It has been a year since I last wrote about telcos. Looking back at what I wrote, it has been gratifying to see that I was right about M1's revenue/ profits bottoming out sometime in 2H2017 and Starhub facing challenges in its Pay TV and broadband businesses. See Challenging Times Ahead for Starhub's Dividends for more info.
Even so, there have been hits and misses in my analysis. One of the misses is the Impact of SIM-Only Plans on Telcos. There, I wrote that "for each subscriber who chooses to switch (from regular telco plans), SIM-only plans will result in a significant drop in revenue. The impact to profit is also negative but smaller than the decline in revenue. However, the no. of subscribers who choose to switch to SIM-only plans is likely to be small."
A year later, I have a better understanding of SIM-only plans. My analysis that SIM-only plans will result in a drop in revenue and profitability is still correct, as shown by the decline in Average Revenue Per User (ARPU) since 3Q2015, when M1 launched the first SIM-only plan. Given that existing subscribers who wish to downgrade from the regular telco plans to SIM-only plans have to wait until their contracts expire, and the typical contract period is 2 years, the effects of SIM-only plans will only disappear 2-3 years later, which is around now. As shown in Fig. 1 below, the year-on-year (YOY) decline in ARPU for M1 has moderated starting from 3Q2017.
|Fig. 1: Changes in M1's Revenue & ARPU|
The part that I got wrong is the popularity of SIM-only plans. It appears that SIM-only plans are quite popular, as shown by the rise in the no. of M1's post-paid customers, which has been growing by at least 3% YOY since 3Q2015 (note: the no. of post-paid customers reported by M1 also includes those of Circles.Life, the Mobile Virtual Network Operator that leases network capacity from M1. Thus, part of the rise in customer numbers is due to Circles.Life).
|Fig. 2: Changes in M1's Post-Paid Customers|
Thus, when you put the 2 parts together -- (1) SIM-only plans will result in a significant drop in revenue and more moderate drop in profits for each subscriber who chooses to switch from regular telco plans, and (2) SIM-only plans are quite popular, the inevitable outcome is that M1 will see declining revenue and profitability for 2-3 years from 3Q2015 till now. This is evident from the YOY decline in revenue from 3Q2015 to 2Q2017 as shown in Fig. 1 above. In other words, SIM-only plans will cannibalise the regular telco plans that are more profitable.
Yet, although SIM-only plans will cannibalise the regular telco plans, they also create demand of their own. Given the low-cost nature of SIM-only plans, it will attract new customers who are not on the regular telco plans. In past earnings conference calls, M1 had mentioned that SIM-only plans are value accretive at the EBITDA level, because they attract new customers and eliminate the need for mobile phone subsidies. They also mentioned that approximately 30% of new customers are on the SIM-only plans.
Perhaps the best way of thinking about regular telco plans and SIM-only plans is to borrow an analogy from the airline industry: full-service airlines and budget airlines. Regular telco plans are like full-service airlines; you get a mobile phone, telco services (voice, SMS & data) and maybe a few Value-Added Services (VAS). Whereas SIM-only plans are like budget airlines; you get only telco services. If you need a mobile phone or some VAS, you need to top-up cash. Although budget airlines do take away customers from full-service airlines, they also create demand of their own. Likewise, SIM-only plans will create demand of their own.
Nowadays, it is not uncommon to have airlines operating full-service brands and budget-service brands under one roof. Likewise, all 3 local telcos have regular and SIM-only plans. Investing Wolf recently compared the regular and SIM-only plans of the 3 telcos (see link). One of them is actually not very competitive in the SIM-only plans, perhaps worried about the cannibalisation of its regular telco plans! It is as good as not having SIM-only plans. We all know what happens to airlines that insist on flying full-service only.
P.S. I am vested in M1, Netlink Trust and Singtel.
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