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

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.