Telstra's fight to keep mobile network to itself

Australia's telecos finally got back to what they do best this week - publicly sledging each other over competition issues.

No wonder the gloves are off. The competition watchdog sent shockwaves through the sector last month when it launched an inquiry into domestic mobile roaming services - including the crucial question of whether Telstra should be forced to share its prized regional network with its competitors at commercial rates.

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Should Telstra share its regional mobile network?

The ACCC has launched an inquiry into domestic roaming services which has Telstra shareholders up in arms.

For Telstra's rivals, Vodafone and TPG, the action by the Australian Competition and Consumer Commission represents a prime opportunity to prise open Telstra's lock on mobile signals around Australia and its unrivalled status as the offerer of Australia's biggest network. For Telstra, it represents a threat so stark that it is mobilising its army of 1.4 million retail shareholders and laying out battle plans.

It is a fight that is pitting a big one-time monopoly against smaller upstarts, and retail shareholders against regional customers. And it is now threatening to spill over into the political realm.

'It's a free ride,' one Telstra shareholder has said of moves to force the Telco giant to open up its regional network.
'It's a free ride,' one Telstra shareholder has said of moves to force the Telco giant to open up its regional network. Photo: Peter Braig

Telstra's strategy was clear at its annual meeting this week.

"For those of you not aware, the declaration of domestic mobile roaming would allow our competitors to utilise the Telstra network in areas where we have invested and provide coverage and they have not," Telstra chairman John Mullen told the company's assembled throngs of shareholders.

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"If the ACCC decides to declare mobile roaming, it would absolutely be at the expense of you, the Telstra shareholders." Later, in his own speech, Telstra chief executive Andy Penn mentioned four times that Vodafone is a "foreign company".

Telstra's shareholders heard the call loud and clear.

"Their shares are worth one cent! Ours are $5! They want to coat-tail with us and you people will all pay the price. Write to the ACCC! Write to your representatives. It's really really serious," one shareholder urged his fellow investors at the meeting in Sydney. 

Sharing value 

Illustration: Simon Bosch

Illustration: Simon Bosch

'They' is Vodafone Hutchison Australia, which is part-owned by Hutchison Telecommunications and Vodafone Australia. Hutchison's share price currently sits below 1 cent, at 0.8 cent.

"It is a free ride," another shareholder told the meeting. "If they get that, all of us will pay the price and it's wrong. Absolutely wrong. I would like to go even further than that and say that it's criminal."

One man suggested any move by the ACCC to force rival access to Telstra's network could be stopped if shareholders put enough pressure on MPs.

"That will be the best thing we can do to protect our share value and dividends from this overseas hijacking," he said.

The ACCC is thinking of "declaring" wholesale domestic mobile roaming services. 

Declaration is a regulatory tool that forces a network owner to provide access upon request. If commercial agreements are not working, the ACCC can set price and terms.

There are 13 declared services already, including wholesale ADSL and superfast broadband access.  

The ACCC plans to release an issues paper in coming weeks and open it for public submissions. And a preliminary decision is expected in early 2017, according to  ACCC chairman Rod Sims.  

Shareholders may also be wasting their stamps by lobbying politicians, he adds.  

"We are an independent regulator. [Writing to politicians] may not be the best use of their time," Sims told BusinessDay this week.

Sims knows exactly why Telstra is so protective of its mobile network. "Telstra is arguing that the only reason they invest is to have the best network and keep that advantage over their competitors," Sims says.

If roaming is allowed, Telstra will get a reasonable return on their assets, Sims promises.

But, given how fiercely Telstra is fighting, it could be argued it doesn't want a reasonable rate of return. It wants to keep charging its 17 million mobile customers a premium for being on the largest network in the country. 

The ACCC's inquiry threatens that premium.

Superior service 

Man on mobile phone silhouetted on a Telstra screen. generic, telephone, broadband, shadow. Monday 15th December 2008 AFR photo Louie Douvis AFR USE ONLY SPECIAL 97924 clouds

Those companies embroiled in the dispute have fallen into two camps - infrastructure owners Telstra and Optus versus Vodafone, TPG, smaller telcos and consumer groups.

Telstra and Optus don't make a profit from the network traffic that passes through their regional towers. They make a profit from charging consumers more for their superior networks. 

Telstra has invested "huge amounts" to be the leader in coverage across Australia, according to its group executive of corporate affairs, Tony Warren.  

"At the moment if I am a customer who doesn't value coverage, but values price, I go with Vodafone. Australians value coverage and that's why they come to us." 

