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Summary

Australia's second largest fixed broadband operator and MVNO TPG has secured 700MHz spectrum, topping up its 2.5GHz and 1800MHz spectrum holdings. The firm has set an ambitious target for 80% population coverage, with services to start in 2018. We expected TPG to bid for the unsold 700MHz spectrum that was passed in at auction in 2013. It acquired 2x10MHz for A$1.26bn (including spectrum costs). But long term, Australia is unlikely to be able to sustain four operators. TPG's move into mobile has delayed the inevitability of consolidation.

TPG has a few benefits other newcomers do not have

TPG bought 2.5GHz spectrum in 2013 and 1800MHz regional licenses in 2016. With its new 700MHz spectrum, it is aiming to finally launch its own mobile network service and hopes to reach EBITDA breakeven with only 500,000 subs (around 2% market share; TPG has 500,000 MVNO subs). Key to achieving breakeven is TPG's plans to supplement its macro network build with small cells (e.g., in the dense urban areas). Also, TPG can leverage its existing fiber for mobile backhaul, and its business case will be strengthened should the regulator rule in favor of mandatory mobile roaming.

Economically, all things considered, it is cheaper for TPG to use its own network where it can, rather than pay for wholesale carriage as an MVNO. That MVNO deal is charged at cost, plus a profit margin is taken by the wholesale provider (Vodafone in this case). Moreover, should mobile roaming become mandated, TPG will also be better off – it will have to pay only for cost-based access (and no profit margin) to boost and gain network coverage in regional and rural areas.

Market consolidation delayed, as market gets disrupted

Ovum believes that most markets come 2025 will be able to support only three players, and that certainly is true in the small market of Australia. TPG and Vodafone are the most likely M&A partners, rather than Telstra and Optus as the two largest operators. Speculation in the market last year was the TPG was planning to buy Vodafone in Australia and New Zealand, but that was not announced nor did it eventuate (probably because of a disagreement over valuation). In turn, TPG emerged as the fourth network operator in Singapore, in addition to adding to its mobile spectrum haul in Australia.

While Australian mobile customers will benefit from cheaper mobile tariffs in the short term, TPG's debut as Australia's next mobile network operator has delayed the inevitable. At some stage, four players will very likely need to become three. That could have been done in 2016. Now it will have to be a long-term ambition, but in the meantime, Australia's incumbents (especially Vodafone) will need to get ready for revenue pressure as TPG will disrupt on price to differentiate.

Appendix

Further reading

"New players will shake up Singapore's benign mobile market," TE0016-000325 (December 2016)

Author

Nicole McCormick, Practice Leader, Broadband and Multiplay

nicole.mccormick@ovum.com

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