Ovum - Asia Pacific Mobile Power Players

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ASIA-PACIFIC: MOBILE POWER PLAYERS1

Ovum 2005. Unauthorised reproduction prohibited.

Asia-Pacific mobile power players

03 August 2005

Nathan Burley

Ovum view Asia-Pacific has the most diverse markets in the world. Markets range in

maturity from those in the earliest stages of development to the most advancedmarkets in the world. Operators in different markets are facing different sets ofchallenges and strategies, depending on their regulatory and competitiveenvironments and stage of development.

Operators performance is market driven. Operators in mature andovercrowded markets perform differently to those in less crowded and younger

markets. Subscriber growth in all markets is predominantly prepaid. Slowing

subscriber growth dominated by prepaid subscribers puts a ceiling on futurerevenue growth. Other means of revenue growth will be derived throughacquisition or value-added services.

Profitability increases are driven by cost containment. All operators arefocusing on cost containment as revenue growth slows across the region.Operating costs have decreased across the board as operators seek to improveprofitability.

ARPU continues to fall. ARPU levels have fallen for almost all operators. Thiswas driven predominantly by increased competition.

Data usage is increasing slowly. All operators reported increased data revenuesin 2004; increasing data usage further will be key to operators revenue growth.

Scope of research

This research focuses on the power player operators and mobile markets of Australia, China,Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Philippines, Singapore, SouthKorea, Taiwan and Thailand. Power operators are large operators that have the ability tochange the competitive environment of the market they are in. Different operators are analysedin each section depending on available data.



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arrangements. These are only just starting to be raised. Every market has at least twooperators with significant market share. Many markets, such as Taiwan, Hong Kong,Thailand and Australia, have upwards of three mobile operators. Figure 2 shows thefragmentation of the Asia-Pacific mobile market, with India and Hong Kong the mostovercrowded, and New Zealand and China the least.

The Herfindahl-Hirschman Index

In Figure 2 we use the Herfindahl-Hirschman Index (HHI) as a measure of marketfragmentation. The HHI represents the sum of squares of the market shares. Thus a perfectmonopoly, where one operator has 100% market share of subscribers, generates a HHI ratio of10,000. A perfect duopoly, where each operator has a 50% market share, generates a ratio of5,000. A ratio of 0 implies a totally atomised market, with all participants recording a marketshare of 0%.

Figure 2 HHI comparison of local mobile market fragmentation, March 2005

0 1,000 2,000 3,000 4,000 5,000

China

New Zealand

Indonesia

Philippines

Japan

Thailand

South Korea

Australia

Malaysia

Singapore

Taiwan

Hong Kong

India

Source: Wireless Intelligence



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Figure 3 Cellular technology usage in Asia-Pacific, March 2005

0%

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100%

A u s t r

a l i a

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d

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p i n e s

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p o r e

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T a i w a

n

T h a i l a

n d

I n d o n

e s i a

I n d i a

Other WCDMACDMA 1xEVDO

CDMA20001xCDMAGSM

Note: 63% of Japanese subscribers are on the PDC network which is classified under other.

Source: Ovum

3G

3G footprints, like other indicators of mobile markets, vary significantly in the Asia-Pacific region. While most markets have 3G operators, most are at a very early stage,subscriber numbers are low and networks have limited population coverage. Figure 4shows the stages of 3G development for each market. It is clear that many marketsare not yet ready for mass take-up of 3G services.



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Figure 4 3G in Asia-Pacific

Country Operators Technology Launch date Comments

Australia 3 Australia WCDMA Apr-03

Telstra CDMA2000 EV-DO /WCDMA

Nov-04 / 3Q05

Optus WCDMA May-05 Launched in National Capital only

Vodafone WCDMA Oct-05

China No 3G licences

Hong Kong 3 Hong Kong WCDMA Jan-04

SmarTone WCDMA Dec-04

Sunday WCDMA Jun-05 Various handset issues

CSL WCDMA Dec-04

India Bharti WCDMA Q1-05 Trials; awaiting licence fromregulator

MTNL WCDMA Q1-05 Trials; awaiting licence fromregulator

BSNL WCDMA Q1-05 Trials; awaiting licence fromregulator

Indonesia Mobile-8 CDMA2000/ EV-DO Jan-04 Trials; government may revokelicences and re-issue spectrum

