Government is forcing the telco industry to fight Telstra dominance

October 31st, 2014, by

Understandable the industry was up in arms about Telstra’s proposed price increases, amounting to some $50 million a year, to be paid for by its industry’s customers. But this is what happens when you start fiddling around with previously agreed industry arrangements, like the government is doing with its proposed MTM solution.

So much for a faster, cheaper and better broadband solution. It is becoming clear that there is no indication that the MTM can be introduced quickly – and as for cheaply, because of the delays in getting the plan together Telstra (or NBN Co for that matter) will now have to maintain its ageing copper network longer (perhaps ‘forever’) and the maintenance cost of that old copper network will only increase over time. This is a key reason telcos around the world are now installing fibre networks.

For the moment Telstra remains a vertically-integrated monopoly and is, because of the Government’s NBN  policies, not under pressure to start rolling out fibre in order to reduce these maintenance costs. The original plan was for the copper network to be closed down and for the new fibre network to be operated under a structurally-separated wholesale arrangement by NBN Co. All of this is now in limbo, and under these circumstances Telstra can indeed build the case for an increase in charges for the maintenance of its copper network. And obviously this will not be the end of such increases as the copper network continues to age. Even if Telstra hands over its copper assets to NBN Co, copper (and HFC) maintenance costs will only increase.

In all reality the extra costs will have to be added to the costs of the MTM plans. These are a direct result of the changes in government policy, regardless of whether the costs will have to be borne by Telstra’s customers or by the government.

This also means that the effectiveness of the structural separation legislation is now under question. Based on the original plan Telstra’s dominance would dwindle as the copper network was shut down, but this is no longer necessarily the case – at a minimum this situation is very unclear and will be so for perhaps another year. The industry is quite correctly addressing the effectiveness of competition under this ‘interim situation’ as well as the longer term effectiveness of the structural separation under the new government policies – yet to be revealed.

 What the proposed price increase shows is that we are rapidly reverting to the situation the industry had to endure over the last 20 years, where, because of its dominance, Telstra was able to prevent any form of effective competition until the ACCC finally lowered the DSL network access prices to cost levels.

As a side comment, it is now easy for the government and its supporters to blame the ACCC for the low wholesale access costs to Telstra’s DSL network (at least in metro areas), but that decision needs to be judged in the context of Telstra’s obstructive behaviour between 1996 and 2008 – when those regulatory changes finally became effective and DSL-based broadband competition in the cities started to develop for the first time.

If we go back to that situation then we can only expect these old battles to start all over again. Those were the days when, at any given time, there could be 20 or more cases in front of the ACCC with industry complaints about Telstra’s anti-competitive behaviour in the market. Do we really want to go back to that? I am sure even Telstra would answer this in the negative.

As we have been predicting since 2009 when the Coalition first launched its opposition to Labor’s NBN plans, this is a very complex matter. Once you unpick one element the whole plan will unravel.

These plans for price increases related to the copper network and the renewed discussion of the structural separation of Telstra are some of the results of this unravelling, which so far had not been recognised by the industry and the government.

As Telstra has changed under David Thodey, it is highly unlikely that Telstra would welcome a renewed period of industry conflict. It is in its long-term interest to build a modern, forward-looking company. Telstra supports an FttH rollout under a structurally-separated regime and for it to go back to those old days of constant conflict is certainly not what it wants. This is also something it needs to take into account in its negotiations with the government in relation to the MTM plans. The company can be a guiding force to a better outcome for the NBN, let’s hope it will also take into account the national interest and opt for the long-term, modern, forward-looking solution for the whole industry.

Paul Budde

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Two interesting new internet business models

October 30th, 2014, by

Vacant parking spaces on the internet

Based on the collaborative consumption model made popular by Uber and AirBnB, Divvy enables individuals and businesses to lease out their vacant car spaces, offering drivers in high-density urban areas convenient long term and monthly parking up to 50 per cent cheaper than traditional options.

After successfully booking the equivalent of 300,000 parking days in Sydney Divvy’s will now also expanded into Melbourne.

As councils and state governments seek to reduce traffic congestion on major inner city roads, finding a convenient parking space has become increasingly more difficult.

The fact however is, there are actually thousands of vacant, but hidden, spaces peppered throughout the cities. Most people would be shocked to know just how many underutilised parking spaces there actually are in Melbourne.

Divvy uses smart technology to open up those spaces, helping commuters find safe, secure and affordable parking in convenient locations.

In inner-Sydney suburbs, such as Surry Hills, Potts Point and Pyrmont, owners of car parks are making between $50 – $90 per week for renting out their spaces, easing the cost of living by reducing rents and mortgages. Spaces in the CBD often rent for $120 per week.

