Analysis Of Celcom Axiata Investment In Tune Talk Marketing Essay

Analysis Of Celcom Axiata enthronization In ancestry babble out Marketing EssayCelcom Axiata is a ph every(prenominal)us of Axiata Group is face kindling argument against the other major(ip) telecommunication rivals. Having coined as malay telco provider that is, Celcom Axiata has weak acuteness into some major markets and the strategy to oercome this is by appointing the Mobile Virtual Network Operators (MVNO) to penetrate into the determine markets using their profess fault, look and feel.Celcom Axiata dividing line model for air spill the beans MVNO is by having 35% hazard in the company. After over 11 months in operation, Celcom Axiata is freshening its position in this company whether to remain its stake, augment its sh atomic number 18holding or pullout.Prior to making any termination with its investment, Celcom Axiata takes to evaluate the existing melody gibber fiscal standing and its capability to provide the required return on investment as rise up as its ability to handle the issues at hands especially those concerning the interchange full points.IntroductionCelcom Axiata is one of the 4 major wandering(a) telecommunication companies in Malaysia. As at 31st March 2010, Celcom Axiata was ranked as second largest mobile telecommunication company behind Maxis, and ahead of Digi and U Mobile respectively. Celcom Axiata is a member of Axiata Group of companies who manage a group of Mobile Telecommunications in the Asia region. Axiata Group was previously known as TM International and part of TM (Telekom Malaysia) Group. The process of de-merger within TM Group saw the descent of Axiata Group, meant to charge on mobile telecommunications arm of the corporation within the region whilst TM continue to musical accompaniment on its fixed lines business as well as broadband provider. fit in to the first quarter monetary circulate, Celcom Axiata continue to show double digit growth on a YoY basis in all lynchpin indicators. reve nue was up 15% whilst Earning Before Interest Tax Depreciation and Amortization (EBITDA) increase by 16%. In tandem, Profit After Tax ( puke) was up 24% in the kindred period.On a QoQ basis, Celcom continued to show despotic performance. Despite coming off anexceptional 4Q09, which put down the extravagantlyest ever quarterly growth, revenue growth wasmarginal, but se go out up by 0.2%. Continued focus on addresss saw EBITDA up by 2% with margins improving by 0.7 percentage points QoQ to 45.4%. PAT showed a robust increase of 7% to RM441 million (Celcom Axiata media release, 27th May 2010).Celcom Axiata has been aggressively expanding its network and coverage to cater for the increasing demand by the customers. Despite its continuous efforts to penetrate into the various subdivisions in this country, Celcom Axiata still lagging in some of key markets such as the Chinese market surgical incision, immigrant market segment and student market or low income earners segment. These markets are predominantly controlled by Maxis and Digi and allow be the key success factor for Celcom Axiata to capture in order to become the number one mobile telecommunication provider in this country.One of the strategy to penetrate into these segments as single out by Celcom Axiata is by way of having a Mobile Virtual Network Operator (MVNO) approach. MVNO means Celcom Axiata forget appoint a third party to run the mobile business using their own brand, leveraging on their own strength such as net workings, track of distribution, marketing and customer service. By doing this, Celcom Axiata can reduce its financial burden on the go-to-market greet which in turn forget be born by the MVNO partners themselves.To date there are four MVNOs appointed and launched by Celcom whereby each of them is given divers(prenominal) market segment to penetrate and capture. Each MVNO is treated as separate entity from Celcom Axiata where the respective MVNOs have full control over their ow n operations and instruction of the companies except for stock tittle-tattle Sdn Bhd where Celcom Axiata has 35% share of the company.Being different business model from other MVNOs, air travel conversation Sdn Bhd is seen as a nonher Celcom Axiata joint venture company. Tune prattle is owned by the following shareholders as shown in figure 1 below Tune Ventures (owned by Datuk Seri Tony Fernandes and Datuk Kamarudin Meranun)Individuals shareholders are Datuk Seri Kalimullah Masheerul Hassan, Lim Kian Onn, Jason Lo (the CEO of Tune let out), Gurtaj Singh (the COO of Tune let loose) and Mark Lankaster (the CEO of Tune Hotels)Celcom decision to have its stake in Tune Talk is to ensure it has some form of control as one the major shareholder. Although Tune Talk focal point will have the control over the steering of the company but the shareholders will have their voice heard during the monthly plank exco