Two weeks ago, we discussed how buying iiNet could expand TPG's network reach by 40 per cent. But there are many more reasons why TPG should be taking a hard look at its competitor from the west.
The jury is out over which company would buy which, but there are clear benefits of a combined iiNet/TPG, at least as far as investors are concerned. Here are the top five.
1. Better ARPU
A couple of years ago, TPG was facing a slide in its average revenue per user (ARPU); it bottoms out at $46 per month. It's now starting to climb again, thanks to bundling. A user with home phone and broadband together is worth $52.20, plus the value of calls — another $7. That's a big improvement on ARPU, and, with 100,000 on-net phone subscribers, it's having a marked impact on income. The ISP could do so much more if it expanded its DSLAM footprint. Phone services are only the beginning, of course. ISPs can increase ARPU with iTV — but that also needs an ADSL2+ DSLAM.
2. Sweat the assets
Pipe Networks (now part of TPG) has heaps of spare capacity. In July 2011, the usage rate was running at 33 per cent. A contract to service VHA means that it would be extending its reach, which could dilute the utilisation percentage. So, TPG has a backhaul network that can do so much more, if it had the customers. An extra 640,000 from iiNet (plus another 260,000 from Internode) would help fill the pipes with little incremental cost.
3. Lower access costs
iiNet's broad DSLAM footprint will help reduce access costs for TPG — essential for a business that primarily competes on price. We highlighted how the iiNet network would expand TPG's network reach by 40 per cent. iiNet's figures put the gross cost of an on-net customer at $25.11, compared to $41.47 for an off-net customer. Clearly, it's not economically feasible to compete when you are reliant on buying Telstra's wholesale DSL offering. TPG needs this expanded DSLAM reach to grow its base.
4. More business customers
Consumer customers account for just 65 per cent of TPG's total revenue. The rest comes from corporate accounts (including wholesale services from Pipe). iiNet has largely focused on consumers, but its acquisition of TransACT has seen the ISP focus a bit more on the business end of town. The margins from business aren't quite as good, but they still represent a massive growth opportunity for a combined entity. The combination of the broad DSLAM network and Pipe's underutilised backhaul would enable competitive products that would give the bigger players a run for their money, particularly in the SME segment.
TPG has grown a business on a much smaller cost base; telecommunications expenses are similar for both companies, but TPG's staff costs are 30 per cent below iiNet's $67.5 million. In fact, if we look at the consumer division, TPG gets by with salaries totalling just $20.9 million. Customers may not like it, but presumably TPG would be arguing to investors that they can slash some of the operating costs at iiNet, improving profitability across the board. It could result in more dissatisfied customers, yet TPG's churn rates aren't high, and TIO complaints aren't alarming — not compared to Telstra or Vodafone.
Of course, there's an even stronger incentive for VHA to buy both of these companies. It needs to be able to bundle, and it's a long, slow haul trying to grow a customer base organically, particularly when you've experienced such a tragic loss of mobile customers through poor network performance. A combined VHA, iiNet and TPG really would create a viable challenger to the top-tier telcos.