What: TPG Telecom Ltd (ASX: TPM) is moving forward with its fibre-to-the-building (FTTB) internet network which offers the same speeds as the National Broadband Network (NBN). With the ACCC allowing the company to offer competitive services to rival the NBN, it is possible for TPG to service 500,000 urban businesses and residences by extending its existing network.
The big shift to high-speed broadband came from the golden ideal of linking up the whole nation for internet downloads many times faster than the average speeds. It was also supposed to be the exclusive realm of the National Broadband Network Company to provide the service to the whole network, but now TPG seems to be moving in on the space.
So What: The reason why TPG's business potential could soar is the number of customers it can possibly reach has been dramatically increased to 1.8 million, according to estimates from the Department of Communications. A Goldman Sachs analyst also projected the company could achieve 30% of the future NBN market share if customers exceed 1 million.
The government may require TPG to split its business into two – a wholesale and retail service provider – if it proceeds with increasing its FTTB network. The wholesale side would have earnings limitations possibly put on it, but its retail side would be paying its wholesale side.
TPG can help protect its market share by getting more retail customers to use its service and keep its revenues up. With other competitors offering similar retail NBN services, TPG can stand out by keeping its fees lower if it can take advantage of its wholesaler cost differences.
Now What: TPG looks like it can keep its strong profit gains from FY 2014 going forwards. Consensus forecasts are for earnings to increase around 21% annually for the next two years. The potential FTTB network business can help realise the forecasts and give TPG a definite competitive advantage over other broadband providers like iiNet Limited (ASX: IIN) and M2 Group Ltd (ASX: MTU).
The mobile and broadband service market is fast-moving and requires constant technology developments for companies to stay competitive. I think TPG Telecom has built in a safety buffer around itself that can propel its business and help it remain as one of the market leaders. That's one good reason to make it a part of your portfolio.
