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Singapore Telecom seeks competitive edge

01 September 1999

Singapore Telecom loses its monopoly in fixed line services in 2000. The operator will focus increasingly on international investments and a diversified range of services to offset a potential decline in revenues from international direct dial. President and CEO Hsien Yang Lee talks to Global Telecoms Business about the operator's long-term ambitions.

Singapore Telecom was corporatized in 1992. The incumbent telco, which is also licensed to provide postal services, was listed on Singapore's stock exchange in 1993. The government holding, Temasek Holdings, owns 77% of the shares. Private investors account for 12% of the shares.
On March 31 2000 Singapore Telecom will lose its monopoly on fixed line national and international communications services. The operator is likely to face stiff competition from a new entrant, StarHub, which is owned by British Telecom (18%), Nippon Telegraph & Telephone (22%), local companies, Singapore Technologies (34.5%) and Singapore Power (25.5%).
In an exclusive interview, the president and CEO of Singapore Telecom Hsien Yang Lee talks about recent developments, including a possible share buyback plan.
The operator has recorded positive earnings results. However, this has not been reflected in its share price. The operator is now considering repurchasing shares, as Lee explains: "I think we have said that in total the company has a debt/credit ratio that is adequate for returning S$2.5 billion ($1.48 billion) to the shareholders. We have announced a special dividend, which will return S$1.8 billion ($1.07 billion) to our shareholders at 12 cents a share. So that is about 15 billion shares. Owing to the tax rebate, this will effectively cost us about S$1.4 billion. So S$1.1 billion would remain available for a share buyback. We have basically said that we would take this step if we felt that it creates value for the company. I think firstly, even after returning the S$2.5 billion, which is what we can do, in view of that credit (the section 44(3) tax credit that we have) - we started out with a cash position of $6.4 billion ($3.79 billion) - we would still be significantly net cash positive. But I think the medium-term objective is to continue to return money to shareholders, unless we make some large, significant acquisitions that absorb those funds.
"We would like to reach a 20/30% debt/equity ratio. I think that we have done well despite the financial crisis. Last year, our bottom line earnings were up S$17 million after tax, or the equivalent of 3.7% earnings growth year-on-year. I think that this was a creditable outcome in view of the difficult conditions. Domestically, operating profits actually fell 10% owing to price reductions and reduced growth rates in the market."
Lee attributes the decline in operating profits in the year to March 1999 to the economic situation: "Well I think that the decline occurred owing to a significant slowdown in traffic volume growth. We witnessed 22% growth in international traffic in the previous year. Last year, growth stood at 6-7%, owing to the poor economic situation. If you reduce your average collection rates by 13%, you are going to see significant declines in international telephony revenues. If costs don't go down proportionately, you are also going to see your margins being squeezed significantly. I think that is why we saw a fall in operating profits. We expect to have a relatively difficult year owing to the numerous tariff reductions that we implemented to ensure our competitiveness, compared to other major telecoms centres in the region, such as Australia, Japan, Hong Kong and Taiwan. We believe that those measures are necessary, but they will continue to impact on our revenues this year. So we adopted a cautious note, when we presented our results in June earlier this year."
Competing on price and quality of service
The operator will also face competition from an alternative operator, StarHub. Lee realizes that the operator cannot rely solely on price reductions: "It is not clear what a new competitor will or will not do to gain market share. There are new entrants that have gone headlong to seek market share above all else, because they feel that is the image of success. Clearly we will ensure that we are competitive. We have been trying to ensure that we are competitive in a number of dimensions, including our ability to service customers in a broad range of capabilities, and not just telco services. Issues such as tele-housing and our ability to provide facilities-management, our ability to carry out systems integration. We are developing those capabilities. Therefore we will not only compete on price. We recognize that the competition will put pressure on domestic prices and growth in the domestic market. It was precisely for these reasons that we decided a number of years ago to invest in overseas markets. This year we saw that strategy pay off in terms of a contribution back to the company."
Lee stresses the importance of customer service: "I believe that we have shown a willingness and ability to compete aggressively on price. We also realize that we need to provide appropriate levels of customer service, as well as value for money to our customers. I think that over the past few years we have consistently been highly rated by independent third parties to be price competitive.
"For example, the National University of Singapore was commissioned by the regulators to conduct a survey. It created an Asia Pacific telecoms index. According to the survey's findings, we were among the region's most price competitive service providers for IDD (international direct dial) and data services. I think that we will continue to look for innovative ways of enhancing our value for money proposition, using IP/fixed mobile integration and guaranteeing service level agreements to our customers. We will try to reduce our prices where appropriate, if we are able to reduce delivery costs. For example, we have lowered rates aggressively to Taiwan, Japan and the US in IDD services by 30-40% over the past few years."
