Will we ditch NBN for mobile phones?

The Australian, May 2, 2017

The Australian Competition & Consumer Commission decision on roaming, which [was] due [last] week, comes against a backdrop of a looming new revolution in the telecommunications market.

That revolution could see a lot more Australians drop the NBN in favour of mobiles.

In simple terms a win in the case means that Telstra will remain dominant in lucrative rural areas because it invested in its mobile network which it retains.

Goldman Sachs estimates if domestic roaming is mandated by the ACCC (for example, if Telstra’s rivals can use its network) Telstra is set to lose $546m in full-year earnings for 2017-18 because it loses its rural margin.

But a loss also has a silver lining for Telstra shareholders. While we will see a fall in the bottom line Telstra will be able to slash its spending in regional and rural Australia. Regional Australia accounts for 51 per cent of Telstra’s mobile capex and 70 per cent of its 8500 base stations. That’s cash for investment elsewhere.

While these outcomes represent stark contrasts they obscure a more important issue which will affect all Australians. When Telstra was floated the government sold its landline network to the new public company for a high price. When it established the National Broadband Network (NBN) in effect the government bought that network back at a lower price than it was sold for.

At the time lots if cash was floating around which obscured the truth but now the dust has settled it is clear that the government got a bargain — it bought the network for about three times earnings. Originally it was planned to scrap the network and replace it with a fibre to the home network but now large segments are being used in a fibre to the node scheme where the old copper wires are still being used.

But NBN becomes a monopoly in most areas of landline transmission and to justify the high cost of establishing the network NBN is charging the telco’s high prices. Resellers like Telstra are gaining only small margins on the business. The low margins help explain why in many areas service being provided by the resellers is less than expected.

The profits in telecommunications are going to be in mobiles. That’s why TPG paid the government $1.26 billion for access to the 4G mobile spectrum and plan to spend $600 million over three years to roll out their mobile network to 80 per cent of the Australian population.

Previously, TPG’s mobile service ran on Vodafone’s network.

There are vast areas of the NBN market that can only be serviced by broadband landline service. But there is about 15 per cent of the NBN market where both mobiles and NBN are suitable. Accordingly NBN in that space competes with Telstra, Vodafone, TPG and Optus etc.

And given the low margins on the NBN the telco’s plan to take as much of that 15 per cent as possible for mobiles.

Among the 15 per cent is routine traffic as distinct from heavy video and commercial usage. The telco’s expect that mobiles market share is going to rise considerably given that is where the marketing action will be.

The economics of the NBN are complex but in any major infrastructure provision the profit comes from volume and, if a big chunk of that 15 per cent overlap market is lost, the NBN results will disappoint its supporters.

The latest fall in the Telstra share price has been triggered by the looming TPG war but the stock has been weak for some time as the market realises that the original deal was not as good as it originally looked and that Telstra is headed into a more competitive market.

Regardless of the rural decision, the introduction of NBN is going to cause a lot more Australians to decide whether they actually need NBN and whether they are best to go totally mobile. In an era where many people are under financial pressure mobile is going take market share NBN expected to gain.

Mobiles are a market where Telstra dominates and it will fight hard to maintain that market share. But market share wars are never good for the bottom line.