City of Melbourne data shows that the number of commercial parking spaces in the CBD has actually dropped eight per cent in the past six years to just under 30,000. Meanwhile, fines for parking infringements had jumped almost 40 per cent in the past year.

YouTube for authors

Publishing platform Tablo has partnered with Momentum, the digital arm of major Australian publishing house Pan Macmillan, to uncover the next generation of bestselling authors.

In what could be the start of an entirely new publishing model, Tablo will make a first ever attempt to spot future bestselling authors while they’re still writing their books.

Tablo, an online platform where authors can publish their books progressively, will be handing the five most promising books on its platform to Momentum for review at the end of November.

Often likened to ‘YouTube for authors’, Tablo allows authors to publish their books and connect with readers. Readers can discover emerging books and authors can build up a loyal fanbase, allowing potential bestsellers to be spotted before the author has even published their final work.

The publishing competition is set to align perfectly with National Novel Writing Month (NaNoWriMo), the annual November event that calls on professional and amateur writers around the world to smash out a 50,000 word novel during the month of November.

Online platforms like Tablo make it easy for writers to publish their work and for readers to discover their next favourite book.

See also: Digital Media

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Solid performances among operators auger well for the NBN age

October 30th, 2014, by

Operators in this market reported steady revenue growth in fiscal 2014, reflecting an encouraging ongoing trend. The exception was AAPT, though this company has now been acquired by TPG and so a new era for the company may herald a change in its fortunes as it is able to utilise its assets in line with TPG’s wholesale services strategy. This acquisition showcased that in the market prepped for the NBN these players require size, geographic reach and a significant customer base among the lucrative government and business segments. This scale has enabled these 2nd tier players to weather aggressive competition from Telstra, which has itself firmed up its relationship with FOXTEL through a wholesale arrangement, enabling FOXTEL to provide broadband and voice services through Telstra’s infrastructure.

There are many transformations yet expected in the telecom sector in coming years as the market adjusts to the NBN. NBN Co, operating under a multi-technology platform rather than the FttP architecture originally envisaged, has shown a reinvigorated purpose in recent months which should see an escalation in the number of connected premises. Given these developments, many opportunities yet remain for the 2nd tier players, as TPG has shown with its commitment to fibre-enable up to half a million apartments within its existing footprint.

Amcom

Amcom provides a range of services bases on fibre and DSL infrastructure. It also offers training services to the consumer, corporate, wholesale, government and SME markets. The Western Australia-based company has solid prospects for future growth, and remains a well-managed and focused business. Amcom has constructed over 2,000km of high-speed fibre optic networks in Perth, Darwin, Alice Springs and Adelaide. It has seven data centres in its own right, while its network connects to 71 centres in the capital cities. The network provides access to around 80% of business premises in these cities. The company in mid-2014 announced plans to make acquisitions on the East Coast to further develop its Cisco-based platform. The company has shown consistent revenue growth in recent years, while its strategy for future growth appears promising.

AAPT

AAPT was acquired in 1999 by Telecom New Zealand as it made a $2 billion bid to break into the Australian market. The investment proved to be unsound for Telecom’s shareholders, and in recent years AATP’s financial performance has deteriorated. Its key retail division was sold to iiNet in 2010, while its remaining business and wholesale interests were sold TPG in early 2014. Though owned by TPG, AAPT remains a separate business and manages a substantial interstate network including 11,000km of fibre, its own data centres in major capital cities, fibre and Ethernet infrastructure. It is also a partner with NBN Co. The company has undergone significant management changes as it struggles to revitalise its financial position, which will help TPG better absorb the company’s assets and manage its strategic position in a fast-changing market.

iiNet

iiNet has developed into one of the largest DSL providers in Australia. The company delivers a wide range of telecom services including fixed-voice, mobile and broadband, business data housing and cloud-based services, VoIP and IPTV. The company manages a significant DSL and FttP network. During the last few years iiNet has expanded through a strategic program of acquisitions, which has consolidated its strengthening market position in the business broadband and mobile voice and data sectors. In March 2014 the founder of iiNet, Michael Malone, stepped down as both CEO and chairman of the company after more than twenty years at the helm. The company will enter a new phase of development with a new CEO. The company’s financials have been solid for a number of years, while growth at 7% for FY2014 enabled to company to broach $1 billion in revenue for the first time.

Macquarie Telecom

Established in 1992, Macquarie Telecom was one of the first telcos of the deregulated era. Its two key target markets are Australian mid-size corporates and the government sector. The Hosting business continues to be a key growth platform. With a third data centre operational in mid-2013, the company has bolstered its hosting and cloud-based services, which remain the main focus of its strategy for growth.