Mobisel CDMA2000 Jun-05 Trials; government may revokelicences and re-issue spectrum

Japan KDDI CDMA2000/ EV-DO Apr-02 / Nov-03

NTT DoCoMo WCDMA Oct-01 Uses FOMA

Vodafone WCDMA Dec-02 / Nov-04 Second launch was Vodafone Live

Malaysia Maxis WCDMA May-05

TelekomMalaysia WCDMA May-05

New Zealand TCNZ EV-DO Nov-04

Vodafone WCDMA Jul-05 Philippines No 3G licences

Singapore SingTel WCDMA Dec-04

Starhub WCDMA Apr-05

M1 WCDMA Q4-04



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Figure 4 3G in Asia-Pacific continued

Country Operators Technology Launch date Comments

South Korea SKT CDMA2000 EV-DO /WCDMA

Jan-02 / Dec-03

KTF CDMA2000 EV-DO /WCDMA

Aug-02 / Dec-03

LG Telecom CDMA2000 - EV-DV H1-05 Problems have occurred acquiringhandsets

Taiwan Chunghwa WCDMA Jul-05

FarEasTone WCDMA Jul-05

Taiwan Mobile WCDMA May-05

APBW CDMA2000 Jul-03

VIBO WCDMA Q4-05

Thailand AIS WCDMA May-05 Trials

Source: Ovum, operators

Data usage rates are both the lowest and the highest in the world

The data usage levels shown in Figure 5 do not necessarily reflect the stage of marketdevelopment in the Asia-Pacific region. Other factors, such as local-language inputconstraints, have also had an effect on data uptake in the region. For example, bothTaiwan and Thailand record very low data usage for this reason. Taiwan also has theadditional problem of SMS being more expensive than a short phone call reducing itsappeal for consumers.



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Figure 5 Data revenues as percentage of total revenues for 2003 and 2004

0

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1015

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45

G l o b e

N T T D

o C o M

o K D

D I S K T

K T F

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a M a

x i s

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M o b

i l e A I S

T a i w a

n M o b

i l e

C h u n

g h w a

20032004

%

Note: NTT DoCoMo and KDDIs financial year-ends are 31 March.Telstras financial year-end is 31 June.

All other operators financial year-ends are 31 December.

Source: Operators

Market conditions

Subscriber growth slowing

The Asia-Pacific region has the greatest contrast of market maturity, ranging frommarkets in the earliest stages of development to the most advanced markets in theworld. Mobile penetration rates ranged from 5% in India to 113% in Hong Kong inMarch 2005.

The majority of markets in the Asia-Pacific region are reaching maturity, as shown bythe slowing subscriber growth rates in Figure 6 .



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Figure 6 Subscriber growth rates and mobile market penetration, March 2005

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n d I n d

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p o r e

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n

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n *

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S u b s c

i b e r g r o w

t h ( % )

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M a r k

e t p e n e

t r a

t i o n

( % )

Subscriber growth 2003

Subscriber growth 2004

Penetration

*Taiwan experienced -13% subscriber growth in 2004

Source: Ovum, operators

Developing markets such as India are still showing significant growth rates. India andChina together added 70 million subscribers throughout 2004. South Korea, Singaporeand to a less extent Australia showed an improved, but still quite small, subscribergrowth rate in 2004.

Figure 7 shows subscriber growth rates for the operators in 2003 and 2004.



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Figure 7 Subscriber growth in 2003 and 2004

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10

0

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G l o b e

S m a r t

M a x i s

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b i l e

K D D I

S K T

N T T D o

C o

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M o

b i l e

2003

2004

%

Source: operators

China Mobile and NTT DoCoMo are the only operators to experience increasedsubscriber growth in 2004, but for different reasons China Mobile for its developingmarket and NTT DoCoMo for its 3G services (albeit mostly from internal subscriberchurn). However, the two standout performers in terms of subscription growth were thetwo Philippines operators Globe and Smart.

Peoples Telecom was not as successful in 2004 as it was in 2003 when subscriptionsincreased due to an aggressive marketing strategy. Similarly, SKT is suffering the

effects of a saturated competitive market.

