TPG and Telstra Go Into Battle Over Market Share

Telstra user

TPG has decided that its presence in Australia isn’t going to stay on the fringes. It has set itself up to be a viable 4th mobile network, joining Telstra, Vodafone and Optus in an already crowded mobile market place. This intention was marked by its acquisition recently of further spectrum licenses auctioned by the Government through the tendering process.

Share drop for Telstra

As with any competitive move which threatens rivals, Telstra’s shares dropped in value by a massive 10%. This basically wiped off almost A$5 billion of the market value of the company. Before this TPG announcement Telstra’s mobile interests were estimated to be from A$28 billion to A$33 billion. The expected drop in value in percentage terms is somewhere between 15 and 18%.

This fall in value may appear as a bit of a surprise, as TPG has stated that it would be able to break even at the earnings before interest, tax, depreciation and amortization (EBITDA) line if it gained a 2% market share. The EBITDA is used to calculate a how well a company is performing. It would have to take a 6% share of the market to be able to break even at the EBIT line. It’s most likely to set a target which is far better than just simply breaking even in the long term as it will have to be able to justify spending out on capital worth A$1.9bn on spectrum and the start of the rolling out of its network. If TPG was successful at achieving a 10% market share, how does Telstra’s mobile portion experience a 15-18% fall in value?

Assessing the value of Telstra’s mobile operations

Telstra should generate an EBITDA margin of about 40% in mobile revenue this year. When an estimation of the ongoing 0 earnings growth capital expenditure (capex) requirement is allowed for, the margin drops to a little more than 30%. At a guesstimate, about 50% of the cost base is fixed and 50% is variable. This means that for every single dollar of revenue lost or gained from a fluctuation in numbers of subscribers, free cash flow will increase or decrease by around A$0.65. So a 5% lowering in revenues due to a change in the number of subscribers, there would be a 10% reduction in cash flow.

Lower prices to the consumer could happen

TPG, with its current operations, has been attracting those with lower budgets, so with its expansion pricing will become an important factor. Telstra has held the key position as the most dominant network provider. Its widespread coverage has long been attractive to subscribers, but at a price of course. This widespread coverage is for the time being putting itself ahead of competitors, especially in relation to its business and premium customers who put coverage across the country as their priority over other considerations like price. Because of this, the threat from TPG may not be that great but Vodafone and Optus may have more to worry about as TPG puts its tentacles out into the market.

Mobile networks aren’t just about the big 3

At the moment the majority of the infrastructure across the country is owned by the three biggest telcos. Secondary to their services is the market that dabbles in reselling. Some of the main players in this area include Amaysim, TPG, iPrimus and Vocus’s Dodo, just to name a few. They are charged by one of the big 3 for the use of infrastructure.

Once TPG adds its own infrastructure it will be adding a more competitive element to the market. Currently it’s using Vodafone’s infrastructure and it will no doubt be offering deals to keep this customer base, while Vodafone will have to undertake some aggressive marketing to keep up. When a new competitor joins a market, particularly in the mobile network field, customer numbers don’t increase – they just have more options to choose from. The resellers have more choice too, opening up the potential to getting better value for money for their purchases. This may, in turn, lead to better pricing for their current customer base.

Summary

TPG is set to become Australia’s next big telco with its successful bid for a share of newly auctioned spectrum. The development has upset Telstra’s share value, but the long term impact may not affect the biggest of Australia’s telcos that much as TPG has been aiming its pricing at the lower end of the market. The effect on Vodafone and Optus may be more obvious as TPG develops its own infrastructure.

 

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.