Data binge brings investor challenges and opportunity
There are winners and losers from rising data downloads as telcos and television channels fight over the scraps that remain as the NBN roll-out progresses.
There are winners and losers from rising data downloads as telcos and television channels fight over the scraps that remain as the NBN roll-out progresses.
As the nation gets hooked on the internet, households are downloading more and more data. Some companies are benefiting from the increased activity, though telecommunications companies are being hit with increased competition and costs as the National Broadband Network (NBN) is rolled out.
New data from the Australian Bureau of Statistics reveals that the total volume of data downloaded over the internet in the three months ended 30 June 2018 was 3.8 million terabytes. That was a 7 per cent increase from the three months ended 31 December 2017 and a 28.1 per cent increase compared with the three months ended June 2017.
The volume of data downloaded via mobile handsets has skyrocketed too. For the three months ended 30 June 2018, 246,765 terabytes of data was downloaded via mobile handsets, a 21.5 per cent increase from the three months ended 30 December 2017 and a 40.9 per cent jump on the three months to 30 June 2017.
The chart below reveals that while the growth in the number of internet subscribers has remained relatively stable, the growth in the volume of data downloaded has accelerated.
Source: ABS Internet Activity June 2018
Winners and losers from data splurge
Brian Han, senior equities analyst with Morningstar, said the companies that benefit most from the increased download activity are streaming and content services businesses. That includes Netflix, YouTube and Australia’s Stan, which is owned by Nine Entertainment (ASX: NEC) and Fairfax Media (ASX: FXJ), soon to be one company.
“They capture the value in the chain by selling more advertisements on their streaming platforms and as they increase subscriber numbers,” said Han.
The flipside of that is that traditional media companies including Seven West Media (ASX: SWM) and Nine’s television businesses are being hurt by increased download activity and video streaming. “As internet speeds increase, more people will stream content over the internet rather than watch TV,” says Han.
For the telecommunications companies, their businesses has been slammed by the NBN, which charges resellers like Telstra (ASX: TLS) high prices to access its network.
"The industry is so competitive, so even though people are downloading more data and speeds are increasing, that is putting a lot of pressure on the telcos’ networks. They can’t increase prices because the market is so competitive even though their operating costs are increasing as they get more customers downloading more data," said Han.
"So it’s a real rat race to the bottom for the telcos," he said.
As Telstra said in a letter to shareholders in August: "On one hand, demand for our core products and services continues to grow. Telecommunications networks have become some of the most important pieces of infrastructure in the world today.
"On the other hand, competition has never been more intense, our market dynamics are shifting rapidly, and customer expectations are changing," Telstra said.
"A unique challenge we do have is the nbn network. This is having an enormous impact on our business – wholesale prices have risen, meaning we and other industry participants are facing a fixed-line market where reseller margins are rapidly reducing. At the same time, competition in the mobile market is increasing with the expected entrance of a fourth mobile network operator [TPG Telecom]," Telstra said.
The NBN is now being accessed by many more households. The ABS Internet Activity report reveals fibre connections jumped by 22.4 per cent in the six months between December 2017 and June 2018. Fibre growth for the year to June 2018 was 69.8 per cent, reaching 3.6 million subscribers as the NBN is rolled out.
Online retailers benefit from boom
Separate data from the Australian Bureau of Statistics reveals that businesses earned $394.3 billion from the internet in 2016-17, a record amount. The measure of internet income includes both business to business and business to customer orders.
For the first time, over half of businesses in the retail trade industry (59 per cent) had a web presence in 2016-17, the ABS recently said.
Online furniture and homewares retailer Temple & Webster said in a recent trading update that faster internet and mobile speeds through the NBN and 5G were benefitting its business, as well as “data driven technology”.
The company reported a record 39 per cent year-on-year increase in gross revenue in the first quarter of 2018-19, and said it has huge growth potential with less than 4 per cent of purchases having moved online in a $13 billion total furniture and homewares market.
However, competition from other online retailers is fierce too. The recent decline of online retailer Kogan.com highlights how competition - and the goods and services tax - can hurt its business.
While Kogan.com achieved 41.6 per cent year-on-year customer growth as at September 2018, its global brands revenue fell 27.4 per cent compared with the first quarter of 2017-18, which was driven by the changes in the GST law from 1 July 2018. Its gross margins fell as a result of competition from foreign websites selling into Australia without the GST as well as the lower Australian dollar.
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Nicki Bourlioufas is a contributor for Morningstar Australia.
This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.
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