In this special release of Staying Connected, we examine how the aggression in the Malaysian mobile scene has altered the dynamics of the postpaid market. We ran TCO analysis on selected postpaid plans to identify ‘value’ and flag the risk of further value destruction should the current obsession with data offers persist. The recent deceleration in the industry’s data revenue growth remains a concern.

Good deal hunting. The stiff competition in the mobile market in Malaysia has contributed to a raft of offers in the postpaid mobile market. In addition to lower monthly commitments, subscribers stand to benefit from generous data buckets typically associated with higher value plans. We ran a Total Cost of Ownership (TCO) analysis on the major device-bundled packages in the market in an attempt to quantify the value of postpaid plans by factoring in: i) handset subsidies offered by the telcos and ii) the cash outlays over the contract periods. Not surprisingly, U-Mobile scores highly on the ‘value’ spectrum.

A downward spiral. While the telcos have indirectly played their part in making mobile broadband more affordable, the lowest priced mobile plan does not necessary present the best value. This is because the industry is notorious in the use of tactical campaigns to drive the notion of ‘value’ which creates a downward spiral, contributing to further value destruction (the IDD market is a case in point). We believe the current data promotions in the market are i) counter-productive, ii) portend negative implications for industry capex and iii) prolongs the attempts to improve the economics of data. The benign competition in recent years is partly to blame for the recent pick-up in competitive intensity.

SIM-only plans gaining popularity in Malaysia. The availability of more affordable handsets has spawned a slew of bring-your-own (BYO) device/SIM-only plans in the market. SIM-only plans are only attractive when the savings are passed back to subscribers but are ARPU dilutive for telcos. The silver lining is the positive impact on EBITDA, as the telco no longer bears the prohibitive cost of subsidising handsets. Over in SG, M1 said its mySIM plans have garnered a strong following, with new customers making up 70% of sign-ups.

Briefly on the TCO

We selected the key device-bundled postpaid plans from Maxis (MAXIS MK, SELL, TP: MYR5.70), Celcom, DiGi.Com (Digi) (DIGI MK, NEUTRAL, TP: MYR5.80) and U-Mobile for the TCO analysis. The TCO is defined as the sum of the monthly commitment (over a 24 month contract period where applicable), upfront device payment, device cost and contracting charges levied. It represents the total cash outlay for a virgin postpaid user over the contract period when signing-up for a plan. TCO excludes discretionary spending during the contract period (i.e. data add-ons, value added services, roaming, etc.) and other qualitative factors that would affect purchasing decision. We use the latest handset models (Figure 2) in the market for the analysis, namely the Samsung Galaxy S6 Edge+, Galaxy Note 5, iPhone 6s and 6s+. While every care has been taken to ensure the accuracy of the information presented, readers are advised to independently verify the details with the mobile operators as plans and offers do change without notice. The analysis SHOULD NOT be interpreted as a solicitation and/or recommendation to enter into a contractual agreement with a telco.

Android device plans Key observations

U-Mobile offers the lowest entry level Android plan. Despite the lower device subsidy, U-Mobile’s Ultimate Device 65 plan comes with a TCO of MYR3,459 (Figure 3). The telco more than makes up for the subsidy through lower monthly commitment. Digi’s SmartPlan 78 (SP78), priced at MYR78 per month, offers better value with larger minutes and SMS bundled (Digi is throwing an additional 2GB per month of data for 12 months during the promotion period which ends on 30 Nov). For avid data users, Celcom’s First Basic 85 (B85) plan (MYR85 per month) is bundled with a generous 5GB of data. B85’s selling point is the ‘Optimizer’ feature (unique to Celcom) which rewards a user with additional data/voice/SMS after the allocated buckets are consumed. It also allows users to carry forward unused data subject to a maximum cap. Celcom’s users also enjoy additional 5GB of monthly internet quota via Celcom’s network of hotspots. Celcom was the first to go on the data offensive, with its all-in-one First Basic 38 (B38) postpaid (launched in April) taking the market by storm. Maxis’ entry level MaxisONE Plan is priced at a premium MYR98 per month with only 1GB of data. The key pitch of the MaxisONE Plan is the unlimited voice calls/SMS to all networks – the first telco to offer limitless voice on postpaid. Its high-end data plan (MYR188 per month) comes with 7GB of data, compared with similar plans by Digi (MYR148) and U Mobile (MYR135).

Can’t get enough of data? Given that average mobile data consumption in Malaysia is still one of the lowest in the region ( <1GB per month), the current spate of data-led competition in the mobile market appears unproductive and runs the risk of ‘short-circuiting’ the industry’s attempts to monetise data. Irrational data offers could also impact network capacity, distort usage by altering data consumption behaviour and contribute to an influx of low yielding data users, translating to capex upside risks.

No let-up in device subsidies. By and large, Malaysian telcos still dish out relatively generous subsidies on smartphones. Celcom’s subsidy for the Galaxy Note 5 (up to MYR1,911) compares with Digi’s up to MYR1,860 on the Galaxy S6 Edge+. Typically, the level of subsidy rises with the value of the plan, although we note that the payback periods (subsidy/monthly commitment) have increased to nine months for both devices (from an average of four to six months). Some operators are only able to recoup their device subsidies after 12 months. In comparison, the payback period for Singapore telcos averaged six to seven months. Some telcos have also eliminated upfront device payments, which lowers the barriers to smartphone ownership.

Source: RHB Research - 11 Nov 2015