“Mergers and acquisitions” (M&A) is one of those terms that is best spoken softly. It carries with it all sorts of dark undertones: hostile takeovers, companies swallowed alive, employees thrown overboard; the business of menacing movie characters like Gordon Gecko and Patrick Bateman. Very rarely are these transactions mutually agreeable. Rarer still are they mutually desired. Yet, with the recent merger of Vodafone Hutchinson Australia (VHA) and TPG Telecom, we have seen just this, as the two telcos ended years of media speculation to announce a ‘merger of equals’ that, to industry behemoths, Telstra and Optus, must sound something like a battle cry.
Figure 1. The Behemoths Dominate the Australian Telco Market…
Source: Statistica, Cainz
TPG’s courtship of Vodafone Australia is rumoured to have started about 3 years ago, so to many, the announcement on August 30 elicited not as much surprise as it did relief. The two mid-tier telcos had been flirting with the idea of merging for good reason, say CEOs – and long-time friends- David Teoh (TPG) and Iñaki Berroeta (VHA). The combination of Vodafone, which boasts the country’s third largest mobile network with a customer base of approximately 6 million subscribers, and TPG, Australia’ second largest internet service provider (ISP) with more than 1.9 million subscribers, will allow the merged business to “deliver faster services and offer more competitive value propositions to more Australian customers” according to a joint statement. The entity will be publicly-listed on the ASX under TPG Telecom Limited and, through cost savings, capex avoidance and lower prices will establish itself as a formidable competitor to incumbents Telstra and Optus.
Figure 2. The NBN Has Caused Significant Disruption for Market Participants…
Source: ACCC, Cainz
At least that’s what theory leads us to believe. In reality, a portion of Australian customers could actually be made worse off by this merge. TPG and Vodafone are renowned for offering cheap good value plans to customers, while telco giants Telstra and Optus typically have higher priced plans but offer more premium service. By stripping the market for low-price products of a key competitor, the merged entity is taking a larger slice of this demand. By maintaining lean cost bases, and catering to the same kind of consumers, they might actually leave the market for premium products untouched, handing over even more power to the big two.
The merger comes at a time when the telco market is in metamorphosis. The rollout of the NBN has already proven to be a democratising force, with delay costs spread consistently across all operators keen enough to channel the fibre-optic network. With 5G lingering on the near horizon, it is possible that we will witness a movement towards more homogenous product lines. It is becoming increasingly clear that firms cannot compete on price alone. Image and goodwill are now arguably just as important for product differentiation and customer clinching. The public’s venomous reaction to Optus’s less than convincing coverage of the recent World Cup says this much. Telstra, who has been distracting stakeholders from a ponderous share price for years, are facing their own identity crisis, announcing their ‘T22’ strategy in June that will see 8,000 jobs cut, an executive overhaul and a cross-company structural makeover.
Figure 3. As Mobile Continues to Grow, TPG and Vodafone’s Capabilities Make Them a Force to be Reckoned With…
Source: ACCC, Cainz
However, what really keeps telcos up at night is not their skin-shedding or self-fashioning; it’s what they can’t control. The fact is that communication is changing. Traditional telco businesses may be eaten out by new communication operators like WhatsApp, Facebook and Snapchat. While there might always be a role for Telstra and Optus to provide the digital infrastructure over which businesses and households deliver their services, failure to become a high-tech company in the Google and Facebook sense will condemn these firms to an eternity as a utility, and nothing more. As Telstra and Optus are left to fight through low margins and survive the long-run by constantly cutting costs, Australians won’t love or hate their traditional telcos – they won’t even remember them.
The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ, its Partners and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.