Do Telco Investors Need to Fear the Fourth Telco?
Shamelessly reblogged from the boring investor
http://boringinvestor.blogspot.sg/2017/02/do-telco-investors-need-to-fear-fourth.html#comment-form
How easy is it to roll out a 4G network infrastructure? I am not an expert. I believe TPG can engage network equipment vendors to design and implement a standard network infrastructure. However, for an optimal network, knowledge of the ground is important. For example, how many people usually congregate in a building, how many voice calls they usually make, what is the typical duration of each voice call, etc., etc. All these factors affect how many base stations are required to serve an area. Not only that, the usage is dynamic throughout the day, with more voice calls during day-time and mobile data usage during night-time. Unless TPG employs network engineers from the existing telcos, they will not have intimate knowledge of the ground for an optimal network infrastructure.
http://boringinvestor.blogspot.sg/2017/02/do-telco-investors-need-to-fear-fourth.html#comment-form
Ever since the Government announced that they would allow the entry of a
fourth telco, share prices of the 3 existing telcos have been on a down
trend. In Dec 2016, the name of the fourth telco was made known; it
would be TPG Telecom. Do investors of the 3 telcos need to fear the
fourth telco?
Firstly, some background information about TPG. TPG is the second
largest internet service provider and the largest mobile virtual network
operator (MVNO) in Australia. As a MVNO, it is able to offer the full
suite of mobile telco services such as voice, SMS and data. However,
there are important differences between a MVNO and a full-scale telco
operator such as the 3 local telcos. MVNOs buy network capacity from
full-scale telcos and resell them to retail customers. In the case of
TPG, it buys network capacity from Vodafone. Thus, when customers use
TPG's services, they are actually using Vodafone's network. Hence,
compared to full-scale telcos, MVNOs do not need to and probably do not
have the experience of setting up their own telco network
infrastructure. Therefore, when TPG sets up shop in Singapore, they will
have to learn this and do it quickly. TPG can start rolling out their
services in Apr 2017 and is required to achieve nation-wide street-level
coverage by Oct 2018, in-building coverage by Oct 2019 and underground
MRT coverage by Oct 2021.
How easy is it to roll out a 4G network infrastructure? I am not an expert. I believe TPG can engage network equipment vendors to design and implement a standard network infrastructure. However, for an optimal network, knowledge of the ground is important. For example, how many people usually congregate in a building, how many voice calls they usually make, what is the typical duration of each voice call, etc., etc. All these factors affect how many base stations are required to serve an area. Not only that, the usage is dynamic throughout the day, with more voice calls during day-time and mobile data usage during night-time. Unless TPG employs network engineers from the existing telcos, they will not have intimate knowledge of the ground for an optimal network infrastructure.
Interestingly, in TPG's annual results presentation in Sep 2013, they
mentioned that they had secured the rights for 2 x 10MHz spectrum to
build a 4G network in Australia from Oct 2014 onwards. I am not sure
what happened subsequently, but the latest I check is that TPG is using
Vodafone's network, so I guess they did not proceed to build their own
4G network in Australia.
Last week, I mentioned that the mobile telco services and broadband markets in Singapore are highly saturated. See The Telco Landscape in Singapore for
more details. When the markets are highly saturated, there are only 2
ways of gaining market share -- price competition or innovative
offerings.
Price competition will hurt the 3 existing telcos badly. However, for
price competition to be viable, TPG must be able to offer a comparable
service in the first place. As discussed above, TPG does not have
experience in rolling out a 4G network infrastructure. Its coverage, at
least in the initial period, will be poor. Subscribers are unlikely to
switch to it in droves even if it offers the most competitive plans. If
it struggles to attract subscribers, it will not be able to generate the
revenue required to further build up its network, which in turn leads
to being unable to attract new subscribers, which ends up essentially as
a chicken-and-egg situation.
In the area of innovative offerings, TPG offers monthly pre-paid plans.
Although of the same name, they are different from the pre-paid plans
that we commonly know. In Singapore, pre-paid subscribers only need to
top-up their pre-paid balance whenever the balance drops to zero or
whenever the balance expires, which is usually 6 months. TPG's pre-paid
plans in Australia require subscribers to pre-pay via direct debit or
credit card every month. Thus, although called pre-paid plans, TPG's
pre-paid plans have more in common with the post-paid plans that the
existing telcos offer. They are unlikely to entice pre-paid subscribers
to switch to TPG, because firstly, pre-paid subscribers do not like the
monthly payment scheme of post-paid plans. Secondly, when pre-paid
subscribers switch telcos, they lose the remaining value in their
pre-paid balance.
TPG also offers SIM-only plans in Australia, but all 3 existing telcos
have offered them since Jul 2015, so it is not innovative.
One offering that TPG might introduce is unlimited mobile data. This
idea was suggested by MyRepublic, the other bidder for the fourth telco
licence, as it drummed up support for its bid. Currently, the largest
mobile data plan offered by the 3 existing telcos is 11GB. Thus, this is
one area that TPG could exploit. Nevertheless, the 3 existing telcos
will not sit back and do nothing. They are very good at matching the
competition. For example, when Singtel launched Data X2 upsize plans in
Mar 2016, the other 2 telcos followed suit within a day. And when
Singtel launched Data X3 upsize plans in Sep 2016, M1 went one step
further and launched not only Data X3 but also Data X4 plans 2 months
later!
One area that the existing telcos might not be able to match fully is
TPG does not have its own physical stores. It sell services online, via
sales hotlines and third-party distributors. In this aspect, TPG saves
on rental and sales staff costs, but incurs distribution costs.
Distribution costs will likely be higher than rental and staff costs, as
distributors add their own profit margins to the costs. Overall, this
is not likely to offer TPG any competitive advantage. If it does, the 3
telcos will likely follow closely.
In conclusion, although TPG offers mobile telco services in Australia,
it does not have experience in setting up a 4G network infrastructure in
Singapore. Coverage is unlikely to match that of the 3 existing telcos,
at least in the initial period. And whatever new services TPG can
offer, the 3 existing telcos will likely match.
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