ASIA-PACIFIC: MOBILE POWER PLAYERS

Asia-Pacific mobile power players

03 August 2005 Nathan Burley

Ovum view
Asia-Pacific has the most diverse markets in the world. Markets range in maturity from those in the earliest stages of development to the most advanced markets in the world. Operators in different markets are facing different sets of challenges and strategies, depending on their regulatory and competitive environments and stage of development. Operators performance is market driven. Operators in mature and overcrowded markets perform differently to those in less crowded and younger markets. Subscriber growth in all markets is predominantly prepaid. Slowing subscriber growth dominated by prepaid subscribers puts a ceiling on future revenue growth. Other means of revenue growth will be derived through acquisition or value-added services. Profitability increases are driven by cost containment. All operators are focusing on cost containment as revenue growth slows across the region. Operating costs have decreased across the board as operators seek to improve profitability. ARPU continues to fall. ARPU levels have fallen for almost all operators. This was driven predominantly by increased competition. Data usage is increasing slowly. All operators reported increased data revenues in 2004; increasing data usage further will be key to operators revenue growth.

Scope of research This research focuses on the power player operators and mobile markets of Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Philippines, Singapore, South Korea, Taiwan and Thailand. Power operators are large operators that have the ability to change the competitive environment of the market they are in. Different operators are analysed in each section depending on available data.

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Asia-Pacific mobile markets

Each mobile market in the Asia-Pacific region is highly individual with its own regulatory environment, data usage indicators, competitive basis and success characteristics. For ease of analysis, we have separated the markets into three broad groups: developing, developed and advanced. We have selected prominent power players in each of these groups. Figure 1 shows the broad characteristics of developing, developed and advanced markets. Figure 1 Developing, developed and advanced market characteristics
Developing Penetration Low to medium. Further potential for considerable growth Growth rates are still strong Developed Nearing saturation Advanced Saturated

Subscriber growth

Level of prepaid subscribers increasing as postpaid subscribers are converting to prepaid plans Focus begins to turn to cost containment and network upgrades

Often dominated by postpaid subscribers

Costs

Focus on network infrastructure, particularly extending network coverage None

Focus is on introduction of new technologies and cost reduction 3G in operation with one or more players South Korea, Japan,

3G operators

Licences awarded; 3G may or may not be commercially launched Malaysia, Thailand, Hong Kong, Australia, New Zealand, Singapore, Taiwan Taiwan Mobile, Telstra Chunghwa, AIS, Maxis, Peoples, SingTel

Markets

India, Indonesia, Philippines, China,

Power operators

China Mobile, Smart, Globe

NTT DoCoMo, KDDI, SKT, KTF

Source: Ovum

Regulatory environment
The Asia-Pacific region has a mix of highly regulated and deregulated markets. China and Thailand are still at the early stages of deregulation and are just opening up to foreign investment. Other markets, such as Hong Kong, Japan and Australia, are highly liberalised. Many markets have tight foreign investment caps, which means market entry strategies for new players require local partnerships and complex political

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arrangements. These are only just starting to be raised. Every market has at least two operators with significant market share. Many markets, such as Taiwan, Hong Kong, Thailand and Australia, have upwards of three mobile operators. Figure 2 shows the fragmentation of the Asia-Pacific mobile market, with India and Hong Kong the most overcrowded, and New Zealand and China the least.

The Herfindahl-Hirschman Index In Figure 2 we use the Herfindahl-Hirschman Index (HHI) as a measure of market fragmentation. The HHI represents the sum of squares of the market shares. Thus a perfect monopoly, where one operator has 100% market share of subscribers, generates a HHI ratio of 10,000. A perfect duopoly, where each operator has a 50% market share, generates a ratio of 5,000. A ratio of 0 implies a totally atomised market, with all participants recording a market share of 0%.

