Telecom Outlook 2003

December 5, 2002
Consolidation expected amidst chaos

SINGAPORE -- The global telecommunications market is currently bordering on chaos. An epidemic of bankruptcy filings has brought to rise a level of uncertainty within the industry as never before.

Interestingly, telecommunications service providers in Asia Pacific have been less affected by the anarchic spell. Frost & Sullivan forecasts a growth of about 10 percent in the telecommunications services market, despite the dip in the long-distance voice market and limited growth in the developed cellular markets. The main growth engine lies in the data business, with developing markets of China, India and Southeast Asia representing the key geographies for the positive outlook.

Manoj Menon, director, Technology Practice, Frost & Sullivan Asia Pacific, said: "Unlike their European and American cousins, telcos in Asia have been risk averse. Cautiousness has been the call of the hour and this has paid off well as Asian carriers have emerged as some of the most profitable companies worldwide."

Nevertheless, earnings have been below expectations and the uptake of telecom services has not seen a high note in most countries. Most telcos in the region have seen their gearing mounting, consequent of expansionary endeavors and slower than expected recovery. Even SingTel has seen its net debt ratio escalating, prompting credit downgrading by S&P.

Collaboration, a possible way out?
Menon continued: "The game today is about leveraging the existing infrastructure as effectively as possible, instead of making new investments into new networks for speedy rollouts. We generally don't expect the industry to deploy new fiber in the next six months. Instead, more concentration will be held in managing their operation support systems -- which includes network management, billing, customer care, etc. -- to bring down the overall cost of the operation. The focus today is on profitability, and less on revenue growth."

Mobile players in the more developed markets are now concentrating hard on retaining their subscribers and consolidating efforts at an industry level to reduce resources into network buildout. Players would also need to develop strong business models and secure beneficial alliances that add value to their businesses.

Menon added: "On their own, competitive carriers have no might to challenge the incumbent's business on local ground. However, a coalition of regional competitive carriers could take advantage of this situation to challenge the larger incumbents in a specific field -- for instance, data. Also given the tight capital market and limited liquid access, such a consortium would provide a stronger case in search of funds."

Many smaller players have deftly secured pockets of the market, under the noses of the giant telecom service providers, as has been in the case of wireless hotspots. The hotspots have become a test bed for wireless data services, given the 3G hiatus. "The combined forces of these players could tap on the pool of consumers, as well as enterprises, which would lead to wireless LAN (WLAN) becoming a pervasive in all leading Asian cities in the next 12 to 14 months," Menon continued.

On a macro scale, incumbent operators have been swift to realign their businesses to capitalize on the market by regionalizing their businesses. SingTel's acquisition of Optus, Telecom New Zealand's forays into AAPT and most recently, Telstra's entrance into Hong Kong's cellular market through CSL -- are just some examples of regional alliances and partnerships that make this point even clearer.

In a preview to his presentation on "Asian Telecom Industry: Readdressing and Refocusing Market Needs", Menon said that the industry is still undergoing a strategic inflection point, as was witnessed in the computing business in the late eighties. He cited trends in the market where telcos are beginning to position themselves more strategically in specific areas of competency, rather than being everything for everybody.

Menon also commented on the regulatory aspects that have shaped the Asian telecommunications shores. He said: "Due to accelerated deregulation in certain quarters of Asia, we saw the industry burgeon from some 25 players in the Asia Pacific in the mid-nineties, to presently, over 1,000 players. This has led to intense competition, which largely loomed on price play. Eventually, the smaller players were either swallowed up or ceased to exist."

"There will be little room for more than three telecom service providers in most countries across Asia Pacific," Menon added. "It is plausible that the regulators will be changing their stance to accommodate one that will balance the pace of innovation against the profitability of the industry at large."

The strong pro-liberalisation measures in the mid-nineties masked the mistakes in the industry, which is now beginning to show. Hong Kong, for instance, has recorded plateauing single-digit cellular growth figures in the past year as the six active telecom contenders vie for a saturated market. The international telephony business is another example of a market that has suffered the effects of swift deregulation.