Winning the iPhone war: Bartholomeusz

Eighteen months ago it looked like growth in the mobile telephony sector was plateauing and that over-capacity in the sector would drain profitability from four big operators. Then along came the smart phones, and Apple’s iPhone in particular, and growth exploded.

Optus was quick to embrace the iPhone and has been aggressive in its pricing, a strategy made more effective by the Sol Trujillo regime’s determination to maintain premium pricing for Telstra’s NextG network. The impact of Paul O’Sullivan’s preparedness to sacrifice some margin for growth is now showing up strongly in Optus’ numbers.

Optus’ mobile revenue grew 16.2% in the June half on the back of a 10.9% increase in subscriber numbers. Significantly, the group grew its more valuable post-paid customer base, where the average revenue per user of $68 a month is 2.5 times that of its pre-paid customer base, by 14.6%.

Subscriber acquisition costs exploded with the launch of the iPhone 3G handset and other smart phones in the September quarter last year, peaking at $226 in the June quarter before falling back to $204 in the September quarter. For the half they were $215 per subscriber versus $175 for the same period last year.

The decision to heavily subsidise the handsets, and the increasing take-up of capped plans – which drive higher usage and network costs that can’t necessarily be recovered from higher revenues – was reflected in relatively modest 4.6% growth in earnings before interest, tax, depreciation and amortisation (EBITDA) and further compression in the EBITDA margin, from 28 cents in each dollar of revenue to 25 cents. Almost 60% of Optus customers are now on capped plans against 47% a year ago.

Optus will be particularly encouraged by the continuing surge in data revenues, which now account for 35% of service revenue. Non-SMS data grew from 7.6% of service revenue to 12% in the half. There is enormous potential growth in wireless broadband as the take up and usage of smart phones continues to rise.

The surge in demand for wireless broadband took the networks by surprise, although Telstra’s decision to invest $1 billion to build its NextG network was almost instantly validated.

From a position where there was excess capacity in the sector only a few years ago, the operators, and Optus in particular, faced capacity constraints and network degradation. Optus is now spending about $125 million a quarter on upgrading and expanding its wireless networks.

O’Sullivan would be mindful that there is both opportunity and threat provided by the merger of Hutchison and Vodafone earlier this year.

There is opportunity because his competitors will be focused for some time on their integration and improving their relatively poor profitability, which might reduce their focus on the market. There is threat because the chief executive of the merged group, Nigel Dews, has made no secret of his ambition of displacing Optus as the number two player in mobiles.

The strong growth in Optus’ revenues and its subscriber base sparked by its enthusiasm for the game-changing smart phones and its preparedness to subsidise the 3G iPhones reflects O’Sullivan’s determination to protect Optus’ share and ensure it is well-positioned as the explosive growth in data services and wireless broadband continues.

This article first appeared on Business Spectator.