Taiwan Mobile is the only operator to have negative subscriber growth. This comes asa result of an intensely competitive saturated market and the Taiwan governmentsdecision to only allow one SIM card per ID card, resulting in a cut in the number ofconnections.

Prepaid users dominate subscriber growth

The majority of Asia-Pacific markets are heading towards market saturation, certainlyin the urban centres. Subscriber growth is predominantly centred on prepaid users, asshown in Figure 8. The total number of Asia-Pacific prepaid subscriptions overtook

postpaid subscriptions in December 2004. However, In the South Korean and



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Japanese markets the proportion of prepaid subscribers is minimal and estimated tobe less than 1% of subscriber growth. In these markets operators have tried to limitprepaid packages because of their lower revenue value.

Figure 8 Percentage of subscribers that are prepaid in 2003 and 2004

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T e l k o m s

e l A I S

C e l c o m

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H u t c h

i s o n I n d

i a

N Z T e l e c o

m O p t

u s T e l s t

r a

C h i n a

U n i c o

m M

1

S i n g T e l

N T T D

o C o M o

2003

2004

Source: operators

%

Prepaid subscribers are generally of a lower value to operators than their postpaidequivalents. Figure 9 shows the difference in ARPU between prepaid and postpaidsubscribers.



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Figure 9 Prepaid versus postpaid average monthly ARPU in 2004

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f o n e A

u s .

V o d a

f o n e J

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Z

Postpaid ARPU

Prepaid ARPU

Source: operators

$

The lower value of prepaid subscribers means that achieving a high amount of prepaidsubscriber growth will not necessarily translate into a profit increase without tightcontrol over subscriber acquisition costs.

The growth in prepaid subscribers makes leveraging as much revenue as possiblefrom high-usage subscribers essential to operators success. This trend has createdtwo-speed economies for many Asia-Pacific markets, where subscriber growth iscentred on low-value customers (often in rural areas) and operators focus onincreasing their high-value clients data and value-added services usage.

Financial indicators

Revenue growth slowing for the majority

As subscriber growth stalls, so does revenue growth for the majority of operators in the Asia-Pacific region. Figure 10 shows the decline in revenue growth across theoperators.



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Figure 10 Revenue growth percentage for operators in 2003 and 2004

-6

-1

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9

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K T F

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P e o p

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C h u n g

h w a

N T T D o

C o

M o

20032004

%

Source: operators

Revenue growth is much stronger for operators in the developing markets of Malaysia,China, Philippines and Thailand. For the majority of operators, revenue growth hasslowed. NTT DoCoMo has been hit by increased competition and falling ARPU,resulting in its revenue growth turnaround.

KTF and KDDI were the exceptions to the general trend of falling revenue growth.Despite the competitive market in Japan, KDDI has increased market share throughthe popularity of its 3G service. KTF achieved its result through increased

subscriptions and market share despite a small decline in ARPU.

Data revenues as an ARPU stabiliser

Figure 11 shows that operators in the more advanced markets have the highest ratesof data usage. Globe is the exception, driving high data usage from cheap SMS.



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Figure 11 Data revenue as percentage of service revenues

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g h w a

2003

2004

Source: operators

%

NTT DoCoMo and KDDI both have data revenues accounting for over 24% of totalrevenues. The difference between Globe and the Japanese operators is the type ofdata usage occurring. KDDI offers 3G services, access to the Internet and email, videomail, broadcast, music and games, through the EZweb portal. In contrast, Globes datausage in 2004 was 89% SMS-based. Other data services offered by Philippinecompanies are Smarts Pasa Load, which allows the transfer of prepaid creditsbetween subscribers, and Smart Money, which allows subscribers to do bank-to-bankmoney transfers and bill payments for utilities. It is this type of advanced applicationthat all operators are trying to grow.

All operators have experienced significant growth rates in data usage, outstrippinggrowth in service revenues. Korean operator SKT and Australian operator Telstrastand out both increases were driven by value-added services. Operators need tocontinue to push for increased data revenues.

