Welcome to the Fear and Greed Business interview. I'm Sean Aylmer. There's a lot happening in the Telco space right now. Yesterday TPGs share price tumbled after a disappointing profit for the half- year to the end of December. At the same time, Aussie Broadband made a $ 466 million takeover bid for rival internet provider Superloop. And there's been plenty of news as well as about the two big plays in the market with Optus last week revealing just how much its major outage cost and Telstra the week before posting a $ 1 billion net profit driven by growth in its mobile business. As I said, plenty happening, so we need an expert who can take us through it. Paul Budde is a telecommunications management and business consultant, and through his business, Paul Budde Consultancy has advised more than 100 investment companies on transactions. He's also worked with governments around the world on Telco strategies, particularly relating to national broadband networks. Paul, welcome to Fear and Greed.

Welcome to the Fear and Greed Business interview. I'm Sean Aylmer. There's a lot happening in the Telco space right now. Yesterday TPGs share price tumbled after a disappointing profit for the half- year to the end of December. At the same time, Aussie Broadband made a $ 466 million takeover bid for rival internet provider Superloop. And there's been plenty of news as well as about the two big plays in the market with Optus last week revealing just how much its major outage cost and Telstra the week before posting a $ 1 billion net profit driven by growth in its mobile business. As I said, plenty happening, so we need an expert who can take us through it. Paul Budde is a telecommunications management and business consultant, and through his business, Paul Budde Consultancy has advised more than 100 investment companies on transactions. He's also worked with governments around the world on Telco strategies, particularly relating to national broadband networks. Paul, welcome to Fear and Greed.

Good morning, Sean.

Good morning, Sean.

Now Paul, you are talking to someone who knows very little about Telco, so I'm going to ask for a bit of a 101 first before we get into results and mergers and things like that. Obviously, we have a broadband network. The NBN has been rolled out across Australia. We have a 5G network, which people like Telstra and that are using. When we talk about these smaller players, TPG, Superloop, Aussie Broadband, do they just tap in and get access to the NBN? Is that how they operate?

Now Paul, you are talking to someone who knows very little about Telco, so I'm going to ask for a bit of a 101 first before we get into results and mergers and things like that. Obviously, we have a broadband network. The NBN has been rolled out across Australia. We have a 5G network, which people like Telstra and that are using. When we talk about these smaller players, TPG, Superloop, Aussie Broadband, do they just tap in and get access to the NBN? Is that how they operate?

Yeah, what we've seen, Sean, is that when the NBN actually was introduced, it became a wholesale service. Before that time, Telstra was basically and a wholesaler and a retailer. Then some 20 years ago, the government decided to build a wholesale network being the NBN, and then everybody basically could have equal access to that network that the NBN company then offers to the market. That has been a big change when that happened some 20 years ago. Now at the moment, if we talk about Telstar, Optus, TPG, et cetera, they're retailers. And at the same time of course, it's important to realize that the NBN has nothing to do with the mobile network. The mobile network is independent, and the operators, Telstra, Optus, a Vodafone, all have their own network on which they offer the mobile services, which are basically the big growth market still.

Yeah, what we've seen, Sean, is that when the NBN actually was introduced, it became a wholesale service. Before that time, Telstra was basically and a wholesaler and a retailer. Then some 20 years ago, the government decided to build a wholesale network being the NBN, and then everybody basically could have equal access to that network that the NBN company then offers to the market. That has been a big change when that happened some 20 years ago. Now at the moment, if we talk about Telstar, Optus, TPG, et cetera, they're retailers. And at the same time of course, it's important to realize that the NBN has nothing to do with the mobile network. The mobile network is independent, and the operators, Telstra, Optus, a Vodafone, all have their own network on which they offer the mobile services, which are basically the big growth market still.

Okay, so what about the smaller players like Aussie Broadband, Superloop and they talk about their mobile numbers rising. Are they piggybacking off the major three's network or are they actually talking about something different to that?

Okay, so what about the smaller players like Aussie Broadband, Superloop and they talk about their mobile numbers rising. Are they piggybacking off the major three's network or are they actually talking about something different to that?

A bit of background, again, Sean, if you go back 30 years ago when competition started, then slowly we saw the Telstra market share erode and that eroded to approximately 60%, 65, 60%. So now 30 years later, Telstra is still the dominant player, it still has 55, 60% market share. And then you've got our Optus, TPG, they have a similar market share around 20%. And then all the others, 100 others, are 5% of the market. You have to put it in perspective where these smaller players are. Aussie Broadband is now close to a billion- dollar company, so it's not the small company, but in total percentage it's still only one or 2% of the total telecommunications market. Now, the smaller players, apart from the three that operate their own mobile networks, Telstra, Optus and Vodafone, everybody else if you want to operate in the mobile market, you are a reseller of one of the three mobile network operators. So Aussie Broadband, Superloop, et cetera, they don't have their own mobile networks. They all operate on top of the network from Telstra, Optus, or Vodafone, or TPG. Sorry.