Figure 2 HHI comparison of local mobile market fragmentation, March 2005

India Hong Kong Taiwan Singapore Malaysia Australia South Korea Thailand Japan Philippines Indonesia New Zealand China 0 1,000 2,000 3,000 4,000 5,000

Source: Wireless Intelligence

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Market size
The markets in Asia-Pacific are relatively inward looking. Very few operators have a presence in more than one market. Hutchison has a small presence in Thailand, Macau, Sri Lanka, India and Australia, and is the number one operator in Hong Kong. SingTel, the largest operator in Singapore, holds the number two position in Australia through its subsidiary Optus. Telstra owns CSL which just holds the number two position in Hong Kong. Vodafone has a weaker presence in Asia (with the exception of New Zealand) than in Europe and the Americas. It is the number three operator in Australia and Japan, and the only operator in Fiji. These few multi-market operators have a small proportion of Asia-Pacific subscribers. The unique regulatory and cultural facets of many Asian markets make crossownership difficult and synergies hard to achieve. However, when faced with a saturated market, operators may start to consider cross-market consolidation and partnerships more seriously to increase revenues.

Technology
Most markets use GSM technology, as shown in Figure 3. 3G has been launched in a few markets and is at early stages in others. 26% of Japanese users are 3G subscribers. It also has the highest level of WCDMA users, with over 15% of subscribers using the technology at the end of April 2005. Some 92% of South Koreas subscribers are using CDMA 1X technology, making these the two most advanced markets in Asia-Pacific.

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Figure 3 Cellular technology usage in Asia-Pacific, March 2005

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Au st ra lia C h H on ina g Ko ng Ja p M an al a N ew ys i Ze a al Ph an ilip d pi Si nes ng So ap or ut e h Ko re Ta a iw T h an ai la n In do d ne si a In di a

Other WCDMA CDMA 1xEVDO CDMA20001x CDMA GSM

Note: 63% of Japanese subscribers are on the PDC network which is classified under other. Source: Ovum

3G
3G footprints, like other indicators of mobile markets, vary significantly in the AsiaPacific region. While most markets have 3G operators, most are at a very early stage, subscriber numbers are low and networks have limited population coverage. Figure 4 shows the stages of 3G development for each market. It is clear that many markets are not yet ready for mass take-up of 3G services.

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Figure 4 3G in Asia-Pacific
Country Australia Operators 3 Australia Telstra Optus Vodafone China Hong Kong 3 Hong Kong SmarTone Sunday CSL India Bharti MTNL BSNL Indonesia Mobile-8 Mobisel Japan KDDI NTT DoCoMo Vodafone Malaysia Maxis Technology WCDMA CDMA2000 EV-DO / WCDMA WCDMA WCDMA WCDMA WCDMA WCDMA WCDMA WCDMA WCDMA WCDMA CDMA2000/ EV-DO CDMA2000 CDMA2000/ EV-DO WCDMA WCDMA WCDMA Launch date Apr-03 Nov-04 / 3Q05 May-05 Oct-05 Jan-04 Dec-04 Jun-05 Dec-04 Q1-05 Q1-05 Q1-05 Jan-04 Jun-05 Apr-02 / Nov-03 Oct-01 Dec-02 / Nov-04 May-05 May-05 Nov-04 Jul-05 Dec-04 Apr-05 Q4-04 Comments Launched in National Capital only No 3G licences Various handset issues Trials; awaiting licence from regulator Trials; awaiting licence from regulator Trials; awaiting licence from regulator Trials; government may revoke licences and re-issue spectrum Trials; government may revoke licences and re-issue spectrum Uses FOMA Second launch was Vodafone Live No 3G licences

TelekomMalaysia WCDMA New Zealand TCNZ Vodafone Philippines Singapore SingTel Starhub M1 EV-DO WCDMA WCDMA WCDMA WCDMA

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Figure 4 3G in Asia-Pacific continued

