Company X’s profit decline has been driven by declining market share and ARPU, as

consumers do not see the existing products as compelling as before.

As obvious in the Balance Sheet, the telecom industry is projected to contract by 4%

annually between 2018-22, (2015-2019) revenue growth: - 4.0%

and competitors have shifted their focus towards handset leasing so as to maximize their
profitability.

If it is assumed that the market will respond in the same way in comparable markets, then I
recommend the introduction of handset leasing for Company X, as handset leasing has been
successfully launched in similar developed markets, such as Singapore and Australia.

 Since, Revenues - Leasing packages + SIM plans generally cost less than traditional
plans, handset leasing responds to customer needs by offering frequent handset
upgrades and lower overall costs.

o Consumers no longer want to be committed to their mobile devices for the duration
of their 2-year contracts, as new phone models get released with improved features
as frequently as once a year:

“Smartphone replacement cycles are getting longer, resulting in the rise in popularity of
SIM-Only plans. These SIM-Only plans are low ARPU products"(Telcos:11)

“Structurally we see a shift in the mobile business as smart phone replacement cycles
increase this has led to higher adoption of SIM-Only plans which are lower ARPU in
natüre”(Telcos:21).

o Also, there is a growth opportunity in the expanding market share:

“As seen in figure 5, customer spend is substantially lower in the lifetime of a contract under
the SIM-Only plan as compared to traditional handset plans. As such, net revenue will be
weighed down by the higher adoption of SIM-Only plans” (Telcos:2)

“We observe a re-allocation of pre-paid customers to post-paid as the popularity of SIM-

only plan increases (Figure 6 & 7). Higher spending prepaid customers now have SIM-Only
plans as an alternative to using the pre-paid services” (Telcos:3)

o Moreover, evidence from other markets shows that telcos that offer leasing
outperform the market on topline growth, even though ARPU might decline:
“The growth in postpaid customers has tapered the effect of industry shrinking ARPU”
(Telcos: 6).

 MVNOs are also became as competitors, thereby forcing the hand of telecom
incumbents:

“Circles.Life intends to grab a market share of 5%” (Telcos:2).

o Lower priced SIM-Only plans have been introduced by ‘mobile virtual network
operators:

“In total there are 4 MVNOs, Circles.Life collaborates with M1, Zero and Zero1 are working
with Singtel, MyRepublic is partnered with StarHub” (Telcos:2).

“To make matters worse, the price sensitive market is filled with MVNOs competing for
market share; this puts further pressure on ARPU” (Telcos:11).

“The entrance of MVNOs in the market has also weakened ARPU figures as the MVNOs
compete in the price- sensitive space in the market giving higher data allowance to
consumers” (Telcos:21).

o Increased competition from asset-light and low-cost MVNOs has compelled telecom
incumbents to engage in price wars and reduce their prices of mobile services.

“These MVNOs compete in the price-sensitive space and generally offer competitive price
plans”(Telcos:2).

“The MVNOs strategy is to target niche markets in Singapore. It essentially targets the most
price- sensitive segments. Their presence has undoubtedly weighed down on the telco
sector with their competitive pricing strategy and by offering larger data plans to its
customers” (Telcos:2).

o As a result most of telecom incumbents have formed partnerships with MVNOs

operating in their markets, to offer the lower-priced and highly popular SIM-Only
plans:

“In fiscal 3Q16, which ended December 2016, the take rate of Sprint’s leasing plans reached
~43%”(Sprint:2).

o Offering handset leasing to SIM-Only customers is estimated to reduce net losses in

revenue from 54% to just 5%:
 “Nevertheless we have factored in a 5% decline in post-paid subscribers across the 3
telcos”(Telcos:11).

Hence, my hypothesis is that handset leasing is an attractive business model which the team
should consider.