Winners and losers in Telstra-TPG decision, but what about customers?

The big winner from Wednesday’s landmark decision by the Australian Competition Tribunal on Wednesday to reject a proposed deal between Telstra and TPG Telecom to share their regional network capacity was Optus, with the big loser being TPG.

While the decision was clearly aimed at blocking any increase in power by market leader Telstra, it also undermines TPG’s potential growth, both in the bush and with city-based customers wanting regional coverage.

As TPG’s chief executive, Inaki Berroeta, said after the decision, it is an outcome that “entrenches the status quo for mobile coverage in regional Australia”.

While it would make sense on the surface to argue that a deal between the No.1 and No.3 in any market would reduce competition, it begs the question of whether it will lead to better outcomes in the long term for Australians wanting ­mobile coverage in rural and regional areas, which traditionally have been underserved because of the tough economics of covering such large and remote land areas.

While the majority of Australians live in the city, the ability to deliver mobile services in the country is still an important decision maker in the selection of carriers, which means the decision also has an impact for a much broader range of people than the 17 per cent living in the area covered by the deal.

While Optus welcomed the deal, describing it as a “big win for Australians”, the decision resulted in TPG’s shares taking a pounding – they fell 5.4 per cent to $5.26 on the day – despite its confirmation that its earnings guidance for the current financial year until the end of December remained unchanged at between $1.85bn and $1.95bn.

Optus called the decision a ‘big win for Australians’. Picture: NCA NewsWire / Andrew Henshaw

What happens next will hinge on two major factors: how TPG plans to take things going forward, and how much the decision – which goes back to a deal done ­between Telstra and TPG in February last year – could prompt a broader review of government policies in the sector.

As TPG points out, its part of the deal involved giving Telstra access to spectrum that TPG currently does not even use at the ­moment.

In February last year, Telstra and TPG reached what was seen as a landmark, non-exclusive 10-year network-sharing agreement covering the regions.

It involved Telstra buying spectrum owned by TPG covering 17 per cent of the population who lived in outer suburban and ­regional areas.

In return, TPG was planning to transfer 169 of its mobile sites to Telstra and get access to Telstra’s mobile phone network of 3700 towers, boosting its coverage from 96 per cent to 98.8 per cent of the population.

The deal would have resulted in TPG decommissioning 580 ­mobile sites in the regional coverage zone.

The net result would have been a more efficient outcome for both companies in their coverage of regional Australia, which potentially could benefit customers of both telcos and would have boosted TPG’s offering across its network of brands, which cater to the cheaper end of the market.

But Optus, which stood to lose from the arrangement, lodged a complaint to the ACCC in June last year that effectively blocked the deal in December.

On Wednesday, the tribunal upheld the ACCC’s decision.

Tribunal president Justice ­Michael O’Bryan took the view that the deal was likely to have a materially adverse effect on Optus’s competitive position as against Telstra.

He argued that it could also be detrimental to broader mobile coverage in Australia in general by undermining Optus’s incentive to invest in the 5G network.

“Over time, the network quality gap between Telstra’s network and Optus’s network would be likely to increase,” he said.

“As a consequence, the competitive constraint that Optus currently imposes on Telstra would be likely to weaken, which would enable Telstra to maintain higher price margins than would otherwise be the case.”

Any efficiency benefits from the deal that might benefit the public (in terms of more competitive prices by Telstra and TPG), he argued, would not be enough to offset the broader detriment of the reduction in competition in the market.

So what’s next?

The ideal outcome from the competition regulators point of view would be for TPG to turn to Optus to do a similar deal – a proposition that TPG has rejected so far. TPG is insisting it has no current intention of doing a deal with Optus.

For one thing, relations between the two are not good at the moment.

For another, TPG believes that if it did turn its sights to Optus now, Optus would realise it is in the box deal and not offer anywhere near as good a deal as it has reached with Telstra.

