Telstra is expecting TPG’s forthcoming mobile network to be a “formidable” competitor that will impact service prices.
The admission by Telstra chairman John Mullen at the telco’s AGM today runs counter to analyst expectations around the impact of TPG’s $2 billion LTE network investment.
The TPG network is expected to cover about 80 percent of the population - well short of the reach of Telstra’s network, which was reinforced yesterday with the results of an extensive drive-testing survey.
To date, most analysts have predicted TPG will not enter the mobile market aggressively.
This is because the company has an existing mobile virtual network operator (MVNO) customer base that, if transitioned on-net, would allow TPG to break even on its operating costs, without requiring major new customer acquisition.
UBS’ Australian evidence lab in August found Telstra customers were least likely to churn to TPG, mostly over concerns about the latter's limited geographical coverage.
However, Mullen today indicated that Telstra was sufficiently concerned about TPG’s entry to take stock of its finances and fast-track its own network investments in preparation.
“TPG is and will be a formidable competitor - of that there is absolutely no doubt,” Mullen told shareholders in Melbourne.
“We do not underestimate the impact this may have, the effect on pricing, nor the fact that we must - and almost certainly will - continue to invest heavily to maintain our mobile network superiority and continue to improve the experience we offer to customers."
Shareholders had been spooked when TPG finally unveiled its $2 billion plan in April this year, after dropping hints that an LTE play was coming throughout 2016.
Mullen said the TPG threat was one reason Telstra had decided to change a long-running policy on how it pays dividends to shareholders.
The change - the first major one since Telstra was floated - means dividends are no longer paid on 100 percent of underlying earnings, but on a range of between 70 to 90 percent.
Mullen said the dividend policy change was “one of the toughest decisions the board has ever had to make”.
“We spent many long hours debating it, many sleepless nights working it through in our minds, knowing full well the impact it would have on our shareholders,” Mullen said.
“I don’t like it, I know that you don’t like it, but the world has changed and it would have been irresponsible of the board not to take this tough but correct decision for the future.”
The other driver of the dividend cut is Telstra’s ongoing efforts to plug a $3 billion gap in earnings left by the effective closure of its wholesale DSL business once the NBN is completed in 2020.
Mullen said some shareholders had asked why Telstra could not “go out and find high growth businesses to replace the $3 billion in earnings that we are losing because of the NBN, so we can maintain the dividend at previous levels”.
He said he did not believe shareholders would appreciate Telstra splurging on businesses “just for the sake of making up the numbers”.
Telstra does want high growth businesses but would prefer to develop them itself “close to the core” - a longer-term strategy that is likely to be more lucrative than doing so through acquisition.