Impact of IP telephony and the operator's IP strategy
Singapore Telecom is experimenting in new areas, such as IP telephony: "I think that everyone is experimenting with IP telephony. We have used it as a platform for deploying some of our Budget Call IDD services, which are meant to provide lower-cost alternatives to the existing IDD services. I think that the rates could be as much as 50% lower, as it allows us to bypass some of the existing accounting rate settlement costs."
Lee adds that the significance of this area has been exaggerated: "I think that there is a lot of hype surrounding Internet telephony, as people believe that it will drastically reduce the cost of doing business. I think that accounting settlements will have to come down, as people deploy these technologies. If not, then it will just become completely irrelevant. We are also using IP telephony for corporate voice services. We are examining how can we use IP telephony for that purpose. We are providing an IP-based fax service called FaxPlus Connect. I think that there is a lot of potential growth in this area: we hope that growth in traffic would compensate for the reduced collection rates that these services tend to enjoy."
Lee expands on the company's IP strategy: "Telcos are clearly considering how quickly they should introduce IP. We have existing systems in place. We need to understand what a sensible migration path is. As I mentioned, we are using IP to deliver some of our budget-call traffic. We have an IP virtual private network service, which we launched under our connect plus service. Today it extends across eight major cities in the Asia Pacific. At the same time this will harden the ubiquity and enhance the connectivity of the Internet to cater to business and Internet VPNs, which need remote access to corporate networks. We expect this to help businesses to reduce operating costs by as much as 40%."
Singapore has one of the highest Internet penetration rates anywhere in the world and is in a prime position to have one of the first fully networked economies through the Internet. There are more than 5,000 multi-national companies with offices in Singapore, all prospective buyers of end-to-end network services.
Lee explains how the company is expanding its range of services in these areas: "I think that Singapore PC penetration is high. There are some statistics which show it at 40%, and we see Internet usage to be growing rapidly. Our dial-up/ISP service continues to grow strongly: we have about 50% of that market. That market has been liberalized and there is no limit on the number of ISPs that can come in. We believe that going forward, many Internet users are hungry for bandwidth, that the ADSL service that we provide, called "Magix", helps to serve that need. We will look at ways in which we can expand the reach and penetration of that service to make it affordable to people and to make use of new technologies and other such innovations to offer it in a way that more people can have access to it.
Singapore Telecom is spearheading the drive to make Singapore the preferred Internet hub in the region. It has become involved in the Asia-Pacific Cable Network 2 (APCN2). Lee notes: "The network provides a huge amount of bandwidth. I think that we are talking about state of the art cable with 640 gigabits of DWDM technology. Clearly that capacity will increase connectivity in the region and allow a lot of the data traffic, which is growing so rapidly, to be carried and for E-commerce activities to be conducted."
Development of E-commerce strategy
Lee expands on the operator's E-commerce plans: ?We see electronic procurement as a critical element to our regional E-commerce strategy. And we want to position Singapore as an E-commerce hub in the Asia Pacific."
Lee explains the importance of the recently announced partnership with CommerceOne: "Our partnership with CommerceOne encompasses not only the Singapore market, but also stretches into the region. CommerceOne is an industry leader in the e-procurement business. It provides solutions to link the buying and supplying organizations into real-time trading communities. We think that the partnership that we have with CommerceOne is mutually beneficial and will offer businesses in Asia the chance to reach a larger community of global suppliers. And the region's suppliers will have access to business-to-business markets on the web. We are very excited about the opportunity. CommerceOne recently had an IPO, which went well. We believe that there are a number of opportunities in areas like that for us to play and we intend to aggressively explore such business opportunities."
Other partnerships reflect increased focus on data services
Lee also stresses the significance of the operator's alliance with Cisco Systems: "I think that the partnership will enable us to leverage Cisco's products and technologies and offer our customers end-to-end global communication solutions. They will enable us to accelerate the development and marketing of new services. We recognize that this area is changing quickly. Clearly this partnership will enable us to leverage the best of both organizations. We have planned a number of multi-service projects, including Internet-enabled intelligent buildings, IP-DPS services, a local frame relay network, DSL technology as well next-generation multi-service networks that integrate data, voice and video.?