Country South Korea Operators SKT KTF LG Telecom Taiwan Chunghwa FarEasTone Taiwan Mobile APBW VIBO Thailand AIS Technology CDMA2000 EV-DO / WCDMA CDMA2000 EV-DO / WCDMA CDMA2000 - EV-DV WCDMA WCDMA WCDMA CDMA2000 WCDMA WCDMA Launch date Jan-02 / Dec-03 Aug-02 / Dec-03 H1-05 Jul-05 Jul-05 May-05 Jul-03 Q4-05 May-05 Comments Problems have occurred acquiring handsets Trials

Source: Ovum, operators

Data usage rates are both the lowest and the highest in the world
The data usage levels shown in Figure 5 do not necessarily reflect the stage of market development in the Asia-Pacific region. Other factors, such as local-language input constraints, have also had an effect on data uptake in the region. For example, both Taiwan and Thailand record very low data usage for this reason. Taiwan also has the additional problem of SMS being more expensive than a short phone call reducing its appeal for consumers.

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Figure 5 Data revenues as percentage of total revenues for 2003 and 2004
% 45 40 35 30 25 20 15 10 5 0
F Te ls tra be T ax is S I M ob ile ile ob M C hu o D SK KT AI oM KD M G oC ng hw lo a

2003 2004

C hi na

Note: NTT DoCoMo and KDDIs financial year-ends are 31 March. Telstras financial year-end is 31 June. All other operators financial year-ends are 31 December.
Source: Operators

Market conditions
Subscriber growth slowing
The Asia-Pacific region has the greatest contrast of market maturity, ranging from markets in the earliest stages of development to the most advanced markets in the world. Mobile penetration rates ranged from 5% in India to 113% in Hong Kong in March 2005. The majority of markets in the Asia-Pacific region are reaching maturity, as shown by the slowing subscriber growth rates in Figure 6.

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Figure 6 Subscriber growth rates and mobile market penetration, March 2005
180 160 Subscriber growth 2003 Subscriber growth 2004 Penetration 100 140 120 100 60 80 60 40 20 0
nd In In dia d N one ew s Ze ia al an d C P h hin ilip a pi n M es al a Si y s i a ng ap o Au re s So tra lia ut h Ko re a Ja pa Ta n iw a H on n* g Ko ng ai la

120

80

40

20

*Taiwan experienced -13% subscriber growth in 2004

Source: Ovum, operators

Developing markets such as India are still showing significant growth rates. India and China together added 70 million subscribers throughout 2004. South Korea, Singapore and to a less extent Australia showed an improved, but still quite small, subscriber growth rate in 2004. Figure 7 shows subscriber growth rates for the operators in 2003 and 2004.

Th

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Market penetration (%)

Subscibergrowth (%)

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10

Figure 7 Subscriber growth in 2003 and 2004

% 60 50 40 30 20 10 0 10 2003 2004

Source: operators

China Mobile and NTT DoCoMo are the only operators to experience increased subscriber growth in 2004, but for different reasons China Mobile for its developing market and NTT DoCoMo for its 3G services (albeit mostly from internal subscriber churn). However, the two standout performers in terms of subscription growth were the two Philippines operators Globe and Smart. Peoples Telecom was not as successful in 2004 as it was in 2003 when subscriptions increased due to an aggressive marketing strategy. Similarly, SKT is suffering the effects of a saturated competitive market. Taiwan Mobile is the only operator to have negative subscriber growth. This comes as a result of an intensely competitive saturated market and the Taiwan governments decision to only allow one SIM card per ID card, resulting in a cut in the number of connections.

