Telstra’s continuing assault on the mobile telephony market shows no signs of abating. Thanks to the self-inflicted implosion within Vodafone, however, Optus has been able to largely protect its position.
Optus’ third-quarter results do show some signs of the stress that Telstra’s new-found competitiveness is exerting on the rest of the sector but Paul O’Sullivan’s strategy of defending the Optus franchise without engaging in destructive competition appears to be holding up reasonably well.
Last week’s interim result from Telstra showed its mobile business grew revenue almost 11 per cent and added another 958,000 customers. Its aggression came at the cost of a 4.3 per cent decline in average revenues per user but David Thodey would regard that as a reasonable price to pay for the momentum that the decision last year to reduce Telstra's premium built into the pricing of its wireless offerings.
The Optus result shows that most of Telstra’s gains are coming at Vodafone’s expense. Vodafone’s horrendous network quality issues last year sparked an exodus of customers that appears to be continuing, despite an urgent $1 billion upgrade of the network scheduled to be completed before the end of this year.
Optus actually increased its customer numbers by five per cent and its mobiles revenue by three per cent in the nine months to end-December. It also, however, experienced some pressure on its average revenues per user, which fell 3.4 per cent.
Overall, however, its margins held up, with earnings before interest, tax, depreciation and amortisation slipping only one percentage point as a proportion of its revenue, from 25 per cent to 24 per cent.
Both the Telstra and Optus numbers tend to indicate rational competition is occurring, with Optus content to allow Telstra to soak up the bulk of the customers fleeing Vodafone rather than sacrifice its margins.
Within the Optus result it was notable that its acquisition costs per customer have fallen significantly. In the December quarter of 2010 it cost Optus $254 on average to acquire a customer. In the latest December quarter that was down to $180. Both the major carriers re-jigged their pricing of post-paid plans late last year to reduce up-front handset subsidies.
That’s not to say the market will become markedly less competitive. Before Telstra decided it was over-pricing the network quality advantage it had, Optus (thanks partly to its recognition that the iPhone was a potential game changer for the industry), and to a lesser extent Vodafone, signed up a lot of customers who are steadily coming off their two-year contracts and are up for grabs.
While Optus has invested heavily in its own network, Telstra has already begun to extend its network quality advantage by starting to roll out its Long Term Evolution or 4G network last year. This will not only facilitate higher speeds but significantly increase the capacity of its entire wireless network, alleviating some of the congestion created by the growth in its customer base and the ongoing growth in data usage on the networks generally.
The 4G network is also more efficient than Telstra’s Next G network, giving it some optionality between profit and growth in its customer base. Optus hopes to launch its 4G offering mid-year.
In the pre-national broadband network environment, all three of the wireless carriers understand the need to protect and preferably growth their core mobile customer bases. The timing of Vodafone’s problems has been a windfall for Telstra and Optus.
Overall the Optus result was solid, with revenue up 1.6 per cent for the nine months and, thanks to a typically disciplined effort on costs, which edged up in line with revenue, earnings before interest and tax were up 7 per cent. An increased tax bill kept the increase in net profit to 1.2 per cent.
The numbers may not be exciting but against the backdrop of a highly competitive sector and a re-energised major competitor, O’Sullivan appears to be content for Optus to hold its ground and protect its profitability while maintaining its heavy investment program in its network.