A bit of background, again, Sean, if you go back 30 years ago when competition started, then slowly we saw the Telstra market share erode and that eroded to approximately 60%, 65, 60%. So now 30 years later, Telstra is still the dominant player, it still has 55, 60% market share. And then you've got our Optus, TPG, they have a similar market share around 20%. And then all the others, 100 others, are 5% of the market. You have to put it in perspective where these smaller players are. Aussie Broadband is now close to a billion- dollar company, so it's not the small company, but in total percentage it's still only one or 2% of the total telecommunications market. Now, the smaller players, apart from the three that operate their own mobile networks, Telstra, Optus and Vodafone, everybody else if you want to operate in the mobile market, you are a reseller of one of the three mobile network operators. So Aussie Broadband, Superloop, et cetera, they don't have their own mobile networks. They all operate on top of the network from Telstra, Optus, or Vodafone, or TPG. Sorry.

Fantastic. I've learned a lot in the last three or four minutes. Let's look at where we are today. Yesterday we heard that Aussie Broadband was making a bid for Superloop. Aussie Broadband now has just under 20% of Superloop. I think the bid price was about $ 466 million. Aussie Broadband said it wants to actually take on some of those bigger players. What's the story there? Is it just about scale for these smaller guys?

Fantastic. I've learned a lot in the last three or four minutes. Let's look at where we are today. Yesterday we heard that Aussie Broadband was making a bid for Superloop. Aussie Broadband now has just under 20% of Superloop. I think the bid price was about $ 466 million. Aussie Broadband said it wants to actually take on some of those bigger players. What's the story there? Is it just about scale for these smaller guys?

Oh, absolutely. It's definitely Aussie Broadband is now becoming the fifth- largest Telco in Australia, so it's quite significant in that respect, even if it's only relative small player. What you've seen is with these organizations, basically they grow through acquisition, so as I mentioned, there might be close to a hundred telcos around the country and what you then do as a small player, you buy up one of the smaller ones. That's how quite often these players... Superloop bought Veronet and MyRepublic. Aussie Broadband bought Symbio and IPA and IP- Voice company. So that's how you see that massive growth. Once again, all relative, you have massive growth for these smaller players is happening in that particular way.

Oh, absolutely. It's definitely Aussie Broadband is now becoming the fifth- largest Telco in Australia, so it's quite significant in that respect, even if it's only relative small player. What you've seen is with these organizations, basically they grow through acquisition, so as I mentioned, there might be close to a hundred telcos around the country and what you then do as a small player, you buy up one of the smaller ones. That's how quite often these players... Superloop bought Veronet and MyRepublic. Aussie Broadband bought Symbio and IPA and IP- Voice company. So that's how you see that massive growth. Once again, all relative, you have massive growth for these smaller players is happening in that particular way.

If you look at Aussie Broadband specifically, you said it's looking at becoming the fifth player. It's certainly done pretty well share price terms over the past 12 months or so, I think it's up about 50% or so. Is that about it growing by acquisition, is it a particularly good model? I'm trying to get a feel for why people like Aussie Broadband.

If you look at Aussie Broadband specifically, you said it's looking at becoming the fifth player. It's certainly done pretty well share price terms over the past 12 months or so, I think it's up about 50% or so. Is that about it growing by acquisition, is it a particularly good model? I'm trying to get a feel for why people like Aussie Broadband.

Yeah, I think growing the telecommunications market in general, everybody together is about cost- cutting. The overall size of the telecommunications market might grow 1%, perhaps 2% per year, but some years it would go minus 1%. The overall growth in the telecommunications market is relatively small, so if you want to stay profitable, you have to cut cost. And that is possible with new technologies like 5G, 30% more efficient, so that's where the operators are sitting. So Aussie Broadband, new player, small player, relatively low cost, therefore once again, relatively more profit. The bigger players like Telstra, Optus and Vodafone, they all have smaller profit growth based on the fact that they need to get that from cost- cutting, more so than from acquisition and growth.

Yeah, I think growing the telecommunications market in general, everybody together is about cost- cutting. The overall size of the telecommunications market might grow 1%, perhaps 2% per year, but some years it would go minus 1%. The overall growth in the telecommunications market is relatively small, so if you want to stay profitable, you have to cut cost. And that is possible with new technologies like 5G, 30% more efficient, so that's where the operators are sitting. So Aussie Broadband, new player, small player, relatively low cost, therefore once again, relatively more profit. The bigger players like Telstra, Optus and Vodafone, they all have smaller profit growth based on the fact that they need to get that from cost- cutting, more so than from acquisition and growth.

