News, views and commentary from the telecoms sector across emerging markets and developing countries worldwide

Tuesday, 28 July 2009

Millicom's withdrawal from Asia to prompt (much-needed?) market consolidations?

Russia's Beeline brand comes to Cambodia - and set to drive consolidation in the wake of Millicom's withdrawl? Picture (C) Roger Barlow.

Millicom International Cellular, the Luxembourg-based company which provides cellular telephony services to more than 30 million customers in across Latin America, Africa and Asia recently announced that its assets in the latter of these three regions are up for sale. The company's announcement mentioned that during Q1 2009, these Asian operations and joint ventures generated UDS 68 million in revenues and USD 4 million net profit for the group.

Even more recently - on Tuesday last week - the company announced its 2Q 2009 results, encouraging highlights of which were:
  • mobile subscribers up 25% vs. 2Q 2008 - bringing total subscribers up to 30.8 million
  • reported revenues up 5% to USD 814 million (2Q 2008: USD 774 million)
  • EBIDTA up 14% to USD 371 million (2Q 2008: USD 326 million) - this beat the USD 361 million forecast in a Reuters poll of twelve analysts
  • EBIDTA margin of 45.6% (+340 basis points vs. 2Q 2008)
These results excluded "discontinued operations" - this means Tigo Sierra Leone and the three Asian operators. This, then, certainly leaves little doubt that the group is committed to its exit from Asia. The three Asian operations concerned are in Cambodia, Laos and Sri Lanka.

Why is Millicom looking to get out of these markets? Zacks Investment Research offers the following explanation: "The major concerns in these markets for Millicom are increased competition and an extremely tight credit market." According to Zacks, the Asian region contributed just 8% of the company’s total revenue and its EBITDA contribution was even lower at 6% of the total. The Zacks commentary also notes that overall ARPU in Asia was just USD 6.2 in the first quarter of 2009, compared to USD 6.6 in the previous quarter and "a massive" USD 8.7 in 1Q 2008.

According to Millicom CEO Mikael Grahne, increased competition certainly does seem to have affected the profitability of Cellcard, the Cambodian cellco in which Millicom has a 58.4% stake. Steve Finch, writing on Friday in the Phnom Penh Post, observed that Millicom's Grahne appears very critical of the "disruptive market-entry strategies" of new entrants into Cambodia's increasingly crowded mobile sector. On the other hand, Finch also observes that another major shareholder in Cellcard does not agree with Millicom's assertion that this is negatively impacting profitability: "[There are] no concerns on profitability from our side," said Mark Hanna, CFO of Royal Group, which owns a 38.5% stake in the cellco, denying that margins had become tighter. As well as investments in property development and the media sector, Royal Group is very active in Cambodia's telecoms sector. In addition to its stake in Cellcard, the group has shares in Royal Telecam International (the second licenced international gateway in the Kingdom; also a joint venture with Millicom) and teleSurf, a broadband service provider.

Whichever side of this argument is the more valid, it seems undeniable to me that Cambodia is currently supporting an incredibly large number of cellcos. Millicom-backed Cellcard, which is by some margin the market leader (43.65% of subs according to WCIS) is one of three well-established players, the others being Hello (an Axiata company with 13.28% of subs) and Mfone (19.84% of subs). From 2007 onwards, a number of further entrants have piled into the market. The most recent of these is Beeline Cambodia, owned by Vimpelcom, one of Russia's big three cellcos. The arrival of this new operator, whose services were launched very recently and whose subs are not yet recorded by WCIS, brings the grand total to nine MNOs vying for business in a country of just 14.2 million people.

To me, this feels like a vastly excessive number, particularly in light of the fact that mobile market consolidation has been a recurrent theme here at DevelopingTelecomsWatch this year - we've discussed whether even a relatively large African market such as Tanzania can possibly sustain the numbers of licensed mobile operators currently competing there - and have asked the same question about much smaller markets such as Burundi and Gabon. Moreover, we have discussed this issue in broader terms, i.e. whether/when we should expect a wave of market consolidations across Africa, prompted to do so by the stated belief of MTN CEO Phuthuma Nhleko that this is set to happen.

Mobile penetration in Cambodia currently stands at 34.41%, according to WCIS. So there is room for growth. How many of this large number of cellcos, though, will be equipped to take full advantage of that opportunity? I suppose that will partly depend on their resources and the quality of their management teams - but even very solid companies could struggle if there is any truth in the Millicom allegation about the effects of new players' disruptive market entry strategies. As Steve Finch of the Phnom Penh Post explained, these strategies involve the distribution of free SIM cards and airtime - very nice for quickly building a subscriber base, but taken to its logical conclusion this can seriously erode overall market value for all players.

Has this kind of strategy worked for any of the new players in terms of rapidly building market share? The answer seems to be a resounding 'yes' in the case of one particular new entrant, Metfone, which is the Cambodian subsidiary of Vietnamese MNO Viettel. According to WCIS, Metfone has quickly carved out an incredible 17.47% of the market since its launch late last year. The current WCIS estimate for Metfone subsriber numbers is 900,000. There may be precedents elsewhere in the world for an operator arriving in an already fragmented market and amassing subscribers at something like that rate - but none spring immediately to mind for me.

