macquarie research equities the economic outlook and trends

MacquarieResearchEquities

The economic outlook and trendsfor the Australian

mobile telecommunications industry

Tim SmartMacquarie Research Equities

Phone: (612) 8232 [email protected]

www.macquarie.com.au/research

In preparing this research, we did not take into account the investment objectives, financial situation and particular needs of the reader. Before making an investment decision on the basis of this research, the reader needs to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of their particular investment needs, objectives and financial circumstances. Please see disclaimer.


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Presentation outline

Overview of recent developments

Assessing the current market in Australia

Snapshot – key industry metrics

Subscriber growth – racing towards the end of the track

Retention costs – handset subsidies fuelling subs growth and shorter handset refresh cycle

ARPU

Voice revenues under threat

Data revenues – where is the vision?

Economic outlook – is consolidation needed?


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Attempt to reduce/eliminate handset subsidies in 2002

Telstra introduces “more4you”

Vodafone introduces “no plans” and reduces contract subsidies

Optus wins market share, improves margins

Handset subsidies reintroduced aggressively

Fuels market growth (sub adds for 6 months to June 03, 7.5% greater than in corresponding 6 months in 02)

Penetration now up to 71.8%

Recent developments and trends - local


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Hutchison 3G launches in April in Sydney and Melbourne and in July launched in remaining capital cities

Telstra, Optus, Vodafone marketing 2.5G services

Vodafone announces it will supply 3G services by 1H05, preference to share, rather than build infrastructure

Telstra,Optus remain non-committal on 3G timing – not in FY04

ACCC investigates mobile termination rates

Recent developments and trends - local


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European regulators aggressively reduce mobile termination rates

Hutchison launches 3G services in UK, Italy and Sweden

Wi-fi growth accelerates – carriers looking to integrate with mobile data offering

Performance and take up of new data services (2.5G, MMS, 3G) mixed

The outlook for mobile carriers continues to be difficult globally

Recent developments and trends - global


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Global wireless indices

Notes: Asian index excludes JapanAll indices are in US$

Source: Bloomberg


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Australian mobile market snapshot –key metrics

Penetration at 71.8% at June 2003

Telstra and Optus remain dominant

ARPU falling as prepaid increases and voice yields fall

Australian Mobile Subscribers

-

1,000

2,000

3,000

4,000

5,000

6,000

2002 2003 2004 2005

Su

bs

('00

0s)

Postpaid

Prepaid

3G

2003 2004f 2005fSubscribers Penetration 71.8% 79.5% 82.5% Number of subscribers ('000s) 14,349 16,047 16,820 Subscriber growth (YoY) 16% 12% 5% Percentage postpaid 61.0% 55.1% 52.1% Percentage prepaid 38.9% 42.9% 44.0% Percentage 3G 0.1% 2.1% 3.9%

Market Shares Telstra 46.3% 45.8% 44.7% Optus 34.2% 34.1% 34.1% Vodafone 17.5% 18.1% 17.5% 3 (Hutchison) 1.9% 2.1% 3.8%

Revenues Industry revenues (A$ '000s) 9,019.5 9,738.8 10,322.7 Revenue growth 7.2% 8.0% 6.0%

ARPU ARPU - blended 50.87 48.09 46.98 Growth -9.1% -5.5% -2.3% ARPU - postpaid 66.89 65.70 65.05 ARPU - prepaid 23.62 23.30 23.07 ARPU - 3G 55.02 95.62 95.18 Voice rev/min 100.24 103.75 107.90 Data ARPU 4.99 7.07 10.52Source: MRE

Source: MRE


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Mobile profitability – a three part equation

SUBSCRIBERS: mobile penetration x market share

TIMES

ARPU: outgoing voice revenues + incoming termination revenues

+ data revenues

MINUS

COSTS: cost of retention / acquisition (incl. handset subsidies) +

other operating costs

= MOBILE PROFITABILITY


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Subscriber growth – has been the dominant component of the mobile profit equation…

…BUT growth is finite

Reintroduction handset subsidies and H3G entry has accelerated growth again

Australia now at 71.8% penetration

Penetration forecast to reach 80% by FY05

Having been the dominant component in industry profitability equation, it will soon become least important part of equation

Singapore market growth has slowed dramatically since penetration neared 80%

Subscribers – racing towards the end of the track


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Singapore market – growth slowing

Source: Infocomm Development Authority, Singapore

With minimal market growth, focus of players is on winning share from each other

Competition intensifying


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So, where is Australia?

Source: MRE

Subscriber growth is likely to slow dramatically after 2004, with penetration growing slightly above 80% level


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ARPU – voice under pressure Voice yields falling at double digit rates and likely to continue. Why?

Lack of industry subs growth will intensify competition for existing subscribers. Reducing voice one way to win market share.

3G introduces massive new capacity. Little incremental cost so voice will be priced down to increase network utilisation.

Incoming voice revenues subject to regulatory threat (ACCC review)

Source: MRE Source: MRE


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Source: MRE

Steady data growth driven by SMS

Little take-up of new data services

Data ARPU – key to the industry’s future


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If voice yields fall at double digit rates (10%) as we expect and incoming termination rates decline at 5% pa (or worse), then data ARPUs would need to grow at a compound rate of 20% pa just to maintain overall ARPU in 5 years time.

MMS, 2.5G, 1x and 3G networks all in place…BUT service delivery is poor and take up minimal

SMS remains main component of data revenues

Issue: Can telcos deliver content and services that customers actually want?

Evidence in Australia to date is not positive

Some offshore carriers appear to doing a better job

Sprint PCS Vision saw a 62% subscriber growth from 1.3m in 1Q03 to 2.1m in 2Q03. Data ARPU per subscriber also grew during the same period by 29%.

Data ARPU – key to the industry’s future


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Handset refresh cycle is shortening

Estimate 5.2m handset sales in 2003, an increase of 25% on 2002. Subscriber growth in 2003 is 16%.

Colour screen phones, cameras and polyphonic ringtones encouraging refresh cycle BUT accompanied by increasing subsidies.

Potentially dangerous combination – handset life cycle down, handset subsidies up…

…good for handset vendors (and dealers) but not good for carriers.

Costs – retention / acquisition costs increasing


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Good news: Average annual revenues growth forecast to be 6.3% pa for the next 5 years – above GDP level

Bad news: Good revenue growth does not mean attractive returns eg. aviation industry

Key issue: How much capital is invested in the industry

Consolidation – is it needed?

…not at the service layer – sufficient industry size, diversity and niches to justify many service providers

…issue is at the infrastructure level

Number of 3G networks will be the dominant factor in determining returns for the industry over the next 5-10 years.

Economic outlook


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