Bisnis Indonesia reported that Indonesian telco regulator BRTI has advised 5 telcos to scale back free off-net SMS promotions. The 5 telcos affected are XL (66% owned by Axiata), Indosat, Telkomsel (65% owned by Telkom and 35% owned by SingTel), Natrindo and Hutchinson. Since there is no interconnect charge for off-net SMS, terminating (receiving) telcos do not get paid for delivering SMS (to end users) through their networks. As such, sending massive amounts of SMS to a competitor’s subscribers could choke up its network without compensating the receiving telco. Hence, the regulator is concerned about deterioration in quality of services that phone subscribers would eventually endure, and deems such free off-net SMS as an unhealthy trend. Unless Telcos scale back their existing offerings, BRTI would ignore requests from telcos, including requests for new phone numbers. This would hamper telcos’ ability to add subscribers.
As XL and Indosat were among the early telcos who participated in the off-net SMS price war (in 4Q09), they grew 4Q09 revenues by 12% and 11% q-o-q respectively, while increasing subscriber base by 5.9m (+23% q-o-q) and 4.4m (+15%). In comparison, late comer Telkomsel (in 1Q10) added only 1.9m (+2.3%) and raised revenue by a minimal 2%. We think that the telcos would concede to BRTI’s sanction, and foresee XL and ISAT as potentially the bigger losers while Telkomsel would be the least affected among the Big 3 cellular operators.
With the potential end of the off-net SMS price war, we foresee normalization of the telecommunication industry. In our view, Telkomsel is the major “winner” in this case. We reiterate our BUY call on TLKM with a DCF-based price target of Rp10,000.
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