Making the connection

  • Business
  • Saturday, 14 Nov 2009

Telekom Malaysia Bhd’s battleground has widened and its survival rests on the roll out of its high-speed broadband services

CALL it what you want – dividend, high growth or sector theme play – the tempo for the game of musical chairs played by investors in the telco sector is set to get catchier. Bhd raised its game recently by revising its dividend policy and declaring a special dividend to retain its status as a magnet for yield-conscious investors, not an altogether surprising move as long-term earnings prospects put aside, the company’s strongest appeal has long rested on its huge payouts.

Wooing investors with a high-growth palette is sibling of incumbent telco Telekom Malaysia Bhd (TM), Axiata Group Bhd, which analysts expect to chart a strong performance given the “explosive” growth for wireless broadband from Celcom and its overseas business operations in Indonesia, Bangladesh and Sri Lanka.

Bringing sexy back to the telco sector is investor darling Maxis Bhd with its mobile leadership position and strong cash flow, and the accompanying hoopla over its listing and the much-echoed hope that it will raise Malaysia’s profile in the global investing stage and this – its sweet yield promise.

Stepping up to the plate are the listed WiMAX players – YTL e-Solutions Bhd, Green Packet Bhd and REDtone International Bhd – with their offerings, some a lot more aggressive than others, which is galvanising the country’s under-served broadband consumer segment.

So, exactly where does that leave TM, whose long-standing comfort zone in the fixed voice business is being rattled, you ask?

Sexy, TM may not be, just yet that is, but its seat in the sector is still on firm ground, despite the rapidly shrinking fixed voice revenue and ruthless competition from its wireless broadband counterparts. Furthermore, the investment case for TM is compelling given its superior dividend yields of 6%-7%.

Zam’s game plan

TM’s operational imperatives have shifted significantly in the past year and it’s no different for incumbents all over the world. It has to dramatically restrategise or lose market share it has enjoyed before the monopolies cracked.

Leading that charge is Datuk Zam Isa, TM Group’s chief executive officer, who took over the reins of one half of the operations as a result of a major demerger which was put in place early last year by his predecessor Datuk Seri Abdul Wahid Omar, boss of Malayan Banking Bhd. (Under the demerger, the group was split into fixed (TM) and mobile business (Axiata which used to be known as TM International Bhd)

His game plan is to bundle voice, video and data or in short – triple play – to cut the churn (customers switching to other service providers) in the broadband segment. “It’ll be more of a lifestyle approach. That’s our value proposition. If we stay focused, we will be able to meet expectations,” says Zam, in an interview with StarBizWeek.

Given the telco’s dominant market position, it has a competitive advantage in monetising its existing broad customer base. The commercial rationale of bundling services is quite clear – end users prefer to consolidate their spending with one player instead of spreading it out among various service providers. So, if consumers like the package, the telco will see a rise in average spend.

The magic wand

TM is expected to commercially roll out the much-awaited high speed broadband (HSBB) retail service by first quarter next year. To recap, the project costs a whopping RM11.3bil over 10 years. TM will bear 80% of the cost, while the Government will subsidise the remaining RM2.4bil. The HSBB network will mainly use fibre-optic cables, which will lend a competitive edge to TM in terms of speed, scale and reliability.

Many view HSBB as TM’s magic bullet to reboot the group onto a higher growth path. Zam readily acknowledges that. “The growth is in broadband, so we will drive this area. This is what all fixed line operators are doing. It is not rocket science,” says Zam.

But there’s more to broadband then throwing money over it. Zam agrees: “Quality is not just the network part, but also sales and after sales. We need to remain relevant in the marketplace and retain our position as the leading broadband service provider.”

While awaiting the HSBB roll out however, TM’s flagship broadband service Streamyx continues to face unprecedented competition from WiMAX and more importantly, mobile broadband.

There are numbers to back that up (refer to side story); subscribers grew by a meagre 3% in the second quarter from the previous quarter. As it stands now however, it enjoys the leadership position with a 65% subscriber market share.

The appetite for broadband nevertheless is encouraging. For the first half of financial year ending Dec 31, 2009, while revenue contribution from voice segment slipped (not surprisingly), TM’s internet and data services continued to gain traction, with a combined revenue that rose 15% year-on-year to RM1.5bil; Internet broadband customers improved by 18% year-on-year to 1.4 million from 1.2 million a year ago.

“The traditional voice business is declining but this is not unique to Malaysia. The challenge is not to grow the voice but to mitigate the decline so that it does not decline too fast and of course, to drive growth in broadband,” says Zam. As far as technology for broadband is concerned, there are several things which work in TM’s favour. Zam is quick to point out the shortcomings of wireless broadband (as opposed to fixed-line): “Competition is good for the industry. It drives us to perform better. But for wireless, the law of physics says, if you have a fixed amount of resources, something else may give way. There’s limited spectrum and power to transmit. So, typically in any wireless technology deployed, when you have an increase in the number of users, something will have to give way and that is their challenge.

“We would like to take advantage of that strength. We are continuously upgrading our network,” he says.

So, will TM join the bandwagon of the almost-suicidal price war? “We’ll do it in our own way. We will not stoop as low as them (our competitors). We need to retain our status as a premier provider.” From this vantage point, that is pre-HSBB roll out, that seems easier said than done.

Related Stories: TM’s turning point A pure broadband play Improving the customer experience

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