An outrageous, beautiful monopoly

Telstra's mobile business is a cash machine with few competitors, giving it the highest returns in the world.

- GAURAV SODHI

To Telstra, it was cost cuts; for the press, it was job cuts; and for brokers, it was panic about guidance. The reaction to the telco’s news that it would cut 2800 jobs from its enterprise division was varied and swift. The share price fell almost 10% after the announcement before recovering slightly.

The herd may have missed the bigger picture. Telstra’s mobile business grew operating profits by 13% to more than $2.5 billion for the half year. For a business that commands more than 40% of the national market, that is astonishing growth, brought about by the enviable combination of higher prices and more users.

Mobile subscribers increased by almost 5% over the period, with average revenue per user (ARPU) rising by 3.4%. Once again, Telstra has managed to draw more users to its network while charging each one more money.

Media and politicians are too busy getting stuck into supermarkets to see that the cosiest monopoly sits pretty in front of their very eyes.

Woolies and Coles generate EBITDA (earnings before interest, tax, depreciation and amortisation) margins of 5-6%. This is slightly better than supermarkets globally but hardly grand larceny.

Telstra’s mobile business now generates EBITDA margins of 47% – the highest mobile margins in the world. There are two reasons for this outrageous figure: Telstra is now indexing prices to inflation, so mobile prices are rising annually, but the more important reason is the feeble competition.

Vodafone remains a subscale network. It is crippled by debt, and there aren’t enough users to generate the cash surplus needed to compete effectively with Telstra.