Reduction in handset subsidies likely to pay off

“Although operators may face slower revenue growth in the shorter term as cost-conscious subscribers switch to competitors, we believe the impact would be more than offset by a reduction in costs to acquire and retain subscribers,” the ratings agency said. “Competition could become more rational as operators focus on network investment and service quality to attract and keep subscribers.”
Advanced Info Service (AIS) and Total Access Communication (dtac) reported a drop in earnings before interest, tax, depreciation and amortisation (EBITDA) in 2016 as handset subsidies became a feature of the market. However, AIS and DTAC have been reducing their handset subsidies since the second half of last year and since the first quarter of this year, they have been offering subsidies only on post-paid plans to attract new subscribers and provide an incentive for pre-paid customers to convert. 
Fitch believes that AIS and dtac could be vulnerable to an increase in the churn rate for the pre-paid segment, but their mobile service revenue should be protected by their strategy to focus on the post-paid segment, which has higher average revenue per user.
“We think the reduction in service revenue from pre-paid subscribers should be offset by an increase in post-paid revenue,” the agency said. “In the first half of this year, AIS reported a moderate increase in mobile service revenue by 3.9 per cent, while that of dtac was stable year on year.”
Fitch expects the profitability of AIS and dtac to improve strongly in 2017 as a result of the reduction in handset subsidy costs.
“We forecast AIS's and dtac’s 2017 EBITDA margin to improve to 43 per cent and 34 per cent, respectively.”
 Marketing expense (including handset subsidies) as a percentage of service revenue for AIS and dtac in the first half of this year decreased significantly to 8 per cent and 7 per cent from 14 per cent and 12 per cent, respectively, in 2016, the agency said.