Company Trend Analysis - TPG To Put More Pressure On Prices - JUNE 2017

BMI View: The entry of TPG in the Australian mobile market will put more pressure on prices, as this is the only way the new entrant can gain share in what is a saturated market. Incumbent operators will look to respond with better data services and greater quality, in the hope they can continue to monetise investments in their networks as they shut down 2G services.

Australian regulator ACMA has auctioned spectrum in the 700MHz band which was left unsold during the 2013 auction. Vodafone Hutchison Australia (VHA), which did not win anything in 2013, was awarded 2x5MHz at the reserve price of AUD1.25 (USD0.94) per MHz per population, for a total fee of AUD285.9mn. But the big winner was TPG, which was awarded 2x10MHz for a total fee of AUD1.26bn, or AUD2.75/MHz/pop, well above the reserve price. The company, which offers broadband services and mobile through a MVNO, announced it would roll out its own mobile network, akin to its plan in Singapore, and part of an overall strategy in developed markets of greater convergence (see ' Competition From TPG To Accelerate Customer Service Focus ' , December 20 2016).

TPG Gaining Ground
Spectrum Holdings (MHz)
1,800MHz holdings excluded as awarded on a regional basis. Source: ACMA, BMI

With the acquisition, TPG will hold spectrum in the 700MHz, 1.8GHz and 2.5GHz bands, enough to roll out a sufficiently attractive network. The company is planning to spend AUD1.9bn (including what it has spent in the auction) to deploy between 2,000 and 2,500 sites, which would give it a nationwide population coverage of 80% within three years. The company is looking to gain extra scale with the move, as it has 1.9mn broadband and 500,000 mobile customers (through a MVNO agreement) on its books. Hence the move towards convergence, with the aim of diversifying its revenue streams and bundling more customers with multiple services, is part of the company's long-term strategy, as evidenced by its entry in the Singaporean mobile market or its acquisition of iiNet in the Australian broadband market in 2015.

TPG Another Pressure After MTR Cuts
Monthly ARPU (AUD), 2015-2016
Source: Operators, BMI

The move will return the number of mobile operators in the market to four, after Vodafone and Hutchison merged in 2009. VHA will be the most impacted in the short-term, as TPG's half-a-million mobile subscribers are using its network, meaning the company will lose a large part of its wholesale revenue. But the long-term impact is likely to be on profitability for the incumbent operators ( Telstra, Optus and VHA). TPG is a known brand in the market, which gives it more weight as a new entrant. As the market is saturated, it means it will look to gain market share from cannibalising its rivals' customer base, and will do so by being very competitive on pricing. As ARPUs have already decreased in 2016 following a cut in mobile termination rates, from AUD0.036 to AUD0.017 per minute for voice calls and from AUD0.075 to AUD0.0003 per message for SMS, this will add another competitive pressure. It will also exacerbate the move towards data services, as the three incumbents have all, or are planning, to shut down their 2G networks by the end of the year, with the focus on data and quality of service a potential response against the new entrant's price-cutting strategy.

TPG Will Not Impact Market Growth
Australia Forecasts, 2015-2021
e/f = BMI estimate/forecast. Source: National Sources, BMI