Telstra’s decision to more than double the reach of its 4G network over the next 10 months is a logical move to defend the technology and network quality advantage it has over Optus and Vodafone. It’s also sensible at an operational level.
Mobiles and mobile broadband have been the success stories for Telstra ever since David Thodey took the momentous decision to compete more aggressively on price rather the relying purely on the network quality advantage Telstra has enjoyed over its rivals. That the decision happened to roughly coincide with the meltdown in Vodafone’s network produced a massive bonus.
Over the past two years Telstra has added about 3.2 million mobile customers and built its wireless broadband customer base to about 3.1 million, or a market share in the 60 per cent-plus range.
That drove an 8.5 per cent rise in mobile revenues last year, a 3 per cent increase in margin and a $500 million increase in the division’s earnings before interest, tax, depreciation and amortisation.
Telstra’s aggression most visibly damaged Vodafone, which is now spending $1 billion to upgrade its network, but Optus, too, was affected and chose to protect its margins rather than compete head-on with Telstra for market share.
Success, however, can bring its own issues and the sheer volume of new customers and the growth in wireless broadband traffic is said to be having a discernible impact on Telstra’s Next G 3G/HSPA network, the source of its competitive advantage.
Telstra started rolling out 4G services last September and already has more than 340,000 mobile broadband devices and 160,000 smartphones accessing the network, which currently reaches about 40 per cent of the population. The expanded rollout announced today will lift its coverage to about 66 per cent of the population by the middle of next year.
The appeal of 4G is not just that it offers far faster speeds of up to 40 Mbps but that it is a far more efficient technology. It will allow Telstra to absorb the explosive increase in capacity and speed-hungry mobile broadband while also relieving congestion on its 3G network.
Optus has also started switching on its 4G network in Sydney and Perth but is lagging behind the Telstra rollout.
The timing of Telstra’s decision to accelerate its 4G rollout is intelligent. There are an increasing number of compatible smartphones and devices in the market and, while it is uncertain whether the iPhone 5 will be compatible its imminent launch is likely to ignite another major flurry of activity in the market.
There has been a lull in the growth in the mobile sector in recent months, perhaps because consumers are waiting for the new iPhone. That has been a positive for margins and industry profitability but the iPhone launches have in the past driven big spikes in upgrading and customer churn.
In the past Telstra didn’t have much at stake – Optus seized the moment of the original launch while Telstra sat back and grabbed the bulk of the big surge in customer numbers the wildly popular smartphone triggered. Vodafone was a lesser beneficiary. That meant Telstra had fewer customers at risk when their contracts, generally two-year contracts, were up for renewal.
Given that Telstra’s big market share drive started in the middle of 2010, however, it now has an increasing number of customers coming off contract and therefore at risk. So far there has been little evidence of customer-switching but Telstra would be aware that it is more exposed than it was previously.
That’s why maintaining its network quality advantage and relieving some of the growing pressures on its 3G network makes strategic sense. Vodafone provided a dramatic illustration of what can happen if a mobile operator can’t meet customer expectations.
Telstra is also acutely aware that in a post-national broadband network environment (and regardless of whether it is Stephen Conroy’s version of Malcolm Turnbull’s) its key asset will be its wireless business and that it needs to protect both its customer base and its technology and network quality leadership.
With $1.2 billion earmarked to be spent on its mobile networks this financial year – about $400 million more than last year – Telstra is shoring up its advantage by bringing its financial strength, itself boosted and/or underwritten by Telstra’s deals with NBN Co and the federal government, to bear on the sector. That’s another source of competitive advantage.
Telstra's timely 4G boast
As smartphone users gear up for the iPhone 5 launch later this year, Telstra has cleverly opted to boost its – already leading – 4G wireless coverage to coincide with the flurry of activity in the market.
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