sustaining axiata’s growth in the new telco paradigm

Sustaining Axiata’s growth in the new Telco Paradigm

1st December 2012

SHANMUGA PILLAIYAN (010194)TAN CHEE HOAW (010120)KEVIN CHOO (010226)

Presentation Outline

1. Problem statement

2. External Analysis

a) The New Telco Paradigm

b) Porter’s 5 Forces

3. Internal Analysis

a) Customer base

b) Financial performance

c) Analysis of current strategy

d) SWOT

4. Recommendations

5. Conclusion

Slide 2December 2012Nottingham Malaysia

Nottingham Malaysia

Problem Statement

Axiata has had an amazing period of growth for the last couple years, highlighted by the fact that it has clinched Frost & Sullivan's Asia Pacific ICT award for the "Best Telecom Group of the Year" for four consecutive years since 2009.

However, a new technological paradigm has emerged in recent years that could threaten the traditional telco business model. The question is:

December 2012Slide 3

Can Axiata continue it’s stellar growth performance within the

context of the New Telco Paradigm?

Nottingham Malaysia

The mindshare of mobile users is currently dominated by handset manufacturers, having shifted away from the mobile network operators.

The 3 main drivers for this paradigm shift are:


The New Telco Paradigm

1.Smartphones

2.Commoditization of telco services

3.OTT Services

Nottingham Malaysia

1. Smartphones reached 30% market share in 2011 with a total of 483 million units shipped worldwide

2. This trend is likely to increase significantly in the coming years as the battle for market share between handset manufacturers intensifies.


Source: Mobile Megatrends 2012, visionMobile

New Paradigm Driver: Smartphones

Nottingham Malaysia

New Paradigm Driver: SmartphonesConvergence of Telco and Computing Industry



1. Apple & Google are the two juggernauts from the computing industry which have moved into the telco industry.

Nottingham Malaysia

New Paradigm Driver: SmartphonesControl of the customer

1. Telcos are losing control of the customer to the computing industry that controls the mobile operating system (OS).


New Internet Titans

Traditional Computing

Giants

Telcos

Nottingham Malaysia

New Paradigm Driver: Commoditization of Service

As the telecommunication industry approaches maturity, telco offerings and QoS begin to look and feel the same between different competitors, causing:

1. Less room for differentiation in terms of the core services offered

2. Margin erosion from lower prices


Commoditization occurs as the Service / Product matures

Traditional Telco Services

Nottingham Malaysia

New Paradigm Driver: Commoditization of Telco Services

1. Despite overall subscriber growth, telco ARPU (especially for Voice and Messaging) is declining globally.

2. Traditional mobile services (voice, messaging, mobile data) are being threatened by substitutes like Skype, Whatsapp and Wifi Hotspots


ARPU = Average Revenue Per Uer

Operator Asset OTT Alternative

Distribution & Retail Apple physical retail stores and digital App Stores

Telephony Skype, Viber, TalkBox, Tango

Messaging Whatsapp, KakapTalk, iMessage, Samsung ChatOn

Billing and settlement iTunes, Google Wallet, FB credits, Amazon 1-Click

User Identification & Profile

Facebook, Google, Apple ID

Consumer intelligence Distimo, Flurry, AppAnnie

Nottingham Malaysia

New Paradigm Driver: OTTThe new gold rush

1. The money is currently in mobile applications.

2. This market is currently dominated by the mobile handset manufacturers.

3. Handset manufacturers currently have a unprecedented control over the customer.



Nottingham Malaysia

New Paradigm Driver: OTTApp Stores are being setup by diverse industry players


Source:Distimo, 2011

Nottingham Malaysia

External Analysis: Porters Five Forces on the Mobile Telco Industry


Bargaining Power of Customer

Bargaining Power of Suppliers

Threat of New Entry

Threat of Substitution

Rivalry Among Existing

Competitors

Legend:

Low

Medium

High

1. Capital requirements

2. Government policy

1. Presence of substitute

1. Substitute products/services

1. Buyer propensity to substitute

1. Diversity of competition

2. Product differences

Nottingham Malaysia

Internal Analysis : Customer Base


With a customer base of 200 million Axiata

has critical mass

2007 2008 2009 2010 2011

Series1 40 89 120 160 199

25

75

125

175

225

Axiata Group Customer Base

Mil

lio

n

Nottingham Malaysia

Internal Analysis : Group Financial PerformanceRevenue Growth rate is slowing


13.5%

17.3%

17.3% 5.3%

Axiata appears to be unable to sustain the momentum of growth in New Telco Paradigm, as revenue growth rate seems to be declining.

