SingTel, Starhub & M1: A Comparative Analysis

(Z74 = SingTel, CC3 = Starhub, B2F = M1)

SingTel

Singapore Telecommunications Limited, together with its subsidiaries, provides services and solutions in fixed, mobile and data communications, Internet, IT and consultancy, and satellite.

• Wireline services include cable-based and satellite-based fixed telecommunications network services, such as domestic and IDD services, leased lines, data communications, lease of satellite capacity, Inmarsat, and Internet services.
• Wireless services comprise mobile telecommunications services, such as cellular and paging services, and sale of handsets and pagers.
• Information technology and engineering services portfolio consists of information technology consultancy, systems integration, and engineering services.
• Other businesses include subscription television; technical and management consultancy services; ownership and chartering of barges; provision of storage facilities for submarine cables and related equipment; billing services; IT disaster recovery services; operation and maintenance of fibre optic network between Brisbane and Cairns; research and development of software; and managing and operating a call centre for telecommunications services.

Singapore Telecommunications provides its services to corporate and consumer markets primarily in Singapore and Australia. The company was founded in 1879 and is headquartered in Singapore, Singapore. Singapore Telecommunications Limited is a subsidiary of Temasek Holdings (Private) Limited.

SingTel also has extensive overseas investments in Mobile operators around Asia. These include Bharti Airtel of India and Telkomsel of Indonesia.

Starhub

StarHub, Ltd., an info-communications company, provides a range of information, communications, and entertainment services over its fixed, cable, mobile, and Internet platforms for residential and commercial customers in Singapore.

• Mobile services include 3G that enables users to make video calls and 3.5G that offers broadband Internet access over mobile phone; mobile voice services; mobile data services, including video downloads, Web SMS, MMS animation and wallpapers, MMS retrieval centre, Disney mobile, mobile ESPN premiership, and themes, as well as call, MP3, and true tones; green prepaid card; and roaming services.
• Cable TV services comprise operation of news, movies, entertainment, sports, music, and education channels.
• Broadband services include mobile and home broadband access, as well as other Internet services; and fixed network services comprise voice, data, Internet, and wholesale services for businesses.
• StarHub offers online value-added services, such as online music portal; email and broadband content filtering service, family access network, and anti-virus email scan services; data/Web storage services; corporate portal and IP-VPN solutions; and content creation and development solutions.

It is also involved in the sale of customer premise telecommunication equipment. The company was incorporated in 1998 and is based in Singapore, Singapore. StarHub, Ltd. is a subsidiary of Asia Mobile Holdings Pte., Ltd.

MobileOne

MobileOne, Ltd. provides cellular mobile communications services in Singapore. It provides

• a range of mobile voice and data communications services over its 2G/3G/3.5G network.
• international call services to mobile and fixed line users; and wireless broadband Internet services to home, office, and mobile users.
• a range of mobile voice, nonvoice, and value-added services on its cellular network and as an operator.

It has a network of operator-owned retail shops (M1 Shop) and operator-appointed distributor outlets in Singapore. As of December 31, 2007, MobileOne operated approximately 13 M1 shop outlets, as well as an e-shop, which sells mobile phones and accessories online. The company also had approximately 1,535,000 mobile customers comprising 856,000 postpaid customers and 679,000 prepaid customers.

In addition, it involves in the research and development of mobile telecommunications product and services, as well as provision of after sales support and customer services. MobileOne has a partnership with Vodafone to provide a range of wireless business products and solutions, as well as has a joint venture with PLDT (SG) Retail Service Pte, Ltd. to provide prepaid mobile services. The company was founded in 1994 and is headquartered in Singapore, Singapore.

Financials

The following is a comparative financial analysis of the three companies:

Profitability:



As can be seen SingTel has the highest margins whereas Starhub has the highest profitability ratios. However, SingTel has contributions from associates above the EBITDA line, so this skews the results.

Leverage & Multiples:



SingTel has the strongest leverage ratios. However it is also the most expensive, compared to M1 which is the cheapest stock, and has the highest yield.

