Singtel, Southeast Asia's largest telecoms operator, reported that annual net profit halved to S$554 million ($418 million), the lowest net profit in at least two decades. That performance by a leader in exploring additional lines of business illustrates three related strategic issues that eventually will be faced by every connectivity service provider serving the mass market.
The first issue is the exhaustion of legacy connectivity services markets. At some point, every customers that wants service will be buying it.
The second issue is the traditional difficulty or entering new markets, either in other parts of the ecosystem or in content or applications. Telcos have had a very-difficult time sustainably creating new roles for themselves elsewhere in the value system.
The third issue is the valuation penalty any successful “up the stack” asset (content, platform, application) has when buried within the telco organization. The same asset--inside a telco--earns a less robust valuation than that same asset, outside the telco organization.
That raises the issue of "how" a connectivity provider should "own" assets elsewhere in the value chain. Vertical integration actually seems to penalize the value of assets. Which suggests some strategy of ownership "outside" the connectivity organization.
Singtel has been trying to diversify for years, and has been a leader in exploring growth “up the stack” in the application layer, and beyond connectivity. So the inability to reap profit rewards is troubling.
But some investments such as those in digital marketer Amobee and cyber-security firm Trustwave yielded weaker-than-expected returns, observers note. That is a recurring story for telcos who have tried for many decades to broaden their revenue bases in adjacent areas such as software or computing services.
The next moves might pair infrastructure asset sales to fund investments in other growth areas such as financial services or gaming.
At least part of the problem is valuation of telco infrastructure assets. Singtel notes that its infrastructure assets do not provide a valuation boost, compared to other suppliers that own fewer network assets.
The other issue is that Singtel executives believe ownership of towers, satellites, subsea cables and data centers has not boosted Singtel’s valuation, compared to peers who own less of such assets. The expectation is that selling some of those infrastructure elements will free up capital to deploy in other growth areas.
Weakness in mobile services revenue and market share is among the current issues. Mobile service revenue dropped 19 percent; blended average revenue per user fell 18.5 percent and subscriptions fell 3.6 percent over the last year, for example.
That is not a unique problem. Globally, other service providers face low growth rates and falling ARPU. Saturation of mobile services--the industry growth driver for decades--is part of the problem.
Beyond that, the typical telco must replace half of existing revenue every decade or so. We have seen that in fixed network voice services, mobile voice, long distance revenue and fixed network services generally. We have seen it in text messaging as well.
That might seem hyperbole, but is a demonstrable fact. Globally, that means telcos have to generate about $400 billion in new revenue just to replace what they will lose over the next decade.
Singtel’s issues really are the same issues every connectivity service provider eventually will face.
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