Telstra’s mobile network market dominance and privileged assets deliver pricing power

Owning Australia’s largest mobile phone network ensures pricing power

Owning Australia’s largest 5G mobile network that covers 89 per cent of the Australian population delivers Telstra a dominant 43 percent market share of the country’s mobile phone services retail market. This market dominance has enabled Telstra to increase prices by between $2 and $4 to its postpaid mobile plans effective from 27 August 2024 and its pre-paid mobile plans effective from 22 October 2024. This is despite Telstra’s announcement on 21 May 2024 that it would not be increasing prices in July when it updated its customer terms to remove the CPI-linked annual price review.

The price rises illustrate the pricing power that comes with market dominance and owning privileged assets in that the price increases are unlikely to impact Telstra’s market share. The increases exemplify the fundamental question of whether one has a sound business or not; ‘What happens if I raise prices tomorrow’? In Telstra’s case the market anticipates continued growth in mobile service revenue based on ongoing strong customer demand on its mobile network. Telstra’s mobile network subscriber numbers are increasing at about 4 percent per annum while traffic demand is currently increasing by 20 percent per annum and over the five years to FY24, network traffic has increased by 350 percent.

Digital infrastructure is driving long-term revenue growth

The accelerating rate of digitisation throughout the Australian economy, driven by Artificial Intelligence (AI), cloud computing and the Internet of Things (IoT) is re-defining the telecommunications infrastructure requirements of households, business, and government. The complex digital infrastructure critical to productivity growth to facilitate reliable and efficient data exchange at scale requires significant capital outlay and is long-term in nature. Telstra is ideally placed to meet this crucial need for new digital infrastructure assets such as more mobile spectrum, data centres, fibre networks, and low orbit satellites to drive the 5G and AI-enabled world.

This is why Telstra is constructing 14,000 kilometres of new fibre routes between Australia’s major capital cities that will provide more capacity than all other existing fibre networks in Australia combined. The fibre cables will connect industries and governments that have huge data exchange requirements, as well as data centres, and satellite providers. This ‘next-generation’ technology complements Telstra’s existing 250,000-kilometre fibre and duct network and should future-proof Australia’s connectivity needs for the next 20 or more years. At the same time, ownership of Australia’s largest digital data network should also future-proof Telstra’s revenue and earnings growth over the long-term.

Looking Ahead 

Australia’s inflation rate will continue to gradually decline, and the interest rate cycle will turn, especially as the domestic economy slows. Lower interest rates are accompanied by lower discount rates that support higher equity valuations. However, use of telecommunication facilities, iPhones and the internet should remain stable through the economic cycle because of the essential nature of telecommunication in the daily lives of consumers, government and businesses. This situation has become more accentuated with the advent of AI, cloud computing and the resultant explosion in the reliance on digital data and connectivity as the digital revolution gathers pace. The combination of these various factors is likely to underwrite Telstra’s long-term revenue and earnings growth for patient investors.