One of the biggest themes in the telecommunications sector is the increasing use of mobile data. This is a direct result of the proliferation of smart phones, and signals that mobile phones are the most important part of the average person's telecommunication expenditure. Therefore, mobile phones are an increasingly important source of revenue for telecommunications companies.
The three market leaders in mobile phone plans are Telstra Corporation Ltd (ASX: TLS) with 15.3 million mobile subscribers, Optus with 9.5 million customers, and Vodafone with around 5 million. Singapore Telecommunications Ltd (ASX: SGT) owns Optus, and Vodafone is part owned by Hutchinson Telecommunications (Aus) Ltd (ASX: HTA), giving Australian investors the opportunity to invest in any of the big three.
I have previously opined that Optus is unlikely to challenge Telstra's dominance in the near future. In this article, I make the case that Vodafone is unlikely to ever challenge Optus for the second-place spot, and that Hutchinson isn't worthy of your investment dollars.
Vodafone is notable for the damage suffered to its brand; in fact the phrase "Vodafail" as an explanation of poor coverage, has entered the lexicon in Australia. The Australian used it in a headline as recently as September 2013, and I get 34,000 hits if I google the phrase. This public relations disaster was brought about by poor service, and in my opinion, there's an element of schadenfreude involved. As (ex) customers perpetuate the damage in retaliation for perceived Vodafone failures. Its customer base has shrunk by over 30% since the brand damage began in 2010.
To make matters worse, the outgoing CEO of Vodafone, Bill Morrow, is leaving his role before his turnaround plan is complete. Despite the fact that the risk of a CEO leaving prematurely should be something the board guards against. The new CEO may well be forced to see out a plan over which he or she has no personal ownership; not exactly an attractive proposition, though there are some signs that the company's fortunes are improving.
Surprisingly, the Australian Financial Review recently claimed that the "other option on the table" is the purchase of a local fixed-line internet service provider such as TPG Telecom Ltd (ASX: TPM) or Perth-based iiNet Limited (ASX: IIN). This is not a realistic option in my opinion, as they are two of the most impressive (and growing) Australian telecommunications companies.
The companies' reputations and results suggest an excellent culture and future. The former owns shares in the latter, and both companies have founders as major shareholders. I don't think it's plausible that either company would agree to be taken over by Vodafone, nor do I think a hostile takeover likely. It's far more plausible that TPG, which currently has around 360,000 mobile subscribers, will one day take over Vodafone's subscribers and scrap that brand. For my money, Hutchinson (the part owner of Vodafone) is a sell.
It seems to me that Optus will remain the second most popular provider of mobile phone services. Although Telstra offers better coverage, only some people will be motivated to switch from Optus. Most long-term Optus customers will stay with Optus; it takes some serious bad publicity to lose customers en masse. I wouldn't buy shares in Singapore Telecommunications, but I'd hold for a little longer if I owned shares, in the hope that Optus does succeed with its latest plans to grow its customer base.
Foolish takeaway
Unlike Optus and Vodafone, I would strongly consider buying Telstra stock, even after the reasonable share price appreciation of the last year. Now is the ideal time for the company to be winning new mobile customers, as data usage will likely increase over the next couple of years. Teenagers buying phones today are likely to be far more prolific users of mobile data than the elderly. Telstra is winning the most new customers, and has an impressive hoard of cash.
