AUD1.3bn 4G Spectrum Bid To Weigh On Telstra
Telstra acquired the majority of the digital dividend spectrum auctioned by the Australian Communications and Media Authority (ACMA), offering AUD1.302bn (US$ 1.323 bn) for frequencies in the 700MHz and 2.5GHz bands. With rivals Optus Mobile and TPG Internet taking a more selective approach to spectrum acquisition and Vodafone Hutchison Australia declining to bid, Telstra was able to make offers close to the reserve prices. The company continues to believe it can finance the purchases through debt, but BMI believes increased network infrastructure capital expenditure will weigh on profitability in the long term.
Telstra acquired 2x20MHz in the 700MHz band and 2x40MHz in the 2.5GHz band, while Optus Mobile offered AUD649.1mn for 2x10MHz in the 700MHz band and 2x20MHz in the 2.5GHz band and TPG Internet agreed to pay AUD13.5mn for 2x10MHz in the 2.5GHz band only. This means that 2x15MHz in the 700MHz band went unsold. Under the allocation caps, a single bidder could not acquire more than 2x25MHz in the 700MHz band and more than 2x40MHz in the 2.5GHz band. Thus, Telstra secured the maximum allocations allowed under the terms of the auction, representing two-thirds of the spectrum offered.
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The 700MHz band will be ready to use on January 1 2015, while most of the 2.5GHz band will be usable from October 1 2014 (except in metropolitan Perth and the Western Australia region, which will be available from February 1 2016).
Telstra is staking its future on the anticipated success of 4G services and solutions. Demand for its traditional fixed voice telephony services is falling and interest in retail fixed broadband services is slowing as competition from alternative providers - such as TPG - and the levelling of the market following the introduction of the National Broadband Network (NBN) wholesale services platform continue to weigh on its ability to compete.
Telstra has already begun offering 4G LTE services using the 1800MHz spectrum already used for its 3G services. By the end of 2012, the company had sold more than 1.5mn 4G-ready devices, including smartphones and tablet computers. Increased investment on the mobile business is laudable given the shrinking or smaller profit margins recorded by its other operations. However, mobile handset and broadband ARPUs are, in general, declining owing to increased use of bandwidth-intensive but operator-agnostic over-the-top (OTT) services such as Facebook , S k ype , Viber and Whatsapp , which incur heavy network utilisation costs but deliver very little revenues back to the operator. The faster speeds promised by 4G will merely accelerate this trend.
Telstra already planned to spend AUD1.2bn on upgrading its mobile network in FY2013, mainly to offer faster data throughput speeds and build additional base stations; that investment will need to be increased significantly if Telstra is to be ready to use its new spectrum. Construction of new towers to support rural coverage in the 700MHz band and in increasing in-building penetration using the 2.5GHz frequencies could prove to be a major cost burden that other services may not be able to subsidise. While we welcome the news that total bids for the spectrum only slightly exceeded the controversially high reserve prices, we are concerned that Telstra's overly-aggressive defensive strategy might bear too high a cost and impact on the company's ability to profitably provide next-generation services.
For now, we continue to forecast the number of 3G/4G subscribers to rise from 22.46mn in 2012 to 26.38mn by 2017, accounting for 79.5% of the mobile market by the end of the forecast period. However, if the high costs of network buildout are ultimately passed on to consumers, enthusiasm for 4G services could be blunted.