TPG will offer six months of free mobile services when it launches a new mobile network next year to entice customers to test out its infrastructure.
The cut-price telco surprised the industry on Wednesday when it paid a record-high price for mobile spectrum and announced plans to build a fourth 4G network covering 80 per cent of Australia’s population.
Telstra posts profit slump
Increased competition in the mobile space is being blamed for Telstra’s half-year profit slump.
Meanwhile, Telstra’s share price continues to fall as investors worry about its ability to maintain higher mobile prices, especially if it loses network exclusivity while also dealing with a new competitor. Analysts expect it to lose up to one million customers and are lowering their target prices.
Telstra shares were heading towards $4.10 at lunchtime on Thursday, the lowest price since November 2012. Shares were trading at $4.56 on Tuesday afternoon and dropped 7.46 per cent on Wednesday.
TPG shares are currently in a trading halt that will be lifted on Tuesday, after the Easter break.
TPG’s chief executive David Teoh said he will offer six months of free mobile services to people in Canberra next year – the first rollout city – to get feedback on the network quality.
Telstra’s share price is dropping amid fears its profit margins will drop in a mobile pricing war. Photo: Peter Braig
After that TPG’s prices would continue to be “extremely competitive”.
“In our plan we have to be successful [and] very attractive in the marketplace. We are very excited,” Mr Teoh told Fairfax Media.
TPG chief executive David Teoh is building Australia’s fourth mobile network. Photo: Daniel Munoz
On Wednesday TPG emerged as the highest bidder in a spectrum auction that netted $1.5 billion for the federal government. It paid $1.26 billion for two 10 megahertz [MHz] lots of spectrum at 700 MHZ and Vodafone paid $285 million for two 5 MHz lots.
Mr Teoh also described an upcoming decision by the competition watchdog about mobile network roaming as “extremely important”, but added TPG is proceeding with the new network regardless of the outcome.
TPG insists it can build a solid network for just $600 million. Photo: Rob Gunstone
The Australian Competition and Consumer Commission may force telcos to share their networks, if it decides to “declare” domestic mobile roaming. This would give everyone access to Telstra and Optus’ entire networks in regional and remote areas. A decision is expected before May.
“Roaming is important to us – extremely,” Mr Teoh said. “That will help the regional people to get better service and also have options.”
A spokesman for Telstra said the high prices paid for spectrum “show Australia has a strong and competitive mobile market under the current regulatory settings and reinforce why there is absolutely no case for regulated roaming”.
Even though some white label operators such as Vaya and Amaysim continue to offer cheap mobile deals, prices for mobile plans with smartphones are reaching record highs among Australia’s network owners.
Telstra, Optus and Vodafone have been inching up monthly fees and offering more data instead of reducing prices, according to a note released this week by Goldman Sachs analyst Kane Hannan.
Shaw and Partners analyst David Spotswood believes Telstra will lose about one million mobile subscribers between 2019 and 2022.
“TPG building a mobile network cannot be overlooked,” he wrote in a note to clients.
“We assume Telstra loses $5 off its average revenue per user in 2019 and 2020 as it enters a price war … we lower our price target from $4.22 to $3.78.”
Mr Spotswood has both TPG and Telstra rated as “sell” and has also lowered his price target for TPG from $6.77 to $4.63. However, he is optimistic that even if TPG loses money in the short-term, it will be making money from the mobile network by 2024.
“TPG are guiding to become [earnings] position with a 6 per cent to 7 per cent market share or about 1.625 million subscribers … we estimate TPG will get 10 per cent market share by 2024 with a $30 average revenue per user, 65 per cent gross margin and 38 per cent earnings margin.”
Ord Minnett painted a more optimistic view of Telstra’s future for its clients, although it does believe the telco giant will have to cut dividends in coming years.
“The threat of a fourth mobile operator in Australia has come one step closer to reality, but the actual impact is still two to three years away and yet to be determined,” Ord Minnett’s note states.
“It is hard to see how competitive or disruptive TPG could be to the industry, and more importantly to Telstra, given TPG is spending $600 million for only a bare-bones network.”
Don Hamson, managing director of Plato Investment Management, which holds Telstra shares, said TPG’s decision to enter the market is negative for Telstra because it “increases competition and is likely to reduce margins”.
“I think it is largely in [share] price already,” he added.
Argo Investments holds about 43 millions Telstra shares and its managing director, Jason Beddow, said TPG has been talking for a while about getting into mobile networks. He has not changed his holding because of the news.
“TPG has been a pretty formidable competitor sow we would have to think that they would have a decent crack [at mobiles],” he said.
“Clearly it will put pressure on Telstra. Mobile has been one of Telstra’s key profit drivers and it probably will continue to be so, but it is going to be tougher.”
Mr Teoh says his company can build a decent network for just $600 million, a surprisingly cheap price to reach 80 per cent of Australians.
TPG already employs the people who will build its mobile network and will start by focusing on capital cities and major regional towns.
“We have a great team in the company and we have the expertise and experience of rolling out basic infrastructure. It shouldn’t be any problem at all. We are very confident we will get it done,” Mr Teoh said.
TPG already has over 21,000 kilometres of fibre optic cables installed around Australia and will look for mobile sites on infrastructure that is already connected to its fibre. It has budgeted just $600 million for up to 2500 mobile sites, about $240,000 a site. It is already talking to “a number of suppliers” to get access to space on towers or commercial buildings to install equipment.