Impact of SIM-Only Plans on Telcos
Regular Plans | ||||||
Plan | Lite | Lite+ | Reg | Reg+ | Max | Max+ |
Monthly Cost | 28 | 42 | 62 | 82 | 102 | 228 |
Voice (mins) | 100 | 200 | 300 | 400 | 800 | Unlimited |
SMS/MMS | 500 | 1000 | 1200 | 1500 | 2000 | 5000 |
Data (GB) | 0.3 | 3 | 4 | 5 | 7 | 13 |
SIM-Only Plans | ||||||
Plan | MS+ 15 | MS+ 20 | MS+ 30 | MS+ 45 | MS+ 75 | MS+ 125 |
Monthly Cost | 15 | 20 | 30 | 45 | 75 | 125 |
Voice (mins) | 100 | 150 | 300 | 400 | 800 | Unlimited |
SMS/MMS | 600 | 800 | 1000 | 1200 | 2000 | Unlimited |
Data (GB) | 1 | 4 | 6 | 8 | 13 | 20 |
Differences | ||||||
Monthly Cost | -13 | -22 | -32 | -37 | -27 | -103 |
Voice (mins) | 0 | -50 | 0 | 0 | 0 | 0 |
SMS/MMS | 100 | -200 | -200 | -300 | 0 | Unlimited |
Data (GB) | 0.7 | 1 | 2 | 3 | 6 | 7 |
What is the impact of SIM-only plans on telco's revenues? We have to assume a particular handset to illustrate the impact. Let us use Samsung S7 as the handset. If you purchase it under the regular plans, the price you pay ranges from $608 to $0, depending on which plan you choose. This sale of handset contributes to the overall revenue of the telco. However, for SIM-only plans, there is no sale of handset, so handset sale no longer contributes to the overall revenue. Not only that, the service revenue is also lower. The table below shows the revenue impact of SIM-only plans. Using Lite/ mySIM+ (MS+) 15 plans as an example, the total revenue over a 24-month period is $1280 under the regular plan, but only $360 under the SIM-only plan. The decline in revenue is $920, or 72% of the revenue under the regular plan! As we move towards the more expensive plans, the percentage decline becomes lower. Thus, we can expect telco revenue to drop, depending on how many people switch to SIM-only plans.
Lite | Lite+ | Reg | Reg+ | Max | Max+ | |
MS+ 15 | MS+ 20 | MS+ 30 | MS+ 45 | MS+ 75 | MS+ 125 | |
Handset Price | ||||||
Regular | 608 | 458 | 128 | 58 | 0 | 0 |
SIM-Only | 898 | 898 | 898 | 898 | 898 | 898 |
Total Revenue | ||||||
Regular | 1280 | 1466 | 1616 | 2026 | 2448 | 5472 |
SIM-Only | 360 | 480 | 720 | 1080 | 1800 | 3000 |
Difference | -920 | -986 | -896 | -946 | -648 | -2472 |
% Difference | -72% | -67% | -55% | -47% | -26% | -45% |
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Fig. 1: M1's Revenue |
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Fig. 2: M1's ARPU |
In FY2016, M1 reported gross profit of $180.0M on total revenue of $1,060.9M, giving it a profit margin of 17.0% (Based on FY2014 financial results, which is before M1's launch of SIM-only plans in Jul 2015, the gross profit margin was 20.4%. We will use the more conservative and latest figure of 17.0% in this analysis). Since this profit margin includes both the sale of handsets and mobile telco services, it is assumed to be the profit margin for the regular plans.
Overall | Handset | Service | |
Revenue | 1060.9 | 255.4 | 805.5 |
Expenses | 880.9 | 343.9 | 537.0 |
Gross Profit | 180.0 | -88.5 | 268.5 |
% Profit | 17.0% | -34.7% | 33.3% |
Finally, I will further assume that the profit margins of 17.0% and 33.3% apply for all regular and SIM-only plans respectively, which is likely to be incorrect. I understand that a lot of assumptions have been made here, but these assumptions provide at least a starting point for analysing the impact of SIM-only plans on telco profitability. If you have better figures, please let me know.
Applying these profit margins to the revenue discussed above, the gross profit for the various plans are shown in the table below.
Lite | Lite+ | Reg | Reg+ | Max | Max+ | |
MS+ 15 | MS+ 20 | MS+ 30 | MS+ 45 | MS+ 75 | MS+ 125 | |
Gross Profit | ||||||
Regular | 217 | 249 | 274 | 344 | 415 | 928 |
SIM-Only | 120 | 160 | 240 | 360 | 600 | 1000 |
Difference | -97 | -89 | -34 | 16 | 185 | 72 |
% Difference | -45% | -36% | -12% | 5% | 44% | 8% |
Using the Lite/ MS+ 15 plans as an example, the gross profit for the regular plan is $217 (17.0% x $1280) but only $120 (33.3% x $360) for the SIM-only plan. The difference is $97 or 45% of the gross profit of the regular plan. However, as we move towards the more expensive plans, this difference turns from a loss into a profit! The reason is pure mobile telco services has a higher profit margin. Thus, the more expensive the plan is, the more profit the telco makes!
The same analysis repeated for iPhone 7 (128GB) is shown below. Likewise, it shows that there is a significant drop in revenue but the impact to profit depends on which plan the subscriber chooses.
Lite | Lite+ | Reg | Reg+ | Max | Max+ | |
MS+ 15 | MS+ 20 | MS+ 30 | MS+ 45 | MS+ 75 | MS+ 125 | |
Handset Price | ||||||
Regular | 880 | 745 | 560 | 380 | 190 | 0 |
SIM-Only | 1218 | 1218 | 1218 | 1218 | 1218 | 1218 |
Total Revenue | ||||||
Regular | 1552 | 1753 | 2048 | 2348 | 2638 | 5472 |
SIM-Only | 360 | 480 | 720 | 1080 | 1800 | 3000 |
Difference | -1192 | -1273 | -1328 | -1268 | -838 | -2472 |
% Difference | -77% | -73% | -65% | -54% | -32% | -45% |
Gross Profit | ||||||
Regular | 263 | 297 | 347 | 398 | 448 | 928 |
SIM-Only | 120 | 160 | 240 | 360 | 600 | 1000 |
Difference | -143 | -137 | -107 | -38 | 152 | 72 |
% Difference | -54% | -46% | -31% | -10% | 34% | 8% |
So, the next 2 big questions are: (1) how many people will choose to switch from regular plans to SIM-only plans, and (2) which plans are they on currently?
I do not have much insights on these 2 questions. On the first question, my opinion is that people who choose to switch include those who are cost-conscious, do not need an expensive phone and/or tired of upgrading phones every 2 years. The possible profiles of these groups of people would be the elderly and young children (if they are not already on the pre-paid plans). To cut a long story short, I do not think a lot of people will switch.
Another point to note is that M1 launched the SIM-only plans in Jul 2015. Since the typical contract period is 2 years, we are approximately 75% into the first renewal cycle. Nevertheless, it is also possible that some subscribers could have missed the SIM-only plans when they previously renewed and choose to make the switch in the next cycle.
On the second question, based on Fig. 2 above, the ARPU is $58, which is closest to the Reg plan that costs $62 per month. For this plan, the SIM-only equivalent will result in lower profit based on the analysis for Samsung S7 and iPhone 7 (128GB) above.
Hence, in conclusion, for each subscriber who chooses to switch, SIM-only plans will result in a significant drop in revenue. The impact to profit is also negative but smaller than the decline in revenue. However, the no. of subscribers who choose to switch to SIM-only plans is likely to be small.
P.S. I am vested in M1.
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