Lee also comments on the company's links with Infonet: "I think that we see Infonet as a good global data partner to work with. We have had a long working relationship with them. We believe that working with them enables us to meet the needs of some of our customers in terms of geographical reach. Data communications was one of the strong growth areas last year, recording over 20% growth. We expect this trend to continue. We hope that partnerships with companies such as Infonet will enable us to exploit that trend. I think that this is something we have seen in many telcos in recent times."
Lee comments on a few of the convergent services that the operator launched in June 1999: "The aim of our convergent services is to offer our customers greater convenience, more value and choice. We announced three innovative convergent services that we hope will benefit our fixed/mobile and Internet users: one mail which provides for convenient access to all voice mail messages, e-mail and faxes integrated in one mail box, that can be retrieved either from a fixed line telephone, mobile phone or PC. We introduced an Internet call waiting service, which informs users through a visual identification on their PCs of incoming calls while they are on line, so that they don't miss any important calls, while they are surfing the net. They can choose to ignore the call, temporarily drop the Internet connection, answer it or talk simultaneously, using the same telephone line that they are surfing the Net on.
"Then we have a single number service, enabling users to be reached with just one number, whether it is office, home, mobile or pager. We have some other fixed mobile integration services, such as pager caller ID, which allows a paging customer to know when his home number is called, as well as the identity of the caller. We have also introduced mobile phone net, which is a virtual private network on a mobile phone service."
Mobile, 3G and innovative new services
Singapore Telecom has teamed up with leading Japanese wireless operator, NTT DoCoMo and conducted W-CDMA trials, as it seeks to expand its range of services. Lee is positive about the potential for wireless: "I think Singapore has huge potential for wireless services. If you look at the growth rate, the mobile market has increased over the past few years much more rapidly than our own expectations. I think that historically the paging market has also been quite exceptional. At its peak paging penetration exceeded 50% in Singapore. In other words more than one in two Singaporeans carried a pager. I believe that culturally people accept this as part of their way of life: it is not considered socially unacceptable to carry a phone around, pick it up halfway through lunch and carry on a conversation. I think that is no different from people's attitudes towards mobile telephony. I believe that would certainly augur well for 3G services. While it is too early to assess the potential for 3G services, I think that it will certainly take off in Singapore. We are exploring the technical aspects of 3G with NTT DoCoMo, by running a trial to test the technologies and systems and make sure that we are ready to introduce it, as soon it makes commercial sense to do so."
Lee believes that data holds the key to increasing cellular subscriber revenues: "I think that we have more than 750,000 subscribers today. We have been adding subscribers at the rate of about 10,000 a month over the past few months. I think that many of the new subscribers are from the low-end customer base. Naturally, the hard core users belong to the early adopters. We certainly see data as a potential area where are trying to increase ARPU (average revenue/user) from customers. We will also see how we can exploit value-added services. For example, we are involved in Internet banking with DBS (Development Bank of Singapore). We have also put in place mobile Internet stock trading. These kinds of opportunities provide significant value to our customers and also revenues to the company in terms of transactional revenues."
These revenues should help the operator offset the decline in turnover from IDD. Lee notes: "I think that both mobile and data services are experiencing rapid growth. We expect that the proportion of turnover that they represent will continue to grow, with healthy double digit growth over the next few years. I think that mobile saw a slowdown in the first year after competition. But certainly over the past year we have begun to see healthy growth return to mobile. Data services grew by over 20% last year. Last year IDD services accounted for only 38% of our turnover. At the time of our IPO in November 1993, IDD services represented about 50% of our turnover. This figure has declined ever since."
More revenues from international operations are likely
Singapore Telecom also expects to derive revenues from its increasing number of international investments. According to Craig Irvine, a telecoms equity analyst at Merrill Lynch, the Asian crisis could have provided an ideal opportunity to make strategic investments at low cost: "I would like to see them make more regional investments, but I think they may have missed the window of opportunity in terms of valuation probably, in the sense that the Asian crisis for all intents and purposes is over and valuations for anything they might want to buy are going up again."
Lee notes: "I think it is easy with the benefit of 20/20 hindsight to ask why we did not act in a bigger way. We are a strategic investor, rather than a financial investor, who can go into financial markets and buy small stakes. There has to be a willing buyer and seller for strategic stakes. We also want to assume an appropriate role. We are not interested in going in as a purely passive financial investor.
"We believe that our track record in international investments has been excellent, despite the crisis. International investments have contributed significantly to our bottom line. I think that even our regional investments have done well, including Globe Telecom, which used to be loss-making. Last year, it turned the corner. It was profitable for the first time. This year we have seen its operations improve considerably."
