Telstra May Cut Mobile Prices In Wake of Aggressive Push From Optus And Vodafone

Telstra chief executive Andy Penn has left the door open to cutting mobile prices to ensure the gap between to its rivals doesn’t get so large it threatens Telstra’s market share.

Competition on the mobile space is intensifying, with Optus and Vodafone Hutchison Australia slashing prices in the new financial year.

Telstra has always maintained a pricing premium over its rivals, which Citibank estimates to be about 20 per cent over the long term.

But as the battle for market share in mobile pushes average revenue per user (ARPU) lower, the offers from Telstra’s two main competitors have stretched its pricing premium out to an average of 30 per cent, and in some cases 40 per cent, according to Citi.

Mr Penn told The Australian Financial Review he is confident Telstra will be able to maintain its premium because of its network and service, but would not go into the telco’s pricing plans.

“What I can’t control, necessarily, is the pricing in the market. Ultimately, our prices are really a function of what the market competitive dynamics are,” he said.

“We’ll continue to focus on the strategy we have for our customers. I’m confident that’s the right one.”

Mr Penn also noted Telstra has had success with its competitor brand Belong into mobile in October last year and has added 67,000 customers in the low-price market, where it also has the Boost and Aldi brands. Overall, Telstra added 342,000 retail mobile customers in 2017-18.

“Our mobile performance has very much moved to a multi-brand offering,” he said.

Need to adjust pricing

Telstra unveiled its first round of mobile plans in July as it simplifies its mobile product line from 1800 to 20 core plans. The simpler line of plans and elimination of excess data charges mean Telstra will sacrifice $500 million in revenue over the next three years as it aims to entice customers and drive retention.

Citi analyst David Kaynes believes Telstra’s premium is now too high and given most of the growth in mobiles is at the lower price points, the telco will need to adjust pricing to hold its market share.

“When they launched the new plans, the pricing looking pretty good compared to Optus and Vodafone but very quickly after that you’ve seen price cuts from both competitors,” Mr Kaynes said.

“Telstra had really strong subscriber growth in the June quarter, particularly for that quarter their pricing was really competitive. It’s since that point, in July and August, where Optus and Vodafone have cut their prices again.”

Mr Kaynes noted the biggest gap in premium has opened up in SIM-only plans, where customers bring their own phone. These plans are rising in popularity as the difference between, for example, a new phone and a two year old phone, are not hugely significant.

Optus boss Allen Lew noted the increase in SIM-only plans at the telco’s results in August, stating handset providers “don’t seem to be innovating” as much with new models being release each year with only marginal improvements.

The trend towards SIM-only plans, the need to increase data inclusions on mobile plans, and the pressure to cut prices, is hitting mobile profits across the sector at the same time as the industry comes under pressure in the fixed internet market.

Fixed internet margins have crashed thanks to the wholesale pricing of the National Broadband Network, which is forcing telcos to compete more aggressively in mobile, again hitting ARPU.

Retail offers to remain competitive

The merger of TPG Telecom and Vodafone is expected to ease some pressure on the market. TPG had planned to be the fourth mobile network, entering with irrational pricing as low as $9.99.

Mobile is being tagged as the big hope of the telco sector. The industry hopes it can capture a greater share of profits in mobile when networks are upgraded to 5G than it has in previous generations of mobile technology.

The internet of things and other services around mobile, such as cloud storage, data centre management, security and monitoring services will play a role, with general pricing and inclusions for retail mobile offers to consumers expected to remain highly competitive.

Martin Currie research analyst Patricks Potts said Telstra has always had a premium to Optus and Vodafone, and it remains warranted, it’s just a question of how much of a premium.

“Optus seems to be moving on headline price and Vodafone having to react. Telstra hasn’t moved that much, but they’ve been doing some more innovative things around product, more discounted second device product offers,” Mr Potts said.

“Telstra were doing that in the fourth quarter of last financial year and saw a big jump in post paid net adds at the time. You’re left wondering if Optus has to be more aggressive on headline prices to slow that momentum.” – Financial Review