The establishment of a fourth mobile network operator (MNO) in Australia would “likely intensify competition in mobile and fixed markets,” according to an analysis by S&P Global Ratings team.
The analysis is included in a special post-election report released by the ratings agency.
The “competitive intensity” of the Australian telecommunications market largely hinges on whether the merger between TPG and Vodafone Hutchison Australia goes ahead, the report says.
The Australian Competition and Consumer Commission (ACCC) earlier this month announced that it opposed the proposed merger between TPG and VHA.
Releasing its decision, the ACCC noted the Australia has a concentrated mobile services market, with Telstra, Optus and VHA having a combined 87 per cent share. In the fixed broadband market, TPG, Telstra and Optus have a combined 85 per cent share.
“Broadband services are of critical importance to Australian consumers and businesses, across both fixed and mobile channels,” ACCC chair Rod Sims said in a statement explaining the commission’s views.
“Given the longer term industry trends, TPG has a commercial imperative to roll out its own mobile network giving it the flexibility to deliver both fixed and mobile services at competitive prices. It has previously stated this and invested accordingly.”
“Vodafone has likewise felt the need to enter the market for fixed broadband services. These moves by TPG and Vodafone are likely to improve competition and future market contestability,” Sims said.
TPG in 2017 announced its intention to roll out Australia’s fourth mobile network. In January this year, however, TPG said it was dumping the plan, writing down $76 million in capex associated with the mobile infrastructure it had already deployed.
In addition to the small cells already installed by TPG in major cities, the telco still holds a significant amount of spectrum, however. It not only holds spectrum in the 700MHz, 1800MHz and 2600MHz bands, but a joint venture it formed with VHA shortly after the two revealed they intend to merge was the second-highest bidder in the government’s 3.6GHz auction. 3.6GHz is the band that is being used to deliver Australia’s first 5G services.
VHA and TPG have rejected the ACCC’s arguments and are challenging its analysis in Federal Court. In documents filed with the court, VHA has argued that without a merger it will never become a significant fixed broadband player and TPG will never become a mobile powerhouse.
VHA intends to argue that that a merged telco will present a more significant challenge to Optus and Telstra in the mobile market, and absent a merger VHA’s ability to compete with the two other mobile network operators will decrease.
In a speech over the weekend, Sims defended the ACCC’s opposition to the merger, citing international experience to support his view that having four mobile operators in a market delivers better outcomes for consumers.
“A stable three-player market facing no threats will likely lead to stable and so-called rational pricing,” the ACCC chair said.
“The prospect of more rational pricing, meaning higher and stable pricing, was warmly anticipated by many analysts when this merger was first announced,” Sims said. “Most commentators at that time, therefore, saw the merger as a long-term positive for Telstra and Optus.”
However, he added, “rational pricing” should not be confused with consumers’ interests.
S&P believes that the profitability of mobile network operators will remain under pressure “due to intense competition stemming from mature market conditions, increased commoditization of services, and regulatory interventions.”
Incumbent players “have substantial opportunities to cut costs through simplification, digitization, and automation, and improve subscriber economics through stickier bundles and differentiated offerings,” the report adds.
S&P expects continued high capex from telcos as they roll out 5G services, with mobile operators needing to deploy a large number of small cells to deliver the full benefits of the new standard.