Lee believes that the regional investments will also start to pay dividends: "This year, we expect to be significantly profitable. Recently Globe Telecom completed a bond offering, which was well received by the market. I think that it had a good rating from the credit agencies as well, reflecting its strong business position. In January this year we made an investment in AIS in Thailand. We had an existing relationship with Shinawatra and we invested in 18.3% of AIS. It was limited in the amount permissible to a foreign shareholder. There are foreign shareholder limits in place in Thailand. We went in at 230 Baht ($5.93) a share. I think that since then the market has moved significantly. The company has performed well. We believe that Shinawatra is well positioned. AIS, the cellular entity of Shinawatra, is well placed to be the leading player in Thailand and to continue to be so for the next few years and complement our own capabilities in Singapore and in Globe.?
Lee explains why Singapore Telecom decided to invest in Belgium's incumbent operator, Belgacom: "We saw Belgacom as an opportunity: we could work with a partner that we knew well. We had an existing relationship with Ameritech through our investments with them in Norway, which we entered into when markets in Europe initially started to liberalize. We saw Belgium as a potential beach-head into Europe and we also saw the European market as one where there was potential for significant gains. I think the company's performance has more than borne out our view on that issue. This allows us to have a partner in Europe to work with. We are very happy with the company's performance."
Regional mobile strategy
Lee goes on to explain how the acquisitions of AIS in Thailand and Globe Telecom reflect Singapore Telecom's long-term mobile strategy and its ability to offer more regional-based wireless services: "I think -when we added AIS to our investment portfolio - we felt that between SingTel and Globe Telecom perhaps we did not have the critical mass to do so. But right now, with the leading GSM 900 players in the Philippines, Thailand and Singapore, we believe that we have a strong basis to try and build our regional services in terms of preferred roaming, local SIM cards, local access to voice mail and customer service and to also try and leverage economies of scale in terms of the bulk purchase of handsets and network equipment. So I think that we are well-positioned to take advantage of that."
Clearly China represents a significant investment opportunity. Singapore Telecom recently announced a memorandum of understanding with the Shanghai Post and Telecommunications Authority. Lee stresses the significance of this agreement: "I think that the MoU is a demonstration of intent on both sides to explore opportunities to collaborate. We will certainly explore how we can enhance end-to-end managed data and voice communication services between Singapore and the Chinese market. The Chinese market is of interest to us: to the extent that we are able to participate through collaboration with the Chinese authorities. We certainly intend to explore that opportunity."
International and regional alliances under review
Singapore Telecom will soon have to make key decisions on future alliance partners. According to Lee, its participation in the WorldPartners' alliance appears to be about to end: "I think that WorldPartners will be winding down. I believe that we have an understanding with the players in WorldPartners to ensure that there is a smooth transition going forward. We are all seeking ways to meet customer needs, so that they are not disrupted as a result of this development."
Singapore Telecom recently sold its shares in AAPT in Australia and may well form closer ties with Telstra. Lee pinpoints the benefits of such collaboration: "SingTel constantly reviews the overseas investment portfolio to see how these investments suit our business strategy and objectives. We felt that we were able to achieve what we wanted in the Australian market by ourselves, conducting those activities without necessarily having to make joint venture investments, such as AAPT. We have worked successfully with Telstra in the past. We are confident of our ability to achieve a closer partnership and introduce new, enhanced products and services to meet customer needs. For example, we are talking about introducing ATM services between Telstra and ourselves. I think that the alliance world is rapidly changing. Clearly, despite all the failures, carriers are still analysing which alliances make sense. We ourselves will continue to explore that space and make sure that we participate in any opportunity which creates shareholder value."
Lee is optimistic about the future for Singapore Telecom: "SingTel celebrates 120 years of telephony in Singapore this year. We have seen many changes in the past. Historically the company has gone through several incarnations in its development. We think that as an organization we have the capacity and wherewithal to change with the different circumstances. Certainly we have been one of the most flexible and adaptable organizations. The fact that over the past five years we have grown significantly from S$1 billion after-tax profit to just under S$2 billion last year reflects the company's commitment and ability to continue to find a role and be a successful player.
"We see the Asian telecoms market as a key area for us to develop. We intend to pursue opportunities in that market, for example, in the regional mobile businesses that we talked about and the Internet businesses, the wholesale backbone businesses. It is very hard to predict trends in this industry, as anyone associated with this sector for any length of time will know. Many past predictions have proved completely off the mark. Many of the things which are so prevalent today were never seen to be commercially successful. We will explore broadband opportunities, as we see potential there. But it is still at a very early stage. Whatever form the communications business takes in future, SingTel as an entity will be playing in that space."