In the big battle, Telstra, Vodafone, Optus and the new forces of TPG are going to get hurt. It will cost them a fortune. But it will be great news for the rest of us. The competition will make the mobile phone market not only better, but also cheaper.
I love competition. It takes profit away from big business, transforming it into benefits for customers. When it comes to the mobile phone market, a bit of redistribution is well and truly overdue. Like many Australians I pay a fortune for a crappy prepaid deal and I’m very much ready for something better.
Telstra in particular has been making out like a bandit. The size of the margins they have been making on mobile phones are 40 per cent — and they used to be even higher. That is a lot of your monthly bill going to Telstra shareholders.
As the next graph shows, Telstra has been a profit machine. The height of the bar shows how much revenue they make, and the red section shows how much of that revenue is profit. (The measure of profit here is ‘earnings before interest, depreciation and amortisation’ (EBITDA), which people like to use because it makes comparisons easier.)
But finally, Telstra is getting the message that it is time to fight for our loyalty. They recently dropped excess data charges to keep customers happy. (Vodafone did the same.)
Telstra needs to do something, because investors are losing their loyalty to Telstra. Its share price has been falling as investors worry that with competition brewing, the biggest player has the most to lose. As the next graph shows, Telstra’s share price has been falling for two years.
So Telstra is now scrambling to turn this graph around. Which is why all the signs point to a big battle where it cuts prices and improves deals to try to win back customers. The company has announced plans to cut the number of their plans on offer from 1800 to just 20. The Telstra CEO has also been complaining about rising competition, then Telstra sacked 8000 people to reduce costs.
Cutting the dead weight like that is exactly what you need to do if you’re planning to go to war.
“The mobiles market is incredibly competitive and that’s great for consumers,” says Telstra head of mobiles Kevin Teoh. “While we don’t pre-announce our future pricing intentions we will continue to look for ways to provide customers with more value.”
The battle for Australia’s customers comes just before the 5G network launches. This should give you a clue that they don’t mean to engage in price war for eternity. Before long, companies will be trying to offer premium products again at premium prices.
5G means faster download speeds, although it is not yet clear just how much faster. There are some technologies that count as 5G (called millimetre wave) that are 30 times faster than 4G. Their downside is the cell towers have short range. Other 5G technologies are just a tiny bit faster than 4G.
Telstra seems to have the lead so far in rolling out 5G plans, with Optus competing too. Telstra expects to have the technology going in 2019, albeit probably in Australia’s densest areas to start with. 5G should allow them to start charging more to customers who want top-level service.
That is certainly Telstra’s long game. Competition means you have to cut costs. So it inspires companies to offer service like 5G, that their competitors don’t offer yet. That allows them to step out of the battle and enjoy a bit of peace.
That is certainly Telstra’s long game. Competition means you have to cut costs. So it inspires companies to offer services like 5G, that their competitors don’t offer yet. That allows them to step out of the battle and enjoy a bit of peace. We consumers just need to hope the other phone companies are quick to sort out their own 5G networks and step back into the battle.
Jason Murphy is an economist. He runs the blog Thomas the Think Engine.