Telecoms & Broadband Business Newsletter - July 2013

Editorial - Optus results reveal Australian market realities

Optus is caught between a rock and a hard place in the Australia telecom landscape. The position which the company has found itself in – with its HFC network in limbo and being unable effectively to compete with Telstra in the mobile sector – has resulted in a poor financial showing for the last fiscal year. Its strategies for the future depend on mobile services, but here opportunities for growth are limited, and ARPU continues to slide in the face of stiff competition on pricing.

In the fixed-voice and broadband markets Optus manages the only significant fixed infrastructure competition to Telstra. Yet its HFC broadband subscriber base has shown stagnant growth for many years, stubbornly hovering at around 430,000. This represents only a fraction of Telstra’s broadband subscriber base, while Optus’s share of broadband revenue has declined steadily in recent years, now being about 12% compared to 45% for Telstra.

So Optus does not present serious competition in this market. Having been burned by Telstra some years ago in its ambitions to become an infrastructure-based competitor – when its investment in cable was overlayed by Telstra street-by-street – the company decided that it would make no further investment in its HFC network (though this network has at least been upgraded with DOCSIS 3.0). To reinforce this decision, Optus is aware that its HFC network will be replaced by the NBN’s FttP infrastructure, though the timetable for this migration would depend on whether or not the Coalition gets to form a government later in 2013. Optus is not alone with its HFC conundrum, of course: Telstra also has put minimal effort in developing its HFC subscriber base or infrastructure.

So Optus is largely limited to playing the mobile card. Here it is also at a disadvantage. In the recent spectrum auction Telstra managed to secure twice as much spectrum in the 700MHz and 2.5GHz bands as did Optus. This will place further distance between the operators in their ability to develop and extend mobile data services (the only real area of growth in the sector). The likelihood is that Telstra will attract more customers (new ones as well as those churning from Optus and Vodafone, which did not bid at the auction), and so be in a stronger position to develop its mobile business.

Optus’s recent performance is indicative of the brewing trouble. It reported a 4.6% fall in revenue for the year to March 2013, and a 7.5% fall in net profit. Revenue from the mobile business fell 5.9% year-on-year. The 1.1% growth in the mobile subscriber base (with the post-paid sector slightly offsetting prepaid losses) is largely immaterial, given that mobile services provide few opportunities to develop ARPU: indeed the 6.9% fall in blended ARPU in the period is indicative of how difficult it is for operators to squeeze much out of customers, given price competition among the players and the popular adoption by customers of off-net messaging and voice services.

Optus seems to be resigned to keeping up rather than challenging. The operator has effectively stopped hustling for new customers as it had done in the past, preferring instead to retain its existing customer base. Telstra, by contrast, added 607,000 new customers in the second half of 2012 alone. This is a reflection of customers wanting to tap into Telstra’s offerings delivered via its 4G network, which is fast approaching two-thirds population coverage. To compound these heady advantages, Telstra has placed considerable emphasis on customer services during the last three years. While customer complaints against Telstra fell again in 2012, those against Optus increased 47%, mainly related to faults, disputed charges and complaint handling.

These are difficult times for Optus. With no clear strategy for its HFC network, and with a passive role for its position in the mobile market, the outlook for the rest of 2013 may be ‘more of the same’.