Published on the Malta Independant, issue Wednesday, 19th September 2010
Recession has not spared the local telecoms sector, which now has more than six operators all competing in a miniscule market. But not everything is doom and gloom since GO Group (formerly Maltacom plc) this quarter reported improved growth in broadband, data and TV services, which have compensated for the decline it continues to experience in traditional fixed-voice services. But, this may not be a permanent feature and the future could be choppy.
Readers are probably familiar with efforts made by various consultants to prop up efficiency, particularly in the fixed line sector operated exclusively by state operator Maltacom plc. The company had enjoyed a quasi monopoly on fixed line telephony and now shares the market with Vodafone and Melita in respect of mobile telephony services, broadband and Internet services, including voice over Internet protocol services, radio paging and data hosting facilities. Ever since its well-publicised sale to the Gulf Arabs, Maltacom plc (now renamed GO) is now a private company, which, until the end of 2002, exploited its position as the main provider of fixed telecommunications and international communications. It is no secret that, being a parastatal body, it attracted calls from politicians to swell its intake of workers to help solve any temporary unemployment problem among constituents. Today, it competes with Vodafone International on mobile communication alongside Melita cable plc and two other telecom companies owed by political parties, namely Ping and Redtouch.
GO prides itself on being operator whose network covers the whole archipelago due to state-of-the-art fibre optics it uses. GO promoted the Internet that is now widely used in households and offices and, since its privatisation, Malta has exceeded the European level of Internet penetration. Due to telecoms liberalisation, we have seen the pendulum swing widely from a state monopoly in 2002 to more than six mobile phone operators. The stiff competition has also exacerbated a price war in the provision of mobile services, which combined with the reduction in consumer spending power (partly caused by the hike in water and electricity tariffs) has resulted in reduced demand. All this resulted in lower profits for telecoms operators. Developments in the mobile market during the second half of 2009 led to a marginal decline in revenue from mobile operations in spite of overall growth in the subscriber base.
This article attempts to analyse how the global recession has affected three of the main operators. It is true that operators are constantly introducing new products to optimise new revenue lines. But hard facts show that companies are struggling under the weight of reduced revenue and increased costs. Malta’s telecom sector revenue fell by more than six per cent in 2009 having shown seven per cent growth in 2008. Undisputedly, the price war on SMS services has trimmed down their cost to the bone and exponentially increased their popularity, although it yields little profit. By comparison, MMS has been slow on the uptake.
Party apologists tell us to be grateful and are forceful in their claims that Malta’s economic contraction has not been as severe as in other areas of the EU, which in turn has theoretically helped the telecoms weather a difficult period. Analysts tell us that next year there will be further consolidation and possibly increased costs of operation when the majority of mobile networks will offer superior services by upgrading to the latest HSPA technology. Whether this will generate the much-desired extra revenue will depend on demand from heavy users such as online gaming and banks that are the main users of data transmission. This will of course depend largely on the future of the online gaming industry, which itself may face stiff challenges next year from emerging European countries vying for their local business. Banks on the other hand seem to have weathered the storm perfectly and one expects higher profits next year.
Let us now examine some salient economic factors as reported by the main operators, starting with GO. GO reported a 4.8 per cent drop in its first half revenues recently compared to last year, to €61.12 million. Its financial statements show that the drop in revenue occurred, in spite of an overall increase in the group’s customers’ connections and services. The group’s earnings before interest, tax, depreciation and amortisation (EBITDA), and after eliminating significant one-off items, amounted to €18.61 million, a drop of 28.5 per cent over the comparative period. It is no secret that GO is seeking to attain a leaner labour utilisation level. As part of the privatisation package deal, the new owners contracted to employ all Maltacom workers even though it was an open secret that it was overstaffed. GO initiated a generous voluntary redundancy scheme and managed to reduce its workforce by 450 employees; it is trying to further reduce its workforce to reach a manageable level of 1,150 in full consultation with the unions.
Back to operating results and we see that GO reported a loss of €1.14 million compared to a profit of €1.04 million a year ago, after accounting for various significant one-off items including voluntary retirement costs amounting to €7.26 million.
The operating activities for the current period have returned a profit of €6.89 million – which is still down sharply on the €13.15 million a year ago. The company said three key factors that have impacted GO’s revenues, namely the overall economic slowdown, the increasing competitive environment and ensuing lowering of rates and issuing of more attractive GO tariffs and offers in the market, as well as the effects of regulation on both retail and wholesale rates. Revenue from fixed line voice services declined by €3 million representing a decline of 12 per cent. Local regulations, which became effective half way through in 2008, adversely affected data services revenue, which declined by six per cent, while mobile services declined by three per cent driven by lower consumer spending, increased competition and aggressive retention offers. Certainly not an exemplary year seeing that the group’s loss before taxation amounted to €5.37 million, compared to a loss of €1.42 million in the comparative period to 30 June 2008. The net loss after tax amounted to €5.43 million compared to a net loss of €4.40 million for the six-month period to 30 June 2008.
The outlook improved when, on 31 August, GO plc issued its 2010 interim results. During the first six months of the current financial year, the group showed a slight improvement. It achieved an operating profit of €11.24 million, compared with a loss of €0.25 million registered in 2009. The group explained that the 2009 half-year results included a number of one-off items, such as voluntary redundancy costs, which had no impact on the group’s 2010 results. Normalised results before one-off items show an operating profit of €11.35 million this year representing an increase of 46.1 per cent over the normalised operating profit of €7.77 million in the comparative period. It seems that the tide is turning for GO. It stated that the advance in operating performance is due to improved revenues as well as lower costs.
How do GO results compare with that of its other rival Melita Group plc, a diversified telecommunications provider offering home entertainment and telecommunications services. Like GO, Melita also owns and operates an undersea submarine optical fiber cable. Projections for 2009 revealed revenues amounting to €7,400,000 while the cost totalled €18,200,000.
The third kid on the block is Vodafone Malta, which reports at group level and it is difficult to analyse its local operating results. Vodafone has been established over 12 years on the island and was the pioneer in telecoms, having been granted an exclusive licensee for a number of years to provide mobile services. Vodafone reported revenues for 2009 of €70,907,414 and the cost of sales account to €35,640,404. As a result, the net profit of the year 2009 amounted €13,384,282. Vodafone Malta has invested heavily and, like the other two providers, sought to build its own submarine cable system to improve connectivity with the Italian mainland. It has now been six years since it provided this redundancy in broadband service and enhancing its international gateway with a capacity of 10Gbit/sec. Lately it purchased more capacity from a third party submarine cable. Such massive investment laid the backbone to guarantee a seamless capability to re-route traffic, particularly in case of date transmission so critical for the online gaming sector. Thus Vodafone Malta is offering diversity both on its international carrier of repute as well as on the submarine cables to Sicily.
To conclude, the future does not seem too bright for the six providers and one expects a certain amount of consolidation within the next decade. Again, stiffer EU and local regulations have contributed to lower wholesale and retail revenues thus depressing further the sector ‘s turnover. One hopes that with further investment and the success of SunCity as an ICT centre will both lead to better chances in attracting international business, thus widening the existing customer base.
The writer is a partner in PKF Malta, an audit and business advisory firm.