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Starhub analysis Essay

Generic Characteristics of Telco Industry
Market structure is either a:
Monopoly
Natural monopoly
Oligopoly
Dominated by a handful of big players
High capital expenditure (capex)
Absolute fixed cost is high
But fixed cost per user is very low
Telco may be very cash flow rich if capex is controlled
Low operating expenditure (opex)
Average cost per user is very, very, VERY low.

Generic Characteristics of Telco Industry
Lines of business
Voice
Traditional fixed lines overtaken by mobile
Some households do not even have fixed lines
i.e. M1 gives free fixed line with fibre plan
Lucrative international dialing business is largely gone
Replaced by data i.e. Skype, VOIP etc.

Generic Characteristics of Telco Industry
Lines of business
Data
Escalating bandwidth demand (geometric growth)
Some business models have failed as a result
Unlimited mobile data plan replaced by tiered pricing plans
Reasonably priced unlimited fixed broadband/fibre still available in some countries (not so in the US).
Price differentiation between home and business data plans
Sub segment differentiation exists – gamers (low latency)
Telcos need data to make up for loss revenue in voice business

Generic Characteristics of Telco Industry
Lines of business
Pay TV
Telcos offering pay TV not common for all countries. Exists in Singapore.
Always a balancing act between controlling cost of content and charging viewers more
Cost is increasing for developed countries
» Not so for developing countries…..
Video on-demand new business model
Don’t pay for a whole channel, just pay for the
TV program you want
Mio TV vs Cable TV

Generic Characteristics of Telco Industry
Strategy for non-saturated markets
Build out infrastructure and coverage while controlling capex
Gain market share by grabbing customers
Especially in underserved markets
Attempt to lock in existing customers
Increase revenue by offering differentiated price plans
Tiered data plans (both mobile and fixed)
Sell supplementary services
Caller ID, low latency etc.

Generic Characteristics of Telco Industry
Strategy for mature and saturated markets
Infrastructure and coverage largely built so there is little capex
Control opex tightly
Gain market share by poaching customers from competitors
Avoid price war
Same as before
Attempt to lock in existing customers
Increase revenue by offering differentiated price plans
Expand into overseas markets
Any economies of scale?

Industry Life Cycle Analysis

Porter’s Five Forces
Threat of
New
Entrants

Bargaining
Power of
Suppliers

Competitive
Rivalry
Within the
Industry

Threat of
Substitutes

Bargaining
Power of
Buyers

Porter’s Five Forces
Threat of New Entrants
How easy is it for new players to enter the industry?
What are the barriers to entry?
Loyalty to existing brands
Stickiness and incentives (e.g. loyalty points)
High switching costs
High capex and fixed opex costs
Scarcity of resources
Government restrictions and licensing
Technology and intellectual property rights

Porter’s Five Forces
Power of Suppliers
How much pressure can suppliers exert on the business?
Single or few suppliers (monopoly or oligopoly)
Few or no substitutes
Switching to new supplier is costly or time consuming
Supplier’s product is extremely important
Supplier’s industry has higher profitability than buyer’s industry

Porter’s Five Forces
Power of Buyers
How much pressure can buyers exert on the business?
Single or few big buyers
Purchases are in large volumes
Switching to a different competitor is easy
No stickiness or loyalty
Buyer’s are price sensitive
Company’s product is not important

Porter’s Five Forces
Availability of Substitutes
How likely are customers to switch?
Few or many similar products on the market?
Switching cost is low and easy to do
Disruptive technology
Secular changes in consumption patterns and lifestyles

Porter’s Five Forces
Competitive Rivalry
How intense is the competition in the industry?
High competition means low margins
Number of competitors and size
Any dominant company?
Little differentiation between competitor’s products and services
Industry life cycle
Young market means all firms grow as overall pie expands
Mature market means competitors grow by taking market share from other companies

Applying Porter’s Five Forces to Starhub
Threat of New Entrants
Government license is required and need to bid for airwaves in government auction
Is Singapore government issuing new telco licenses?
What is the availability of airwaves?
Auction prices cheap or costly?
High capex and fixed cost…..but very low opex cost per user!
Loyalty and stickness
Some stickiness due to contract obligations (early termination penalty) and incentives (handset upgrade subsidies)
Low switching costs if not under contract
No cost and retain old mobile number

Applying Porter’s Five Forces to Starhub
Power of Suppliers
Pressure from handset manufacturers
Handset subsidy recouped by locking in customers into contracts
Big difference in price of handset without contract
Apple able to negotiate for higher prices
Telcos subsidize more. Costs passed down to consumers.
Pressure from content providers
Cable TV pays HBO, Fox etc for content
Special events like EPL cost much more
Costs have been escalating lately…..

Applying Porter’s Five Forces to Starhub
Power of Buyers
Many retail customers (Starhub is no. 2 in SG)
Extremely price sensitive
Little brand loyalty and stickiness
Individual customer have zero power
Easy to switch out to competitor’s offerings
Product is important but not tied to Starhub
E.g. can get same handset and data plan from competitors
Some tradeoff between monthly price plan and data
All telcos moving away from all-you-can-eat data plan

Applying Porter’s Five Forces to Starhub
Availability of Substitutes
Handsets are not tied to Starhub
Voice and data plans are also not unique to Starhub
Cable TV content is differentiated
Competes only with Singtel but not directly
Different content and pricing content
Special events like EPL are hotly contented

Applying Porter’s Five Forces to Starhub
Competitive Rivalry
Extremely high competition
Mature and saturated Singapore market
Starhub grows by taking market share from
Singtel and M1
Little differentiation between competitor’s products and services
But no direct price competition!
Despite rivalry, industry margins relatively high
Low opex cost per user
Average revenue per user (ARPU) is growing
Driven mainly from new tiered data plans

Key Ratios for Telco Industry
Earnings Before Interest, Taxes, Depreciation and
Amortization (EBITDA)
Indicator of a company’s financial performance
Churn Rate
Actual rate at which customers leave for a competitor
Average Revenue Per User (ARPU)
Takes into account revenue, capex and opex.
As market matures, ARPU drops….

THE EQUITY RESEARCH PROCESS

Purpose of the Equity Research Report
To communicate to clients a single message
How to allocate financial resources
All other issues are secondary
What are readers looking for?
Ideas, ideas and ideas!
Unique ideas are great but most of the time, ideas generated could just be the same as everyone else
Herd instinct is safe option!
But no one will remember you…..!

How to Make the Report Valuable?
Use the KISS principle
Investors have little time (and patience)
Communicate clearly, concisely and get to the point.
Have something to say
Does it lead to an actionable idea?
Report is an opportunity to standout and may lead to other revenue generating activities or more face time with the client.

How to Make the Report Valuable?
Issue the report in a timely fashion
Giving investment opinion and advise too late is pointless
“Better late than never” fails in this case

Treat your reader with respect
Reader may be an investment professional herself
Don’t patronize or condescend
Tailor tone and language to target audience

How to Make the Report Valuable?
Be impartial and objective
A research report is not an advertisement.
Even if you like the company very much, not over hype the company – leave that to the IR firms

Know your stuff
Be familiar with both the industry and company
Be brave (but be prepared to face the firing squad)
The best analysts are willing to take risks with their opinions


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