TPG says telco price war to continue, but is it sustainable?

The telco price war is set to continue, with TPG yesterday confirming it has managed to sign on 28,000 new customers within the past four months as a result of its discounted deals, which provide more bandwidth for much lower prices than competitors.

But one telco expert says the discount strategy alone is not sustainable and cannot generate enough profit – businesses will need to start adding new products and services in order to keep those customers loyal.

“What you see happening is that companies are positioning themselves to win as many customers as possible, because they know a large proportion of those are going to upgrade once new services become available,” telecommunications analyst Paul Budde says.

The comment comes after TPG announced yesterday that its 2011 EBITDA guidance had risen from between $210-216 million, to $215-225 million. Chief executive David Teoh, who is usually media shy, took the opportunity to confirm that TPG is expanding well and that 28,000 new customers were added in the last four months.

The announcement comes after TPG released a lower-than-expected result for the 2009-10 year, recording a profit of $55.73 million in the 12 months to July. But Teoh says earnings are set to increase this half as well.

Macquarie analyst Andrew Levy wrote in a research note that the company may be well positioned for growth, but its broadband market is still experiencing margin erosion.

“This update is a positive as it flags continued robust organic subscriber growth (particularly on-net), and improving confidence by management to maintain organic earnings growth in this environment,” Levy said.

“Growth is coming from new corporate wins as well as the bundling of fixed voice into plans that were previously broadband-only.”

“The broadband segment remains highly competitive, and is likely experiencing margin contraction at the moment.”

This erosion comes from a broadband price war mostly instigated by TPG. It offers several deals for under $30, with ADSL2+ speeds and download quotas well above those offered by larger telcos such as Telstra.

This, in turn, has pushed other telcos such as iiNet and Internode to either bring down prices, or start offering more bandwidth for existing plans. Such a strategy, Budde says, is not sustainable by itself.

“In the future, it’s not going to be just about internet connections, but a range of other services that are going to be delivered by these companies,” he says.

“So while at the moment all you see is these internet plans, what you are going to see is that more people want something else. So you might have $10 for internet, but then you want an IPTV service for $20, or whatever. They are not discounting to ruin themselves, they want to add services later on.”

TPG even said yesterday it will introduce new “triple play bundles” in 2011, offering more channels, films, entertainment and sports content on an HD video recover, with “very competitive pricing”.

This comes after TPG has launched its own IPTV service in 2007, along with iiNet, which launched its own earlier this year – Budde says both companies will need to focus more on these types of services now.

Budde points out the collection of users is also preparing for the introduction of the National Broadband Network, when having a large user base will be critical as infrastructure becomes less relevant in competition. Teoh said yesterday that the company is positioned well to compete “in an NBN world”.

“You either get big, or become a niche market player,” Budde says. “There is nothing in-between. You build up the numbers, and then you become attractive to larger companies like, for instance, Coles, or whoever, that are interested in these databases.”

“But of course, you can focus on both internet services and these types of extras, but that is what most are doing, with iiNet’s IPTV and the Telstra T-Box and so on. You get those customers, and then they eventually spend more and more.”