Stay with me, Paul, we'll be back in a minute. I'm speaking to Paul Budde, Telco expert and investment advisor through Paul Budde consultancy. I suppose the economics of this still kind of stumps me a little bit. If you are with reseller, so if you are basically leasing bandwidth spectrum, I'm not sure the right word is, the ability to provide mobile services from one of those big three, you are perhaps getting it at a discount because you are buying at wholesale, you're buying huge amounts of it. And then you are backing yourself to be able to sell that to the customer, to the client and make a profit. That's in a nutshell how it works?

Stay with me, Paul, we'll be back in a minute. I'm speaking to Paul Budde, Telco expert and investment advisor through Paul Budde consultancy. I suppose the economics of this still kind of stumps me a little bit. If you are with reseller, so if you are basically leasing bandwidth spectrum, I'm not sure the right word is, the ability to provide mobile services from one of those big three, you are perhaps getting it at a discount because you are buying at wholesale, you're buying huge amounts of it. And then you are backing yourself to be able to sell that to the customer, to the client and make a profit. That's in a nutshell how it works?

Yes, you're totally right, Sean. That's how it worked. The NBN of course is different, because you can go directly to the NBN, you don't have to go to Telstar or whatever. You can go directly to the NVN and purchase capacity that you want to use for your broadband network. If you want to have a mobile service, then yes, you have to go to the Telstras of this world, Optus, et cetera, and then you have to negotiate an wholesale price. And that is then quite often based on a business plan that you propose to the operator, to the mobile operator, will indicate you how many customers you have, and based on that you can negotiate a particular discount or wholesale price, whatever you want to call it, and based on that, you can then actually start offering your own services as basically as an virtual mobile network operator, as they are called. You don't own the network, but you are operating on top of the network.

Yes, you're totally right, Sean. That's how it worked. The NBN of course is different, because you can go directly to the NBN, you don't have to go to Telstar or whatever. You can go directly to the NVN and purchase capacity that you want to use for your broadband network. If you want to have a mobile service, then yes, you have to go to the Telstras of this world, Optus, et cetera, and then you have to negotiate an wholesale price. And that is then quite often based on a business plan that you propose to the operator, to the mobile operator, will indicate you how many customers you have, and based on that you can negotiate a particular discount or wholesale price, whatever you want to call it, and based on that, you can then actually start offering your own services as basically as an virtual mobile network operator, as they are called. You don't own the network, but you are operating on top of the network.

Okay, so let's talk about TPG Telecom. It came in yesterday and your profit came in at $ 49 million. Now that was way down from the year before, that's net profit, but the previous year I think it sold some of its towers and therefore it had an extraordinary profit the year before. It now is leasing some of those towers back, therefore higher costs, et cetera. Where does TPG Telecom, which has been around for a long time and started by an incredibly successful entrepreneur, where's it sit on this spectrum? It's somewhere between the big guys and the little guys, it seems.

Okay, so let's talk about TPG Telecom. It came in yesterday and your profit came in at $ 49 million. Now that was way down from the year before, that's net profit, but the previous year I think it sold some of its towers and therefore it had an extraordinary profit the year before. It now is leasing some of those towers back, therefore higher costs, et cetera. Where does TPG Telecom, which has been around for a long time and started by an incredibly successful entrepreneur, where's it sit on this spectrum? It's somewhere between the big guys and the little guys, it seems.

Yeah, it's sitting basically on the similar level as Optus. So Optus and TPG are roughly similar in size, similar in market share, but then as soon as you are in that sort of league, then you have faced the problems that I just mentioned. Low growth in the overall market. Growth in Australia in the mobile market basically comes from migrants, new markets coming into the country and they all need a mobile phone, so here you are, you've got growth in that particular market. Secondly, the growth is coming from you and I spending a little bit more on mobile, because mobile data and all sorts of services that we are using on the mobile network. So that are the two areas where growth is coming from on the mobile network. It's very difficult to move in between customers. As I mentioned, the market shares have not changed that much over decades, so it's not really possible that you pinch customers away from one to another. That happens, of course, after Optus had a disaster with its network in September. For a time you have some opportunities there, but that levels itself out very, very quickly. It's a little bit like the banks, if you go to another bank, it doesn't really make a difference. If you go to another Telco it doesn't really make a big difference, so people stick to the networks where they are. There's very little movement between them.

Yeah, it's sitting basically on the similar level as Optus. So Optus and TPG are roughly similar in size, similar in market share, but then as soon as you are in that sort of league, then you have faced the problems that I just mentioned. Low growth in the overall market. Growth in Australia in the mobile market basically comes from migrants, new markets coming into the country and they all need a mobile phone, so here you are, you've got growth in that particular market. Secondly, the growth is coming from you and I spending a little bit more on mobile, because mobile data and all sorts of services that we are using on the mobile network. So that are the two areas where growth is coming from on the mobile network. It's very difficult to move in between customers. As I mentioned, the market shares have not changed that much over decades, so it's not really possible that you pinch customers away from one to another. That happens, of course, after Optus had a disaster with its network in September. For a time you have some opportunities there, but that levels itself out very, very quickly. It's a little bit like the banks, if you go to another bank, it doesn't really make a difference. If you go to another Telco it doesn't really make a big difference, so people stick to the networks where they are. There's very little movement between them.

