What the Vodafone-TPG deal means for Optus

With TPG cutting Optus out of its wholesale mobile operations by signing a billion-dollar deal with Vodafone, will Optus be hamstrung from competing in the industry?

Telecommunications carrier Optus is facing increasing competition on both mobile and fixed-line fronts, with M2 Group announcing plans on Monday to merge with fibre infrastructure company Vocus Communications to form the fourth-largest telco in Australia, and Vodafone Australia on Wednesday following this with news that it has signed a AU$1 billion deal with TPG for mobile services.

Vodafone, the number three mobile operator in Australia, will make use of the dark fibre infrastructure owned by TPG, the number three fixed-line operator, with the latter in turn using Vodafone's mobile network for its customers.

Under the AU$900 million, 15-year dark fibre deal, TPG will build out an extra 4,000km of fibre to connect Vodafone's cell towers across Australia by mid-2018, which the companies forecast to cost between AU$300 million and AU$400 million in capex.

"For customers, it will mean a higher-performing, 5G-ready network, which will enable exciting future opportunities such as virtual- and augmented-reality applications," Vodafone Australia CEO Inaki Berroeta said in a statement.

TPG will also be shifting its 320,000 mobile customers from current provider Optus to Vodafone, with customers being offered bonus data as an incentive to move networks, according to TPG chief operating officer Craig Levy.

"We are excited and moving into the future. What it gives TPG -- it gives us the ability to keep up with the market," Levy said.

"If you look at us in the last two years, we haven't kept up with the pace as much as we'd have liked to. This gives us the opportunity ... to be more aggressive in the marketplace, and hopefully improve what has been a little bit of a declining mobile business."

TPG CEO David Teoh said that moving to Vodafone would enable customer data reporting within half an hour, rather than TPG's present time frame of one day.

"One of the biggest benefits for all existing TPG mobile customers is access to 4G on Vodafone's network, meaning they will be able to experience substantially faster data speeds," Teoh added.

The length of the deal is unknown, and TPG would not comment on when its arrangement with Optus will end.

Optus, for its part, denied that the Vodafone-TPG deal would affect it to a large extent, merely saying that it is in discussions with TPG on future plans, and regardless continues to be a primary mobile network provider in the space.

"Optus remains the leading wholesale service provider in the market," an Optus spokesperson said.

"We are currently working with the TPG Group on revised wholesale arrangements, but expect to be a continuing wholesale provider to the TPG Group in the future."

Optus added that it cannot discuss its own wholesale arrangements with TPG due to contractual obligations, but said that it welcomes the increased competition and remains confident that customers will choose the Optus mobile network.

"Optus' national mobile network offers differentiation to other market participants," the spokesperson said.

"We respect TPG's decision to work with other providers, and welcome the opportunity to compete for customers based on our reliable network coverage, first-rate service, and compelling plans."

Optus encouraged any TPG customers who would prefer to remain on the Optus network rather than be moved across to Vodafone's network to get in contact, though they would need a new SIM in order to stay.

Vodafone's 4G mobile network currently covers 96 percent of the population, while Optus only claims that its 4G network covers 90 percent, and Telstra lays claim to 94 percent. However, according to a report by OpenSignal last week, which calculates "time coverage", Vodafone covers 77 percent of the population, Telstra 76 percent, and Optus 70 percent.

In regards to speeds, Telstra is the 21st fastest mobile network provider worldwide, at speeds of 23Mbps; Vodafone is in 37th place and Optus is in 43rd place, both with average download speeds of 19Mbps.

Optus has been switching on its 4G+ network, combining one frequency-division duplex (FDD) and two time-division duplex (TDD) LTE spectrum bands, in Newcastle and Melbourne, with more major cities planned for the future. The telco has achieved download speeds of 317Mbps on this network during a trial in Newcastle.

The telco also upgraded its city-connecting wholesale fibre network to 100Gbps in mid September, bringing faster speeds and greater capacity to enterprise and government customers in Sydney, Melbourne, Canberra, Brisbane, Adelaide, Perth, and Cairns.

TPG's deal with Vodafone follows its acquisition of rival telco iiNet earlier this year in a deal worth around AU$1.5 billion, wherein TPG paid AU$9.55 per iiNet share, incorporating a AU$8.80 cash or scrip consideration and AU$0.75 cash per share.

iiNet shareholders ultimately voted in favour of the acquisition, with the ACCC and the Federal Court also approving the deal last month.

iiNet customers will not be transitioned to the Vodafone network under the new deal.

Optus is also facing increased competition in the fixed-line space, with news on Monday that Vocus would be merging with M2 in order to form a telco worth AU$3 billion, bringing it closer to Telstra, TPG, and Optus.

"Today, we have announced plans to create a full-service, vertically integrated trans-Tasman telecommunications company," said David Spence, chairman of Vocus.

"The combined group will benefit from extensive infrastructure in Australia and New Zealand with well-established brands and more than 2.1 million services. Vocus and M2 together make a compelling proposition, and combined will create scale and reach to continue our growth strategies. The combined group will be well placed to leverage growth, and data consumption, and IT outsourcing. We will deliver an exceptional experience on the NBN, and on the UFB in New Zealand."

The entity would provide retail internet, corporate and wholesale internet and VoIP, datacentre and cloud services, domestic and international bandwidth, dark fibre, and retail electricity and gas.

The companies' scrip-based merger -- wherein M2 shareholders will be given 1.625 Vocus shares per M2 share -- has the support of both boards, but has yet to attain a shareholder endorsement or approval from the Australian Competition and Consumer Commission (ACCC) and the Federal Court. These procedural hurdles are set to take place in early 2016.

The Vocus-M2 merger had sparked debate about Vodafone's future; with Vodafone the last remaining significant telco provider that had yet to be acquired by a fixed-line provider, David Kennedy, research director of Telecoms at Ovum, predicted on Tuesday that either TPG or Vocus would attempt to snap it up.

"It is highly likely that Vodafone will be integrated into a fixed telco at some point," said Kennedy.

"TPG and M2 are the two obvious bidders. The merger with Vocus gives M2 extra financial clout and network assets. We can therefore expect that the bidding war for Vodafone, when it comes, will be a more balanced and unpredictable battle."