Cannibalism 2 - a response to Jack

Dialog just reported a loss of 3 billion for the year ended 31st December 2008.

Jack Point seems to think the sole reason for it centred around the Blaster Package. But theres more to the story than just the blaster package, the blaster package was necessary to ensure the non erosion of Dialog's customer base, which was essential taking immediate market implications into consideration.

While the Sri Lankan telco market has almost bordered on a price war over the past few months, this has been good for the population and the economy as a whole as it reduces communication costs and in turn increases productivity, providing a much needed boost to a relative downturn.

Also this has a penetrative effect where new users previously unable to afford a mobile subscription entering the fray, the blaster/ Upahara packages also have a potential to create a loyal customer base provided service levels are high and coverage problems are minimal. And however much Dialog is criticized for its bad customer service, they are still pretty much the best at it in comparison to their competitors. That may not be saying much, but it's all that matters. Coverage wise Dialog is the undisputed leader with most of its competitors struggling to keep up, but Mobitel is an exception posing a strong challenge and will probably catch up sooner or later.

The problems rather, were caused by a too-big organization, it is a structural/ managerial problem rather than a marketing one. Dialog has a bureaucratic culture with a largely centralized decision making system with a maze of divisions and departments. They need to restructure fast to cope with the suddenly dynamic nature of the Sri Lankan Telco market. To streamline themselves to be able to swim faster. They are also laden with two subsidiaries that are yet to turn a substantial profit (as is evidenced by the disparity between the 'group' and 'company' losses) Dialog TV and Dialog CDMA, the latter which is seen to be an entry into a declining market by many pundits.

Jack Point also seems to think that the share prices of Dialog will drop to Rs. 2 but it’s my personal opinion that things won't get that bad, but his reasoning is also realistic. If there is a selling scramble prices could drop to a previously unheard of level but i think the worst has already happened, most investors would not have been expecting a profit for the last quarter anyway, although the level of  the loss incurred may have been un-anticipated.

A lot will depend onDialog's relationship with its major shareholders and their level of confidence in Dialog's ability to turn a proifit soon. Dialog still has a strong equity base with a relatively small portion of it actually public. This will squeeze demand and increase prices soon enough if they pick up their ball game. But they are notoriously resistive to internal change and it will remain to be seen of they can actually make a drastic pull-together.

2008 was one of the most volatile years the Telco market in Sri Lanka has ever experienced. Mainly due to the hype generated by Airtel. But as I blogged about it earlier, the panic attack generated by the threat of Airtel's entry is yet to materialize and be justified.

In most stable markets around the world, in any industry, the market leader usually does not possess more than 30% share. Dialog currently possesses closer to 50% of the mobile market if my figures are correct. Any change that happens will be for the overall good of the industry and for Dialog as well, which will have to eventually stabilize with a leaner operation and a more profitable portfolio, in order to remain dominant.


Jack Point said...

Remember the balmy days of Jan 2008 when an SMS was Rs.2 and the D to D call was Rs.5/minute?

I think we have been having an all out price war, of the most destructive kind, in the telco sector since the beginning of 2008. I believe this was started by Dialog.

This is typical behaviour in an oligopolistic market, when the basic price stability is disturbed.

Previous local examples include the cement price war around 1998/9 and the courier price war a little before that. See

Price wars are very good for customers, but very bad for companies involved in them. No sensible company will ever ignite a price war in an oligopolistic market.

My comments were on Dialog's strategy, which I think is absolutely terrible. There is no point hanging on to customers if you don't make any money out of them. Regardless of all the CSR claptrap, the most important purpose, I would say the sole purpose, of being business is profit.

The follies of the last quarter are exposed if one compares the third and the fourth quarter results.

In the nine months to September the Dialog Group (ie including all subsidiaries such as DBN & DTV) had a profit of Rs.1,031m while Dialog Company (ie cellphone operation only) had a profit of Rs.2,532m

By the end of the 4th quarter the Group had a LOSS of Rs.2,879m while the company (cellphone only) had a loss of Rs.387m.

This means they managed to lose Rs.3,910m and Rs.2,920m in three months.

