Telstra must use low-cost ISP to keep regional dominance: CBA

Summary:Telstra will need to continue marketing aggressively in regional Australia, using Foxtel and its planned low-cost provider Adam Internet, in order to maintain dominance, according to the Commonwealth Bank.

The latest analysis of Australia's fixed line broadband market from the Commonwealth Bank of Australia (CBA) shows that Telstra will need to aggressively push for new customers in regional Australia, using both pay TV company Foxtel and low-budget internet provider Adam Internet, in order to maintain dominance in the National Broadband Network (NBN) world.

CBA analysts Nathan Burley and Alice Bennett estimated that in regional Australia, Telstra's retail broadband market share sits at 60 percent, compared to 41 percent in metropolitan Australia. On the copper network, Telstra's retail share in regional Australia is estimated to be even higher at 70 percent. Across the board, Telstra has a 46 percent share of the broadband market

The analysts expect that once the NBN has been completed and has been on for a couple of years, that by June of 2024, Telstra will maintain most of its metro market share, but its regional share will slip down to 48 percent.

This will largely come from Telstra's competitors, such as iiNet, TPG, and Optus, being able to expand their on-net coverage out to 100 percent from where it sits at around 60 percent today. The analysts predict TPG will pick up the most overall, increasing its share of the market by 4 percent to 14.2 percent by 2024.

For iiNet, the value in moving to the NBN won't be about acquiring new customers, but by lowering margins by no longer having to pay Telstra's wholesale broadband costs. iiNet's market share in off-net areas has decreased over the last two years , with the company blaming Telstra Wholesale charging more for wholesale broadband than BigPond charges retail customers for broadband.

In order to keep its regional share higher, Telstra will need to market aggressively, the CBA analysts said.

"Telstra has grown overall broadband share by 3.5 percent since June 2010. However, this has come in regional areas, with metro share largely flat on our estimates. This highlights [Telstra's] need to continue aggression and extend reach with brands such as Foxtel retail and lower-cost Adam Internet, in order to maintain share as NBN breaks down some competitive advantage."

Telstra cited the need to create a low-price Jetstar-like ISP as the reason why it was seeking to buy Adelaide-based ISP Adam Internet .

Telstra's competitors iiNet and Optus have raised concerns about whether Adam will seek to undercut its competitors through an arrangement with Telstra's fixed wholesale arm that is not available to other wholesale customers. The Australian Competition and Consumer Commission (ACCC) this week pushed out its deadline for making a decision on the purchase until December 20, 2012.

If the ACCC rejects the proposal, it is expected that Telstra will set up its own low-cost ISP under a new name.

Overall, CBA estimates that the NBN isn't likely to have much of an effect on broadband market share until 2014, which would put any meaningful impact past the next Federal Election.

Topics: Telcos, NBN, Optus, Telstra

About

Armed with a degree in Computer Science and a Masters in Journalism, Josh keeps a close eye on the telecommunications industry, the National Broadband Network, and all the goings on in government IT.

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