Andrew Hansen once told me his eponymous billing software company had hardly ever lost a client. “That’s the good news”, he told me, “but we have hardly ever won one from an incumbent provider either”.
The switching costs are so high in his business that clients don’t ever switch providers. That’s why Hansen’s growth has mostly come through acquisition. But there is one source of organic growth: change.
New clients are only won when they need a new system. In Hansen’s business that happens when an industry deregulates. When new providers enter an industry that was a government owned monopoly, they all need a new billing system. Enter Hansen. And when new regulations require more complex technology, a company will often shop around. Enter Hansen.
Retail customers are not that different. The “If it ain’t broke, don’t fix it” principle has made for some very lucrative annuity streams. We don’t tend to switch service providers unless we have a good reason to.
Bonanza for ADSL Internet Providers
TPG is an extraordinarily profitable business. The telecoms provider’s $1.9bn equity base is all goodwill – the amount of tangible capital in the business is actually negative. Yet last year it spewed out more than half a billion dollars in pre-tax profits. That’s a great return on equity, and a stunning result for a business without tangible assets (net of debt).
The bulls will argue that TPG is so profitable because its Managing Director, David Teoh, is a genius and the company is far more efficient than its competitors. Both of those suppositions might be true. But I think there is a bigger factor at play: a lack of change.
When broadband services first became widely available in the mid 2000s, we all needed an internet connection. That’s a good reason to shop around and find the lowest cost provider and the offerings were highly competitive as a result.
But, once we have picked one, we tend to stick. Sure, a small percentage of the population are always on the lookout for the best available offer and jump ship regularly. We move houses, and that’s a good reason to change (I have probably changed providers three times in the past decade, but only ever when moving house). But most of us just pay the monthly bill and don’t give it another thought.
That’s why industry consolidation has been so profitable. In a competitive business you would expect most of the benefits of consolidation to be passed on to customers in the form of lower prices. As should ACCC-enforced cuts in the price Telstra can charge competitors for access to its infrastructure. None of the challenger providers have particularly strong brand loyalty. Thanks to our lethargy, however, TPG, Vocus and their many acquired subsidiaries have been able to hang on to the profits.
NBN is a reason to shop around
Now we have industry-wide change in the form of the NBN. For the first time in more than a decade, most of the population is going to have to sign up to a provider at some point over the next five years.
I’m a current TPG customer and the NBN has recently arrived at my apartment building. TPG has been harassing me to sign up to its NBN offering for the past few months. But if I have to go through the rigmarole, I might as well take a look at the competition.
The difference is staggering. TPG want $90 a month for full-speed NBN and unlimited data. Singaporean provider MyRepublic is offering me the same deal for $60 month and $1 upfront (it’s a 12 month contract).
It took me five minutes to make the switch. Surely thousands of other customers are doing the same?
NBN Co’s pricing and its impact on TPG and Vocus has been the topic of hot debate of late. Even at $90 a month it seems NBN pricing is going to eat into TPG’s margins.
That might be the least of their problems if all of those sticky customers take the opportunity to scan the market. The last thing an absurdly profitable business wants is something that upsets the status quo.
My unlimited superfast NBN deal with TPG is $60 per month, so the same price as MyRepublic. So I didnt switch – why bother with the hassle. So Im not sure that you will see that much churn as you have suggested. But I agree their will be margin pressure to all telcos.
Really? That’s weird. I told them the offer I had and they couldn’t match it. Maybe your place is on TPG infrastructure rather than the actual NBN.
TPG was cheaper for me too.
The pricing structure depends on the speed of the connection – MyRepublic (at $60 per month) is the clear cost leader for unlimited packages at 100mbps, with most other providers around TPG’s price point of $100 per month: https://www.whistleout.com.au/Broadband/Search?data=-1&connection=NBN-Fixed-Line&tab=nbn100&showall=true. According to the link, the MyRepublic $60 per month offer is a limited time offer which expires today (31 May), which makes sense given the cheapest non-promotional plan is $90 per month.
Within the 3 products in which it offers a package (100, 25 & 12mbps), TPG is usually toward the cheaper end of the price spectrum.
It looks like you just got a really good limited time deal with MyRepublic, Steve! Let us know what the pricing from MyRepubic is like 12 months from now when your contract resets…
I called MyRepublic this morning, thinking I’d missed out on the $60 p/m deal. They said the promotion was supposed to end on 31 May but it has been extended until 31 August.
Maybe they will just keep extending it!
Note that there was a comment on Livewire about MyRepublic’s woeful customer service. I’m not plugging the product at all. http://www.productreview.com.au/p/my-republic.html
Just an update on this. Modem arrived 2 days after I signed up, NBN man came yesterday and I am up and running. Working to spec – 100MB up and 40MB down. Fingers crossed it lasts … nothing to complain about so far.
An in depth analysis needs to look at things like CVC, AVC, ARPU, etc…
Because of the structure of AVC & CVC cost’s, it does tend to level the playing field across retail recipients but it’s not the whole answer.
Consider the ACCC forced NBN to create 121 Points of Interconnect (Aggregation Points where customer tails are offhanded) so an ISP will still need to have their own Network (Fibre in the Ground) or Purchase it from a Third Party. Only your major’s have these infrastructure assets (Think Telstra, Optus, TPG, Vocus).
