Sunday, 5 February 2017

Impact of Data Upsize Plans on Telcos

Competition among the 3 local telcos used to be fairly stale, until things started to heat up in Mar 2016 when all 3 telcos launched data upsize plans as a way to pre-empt competition from a potential fourth telco. The upsize plans provide subscribers with more data with the payment of an extra monthly fee. How does that impact the revenue and profitability of telcos? As M1 is closest to a pure mobile telco company, with 79% of its service revenue derived from mobile telco services, this analysis is carried out using M1's results.

Data X2

The table below shows the monthly cost and data allowance of M1's regular plans without data upsize and with Data X2 upsize (Note: each telco calls its plans differently and has different data sizes. I am using Singtel's naming convention for ease of reference). M1's Data X2 upsize costs an additional $5.90 monthly for all regular plans.

Plan Lite Lite+ Reg Reg+ Max Max+
Monthly Cost $28.00 $42.00 $62.00 $82.00 $102.00 $228.00
Original Data (GB) 0.3 3 4 5 7 13
Data X2 Cost
$47.90 $67.90 $87.90 $107.90 $233.90
Data X2 (GB)
5 7 9 13 25

Prior to the launch of data upsize plans, M1 charged $10.70/GB for excess data usage beyond the data allowance. Thus, a subscriber who previously had to pay $10.70/GB for excess data usage now only has to pay $5.90 to upsize his data allowance. He saves at least $4.80 per month on excess data usage. This has a direct impact on M1's revenue and gross profit, since the network infrastructure is already set up and the marginal cost of providing the additional data is likely to be small.

Using M1's financial results for 4Q2015, which is just before the 3 telcos launched their data upsize plans in Mar 2016, the percentage of subscribers who exceeded their data allowance was 21%. I assume conservatively that these subscribers exceed their data allowance by not more than 1GB, because those who exceed their data allowance by between 1-2GB would have to pay $21.40 more in excess data usage and are better off subscribing to the next tier regular plan, which costs $20 more only. Thus, M1 potentially loses $4.80 per month for every subscriber who chooses to upsize their data allowance. As at 4Q2015, the number of post-paid subscribers was 1.195M. The number of subscribers who exceeded their data allowance was 251K (21% of 1.195M). The potential revenue loss is 251K x $4.80 x 12 months or $14.5M. This works out to be 2.4% of FY2015's revenue of $591M. It is also equivalent to 6.6% of FY2015's pre-tax profit of $218.4M.

Unlike the SIM-only plans, which subscribers could only switch when their 2-year contracts expire, subscribers could choose to upsize their data allowance at any time. Thus, while the impact of SIM-only plans are spread out over 2 years, the impact from data upsize plans is fairly immediate. 

Fig. 1 below shows the year-on-year changes in M1's revenue and post-paid ARPU, with timeline of the launches of the SIM-only plans and Data X2/X3/X4 plans superimposed on the chart. To understand the impact of SIM-only plans, please refer to Impact of SIM-Only Plans on Telcos.

Changes In M1's Revenue & ARPU

From Fig. 1, M1's revenue and ARPU have actually started falling in 2Q2015, but the decline accelerated from 3Q2015 onwards, which was when M1 launched the SIM-only plans. Things got worse in 1Q2016, which coincided with the launch of data upsize plans. 

Given that the impact of data upsize plans is fairly immediate, I am unable to explain why M1's revenue continued to fall at a rapid pace after 2Q2016. The reasons M1 gave for the decline in net profit were lower IDD and roaming revenue, higher handset subsidy and higher depreciation and amortisation. Thus, there are other factors at play besides SIM-only plans and data upsize plans.

Data X3/X4

As if Data X2 plans are not good (or bad) enough, Singtel launched Data X3 plans in Sep 2016, just after TPG, MyRepublic and airYotta submitted bids to be the fourth telco. M1 followed suit in Nov 2016 with not just Data X3 but also Data X4 plans!

As M1 did not disclose the number of subscribers who exceed their Data X2 allowance, it is difficult to assess what is the impact to revenue and profitability of Data X3/X4 plans. My personal opinion is the number of such subscribers is likely to be small and thus, the impact on revenue and profitability is likely to be small as well. Data X3/X4 plans are likely to be marketing gimmicks.

What's Next

Data upsize plans may be bad for telcos, but there is a silver lining. The higher data allowance of the upsize plans are enticing some subscribers to use more data. Fig. 2 below shows the average data usage and percentage of subscribers who exceed their original data allowance.

Fig. 2: M1's Subscriber Data Usage

As shown in Fig. 2, there is an uptick in average data usage after 2Q2016, which is after the launch of data upsize plans in Mar 2016. The percentage of subscribers who exceed their original data allowance is also on the rise (note: M1 changed the way it measures this metric in FY2016. The figures for 2015 and 2016 are not directly comparable). This will eventually translate to increased revenue and profitability as subscribers who now exceed their original data allowance and upsize have to pay at least $5.90 extra per month.


Data upsize plans have a direct and immediate negative impact on telco's revenue and profitability. However, they are also enticing subscribers to use more data, which will gradually translate to higher revenue and profitability (assuming all other factors remain constant).

Finally, please note that although all 3 telcos have mobile telco operations, Starhub has other business segments and Singtel has overseas operations and investments. 

P.S. I am vested in M1 and Singtel.

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