Starhub analysis Essay Example for Free

Starhub analysis Essay Generic Characteristics of Telco Industry Market structure is either a: Monopoly Natural monopoly Oligopoly Dominated by a handful of big players High capital expenditure (capex) Absolute fixed cost is high But fixed cost per user is very low Telco may be very cash flow rich if capex is controlled Low operating expenditure (opex) Average cost per user is very, very, VERY low. Generic Characteristics of Telco Industry Lines of business Voice Traditional fixed lines overtaken by mobile Some households do not even have fixed lines i.e. M1 gives free fixed line with fibre plan Lucrative international dialing business is largely  gone Replaced by data i.e. Skype, VOIP etc. Generic Characteristics of Telco Industry Lines of business Data Escalating bandwidth demand (geometric growth) Some business models have failed as a result Unlimited mobile data plan replaced by tiered  pricing plans Reasonably priced unlimited fixed broadband/fibre  still available in some countries (not so in the US). Price differentiation between home and business data  plans Sub segment differentiation exists – gamers (low  latency) Telcos need data to make up for loss revenue in voice  business Generic Characteristics of Telco Industry Lines of business Pay TV Telcos offering pay TV not common for all  countries. Exists in Singapore. Always a balancing act between controlling cost  of content and charging viewers more Cost is increasing for developed countries  » Not so for developing countries†¦.. Video on-demand new business model Don’t pay for a whole channel, just pay for the TV program you want Mio TV vs Cable TV Generic Characteristics of Telco Industry Strategy for non-saturated markets Build out infrastructure and coverage while  controlling capex Gain market share by grabbing customers Especially in underserved markets Attempt to lock in existing customers Increase revenue by offering differentiated price  plans Tiered data plans (both mobile and fixed) Sell supplementary services Caller ID, low latency etc. Generic Characteristics of Telco Industry Strategy for mature and saturated markets Infrastructure and coverage largely built so there is little capex Control opex tightly Gain market share by poaching customers from  competitors Avoid price war Same as before Attempt to lock in existing customers Increase revenue by offering differentiated price plans Expand into overseas markets Any economies of scale? Industry Life Cycle Analysis Porter’s Five Forces Threat of New Entrants Bargaining Power of Suppliers Competitive Rivalry Within the Industry Threat of Substitutes Bargaining Power of Buyers Porter’s Five Forces Threat of New Entrants How easy is it for new players to enter the industry? What are the barriers to entry? Loyalty to existing brands Stickiness and incentives (e.g. loyalty points) High switching costs High capex and fixed opex costs Scarcity of resources Government restrictions and licensing Technology and intellectual property rights Porter’s Five Forces Power of Suppliers How much pressure can suppliers exert on the  business? Single or few suppliers (monopoly or oligopoly) Few or no substitutes Switching to new supplier is costly or time  consuming Supplier’s product is extremely important Supplier’s industry has higher profitability than  buyer’s industry Porter’s Five Forces Power of Buyers How much pressure can buyers exert on the  business? Single or few big buyers Purchases are in large volumes Switching to a different competitor is easy No stickiness or loyalty Buyer’s are price sensitive Company’s product is not important Porter’s Five Forces Availability of Substitutes How likely are customers to switch? Few or many similar products on the market? Switching cost is low and easy to do Disruptive technology Secular changes in consumption patterns and  lifestyles Porter’s Five Forces Competitive Rivalry How intense is the competition in the industry? High competition means low margins Number of competitors and size Any dominant company? Little differentiation between competitor’s  products and services Industry life cycle Young market means all firms grow as overall pie  expands Mature market means competitors grow by taking  market share from other companies Applying Porter’s Five Forces to Starhub Threat of New Entrants Government license is required and need to bid for  airwaves in government auction Is Singapore government issuing new telco licenses? What is the availability of airwaves? Auction prices cheap or costly? High capex and fixed cost†¦..but very low opex cost per user! Loyalty and stickness Some stickiness due to contract obligations (early  termination penalty) and incentives (handset upgrade  subsidies) Low switching costs if not under contract No cost and retain old mobile number Applying Porter’s Five Forces to Starhub Power of Suppliers Pressure from handset manufacturers Handset subsidy recouped by locking in  customers into contracts Big difference in price of handset without contract Apple able to negotiate for higher prices Telcos subsidize more. Costs passed down to  consumers. Pressure from content providers Cable TV pays HBO, Fox etc for content Special events like EPL cost much more Costs have been escalating lately†¦.. Applying Porter’s Five Forces to Starhub Power of Buyers Many retail customers (Starhub is no. 2 in SG) Extremely price sensitive Little brand loyalty and stickiness Individual customer have zero power Easy to switch out to competitor’s offerings Product is important but not tied to Starhub E.g. can get same handset and data plan from  competitors Some tradeoff between monthly price plan and data All telcos moving away from all-you-can-eat data plan Applying Porter’s Five Forces to Starhub Availability of Substitutes Handsets are not tied to Starhub Voice and data plans are also not unique to Starhub Cable TV content is differentiated Competes only with Singtel but not directly Different content and pricing content Special events like EPL are hotly contented Applying Porter’s Five Forces to Starhub Competitive Rivalry Extremely high competition Mature and saturated Singapore market Starhub grows by taking market share from Singtel and M1 Little differentiation between competitor’s  products and services But no direct price competition! Despite rivalry, industry margins relatively high Low opex cost per user Average revenue per user (ARPU) is growing Driven mainly from new tiered data plans Key Ratios for Telco Industry Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) Indicator of a company’s financial performance Churn Rate Actual rate at which customers leave for a  competitor Average Revenue Per User (ARPU) Takes into account revenue, capex and opex. As market matures, ARPU drops†¦. THE EQUITY RESEARCH PROCESS Purpose of the Equity Research Report To communicate to clients a single message How to allocate financial resources All other issues are secondary What are readers looking for? Ideas, ideas and ideas! Unique ideas are great but most of the time, ideas  generated could just be the same as everyone else Herd instinct is safe option! But no one will remember you†¦..! How to Make the Report Valuable? Use the KISS principle Investors have little time (and patience) Communicate clearly, concisely and get to the point. Have something to say Does it lead to an actionable idea? Report is an opportunity to standout and may lead to  other revenue generating activities or more face time  with the client. How to Make the Report Valuable? Issue the report in a timely fashion Giving investment opinion and advise too late is  pointless â€Å"Better late than never† fails in this case Treat your reader with respect Reader may be an investment professional herself Don’t patronize or condescend Tailor tone and language to target audience How to Make the Report Valuable? Be impartial and objective A research report is not an advertisement. Even if you like the company very much, not over  hype the company – leave that to the IR firms Know your stuff Be familiar with both the industry and company Be brave (but be prepared to face the firing squad) The best analysts are willing to take risks with their  opinions