In Australia Telstra Corporation Ltd's (ASX: TLS) mobile network is unsurpassed. No ifs, buts or maybes.
Although it may not be the fastest connection in all major urban areas, it's perceived to have the widest coverage and greatest reliability.
In its latest annual report, Telstra claimed to have four times the 4G coverage of its closest rival and a whopping 16 million retail mobile services. 937,000 new mobile subscribers joined the telco giant within the 12-month period.
As at June 30 2014, Vodafone – part-owned by Hutchison Telecommunications (Aus) Ltd (ASX: HTA) – had 5.2 million mobile customers, down 13.6% year-on-year. Whilst Optus – owned by Singapore Telecommunications Ltd (CHESS) (ASX: SGT) is believed to have approximately 9.4 million mobile customers.
Other than its market dominance, Telstra's superiority is also reflected in the pricing of its products. Consumers are willing to pay the premium for its services because they know what they're getting is worth the extra few dollars per month. This too holds true for modern businesses, which demand high levels of reliability, above all else.
But having the ability to charge more than its rivals, known in finance as a demand side competitive advantage, enables Telstra to generate enviable profit margins and free cash flows. In turn this provides massive scope for reinvestment, into either existing infrastructure or new services. Further widening its economic moat, or advantage.
Telstra has invested more than $5.5 billion in its mobile network since 2006 and $1.1 billion in just the last financial year, with another $1 billion expected this year.
In 2014 Optus generated $903 million in free cash flow, whereas Telstra's ballooned out to $7.49 billion, up from $5.02 billion a year earlier.
Just this week Telstra turned on its '4GX' service, which uses radio spectrum, previously reserved for analogue TV, to improve coverage of its 4G network throughout buildings and over long distances. Telstra spent $1.3 billion to acquire the 700MHz spectrum last year. In the same auction, Optus spent $649 million.
However, customers of all three major telcos are likely to witness significant improvements in their speed and coverage in the near future, as upgrades continue to roll across the country.
Indeed, Telstra has already trailed new mobile technology which could render the government's National Broadband Network (NBN), inferior.
Another significant reason Telstra will likely continue to be Australia's most dominant telco for some time is the payments it will receive from the government's NBN Co for the lease of its extensive copper cable network. These payments are set to total into the tens of billions of dollars in coming decades. Telstra will be able to use the capital to invest for the future.
Should you buy, hold, or sell Telstra shares?
Telstra is likely to be the most powerful force in Australian telecommunications for some time yet. Unfortunately though, its share price already reflects this and it is thus not a standout investment today.
