Get set for a price war in the Australian mobile phone market as the near-$2 billion entry of the aggressive telco TPG, controlled by reclusive billionaire David Teoh, sets the scene for a major industry shakeup.
TPG, which is already a big player in the broadband market, kicked off its entry with a $1.26 billion investment in spectrum and has earmarked a $600 million spend on rolling out cell sites in order to cover 80 per cent of the Australian market.
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Telstra posts profit slump
Increased competition in the mobile space is being blamed for Telstra's half-year profit slump.
Run by rich-lister Teoh, who has an estimated personal wealth of $2.2 billion, TPG has a history of disrupting the telecommunications market, running a low-cost business and cutting prices.
The extent of the damage to incumbent players was evident immediately on Wednesday morning as Telstra's shares fell more than 7.5 per cent, wiping more than $4 billion from its stock market value.
![David Teoh has an estimated personal wealth of $2.2 billion.](/web/20170413221839im_/http://www.brisbanetimes.com.au/content/dam/images/g/j/r/v/j/e/image.related.articleLeadwide.620x349.gvjeb6.png/1492033158552.jpg)
TPG expects to have the new mobile business earnings positive when it reaches a 6 per cent to 7 per cent share of the $8 billion mobile market.
Attracting those customers will require attractive pricing for voice and data – which the other major players – Telstra, Optus and Vodafone will need to adjust for. This, in turn, will have a negative effect on their profit margins.
As the biggest player Telstra will have the most to lose, its pricing levels are already higher than the others, which it justifies by better network coverage.
![The level of competition in mobiles has been increasing.](/web/20170413221839im_/http://www.brisbanetimes.com.au/content/dam/images/g/v/j/k/3/n/image.related.articleLeadwide.620x349.gvjeb6.png/1492035562529.jpg)
Even without the entry of TPG, the level of competition in mobiles has been increasing and it's putting a strain on the telco earnings.
(And Telstra shareholders are already jumpy about the prospect of it receiving a negative outcome from the competition regulator later this month which may force it to allow mobile competitors to use that part of its regional network in which it currently has a monopoly.)
![TPG says it already has a large chunk of the infrastructure needed to operate a mobile business.](/web/20170413221839im_/http://www.brisbanetimes.com.au/content/dam/images/g/s/2/t/y/8/image.related.articleLeadwide.620x349.gvjeb6.png/1492033158552.jpg)
And for Telstra, the mobile business is its largest profit engine which it cannot afford to have splutter if it is to make good on its outlook for single digit earnings growth.
And Telstra's most recent earnings report was softer than expected and not one that impressed the market.
A recent report from Deutsche Bank said that while total mobile subscriber growth improved 2 per cent in the 6 months to December 2016, in the postpaid market Optus continued to take market share, adding more subscribers than Telstra for the fifth consecutive 6 month period. In that six month period Optus added 201,000 net postpaid subscribers while Telstra signed up another 79,000 and Vodafone 47,000.
But in terms of revenue and earnings (before interest tax and depreciation) Australian mobile market continued to decline.
Overall industry service revenue deteriorated from being down 1 per cent in the six months to June 16 to moving down 3 per cent in the six months to Dec 2016, while overall industry EBITDA deteriorated by 7 percent and 8 percent respectively during those periods.
Company revenues declined by double digit rates due mostly to a reduction in mobile termination access rates but even after accounting for this both Telstra and Optus sustained a fall in service revenue from mobiles.
But David Teoh's TPG, which is part funding its move to mobiles through a $400 million equity issue, believes there is money to be made in mobiles by using his low cost model to get a decent return.
TPG says it already has a large chunk of the infrastructure needed to operate a mobile business and doesn't have the anchor of having to support legacy 2G and 3G equipment. Plus it can deploy the latest technology to reduce the costs of rolling out the network.
While TPG might be able to capitalise on new technology and focus on its cost base, the cost of the spectrum which it acquired from the Government via auction was not cheap.
Investors in TPG will need to be convinced that the move into mobiles can deliver the returns that Teoh is known for.
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