At face value the numbers don’t appear to say much. Revenue’s down, earnings are down and mobile subscriber numbers are flat on both a quarterly and nine-month basis. What’s interesting is the contrast between those apparently unexciting numbers and the growth that poured through Telstra’s mobile business numbers last week.
The simplistic conclusion would be that Telstra is simply blowing its competitors away by deploying a combination of network quality advantage and more aggressive pricing, absorbing almost all the growth in the sector. It attracted more than 600,000 net new customers in six months. Optus added 22,000 in the December quarter and 156,000 in the nine months to December.
Vodafone, of course, has been losing customers in droves as a result of network degradation that it is now investing heavily to remedy.
While Telstra’s aggression might be part of the explanation for what’s happening in the sector it is equally apparent that Optus has, under new consumer chief executive, Kevin Russell, embarked on a quite different course.
It’s not aggressively chasing new customers, it’s not heavily subsidising its handsets and, indeed, it doesn’t appear to be at all concerned that its mobile revenue was down 7 per cent for the quarter and 5.5 per cent for the nine months.
Russell appears far more concerned about generating stronger profits from his existing customer base than chasing new customers on the basis of price, even if that means allowing Telstra to increase its scale advantage and dominance of the sector.
He is pursuing that through a combination of cost cutting (Optus has shed nearly 10 per cent of its workforce and shrunk its operating costs by 8 per cent for the quarter and 5.7 per cent for the nine months) and shifting the focus from simple revenue to real customer outgoing service revenues. He wants to lift Optus’ customer service levels and reduce its churn rate.
The financial results don’t provide a clear indication of the progress, if any, being made – although it is interesting those acquisitions costs per subscriber were down 8 per cent as a result of lower device subsidies. Equipment sales were also down sharply – they are low margin relative to service revenue.
The Russell agenda is, at this early stage, very much a work in progress. Major elements like the restructuring of its retail footprint to increase its own branded outlets and exit third party channels won’t even start occurring until later this year and will take quite some time to flow through to the group’s performance and service levels.
While he is redirecting Optus’ focus from simple growth to more profitable growth Russell is also overseeing a massive investment in the Optus network to improve the performance of its 3G network by adding infill base stations, and a lot of them, while rolling out its 4G network. Optus intends to close the gap in coverage and performance that Telstra has enjoyed since Sol Trujillo built the NextG network.
Russell has, so far, protected Optus’ margins – margins in the mobiles business were up a couple of basis points – despite the revenue leakage, but he is pursuing a long-term strategic shift that involves quite a few moving parts and different timelines that will complicate efforts to track its success.
If at the end of that process he has improved his margins and has a stable and stickier customer base with (because they weren’t acquired on the basis of price) lower churn rates, operating on a bigger and higher-quality network he’ll get higher quality revenue growth and earnings.
It might be a smaller customer base and have lower revenues than if growth were measured and pursued purely by the top-line outcomes, and it might gift Telstra some customers (potentially a lot of them) that it might not otherwise have acquired, but Optus doesn’t appear concerned about anything other than improving the fundamentals of its existing business.
With Vodafone steadily rolling out an improved network (and in a network cooperation relationship with Optus) ahead of what will later this year effectively be a re-launch of its brand, the three big mobile players are in different positions and pursuing quite different strategies. That ought to make an already interesting and dynamic sector that much more dynamic and interesting.