Embattled shareholders in our leading telecommunication stocks are probably wondering if the big cuts in pricing by the NBN will deliver a badly needed Christmas present for the sector, which is looking like the only sector on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) to finish in the red this year.
It's not a pretty sight. The telecommunication services sector has shed nearly a quarter of its value over the past 12-months, largely thanks to the crash in the share price of sector heavyweight Telstra Corporation Ltd (ASX: TLS).
But we can't just blame Telstra. Its smaller rivals have performed abysmally too. You only have to look at Vocus Group Ltd (ASX: VOC), although TPG Telecom Ltd (ASX: TPM) might just be able to close the year at breakeven thanks to the recent bounce in the stock.
The NBN is cutting fees it charges to telcos for onboarding customers to the national broadband network in an attempt to encourage households to upgrade to the faster internet speed packages (namely the 50Mbps and 100Mbps services).
The wholesale cost for the 50Mbps service will fall by around 27%, while the faster service will fall by circa 10%.
More significantly, the NBN will double the capacity for each user connected to its network and cutting the amount resellers will be charged for increasing this capacity beyond what the NBN is providing (called the CVC).
The industry had been hoping for the complete removal of the CVC but that was unlikely to happen as it will expose the NBN to a lot of risks in relation to cost blowouts. Nonetheless, the move to revamp the CVC and standard capacity is good news as this issue is behind the numerous complaints by consumers about the slow internet speeds.
This is a clear win for consumers. The question is whether this is a positive for earnings for our listed telcos given that the sector has been under intense margin pressure because of the NBN pricing structure.
Unfortunately, this is no panacea as a number of analysts have come to the conclusion that NBN's pricing overhaul won't have much of an impact.
UBS has run the numbers and estimates that Telstra's gross margin per NBN customer today (in dollar terms and before backhaul and overhead costs) is in the low "30s".
Following the revised NBN pricing structure, Telstra may opt for one of three courses of action. The first is to cut the retail price on the 50Mbps package to hold the same gross margin per subscriber.
The second option is for it to increase the CVC provisioning for each user and the third is to do a combination of both.
"We think the third option is most likely – we estimate Telstra could increase CVC per user by c50%, and cut retail prices by $8-$10 on the 50Mbps plan, and still deliver a broadly neutral $ gross margin per subscriber result," said the broker, who has a "neutral" recommendation on the stock with a price target of $3.73.
Macquarie also doesn't think the changes will have a longer-term impact on the profits of resellers although they now have an opportunity to upsell customers to a faster internet speed package. That could lead to incremental increases in revenue but intense competition among Telstra and "friends" could whittle down any real gains.
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