Optus' mobile market squeeze

SingTel-owned mobile operator Optus' results were a bit of a disappointment, but the numbers weren't unexpected given how much time and money Telstra has put into winning back customers through its billion dollar ‘Project New' initiative.

Between 2005 and 2009, Telstra had positioned itself as a ‘premium service' operator, that charged premium prices. However, customers didn't think that this was the case and therefore there was plenty of opportunity for Optus and Vodafone to win new customers ahead of the incumbent.

Unfortunately Vodafone couldn't cope with its success and was clearly not well prepared for the massive increase in mobile broadband capacity that was required to satisfy the demand of their customers; this resulted in severe network problems and a significant loss of customers. But in the end, both Vodafone and Optus paid the price for Telstra's aggressive competition and that clearly shows up in the Optus results.

The positivity from the ‘Project New' campaign was reflected in the Telstra results but as I have said before that growth has come at the cost of profitability, in the form of lower Average Revenue Per User (ARPU).

In order to rectify this Telstra has in the meantime increased its prices, this certainly would give Optus and Vodafone a new opportunity to compete, but again this competition will concentrate around price – mobile is a commodity – so any competition based growth will face a squeeze on margins. Optus had already made provisions for this with cost reductions they introduced earlier in 2012.

While all players hope for better margins, it will be interesting to see how that is going to happen. Basically the operators are now driven by the activities of the smartphone manufacturers; what they produce creates customer demand and it is increasingly more difficult for them to operate outside that commodity area, the value add is now all linked to the smartphone.

Optus and Vodafone are in particular affected by the limitation that the mobile market has to offer as they depend heavily on mobile comms revenues. While there are still a few years of growth ahead based on mobile broadband, also this market will eventually be saturated. Telstra has a bit more room to explore other revenue streams, but in general all of the telecoms market has become a commodity business and it will be interesting to see how this will pan out for the operators.

There are some indications that 4G LTE will increase mobile broadband use and that increase in the extra capacity needed for new apps and services could be monetised by the operators through higher revenues. However, lessons learned from the past are not necessarily showing that this will be the case.

If one look at the cost structures of mobile operators in developing markets such as India and China than you see that these companies can be more profitable at ARPU rates that are a fraction of the ones in the developed world. For the time being, a safer bet will be to lower costs rather than hoping for higher margins.

Paul Budde is the managing director of BuddeComm, an independent telecommunications research and consultancy company, which includes 45 national and international researchers in 15 countries.