Why the M1 - City Telecom Partnership Is Front Runner for NGNBN OpCo

Singapore's Next-Gen NBN OpCo RFP was released earlier this month. The race is much more open for the OpCo than the NetCo because of the lower barriers to entry and lower capital investments involved. However, despite this, I think that the only bid that truly makes sense for the NGNBN OpCo is the City Telecom - M1 consortium.

1. The operational separation is extremely onerous for the wireline incumbents, and severely dilutes the attractiveness to StarHub and SingTel.

One of the requirements of the OpCo is that it has to be operationally separated from its affiliates. This means that OpCo has to:

• Operate in all respects on a standalone basis, separate from affiliated downstream operating units
• Be located in separate premises
• Independently formulate & make own decisions on its assets and commercial policy
• Not allow its affiliated downstream operating units to have unequal influence on the formulation of commercial policy, and access to commercial information or customer confidential information
• OpCo’s Board of Directors, Management and employees not to have responsibilities in any Affiliated Operator

All these requirements will mean that an incumbent like StarHub and SingTel will have to incur significant duplication of manpower and will have to come up with a different brand name for its OpCo's operations, which might in turn compete with or overlap with its non OpCo operations. In short, Operational Separation significantly restricts their flexibility in the allocation of resources and human talent across the OpCo & RSPs.

A much less onerous option for the wireline incumbents would be to simply set up separate integrated OpCos which would have no such operational separation requirements and which could be a simple extension of existing business units. Such business units would move much faster into the market and be operationally ready.

2. A non-incumbent challenger without any sort of cooperation from existing market players faces significant market and demand risk.

Firstly, a Greenfield entrant into the OpCo space faces a significant degree of risk because his OpCo grant depends largely on meeting adoption targets. Furthermore, the incumbents like SingTel and StarHub could migrate their customer base away from the NBN OpCo to their own OpCos once the five-year exclusivity is over, thereby seeking to kill the NBN OpCo, or thereby severly harming its business case.

Secondly, Bidders with a higher risk outlook will seek to be compensated for this risk with the possibility of higher returns through higher ICO prices. However, the attractiveness of ICO prices is weighted very highly in the evaluation criteria. This puts prospective bidders in a fix. In order to be profitable, the greenfield OpCo will need to win some kind of reasonable margin from his operations. However, he is contrained by the ICO evaluation and regulation plus the fact that the iDA is trying to bring about "attractive ICO prices."

These factors, amongst others, make it highly unattractive for any prospective greenfield bidder with no demand guarantee (e.g. Axia, Zitius etc.)

3. This leaves the M1 - City Telecom (CTI) consortium as the only sensible bid.

A City Telecom - M1 partnership goes a long way in circumnavigating the challenges mentioned above.

Firstly, M1 has a substantial mobile customer base in Singapore, and will be looking towards the NGNBN as an opportunity to provide fixed line services to prevent customer churn and to attract new customers. With a stake in the OpCo, M1 will ensure that its services run over the NBN OpCo, thus significantly enhancing the business case of the OpCo.

Secondly, M1 has no significant wireline operations in Singapore. This means that the operational separation is no where as onerous to M1 as the incumbents. Furthermore, with City Telecom taking a major stake in the OpCo and contributing significant manpower and operational expertise to the OpCo, this greatly relieves the need for M1 to create duplication of manpower - the OpCo business does not cannibalise or compete with M1's current core competencies. In contrast to the incumbents, the Operational Separation requirements are a relative non-issue to M1/CTI.

Conclusions

Neil Montefiore must therefore be an optimistic man. Because for a long time now, SingTel and StarHub have been attacking M1's market share because of the small telco's lack of fixed-line offerings.

I certainly hope Neil realises that he has a very real opportunity here and makes the best of it. Consumers would all benefit from genuine extra competition and from someone who appears to have a genuine understanding of what is really going on.

