News that Australia is about to get a fourth mobile phone network has both scared the existing players and caused observers to wonder how it will make a profit.

Upstart internet company TPG Telecom recently announced it would build a mobile network to compete with Telstra, Optus and Vodafone.

The move was widely expected after TPG splurged big mobile phone spectrum. It beat out all other bidders with a A$1.26 billion (NZ$1.35b) purchase of the spectrum in the most recent government auction.

The price equates to A$2.75 per mergahertz, which means nothing to most of us, until we learn that the reserve price was just A$1.25, and that it's the highest price anyone has paid for spectrum anywhere in the world, eclipsing the A$2.46 per MHz paid in the Netherlands in 2014.


TPG now plans to spend another A$600 million to build a mobile network that will cover 80 per cent of the Australian population and give it access to the A$8 billion mobile market.

The price might seem low for a country as vast as Australia, but the fact is that most Australians live in the capital cities and along the east coast, and that's all that TPG will need to cover, as the rest is largely uninhabited.

Even so, investors are wondering how the company will make money after paying so much for spectrum. Australia had a fourth mobile network once before, operated by global player Hutchison. But it simply couldn't make enough money and ultimately merged with Vodafone.

The cost is also higher than TPG had factored in. It had to tap investors for A$400 million to help fund the bid and the build. As a result the company's share price fell sharply.

TPG already has close to half a million "virtual" mobile customers which are currently on Vodafone and Optus networks. It can shift these to its own network and be quickly up and running with a solid customer base.

However, perhaps the biggest single factor in the possible success of the venture is its founder, David Teoh.

Malaysian-born Teoh, an intensely private billionaire, built TPG into Australia's second-largest broadband network in Australia with 1.9 million customers.

After buying the spectrum, Teoh told the Australian Financial Review: "This is to make sure our long-term shareholders benefit for the future. This is very long-term, we're investing for 10 and 20 years down the track."


It's the sort of things chairmen and chief executives always say. (You never hear them say: "I'm doing this for a short-term gain to appease fund managers and ensure I get my bonus.")

In the case of Teoh, however, we can be much more confident that he will stay the course and not trash the strategy if it hits a bump along the way.

He can do this because he and businessman Robert Milner control 60 per cent of the company between them. Milner is known as an investor who takes a very long-term view.

It means Teoh isn't beholden to fund managers, whose primary focus is this quarter's numbers. He will be able to look through any short-term share price falls and keep an eye on the bigger prize.

In such a context, the price doesn't look too higher after all.

One of the reasons Teoh is doing this is that selling broadband, which until now has built both his business and fortune, will soon become a lot less profitable.

Up until now, internet service providers have mostly resold services on the old copper wire phone network to the customers. They didn't have to pay much for access and so were able to make solid profits.

However, Australian households and businesses are being progressively and compulsorily switched to the government-owned National Broadband Network. The problem is the NBN charges a resellers a much higher fee for access to its network, thereby crimping their profits.

In this context, it's important for TPG to find a new source of profit and growth, and that's mobile. It also makes sense as more of our communications needs are met via mobile broadband.

Australia's largest phone company Telstra had the same sort of idea, because it will also take an earnings hit as broadband users transition to the NBN.

It was hoping that mobile would be the key driver of earnings growth over the next few years, but this is going to be a lot more difficult with a fourth player in the market, particularly TPG.

TPG competes aggressively on price, so not only does it have the potential to take market share from the existing players, it might also drive down prices across the market.

Shares in Telstra plunged 7.5 per cent to a four and a half year low and wiped A$4b off the market value of the company in the wake of the news.

Investors have enjoyed a steady stream of dividends from Telstra for several decades, but there are now questions about how sustainable they will be in future.