Squeezing out growth from a mature market is always a challenge, but integrated Singaporean telco StarHub’s (STH's) recent downgrade of its 2014 forecast is a concern for investors.
STH’s downgrade implies that its service revenue will be flat in 2014, as opposed to growing at a low single-digit rate.
“The core business remains in robust health in spite of the continued broadband blowout,” says Vivek Couto, executive director at leading industry analysts Media Partners Asia (MPA).
“Management has taken a long view of the broadband market and it will likely bear out. There’s also some spring in the pay-TV business.”
“The main issue,” he cautions, “is around one to two key fundamental concerns on the long-term health of the business.”
A weakening broadband franchise typically sounds the death knell for an overall business, according to Liberty Global chairman John Malone.
Based on STH's June 2014 quarter numbers, broadband only represents 9% of its core service revenue versus 56% for mobile, 18% for pay-TV and 17% for fixed line. Broadband’s profit contribution has typically been significant however, and the business is a vital part of STH's overall bundling strategy, termed 'hubbing' in its own lexicon.
The current noise about broadband is the corrosive impact of price-based competition and the growth of disruptors such as MyRepublic. Since 2012, following the launch of Singapore's National Broadband Network (NBN), price-based competition on fiber has become the norm while download speeds have substantially increased.
For StarHub and SingTel, continued price-based competition hurts both ARPUs and margins.
MPA believes that StarHub’s strategy to defend market share even at the expense of ARPU is sensible, as pricing trends are expected to stabilize from 2015 onwards while retail prices are unlikely to fall below the S$30 monthly mark.
In 1H 2014, STH added 8,000 new broadband customers but both ARPU and revenue contracted year-on-year in Q2, at 17.8% and 17.2% respectively. StarHub believes that most of the declines have been accounted for and that metrics should stabilize over the next couple of quarters. Churn has increased however, and will largely depend on the number of customers coming up for contract renewal.
“Bundling pay-TV set-top boxes with broadband is one way to reduce churn and perhaps even increase stickiness, but its long-term impact on pay-TV is something to watch out for,” says Aravind Venugopal, analyst at MPA.
StarHub has also indicated that it is likely to roll out a residential IPTV service, leveraging its fiber NBN. The service is currently available to the corporate segment.
STH’s pay-TV business is starting to show some positive trends as new customer additions were up 2,000 versus Q1 2014, and up 5,000 versus Q2 2013. Churn has stabilized while revenues are up at low single-digit levels, bolstered by advertising gains.
However, key concerns remain, according to MPA’s Venugopal. While StarHub’s ‘hubbing’ households are up, “our concern is that there could be a softening of pay-TV ARPUs if subscribers coming off contracts decide to shave the cord,” Venugopal says.
“Therefore, subscribers could be retained on account of having an set-top box in their homes, but actual viewing of pay-TV channels, and subsequent generation of revenues, could be impacted.”
Monthly ARPUs were flat at S$52 in Q2 2014.
The growth of strong Chinese, Korean and Indian content on STH’s video platform, combined with performing brands from key global majors and new independent entrepreneurs, is helping STH serve more than 80% of its target market.
The key in the future will be growing demand for premium Asian and local content. StarHub is addressing this slowly through various initiatives with new local programs, while a number of new Korean and Chinese channels are expected to come on board over the next 6-12 months.
The other big issue is international input into content costs, which remain high. Online proliferation (both legal and illegal) of Hollywood-originated entertainment content is a key issue and will determine deals going forward.
“If the content is popular or premium-oriented, the cost will continue to go up. I don't see that dropping,” says StarHub CEO Tan Tong Hai.
“But, we can make choices on whether there is certain content that is not so popular, and we shouldn't renew," he adds. "The good thing is our set-top box has return-path data and we can use analytics.
"Then also we also look at piracy. If the content is available on YouTube and the internet, this will also impact the future economics we have with our partners.”
Longer-term, it will be especially interesting to see how the market for premium movie channels evolves in Singapore, and whether telcos such as STH and SingTel move forward with a direct-to-consumer proposition, leveraging mobile and broadband through direct partnerships with studios.
StarHub launched a new set-top box earlier this year, in partnership with Samsung, offering a new and improved interface. Built using Nagra’s Open TV 5 middleware, the new box was deployed in "substantial numbers", according to the company
Crucially, the new set-top boxes are meant to help StarHub curb the menace of box-based piracy. From a service roadmap perspective, the new box may also allow the operator to integrate over-the-top (OTT) media services – similar to what Virgin Media in the UK has done. 'Co-opt, not compete' could be a mantra for StarHub, as it looks to keep services from virtual private networks at bay.
Two key considerations, according to MPA:
(i) NBN Long-term funding of STH’s OpCo (i.e. Nucleus Connect) business may prove tricky. Grants from the IDA are set to expire over the medium term. Managing technology costs may prove an issue in the long term.
(ii) Network evolution There are a number of issues at play here. Firstly, STH is likely to decommission its cable network in 2020. Secondly, STH’s network lease agreement (NLA) with SingTel expires in 2017 – the NLA essentially comprises backhaul and fiber for StarHub’s cable TV business. The new NLA may likely be negotiated on more challenging economics for STH, especially as SingTel may use NBN pricing as a benchmark.
All of this brings the future into focus with some key questions:
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