Australia Telecommunications Report Q1 2013

BMI View: The Australian telecommunications industry is one of the highest value markets in AsiaPacific and even the world, underpinned by high incomes and strong uptake of higher value services suchas broadband and smartphone handsets. However, subscription growth opportunities are severely limitedin the years ahead due to the highly saturated nature of the market. Operators are increasingly focusedon value generation strategies, although the drop in ARPUs in Q312 demonstrates this has yet to pay offdramatically. However, the market is currently seeing high levels of investment in next generationbroadband technologies which we believe will buoy ARPUs through 2013.

Key Data:

While full data was not available for all the main operators, Optus and Vodafone have released Q312 data. Optus finished Q312 with 9.5mn mobile subscribers, and Vodafone with 3.2mn.

Optus ARPU remained unchanged on Q212, at AUD43, down 8.5% y-o-y.

The number of internet subscribers in Australia grew to 12mn. Of these, 11.6mn were broadbandconnections, of which 4.6mn were DSL, 5.9mn mobile, and 917,000 cable.

Key Trends And Developments

Telstra and Vodafone Hutchison Australia had yet to release data for Q312 at time of writing.

However, results from second-largest operator Optus were disappointing. Optus has reported that itsoperating revenue for the quarter ended September 2012 fell by 4.2% y-o-y to AUD2.239bn while netprofit decreased by 10.0% to AUD164mn. The negative headline growth was attributed to the mandatedreduction in mobile termination rates, lower equipment sales and introduction of service creditsassociated with device repayment plans. Given the mature Australian competitive landscape, we expectOptus' recovery to be a gradual process.

It is difficuslt to strive for mobile subscriber growth in the mature market, and Optus has rightly decidedto focus on maximising revenue from its existing subscriber base. This is done through the deployment ofLTE services across the country (4G is online in Sydney, Melbourne, Perth and the Hunter Valleyregion), upgrading the 3G network and bolstering of value-added services (VAS) portfolio such as theacquisition of restaurant review website Eatability. Additionally, Optus has reduced the number ofemployees from 9,726 in end-December 2011 to 9,069 in end-September 2012, and the operator willcontinue to streamline its business.

Consolidation within Australia's fixed broadband industry has been a running theme in the last two yearsdue to the changing competitive landscape in light of the National Broadband Network (NBN). iiNet hasbeen one of the most aggressive operators in acquiring rivals butTelstra has finally responded afterreaching an agreement to purchase Adam Internet. By retaining the Adam Internet brand and expandingthe South Australian broadband business nationally, we expect Telstra to target the lower-end market,which will be complementary to Telstra's traditional business.

In October 2012, AAPT emerged as a potential bidder for Australian fibre-optic backboneoperator NextGen Networks. The business, which is currently owned by the diversified LeightonHoldingsgroup, is widely expected to be put up for sale as the parent seeks to streamline its investmentsand improve its profitability. NextGen's 18,000km fibre-optic network and advanced regional data centresare believed to appeal to AAPT as it strives to make itself more appealing to large enterprise customers inAustralia. However, there will be strong interest from other Australian broadband operatorsand BMI believes AAPT will be reluctant to pay a premium for the business.