The_Marketeer

Telstra:: The changing of the guard – the future glass optics to rivers of gold! May 10, 2009

Well, the change in leadership at Telstra will come as no surprise to Telco spectators in Australia and around the world.

In fact, you could argue that this change is 10 years over due, not the change in CEO with Sol Trujillio or even Ziggy Switkowski before Sol. But the strategic change in direction of Telstra as a fierce combatant against the investment in true Broadband in Australia, currently anything rated >56k is considered broadband in Australia.

Telstra is the privatised natural monopoly which the Australian government privatised with three investor sales known as T1, T2 and finally T3 which effectively privatised the business.

As Telstra owns a significant copper based network which the Australian tax payer funded the build of back in the days of Australia Post long before new technologies were added that we know and use today such as; mobile phones and the internet. This network of course was all wrapped up into the corporation we know today first from the disaggregation of the Australian Telecoms Commission to Telecom Australia and then into the entity we know today as Telstra.

Whilst everyday we see the telephone and power line poles in the street we really do not pay these ‘backbones‘ of power and fixed line communication any notice, as they are lost in our contemporary landscape. But they are not lost for Telstra as these ‘fixed lines’ account for a staggering 36% of Telstra’s revenue.

And, there is the rub, Telstra makes an extremely high margin/profit from their connected land lines over a 1/3 of their revenue comes from the ‘fixed line’ which is known as PSTN quite probably the very phone you have in your home (along with other ‘value added services they supply as part of this product mix).

Internationally, the movement of PSTN or fixed line revenues has been heading south faster than a US banking stock. Their is only one country in the world that has managed to arrest and reverse the decline of PSTN and that is of course Australia’s Telstra.

Whilst the reduction in PSTN is an issue for some other traditional Telco’s the usage of bandwidth is fast being replaced with Voice Over Internet Protocol (VOIP). Australia so far has been pretty removed from the real terms growth in VOIP. Reason being the lack of true broadband availability and the cost which has in recent year been set at a monopoloy price via Telstra Wholesale (Internet Provider). Which is then sold on to Internet Service Providers at a higher base cost (refer to Wikipedia:”face a downward-sloping demand”)

A report from Telegeography maps the current trend (apologies for lack of recency) in Europe which is home to some pretty large Telco networks and new Internet Providers. As a note, it is of interest that the Australian player Telstra is not represented in the international Tier 1 market and in fact could be considered a Tier 2 player internationally excluding it’s own home market. What Telegeography found in Europe is of interest here locally as Telstra has been holding the Australian broadband market back for over ten years to ring-fence their PSTN or copper based land line revenues from cannibalisation and fragmentation leading to loss of revenue from VOIP players in the market. Of course this strategy also allows for greater control of the internet service provider markets. It is of note though that some companies are reducing the relevance of Telstra via their DSLAM networks with naked DSL (The removal of having to have the PSTN line hooked into the exchange to receive ADSL 1 services)

Telegeography found in 2008, from their research the following key highlights in their “European VoIP & Triple-Play Research Service” report:

• VoIP services will have a dramatic impact on revenues from switched services, both by siphoning subscribers off of the switched network, and by forcing deep reductions in fixed-line voice prices.
• While Skype has more subscribers in Europe than any individual provider of handset-based VoIP services, the revenues and traffic volumes generated by Skype’s subscribers are lower, and have a much smaller impact on incumbents revenues.
• VoIP adoption in Europe is growing far faster than in the U.S. Prices are a key reason: typical prices for triple play service in the U.S. are approximately 70 percent higher than in Europe.

It is of interest that adoption of VOIP in Europe is strong and that it would seem that PSTN voice services days are truly numbered as this graph showing VOIP Penetration clearly demonstrates.

European VOIP consumer market penetration

France is clearly leading the way with their VOIP penetration. It is this type of growth and consumer adoption which Telstra has been monitoring on  and doing their best to hold back so that they can in effect control the market for as long as possible. This has been pretty much to allow Telstra the opportunity to position it’s different strategic business units for longer term competition and to ‘transform’ it’s back end operations into more efficient and competitive systems.

That said, the ‘argy bargy’ with Telstra and the government during Sol’s reign delivered Telstra’s key objective of the buying Telstra time.

But with the change in government and the ‘New Deal’ for broadband in Australia Telstra found it’s long-term strategy of defer and deter had come full swing. Telstra had been summarily negated through their pitiful Request for Proposal not having any mention of Australian SME inclusion and the very fact that their new high speed mobile service which can deliver blistering high speed as long as you have the handset which can use it – which are not available as yet!

What we now have is the biggest threat to Telstra ever. Through the ‘defer and deter’ mantra of constraining Australia to narrow-band services dressed up as broadband and by playing in an uneven field Telstra has used it’s market power to impair the national good of true high-speed broadband to Australians. Of course this was once in the interest of the Shareholders and the Telstra Corporation.

The problem which NBN has created is that of the very real potential for a break up of Telstra to enable what would be a Natural Monopoly build of the Australian broadband backbone with a Fibre to the Premise/Home (FttP). This would be delivered along the similar disaggregation of other countries Telco’s such as in the UK with BT and in New Zealand with Telecom NZ. As to whether the NBN will become privatised or hybridised with PPP or remain a Nationalised asset it will if the NBN goes ahead change the very nature of doing business and consumerism in Australia.

By creating a new wholesale Internet Provider (NBN) in Australia, which would have the single strategy and charter, of building, maintaining and growing high speed conectivity to all Australians. The NBN would be replace the current model and 800 pound gorilla which Telstra owns in this area known as Telstra Wholesale.

All of these recent developments have added to the growing dissatisfaction with Australians, Shareholders and even Telstra employees with Telstra’s strategy.  The game was up for Sol (who recognised this over 6 months ago) and more importantly for Donald McGauchie. Don, has championed the thunder headed approach to competitors, the ACCC and importantly with the Government. It was his way or the highway and in fact either you were on the ‘farm’ with him or you were not.

So, with his ‘resignation’ we now have the appointment of the ‘conciliator’ David Thodey, whom having run IBM Australia and New Zealand has a demonstrated understanding of technology and the coming integration of communications platforms, technology and ubiquitous connectivity. It is also of note that David is not on the record as being as passionate about the McGauchie Way.

It is indeed an appointment of appeasment to the Australian Government to build relations and re-build burnt out bridges. David, know’s the Telstra Wholesale business he used to run it. It will be David’s understanding of the wholesale delivery and technology which drives the desire of the Australian Government to deliver FttP.

It remains to be seen what effect Davids’ appointment will have on the relationship and probably more importantly the share price. But there is no doubt in my mind that we will see a far less powerful Telstra in the next 2-3 years in fact I predict a beak up of the company by 2012 if the NBN goes ahead. We will see the separation of the wholesale, internet ISP, wireless-mobile, Sensis, and the ‘rest’.

This may well bring about the biggest change in the Australian telecommunications and media landscape in it’s history.

I think in the next 6 months we will say some very conciliatory actions from Telstra along with some rather large shocks for Telstra shareholders as some of the transforming projects costs are deferred or written off  due to failed delivery becoming ‘known’.

It will make for great sport watching this change. I welcome the change and look forward to a Telstra’s change in strategy to engage and expand rather than to deter and defer. This can only lead to improved relations with all of Telstra’s stakeholders.

David, I wish you luck, maybe you can turn the FttP ‘glass to gold’ rather than the cash cowed copper to gold Telstra was known for whilst removing Australia’s potential competitive advantage by deterring delivery of true broadband in Australia.