run into. Having represented by 2 permanent exco members from Celcom, it can ensure that Tune Talk business plan and strategies are in line with its goal to become one of the top mobile service provider in this country.The topographic pointTune Talk is approaching its first anniversary on the coming 19th August 2010. Celcom need to assess its investment and evaluate whether Tune Talk business is moving to the right direction and whence yield the desired divid finiss to shareholders.In order to achieve the target, Celcom take to keep track of Tune Talk steerings way of running the business. The permanent exco members sitting in the boardroom must be able to utilisation down to the bottom line and analyze their way of spending their monetary fund.This is very important to Celcom as the major shareholder in Tune Talk so it can decide on the next line of merchandise of actions such as to inject more fund into Tune Talk, or to remain its position without adding anymore exchange in or worst role decide to pull out from the pack.Prior to such decision, Celcom necessitate to gather as much information as possible with regards to Tune Talk financial position, business directions, marketing strategies and other commercial matters which will be the key determination factors.Based from the previous exco meeting it was learned that Tune Talk is facing difficulties to move forward with its business plans and marketing strategies due to paucity of cash flow. Tune Talk Chief Financial Officer (CFO) during his presentation to the board of directors highlighted the following scenarios a. growing in Managed serve constitutesTune Talk adopted the managed work concept to deploy and hold the Intelligent Network (IN) billing system, network related infrastructure namely Short Message Services Centre (SMSC), Home Location Register (HLR) and other Value Added Services (VAS).Managed go concept is a sore campaign in telecommunication and information technology (IT) business whereby the customers or business hustlers do not buy out right the related systems but pay to the supplier or provider on usage based. This method saves the company from spending an upfront purchase of an asset, hence reduce the cash outflow. Managed services can help a particular company to avoid from having to allocate depreciation cost which whitethorn impact the company balance sheet.In the typeface of Tune Talk the burden they are facing now is due to the increase in the amount to be played out on this managed services. The deal they are having right now is based on the number of subscribers using the system, the higher the number of subscribers the higher the managed services cost to be incurred. The amount will grow in tandem with the intake of new subscribers where the average cost per subscriber remain unchanged. Unlike buying own fixed asset, the average cost will tend to reduce as the number of new subscribers grow until it reaches the economic of scales.Increase in behave and Distribution CostIn Malaysia, all the mobile op erators are highly dependant to the normal traditional channel ie. mobilephone dealers to sell its SIM card and recharge vouchers.Being too dependant to this type of distribution channel will increase the companys cost of gross sales whereby for every sales of SIM card game or recharge voucher the company needfully to allocate some amount of percentage as an inducing for them to push its products over the competitors.Traditionally, in mobile telecommunication business the channel of distribution consist of 3 layers distributorsmaster dealers mine run dealersNormally lonesome(prenominal) a handful of distributors are being appointed to distribute to the master dealers whom will then sell it through the ordinary dealers. Each of these channels will keep a small percentage as their incentive from the retail price.Operators are normally stuck with this channel cost which they cannot run off with in order to push their products to the customers.On average an operator will have to spend not less than 10% from its retail price being part of the channel cost.Allocation for Marketing CostAs a new mobile operator in Malaysia competing against the other 4 major mobile telecommunications service providers Tune Talk is facing a tough time to introduce its brand to the market.According to Nielsen Co Malaysia 2009 report (a research company), the telecommunication companies are among the highest contributor to the total advertising expenditure in Malaysia with Celcom leading the pack at RM 115.8 million, followed by Telekom Malaysia at RM 94.3 million, Maxis with RM 89.7 million and Digi for RM 87.1 million (see Figure 2 below). newsprint and TV advertisement represent the top 2 categories for advertising followed by Radio, Magazine and Outdoor.To date Tune Talk had already spent RM 2 million in their advertising cost through billboards, newspaper, TV and radio advertisements. This