Its options are to appeal to the Federal Court (which could be difficult as this would involve arguing that the tribunal had made a mistake in law) or to consider if it could recut its deal with Telstra in a way that might be more acceptable to the competition regulator.

Telstra chief executive Vicki Brady. Picture: NCA NewsWire / Luis Ascui

In his decision, Justice O’Bryan made it clear that he was constrained in providing a decision on only one aspect of the deal between Telstra and TPG – that involving the use of spectrum.

He also made it clear that the tribunal could see there would be benefits in operators sharing spectrum, given the economic cost faced by Telstra and Optus in expanding in regional areas.

“The tribunal considers there are strong commercial and economic incentives for the mobile network operators to share mobile network infrastructure in regional areas,” he said.

“Appropriately structured ­arrangements are capable of ­delivering efficiency benefits without substantially lessening competition.”

“This determination should not be understood as indicating a contrary conclusion.”

In his statement, Berroeta said TPG was “not giving up on regional Australia”.

He indicated that policy reform by government may be needed to “deliver greater competition and choice in the regions that need it most”.

Telstra chief executive Vicki Brady also raised the issue of the decision needing more policy responses from the government to ensure a better outcome for regional Australia.

Brady argued that the deal had “overwhelming support” from regional Australia and would have led to immediate benefits for customers of both networks.

She said Telstra was calling for a “rethink” of the government’s policy on access to spectrum in the light of the “ever increasing demand for mobile data”.

As she pointed out, there are two ways of adding capacity to meet the demand for more data – getting access to more spectrum or building more towers.

At the moment, TPG has access to spectrum it is not using, which Telstra could have used, and building more towers is not always commercially viable.

“As 5G drives increased data use and with 6G on the horizon, as a country we need to be smarter about how we use our spectrum assets. There is a role for government to look at how we do that more efficiently,” Brady said.

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Dexus write-off a worry

Dexus’s announcement that it will be writing off $1bn from the value of its office block portfolio has significant implications for the broader fund management industry, including superannuation funds, some of which have been significant investors in CBD ­property.

The announcement, which will send more shivers down the spines of property investors, was made after a revaluation of 175 of its 182 assets, made up of 32 office blocks and 143 industrial properties.

Its portfolio was listed as being worth $17.8bn in its half-year results released in February.

A combination of more than a year of rising interest rates and a lack of enthusiasm for workers to return to the office and a general economic downturn is behind the 6 per cent devaluation of its portfolio.

The move, which follows increasing signs of declining property markets – particularly in office blocks – will put pressure on financial industry regulator APRA to make sure super funds have also updated the value of their property portfolios.

The announcement is another sign of the divergent forces on the Australian economy and those in the developed world.

Reserve Bank deputy governor Michele Bullock painted a detailed picture on Tuesday of the unusually strong state of the labour market in Australia with unemployment down to 3.6 per cent and labour shortages still an issue across the board.

Yet higher interest rates – and the prospect of more to come- are hitting consumer demand, hurting interest sensitive sectors like property the most and adding to fears of recession.

Los Angles-based bond market specialist, Eric Souders, principal with US fund manager Payden & Rygel, noted this differential in terms of the US economy in a media briefing in Sydney on Wednesday.

The US economy, he said, was at a fork in the road with the left side being the negative forces evident in leading economic indicators for the US economy, such as commodity prices, manufacturing, the shape of the yield curve, manufacturing, building permits in the housing market which have turned negative.

But he said “right side of the road” - coincident indicators, including inflation and jobs data, were showing unexpected resiliency.

“The left fork is suggesting trouble ahead, the right fork is suggesting the jobs market is still pretty durable and stable.”

His prediction was that the US was headed for a “bumpy landing” – somewhere between a soft landing and a hard landing.

While the RBA has not moved to increase rates as much as the US central bank, the divergence between a resilient labour market and the negative impact of other interest rate sensitive sectors is also evident in Australia.