The idea in 60 seconds
- The TPG / Vodafone merger will almost certainly go ahead in our view.
- One interesting question presents itself – did TPG ever really intend to launch the $10 / unlimited data plan they presented to the press earlier in 2018?
- My view is – no, they didn’t.
- Which makes it one of the cleverest strategic moves I’ve ever seen.
The pros and cons of TPG merging with Vodafone in Australia
The net worth of David Teoh, CEO of TPG rise by around 40% last week from only $2bn to around $3bn, on news of the proposed merger between his company, TPG, and Vodafone Australia. The deal is currently being reviewed and evaluated by the ACCC (Australian Competition and Consumer Commission.)
If and when they are joined, the new entity, TPG Telecom Limited will consist of what the companies are calling a ‘merger of equals’ and will result in a $15 billion corporation, roughly the size of Optus.
There are 2 sides to the argument the ACCC is considering, on your behalf, in their review of whether the merger should be allowed.
- The bigger the phone company, potentially, the cheaper the plan:
Australia is a big country which means providing coverage which reaches as many inhabitants as possible, can be expensive. Telstra, for example, have spent approximately $10 billion on building their network. Those costs have to be recovered from their customer base. The more customers they have, the lower the average price Telstra has to pass along, as part of their phone plans. - The more companies in market, the more competition there is, and the lower the prices they will charge:
Phone companies are subject to the same economic forces that other companies are. The more competition there is, the more they have to compete on lower prices and better service levels to win your business. This ‘race to the bottom’ is what the ACCC wants to encourage.
In our view, the merger will probably go ahead
Our own research on WhatPhone, shows that Australia has one of the most competitive markets for telecommunications services, of any country in the world. There are around 50 phone companies in Australia (although not everyone knows that.) Australia is, in reality, one of the most competitive markets in the world for telecommunications services, as the precipitous fall in cost per GB for data, the main feature of phone plans, shows. Again, our own research shows that the price of data has fallen 75% per year, for the last several years. We now enjoy better prices per GB of data than any other country in the world.
The ACCC themselves conducted a review of the Australian market in April 2018 and concluded (in part) that ‘There is evidence of strong price competition for broadband, voice and messaging services with prices of all services on fixed line and mobile networks declining in 2016–17.’ ( Source : ACCC April 2018 Report.. page 24. )
Merging TPG and Vodafone in Australia would remove only one of fifty telcos from our market. That’s an extremely small reduction in competitive pressure and it would create an entity which would find it easier to compete with Testra and Optus on the $30+ monthly spend segment of the market.
But will the cultures merge effectively ?
Less interestingly, for customers, anyway, on the outside of the deal, the corporate cultures of the two companies involved in the merger are very, very different. The cultural mash may present the biggest obstacle to the merger’s success.
TPG is cost conscious in a way which will seem very alien to Vodafone staff. CEO, Thodey famously walked around the office when people left, turning the lights out, to keep costs low.
I’ve worked for Vodafone in the UK and Australia, and was sent to a Vodafone event on Hamilton Island many years ago, where the company established a party for around 250 sales staff. The most memorable element of the trip was seeing the CEO, Russell Hewitt leave the sales presentations, in a helicopter.
The merger between ‘3’ and Vodafone was brutal in 2009. Those cultures clashed and the office was a stressful place to be for several years, as the two entities came together. It seems likely that TPG / Vodafone merging will be an even more turbulent affair.
Did TPG ever want to launch a $10 Unlimited Plan?
TPG’s strategy in the run up to the announcement of the merger has been nothing less than stunning.
One view of what’s happened is that they have drawn Telstra, Optus and Vodafone in to launching plans with ‘unlimited’ data, something they may never have intended to launch without the threat of TPG’s ‘proposed’ $10 for unlimited data plan.
Interestingly, hilariously, TPG may have fooled first Optus and then Vodafone & Telstra in releasing plans which offer unlimited data – when TPG themselves, may never have intended to release their $10 plan with unlimited data.
If that’s true, it’s the best strategic move I’ve ever seen.
If the merger goes ahead, what are the likely impacts to you?
If, as seems likely, the ACCC sign off the merger, here are the most probably impacts of the merged company.
- We are unlikely to get the $10 unlimited offer:
The most pertinent question to ask is – was there ever going to be a $10 unlimited plan ? David Teoh might have just been fooling the indsutry. Which brings me to the next point. - The merger could mark an end to unlimited data plans:
Get in quickly if you want an unlimited plan because, based on what we’ve seen, there may be no need for Optus, Telstra and Vodafone to keep them around. - More similar pricing :
You won’t find a phone plan valid for around 30 days on the Vodafone, Optus or Telstra websites, starting at less than $30. Our own analysis shows that 70% of people on what phone choose plans which are cheaper than that. - Real completion from smaller phone companies:
In our view, the merger between TPG and Vodafone is very little different, in substance to the merger in 2009 between the ‘3’ network and Vodafone. The ACCC signed that deal off, without concern that it would reduce levels of competition in the Australian market, and that was before many of the currently 50 telcos in Oz, existed. The reason they chose as they did at the time was the plethora of smaller phone companies, so called ‘MVNOs’ (Mobile Virtual Network Operators) who piggy back the main networks and offer cut price deals on them. Kogan, for example, resell the Vodafone network. Amaysim and Vaya resell the Optus network. Belong Mobile and Boost both resell parts of the Telstra network (Boost actually resell the entire Telstra network.) - Potentially video content for the Vodafone / TPG brand:
With more customers to split the cost, TPG / Vodafone could address their biggest competitive shortfall against Telstra and Optus, and offer their customers.
Summing up the next steps in the TPG / Vodafone Merger
The ACCC is right to consider the interests of Australian consumers before signing the deal off. Rod Sims, the head of the ACCC has also, rightly, pointed out that TPG’s stated goals of mixing the market up, were in the interests of consumers (if they ever existed – see above) should be considered.
Many questions remain. Will the merged company keep both the TPG and Vodafone brands? Each stands for different things. The ‘3’ brand was subsumed in to Vodafone. Will TPG be treated the same?
The danger for Vodafone and TPG is that while the review takes place and the cultural collision occupies the mind of staff at both companies, the real competition in the market, the smaller phone companies servicing the 70% of customers who want cheaper plans will simply leak away.