TPG Telecom (ASX: TPM) yesterday announced stellar results, boasting improved earnings per share, improved cash flow and reduced debt.
For those interested in the telecommunications sector, the recent release by TPG is valuable information. Among other things, the company updated the market on its fibre optic operations. This is of particular relevance to shareholders of Vocus Communications (ASX: VOC) and Amcom Telecommunications (ASX: AMM). Both Vocus and Amcom earn a significant portion of their revenues from fibre optic communication.
TPG has flagged its intention to continue with the roll out of its own fibre network. The results commentary stated that:
"The Group is planning to increase the number of buildings directly connected to its fibre network in metro areas. With the evolution of new technologies now enabling speeds of up to 100 Mbps this will enable the Group to commence offering very high-speed broadband services to its customers at ADSL2+ prices."
TPG has more than 3,800km of (mostly long-distance) fibre networks and 1,600 connected buildings. This move could deliver a superior service to subscribers (and further utilise the existing fibre network). TPG is essentially creating a network similar to the NBN, although by connecting buildings rather than individual premises, it will be able to add subscribers far more quickly and at lower cost than NBN Co has in the past.
The speeds allowed by fibre to the building (FTTB) will surely be an attractive offering for residential customers (and many businesses). Even better for TPG, the government is now likely to abandon the NBN Co's fibre to the premises plan and replace it with a fibre to the node plan. This means that even if the NBN is rolled out to areas covered by FTTB, it won't be a superior offer.
In comparison, Amcom and Vocus are major suppliers of dark fibre connections to corporate customers. Dark fibre is a glass strand reserved exclusively for a single organisation. It's called dark fibre because unless the customer is using it, no light travels through it. There are several benefits of this system. For example, Vocus can securely connect its own data centres directly to the customer. As a result, the customer, who may occupy multiple premises, has a dedicated secure network linking everyone within the organisation to each other and the data centre. This allows super-fast cloud based software solutions. Vocus further connects organisations to the rest of the world via an undersea fibre optic cable to which it has rights.
For a company like Vocus, the threat of further competition from TPG is real: the giant already offers dark fibre services. However, dark fibre to the corporate market may not be the main game for TPG and, in any event, Vocus has greater focus and momentum in that niche. Although Vocus had only 651 buildings connected to its fibre network when it last updated the market, it grew this number by more than TPG did in FY2013. I won't be selling my Vocus shares because of this news.
Foolish takeaway
TPG's FTTB could drastically improve internet speeds available to residents in high-density metropolitan areas. If TPG is able to offer this plan to customers at the prices it expects, it will very likely increase subscriber numbers in the years to come, probably at the expense of competitors. TPG Telecom is definitely a stock for your watchlist.
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Motley Fool contributor Claude Walker owns shares in Vocus and has an indirect interest in TPG Telecom through a managed fund. Find him on Twitter @claudedwalker.