Cheap doesn’t always equal better also. Look at how many people still pay money to Telstra for their Mobile Service. A lot of these cheap all you can eat ISP’s are having major congestion issues and their networks slow down to a crawl at peak usage times. i.e. they are cheap because they are oversubscribing their services.
ISP’s will continue to try and value add via other services for further revenue, think Phone, TV, Movies, etc.,
I think there is a couple of tailwinds for the industry in General & in particular Vocus/TPG.
1. NBN is providing broadband too some households & businesses that can’t currently access it. (Bonus to Whole Market).
2. Increasing the overall average speed of Internet Access. Means potential for people to pay more to access higher speeds. More likely to pay for services that can utilise the higher speeds Streaming services, etc. (Bonus to Whole Market).
3. Australia’s rampant population, the market is getting bigger every year. (Whole Market)
4. Telstra & Optus’s HFC Customers will be transitioned to the NBN and available to all providers. Telstra/Optus never wholesaled these networks, so it was a massive segment of the market not available to the other ISP’s. If you understand the technical differences between HFC & DSL you will understand why this is big. (Big Negative to Telstra/Optus, Big Benefit to everyone else.)
5. Demographic benefit, Young people can’t live without internet, older people are so/so.
6. High Speeds will mean a greater demand on local, interstate & International Backhaul (the same fibre in the ground that Telstra, Optus, TPG, VOCUS operate).
Major Headwinds are:
1. Increased Competition squeezes margins.
2. As wireless increases in speed & quota, you may lose some of the bottom of the market.
Overall not a bad industry to be in imo, your selling a product that everyone wants, in an industry that’s growing. Worse industries to be in.
You may have churned to elsewhere for NBN but the numbers I see shows TPG getting a big chunk of Optus’ and Telstra’s existing customers especially outside of metropolitan areas.
I was with TPG years back, but the service wasn’t great, and felt I was getting gouged. Looked around, found a much better deal, and no regrets.
Lots of better deals around if you take the time to look.
It’s true that TPG customers have the opportunity to churn but the inverse is also true; Telstra and Optus customers (who pay higher charges) will also churn. TPG should be a net beneficiary of greater churn because it is the lowest cost provider in the industry.
Consider this; for its ADSL product, TPG charges less than halve the retail price of Telstra and yet both firms generate EBITDA margins of 40%.
The structure of NBN pricing limits the benefits of incumbency but it doesnt eliminate that benefit. TPG still owns all its backhaul while MyRepublic must lease it and it has millions of customers to spread billing, service and marketing costs across. TPGs broadband margins will fall, but market share might not be as vulnerable. Assuming, of course, that competitors remain rational. It is possible that, in the grab for market share, we see irrational pricing which would decimate margins for all.
Not exactly sure how I should interpret this but I think the key question is whether TPG could build its FTTB fast enough to maintain its advantage. The reasons are:
(i) TPG does not have its own copper network so it is relying on Telstra’s copper infrastructure. I don’t see why TPG (as an ADSL reseller) could maintain its edge over Telstra in the long run.
(ii) As both Telstra and Optus are switching off their own networks (copper and cable respectively), NBN will quickly capture the wholesale market, creating a level playing field for everyone. Consequently, increasing retail competition will squeeze ISPs’ margin.
TPG got the chance to roll out its own FTTB network (as it announced 2 years ago?) but insofar progress seems slow. They only recorded 16k active connections or so in the last half. My take is that if you don’t get customers in the first 3 months of rolling out, you might not even get them at all (because as explained in earlier comments, people don’t change their ISPs suddenly). As such, by the time TPG could roll out sth meaningful, NBN might have captured the majority of the connections.
There is a possible way for TPG to get out of this situation, which is by undercutting NBN prices (and hopefully people will change). But I expect NBN would respond to that since they’ve got ample room to slash their pricing. If I’m not wrong, Australia is one of the most expensive fixed broadband market in the world (maybe just behind the middle east).
I think you are right Gaurav.
The other concern is people assuming that every provider’s service on the NBN is identical but failing to take into consideration the experience you are likely to receive is something goes wrong (like what others have described about the poor customer support received from MyRepublic about slow speeds and getting it fixed).
Potentially this is a bigger issue for Telstra. I know several people who are getting HFC NBN in their neighbourhoods in the next few months – in WA and NSW – who have had major internet access issues after Telstra undertook an upgrade of its cable broadband network infrastructure prior to the NBN becoming available (possibly related to the NBN roll-out and making the Foxtel cables available to the NBN).
I’m sure the frustration these people have had in spending hours with customer support in the Philippines trying to get these issues fixed, only a couple of months before the NBN comes on-line, is going to cause major churn issues for Telstra.
Pretty sure the $60/month unlimited deal with TPG is on their fibre to the basement infrastructure. I have this product as well in an older apartment block on the edge of the city. Getting a max of 13mb/sec real download speeds through websites/software that can handle it, so it’s definitely comparable with NBN.
The wholesale NBN price changes take effect today, so I would expect to see new price plans coming to market soon as the providers servicing heavy data users (like TPG) get a substantial reduction in price. This is why a lot of smaller providers have been in a hurry to load their networks with as many big data users as possible by offering cheap unlimited plans.
TPG’s FTTB connection @ $60/month is about the best broadband you can get as a retail customer. I do hope they expand that offering to more units.