Threat From TPG Is Modest

Threat from TPG is Modest

The Australian telecommunication landscape is set for a likely shake-up after TPG announced its intention to build its own mobile network. The company already paid the government $1.26 billion for a share of the 4G mobile spectrum and plans to spend another $600 million for the next 3 years to build its network. Despite its ultra-cheap offer to the market, analysts at UBS opine that TPG’s move is unlikely to affect Telstra’s customer base.

Pricing Not the Only Determinant

According to UBS, the low pricing strategy may not necessarily be a sure-fire winner for TPG because other factors come into play when consumers decide to switch network from one telco to the other. Two of these factors are network coverage and quality.

In a survey done by UBS Evidence Lab, the 1,800 consumers who participated expressed their willingness to spend over $25 a month paying for a similar type of plan TPG may offer at a lower price. It is therefore clear that it will take more than a low-priced plan to entice people to switch networks in favour of TPG. Network quality is a fundamental swing factor TPG should consider.

Massive Investment to Hurt Share Price

To build a mobile network covering 80% of the market, TPG has planned to spend $600 million within a period of 3 years. Because of this massive capital expenditure and the fact that it has already paid the government $1.26 billion, the future for the telco doesn’t look as promising. In response, UBS has downgraded its share from buy to neutral. This simply means that the company is expected to perform at the same pace as other companies in the market.

The analysts position is that the telco needs to spend much more than the earmarked budget to become a serious player in the industry. While acknowledging that the initial $600 million network rollout cost is reasonable, UBS cites uncertainty around future capital expenditure requirements.

TPG’s plan to rollout a much smaller network coupled with the fact that it does not have the 2G and 3G legacy technology, plays to its advantage. That said, chances are high it will have to spend more in future to buy the 900MHz/5G spectrum.

2018 Financial Prospects

In April 2017, TPG won 2x 5 MHz in the 2.5 GHz band during an auction of mobile band spectrum in Singapore at a cost of 23.8 million Singapore dollars (S$). According to the telco, this allocation is important because it will enhance the value of services it plans to deliver to its customers.

At the end of 2016, TPG acquired 2x 5MHz in the 900MHz band during the new entrant auction plus another 8x 5MHz in the 2.3 GHz spectrum which cost a total of S$105 million. This was far above the S$35 million reserve price.

UBS analysts see the impact of this mobile play in Singapore filtering through TPG’s financials and more so its 2018 EBITDA. In their projection, the 2018 numbers will be flat or even lower compared to those of 2017.

TPG’s Impact on the Overall Telecommunication Sector

Telstra’s core business is likely to be squeezed not by TPG’s mobile assault, but by Vodafone and Optus. In its analysis, UBS points out that Telstra’s metro subscribers may show reluctance in switching to TPG, but the latter’s entry may trigger deflationary pressure on the overall pricing of mobile plans in the telecommunication sector.

Just like Telstra, Optus is looking at differentiating itself through network quality instead of pricing. On the other hand, Vodafone has shown a considerable improvement in consumer metrics within the last 3 years. The telco realized most of its gains from the metro market when it rolled out its value for money proposition. Based on TPG’s entry strategy, Vodafone will likely be affected the most because the segments they are targeting are similar.

Vodafone may respond to TPG’s entry into its market segment by lowering its pricing further. This will have a cascading effect on Optus and Telstra. UBS expects Telstra to combat the pricing pressure by giving free offers instead of lowering the cost of its plans.

It will be interesting to see the interplay between price-driven and network-driven strategies as every player rises to the occasion to aggressively bid for a slice of the Australian telco market.  Competition is also likely to spill over to the bidding for 900MHz, 3.6 GHz, and the low 800MHz bands.

Neil Aitken

Having worked in 3 countries for 4 telcos on both voice and data products, Neil is in a position to give you the inside track. Get beyond the marketing messages to the best plan for you.