Analysis: Aggressive Vodafone could spell price war

Telstra chief executive David Thodey was adamant this month that a mobile price war wasn’t coming. Ovum senior telecommunications strategy analyst Nicole McCormick begs to differ.

Pricing stability has returned to the Australian mobile scene but the serenity may be short-lived.
About this time last year, Telstra said it would spend big to increase its mobile market share, even if mobile earning margins were temporarily pummeled.

The firm spent more than it originally planned - $670 million in additional mobile operational expenditure - but it also added more customers than it expected at almost 1.7 million new mobile connections in 2010/2011 financial year.

Among all the operators in the Australian market, only Telstra has the financial muscle to launch such a well-resourced growth play. Neither Optus or Vodafone could possibly hope to launch campaigns on a similar scale.

It seemed to work. The handset subsidy-led aggression increased Telstra's market share back above the 40 percent mark, contributing to market share losses for both Optus and Vodafone.

In contrast, Optus gained only 408,000 net adds and lost almost one percentage point in market share to 31.8 percent.

Vodafone's network woes also found their footing, with the firm losing 233,000 mobile subscriptions and 2.6 percentage points to end the year with a market share of 25.5 percent.

In short, Telstra in the last year strengthened its lead over Optus as Australia's number one mobile operator.  

The challenge for Telstra now, however, will be to retain its newly won customers, both prepaid and those on contract. Telstra will be betting on its better network "coverage, speed and performance" mantra to woo even more subscribers and keep them there; especially important for those returning to the telco.

The other big challenge for Telstra will be to up-sell from the basic mobile service for these new customers as well as existing customers. Extracting extra revenue out of customers in this free data world we live in is no mean feat.

But Telstra will be first to market with dongles for its upgraded LTE network. Provided monthly premiums for the faster mobile technology are not considerably higher than 3G - and early indications are they will not be - Telstra could be on a short-term winner.

Despite its continued downturn, it is Vodafone that the industry has its focus on.

Telstra chief executive David Thodey said earlier this month at the firm's results announcement that Vodafone would try to win back some of the customers they had recently lost.

Thodey’s equivalent at Optus, Paul O’Sullivan, also pulled no punches when he pointed to Vodafone’s ‘Infinite’ plans as a major source of competition.

Thodey said he didn't think an "all-out price war" would ensue but we are not convinced.

Vodafone has to do something to regain its competitiveness and if it does not compete on price, then what?  

We wouldn't be surprised to see Vodafone aggressively target the youth market in 2012 as it continues with its network consolidation and upgrade.

Optus could respond, given it will vigorously fend off any encroachment by a more aggressive Vodafone onto its number two turf.

That, in turn, could spark a response from Telstra, all of which has the makings of a price war to me.

Thodey might think any ensuing war is "disappointing" as the company embarks on its mobile growth strategy but he might not ultimately have a choice in the matter. 

Maybe it's time for Vodafone to have a bite of the cherry as well.