TPG could struggle against Singapore's 7 telco service providers

Its expected market share was cut from 5.5% to 4% due to incumbent telcos partnering with MVNOs.

TPG, the fourth Mobile Network Operator (MNO) set to enter Singapore in the second half of 2018, faces an uphill battle, amidst the myriad of Mobile Virtual Network Operators (MVNO) the incumbents have partnered with.

DBS Equity Research analyst Sachin Mittal said in a report that each incumbent has partnered with at least one MVNO, with Singtel joining hands with two, taking the total number of mobile service providers in the country to seven from just three players at the end of 2015.

"By partnering with MVNOs the incumbents are 1) making it difficult for TPG to succeed by stirring up competition in the SIM-only segments, which TPG is likely to target first, and 2) generating wholesale mobile revenues, offsetting any potential revenue impact in the low-end segments that are likely to be caused by TPG," Mittal said.

TPG has already announced plans to offer unlimited voice and 3GB of data free of charge for 24 months to senior citizens in Singapore. The telco is also offering free unlimited data for six months (A$9.99 thereafter) in Australia, where TPG entered as an MNO. "We believe that TPG will likely adopt a similar strategy of offering free services at the initial stages of its entry in Singapore as well, possibly leading to price wars between operators," Mittal said.

This has caused the analyst to change his forecast of the annual decline in the mobile industry through 2017-2022 to 4% from 1%. Mittal said this could be attributed to the rising adoption of SIM-only plans and the escalation of price wars in the industry as TPG battles it out with MVNOs.

SIM-only plans, which comprise 8-9% of postpaid plans currently, are seeing rising adoption amidst lengthening smartphone replacement cycles and aggressive promotions by MVNOs. Judging from Australia’ s experience, where SIM-only constitutes ~25% of the total postpaid, Singapore is likely to see a big rise in these plans, Mittal added.

"Customer spend on SIM-only plans vis-à-vis handset plans tends to be substantially lower and growing uptake would negatively impact mobile service revenues and dilute industry ARPU going forward, Mittal noted," he said.

Also read: 'Four is a crowd' in Singapore's telco market

The analyst also argued that TPG would need to adopt very aggressive pricing strategies during the first few years of entry to snatch revenue share in an overcrowded mobile space with seven service providers. "This would likely lead to steep contraction of voice and data yields, further weighing down the industry topline. Factoring these, we project an 18% contraction in industry revenues by 2022 from present levels vs our previous assumption of just 4% contraction of the industry topline over the same period," he said.

An annual industry contraction of 6% over 2018-2022 could also be expected if TPG is more successful than their projections.

"We project that almost a quarter of the industry topline could be wiped out by 2022, if TPG, backed with a strong balance sheet, adopts heavily disruptive pricing policies, much like Reliance Jio in India, driving MVNOs out of the market and instigating severe downward adjustments to industry yields," Mittal said. "Under this scenario, we expect the mobile industry to contract at an annual rate of 6% over 2018-2022."

However, should TPG get sold in 2020 to 2021, annual industry contraction could reach only 2-3% over 2018-2022. "Under our bull case, we assume that TPG will exit the Singapore mobile market by 2021, after intense competition from MVNOs and the incumbents, via a sale of its operations to an incumbent operator. Under this scenario, we expect the mobile industry to return to a growth trajectory by 2022 and the 2017-2022 annual contraction of the mobile industry to be limited to 2% vs our base-case projection of 4%," the analyst said.

Moreover, DBS Equity Research has revised down the potential revenue share grab of TPG by 2022 to just 4% from 5.5% before, after factoring in the MVNOs.

"Under our new base-case scenario, TPG could remain cash-flow negative till 2022, four years after its entry," Mittal concluded. "Negative cash flow generation in Singapore, coupled with TPG’s on-going investments in deploying a mobile network in Australia, could heavily weigh on the telco’s balance sheet, making TPG a potential target for acquisition."

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