M1's CEO Neil Montefiore on the Pay TV Market

At last, someone with some knowledge about the Pay TV market says something wise about it in the Singapore newspapers. This time, TODAY carried an interview with M1 CEO Neil Montefiore (unlike My Paper which contained a trashy column by the bungling Lee Sze Yong):

Neil makes the following astute observation:

“I’m not in favour of bidding for content because in the end, it costs the consumer more,” he said. “It seems we’re the only example in the world where you introduce competition and the consumer pays more. It doesn’t seem to be the right model to me. I’m hoping the regulators or the content owners will change that.”

Well, Neil, I too wish the regulators or the content owners would do something about it. But I don't think that's going to happen soon.

• The content owners are too elated that they are able to collect monopoly rent from the Singapore market.
• The regulators are too busy covering their asses to please their political masters.
• And of course SingTel wouldn't care two hoots about the inconvenience caused to consumers - they're a multi-billion dollar company who only cares about how they can break into the Pay TV market in Singapore and make more profits.

This is a simple result of the economics of the bidding model and the monopoly over content rights.

The only realistic chance consumers have is to band together and speak up and make noise through the consumer commission to enact change. Either that or boycott SingTel. It's really up to the consumers to demand and get what they want and stand up for their own consumer rights.

On another note, I think M1 will be the biggest beneficiary in the upcoming next-gen NBN project. In my opinion, an M1 consortium that does not include SingTel and StarHub (i.e. City Telecom & M1) makes the most sense for the OpCo bid. I'll explain why in a later post.

SingTel, Starhub & M1: Analysts' Reactions to the Next-Gen NBN OpCo RFP

CIMB

Operational Separation requirements could significantly dilute the attractiveness of the OpCo to the incumbents.

• Operational Separation significantly restricts their flexibility in the allocation of resources and human talent across the OpCo & RSPs

There is “little incentive for bidders to offer sharply lower ICO prices to what incumbents are charging.”

• Greenfield entrant into the OpCo space faces a significant degree of risk because his OpCo grant depends largely on meeting adoption targets.
• Bidders with a higher risk outlook will seek to be compensated for this risk with the possibility of higher returns through higher ICO prices. However, the attractiveness of ICO prices is weighted very highly in the evaluation criteria.

NGNBN is essentially neutral for the telcos and downside is limited.

Credit Suisse

For incumbents, outcome looks neutral at best...

• At OpCo level it would be easier for infrastructure builders to drag their feet in truly offering open access.
• Receipt of OpCo licences for SingTel and StarHub would be unlikely to change the competitive dynamics materially.

… and more probably materially negative

• Additional player into the OpCo space willl begin chasing the existing broadband revenue pool.

Continue to prefer M1

• Upside potential since M1’s leased line costs could fall and it could defend cellular market share by becoming an RSP.

M1, CTI & StarHub vs SingTel in Singapore's Next Generation National Broadband Network (NGNBN)

A. Next Generation National Infocomm Infrastructure

The Next Generation National Infocomm Infrastructure (Next Gen NII) is Singapore’s new digital super-highway for super-connectivity. It will entrench Singapore’s Infocomm hub status and open the doors to new business and social growth for the country. Next Gen NII comprises complementary wired and wireless networks to ensure Singaporeans enjoy seamless connectivity.

The wired broadband network or Next Generation National Broadband Network (Next Gen NBN) will deliver ultra-high broadband symmetric speeds of 1Gbps and above, to all homes, offices and schools, while the Wireless Broadband Network (WBN) will offer pervasive connectivity around Singapore.

B. Next Gen NBN (NGNBN) RFP Launch

The IDA, on 11 Dec 2007, released the Request-For-Proposal (RFP) to all interested parties to submit their bid to design, build and operate the passive infrastructure layer of the Next Gen NBN.

According to the Minister for Information, Communications and the Arts, Dr Lee Boon Yang, the Next Gen NBN is envisioned to offer pervasive and competitively priced ultra high-speed broadband connectivity to business users at the workplace as well as to Singaporeans at home, schools and learning institutions and other premises.

The Next Gen NBN is expected to be available nationwide by 2015, although consumers can begin to look forward to a range of new and exciting Next Gen Services such as high-definition video conferencing, telemedicine, Grid Computing-on-Demand, security and immersive learning applications on the Next Gen NBN from about 2010.

