Merged Vodafone Australia and TPG plan to raise convergence game

Competition and convergence are the key words as Vodafone Australia and TPG announce merger plans to lodge a challenge to market leaders Telstra and Optus.

Although the pair have stated there would no notable changes to either of the brands after the merger, the opportunity to cross-sell Vodafone’s mobile and TPG’s broadband offering could mount a serious challenge to the domination of Telstra and Optus who control more than 80% of the mobile market as it stands. Vodafone currently sits in third place in the market share race, accounting for just over 18% of Australian mobile consumers.

“This transaction accelerates Vodafone’s converged communications strategy and is consistent with our proactive approach to enhance the value of our portfolio of businesses,” said Nick Read, CEO-designate of Vodafone. “The combined listed company will be a more capable challenger to Telstra and Optus, and will be much better placed to invest in next generation mobile and fixed line services to benefit Australian consumers and businesses.”

TPG is currently Australia’s second largest broadband provider with 1.9 million subscribers, and has built a 11,000km-long fibre network primarily through acquisition, also offering wholesale broadband services to businesses. Alongside its solid position in the broadband space, TPG has also been registering interest for a launch into the mobile space, though what this now means for plans remains to be seen.

Over the course of the day, share price in Telstra has increased by 2.9% while Singtel, parent company of Optus, has witnessed a 2.19% boost (at the time of writing), perhaps indicating relief from investors. With TPG spending billions on a new mobile network and acquiring three of the thirty available spectrum lots in the most recent auction, the promise had been a fourth player to undercut rivals with a AUS$9.99 a month offering in Sydney, Melbourne, Adelaide, Canberra and Brisbane. While this had the potential to heavily disrupt the Australian market, it seems investors are confident such plans will be brushed aside in favour of convergence.

This does not mean clear sailing for the pair, but fighting on value is much more favourable than an troublesome challenger kicking off a race to the bottom. Vodafone has suggested the combination of the businesses will allow create a much broader footprint for the business, while also scale when investing in future-proof mobile and fixed networks. The immediate introduction of a convergence offer will certainly give disillusioned Telstra and Optus customers to think about.

Telstra has been having a rough time of it in recent years, with a 55% drop in market value since the appointment of CEO Andy Penn in May 2015. The recent launch of the Telstra2022 plan, targeting a simplified management and operational structure, had little impact on the mood of investors, perhaps as it coincided with the third network outage in seven weeks. As a strategy, it Telstra2022 was supposed to offer a vision of a more efficient and profitable organization, saving roughly $740 million over the next four years, with the ability to invest in the 5G era. Apparently not.

Optus as a business has been plodding along relatively comfortably. The last financial statement revealed revenue growth of 6%, continuing to grow its subscription base on both mobile and broadband offerings. Progress has not been exceptional, but few would complain.

The market on the whole has been pretty steady over the course of the last two years, Telstra might be losing a bit of market share to rivals, but nothing exceptional. A Vodafone/TPG tie up would change the status quo however. A third player able to offer convergent offers to the Australian customer certainly has the potential to cause problems. With a suspect nationalised network, a public spat with Huawei, the government attacking the users right to privacy through encryption and now this merger, Australia is certainly an interesting market right now.

Vodafone Australia and TPG mull merger

The Australian mobile market may be set for consolidation with the revelation that Vodafone and TPG are thinking of hooking up.

Widespread reports in Australia compelled the two companies to publicly admit they’ve been chatting. “Vodafone Hutchison Australia (VHA) confirms it has commenced discussions with TPG in relation to a potential combination of the two highly complementary companies,” said Vodafone in a statement. “At this stage, these are exploratory non-binding discussions, with no commitment from VHA or its shareholders.” TPG seems to have issued some similarly cautious statements.

TPG is a new entrant to the Australian mobile market that is expected to launch in metropolitan areas this year, making heavy use of small cells to augment a limited macro network. It has been providing some telecoms services via a wholesale agreement with Vodafone but its move into the mass market, most probably via the tried-and-tested aggressive pricing model, is expected to significantly disrupt the Aussie market.

Vodafone is the distant third of three Australian MNOs, with a 17% subscriber share according to Ovum’s WCIS. Telstra is the dominant player, controlling a narrow majority of subscribers, and thus has the most to lose by a disruptive new entrant. All this M&A talk seems to have actually boosted Telstra’s share price, however, with distracted competitors considered to offer competitive advantage.

TPG attempts to bring the Jio chaos to Australia

TPG has announced customers who sign-up to the telcos new mobile offering will receive the first six months of data, voice and texts for free in exchange for helping test out the new network.

In its bid to become the fourth major mobile player in the Australian market, TPG has said its $1.9 billion 4G network is almost ready after a year of waiting, and any customers who sign up will receive the first six months of services for free. After this period, customers will be charged AUS$9.99 a month. The move is somewhat similar to Jio’s grand entrance into the Indian market, which has resulted in chaos and misery for the traditional players.

“The TPG team has been working hard constructing our own network and I feel proud and excited to be introducing our very first on-net mobile product offering,” said TPG’s Executive Chairman, David Teoh. “We are inviting users to register to experience our coverage and network performance as well as to take advantage of unlimited mobile data for free. This promotion is the first of its kind in Australia and signals a new era of competition in the mobile market and will undoubtedly bring great benefit to Australian consumers.”

As with every other aspect of life, there is no such thing as a free lunch however. Users will be entitled to use as much data as they want, however speeds will be capped at 1 Mbps once 1 GB of data has been used up each day. Some might complain, though exceeding 1 GB every day would be equally impressive and depressing.

Another point worth noting is the coverage. The footprint of the network is inferior to Telstra, Optus and Vodafone, limited to the state capitals for the moment. This will increase after the trial period, and over time, but it will be long-time before it will be able to compete with the mainstays of the industry.

“The network rollout is ongoing and our mobile network coverage will increase significantly over time as we make the best use of our extensive fibre optic network assets,” said Craig Levy, TPG’s Chief Operating Officer.

While it might not be able to compete with the established players on footprint, tempting the cash conscious consumers across is very doable. It doesn’t matter whether the fish is wrapped in beer batter, or if your throwing shrimp on the barbie, everyone loves a good deal. Telstra, Optus and Vodafone might well be peering over nervously, as the prospect of a race to the bottom price war will not help anyone.

The economics of a price war are questionable when you take sustainability into account, however it might be one way for TPG to get level pegging with the Telstra, Optus and Vodafone trio. It could be viewed as more of a  Can TPG bring the Indian chaos across to Australia?