Monday, May 18, 2009

Any bets on Dialog results?

Would anyone care to make a prediction as to what Dialog's bottom line is likely to be for Q1?

I'm expecting a loss of Rs.4,000-4,500 million. They lost Rs.3,900m in the quarter to December and observing things from a distance no significant changes are apparent in the business, apart from the fairly small VRS which will have an impact from Q2 onwards.

The loss in revenue should be greater in Q1 because they will not have the one-off sign on fee that customers paid to register for the Blaster package. I customers were charged Rs.500 each to sign-on and assuming a million signed up, Dialog could have booked in Rs.500m in revenue, depending on how it was accounted for. I suspect a far higher number signed on and if they accounted all the fees as revenue then this will not appear in Q1.

A company that manages to lose such large sums of money has something fundamentally wrong with it: it needs to re-look at its business model from scratch; incremental changes will not help.

Anyone who is expecting volume growth to compensate for tariff cuts must remember that this tied to the economy: the spending power of retail consumers (which is being eroded by inflation, salary cuts, job losses and the like) as well as the general level of business activity, which is what drives business usage. In any case it is the height of optimism to expect a 60% tariff cut to translate to a 60%+ usage increase (I'm just looking at the Dialog to Dialog charge which was Rs.5 in Jan 2008 and is now Rs.2). Nor are tariff cuts likely to increase penetration significantly given that it is already at a fairly high level.

Update: Dialog announces a first quarter loss of Rs.1,800m today.

The results are far better than I expected. Am trying to get my hands on the numbers analyse them further to see where the improvement came from.

Update 2:

Had a quick look at the accounts and I'm baffled. Gross margins are down by around half, operating profits are down by a similar amount but cash generated is up significantly, from 893m in 2008 to 3,617m in 2009. Even odder, cash generated from operations exceeds gross margins (in comparison, last years cash generated was around 18.7% of gross margin). EBITDA, which should be pretty close to the cash generated figure is only 1.33bn so how cash generation was double that is a mystery.

The company succeeded in raising 16bn of debt in the quarter which should keep them going for a while, although it is not known on what terms the debt was raised.


Bell said...

Dialog will recover man.

Anonymous said...

That's not very fair, JP.

It is perfectly legitimate to lose some money to establish (or re-establish, as in this case) market share. Seen in this light, cutting D2D tariffs makes perfect sense because you are rewarding network effects - the more people stay on your network, the higher the value proposition for those who might have otherwise contemplated switching.

My take on the problems for Dialog: overstaffing and inefficiency. At every level. They hired too many expecting the boom to continue indefinitely. What cash reserves might have otherwise gone into helping them wait it out (that's how they killed Celltel after all, along with a barrage of marketing) has been poured into those twin money pits called Dialog Broadband and Dialog TV.

Another part of it is IMHO that the revenue models for most of the mobile telco operators was/is unsustainable - but that's a whole 'nother story and I'm tired of pontificating :)

indi said...

I'm pretty sure there wasn't a Rs. 500 connection fee for the Blaster Package. There was for the Lifetime Discount, but switching to Blaster was and is free. They didn't book any revenue there.

Jack Point said...

Indi - I remember paying a fee of some 470 or 500 when I signed up in Aug or Sept last year, that was the life time discount, I think I've mixed it up with blaster.


losing money to establish market share: on the surface this argument sounds reasonable but there are a number of flaws in this argument.

First, you must remember the nature of the market itself as well as the state of the economy.

In an oligoplistic market it is an extremely bad idea to start a price war, what is happening in the telco market is a textbook case of this. There is plenty of literature on the subject plus the past experience in Sri Lanka. The local examples are: the cement price war roughly around 97/98, the courier price war around the same time or just before, the city hotels in Colombo following the launch of the Hilton in 1987 (room rates were down to US$10 a night and there were rumoured to be deals even below that). There is another price war that seems to have broken out amongst the insurance companies now.

Secondly, while it is a bad idea to get into a price war at any time in an oligopolistic market, it is doubly so during times of high inflation and ever increasing taxes.

When facing 20%+ inflation plus a state hungry for tax, both factors being obvious by the start of 2008, reducing prices is suicidal.

If one is trying to apply the Porter model, if one it to practice price leadership, the cost leadership is a prerequisite and in anycase it should not have been attempted in an oligopolistic market.

The best approach to dealing with competition in oligopolistic markets is to be found within the realms of game theory.

Anonymous said...


out of the possibilities - price leadership is, I would argue, the most familiar option available to Dialog. This is also due to the market conditions - free minutes didn't mean much until recently, everyone was looking at price.

Besides, what else can Dialog do? they already do segmentation to an alarming (I would say almost unmanageable) degree.

Game theory is all well and good, but for Dialog especially - this isn't a zero sum game.

Jack Point said...


“The power to constrain an adversary depends upon the power to bind oneself.”

-Thomas Schelling

This is what Game Theory is about: don't fall for the temptation to cut price.

The Game that needs to be played is the Game of Collusion, in my opinion.

Anonymous said...

prisoner's dilemma.

What incentive does Dialog have for negotiating away a slice of its market? The market isn't large enough. Besides, there are a few too many players yet to collude successfully.

Out of curiosity (since I don't know), isn't collusion illegal in SL too?

Jack Point said...


Value and volume need to be looked at.

If you look at what has happened, the market, in value terms has shrunk a great deal.

Dialog may be hanging on to its market share but it is worth a great deal less.

Dialog has lost far more, in value terms, than if they gave up a slice of the original market.

What is worse is that customers have now been taught the bad habit of shopping for price. Previously they just accepted the tariffs, so raising them will be tricky but in this environment, necessary and that is where the real skill will come in to play-persuading them to pay more.

In anycase it is impossible for any incumbent operator to hope to retain all their market. Some loss is inevitiable.

Had Dialog been smart, they could have lead the way to grow the market, in value terms. Once that happens, giving up a slice will matter less, overall value will be preserved, but that should have been done before Airtel's entry, then price leadership and price followership, could have been practised. Dialog pushes prices up, others follow, slightly below. Dialog loses s bit of market share but overall value is preserved.

Collusion is what sorted out the problems in all the examples I listed previously, except cement, where all the small players went bankrupt and the construction boom of 2003-6 restored the industry to some health.

Consolidation of the telco industry may help restore value to the market (fewer players, easier to raise prices) but the ownership structures makes it very difficult. A couple of players maybe up for sale but who has the cash to buy?

Post war, growth prospects for the local economy are mostly dependent on how much foreign aid the government can rustle up, so there is little by way of silver lining in the cloud.

Govt has no money. Exporters are hit by the global slowdown and consumer purchasing power keeps dwindling (prices are still high and taxes have just gone up, factor in the job losses, reduced bonus and increments and we have overall consumer demand slowing quite sharply).

Unless the fundamental issues are addressed, it becomes a case of who can stretch their cash out the farthest.