DATA service, a key earnings growth driver, does not seem to be yielding fat margins for the telecommunications companies (telcos), say analysts who track the industry.

Even as the financials of telcos continue to reflect the growing importance of data as a revenue generator, analysts believe the contribution of data service to the bottom line may not be as lucrative, despite higher data adoption rates and wider smartphone usage.

According to TA Securities, the main challenges faced by telcos are data pricing and critical mass of data users, leading to compression in data yields measured as price per gigabyte (RM/GB).

Data yields have declined and analysts expect this to persist despite the data boom and higher smartphone penetration, the research house says.

In her latest report, TA’s research analyst Kylie Chan says, “We understand from operators that margins for small screen mobile Internet (MI) are attractive, almost matching those of voice services. However, we believe that unless operators achieve a critical volume of MI traffic or increase data pricing, Ebitda margin decline will continue to persist.”

The research house notes that DiGi.Com Bhd’s (fundamental: 1.55; valuation: 2.1) data yield has been declining steadily, from RM41 per GB in the third quarter of FY2013 to RM30.50 per GB in the same quarter of FY2014.

In the same period, Celcom Bhd’s data yield was also on a downward trend, albeit less steep than DiGi’s, falling from RM15.40 per GB to RM13.90 per GB. Maxis Bhd was not included in TA’s analysis.

Responding to queries from The Edge via email, DiGi says its data yields generally decrease over time, given better efficiencies gained from newer network technologies and the growing scale of operators.

But the telco believes Internet adoption and usage will increase as data yield optimises over time, given that pricing adjustments allow more affordable data packages and plans.

Maxis and Celcom did not reply to The Edge’s queries.

TA’s Chan believes telcos are hesitant to raise data pricing aggressively due to concerns about losing subscribers.

According to a research analyst, if data prices are raised, prepaid consumers who are more price-sensitive may switch to a rival telco, particularly in the foreign migrant and urban youth sub-segment.

“Penetrating this segment and offering affordable Internet plans is key to capturing the growth prospects of data,” she says, adding that the segment comprises 80% of the market.

Telcos, she points out, are “desperate” for incremental market share in the prepaid segment, given its potential, the tepid overall industry growth and the cannibalisation of voice and SMS by data.

The research analyst recalls this having happened to Axiata’s (fundamental: 0.85; valuation: 0.90) Indonesian subsidiary PT XL Axiata, which suffered from subscriber attrition after raising prices in 2013.

“In addition, if prices are high, this segment would most likely refrain from discretionary spending on data,” she says.

On the critical mass of mobile data users, Chan says smartphone penetration is still moderate in Malaysia, at about 50% despite recording growth.

The penetration rate is expected to rise to 67% by the end of this year, according to International Data Corp. “There is room for growth,” its research manager Alfie Amir tells The Edge.

Alfie concurs that with the increasing number of devices (smartphones and tablets) per person, there is even more room for growth as the tablet market is still expanding.

Even so, says the research analyst, critical mass is a “moving target” that takes into account continued network investments and data pricing. “The current environment suggests that penetration levels closer to 100% will likely push telcos closer to achieving a critical mass of subscribers.”

She believes affordable smartphone bundles, bite-sized Internet packages and data plans offered by telcos now will eventually help them gain critical mass.

In fact, Maxis (fundamental: 1.15; valuation: 0.90) recently hiked the prices of its SurfMore M1 plans in an effort to squeeze more money out of data, she notes.

An analyst with a bank-backed research house believes mobile operators could improve their data value propositions, but says data yields could take “some time” to achieve optimal monetisation. “Mobile operators are experimenting with various pricing models to cater for the different needs of data subscribers. We expect data yields to improve over time, but that would depend on market dynamics.”

Note: The Edge Research's fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for more details on a company's financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on February 16 - 22, 2015.

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