While the recent result for fixed products mixed it was largely in line with analyst’s expectations. New businesses in mobiles, network applications and services (NAS), and digital media will support long-term growth. Despite the decline, fixed products will remain a meaningful contributor to group revenue over the next five years. Fixed products make up 28% of group revenue, but analysts forecast a decline to 17% by 2017. This is largely attributable to structural headwinds as consumers disconnect fixed-voice lines. Telstra is also compensated with disconnection payments from NBN Co as the copper network is switched off. Management is adamant renegotiation of any existing contracts would only take place if it is a net benefit for shareholders.
Fixed-broadband was solid as market share continues to grow. Telstra registered a 3.3% increase in its fixedbroadband customer base, ahead of industry growth of 2%. More interesting is the decline in the number of wholesale broadband subscribers, which have slowed considerably from previous quarters. Heavy investment by competitors to gain market share in prior periods was reflected in a decline in Telstra’s wholesale subscriber base.
The industry will wait for the eventual fibre rollout and, in response, has reduced copper based infrastructure investments such as ADSL. We believe the timeframe needed to realise an economic return on new investments has closed, as the NBN is progressively rolled out. The payback period for infrastructure investment averaged around 20 months. In context, a retail broadband contract typically lasts 24 months. In the long term, there is no change in our view that Telstra’s wholesale subscriber base will be the first to decline. Early fibre rollout is focused on regional areas where most of Telstra’s wholesale subscriber base is located. We note Telstra is compensated from the disconnection payment but competition will intensify as peers gain access to markets, in particular regional areas, where Telstra once held a monopoly.
As the market waits for the rollout of fibre infrastructure to gather pace, the interim strategy for the sector shifts to offering the existing customer base additional services. This is a growth opportunity for Telstra with bundled customers as a percentage of its fixed broadband customer base at 56%. While smaller competitors are catching up by adding mobile services and pay television, Telstra’s diverse product range and quality, provide a competitive edge against peers in the consumer market.
Mobile services are supported by superior network quality while pay-tv Foxtel is underpinned by significant content rights. The obvious benefit from increased take-up of services is ARPU (average revenue per user) growth and improved customer service, which helps customer retention. Customers taking multiple services have a lower tendency to switch providers if backed by strong customer support. Telstra has strengthened customer support in recent years and the improvement will sustain customer retention and growth going forward.
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