Prepaid users dominate subscriber growth

The majority of Asia-Pacific markets are heading towards market saturation, certainly in the urban centres. Subscriber growth is predominantly centred on prepaid users, as shown in Figure 8. The total number of Asia-Pacific prepaid subscriptions overtook postpaid subscriptions in December 2004. However, In the South Korean and

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Taiwan Mobile

China Mobile

Globe

Peoples Telecom

Maxis

KDDI

AIS

SKT

20

NTTDoCoMo

Smart

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Japanese markets the proportion of prepaid subscribers is minimal and estimated to be less than 1% of subscriber growth. In these markets operators have tried to limit prepaid packages because of their lower revenue value. Figure 8 Percentage of subscribers that are prepaid in 2003 and 2004
% 100 90 80 70 60 50 40 30 20 10 0 2003 2004

M ax C is hi na M H ut ob ch ile is on In di N a Z Te le co m

us Te C ls hi tra na U ni co m

Source: operators

Prepaid subscribers are generally of a lower value to operators than their postpaid equivalents. Figure 9 shows the difference in ARPU between prepaid and postpaid subscribers.

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Figure 9 Prepaid versus postpaid average monthly ARPU in 2004

$ 100 90 80 70 60 50 40 30 20 10 0 Postpaid ARPU Prepaid ARPU

Source: operators

The lower value of prepaid subscribers means that achieving a high amount of prepaid subscriber growth will not necessarily translate into a profit increase without tight control over subscriber acquisition costs. The growth in prepaid subscribers makes leveraging as much revenue as possible from high-usage subscribers essential to operators success. This trend has created two-speed economies for many Asia-Pacific markets, where subscriber growth is centred on low-value customers (often in rural areas) and operators focus on increasing their high-value clients data and value-added services usage.

Financial indicators
Revenue growth slowing for the majority
As subscriber growth stalls, so does revenue growth for the majority of operators in the Asia-Pacific region. Figure 10 shows the decline in revenue growth across the operators.

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is M ax

M ob ile

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Figure 10 Revenue growth percentage for operators in 2003 and 2004

%

24 19 14 9 4 -1 -6 2003 2004

China Mobile

Peoples Telecom

Taiwan Mobile

Chunghwa

Globe

Maxis

KDDI

Source: operators

Revenue growth is much stronger for operators in the developing markets of Malaysia, China, Philippines and Thailand. For the majority of operators, revenue growth has slowed. NTT DoCoMo has been hit by increased competition and falling ARPU, resulting in its revenue growth turnaround. KTF and KDDI were the exceptions to the general trend of falling revenue growth. Despite the competitive market in Japan, KDDI has increased market share through the popularity of its 3G service. KTF achieved its result through increased subscriptions and market share despite a small decline in ARPU.

Data revenues as an ARPU stabiliser

Figure 11 shows that operators in the more advanced markets have the highest rates of data usage. Globe is the exception, driving high data usage from cheap SMS.

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NTTDoCoMo

SKT

KTF

AIS

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Figure 11 Data revenue as percentage of service revenues

% 45 40 35 30 25 20 15 10 5 0
SK T KT F be Te ls tra AI S Ta iw an D I is ile ob ile C hu ng hw a o oM lo KD ax oC M G M ob M

2003 2004

N TT

Source: operators

NTT DoCoMo and KDDI both have data revenues accounting for over 24% of total revenues. The difference between Globe and the Japanese operators is the type of data usage occurring. KDDI offers 3G services, access to the Internet and email, video mail, broadcast, music and games, through the EZweb portal. In contrast, Globes data usage in 2004 was 89% SMS-based. Other data services offered by Philippine companies are Smarts Pasa Load, which allows the transfer of prepaid credits between subscribers, and Smart Money, which allows subscribers to do bank-to-bank money transfers and bill payments for utilities. It is this type of advanced application that all operators are trying to grow. All operators have experienced significant growth rates in data usage, outstripping growth in service revenues. Korean operator SKT and Australian operator Telstra stand out both increases were driven by value-added services. Operators need to continue to push for increased data revenues.

Profitability
The profitability of most operators remained fairly constant in 2004 as shown in Figure 12. However, the profitability of the two Korean operators reduced markedly. This was largely due to the heightened competition caused by the introduction of mobile number portability and the regulatory environment (which included tariff cuts). NTT DoCoMos EBIT margin reduced by 4%, as extended discounting has hit operating revenues and profits. Results for 2006 and 2007 will also be affected by discounting in data and voice. The operators estimates for operating revenues and operating income in March

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2006 are both relatively flat (0.8% and up 3.3% respectively). Those with improved profitability include Maxis, AIS and Taiwan Mobile.