amount is rather very small compare to the amount spent by the bulky giants and it ma y not give the required exposure that Tune Talk expected to create its brand awareness to the market place.Based from the report and dip stick survey conducted by Tune Talk marketing department their brand index is still very low and they would require more fund to be pumped in for this purpose.Slow Moving of Customer Recharge ActivitiesTune Talk is wholly selling prepaid mobile and it main source of income is by selling the SIM card and recharge vouchers. As far as Tune Talk is concern the revenue generated from these sales are considered as their income (based on the generally Accepted Accounting Principle).This is due to the fact the income will be reported when it is earned (Ross, Westerfiled, Jaffe, somatic Finance, 7th edition). The good thing about prepaid business is the transactions are in cash terms. This means Tune Talk will get to record the transaction into its book as and when the SIM cards or vouchers are sold to the distributors.In accounting, the revenue from sale s of SIM cards and recharge vouchers will only be realized upon usage and not upon sales. Nonetheless, as far as Tune Talk income is implicated it has already acquired the money from the distributor and realized in its book as income as per GAAP.As a rippling effect to lack of awareness of its brand in the market place, Tune Talk sales of SIM cards and recharge vouchers are moving rather at a very slow pace. give in 1 below is example of the average sales and projected 1st division revenue from SIM cards and recharge vouchers Table 1ItemsAverage Monthly RevenueProjected 1st Year RevenueSIM CardsRM 500,000RM 6,000,000Recharge VouchersRM 900,000RM 10,800,000TotalRM 1,400,000RM 16,800,000This figure is far cry from the original budget that Tune Talk has to make which is RM 36.0 million for its first year operation and increase to RM 50.0 million and RM 72.0 million in year 2 and 3 respectively.High Customer Turnover or Attrition RateIt is common in the prepaid business industry that users tend to move or hope around from one operator to another operator to find for better offer and cheaper cost. Tune Talk is also affected by this game by the customers whereby the rate of customers churning out or leaving for another brand keep on increasing on month-on-month basis.Malaysian prepaid business industry rate of customers lenifying in a particular operator (industry language is length of stay) is in average of 6 months. However in the case of Tune Talk its customers average length of stay is a mere 3 months which is about fractional of the industry average.The impact of this short stay will parkway a high acquisition cost to Tune Talk whereby its cash flow will be badly affected. In order to stay healthy, Tune Talk needs more than 3 months for each customer with average usage of RM 30 per month to recover its upfront acquisition cost such as the channel incentive, marketing cost and the other variable costs.Shortage of CashTune Talk started off its business with RM 7.5 million worth of shares with 35% own by Celcom whilst the remainder are by several other individuals. After 11 months of operations, Tune Talk is now facing with the most critical moment in its business where their cash flow is deteriorating. Despite being a lean and mean in expenditure and had not spent any money on fixed asset, Tune Talk still face the cash flow difficulty.An area that has badly affected Tune Talk cash flow is the channel incentive and the sweeping airtime rates that it has to pay back to Celcom. With intense competition Tune Talk needs to set its incentive on par or slightly better than the competition in order to get the channel fear and support.On the other hand, the prepaid business market is competing on the call rates to be offered to the end users in order to beat the others. Since Tune Talk is buying its airtime from Celcom at fixed rate, the competition which had forced Tune Talk to also lower down its selling rate to the end users had cause Tun e Talk margin to shrink and became smaller. The result is, the income collected from the sales of SIM cards and recharge vouchers will have to be spent largely to incentive and wholesale airtime to Celcom, leaving only peanuts to Tune Talk to be used to re-generate its business. It is also better for Tune Talk to maintain a level of working capital that allows it to make it through those crunch times and continue to operate the business within tight-fitting budget (Cater McNamara, Authenticity Consulting LLC).ActionCelcom Axiata really need to review its investment in Tune Talk Sdn Bhd by looking at the present situation and its potential. It is a known fact that every new business need some times to be able to stabilize and start to show positive result out of its investment.As far as telecommunication industry is concerned, a minimum of 3 