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And Telstra admits that its decision to build towers in regional areas has more to do with maintaining its premium pricing than a community-minded commitment to ensuring regional Australians have decent coverage.

"We have invested in a whole lot of towers in the bush that are not economic in their own right. But because they have extended our coverage claim it has made sense for us to upgrade and extend [the network]," Warren tells BusinessDay.

"We made a choice to be the premium supplier with the best coverage and the best network. What Vodafone is trying to do is have that removed by regulation."

Warren is one of the key players in the public battle, recently telling an industry conference that declaring the mobile network will "kneecap" Telstra's investment plans.

But competitors argue Telstra has only has the biggest network because of billions of dollars of government subsidies.  

Public funding 

"Without government handouts they would only have an incentive to build one base station further out from where Optus is," Macquarie Telecom's national executive for industry and policy, Matt Healy says.

"And each round of new government funding is passing taxpayers' money into the pockets of Telstra shareholders."

In 2012 the West Australian government awarded $40 million to Telstra for 113 new towers along regional highways. Telstra added $100 million of its own capital, but only Telstra customers can use those towers.  The same with the $95 million Telstra received for building 430 new towers under the federal government's Mobile Black Spot Program.  This added 68,600 square kilometres to the size of Telstra's network. 

At the moment Telstra charges customers about 15 per cent more than its competitors, leading to healthy revenues. Last financial year 40 per cent of all of Telstra's revenues, about $10.4 billion, came from mobile products. Pre-tax earnings from mobiles are just over $4 billion annually.

Telstra does heavily invest its own funds into its mobile network, including $1.3 billion last year.  It says only 1 per cent of funding for mobile towers came from public money. 

Now it it has threatened to stop building towers in regional areas if it has to let other telcos use the network. And Optus is threatening the same.

"Declaring domestic roaming would remove all the incentives for current record levels of investment in mobile infrastructure in regional areas," Optus' vice president of corporate and regulatory affairs, David Epstein, says.

Last year Optus, which is wholly owned by SingTel, spent $1.7 billion on mobile infrastructure. It reported revenues of $6 billion from 9.4 million mobile customers.  

Epstein says Optus will only keep building more towers if it can make a profit.

"We would not have ever contributed that investment if it was going to be subjected to domestic roaming declaration," Epstein says.

​At the recent CommsDay conference he gave a speech arguing regional areas are a "growing and very significant competition" among telcos. But he suggested that smaller telcos are not really prepared for the high cost of servicing regional customers.

"Surely, protagonists are not suggesting that infrastructure operators should offer mandated roaming to competitors below cost or with significant subsidies?"

Declaring war 

CIE director Phil Manners (left )and Chief Strategy Officer and Corporate Affairs Director Dan Lloyd.

Leading the push in favour of declaration is Vodafone's chief strategy officer Dan Lloyd.

He disagrees domestic roaming would reduce investment and argues that Vodafone and other mobile operators will invest more in regional areas if they only have to expand around the edges of Telstra or Optus' networks.

And then everyone can use those expanded areas.

He says Australians are paying exorbitant prices because of entrenched monopoly.

"Overall, Telstra is undeniably one of the most profitable communications companies on the planet," he says. "At the moment they are earning an unreasonably high rate of return".

Globally, mobile operators earn margins between 20 per cent and 30 per cent. Telstra's pre-tax earnings margin for mobile products is about 42 per cent.

The foreign Vodafone Group that Telstra warned its shareholders about has 500 million customers worldwide and earns free cash flow of about $4 per customer per year. Telstra is currently earning free cash flow of $234 per customer per year, Lloyd says.

Essentially, he is arguing Telstra earns too much money.

Macquarie's Healy agrees, saying Telstra's dominant position in the mobile market is another example of failed deregulation.

In the UK, British Telecom was banned from building a mobile network for several years to give new entrants a chance to build networks and gather customer share.

But Telstra was allowed to build mobile straight away using the profits from its fixed monopoly. It has never fallen behind and successive rounds of government funding to improve regional mobile reception have mostly gone to Telstra.

Barriers to entry 

Analysts and investors were hoping to see more ambitious guidance.

TPG's chief operating officer, Craig Levy,  says the barriers for new mobile entrants are "extremely high", including millions of dollars of investment to buy spectrum and build a network large enough to start selling mobile plans.

TPG has plans to become a mobile operator in Singapore and has bought spectrum in Australia. But it is still hamstrung.

"TPG does not believe that it is likely that it will be able to successfully secure a commercially negotiated roaming arrangement with the current incumbent mobile carriers.  For that reason, it should be declared," Levy says.   