Operating costs
A number of operators have focused on reducing operating costs as subscriber growth and value dwindles. Figure 12 shows the operating costs as a percentage of revenues. The advanced market operators, KTF, NTT DoCoMo and SKT, all experienced increases, primarily due to increased competition and next-generation costs. Figure 12 EBIT margins and operating expenses/revenues
EBIT margin 2003 AIS China Mobile Chunghwa Globe KDDI KTF Maxis NTT DoCoMo Peoples SingTel SKT Taiwan Mobile Telstra Source: operators 32% 31% 33% 32% 12% 15% 35% 22% 24% 28% 32% 33% 25% 2004 34% 32% 33% 31% 10% 7% 41% 18% 19% 30% 24% 36% 32% Change 2% 0% 0% -1% -1% -7% 7% -3% -5% 2% -8% 3% 7% 2003 69% 69% 71% 41% 90% 85% 43% 78% 76% 65% 68% 40% 69% Opex/revenue 2004 66% 69% 68% 44% 90% 91% 43% 84% 67% 63% 76% 41% 69% Change -3% 0% -2% 3% 0% 6% 0% 6% -9% -1% 8% 1% 0%

Key performance indicators

ARPU continues to fall
Operators ARPU continues to fall, as shown in Figure 13, exacerbated by the increase in prepaid subscribers in the majority of markets. Chungwas increase in ARPU was obtained by shedding inactive subscribers. TCNZs ARPU increase reflect higher data usage as well as an increase of 10% in average MoU. Driving the increase was prepaid ARPU which increased 44%. New Zealand mobile prices are among the highest in the world and heavy competition hasnt driven prices down as in other markets.

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Figure 13 Change in average monthly ARPU (%) in 2003 and 2004

9 2003 5 1
%

2004

-3 -7 -11 -15 -19 Chungwa China Mobile Singtel Optus Globe NTTDoCoMo Telkomsel KDDI SKT AIS KTF Smart TCNZ

Source: Wireless Intelligence, operators

Churn
Figure 14 shows the average monthly churn rates for 2004. Generally more competitive markets have the highest churn rates. This is not the case for Japan; its low churn is driven by a low percentage of prepaid subscribers. Taiwan Mobile has the highest churn rate at 4.4%; most of this is driven by prepaid subscriber churn which was 16%.

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Figure 14 Average churn rates in 2004

% 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
M 1 F SK T is ile ile a I O pt us N TT KT gw ax D M hu n M KD ob oC D M oM ob o

an

iw

All operators have initiated churn stabilising activities, such as launching customer management teams. These activities have had some success, with the majority of operators experiencing reductions in their churn rate.

Strategic implications
Operators looking to emerging markets
Operators in highly competitive and mature markets may start looking elsewhere for profit growth. The example of SingTel, with its acquisition of Optus, shows that it is possible for market leaders to make a profitable entry into other markets. However, the uniqueness of the Asian markets makes economies of scale and worthwhile synergies difficult to achieve.

Revenue growth from data and value-added services

While there is still room for growth in a minority of markets, in the majority revenue and subscriber growth are slowing. This makes high levels of data usage, a revenue

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Source: operators

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growth driver, even more important to achieve. Operators with 3G networks are well positioned to offer increased value-added services. Their success will be driven by whether they can convince market subscribers of their need for these services.

Cost containment is key

Improved profitability will rely on cost containment as revenue growth slows. The best performers will be those operators who can find ways to reduce or stabilise costs especially with expensive capital expenditure on next-generation networks. Subscriber acquisition costs are of particular importance as the majority of subscriber growth is prepaid. Smart is one of the strongest performers in this area, driven by the introduction of over-the-air top-ups for prepaid credits.

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