TPG and Vodafone: Cleared To Merge

I have been working around telco’s in Australia for 20 years and one thing I have seen happen over that time is the insatiable growth in demand for data. It doesn’t matter how much you have in your plan each month 5 GB, 20 GB, 100 GB or more, Australian customers want and demand more data with their telco plans. We are also wanting more connections to towers in our neighbourhood than ever before. Cellular connected cameras, smart watches, dog collars, portable hotspots and home wireless broadband solutions are part of an ever-growing list of items releasing to the market.

In the middle of all of this sits three telecommunications companies with mobile networks, Telstra, Optus and Vodafone. Each company has been fighting a battle to win customers anyway they can. Telstra has leveraged its national fixed line business and invested many billions of dollars in a world-class mobile network that reaches further across the nation than any other. They have also bought high value sporting rights, cut deals with Apple to bundle Apple music and offered streaming services to their customers (via Telstra TV). Their competitive position has been based on bundling a suite of different services into one package and encouraging a customer to consume the bulk of their entertainment and telco services with them.

Optus more recently has gone in the same direction, purchasing the streaming rights to the Premier league in the UK, bundling Fetch TV and other streaming content. Optus has a mobile network that is not to be sneezed at, is the largest holder 5G spectrum in the Australian market thanks to its purchase of vivid wireless and maintains a national fixed line network to. Then you have Vodafone.

Vodafone has gone through a somewhat product renaissance over the last five years. They have been the small and nimble telco, relying on doing things differently in an effort to attract new customers. Vodafone has leveraged its global network to offer value-added services such as $5 roaming, but they have struggled to compete against Telstra and Optus on the domestic front. As good as the Vodafone network is around capital cities and most regional locations, step away from a regional town and your Vodafone service has a higher chance of not finding a close enough \tower than if you are with Telstra and Optus. This has meant Vodafone has had to compete on plans and other innovations, along with price.

The challenge for Vodafone over the last five years is that no matter how much they innovated or how much they dropped their prices, Telstra and Optus were able to respond and keep Vodafone as the third ranked telco. By being third, Vodafone was not able to gain a satisfactory return on investment from the large capital outlays needed to keep their cellular network competitive and this affected their ability to be profitable. In short, Vodafone has been bleeding cash for years.

So Vodafone is left with a challenge. Merge or leave. Vodafone didn’t want to leave Australia, this is why when 3 mobile and Vodafone decided to merge many years ago, Vodafone maintained its brand position in the market. The other option, look for a merger partner, seemed a better choice. But who could they find that would bring Vodafone what they needed most, a competitive domestic fixed line network.

TPG was the best opportunity. As an Australian publicly listed company, TPG was one of the largest fixed line Internet providers following years of purchases of companies like iiNet, Internode and others. TPG also owned a national fibre network following its purchase of PIPE Networks many years ago. TPG also had its fair share of innovation as a telco. In 2008 TPG was the first to offer unlimited calls and text on a mobile phone plan. This was an offer that felt too good to be true at the time, but for $100 per month, TPG earnt me as a customers for many months.

By bringing together Vodafone and TPG, the combined company would be able to connect Vodafone’s cellular towers to TPG’s fibre-optic network and gain a more competitive position as the growth of mobile data continued, especially with the rollout of 5G services. Further, the extra customers would make the cellular network for Vodafone cheaper to operate on a customer per customer basis. TPGs MVNO customers were already on the Vodafone network after they switched across from Optus many years ago.

This was to be a marriage made in heaven, even thought it was one that was happening a number of years later than many said it should.

Further to this, Vodafone and TPG could merge, Australians could purchase shares in the new entity and the larger combined entity would be in a better position to compete with Telstra and Optus.

The fly in the ointment was that TPG had already begun rolling out a national cellular data network. This was designed to provide low-cost home wireless broadband solutions to customers, at a price lower than the cost of a similar solution on the NBN. TPG didn’t want to build their own network, but they didn’t want to be left behind without one either. Building your own national cellular network involves amongst other things, erecting many thousands of mobile phone base stations. This practice, even in its early stages was and would continue to, upset many in local areas, who didn’t want new towers being placed in their neighbourhoods.

Once the opportunity of a marriage with Vodafone became apparent, TPG very quickly scuttled its plans to build its own network, and set about to cut a deal that would work best for their shareholders. At the time the blame for the cancellation was placed on a recent announcement by the Federal Government that Huawei 5G transmission equipment could not be deployed in the Australian market. This decision was to cost all telco’s, including Vodafone, many millions of dollars extra to build their new 5G networks. Not only was Huawei equipment cheaper than many competitors, but if a telco wanted to kit out a mobile tower with 5G, it would have to replace the incumbent 3G and 4G transmission equipment, if it was from Huawei.

This change in the telco landscape either provided TPG the reason or excuse they needed, to kill off their mobile network plans and focus on the merger with Vodafone.

The merger deal agreed to would involve David Teo, the founder of TPG, achieving the position of non-executive Chairman of the combined entity. Inaki Berroeta, the current CEO of Vodafone Australia, would continue as the CEO. Essentially, Vodafone would have management control and TPG would own almost half of the business, at least to start with.

Unfortunately, for both parties, the ACCC decided the merger could not go ahead as they believed Australian customers would be worse off because TPG was only merging so they didn’t have to build their own fourth mobile network. The ACCC believed that a fourth network would be advantageous to Australian customers by lowering prices through extra competition.

Personally, I disagree with that position. Australia had historically tried four cellular networks, if you count Onetel, we once had five and it didn’t work. Now Australia’s third largest mobile phone network was looking at a path to profitability in the future and the competition regulator wasn’t going to be part of the party.

Vodafone and TPG decided to challenge the ruling, and the Federal Court decided that TPG was not likely to build the fourth mobile network and therefore the ACCC ruling was invalid.

Australia will now have a 3rd mobile network provider with far greater resources to compete against Telstra and Optus. They will be better placed to compete not just for retail customers, but for small to medium enterprises and larger enterprises to. TPG fibre lines will be able to provide the connections between Vodafones 5G masts that they need as the demand for data continues to grow.

I’ve been a customer of Vodafone for many years across mobile phones, wireless broadband and more recently connectivity on the NBN. The services have been competitive, but Vodafone haven’t been profitable as a business. Maybe this new merger will allow this to change.

Disclosure – Vodafone has been an advertiser of my radio show, Life And Technology and our TV show, CyberShack TV.



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