Can a gatekeeper innovate?

By Dr. Lai Kok Fung

SingTel has just released its financial figures for financial year and quarter ended 31 March 2014. The figures are broken into three segments: consumer, enterprise and digital. Its Digital Life unit focuses on latest Internet technologies to develop new revenue and growth engines. I will focus my discussion on innovation here.

In the quarter, revenue from the digital unit increased 73% with “strong momentum in mobile advertising”. Amobee, SingTel’s mobile advertising arm, grew 170% to S$35 million, “more than double the growth rate of global mobile advertising spend”. A deeper analysis, however, reveals a more troubling picture.

While Amobee’s revenue increased by S$22 million year-over-year for the quarter, cost increased by S$41 million. For every $1 increase in revenue, an additional $2 was spent. Consequently, earnings decreased by S$22 million. The unit lost S$67 million in the quarter, compared to S$45 million a year ago.

In 2013, Amobee’s revenue increased 110%, or S$59 million, to S$113 million. Cost increased by S$110 million to S$336 million. So, it also took $2 in cost increase to generate additional $1 revenue. Its earnings worsen by S$71 million to S$217 million, compared to S$146 million a year ago.

SingTel acquired Amobee in 2012 for US$321 million. At this rate of loss, it will have incurred a whopping S$1 billion by next year.  SingTel’s largest shareholder is Temasek Holdings, Singapore’s sovereign wealth fund. Therefore, the implications extend far beyond its direct shareholders, but to all citizens.

SingTel argued that the negative picture reflected start-up costs. Nevertheless, Amobee’s performance and valuation can be compared with other similar companies such as Millennial Media, Criteo, Rubicon Project and Rocket Fuel. These companies have increased revenues at bigger quantum while demonstrating clear path to profitability. Clearly, Amobee has underperformed.

Prior to the 2012 acquisition, Amobee’s revenue consisted of two main businesses: carrier platform and ad agency. Amobee started as a mobile advertising platform for mobile carriers, focusing on monetizing carriers’ digital assets. In 2010, it acquired RingRing Media, a mobile advertising agency. While the agency business generated bulk of the revenue, it could never justify the huge price tag as it was merely a broker-buyer placing advertising on various media sites on behalf of its clients.

SingTel’s investment thesis was based on combining the agency and platform businesses to increase monetization of SingTel’s digital assets.  It was not clear whether the promise was verified during the investment due diligence process. Two years after the acquisition, the agency business still function rather independently from the platform team.

For a long time, SingTel operated as a gatekeeper in the mobile industry. It controlled access to mobile subscribers and exerted live-or-die influence to many companies wanting to deliver services to these customers. This changes significantly in the last few years. Developers can now amass large user-base through app stores independent of carriers. An example is WhatsApp, a company with 55 staff. Its U$20 billion acquisition valuation was close to half of SingTel’s market value.

While the gatekeeper’s grip has been broken, the mindset dies hard. In the Mobile World Congress in February this year, SingTel CEO Chua Sock Koong called on regulators to give carriers the power to charge WhatsApp and Skype for use of their networks. Amidst the backlash, SingTel clarified that it will not charge consumers separately for using these services.

Ms Chua reportedly said at the Congress: “We have been unable to monetize this increased demand”. Interestingly, Amobee’s investment thesis was exactly to leverage the carrier platform technology to monetize this increased consumer traffic.

The truth is: the gatekeeper has been out-innovated. Besides Amobee, SingTel’s smaller acquisition of HungryGoWhere has also failed to make progress. In the same financial report, quarterly revenue in the unit has stagnated. Anecdotally, the portal now shows many signs of neglect. It is indeed sad that SingTel’s acquisition of local companies simply eliminated competitions rather than fostered innovation.

Can a gatekeeper innovate or survive in a post-gatekeeper world? SingTel stakeholders should look at the implied S$1 billion price tag for Amobee and ask, “what for?”

Note: Amobee, through the original RingRing Media unit, continues to place mobile advertisement on behalf of their clients on BuzzCity, a mobile advertising network company that I co-founded.

Photo credit – ST

About the Author:

Dr. Lai Kok Fung is currently CEO of BuzzCity, a Singapore-based multinational company specialized in mobile advertising. He is also Adjunct Professor in the School of Computer Science, National University of Singapore. He started his career as an applied researcher in Information Technology Institute, a now-defunct applied research institute funded by the government of Singapore.