This week TPG released details of their planned mobile network and Telstra (TLS) investors should be pleased to discover that TPG's mobile nework will begin life as a data only network (no voice calls allowed initially).
We've consistently argued that TPG's mobile offering is not primarily directed at hurting Telstra's mobile network, rather it is directed at:
- bypassing the NBN's last mile (FTTB with microcells) where economically feasible (as the NBN seriously damages TPG's returns); and
- attracting the cost conscious consumer (which will hurt Vodaphone the most).
There will be a knock-on effect for Telstra but we don't think it's as drastic as feared. In fact, if TPG's mobile network is able to damage the NBN's economics, this could be good for Telstra.
What TPG Telecom said
TPG are notoriously secretive and this is the first time meaningful details on their mobile plans have been released. In the Australian Financial Review (25th May 2018), TPG's Chief Operating Officer Craig Levy said TPG has "decided to go to data only in the beginning" and that TPG will later this year launch a $0 unlimited data plan which after 6 months becomes $9.99 per month.
TPG will target tablet owners and younger generations who are data hungry and prefer social media applications rather than actually talking. This part of the market is serviced mostly by Vodaphone, Kogan and Amaysim (not Telstra).
What this means
In our view the fact that TPG's mobile network commences life as data only (no voice calls allowed) is an indication that the quality of the network (at least initially) will not be high. This is fine for some consumers and TPG has always targeted the cost conscious consumer. Roughly speaking one in four consumers care more about a cheap price than quality of service. Importantly, by definition, this means that the primary target market of TPG mobile is not Telstra.
Telstra, by contrast, targets the consumer that cares more about quality of service over price.
Our positive investment thesis is based on a pessimistic valuation, attractive fundamentals, the probability that (in our view) the NBN is forced to lower prices, and our assertion that TPG's mobile network isn't as negative for Telstra as feared. A potential catalyst is the Telstra investor briefing on 20 June 2018, where they will talk about strategies they are implementing to address market pressures.
Our valuation and share price target remain unchanged. We retain our Add recommendation.
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