Andrew Hansen once told me his eponymous billing software company had hardly ever lost a client. "That's the good news", he told me, "but we have hardly ever won one from an incumbent provider either".
The switching costs are so high in his business that clients don't ever switch providers. That's why Hansen's growth has mostly come through acquisition. But there is one source of organic growth: change.
New clients are only won when they need a new system. In Hansen's business that happens when an industry deregulates. When new providers enter an industry that was a government owned monopoly, they all need a new billing system. Enter Hansen. And when new regulations require more complex technology, a company will often shop around. Enter Hansen.
Retail customers are not that different. The "If it ain't broke, don't fix it" principle has made for some very lucrative annuity streams. We don't tend to switch service providers unless we have a good reason to.
Bonanza for ADSL Internet Providers
TPG is an extraordinarily profitable business. The telecoms provider's $1.9bn equity base is all goodwill - the amount of tangible capital in the business is actually negative. Yet last year it spewed out more than half a billion dollars in pre-tax profits. That's a great return on equity, and a stunning result for a business without tangible assets (net of debt).
The bulls will argue that TPG is so profitable because its Managing Director, David Teoh, is a genius and the company is far more efficient than its competitors. Both of those suppositions might be true. But I think there is a bigger factor at play: a lack of change.
When broadband services first became widely available in the mid-2000s, we all needed an internet connection. That's a good reason to shop around and find the lowest cost provider and the offerings were highly competitive as a result.
But, once we have picked one, we tend to stick. Sure, a small percentage of the population are always on the lookout for the best available offer and jump ship regularly. We move houses, and that's a good reason to change (I have probably changed providers three times in the past decade, but only ever when moving house). But most of us just pay the monthly bill and don't give it another thought.
That's why industry consolidation has been so profitable. In a competitive business, you would expect most of the benefits of consolidation to be passed on to customers in the form of lower prices. As should ACCC-enforced cuts in the price Telstra can charge competitors for access to its infrastructure. None of the challenger providers have particularly strong brand loyalty. Thanks to our lethargy, however, TPG, Vocus and their many acquired subsidiaries have been able to hang on to the profits.
NBN is a reason to shop around
Now we have industry-wide change in the form of the NBN. For the first time in more than a decade, most of the population is going to have to sign up to a provider at some point over the next five years.
I'm a current TPG customer and the NBN has recently arrived at my apartment building. TPG has been harassing me to sign up to their NBN offering for the past few months. But if I have to go through the rigmarole, I might as well take a look at the competition.
The difference is staggering. TPG want $90 a month for full-speed NBN and unlimited data. Singaporean provider MyRepublic is offering me the same deal for $60 month and $1 upfront (it's a 12-month contract).
It took me five minutes to make the switch. Surely thousands of other customers are doing the same?
NBN Co's pricing and its impact on TPG and Vocus has been the topic of hot debate of late. Even at $90 a month it seems NBN pricing is going to eat into TPG's margins.
That might be the least of their problems if all of those sticky customers take the opportunity to scan the market. The last thing an absurdly profitable business wants is something that upsets the status quo.
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Great article Steve. Out of curiosity, what was the next best offer after MyRepublic? I think that many of the incumbent providers will experience this pain as price competition increases on relatively the same network.
According to user reviews, My Republic are likely an ACCC target for court action later this year in relation to their poor service... http://www.productreview.com.au/p/my-republic.html?rating=1#reviews
As they say, you get what you pay for. Cheap ISPs oversubscribe their network capacity, so in peak periods the service is extremely slow. Last I heard TPG was the only ISP buying the high speed CVC product from the NBN, the rest of them are promising "NBN" speeds and delivering little more than ADSL2+.
Good luck with "MyRepublic", Steve...;))
The great thing about the NBN is users can avoid the Telstra phone line charge. The cheapest NBN plan I could find was Teleron 50gig slow speed for $40 a month and VOIP phone with Factortel for $3.60 a month and 12c per outgoing call. This has got to hurt Telstra.