The list of qualified consortium leads for the Next Gen NBN RFP is as follows:
1 Alcatel-Lucent Singapore Pte Ltd
2 Axia NetMedia Corporation
3 BT Singapore Pte Ltd
4 City Telecom (H.K.) Limited (Replacing Hong Kong Broadband Limited)
5 Nippon Telegraph and Telephone West Corporation
6 Nokia Siemens Networks Singapore Pte Ltd
7 Singapore Computer Systems Limited
8 Singapore Telecommunications Limited
9 SP Telecommunications Pte Ltd
10 StarHub Ltd

C. StarHub, CTI and M1

Hong Kong's City Telecom (CTI) and Singapore's M1 and StarHub (CMS Consortium), on 20th March 2008, signed a Memorandum of Understanding (MoU) to jointly form a consortium to design, build and operate the passive infrastructure network capable of delivering ultra high broadband speeds for Singapore. The consortium will jointly submit a bid that will meet all the criteria for the Infocomm Development Authority of Singapore’s Request-for-Proposal (RFP) for the Network Company (NetCo).

This important development effectively narrows down the field to two key bidding consortiums for the NetCo layer of the Next Gen NBN:
i. SingTel and its financial partners
ii. CTI, M1 and Starhub (CMS Consortium)

The other bidders do not have a serious chance in winning the NetCo layer:

1. SingTel's position as incumbent fixed-line operator and its islandwide telecom infrastructure puts it in pole position to roll out the island wide fibre-optic network. It has the experience, deep knowledge, financial pockets and incentive to roll out the fibre infrastructure in the most economically efficient manner that does not duplicate existing infrastructure and requires the minimum construction of new ducts.

2. If the NetCo contract were to be awarded to a player (players) other than SingTel, there is a very high probability that SingTel would then embark on deploying its own fibre-optic network to compete directly with the NGNBN.

• The SingTel entity operating the next gen network would be a vertically integrated beast (from infrastructure operator through to Retail Service Provider) that would not be subject to open access obligations and that would have the speed of execution of an independent, single corporation (rather than a cumbersome regulated consortium).
• SingTel would be able to cherry pick the best and most profitable areas to roll out its network first in order to get a head-start ahead of the NGNBN operators as it is not tied to rollout obligations as stated by iDA
  
• SingTel would not be obliged to make its network infrastructure available to the NGNBN operator, potentially driving civil costs much higher for the NGNBN NetCo.
  

3. It thus follows that any non-SingTel consortium winning the NetCo will have to be a strong, credible force that will be able to take on the SingTel beast in head-on competition and yet be able to survive. The newly formed consortium of CTI, M1 and StarHub fits this bill.

• CTI will bring its experience of operating a fibre network in Hong Kong to the table.
  
• StarHub will bring its deep knowledge & experience with the residential cable networks. It will also bring a strong customer base of payTV subscribers to the table.
  
• Both Starhub & M1 will bring their mobile subscriber base to the table and be able to market a new bundled service incorporating the next-gen services of the NGNBN network.

4. Other players do not stand a realistic chance.

• Any winner of the NetCo layer other than the CMS Consortium will probably be squeezed to death by SingTel, unless the CMS consortium is somehow roped in at the OpCo layer without being awarded the NetCo. This is highly unlikely.
  
• Any independent winner of the OpCo layer that operates with open access without SingTel at the NetCo layer (e.g. Axia) will be absolutely crushed by SingTel, which would have a massive customer base to build its own Next Gen offering and no open access obligations.

D. Conclusions

Thus, it looks like the NGNBN is gradually evolving into a two-horse race. Despite the government's grand plans to create open access and to encourage a vibrant RSP market as well as promote competition along various parts of the telecommunications value chain, the economics of telecoms networking means that a multi-player industry structure looks unsustainable and that the current duopolistic structure will remain, with minor players along the RSP fringe.

I am personally open to considering arguments as to how the NGNBN will allow a third major player into the wireline telco landscape in Singapore. However I remain very skeptical of the possibility of a three-way (or multi-way) fight.

[Update: the NBN OpCo RFP has been released]