Bruised Optus readies for next round

When Telstra decided to raise the price of its mobile phone plans last month the most relieved group would probably have been Optus.

While it is Vodafone whose network quality issues created the opportunity for a Telstra onslaught the reality is that Vodafone still has issues and is bleeding customers at the rate of about 175,000 a quarter – so its priorities are not yet on what competitors are doing. It has lost the best part of 750,000 customers since the haemorrhaging started 18 months ago.

Telstra, by contrast has added 3 million customers – 1.6 million of them last financial year – since it decided to become more competitive on mobile pricing about 18 months ago and $3 billion at the market.

Optus chose not to engage in a head-to-head price war but rather to try to protect what it had and most particularly to protect its margins and earnings. It has been largely successful, although today's first quarter result (for the three months to end-June) suggests the competitive pressures, and some changes within the market, was finally getting to it.

The overall Optus result was, despite a 4.4 per cent reduction in costs, down 7.4 per cent to $161 million on revenue that was down 3.2 per cent. In its core mobile division revenue was down 4.2 per cent and earnings before interest, tax, depreciation and amortisation 5.5 per cent.

Telstra's mobile business increased its revenue by 8.5 per cent, lifted margin three percentage points to 36 per cent and added $500 million to its EBITDA in the year to June.

Throughout Telstra's assault on the market, Optus has made itself a smallish target and focused on maintaining its margins while picking up what it could of the exiting Vodafone customer base and the continuing general growth in the market. Its EBITDA margin was steady at 25 per cent in the June quarter.

All the telcos were affected by a mandated reduction in mobile termination rates at the start of the year, although Telstra as a group was probably a net beneficiary because of its dominance of fixed line telephony.

Both Optus and Telstra reduced handset subsidies and introduced new device repayment plan options late last year that have also impacted revenue, although the lower subsidies contributed to a 19 per cent reduction in Optus' subscriber acquisition costs.

The impact of the lower termination rate and the service credits associated with the device repayment plans – and the competitive intensity in the market – however, could be seen in a 6.2 per cent fall in Optus' average revenue per user, from $45 a month to $43 a month.

It would be helpful to Optus if Telstra's price rises last month ease the competitive intensity a little. It has already responded to the more difficult conditions over the past year by embarking on a major restructuring, including large-scale job losses.

It is already engaged in another "arms race" with Telstra as both groups are building new 4G networks. Telstra, which already has a lead in 4G, last week disclosed it will spend $1.2 billion on its wireless networks this year as it accelerates the rollout.

Vodafone, which is spending $1 billion to upgrade its degraded network, will at some point recover some of its competitiveness. So while the sector itself continues to grow – wireless broadband in particular – the industry structure and settings virtually ensure it will remain a fiercely contested battleground.