Just as the impact of 5G on early adopters’ business performance is very unpredictable (see Wireless Watch May 10), the same is true of operators that are making a significant shift to add digital services to their connectivity business models. For some, the returns are starting to be clear, while for others, the development of new services is proving a burden rather than a driver of new revenues in the earliest stages.
Of course, many operators have flirted with digital services over the past decade or more, and some continue to do so, or are having a renewed push on the back of 5G. For instance, Orange is investing heavily in growing its own non-connectivity business, especially via the Orange Bank in Europe and Africa (in emerging markets, mobile money is often the most successful digital service – see separate item).
But to date, few have made a significant business out of digital services, unless, like Rakuten Mobile, that is their core area of activity, or, like Reliance Jio, they have had the luxury of a greenfield start. Some, like Veon of Russia or Telefónica of Spain, have ended or pulled back on ambitious programs to become digital services providers.
But others, like SK Telecom of South Korea, have sizeable businesses based on content, mobile money, smart home and other mobile digital applications. Indeed, in the first calendar quarter of 2021, South Korea’s two largest operators, SK Telecom and KT, both reported double-digit growth in operating profits thanks to a combination of 5G and digital applications.
SK Telecom said its operating earnings had risen by 29% year-on-year on the back of stronger performances from its mobile, media and security segments, while KT enjoyed 15% year-on-year increase in operating profit, also because of growth that was balanced across several digital services, as well as 5G connectivity.
The larger MNO had its best quarter since launching 5G services, and added 1.26m new 5G subscribers for a total of 6.74m, or 23% of its total base. It expects to reach between 9m and 10m by year end. However, its mobile unit’s operating profit growth was less impressive than the figure for the whole business, up 19% to KRW307bn ($270m).
SKT’s portfolio of content and digital businesses were also major contributors.
The broadband and content unit grew its operating profit by 99% year-on-year, on an 18% leap in revenue; while the security and care group grew revenue by 20% and profit by 9%.
The MNO has been expanding its digital services, and last month its $1.3bn joint venture with ride-sharing company Uber started commercia services, while Wavve, an over-the-top content partnership with local TV broadcasters, plans to spend about $880m on new content by 2025.
To manage its digital services and to maximize the value of its investment in chip giant SK Hynix, SKT has announced it will split its company in two, turning the classic telco operations into “an AI-based infrastructure company”, while the digital and ICT services, plus SK Hynix, will be placed in a new company that should enjoy higher growth and unlock value.
KT announced operating income of KRW444.2bn won ($396.2m) and wireless revenue up 2% to KRW1.77 trillion ($1.6bn). Wireless revenue growth was, again, slower than the company’s as a whole, which was 3.4%, despite the impact of 5G. KT added 785,000 5G subs for the quarter, taking its total to 4.4m, and CFO Kim Young-Jin forecast wireless revenue growth of 4% for the full year.
However, the highest growth was in the AI, cloud and digital transformation business unit, which KT has “aggressively expanded” in the past year. In the quarter, the operator saw 7.5% revenue growth in this division, while its broadband business was flat and IPTV sales were up by 7%. Content businesses were up by 12%.
Over in Japan, a similar pattern was seen at the country’s largest operator, NTT Docomo. The company saw strong growth in some of its diverse range of digital services, but its bottom line was hit by mobile price wars, sparked by the entry of a fourth MNO, Rakuten Mobile, even as Docomo is gaining share in the wireless market.
Docomo reported a 6.3% rise in its full fiscal year earnings to reach ¥629bn (US$5.74bn). Revenue was 1.6% higher at ¥4.73 trillion ($43.14bn) while operating costs were flat.
Non-telecom services, especially the cards and transaction businesses, accounted for one-third of revenue and one-fifth of operating profit. The Smart Life unit, which includes the popular D Card and D Payment services, boosted operating profit by 8% and revenue by 13%.
In the third and fourth quarters, mobile revenue, which had fallen in the first half of the year, grew slightly, but was flat for the full year at ¥2.7 trillion ($24.6bn). The new Ahamo discount plans, launched in March, attracted more than 1m new customers, mainly aged under 30, said CEO Motoyuki Ii on the analyst call to discuss the financial results. “It will be good if we can continue this momentum for 12 months, but it will have a negative impact on revenue. That is going to be painful for us,” he said.
The operator had 3.1m 5G customers on March 31 and is targeting 10m by the end of this fiscal year. It has a build-out plan to increase the number of 5G base stations from 7,100 at the end of March to 20,000, many of them replacing legacy 3G sites.
