Fitch backs lower handset subsidies

Thai mobile phone operators’ strategy to reduce handset subsidies gradually is likely to improve their profitability, says Fitch Ratings.

Although operators may face slower revenue growth in the shorter term as costconscious subscribers switch to competitors, the global ratings agency believes the impact would be more than offset by cost cuts to acquire and retain subscribers. Competition could become more rational as operators focus on network investment and service quality to attract and keep subscribers, it said in report out yesterday.

Advanced Info Service (AIS) and Total Access Communication (DTAC) reported a drop in earnings before interest, tax, depreciation and amortisation (Ebitda) in 2016 as handset subsidies became a feature of the market. But both have been cutting down on handset subsidies since the second half of 2016.

Fitch said since the first quarter of 2017 AIS and DTAC have been offering subsidies only on post-paid plans to attract new subscribers and provide an incentive for pre-paid customers to convert. The strategy could make them vulnerable to a rise in the churn rate for the pre-paid segment, but their mobile service revenue should be protected as the post-paid segment has higher average revenue per user.

“We think the reduction in service revenue from pre-paid subscribers should be offset by an increase in post-paid revenue,” the report said. “In the first half of 2017, AIS reported a moderate increase in mobile service revenue by 3.9%, while that of DTAC was stable year on year.”

Fitch expects the profitability of AIS and DTAC to improve strongly in 2017 as a result of the lower handset subsidy costs. It forecasts the Ebitda margin for AIS and DTAC will improve this year to 43% and 34%, respectively, compared with 40% and 32% in 2016.

Marketing expense (including handset subsidies) as a percentage of service revenue for AIS and DTAC in the first half this year dropped significantly to 8% and 7% from 14% and 12%, respectively, in 2016.

Fitch expects True Corporation’s mobile unit, True Mobile, to cut its handset subsidies for the pre-paid segment in the second half, after having passed DTAC in service revenue market share in the first half.

“While handset subsidies were an effective strategy to boost True Mobile’s market share in a short period of time, we believe that since it has gained significant market share, the company may prioritise margins by scaling back expensive subsidies,” it said.

With a market-wide cut in handset subsidies, Fitch believes the operators will increase their focus on branding and network quality, which may become more important in their customers’ choice of service provider.

Telecom operators are likely to focus on strengthening their networks to ensure they are competitive in service quality and coverage, the report said.