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Who’ll win in our National Broadband Network future?

As any investor knows, Telstra has long been attractive to shareholders pursuing its high dividend payout ratio. Its reliable cash flow is attributable to Telstra’s ownership of Australia’s national copper network which comprises the backbone of Australia’s telecommunications infrastructure.

Whilst it is possible for rivals to build competing networks, on a national basis it is generally known to be a poor allocation of capital (consider AAPT’s performance in the 2000’s and into this current decade) and hence competitors generally will only cherry-pick. That is, they will build a network in areas with high population density as opposed to a national network.

This means that for a majority of Australia’s land masse, Telstra is the only provider of wholesale telecommunications services. This gives a distinct competitive advantage in more sparsely populated regional and rural areas.

On a retail basis, Telstra has seen a divergence in its market share performance over the past few years depending on whether it is the metropolitan broadband market or regional broadband market. As an example, Telstra’s share of the metro broadband market fell from almost 50% in 2006 to trailing below 30% by 2013. In regional areas however, Telstra’s market share rose from near 40% and almost hit 80% over the same period.

What is going on?

In metro overall areas, TPG Telecom Limited, iiNet Limited and M2 Group Limited as well as others came into the fray with more affordable offers, more competitive bundling and other goodies. Collectively these three firms grew their market share from about 10% in 2006 to approximately 41% by 2014, taking the lion’s share of Telstra’s decline.

However, Telstra has little competition in regional areas due to the wholesale costs of the copper network being high and expensive to maintain with low population density to spread the cost over. It becomes difficult for many internet service providers to offer retail plans whilst absorbing these higher wholesale costs. A quick view of iiNet and TPG’s performance over time shows both with stagnating market shares at around 12% and 4% respectively. M2 Group’s share is almost zero. Naturally this advantage isn’t as pervasive in metro and CBD areas where wholesale costs are lower which explains the presence of our three smaller retail service providers (RSP’s) above.

NBN will change the cozy arrangement

This cozy dynamic however is set to change. As the National Broadband Network (NBN) rolls out to regional areas and equalises wholesale costs for all RSP’s, Telstra’s regional broadband market share should deteriorate as competitors are able to compete on an economic basis as they have in metro areas. Estimating the regional competitive landscape post-NBN rollout is difficult, however we would expect a similar market structure to that currently in metro areas, with Telstra’s competitors market shares growing.

Naturally this would be a boon for shareholders of iiNet, TPG and M2 Group, but one can go further and speculate on what opportunities exist in metro areas for these three firms. Generally, it’s known that Telstra’s broadband prices in the metro were high but were made more palatable historically by its high service quality. In an NBN world, however, it’s questionable whether this will still be the case. All competitors will likely offer more or less the same quality with the NBN connection, and lower price, more bundling and higher customer service will likely be the real differentiators.

 

Roger Montgomery is the Founder and Chief Investment Officer at The Montgomery Fund, and author of the bestseller ‘Value.able’. The article is general information and does not address personal financial needs.


 

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