening out now as a cursory glance of Indonesian demography should make clear. There are 160 million adult Indonesians, with 3 million earning more than Rp3 million a month. Once we give those 3 million people each 2 hand phones, it is time to consider the bottom end with 40 percent of Indonesians on less than 800,000 a month.
Some rough math leads to the conclusion that Even with 60 percent all making in excess of 800,000 having a phone plus the multiple handsets at the top we are getting close to everyone wanting a phone having one.
It is the low cost CDMA base that with lower overhead and operating costs seems in the best position to deliver to the lower margin consumers. Recent moves are afoot to indicate that consolidation may be occurring in this sector.
The ever opportunistic Bakrie's have taken a stake already in Mobile 8 and are rumored to be seeking full control. This makes perfect sense where they have out maneuvered Mobile 8 in marketing terms and in financial management. Whereas Mobile 8 lags and has weak balance sheet, Bakrie Telekom remains profitable and has a recent rights issue that has boosted its balance sheet capacity to launch a bid for control and save on additional spend of BTS outside of its initial West Java base and enjoy cost synergies.
In the past year Bakrie Telekom's marketing spend has risen by 50 percent relative to revenue. It has the highest cost of customer acquisition and the lowest yield per customer, thus lengthiest pay back period.
However with a crafty Mobile 8 play and an ongoing low cost offering as opposed to specials offered by other operators there should be much less chance of churn, especially given non compatibility of CDMA handsets. Their last competitor in the space, SMART is giving handsets away and is hard to see how they can catch up in the mass market.
In such a world of increasing customer acquisition costs savings need to be made elsewhere and it seems networks now may be suffering in quality.
XL is now outspending everyone in terms of advertising and consequent large subscriber growth. In the last year the MOU (Minutes of Usage) has seen spectacular growth of 1500 percent -yes 15 times the usage on the near same network. Capital expenditure for the period was up some 60 percent.
Either the network was completely underutilized previously and or the operator found a new rich seam of previously undiscovered customers. Real life experience does not seem to bear this out.
The marketing battle for customers is being won by XL, but what price the war? Claims of network quality being maintained do not seem to gel with user experiences I am aware of. The word I am hearing is that subscribers cannot get a line during the "gratis" time periods. In addition calls are now frequently dropped in the other "low cost" periods. This is becoming the case with other GSM operators also.
In the first half of 2007 net free cashflow was negative 1,600 billion rupiah and in 2008 this fell further to 2,200 billion as XL outspent its larger competitors in advertising and promotion. A result of this has been to lift their debt to equity ratio to some 70 percent. This is the type of level of gearing usually only enjoyed by long term infrastructure plays with fixed regulated returns in countries with a strong rule of law.
Now there is a plan to sell and lease back their mobile phone towers or BTS. It is forecast to sell 10,000 and raise in the region of 6 trillion rupiah. This will help bring debt to equity back to around 60 percent and extinguish some high yielding debt.
However the implicit yield in any transmission deal is likely to be higher given the counterparty risk and responsibility. In net terms, once debt and assets are moved off the balance sheet it is redressed a little but the cash flows associated with the lease deal will have an obvious impact.
There is also planned a capital raising at end of year. One should have a good hard look at any prospectus and/or have a lot of trust in the Malaysian government to keep writing big cheques.
For all this alleged customer growth it is clear that there is very little loyalty. One only has to look around in a cafe or in their office and see people switching SIM cards on their phone. There remains evidence of telephone numbers being sold but not unique, new, loyal customers.
Operators are extending validity periods for phone credits and the lifetime of non filled SIM cards. The statistics thus continue to be muddied.
This is the real world where the only way of the future is surely consolidation. With the Saudis and Qataris buying in late in the game, maybe just the Russian petro dollars still looking for a home after missing out on Indosat.
The writer is General Manager at www.12frenz.com mobile community. He can be contact at do@mobafone.co.id
