Is TPG “Free”?

A discussion by Franklin Djohan, Investment Analyst of Private Portfolio Managers

The potential for TPG, a company with a reputation as a low cost provider in fixed broadband, to become the fourth mobile network operator could potentially be very disruptive for incumbent network operators. For TPG the move is driven out of necessity; as more and more traffic migrates to mobile devices, a development which will be accelerated when 5G emerges in the next 3-4 years.

With the roll out of NBN ramping up, TPG needs to find another way to utilise its extensive fibre assets. Building a 4G mobile network is one way of repurposing the fibre network. A mobile network requires a substantial backhaul fibre network to connect the base stations, inter-state and international connectivity, which TPG already has. With the spectrum now already secured (albeit at a very expensive price), TPG will only need to build the base stations to have a working mobile network.

One success story that offers a blueprint for TPG is Iliad’s Free. France’s Iliad, which started as a fixed broadband provider, successfully built a low cost mobile network in a market with already three incumbents. Shortly after winning the spectrum auction in 2010, Iliad launched “Free”, a new low cost mobile brand. With its cut-price mobile offer, Free managed to gain over 6% market share in less than a year. Free now has ~18% of the market.

TPG has similarities to Iliad in terms of corporate culture; they are both very cost conscious. In the environment where fixed cost is very high, TPG still expects to be EBIT positive with only around 6-7% market share. It is not improbable for TPG to achieve 6-7% share if you think that Iliad achieved the same level within less than a year. Moreover, TPG will not be starting from scratch. It already has around 500,000 mobile customers and 1.9 million fixed-broadband customers which it can potentially convert over to its mobile network. However, as mobile has become a necessity, customers will not tolerate loss of coverage or slow connection speed. With capital expenditure of only $600 million versus the billions of dollars spent by the other operators, the big question is whether TPG’s network will be good enough to entice users to switch to its network.

The crucial element in Free’s success was the roaming contract with Orange (one of the major networks in France), which let Free to use Orange’s network when its customers were outside its coverage areas.  The roaming deal, which was imposed by the France’s regulator, allowed Free to overcome the fact that its network only had 25% coverage to start with.

TPG has no such support from the Australian regulator and will have to rely on a rapid deployment of their network or a deal that allows them to roam on one of their competitor’s networks. Telstra, which differentiates its network through superior quality and coverage, would definitely not consider giving a free ride to its potential competitor. Optus will most likely be in the same camp as Telstra. If there is any prospect for TPG to get a roaming deal, it would most likely come from Vodafone. TPG already has a relationship with Vodafone through its MVNO contract, which basically on-sells Vodafone’s network using TPG’s brand. Being the least profitable amongst the three network operators, Vodafone may feel the pressure to offset some of the potential loss in revenue. It will be interesting to see whether Vodafone will be willing to extend the current MVNO contract arrangement for an additional roaming contract, for a price of course.

Another factor to consider is wireless/mobile penetration. When Iliad entered the French mobile market, mobile penetration in France was around 40%. TPG will enter the market when Australian mobile penetration is already above 140%. Iliad grew its market share by competing for new mobile customers, whereas TPG will have to take away its competitors existing customers to gain market share. This means that TPG will likely experience a different competitive response from the incumbents.

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