ATC to rebound strongly, page-12

Hi oooahhh99,

My response is in 2 parts:
1)
China Mobile; and
2)
ATC.


CHINA MOBILE:

China Mobile, I do not doubt. But neither China, nor China Mobile is the type of "blue sky" market that everyone seems to think it is.

Prepaid services were first introduced into China by China Mobile in August 1999. For 2 reasons, however, the service did not take off:
1)
high service fee; and
2)
lack of roaming facility.

Both of these issues were remedied in mid-2000.

By end q1,02, China Mobile (and satellites) counted 35.6m pre-paid subscribers, vs an overall subscriber base of 69.6m.

With significant and cocntinuing growth in the pre-paid segment (up from 26.0m at end 2001), you would think that this augurs well for the future.

2 problems have emerged, however, as a result of China Mobile moving to a pre-paid option (particularly, as an alternative payment method to its subscription sevrice business):
1)
the availability of pre-paid cards encouraged millions of less affluent people to use mobile phones; and
2)
ARPU values have fallen sharply, meaning that the pre-paid option is less revenue generating (on a per person basis) than for post-paid customers.


CHINA MOBILE ARPU VALUES:

Regarding 2), ARPU values in 2001 were 72RMB for pre-paid, 199RMB for contract, and 145RMB for blended (CSFB).

By end q1,02, however, these rates had declined to 65RMB pre-pad, 190RMB post-paid, and 125RMB, blended (DB).

In 2001, China Mobile’s blended minutes of usage for each user was 249, down from 299 at end of December 2000. Of this amount, post-paid users avergaed 329 minutes in 2001 (326 minutes in 2000), whilst pre-paid users averaged 111 minutes (125, 2000).


CHINA MOBILE PRE-PAID FORECASTS:

Going forward, ING Barings is forecasting ARPU values to fall to 105RMB blended, and 58RMB pre-paid by end 2002, befoe declining to 85RMB blended, and 47RMB pre-paid in 2003.

Against this backdrop, however, ING is also forecasting that pre-paid subs will rise to 55.0m by end 2002, increasing further to 65.0m in 2003, before stabilising at 73m in 2004.


CHINA MOBILE SUMMARY:

With pre-paid minutes in use declining, ARPU values falling, and with a lower level socio-economic mix connecting to the pre-paid service, the potential for pre-paid services to generate high incremental improvements in income, is marginal.

Clearly, the opportunities are still there for FNT /ATC to exploit the China Mobile /Chinese pre-paid market. But my concerns remain as to whether this will be a high net worth revenue earner for ATC going forward.

From a market share perspective, and if the UK is anything to go by, the answer is likely to be, yes.

But, from a margin improvement perspective, the answer is likely to be, no.


ATC'S OWN SWITCHING GAME:

The ATC model is built on the strength of a single Nortel international gateway switch deployed in Hong Kong to allow for the international trunking of mobile traffic across international leased circuits.

Due to the existence of the Hong Kong switch, ATC is able to count as its own, revenue originating across this platform. By then going to the next step of also having an international gateway strategically located in Europe (presumably, in the UK), ATC may well be able to also claim as revenue, traffic switched across its gateway in Europe.

Key, however, to the ATC business model is the ability for them to also maintain leased line capacity, both in-bound to each of the switching centres, as well as outbound from these centres (ie: across international circuits).

The ATC business model is also predicated upon “strategic vendors paying for the transmission costs”.

In effect, this means that ATC can:
1)
switch traffic via 2 international gateways (and call all of the resulting revenue, as its own);
2)
switch that traffic onto various international (or domestic) circuits in respect of which it either has secured (a) inter-connect agreements, (b) dedicated, or leased, capacity, or (c) wholesale capacity at “spot” rates.

As for 2a), arguments will abound as to who is entitled to the resulting revenue – ATC or the carrier with whom it has the inter-connect arrangements?

As for 2b), this is more a case of ATC being able to count as its own, most if not all of the resulting revenue generated via its switched traffic.

The same goes for 2c).

ATC’s true business, therefore, is one of wholesale aggregator of existing line capacity, as opposed to being a telco in its own right, notwithstanding the OFTA licence that it has in Hong Kong.

As an aggregator, ATC’s business is also streamlined towards choosing the least cost route from originating source to intended destination. In these circumstances, ATC has more in common with other commission agents out there, than with other telecommunications’ carriers, particularly as it is being free-carried through “strategic vendors (paying) for the transmission costs”.

The nature of ATC’s business model, therefore, is not too different to that which was tried in recent years by TLO, particularly when it linked up with NTMi and installed an international gateway switch in Sydney. At the time, TLO and NTMi were also extolling the virtues of the Asian market, as well as announcing deals with a wide range of Tier 1 and Tier 2 carriers (including Deutsche Telecom).

There are, however, 3 main differences in the ATC model, when compared to the TLO model:
1)
the deployment of dual international gateways (at least in Asia, and maybe also in Europe);
2)
the acquisition of a complementary business (ie: FNT) which, if properly organised and exported into China could well provide another means of support (ie: revenue access) for ATC; and
3)
the existence of an emerging business relationship with China Mobile (etc) which, if properly developed, will also underscore some of ATC’s business going forward.

For the time being though, ATC is a minnow in the telecom’s game and it will be some time before it rises to the level of a serious business proposition. But, for the record, I agree that it is early days yet.

It remains, however, that I am not yet convinced of the vitality argument based on the strength of monthly reporting of customer traffic /revenue.

More beneficial for the business, and its future prospects of success, therefore, would be explaining more effectively the nature of its business, and communicating with shareholders /the investment public.

Yes, I am dubious of ATC, and I remain to be convinced. But there is a role to be played there as aggregator, based on an effective business model. There is also a role for ATC to be played in China. Over the next 6 months, the market should be in a position to finally determine whether or not ATC has such a model with whichc to succeed. I will, therefore, watch with interest.