August 21, 2014 12:00 am JST

Southeast Asia telecom prepares for smartphone age

MAYUKO TANI, Nikkei staff writer

SINGAPORE -- Commuters in Singapore stare at smartphone and tablet screens on their packed morning commutes. The age of the feature phone feels finished. This may not be the case in other Southeast Asian cities, but few doubt the smartphone era is coming. Affordable devices are spreading across Southeast Asia; telecommunications companies are racing to keep up.

     Singapore Telecommunications, or SingTel, is Southeast Asia's largest telecommunications company in terms of market capitalization. It also leads the way in digital services investment since mid-2012 for future growth. SingTel has allocated $2 billion Singapore dollars ($1.6 billion) for spending on cutting-edge companies and in-house research and development between April 2013 and March 2016.

     Amobee, a former Silicon Valley-based mobile advertising company, was in 2012 acquired by SingTel. Digital advertising and expanding its Asian client base are major focuses for the Singapore company. SingTel was also the first among the three Singapore companies to roll out fourth generation, or 4G, networks. The company's 4G coverage reached 97% of the city-state by the end of March.

     Today, SingTel has a 47% share of the Singapore mobile market. But digital investment is not the only reason investors are attracted to SingTel. "It is the diversity of its revenue stream," said Sachin Gupta, regional telecommunications analyst for Nomura Securities. Optus, Australia's No. 2 telecommunication company, is wholly owned by SingTel. Five other Asian mobile operators have received significant SingTel investments. The total number of mobile subscribers under the group has reached 525 million.

     A strong Singapore dollar has hurt the SingTel group's bottom line. But growth potential in emerging countries and the stability of a diversified portfolio have kept investors on board. The Singapore giant for now focuses on increasing its stakes in existing associates rather than looking for new investments, Chua Sock Koong, group CEO of SingTel, said.

Joining the fray

Malaysia's top telecommunications company, Axiata Group, is also expanding overseas. It is Southeast Asia's second-biggest telecommunications company in terms of mobile subscribers, with 244 million on its books. Axiata operates in nine emerging Asian countries, including Bangladesh, Cambodia, Indonesia and Sri Lanka. It is also the largest shareholder in Singapore's M1. International business contributes about 56% to Axiata's revenue.

     In Malaysia, Axiata launched 4G services last year under its Celcom brand. It will spend 930 million ringgit ($294 million) to boost mobile infrastructure, and list its communication tower assets by 2016. The company posted a net profit of 2.7 billion ringgit on revenue of 18.4 billion ringgit in the fiscal year ended December 2013.

     Other Malaysian telecommunication operators such as Maxis, DiGi.Com and Telekom Malaysia focus on the domestic market. Telekom Malaysia recently launched 4G broadband products, initially in the northern state of Kedah. Market analysts expect Telekom Malaysia to challenge existing 4G players such as Maxis, which rolled out the technology early last year. Maxis' largest shareholder is Malaysian businessman Ananda Krishnan.

     Philippine Long Distance Telephone, or PLDT, is moving beyond telecommunications. In early August, the Philippines' largest telecommunications company announced it would be pumping 333 million euros ($446 million) into Rocket Internet, a German e-commerce outfit, for a 10% stake. The two companies will jointly develop mobile and online payment technologies and services for emerging markets. PLDT also owns TV5, the Philippines' third-biggest broadcaster, and controls two broadsheets, The Philippine Star and BusinessWorld. It has a minority stake in the Philippine Daily Inquirer, the county's most influential paper. The company's core net income in the first half rose 2% to 19.8 billion pesos.

Indonesian angle

In Indonesia, the most populated market in the region, and one of its fastest growing, shares in the top mobile phone operator Telekomunikasi Indonesia, or Telkom, have climbed more than 25% this year. The state-owned company had 137 million cellular subscribers on its books by June -- more than half the country's population.

     The company plans to roll out 4G services in Bali by the end of the year. It will then introduce the services in Jakarta and several smaller cities in early 2015. Telkom faces new rivals. Chinese Indonesian conglomerate Lippo Group teamed up with Japan's Mitsui & Co. to launch 4G services late last year, and has so far gained more than 600,000 users. XL Axiata recently acquired smaller rival Axis Telekom Indonesia for $865 million, and plans to enter the 4G market.

     Telkom, established in the 19th century, has managed to add to its customer base amid increased competition by improving infrastructure and offering SIM-handset packages. The company's balance sheet also proved resilient amid a sharp decline in the rupiah against the dollar last year, when it posted an 11% rise in net profit. Rivals, having funded expansions by borrowing heavily, suffered from ballooning dollar-denominated debts.

     Next, Telkom will head into several countries, including Myanmar, where it has a contract to provide Internet infrastructure.

Instability

Thailand's political troubles mean although the country has plenty of room to grow, there are questions about the outlook for the telecommunications industry. It was only May 2013 that Thailand started offering third generation, or 3G, services, far behind regional peers. It is not clear when 4G services will go mainstream.

     AIS, Thailand's largest telecommunications company in terms of market capitalization, controls about 50% of the domestic mobile market in terms of service revenue. It had a subscriber base of 42.87 million at the end of June, but has yet to launch 4G services. It was expecting to launch them by early 2015. However, after the May 22 coup, the military government delayed bidding for 4G bandwidth until at least next year.

     AIS was founded by fugitive former Prime Minister Thaksin Shinawatra. Although shares held by him and his family were all sold to Singapore's Temasek Holdings in 2006, the company still tends to be seen as related with the politically influential family. Earlier this year, protesters against the administration of Yingluck Shinawatra, Thaksin's sister, called for a boycott of AIS services.

     Total Access Communication, Thailand's second-largest player, has a market share of around 30% in terms of service revenue. The company is the Thailand arm of Norway's telecom giant Telenor Group. For the first half through June, net profits rose 4.8% while total revenue from sales and services fell 10% compared to the same period a year earlier.

     True Corp., Thailand's third-biggest company, has seen its share price more than double in the past six months, partly due to a planned capital injection by China's China Mobile. The company also provides cable TV and Internet services. A latecomer in the mobile market, it was burdened with debts, having to quickly expand to compete. Massive interest expenses weighed on the company, which was in the red for three consecutive years through 2013. It announced plans to raise 65 billion baht ($2.04 billion) by selling new shares, of which 28.6 billion baht will be sold to China Mobile for an 18% stake in True.

     The deal could lead to future cooperation with China Mobile on international data roaming and equipment purchases. In the first half of 2014, the company made a net profit of 2.14 billion baht.

     Southeast Asian telecommunication companies face common challenges: building up networks, keeping prices competitive and adapting to the smartphone model. Balancing these factors without compromising on quality is the key to keeping customers.