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4 February 2019

TPG blames Huawei ban for decision to back away from mobile roll-out

Australia was the first country to follow the USA’s lead and bar Huawei and ZTE from its 5G deployments, even though one of its three established MNOs, Vodafone Hutchison (VHA) had a Huawei-only 4G network and would face a far more difficult and expensive upgrade to 5G than it had envisaged. Now, the country’s new entrant MNO, TPG – which is in the process of merging with VHA – has cancelled its plan to roll out its own cellular network, blaming the bar on Huawei.

TPG, a broadband operator which also operates a mobile network in Singapore, won spectrum in 2017 and had planned to become Australia’s fourth MNO. It already offers some mobile services in Australia via an MVNO deal on Vodafone’s network, and has been working on deploying a small cell network for the past two years.

There were fears of disruption akin to that in France by Free Mobile, but then the firm agreed to acquisition by VHA. It says its decision to back away from its cellular network plan is because the bar on Huawei will change the affordability of moving into 4G/5G services. But the economics of the planned VHA marriage, and the ongoing regulatory approval process – which is due to conclude in April – are also likely to be factors.

It said in a statement: “A key reason for the selection of the vendor and the design of TPG’s network was that there was a simple upgrade path to 5G, using Huawei equipment. In light of the government’s announcement in late August 2018 that it would prohibit the use of Huawei equipment in 5G networks, that upgrade path has now been blocked.”

The operator said it has sought alternative solutions, but has been unable to find a commercially viable solution. It says it has spent A$100m on mobile infrastructure already, and committed a further A$30m, mainly going on sites, additional fiber for backhaul and small cells. But while it is still officially operating as a standalone firm, it clearly will not want to commit too much more until it knows the outcome of the VHA merger approval, and how – if successful – the will affect its future deployments.

VHA, the country’s third MNO after Telstra and Optus, will gain 1.9m fixed residential customers and considerable fiber assets if it is permitted to buy TPG, and so will become a more viable competitor to the two majors. This will help it follow other Vodafone subsidiaries round the world towards a more converged fixed/mobile future, which will be even more important to offset the setbacks to its 5G upgrade plans. Like TPG, VHA had invested in 5G-ready equipment towards the end of its Huawei-supplied 4G roll-out, which would have eased the path to full 5G deployment in the early 2020s.

While the deal clearly makes sense for the parties involved, they have still to convince the regulator that it will not harm competition in the market. However, as paradoxical as it might seem, TPG’s withdrawal from the mobile infrastructure space could effectively circumvent one of the Australian Competition and Consumer Commission’s (ACCC’s) major concerns over the removal of a mobile player from the market.

While it now appears that TPG wants to halt any mobile investment until it knows the outcome of the VHA approval process, success on that front is not assured. Late last year, the antitrust regulator, the ACCC, remarked: “We therefore have preliminary concerns that removing TPG as a new independent competitor with its own network, in what is a concentrated market for mobile services, would be likely to result in a substantial lessening of competition.” Chair Rod Sims said: “The merged TPG-Vodafone would not have the incentive to operate in the same way, and competition in the market would be reduced as a result. A mobile market with three major players rather than four is likely to lead to higher prices and less innovative plans for mobile customers.”

In 2009, the ACCC permitted a 50:50 joint venture to be created between Australia’s third and fourth MNOs, Vodafone and Hutchison, reducing the market to three operators. The basis of that approval was that, left separate, the two operators would lack the resources to invest adequately in high quality mobile broadband networks. With 5G on the horizon, and the price competition introduced by Huawei and ZTE removed, this argument could be even more persuasive a decade later. And TPG’s suspension of its mobile investments, and pointed comments about the failure to find an economic alternative to a Huawei upgrade, will strengthen that.

In fact, the VHA merger has not greatly affected market shares in Australia. Telstra still has over 40% of the mobile market by revenue, followed by Optus with almost 30%, while VHA has lost a little share since its formation, mainly to MVNOs.

The ACCC has also said it will take the impact of the VHA-TPG tie-up on the fixed market into consideration, as well as the potential effect on 5G and the likelihood that mobile broadband services will start to replace wireline. “The ACCC is continuing to consider whether operators will need to offer both mobile and fixed broadband services in the longer term to remain competitive, meaning that TPG and Vodafone will necessarily be closer competitors in the future,” Sims said.