Docomo will also launch 5G NR Standalone this year, but only “where there is actual demand” for enterprise services such as network slicing. This reflects a rising emphasis on enterprise digital and 5G customers in order to boost new revenue and mitigate the effects of consumer market price wars. The CEO said that Docomo’s most promising solution in terms of new income was not in its classic strongholds such as mobile money, but in a joint venture with machinery company Komatsu to provide smart construction services.
CFO Takahashi Hiroi said the company is also planning new financial services through a new partnership with MUFG Bank and is exploring new initiatives in healthcare.
In its guidance, Docomo forecast a 1.4% increase in operating profit for the 2021-22 financial year, with Smart Life services expected to improve earnings by 9.3%.
It anticipates telecom group operating profit will fall 1.6%.
Rakuten has its own problems – notably to persuade investors that it has been a good move to expand into mobile telecoms services, even though this has landed it with hefty losses, even while the core e-commerce business continues to generate good profits. In 2017, Rakuten made a net profit of about ¥110.5bn (US$1bn) on revenues of ¥944.5bn ($8.6bn). For its most recent quarter, ended on March 31, it announced net losses of ¥25.8bn ($240m), on ¥391.5bn ($3.6bn) in sales.
This is largely because the cost of deploying a 4G/5G network has turned out far higher than Rakuten (though not its rivals) had predicted. The firm said, until late 2020, that it would achieve 96% population coverage with 28,000 4G base stations, but in February increased that estimate sharply to 44,000, which will increase the capex bill by about $2bn.
Operating losses at Rakuten Mobile exceeded ¥97bn ($890m) in the first quarter, up from about ¥37bn ($340m) a year earlier, and take-up of the 5G plans – even with a free introductory offer – has been slow in a saturated market where the existing operators offer high quality services. More than a year after launch, Rakuten has received just 4.1m “applications” to join its service, it said last week.
Of course, entering a crowded market rarely delivers quick wins, and Rakuten will not judge its own success merely on customer numbers or other conventional MNO KPIs. Its strategy is to add 5G to a full portfolio of interrelated digital services and to use high quality connectivity – under its own control rather than via an MVNO deal – to improve the user experience, usage levels and stickiness for all its services. Like Apple, it foresees creating a digital lifestyle, with element from banking to shopping to smart home, all integrated by a common user interface, customer identity and connectivity.
That will take time to take hold, but clearly, the first essential enabler is that people subscribe to the connectivity service. The company continues to insist that its telecoms business will break even in 2023, and it did see its mobile sales grow by 39% in the first quarter of 2021 to ¥69bn ($630m). This figure does, however, include revenues from its energy, content and Internet businesses, and the mobile services it offers via an MVNO agreement with KDDI.
“Rakuten remains bullish on the opportunity, but the required customer base to cover the cost is becoming unrealistic,” said New Street Research in an investor note. “One year in, during a period when Rakuten has not charged for its service, the company has gained 4.1m applications, but we now calculate they need 20m just to break even at current costs.”
Meanwhile, there is a very different pattern at another advanced digital operator in south east Asia, SingTel of Singapore. The company said last week that it had begun a strategic review of its digital marketing arm Amobee and cybersecurity business Trustwave, following a warning that it will report a net loss of about $907m in its upcoming full-year results. The losses have come mainly from the severe impairment of US-based Amobee and Trustwave, both of which have been hit badly by the pandemic.
The strategic review could see significant restructuring of product or business units, or even divestment of the two troublesome businesses, even though that would be a setback for SingTel’s previously ambitious digital services plan.
“We are open to all types of strategic partnerships and deals including inviting investors who have complementary capabilities and can enhance the value of the businesses,” said group CEO Yuen Kuan Moon in a statement.
“While the economy is picking up… it is not the same across all sectors. Some of our business at Amobee is quite heavily weighted in sectors such as FMCG (fast-moving consumer goods), auto and travel which means that these sectors will take longer to pick up. So we are disproportionately impacted on our business at Amobee,” said Singtel Group digital life CEO Samba Natarajan.
The telco acquired Amobee in 2012 for USD$321m and Trustwave in 2015 for US$810m. It has booked non-cash impairment charges of US$438m and US$250m against Amobee and Trustwave respectively for the second half of the financial year to March 31 2021. Its Australian subsidiary Optus is also to book non-cash impairments and writedowns, totalling A$197m (US$152.5m), for the second half of the year, though these mainly relate to its legacy fixed access networks. As a result, Singtel said it expects to report full year net exceptional losses of S$1.21bn (US$907m).