2007 2008 2009 2010 2011

Series1 9996879 11347711 13312187 15620674 16447937

1,000,000

3,000,000

5,000,000

7,000,000

9,000,000

11,000,000

13,000,000

15,000,000

17,000,000

Group Operating Revenue

RM

'000

Nottingham Malaysia

Internal Analysis : Axiata Portfolio of companies


Celcom

XL

Dialog

Hello

Robi

Idea

STAR Question Mark

DogCash Cow

HIGH LOW

Relative Market Share

LO

WH

IGH

Mark

et

Gro

wth

Rate

M1Multinet

MTCE

Relative size of revenue contribution to Axiata group

Nottingham Malaysia

Internal Analysis : Analysis of Current StrategyGeographic diversification strategy is to customise services based on needs of each country.


Currently different

sub-brands at each country

Nottingham Malaysia

Internal Analysis : Analysis of Current StrategyAxiata is stuck in the middle

Current strategy focussed on:

1.Customised offerings to match country specific demand

2.Focus on Cost Leadership


Axiata

Nottingham Malaysia

Internal Analysis : SWOT Analysis


Strengths

I. Good financial performance

II. Large overall subscriber base

Weaknesses

I. De-centralized control over regional operations

II. Lack of strong/cohesive differentiation with other operators

Opportunities

I. New verticalsII. Well positioned in

growing markets

Threats

I. Exposure to regulatory and foreign exchange risks

II. OTT services that are viable substitute for core services

Nottingham Malaysia

Conclusion from Analysis


Conclusions from External Analysis

The business environment for telcos is changing rapidly, and Axiata has to change accordingly to stay relevant and vital in the new telco paradigm

Conclusions from Internal Analysis

Axiata's current strategy has been successful so far, but it needs to:

A. Diversify its service offerings

B. Leverage on its large subscriber base

C. Focus more on engaging the under-served bottom-of-the-pyramid market

Nottingham Malaysia

Strategic Options

Possible strategic options can be categorised into the following.


Category Explanation

Core services Redefining customer experience through QoS improvements and core products, enhanced customer interaction, more engaging marketing

Vertical Industry Solutions (SI)

Extending into IT and networking solutions for corporate clients in a “vertical” fashion

Infrastructure Services

Providing infrastructure services such as data centre capabilities, mobile offload to other corporate clients and network operators

Embedded Communications

Integrating voice/messaging/data into 3rd party systems, eg M2M communications

3rd Party Business Enablers

Extending latent telco capabilities to 3rd parties, eg. Identity and authentication, billing and payment, etc

Own brand OTT services

Developing network independent applications and services

Nottingham Malaysia

Recommendations

Based on our understanding of Axiata’s capability and firm characteristics we feel that there are only 2 viable strategies:

Because Axiata is operating in different geographical locations with different cultural leanings, market maturity, industry focus, infrastructures, it is imperative to select a strategy that can be rolled out and implemented successfully and uniformly by each entity.



Own-brand OTT services

Nottingham Malaysia

RecommendationsDiversification Strategy


Sh

ari

ng

Op

era

tion

al

Rela

ted

ness

Betw

een

B

usi

ness

es

LOW

HIGH

Corporate Relatedness (Skills)

HIGHLOW

Own-brand OTT services


Nottingham Malaysia

Recommendation AOwn brand Over The Top (OTT) Services

1. Build an Axiata branded, Mobile OS agnostic app-store that integrates with the handset’s native ecosystem, supported by a network specific cloud storage service.

2. Provide enough incentives for developers (both established and aspiring) to develop applications for Axiata’s App Store, with a particular focus on localized applications.


Nottingham Malaysia

Recommendations B - 3rd Party Business Enablers

1. Negotiate payment settlement agreements with popular online digital content stores (eg. Apple iTunes, Google Play, Blackberry AppWorld, etc) by leveraging on subscriber base size

2. Develop interfaces with these stores to enable customers to pay for their purchases using their mobile subscriptions (postpaid and prepaid)

3. Develop fraud management policies to cater for the potential for increased bad debts by postpaid subcribers

4. Extend the payment solution to other products and services by working with selected vendors and merchants

5. Develop a framework for the provision of micro-financing services with reputable financial institutions and a network of individual agents


Differentiated Vertical Diversification™Servicing the “Bottom of the Pyramid”

Nottingham Malaysia

Recommendations3rd Party Business Enablers

Bottom of the Pyramid – Diversification Strategy


Telco Billing for popular AppStores

Alternative Payment Solutions

Micro-financing

The

Have-It-Alls

The

Have-Somethings

(partially unbanked)

The Have-Nots

(traditionally unbankable)

Nottingham Malaysia

Takeaways

1.ICTBusinesses in technology driven industries are facing ever shorter business model cycles, due to ICT –

Inevitable Convergence of Technologies.

