A look at TPG Telecom's impact on Singapore's Big 3: Page 2 of 2

 

What can we expect from TPG?

If there is one thing that TPG isn't afraid of, it will be competing head on with incumbents.

TPG, a company founded by Malaysian-born Australian tycoon David Teoh, started off in 1986 as an IT company that sells OEM computers.

It is also no stranger to competing against the big boys. 

When it entered the Australia telecommunications play in 2008, specifically the fixed broadband space, it had to battle for market share with well-established players like Telstra, Optus, iiNet and M2. It entered the space via the acquisition of SP Telemedia. 

For now, it is unsure how much will prices drop as a result of TPG's entry, but, based on Australia's price trend when TPG joined the  it is safe to say that the decline will likely be significant. 

When TPG entered the Australian telecommunications scene in 2008, it did directly, and indirectly, resulted in lower prices of Internet services. According to a report by Australian Competition and Consumer Commission, average real prices for Internet services decreased by 4.6% in 2008-09. 

 

Aggressive, but optimistic plans ahead

So, how will TPG compete against its more well-established rivals? Somewhat aggressive. 

TPG announced that it will be allocating up to S$300 million to obtain nationwide coverage by September 2018. In contrast, M1 spent S$133 million on capex last year. It will not likely be a major challenge for TPG to fund its S$300 million capex -- for the financial year ended July 31, 2016, it has raked in A$759 million in operating cash flow and has a free cash flow of A$318 million.

TPG also said that its immediate aim is to capture 5-6% market share as fast as possible, as it is a crucial part for it to become profitable operationally (Ebitda positive). 

In order for one to have a rough idea how TPG will be competing against its Singapore peers, one can also look at how it compete against its peers in Australia. 

In Australia, TPG's offerings include fixed broadband, as well as mobile broadband. It offers its mobile services via mobile virtual network operator (MVNO) arrangements. (TPG signed MVNO deal with Vodafone Australia, while its subsidiary iiNet, which it acquired in 2015, has a MVNO arrangement with Optus)

Nevertheless, it does not stop TPG to offer competitive prices to customers. Today, TPG is offering SIM-only 1.5GB mobile plans for A$19.99 a month, 3GB for A$29.99 a month, and 10GB for A$39.99 a month. (The 10GB plan also comes with unlimited calls and text messages)

In contrast, Telstra's SIM-only 10GB mobile plan is A$70 a month, 500MB for A$35, and 5GB for A$50 a month. In fact, TPG's SIM-only plan pricing is competitive against Telstra's 12-month plans -- 10GB (5GB + 5GB of bonus data) for A$50 a month; 5GB for A$40 a month. 

So far, TPG did not disclose on its exact go-to-market strategy, however, it did drop a clue that it will be very competitive in the market come 2018.

"The company expects to start delivering services to customers in 2018 and forecasts that it will become Ebitda (earnings before interests, tax, depreciation and amortization) positive when it reaches a market share 5-6% which it believes should be achievable within a short period of time due to the excellent value of offerings that it will bring to the market," said TPG in a statement.

 

Manage to grow significantly at lower margins than peers

Besides known for offering value to customers, TPG is also proved that it is able to grow at a strong pace - even when it is having one of the slimmest margins versus its peers. 

For example: During the full year ended July 31, 2016, its revenue and net profit jumped 88% and 69% to A$2.39 billion and A$379.6 million, respectively. This achievement is based on Ebitda margin of 40% (for its broadband business), and 20% (mobile/ other business). During the same period, its subsidiary iiNET recorded an Ebitda margin of 27% (for its broadband business), 16% (fixed voice business) and 4% (mobile business). 

Interestingly, iiNET was able to register an Ebitda of A$2.4 million, despite having a 4% margin. 

In contrast, most of its rivals are operating at a higher margins. Telstra's Ebitda margin for its fixed voice, fixed data, and mobile are 51%, 41% and 42%, respectively.

Another interesting piece of data about TPG is that - the company managed to return to profitability within two years of entering the telecommunications industry. For the financial year ended July 31, 2008, it registered a net loss of A$18.9 million. A year later, it posted a net profit of A$17.7 million. 

 

Final words

From TPG's past track record, it seems that it is all set to make a significant impact in Singapore, and it appears to be confident with its game plan. Based on its price points offered in Australia, one can be confident (to a certain extend) that it will likely also offer very competitive pricing to attract customers.

However, it will not be an easy journey, and Teoh and his team at TPG are aware of it. They know that the incumbents will do all they can to keep their customers loyal, or stick with them, for the next two years. 

But, TPG is not the usual new kid on the block. It is a company that is used to competing with the "big boys". 

For now, there are uncertainties on how the telecommunications industry will pan out and which incumbent will lose the most market share. This is because the outcome is also dependent on the result of the upcoming general spectrum auction, the intensity of the competition (will there be a price war?), and of course, TPG's game plan. 

However, there is one thing that we all can bet on - that is the ultimate winner will be the consumer.

 

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