TPG Telecom

TPG Telecom provides a range of telecom services and also owns a cloud-hosting company and the PIPE network infrastructure. The company is delivering an extensive FttB service to apartment buildings in capital cities. In late 2014 these plans were approved by the AAAC, which determined that the FttB networks would not go against the level playing field provisions within the Telecommunications Act. TPG has also secured spectrum in the 2.5GHz band to bolster its wireless broadband capabilities, and has committed to investing in additional capacity with a subsea cable linking to New Zealand and the US West Coast. TPG’s capabilities and reach were enhanced following its $450 million acquisition of AAPT’s wholesale and business services from Telecom New Zealand, completed in February 2014.

Nextgen Networks

Nextgen specialises in data services for carriers, service providers, government and corporations. It owns and operates one of Australia’s largest national fibre networks, of over 19,000km of fibre rings, as well a data centres in all capital cities. Nextgen has rolled out around 6,000km of a fibre backhaul link to Darwin, which it manages on behalf of NBN Co as part of the Regional Backbone Blackspots Program. The Perth-Singapore submarine cable, being managed by Nextgen’s subsidiary ASC International, secured landing permits in early 2014, so enabling the operator to proceed with the construction phase.

FOXTEL

FOXTEL is the largest subscription TV (STV) provider in Australia, offering over 200 viewing channels. National coverage was secured in 2012 following the company’s acquisition of AUSTAR. Company ownership is equally divided between Telstra and News Corporation. More than 2.6 million homes had an STV service from FOXTEL in mid-2014, showing a 5.6% growth in subscriber numbers year-on-year. The company hopes to expand its services with a triple-play bundle of TV, broadband and telephony service during the first quarter of 2015, with the latter two services resulting from a wholesale agreement with Telstra.

M2 Telecommunications

M2 has shown consistent growth since the mid-2000s, both through organic growth and strategic acquisitions. In 2009 it acquired People Telecom and the business assets of Commander Communications, both at bargain prices. In 2010 the company completed the acquisition of selected business assets of Clever Communications and Bell Networks, while in 2011 it purchased Clear Telecoms and later the subscribers and assets of AUSTAR Mobile from the pay TV satellite provider. In 2012 the assets of Primus Telecommunications were acquired adding further to its subscriber base. Further acquisitions in 2013 brought in Dodo and Eftel under the M2 umbrella. M2 has since declared that it may invest further in the energy sector, taking advantage of deregulated markets and the low customer acquisition cost advantages held by Dodo Energy.

For detailed information, table of contents and pricing see: Australia – Telco Company Profiles – 2nd Tier

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How will competition develop in an NBN environment?

October 29th, 2014, by

Recently I had an interesting discussion with David Kennedy, the research director of Ovum. It is always good to compare notes with colleagues on some of the key issues in our industry. We covered a wide variety of matters in relation to the NBN, competition in the market, Telstra and the various developments in mobile.

We both share concerns about the level of competition in the market and little change is expected in the future from the five or so leading providers in the Australian market. The only difference with the past will be that instead of one dominant player we will end up with two – NBN Co in infrastructure and Telstra in services. Whatever scenario one looks at there is little hope for a more dramatic change; nevertheless this structural separation is a great improvement on the situation we had before the NBN.

Despite all the negative messages from the government in relation to the NBN and its structure, the reality is that it doesn’t make sense to try and develop infrastructure-based competition. In the end the market will grow towards FttH and it makes no sense to try and develop competing FttH infrastructures. So the deal with Telstra will inevitably lead to a take-over of copper and HFC assets from Optus and Telstra, rather than being used to develop competing structures. While, from an ideological perspective, this will not sit well with the government, it is the reality of this market.

On the services side Telstra is, and will remain, dominant. It has a superior and clearer view of the innovations needed to allow it to provide diversified services based on market segmentation, and as it has money to burn it will pursue that strategy further over coming years.

Their interesting healthcare initiative is a clear example of what can be expected from Telstra in other sectors as well. Hopefully some entrepreneurs will become involved in the various market segments, so that we don’t just get one service provider for all of the sectors; but in reality Telstra will dominate the access side of whoever enters this market. It might partner with existing or new entrepreneurs in these segments, on a retail service provider basis, but it is unlikely that in the foreseeable future we will see full services operators competing with Telstra, either from within the industry or from outside.