years is required in order for a particular mobile operator to have a strong foothold and have substantial subscriber base to be relevant.The q uestion here is whether Tune Talk strategies are gearing towards the right direction which will guarantee to bear fruits at the end of 3 years? How much will investor need to pump in to ensure that Tune Talk can still survive until the 3rd year ?It is imperative that Celcom Axiata representatives in the Tune Talk board of directors to insist Tune Talk management to review their existing business models which had obviously affected their cash flows. Serious attention must be given by Tune Talk management to return its dependency on the existing channel which will become its biggest threat in trying to calumniate its cash out flows.Tune Talk management also needs to re-negotiate with its managed services provider to review the charges being imposed to Tune Talk for every new subscribers added into the system. The charges should be on decreasing trend as more customers being added.Tune Talk may also want to consider purpose new manage service provider should the negotiation come to a dead end. This is important in managing Tune Talk spending over the long run.Prior to Celcom Axiata to make any decision with its investment, it needs to analyze Tune Talk financial condition. It is advisable for Celcom Axiata to scrutinize the Tune Talk financial management and ensure that all the monies are well spent and efficiently managed to protect its interest. Celcom Axiata finance manager needs to advice the Chief Financial Officer (CFO) of the real condition of Tune Talk by analyzing its financial disputation cash flows.Having spent for over RM 2.6 million and holding 35% of Tune Talk shares, Celcom Axiata has the responsibility to report to its board of directors on the progress of its investment. The Celcom Axiata board of directors must be very interested to know whether the management of Celcom Axiata has made the right decision by investing in Tune Talk. One thing elicit in this business model ie MVNO is because the airtime being sold by Tune Talk (in this case th e MVNO) is using Celcom network infrastructure. This means even though Tune Talk does not make grand profit and may not be able to provide the required rate of return in terms of dividends to the shareholders but as far as Celcom Axiata is concerned, it still make money from the airtime sold. Thus, board of directors of Celcom Axiata may well be pleased by the increase in Celcom Axiata revenue alone rather than release down to the details of earning through the Tune Talk dividends.Another area that needs special attention is to assess the existing Tune Talk management team style and business competencies. This industry is regarded as highly competitive and it takes excellent team to be able to compete with the big boys (as being referred to the season mobile operators). Celcom Axiata representatives in the Tune Talk exco members must be able to provide information to the Celcom Axiata management whether there is an existence of conflict of interest in the Tune Talk management tea m. Although according to Vishny and Robert W, NBER Reporter, kinsfolk 1989 said that the standard and ideally corporation allows management to have 5% of shares. This can be observed by judging into their way of running the business, their seriousness in fulfilling the required tasks as outlined in the business plans, their priorities in spending and handling the cash flows.ConclusionIt is probably premature for Celcom Axiata to make decision to pull out from this pack by merely basing on the first 11 or 12 months Tune Talk operation. However any decision to increase its capital in Tune Talk either by buying more shares or by pumping more money to support Tune Talk operations must be done with great detail analysis. It is not advisable for Celcom Axiata to plain inject more cash to Tune Talk without seeing any progress or advantage on some of the area of concern which have been highlighted in previous pages.The major issues that need to be really scrutinize by Celcom Axiata fina ncial manager is on the cash flow management. The action items highlighted in previous pages suggested Tune Talk to improve the way it runs its business which will eventually give a positive impact to its cash flow.It is said that high risk will normally generate high rate of return, but having said that, the save decision at the moment is for Celcom Axiata to remain its position without adding more cash but to continue to monitor Tune Talk progress and improvement. After all, Celcom Axiata is the one who makes more money from anyone else in the pack which is through the sales of wholesale airtime.This investment although had not been able to generate dividends to Celcom Axiata but somehow has managed to complement the weak area that cannot be penetrated by Celcom Axiata using its own brand.