Optus and Vodafone have commercial agreements in place today that allow Vodafone customers access to the Optus network in regional areas. And Vodafone lets TPG buy access to its network.

Telstra undoubtedly has the largest mobile network, covering about 2.4 million square kilometres, or just under a third of Australia's land mass. Optus' covers about one million square kilometres and Vodafone's a bit less than that.

About 95 per cent of the population is covered by all three networks, while more than half a million people have no choice but to use Telstra or Optus. A further 230,000 have no mobile coverage at all.

Most mobile networks in regional areas cover the highways, then rapidly fade away.

"The argument that 95 per cent of the population has access to three networks, while those of us in the country have not even one provider in some cases - is the precise reason national roaming needs to be looked at again," the LNP member for Maranoa, David Littleproud, says.

"In terms of investment, let's not forget that Australian taxpayers have made a significant contribution to building communications infrastructure in rural Australia."

Given these geographic challenges it is not surprising the ACCC has investigated domestic roaming before, in 1998 and 2005.

Crucial difference 

PHONE;AFR;980804;;SAVED IN NEWS;GENERIC MOBILE PHONE TOWER, RURAL, COMMUNICATION, DIGITAL PHONE SATELLITE AND SILHOUETTE ***afrphotos.com*** PIC BY LOUISE KENNERLEY

But the crucial difference today is the lack of network sharing.

Levy points out that In 1998, the ACCC concluded regulation was not necessary because "roaming arrangements are likely to be commercially negotiated with the three incumbent mobile carriers".

And during the 2005 review, Telstra had an agreement called 3GIS with 3 Mobile, which is owned by Hutchison Telecommunications. (These days, 3 is known as Vodafone, after Hutchison merged with Vodafone Australia in 2009.)

While Telstra currently re-sells mobile access network to re-sellers like Aldi and Woolworths, they are only allowed to access 1.6 million and 1.3 million square kilometres respectively.

The full 2.4 million sq km is only available to Telstra customers.  

"[Back] then the market had sorted it out through voluntary roaming agreements. Whereas now, clearly, the market is not sorting it out," Sims says.

Healy adds that when Macquarie Telecom buys access from Telstra it comes at slower speeds and with less functions than Telstra sells its own customers.

Lloyd says this kind of situation is why the ACCC exists.

"The whole point of the Consumer and Competition Act is that monopolies and excess profit are not in the interest of consumers," Lloyd says.

Roaming raid 

Telstra chairman John Mullen and chief executive Andy Penn at the company's annual meeting.

Back at the Telstra annual general meeting, shareholders asked the board for help expressing their anger at a foreign company's raid on their assets.

Warren says the telco is not orchestrating a shareholder campaign, but will provide shareholders with information, such as sharing links to the ACCC's inquiry.

And despite the anger in the room the Australian Shareholder Association's Rod McKenzie, says there are no plans for protests or campaigns.

"It doesn't seem fair to Telstra or to Telstra shareholders that others can come along and just piggyback," McKenzie says.

"Telstra's Australia-wide coverage is really the point of difference between Telstra and the smaller providers."

Chairman Mullen told shareholders the company has modelled the financial impact of a full or partial declaration. If the network is declared, it is likely Telstra will have to reduce prices to be more competitive.

Warren says they won't be releasing those figures any time soon.

"Clearly if the ACCC made a decision we will have fiduciary duties to inform the market of the impact."

Telstra currently expects to deliver income growth of between 5 per cent and 9 per cent with earnings growth under 5 per cent.

Free cash flow will be up around $4 billion.

At its full-year results Telstra announced a major investment program that will see capital expenditure grow to 18 per cent of sales, up from the current 14 per cent.

"After divesting Autohome for a $2 billion profit and with the National Broadband Network payments starting to accelerate, Telstra's balance sheet was starting to look lazy, so Telstra has decided to put the funds to work in the form of a larger capital investments and capital management," Morgans analyst Nick Harris wrote in a recent note to clients.

Mr Harris has a target price of $5.51 with a 'hold' recommendation.

Shareholders also complained about the low share price at the annual meeting. It recently dipped below $5 for the first time in three years, but has since recovered and last traded at $5.10 on Friday.

A Bloomberg Intelligence note released worldwide on Friday noted several threats to Telstra's future revenues, including dominance in the mobile market if it has to open up regional networks, losing fat margins on fixed line as customers move to the NBN,  spending more money on infrastructure to reduce outages.  

Bloomberg also noted Singaporean company MyRepublic is planning to launch in Australia in coming months with unlimited super fast speeds on fixed fibre networks.  

If the mobile networks ever become this competitive, it will truly change Australia's regional telecommunications forever.  

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