Okay. We might as well finish on Telstra because it is the gorilla in the market. Certainly, a lot of shareholders love it. A lot of pensioners love it, because it's a great dividend payer, so there's all that side to it, but it hasn't actually shown that much growth really in recent times. What's the outlook for Telstra and what's its strategy? It's doing well in mobiles. Certainly last week when it came out with its results, it seems to be doing well in mobiles, but where does Telstra go?

Okay. We might as well finish on Telstra because it is the gorilla in the market. Certainly, a lot of shareholders love it. A lot of pensioners love it, because it's a great dividend payer, so there's all that side to it, but it hasn't actually shown that much growth really in recent times. What's the outlook for Telstra and what's its strategy? It's doing well in mobiles. Certainly last week when it came out with its results, it seems to be doing well in mobiles, but where does Telstra go?

Yeah, Telstra is of course the incumbent, and that is definitely visible in the way it has its earnings and revenues and profits, et cetera. What you see is basically, if you look at the overall market over the last 20 or 30 years, the big change has been to the big tech companies, the Amazons, the Facebooks, et cetera. They are the big companies that are making an enormous amount of money. 30% of the total IT market in the whole world is in the hands of five or six of these players. That's where the money is. That's where the profits are. That's where the action in the market is. The Telcos have lost that game. They never really, none of them, not only Telstra, BT, Deutsche Telecom, AT & T, you name it, none of these telcos were able to move into that market. So in that respect, they are sitting in the utility end of the market, and that has limited its growth. There's not that much growth in the utility side of the company. That's what I mentioned, 1- 2% per year is all what you can get overall. Once again, not just Australia, internationally, that's what the Telcos are getting. And that's, of course, the market where Telstra operates in and therefore that is its future. That is where it sits, not high growth, heavily cost- cutting, using artificial intelligence, utilizing cloud computing. The mobile network, this is more efficient. Six G coming in five or 10 years time, again, more efficient, so that's how they can keep that profitability. But overall growth remains very, very low, particularly if you compare that with the big tech companies that are incredibly powerful, incredibly wealthy, and that's where all the money basically is going in relation to the overall information technology and communications market.

Yeah, Telstra is of course the incumbent, and that is definitely visible in the way it has its earnings and revenues and profits, et cetera. What you see is basically, if you look at the overall market over the last 20 or 30 years, the big change has been to the big tech companies, the Amazons, the Facebooks, et cetera. They are the big companies that are making an enormous amount of money. 30% of the total IT market in the whole world is in the hands of five or six of these players. That's where the money is. That's where the profits are. That's where the action in the market is. The Telcos have lost that game. They never really, none of them, not only Telstra, BT, Deutsche Telecom, AT & T, you name it, none of these telcos were able to move into that market. So in that respect, they are sitting in the utility end of the market, and that has limited its growth. There's not that much growth in the utility side of the company. That's what I mentioned, 1- 2% per year is all what you can get overall. Once again, not just Australia, internationally, that's what the Telcos are getting. And that's, of course, the market where Telstra operates in and therefore that is its future. That is where it sits, not high growth, heavily cost- cutting, using artificial intelligence, utilizing cloud computing. The mobile network, this is more efficient. Six G coming in five or 10 years time, again, more efficient, so that's how they can keep that profitability. But overall growth remains very, very low, particularly if you compare that with the big tech companies that are incredibly powerful, incredibly wealthy, and that's where all the money basically is going in relation to the overall information technology and communications market.

I love interviews like these, because I end them knowing a lot more than what I did when I started them. Paul, thank you very much for talking to Fear and Greed.

I love interviews like these, because I end them knowing a lot more than what I did when I started them. Paul, thank you very much for talking to Fear and Greed.

My pleasure, Sean.

My pleasure, Sean.

That was Paul Budde, Telco expert and investment advisor through Paul Budde Consultancy. This is the Fear and Greed business interview. Remember, this is general information only and you should seek professional advice before making investment decisions. Join us every morning for the full episode of Fear and Greed, Australia's best business podcast. I'm Sean Aylmer. Enjoy your day.

That was Paul Budde, Telco expert and investment advisor through Paul Budde Consultancy. This is the Fear and Greed business interview. Remember, this is general information only and you should seek professional advice before making investment decisions. Join us every morning for the full episode of Fear and Greed, Australia's best business podcast. I'm Sean Aylmer. Enjoy your day.