|Asia-Pacific I 2002
|Shifting Focus in the Asia Pacific Telecom Market
|Frost & Sullivan Asia Pacific
Deregulation has increased competition, in Asia forcing price cuts and decreasing profits. The shape of the market has changed due to the advent of VoIP, fiber optics, wireless access, mobile and the growth of data traffic. Although revenue growth is slow, new technology promises lower costs and new services to build revenue in the near future. Since local telcos have invested conservatively in infrastructure, they are relatively stable financially and, given the retreat of world investment, are emerging as stronger regional players.
The last five years have seen tremendous opportunities and creativity in the region’s telecommunications industry. Nevertheless, a combination of forces is having a tectonic impact, dramatically reducing the time between profitable growth and bankruptcy for the business of service providers. We believe that the compounded effect is leading the industry to a strategic inflection point*. The market has somewhat shifted from hysteria to despair, innovation inexorably persists and industry correction is afoot, promising new challenges and new challengers. We will review the wireless, long distance and data communications markets to find out what’s taking shape in Asia. Dive in International Long Distance Telephony Revenue A major factor contributing to the changing landscape is deregulation. Since 2000, governments across Asia have accelerated their deregulation initiatives and opened doors to foreign participation, thereby increasing competition in the market. Consequently, price has become the key to competition, resulting in a drastic dip in service tariffs and affecting profitability of operators. A large part of revenues and expenses in international telephone business depends upon the rates that international carriers charge each other to terminate calls. It has been customary for international carriers to settle these charges through agreed accounting rates. Over recent years pressure from increased competition in the international telecommunications market has effectively lowered the overriding rates to a point where international tariffs in the developed countries are now nearly equivalent to local call charges. Long distance which was once the cash cow of incumbent operators, accounting for as much as 35 percent of their revenues, have taken a plunge in recent years. As reflected in their annual reports, total international long distance revenues decreased from about US $ 40.4 billion in 2000 to approximately US $ 38.1 billion in 2001. While the impact may seem marginal at the total level, telecom service providers in highly deregulated markets such as Singapore and Hong Kong have been more affected than China and India which are only beginning to usher in foreign participation in the local market. Growth in this sector has remained relatively flat whilst revenue from broadband customers and mobile has increased over the three-year period. Revenues for long distance are likely to decline in the more advanced and developed countries such as Australia, Hong Kong and Singapore. Dwindling New Cellular Subscriber Additions In Asian countries where fixed-line penetration is very low, the comparatively low cost and minimal time for wireless network rollout has given the ‘unplugged’ technology’s significant advantages over wire line and cable networks. This is especially true since the heavy population density in many of Asia’s major cities, as well as geographical landscapes, are not conducive for competitive fixed-line or cable rollout. With these drivers, the mobile communications market continues to thrive in the region, aggregating large subscriber numbers in a short span of time (see Figure 2). However, with mobile penetration in developed markets like Singapore, Taiwan and Hong Kong have exceeded the 60 percent mark, this leaves very limited room for new subscriber growth in these countries. Additionally, wireless internet services have been slow to take flight, compounding the lack of revenue growth for the operators. 2.5G and 3G growth is only expected to shift into high gear in late 2004 or early 2005. This delay allows content and application developers to use this pocket of time to create new applications and revenue-generating services not available today. In a race to gain new subscribers and grow their average revenue per user (ARPU), wireless operators are making large investments to develop aggressive marketing and billing strategies and step up CRM implementation. The key to survival is for players to build-up their existing ARPU instead of pinching subscribers from competitors. The latter strategy would only provide incremental growth, not in line with the subscriber acquisition costs. These ‘new additions’ are known to be part of the overall churn base, and are unloyal customers offering minimal profit. While there has been some activity in creating wireless narrowband mobile networks and allowing local all-you-can-call at a fixed prices, it is doubtful that mobile networks will in the near future have the capacity to permit wireline calling patterns. Driven: IP into Mainstream IP technology