Handset subsidies to still haunt telcos

Telcos will have little choice but to take a short-term profit hit to provide handset subsidies, even as phonemakers unveil their latest products. In turn, operators should look to recouping their loss from other data-related value-added services.

The impact of handset subsidies on telcos was reflected earlier this week when Singapore operator M1 reported a 20 percent drop in net profit for its third quarter, which it largely blamed on the higher subsidies. The three months ended Sep. 30 saw the launch of handsets such as Apple's iPhone 5 in September, and Samsung's S3 at the start of June.

Going forward, other telcos are expected to also feel the pinch in their earnings for the rest of the year.

Another Singapore telco StarHub is already bracing for the hit. Chan Kin Hung, head of marketing and products at StarHub, said: "We definitely have factored in the softening of margin for our fourth quarter results."

He added this was the key reason why the company had guided for a lower profit margin of about 30 percent compared with 32 percent for the first half of the year. It was also mindful of the popularity of Apple's iPhone 5, Samsung Galaxy S3 and Note II, and other mobile devices.

Price-cut war unlikely
That said, one industry watcher believed in saturated mobile markets such as Singapore, telcos are unlikely to deep digger and engage in a handset subsidy war.

Kelvin Goh, analyst at CIMB Research, said while telcos here recognize the importance of offering handset subsidies, there is little to be gained by price-cutting. "No subsidy war is on the horizon with rational pricing and subsidies by all three [Singapore] telcos."

These telcos are probably aware of the smartphone market saturation, and any average revenue per user (ARPU) uplift from doling out more subsidies was unlikely to be significant, Goh added.

He expects increased handset sales during the end-of-year holiday season and upcoming phone launches will have additional impact on the telcos' margins.

Agreeing, Chan said the more expensive smartphones mean telcos will take a longer period to recover the costs as compared to entry-level smartphones and feature phones.

"We certainly hope the wholesale costs of smart devices will fall over time as the smartphone market becomes more competitive with the introduction of more smartphone models by various handset makers," he added.

Based on his knowledge, Goh said the subsidy and payback period for Apple's iPhone 5 is almost the same as that of its predecessor, iPhone 4S, which amounted to around 6 to 8 months.

In dollar value, Barclays analyst James Ratcliffe said the subsidy for Apple handsets is typically some US$400, while other smartphones range between US$250 and US$300.

Subsidies to continue
Despite the short-term profit loss, mobile operators will not be able to cut back too much on subsidies or they may risk losing customers, said Pradeep Singh, analyst at Itim Research.

"This is especially important for markets where 4G adoption is kicking off, and operators have a window to secure customers onto contracts and generate returns from their increased data usage," Singh added.

He said this meant operators in these markets would likely be willing to sacrifice some profit in the short run to gain in the longer term.

Sachin Mittal, vice president of DBS Vickers, added as data usage rises over time, ARPUs will rise accordingly as more users will be compelled to upgrade to higher-value subscription plans.

Citing Singapore as an example, Mittal said the ongoing 4G rollout in the city-state means more subscribers are renewing or signing up for new postpaid plans. These plans come with reduced data bundles of between 2 gigabyte (GB) and 12GB, down from the 12GB limit for all plans previously, he added.