As the other telcos in the Australian market are basically ‘me too’ operators, very little innovation is expected from them. This is regrettable, but at the same time it reflects market reality. Providing access will remain a costly and therefore a limited activity. Telcos will operate in that access space and it depends on cash-rich Telstra and others from outside the industry to come up with the innovations.

What David added to this was the possibility of a new telco arriving in the market, one still mainly focussed on access but packaging it in a different way. He mentioned the example of ‘MyRepublic’ in the Singaporean market. The telco industry in Singapore also operates in a structurally-separated environment and it has a highly concentrated industry construction – basically a duopoly. However the better wholesale arrangements available through the Singaporean NBN allowed MyRepublic to enter the market. They took the innovative approach of entering the high end of the market, with customers who are using a large amount of bandwidth. They packaged their access product with gaming content in a social media context and were extremely successful in attracting the gaming market to their product. Now, two years later, they have built up sufficient mass and cash to also enter the broader market and are giving the other two players a run for their money. The company has also indicated an interest in the New Zealand and Australia markets.

Here is an extract from what we have on MyRepublic in our BuddeComm report on the Singaporean market.

Singapore saw a new player enter the fibre broadband market in February 2012 when start-up operator MyRepublic launched. The company committed to a focus on ‘accommodating end users’ needs’, including offering a S$69 (US$55) per month package – aimed at online gamers. Although MyRepublic’s basic 100Mb/s plan costs S$59, compared to M1’s S$39 similar offer, MyRepublic promised no contracts to the first 100,000 people signing up to the service to allow them to drop their subscription if they felt it was not up to standard. The new operator noted that ‘the government has built the best broadband network in the world’ and suggested that ‘the incumbents are not doing anything with it…’

In May 2014 MyRepublic launched a 1Gb/s residential fibre service for just S$49.99 per month.

Whatever new competition we can get into the Australian market would be very welcome, so let’s hope that disruption will also stimulate the other players in the market to be more innovative.

David Kennedy, Principle Analyst from Ovum will be speaking at the 2020 Telecoms Summit, due to be held on the 30-31 October at the Sydney Harbour Marriott. For the full agenda visit the website: http://www.ovum2020.com.au/

Paul Budde

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Wasting time on facilities-based competition discussions

October 29th, 2014, by

Chicago School economic ideology was too much even for the Australian government when it was presented with the Vertigan group’s report. In theory, the idea of splitting the NBN into individual separated groups along technologies – a satellite company, a cable company, a VDSL and perhaps a fibre company – sounds attractive. However such a model does not work effectively anywhere in the world and it would also not work in Australia.

If you want to establish facilities-based competition you would first of all need to address the commercial dominance, not the technology. The split would have to create a set of companies of more or less equal value, financially and commercially, with none of them having more than a 25% market share. A competitive environment has nothing to do with technology; it has everything to do with market dominance. Unless that is addressed no effective facilities-based competition will emerge.

But in any case, that scenario is pure theory and fantasy. Infrastructure is, and will remain, a utilities-based industry, and what utilities-based industry has a competition-based structure? Not one.

A further comment on the technology-based separated structure plan of the Vertigan report is that a commercially-based satellite company would only be able to capture around 5% of national market share; its cost structure would never allow it to grow much further. The HFC company would be doomed to die sooner rather than later, as it would not be able to expand its business. There is no company in the world that is currently rolling out new HFC networks – fibre has outcompeted HFC for new rollouts – so this company would be stuck with a 20%-25% market share. The FttN/FttH company would be the winner and that would mean that we would soon be back to a monopoly.

Any utilities-based market will naturally flow into a monopoly position. We have seen that in the fixed telecoms market; in nearly every country in the world this market is still effectively dominated by one, or at the most two, dominant players. Even in markets with two dominant players, as for example the USA, these players constantly request permission to merge with each other.

In some countries we see new independent infrastructure providers arriving rolling out FttH. However, with more and more fibre being rolled out those early (independent) fibre companies are being taken over by some of the existing players in the market, the Netherlands is a good example here.

Industry consolidation is now also starting to happening in the mobile market, where the third and fourth players are being squeezed out of the market. The fact that in Australia the government is suggesting to let state-owned NBN Co also provide fibre backhaul to mobile towers and/or sharing facilities in regional areas is again an indication that infrastructure in many situations is a natural monopoly.

Anyway, even the government recognised the Vertigan report for what it is worth, and has indicated that it will largely ignore such recommendations.

It is just sad to see that, after decades of futile debate on facilities-based competition (since the introduction of HFC in 1996) in the Australian market we are still revisiting this issue. What a waste of time; what a waste of intelligent resources; what a waste of money.

What a waste that we had to write this analysis yet again.

Paul Budde

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