I recently switched my telco subscription plan from the regular ones to SIM-only plans. How do these SIM-only plans impact the revenue and profitability of the 3 local telcos?

Before we begin, let me explain what are SIM-only plans. As the name implies, SIM-only plans only provide voice, SMS and data but do not come with subsidised handphones. The tables below show the amount of voice, SMS and data for regular and SIM-only plans for M1, the telco which I subscribe to. The last table shows the difference in the amount of voice, SMS and data between the 2 types of plans. As you can see, SIM-only plans have generally the same amount of voice but less SMS and more data than regular plans. As people seldom SMS but rely more on data nowadays, I would argue that SIM-only plans provide better value than regular plans at lower costs!

What is the impact of SIM-only plans on telco's revenues? We have to assume a particular handset to illustrate the impact. Let us use Samsung S7 as the handset. If you purchase it under the regular plans, the price you pay ranges from $608 to $0, depending on which plan you choose. This sale of handset contributes to the overall revenue of the telco. However, for SIM-only plans, there is no sale of handset, so handset sale no longer contributes to the overall revenue. Not only that, the service revenue is also lower. The table below shows the revenue impact of SIM-only plans. Using Lite/ mySIM+ (MS+) 15 plans as an example, the total revenue over a 24-month period is $1280 under the regular plan, but only $360 under the SIM-only plan. The decline in revenue is $920, or 72% of the revenue under the regular plan! As we move towards the more expensive plans, the percentage decline becomes lower. Thus, we can expect telco revenue to drop, depending on how many people switch to SIM-only plans.

For M1, the expected decline in revenue shows up in their latest financial statement for FY2016 released last week. Fig. 1 below shows that handset sales dropped by 23.7% in FY2016 and mobile telco revenue dropped by 4.2% despite the total no. of mobile customers rising by 4.7%! Likewise, Fig. 2 below shows that the Average Revenue Per User (ARPU) dropped by 6.0%.

Having said the above, please note that the reasons M1 gave for the decline in net profit were lower IDD and roaming revenue, higher handset subsidy and higher depreciation and amortisation. So, perhaps not many people switched over to SIM-only plans.

Although revenue is expected to drop with SIM-only plans, if the cost of sales drop correspondingly, the impact to profit would not be significant. Here, I will attempt to estimate the profit impact from SIM-only plans. A few assumptions need to be made. Firstly, I will assume that M1 is a pure mobile telco company, even though it also has international call services and fixed services, which together constitute 21% of its service revenue in FY2016.

In FY2016, M1 reported gross profit of $180.0M on total revenue of $1,060.9M, giving it a profit margin of 17.0% (Based on FY2014 financial results, which is before M1's launch of SIM-only plans in Jul 2015, the gross profit margin was 20.4%. We will use the more conservative and latest figure of 17.0% in this analysis). Since this profit margin includes both the sale of handsets and mobile telco services, it is assumed to be the profit margin for the regular plans.

Finally, I will further assume that the profit margins of 17.0% and 33.3% apply for all regular and SIM-only plans respectively, which is likely to be incorrect. I understand that a lot of assumptions have been made here, but these assumptions provide at least a starting point for analysing the impact of SIM-only plans on telco profitability. If you have better figures, please let me know.

Applying these profit margins to the revenue discussed above, the gross profit for the various plans are shown in the table below.

	Lite	Lite+	Reg	Reg+	Max	Max+
	MS+ 15	MS+ 20	MS+ 30	MS+ 45	MS+ 75	MS+ 125
Gross Profit
Regular	217	249	274	344	415	928
SIM-Only	120	160	240	360	600	1000
Difference	-97	-89	-34	16	185	72
% Difference	-45%	-36%	-12%	5%	44%	8%

Using the Lite/ MS+ 15 plans as an example, the gross profit for the regular plan is $217 (17.0% x $1280) but only $120 (33.3% x $360) for the SIM-only plan. The difference is $97 or 45% of the gross profit of the regular plan. However, as we move towards the more expensive plans, this difference turns from a loss into a profit! The reason is pure mobile telco services has a higher profit margin. Thus, the more expensive the plan is, the more profit the telco makes!

The same analysis repeated for iPhone 7 (128GB) is shown below. Likewise, it shows that there is a significant drop in revenue but the impact to profit depends on which plan the subscriber chooses.

	Lite	Lite+	Reg	Reg+	Max	Max+
	MS+ 15	MS+ 20	MS+ 30	MS+ 45	MS+ 75	MS+ 125
Handset Price
Regular	880	745	560	380	190	0
SIM-Only	1218	1218	1218	1218	1218	1218
Total Revenue
Regular	1552	1753	2048	2348	2638	5472
SIM-Only	360	480	720	1080	1800	3000
Difference	-1192	-1273	-1328	-1268	-838	-2472
% Difference	-77%	-73%	-65%	-54%	-32%	-45%
Gross Profit
Regular	263	297	347	398	448	928
SIM-Only	120	160	240	360	600	1000
Difference	-143	-137	-107	-38	152	72
% Difference	-54%	-46%	-31%	-10%	34%	8%

So, the next 2 big questions are: (1) how many people will choose to switch from regular plans to SIM-only plans, and (2) which plans are they on currently?

I do not have much insights on these 2 questions. On the first question, my opinion is that people who choose to switch include those who are cost-conscious, do not need an expensive phone and/or tired of upgrading phones every 2 years. The possible profiles of these groups of people would be the elderly and young children (if they are not already on the pre-paid plans). To cut a long story short, I do not think a lot of people will switch.

Another point to note is that M1 launched the SIM-only plans in Jul 2015. Since the typical contract period is 2 years, we are approximately 75% into the first renewal cycle. Nevertheless, it is also possible that some subscribers could have missed the SIM-only plans when they previously renewed and choose to make the switch in the next cycle.

On the second question, based on Fig. 2 above, the ARPU is $58, which is closest to the Reg plan that costs $62 per month. For this plan, the SIM-only equivalent will result in lower profit based on the analysis for Samsung S7 and iPhone 7 (128GB) above.

Hence, in conclusion, for each subscriber who chooses to switch, SIM-only plans will result in a significant drop in revenue. The impact to profit is also negative but smaller than the decline in revenue. However, the no. of subscribers who choose to switch to SIM-only plans is likely to be small.

P.S. I am vested in M1.