is both a bane and bliss for telecom operators. On one hand, it has brought on the erosion of legacy voice revenues. Conversely. the technology has impacted the underlying costs of both transmission and switching, thereby releasing huge amounts of capacity into the market as well as facilitating the introduction of more cost effective services. Asia Pacific, with its huge populations and little legacy infrastructure, is one of the most promising territories for VoIP. Hong Kong, Singapore and South Korea and, to a lesser extent, Australia have been leaders of IP Telephony adoption and markets in Southeast Asia have been following at a close distance. Despite the current economic slow down, very strong growth rates for VoIP minutes (a compound annual growth rate of 90.5 percent) and service revenues (CAGR of 77.1 percent) are forecast. However, once the price advantages are nullified, the market which is presently flooded by competitive service providers, will be driven by service providers offeringr business-oriented services and applications to achieve higher margins. Data Communications (Datacomm) and Internet to thrive The data communication and Internet markets are expected to be the new starlets in the telco arena (see Figure 3). Governments throughout the region continue to acknowledge the importance of ICT despite the recent technology meltdown. The Chinese government, for one, is taking a proactive measure to boost Internet adoption and is rapidly developing its telecommunications infrastructure and alternative access channels (i.e. mobile phone, cable TV) for Internet usage. It has also launched a government on-line program to promote public sector use of IT and called for all top Chinese corporations to be online by the end of the year. The Chinese government has set up 14 software parks to promote business activities and grants preferential treatments to companies in the park. The Japanese government has been aggressively pushing its “e-Japan strategy”. Its goal is to encourage the private sector to provide high-speed ‘always-on’ access networks to at least 30 million households, and ultra high-speed access to 10 million households, within five years. This was followed, in March 2001, by the creation of the Japanese government’s “e-Japan Priority Policy Program” – a specific action plan to stimulate broadband development. Most telecom operators view such government efforts as an opportunity to increase the data segment of their revenues as other businesses suffer decline. In this light, we believe that data services will replace IDD (international direct dialing) as the single biggest revenue stream for incumbent operators in developed markets through 2003. Similarly, Broadband will continue in its upward trend, driven by the same forces. The advent of new transmission technologies, such as optical fiber, have enabled backbone or inter-exchange transmission capacity to be increased at a relatively low incremental cost. This in turn has paved the way for affordable and commercially viable bandwidth-intensive applications such as video and high-speed data transfer. Consequent to this, communications network cost structures have been revamped, with the cost of transmission capacity declining rapidly. This trend is likely to continue in the foreseeable future. Virtual Private Networks is another area of high growth for the region, having evolved in tandem with the rise in telecommuting, shared enterprise applications, and globally dispersed business operations. Organizations which initially developed and operated their own VPNs internally, are now looking to service providers to provide these secure managed networks services. In a Nutshell Operators in Asia Pacific have been relatively unscathed compared to their North American and European cousins. The overall conservatism in infrastructure investments and licensing bids displayed by the region’s stalwarts have spared most carriers from the roller coaster ride. However, we believe that deregulation will change PTTs from narrow, vertically-integrated, companies to broadbased, internationa,l horizontally-integrated, companies. The second/third tier operators in Asia will have to consider consolidation, as it is unlikely they will have access to significant sources of capital in the next 12-18 months. Companies like Singapore Telecom, PCCW and Telstra have been swift in expanding their footprints in regional markets. Korea Telecom, for instance, have been, to a significant extent, successful in growing their data businesses rapidly to offset declines in their traditional voice business. While, the retreat of the cash-strapped European and North American operators have also given Asian telcos the opportunity to emerge as regional players. The sustainable survival of the region’s telecom service providers depends on the pace of recovery in investment and consumer optimism, which have been vulnerable to external shocks and internal currents in and around the region. There is no “silver bullet” that will protect players from the unpredictable period ahead. Rather, telcos must carry out a number of short and long-term measures and rebuild their operating portfolios for long-term success.