How is Viettel able to do this? The answer might be that the company is simply not working to the same commercial logic as its rivals in the Cambodian mobile market. Viettel itself is owned by the army of Vietnam, a state officially committed to the creed of socialism and where all organs of government are controlled by the country's Communist Party. In a March essay here on the global links between the telecoms organisations of countries with left-leaning regimes, Metfone got a mention. That piece referenced a Saigon Times article on Viettel's foray into neighbouring Cambodia, which indicated that the new cellco would target low-income subscribers with a wide range of low-priced services and packages. Viettel Deputy General Director Nguyen Manh Hung was quoted as saying that this approach is not only about customer acquisition but is also intended to "contribute to society". Perhaps we should take that to imply a quite different interpretation of the for-profit motive than the one most of us in market economies have to live with in our jobs and lives.

Have any of Metfone's fellow recent market entrants been able to build a subscriber base at anything like the same speed? There answer here appears to be a resounding 'no'.

In terms of market share and subs, the other newcomers have fared as follows:

  • Star-Cell (GSM) - 3.27%, 168,400 subs; part of the TeliaSonera group; commercial launch in 2007
  • qb (W-CDMA) - 1.20%, 62,000 subs; commercial launch in 2008
  • Latelz (GSM) -0.97% 50,000 subs; launched in 2009; owned by Time Turns Telecom, which is also an investor in telecoms operators in Burundi, Tanzania, Nepal and Sierra Leone
  • Excell (CDMA) - 0.31%, 16,000 subs; launched in 2009
In September last year, Morten Eriksen, the CEO of the second operator in the above list was interviewed by AsiaLife Guide Phnom Penh, a monthly lifestyle magazine for expatriates living in Cambodia. Eriksen, who also explained that qb is funded by international venture capitalists and local Cambodian partners, expressed the belief that there is a good opportunity created by the country's very limited fixed line telecom infrastructure and the eagerness of its people of "to experience new technologies." He also asserted that rather than focusing on competing, the company is focusing on the people of Cambodia and how it can provide the best benefit to them. Specifically, Eriksen expressed his company's commitment to serving the youth segment with "packages and services to help students in the pursuit of education as they are Cambodia’s future." In an earlier interview - with the Bangkok Post in June 2008 - Eriksen reported that when he was first invited to get involved a 3G project in Cambodia, his initial reaction was that "they must be crazy". He explained that only after reluctantly travelling to Cambodia did he see the potential in a market with three incumbents providing bad, expensive service and where a 256Kbps ADSL line cost over USD 600 a month. The article indicates that the project formally started in 2004, with the company getting a licence in 2006 and then signing a turnkey network agreement with Ericsson in June 2007. Groundwork started in October 2007 and the first test call was made a month later. Finally on March 15 2008, qb was launched "with over 57,000 subscribers signing up on launch day courtesy of a huge concert and free SIM packages."

If that figure of 57,000 initial subs is accurate (and WCIS does reflect this), then further growth has certainly been very slow indeed.

Of the late entrant mobile operators, it would seem, then, that only Viettel's Metfone operation has really made a major impact on the Cambodian market.

So, if Millicom, as market leader, is going to withdraw from this market, which telecoms groups have looked at this seemingly very challenging competitive environment and expressed an interest in acquiring Cellcard? Two names which have surfaced in recent weeks are ones already competing in Cambodia. Consolidation, then, would appear to be on the cards already, even ahead of any of the smaller players potentially having to withdraw.

The first interested party, according to a TeleGeography article earlier this month, is Axiata, the Malaysian-owned mobile group formerly known as TM International. Axiata is said to be considering offering a total of USD 700 million for both Cellcard of Cambodia and Millicom's Sri Lankan operation. Were this bid to be made and accepted, Sri Lanka would also see market consolidation - Axiata owns the island's market-leading cellco Dialog Telekom. According to the TeleGeography article, Axiata has declined to confirm or deny the talks, but said "in-country consolidation is of strategic importance in some of our markets." This does seem to be something of a trend in Asia - and for Axiata - of late. Cellular News reported last month that Aktel, the Axiata/NTT DoCoMo joint venture in Bangladesh is rumoured to be in merger talks with rival Banglalink, which is owned by Egypt's Orascom Telecom. Banglalink CEO Ahmed Abou Doma explained in a statement that apart from the market leader (Grameenphone), "others are continually posting losses" and that "in order to sustain in this fiercely competitive market, and in line with [Orascom's] growth ambitions", his company is "considering many strategies of which consolidation is an option."

In Cambodia, the other potential bidder for Millicom's Cellcard operation seems to be Russia's Vimpelcom. Again, this is another existing competitor, albeit one whose Cambodian launch was very recent. According to a Reuters report earlier this month, Vimpelcom spokeswoman Yelena Prokrova was conceded that potentially the Asian assets of Millicom could be interesting for for the Russian telco because they are located in the region which the company views as strategic in its international expansion. The report notes that Vimpelcom would also be interested in Millicom's operation in Laos.

My sense is that, as we have seen here, Cambodia is one of a number of Asian markets in which mobile sector consolidation seems very likely. I am wary of the notion that low penetration rates alone mean that any given emerging market or developing country offers telecoms groups a licence to print easy money. The low ARPU inherent in serving relatively poor people and the challenges of rolling out infrastructure to under-developed regions, often in challenging physical environments, can make for unattractively thin margins. If destructive levels of price competition are thrown into the mix, it surely becomes difficult for large numbers of competing operators to survive in all but the largest markets. The withdrawal of Millicom International Cellualar from Asia, then, may stimulate much-needed market consolidations in at least two of its three existing Asian territories. Rumours from Bangladesh also suggest that similar developments may be in the offing elsewhere across the continent.

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