More consideration must be given to the lifespan of any initiative recommended in the context of a strategic framework. The current frameworks have limitations with regards to how well they can predict the viability of any strategy in the face of this convergence.

2.BOPMore focus should be given towards developing Bottom of the Pyramid strategies that treat that segment as potential viable consumers and a latent economic/entrepreneurial force, especially in developing countries, because

the poor of today could be the middle class of tomorrow.


Appendices

Nottingham Malaysia

Axiata – Financial Performance (Subsidiaries)Operating Revenue

Celcom (Malaysia)

XL (Indonesia) Robi (Bangladesh) Dialog (Sri

Lanka)Cambodia

RM (Billion) IDR (Trillion) BDT (Billion) SLR (Billion) USD (Million)

2011 7.2 5.88% 18.9 7.39% 30.7 18.08% 45.6 10.14% 39.5 7.63%

2010 6.8 7.94% 17.6 26.62% 26 30.65% 41.4 14.36% 36.7 -21.08%

2009 6.3 12.50% 13.9 13.93% 19.9 36.30% 36.2 -0.28% 46.5 -14.05%

2008 5.6 7.69% 12.2 45.24% 14.6 1.39% 36.3 6.45% 54.1 30.68%

2007 5.2 8.4 14.4 34.1 41.4


Recently, revenue growth for Axiata’s mature strongholds of Celcom and XL are currently only in the single digits, while it’s operations in developing markets (except Cambodia) are registering double digit growth.

EBITDACelcom

(Malaysia)XL (Indonesia) Robi (Bangladesh)

Dialog (Sri Lanka)

Cambodia

RM (Billion) IDR (Trillion) BDT (Billion) SLR (Billion) USD (Million)

2011 3.1 3.33% 9.3 0.00% 9.6 14.29% 16.4 8.61% 1.4 -62.16%

2010 3.0 7.14% 9.3 50.00% 8.4 25.37% 15.1 81.93% 3.7 -67.83%

2009 2.8 12.00% 6.2 21.57% 6.7 59.52% 8.3 5.06% 11.5 -17.86%

2008 2.5 8.70% 5.1 45.71% 4.2 -2.33% 7.9 -43.17% 14.0 -20.45%

2007 2.3 3.5 4.3 13.9 17.6

Nottingham Malaysia

Porter’s 5 ForcesThreat of New Entrants (low)

Capital requirements – very high to start a telco

Government policy – cellular spectrum in most cases is tightly controlled by governments, and in most cases, only a few licenses to operate a telco are issued in each country

Economies of scale – Incumbent operators in mature or maturing markets are usually more able to stave off challenges from late market entrants because of their existing user base

Bargaining Power of Suppliers (low to medium)

Importance of volume to supplier – traditionally none except for network throughput capacity limitations, but there is a trend that vendors are revenue sharing with the telcos.

Presence of substitute inputs – telco suppliers are facing a trend where networks are choosing to work together to lower capital expenditure on infrastructure spending

Bargaining Power of Buyers (high)

Buyer Information – social networks, blogs, TV ads and information on the internet means that the buyer has access to plenty of information about the companies and their products/services as well as their substitutes

Substitute products/services – The rapid proliferation of app stores and OTT services is proving that buyers are increasingly willing to perform traditional telco-based functions like voice calls and messaging using substitute, internet-based services

July 2012Slide 30

Nottingham Malaysia

Porter’s 5 Forces – cont.

Rivalry among existing competitors (high)

Diversity of competition – the core services offered by telcos are voice, messaging and data connectivity. Most telcos do not deviate far

Product differences – as the market matures, product differences become commoditized, especially when the top contenders all have access to the same licenses and radio spectrum

Threat of Substitutes (high)

Buyer propensity to substitute – the availability of OTT services via a handset’s native Mobile OS ecosystem makes it highly accessible to the buyer

Relative price performance of substitutes – since many of the substitutes are free, they compare very favourably against telco offerings July 2012

Slide 31