Profitability

The profitability of most operators remained fairly constant in 2004 as shown in Figure12 . However, the profitability of the two Korean operators reduced markedly. This waslargely due to the heightened competition caused by the introduction of mobile numberportability and the regulatory environment (which included tariff cuts). NTT DoCoMosEBIT margin reduced by 4%, as extended discounting has hit operating revenues andprofits. Results for 2006 and 2007 will also be affected by discounting in data and

voice. The operators estimates for operating revenues and operating income in March



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2006 are both relatively flat (0.8% and up 3.3% respectively). Those with improvedprofitability include Maxis, AIS and Taiwan Mobile.

Operating costs

A number of operators have focused on reducing operating costs as subscriber growthand value dwindles. Figure 12 shows the operating costs as a percentage of revenues.The advanced market operators, KTF, NTT DoCoMo and SKT, all experiencedincreases, primarily due to increased competition and next-generation costs.

Figure 12 EBIT margins and operating expenses/revenues

EBIT margin Opex/revenue

2003 2004 Change 2003 2004 Change

AIS 32% 34% 2% 69% 66% -3%

China Mobile 31% 32% 0% 69% 69% 0%

Chunghwa 33% 33% 0% 71% 68% -2%

Globe 32% 31% -1% 41% 44% 3%

KDDI 12% 10% -1% 90% 90% 0%

KTF 15% 7% -7% 85% 91% 6%

Maxis 35% 41% 7% 43% 43% 0%

NTT DoCoMo 22% 18% -3% 78% 84% 6%

Peoples 24% 19% -5% 76% 67% -9%

SingTel 28% 30% 2% 65% 63% -1%

SKT 32% 24% -8% 68% 76% 8%

Taiwan Mobile 33% 36% 3% 40% 41% 1%

Telstra 25% 32% 7% 69% 69% 0%

Source: operators

Key performance indicators

ARPU continues to fall

Operators ARPU continues to fall, as shown in Figure 13 , exacerbated by theincrease in prepaid subscribers in the majority of markets. Chungwas increase in

ARPU was obtained by shedding inactive subscribers. TCNZs ARPU increase reflecthigher data usage as well as an increase of 10% in average MoU. Driving the increasewas prepaid ARPU which increased 44%. New Zealand mobile prices are among thehighest in the world and heavy competition hasnt driven prices down as in othermarkets.



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Figure 13 Change in average monthly ARPU (%) in 2003 and 2004

-19

-15

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-7

-3

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5

A I S

C h i n a

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b i l e

C h u n g w a

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t e l

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S m a r t

T C N Z

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l

2003

2004

9

Source: Wireless Intelligence, operators

%

Churn

Figure 14 shows the average monthly churn rates for 2004. Generally morecompetitive markets have the highest churn rates. This is not the case for Japan; itslow churn is driven by a low percentage of prepaid subscribers. Taiwan Mobile has thehighest churn rate at 4.4%; most of this is driven by prepaid subscriber churn whichwas 16%.



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Figure 14 Average churn rates in 2004

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Source: operators

All operators have initiated churn stabilising activities, such as launching customermanagement teams. These activities have had some success, with the majority ofoperators experiencing reductions in their churn rate.

Strategic implications

Operators looking to emerging markets

Operators in highly competitive and mature markets may start looking elsewhere forprofit growth. The example of SingTel, with its acquisition of Optus, shows that it ispossible for market leaders to make a profitable entry into other markets. However, theuniqueness of the Asian markets makes economies of scale and worthwhile synergiesdifficult to achieve.

Revenue growth from data and value-added services

While there is still room for growth in a minority of markets, in the majority revenue and

subscriber growth are slowing. This makes high levels of data usage, a revenue



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growth driver, even more important to achieve. Operators with 3G networks are wellpositioned to offer increased value-added services. Their success will be driven bywhether they can convince market subscribers of their need for these services.

Cost containment is key

Improved profitability will rely on cost containment as revenue growth slows. The bestperformers will be those operators who can find ways to reduce or stabilise costsespecially with expensive capital expenditure on next-generation networks.

Subscriber acquisition costs are of particular importance as the majority of subscribergrowth is prepaid. Smart is one of the strongest performers in this area, driven by the

introduction of over-the-air top-ups for prepaid credits.

Ovum - Asia Pacific Mobile Power Players

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