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UBS thinks Telstra Corporation Ltd (ASX: TLS) can boost revenue by cutting prices

Our largest telco is striking back at its competitors by lowering its prices on some of its mobile plans.

Price cuts usually triggers a race to the bottom and that can’t be helping Telstra Corporation Ltd’s (ASX: TLS) share price today, which has tumbled 0.8% to a three-month low of $2.97 in after lunch trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is up 0.6%.

In contrast, the Vocus Group Ltd (ASX: VOC) share price is off 0.6% at $3.28 while TPG Telecom Ltd (ASX: TPM) is up 0.4% at $7.53 at the time of writing.

Investors hanging up on telecom stocks

Reports that Telstra and Vocus are not passing on price cuts from the NBN to retailers shows how desperate telcos are in offsetting falling margins and Telstra is forced to respond to mobile plan competition by lowering some of its mobile plans by $10 a month.

The lower priced plans are only available to customers who have another Telstra service and the move will only reinforce the view that competition for mobile subscribers will remain aggressive.

It’s the jostle for mobile customers that is the key reason why telecom stocks have been on the nose with the sector being among the worst performers on our market over the past year.

Telstra makes a 40% margin on mobile and almost nothing from NBN connections, according to UBS.

Is there a silver lining?

While the latest mobile plan price promotion from Telstra will more than likely lead to lower average revenue per user (ARPU), UBS believes average revenue per account (ARPA) could increase if US telco Verizon Communications Inc.’s experience is anything to go by.

“we think TLS’ broader ambition is to increase the average number of services per household, and subsequently increase the average revenue per account (ARPA),” said UBS>

“Indeed, the strategy is reminiscent of that deployed by Verizon when it launched its ‘Share Everything’ plans in 2QCY12.”

Verizon’s share plan grew to 46% of all retail post-paid subscribers by end of calendar 2013 and 61% at the end of the following year.

The US company’s average connections per account grew around 10% in the two years from the launch of the promotion and its share of industry mobile gross additions inched up in the quarters proceeding the Share Everything launch.

More significantly, Verizon’s ARPA increased 6-7% year-on-year in 2013 although part of that may be due to the 3G to 4G migration.

We are set to experience a similar migration with the arrival of 5G next year.

I see value in Telstra’s stock at around current levels and I believe the stock will still generate a very decent fully franked yield for years to come (even though dividends will be lower in FY19 and possible FY20).

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Motley Fool contributor Brendon Lau owns shares of Telstra Limited, TPG Telecom Limited, and Vocus Communications Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia has recommended TPG Telecom Limited and Vocus Communications Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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