Is Telstra’s monopolistic power generating outstanding profits?
With a 66% market share, Telstra’s monopolistic powers are in the news and generating quite a stir. The only problem is that the telco’s monopolistic powers are not stirring its profits.
With a 90% share, Telstra dominates what used to be called the ‘local call market’. In the last decade mobile phone services have risen from 8 million to 22 million, internet penetration has risen from 30% to 79% of households, and despite unique anti-syphoning legislation which ensures free-to-air tv gets to show the big sporting events, pay tv has increased to 30% household penetration from virtually nothing in 1995.
Despite this rapid growth in new technology and Telstra’s dominant landline market share, its profits are no higher today than they were ten years ago. And while its intrinsic value has risen slightly in the last two years, it has not registered impressive growth overall.
The ‘rebalancing’ and ‘cannibalisation’ that the industry is experiencing, and the government wants, does not detract from the very high underlying growth factors in the telecommunications industry.
Demand for high-speed services will exceed supply. By 2017 Fibre to the Household (FttH) will make our present broadband look like the dial-up systems of ten years ago and will be used by the telecoms, IT and media industries to deliver digital media services, applications, video content hosting and distribution. Whether Telstra will be able to take advantage of it and win is anyone’s guess.
In fast-changing industries, working out who will dominate is difficult and therefore so is estimating an intrinsic value. In any event, Telstra in its current form has not been able to convert its dominant position and the strong growth in telecommunications demand into improving economic performance. There is little reason to believe that it will in the future.
By Roger Montgomery, 17 October 2009
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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Phil Martin
:
About Telstra. using your formula on 2010/06 figures from ANZ I get a value of $3.58. I suppose things have changed because of it latest reports. It says there a payout ratio of 89% which means that some profit was kept, right? Just like to know how you get $2.50? Cheers
Roger Montgomery
:
Hi Phil,
As I have said here and in the book, the formula in the book is a “leg-up” rather than a “hand-out”. Our valuations are destined to be different because of different estimates about the future, in the first instance.
Neil Shuker
:
Hi Roger. I appreciate your comments on Telstra. Would IINet be a good value investment in this space on current prices or should I look elsewhere?? (medium to long term). Ta, Neil
admin
:
Hi Neil,
Really good question. I have put iinet on the list to be valued in the next month or so. I have noticed an increasing number of people posting comments with iinet email addresses. Will look at the numbers.