To put that in perspective, compare that with the Rs.8,906m and the Rs.10,126m profits that the Group and the company respectively made in the whole of 2007.

At the current run-rate Dialog looks set to lose anything between Rs.5,000-10,000m in 2009 unless something radical happens.

As you rightly point out, admin expenses have ballooned - by about Rs.4bn between the two years, Rs.600m of that coming in the last quarter but don't forget that there has also been a Rs4bn drop in margins (16bn v 20bn in 2007).

More than half of that margin drop has occurred in the 4th quarter and I would argue that the single most important factor causing the erosion was Blaster.

Naturally, when the operations do not generate cash (the group lost 7.1bn and the company 6.9bn during the year) the losses need to be funded - by the banks.

Bank borrowing have shot up, which in turn has pushed interest cost to the Group from Rs.630m in 2007 to Rs.2,003m in 2008.

Undoubtedly the behavioural factors that you have stated, empire building, departmental walls etc have all contributed but this again is a manifestation of poor leadership.

On the share price, my comments are based on the liquidity. Although the free float is a fairly small %, in numbers it is huge. Locals generally hang on to their shares when they go below cost but foreigners will cut loss and move on. Since foreigners (excluding MTN) hold the bulk of the free float, once they move out the locals will not be able to hold the price.

Given the lousy outlook (shrinking market, rising costs, falling rates) I see no reason why anyone will want to hold onto the stock.

My angst (apart from the fact that I did not buy in the IPO because I though the share was too liquid) is that I work for a competitor and when the market leader plays stupid, everyone suffers.

TheWhacksteR said...

Hmmm quite right.. but then again we have to look at why the blaster package was introduced in the first place.

Indeed i would go as far to point out that this 'detructive price war' was actually triggered by smaller competition trying to undercut Dialog in the frst place. it had long been known that Dialog had the highest or relatively higher rates in the local market. Making up for it with quality and a brand image.

With the introduction of Tigo persecond billing/incoming free and Mobitel with the all encompassing upahara package Dialog foresaw a future threat to its eroding customer base. 'the sole purpose of business is profit' after all.

So pehaps this is a classic case of a market leader taking a temporary financial hit to undercut smaller competition and preserve its base? hoping that such a strategy would yeild future benefits? and hoping that a successful turnaround can be managed to adapt to the changing market in time?

And in such a case it would obviously imply an inability to reduce costs in time to ensure a better looking balance sheet at the end of the year but it also means that the threat to its position as the leader and best service provider in the market has been successfully mitigated.

Dialog has always pursued a frontal attack policy; actioning the market first and bringing their back end to bear later on. The situation their in right now requires a hell of a lot of coordination from the backend to bring around though and you're right, they are too big to try and be so dynamic in the market and expect not to suffer.

if Dialog had not introduced the blaster package the affects would have been equally disastrous; their base would have eroded and its no point coming up with amarginal profit of you lose customers to capitalize on. It costs way more to win back customers than to maintain them.

I do not think there will be a selling scamble in the shares due to the fact that the market has stabilized to a certain extent. and investors will wait and see. The country's outlook looks positive, in a world economy where investment prospects are on the low down anayway, the hope of a temporary boom this year will keep investors interested. Telco stock being some of the more lucrative type of stock to hold on to in good times.

One thing we have to remember as a major contributor to this 'price war' and volatility in the first place is the hype generated by Airtel, which has pretty much flattened off now.

Jack Point said...

If you have any friends in the cement industry ask them what eventually happened. Once prices are cut they are very difficult to move up and that usually by some kind of cartel agreement.

I think Dialog would have been better off losing some of their customers to Uphara and elsewhere than discounting the nearly all customer base, which is what Blaster succeeded in doing.

I agree that it was the Airtel hype that started it all, and I think it was all false rumours that were spread by Airtel - to get back at the other operators who were blocking their entry. Airtel must be laughing their guts out now, the industry has killed itself all Airtel needs to do is wait for the other operators to run out of cash. In the long run only SLT and Airtel will be left standing unless the price war ends.

Jack Point said...

By the way, on the stock price lets wait and see how things turn out.