Will TPG Telecom Ltd get to carry out its lucrative fibre optic plans?

TPG Telecom is arguing its case to build fibre-to-the-basement: success will be lucrative for shareholders (and good news for apartment-dwellers).

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Six months ago I argued that if TPG Telecom Ltd (ASX: TPM) was allowed to proceed with its fibre-to-the-basement plan then it would have a superior network to the NBN. CEO Ziggy Switkowski has now admitted the plan could have a "severe" impact on the government owned corporation.

As I pointed out more recently, much will hinge on whether Malcolm Turnbull decides to respect the grandfathering clauses in existing legislation. The relevant clauses were designed to prevent unfair devaluation of existing fibre networks, allowing the owners of such cables to connect to premises within 1 km. While some might describe the law as having a loophole, that's inaccurate. There are several "loopholes," if you must use that terminology.

Back in September, TPG told IT News that: "We can use the 1km extension exemption or we can also supply it with wholesale open access… We may also choose to supply a 25 Mbps product. All options are under consideration." In my opinion the 1 km exemption is the most important, because it means that ISPs that own pre-2011 fibre networks have a strategic advantage. This provision particularly helps TPG Telecom, but will also provide excellent opportunities for iiNet Limited (ASX: IIN). Telstra Corporation Ltd (ASX: TLS) has also signaled its interest in building a private FTTB fibre network.

Don't read this as an indication of my political views, but the previous Labor government made an appalling mess of the NBN policy. Their uniform pricing and anti-cherry picking rules were supposed to create a kind of monopoly that would have densely populated areas subsidise less profitable ones. It's a nice idea, if you actually have the determination to serve all Australians equally.

However, the former government made the politically motivated decision to cherry pick the areas it would connect first, and as a result it failed to serve the areas that would result in the most utilitarian benefit. The NBN is a mess, and must collaborate with private companies regarding an optimal outcome. The cost of the network should be expensed to the budget, because I doubt it will be profitable unless the government stops the competition with regulation. It would blow my mind if the Liberal government made the law more hostile to competition than Labor did, but anything is possible in politics.

In its recent submission to the government panel on the NBN, TPG makes the point that: "Carriers (other than Telstra) who had invested many hundreds of millions of dollars building "superfast" networks prior to 2011 were, and should remain, permitted to make use of those networks to compete with the NBN and other broadband providers." In essence, they are arguing that the 1km rule should remain.

Basically, the company just wants to use its existing fibre networks to start connecting customers. The recent acquisition of AAPT was TPG's big bet on fibre, and one I'm happy for the company to take.

As Josh Taylor of ZDNet points out, TPG is now arguing that its plans won't be a threat to the NBN. In the company's recent submission it argued: "In the case of the TPG FttB build, TPG anticipates reaching a potential 500,000 premises. Many of those premises will be entrenched HFC customers… Of the remaining addressable market, TPG might reasonably only expect… a percentage of the customers." However, in July 2013 the company had just under 600,000 on-net customers, so even the addition of 100,000 new customers would be meaningful.

Foolish takeaway

If the government moves to prevent TPG from connecting customers to fibre, the share price will drop like a native Australian duck shot by a recreational hunter. For this reason, I only have a small holding of TPG shares. On the other hand, the company would appear to be the best managed, fastest growing telco in Australia.

To my mind, the investment in fibre optics makes a lot of sense because I doubt I'll live to see the implementation of the technology that replaces the fibre. Because my investments in fibre optic infrastructure and cloud computing have performed very well, I'm overexposed to the sector. Telecommunications companies are increasingly expensive, but they sure beat investing in coal.

Motley Fool contributor Claude Walker (@claudedwalker) owns shares in TPG Telecom, despite preferring iiNet (as a consumer). 
 

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